UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 20172018 

☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ________ to ________. 

Commission file number 1-12711

DIGITAL POWER CORPORATION

DPW HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

CaliforniaDelaware94-1721931
(State or other jurisdiction of incorporation or

organization)
 (I.R.S. Employer Identification Number)
48430 Lakeview Blvd
Fremont,

201 Shipyard Way, Suite E

Newport Beach, CA 94538-3158

92663

(Address of principal executive offices)

(510) 657-2635

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 monthsyear (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☑þ    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataDate File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☑þ    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer  ☐
Accelerated filer  ☐
Non-accelerated filer  ☐þ
 (Do not check if a smaller reporting company)
Smaller reporting company ☑þ
Emerging growth company  ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-212b-2 of the Exchange Act).  Yes  ☐    No ☑þ


At November 17, 201712, 2018 the registrant had outstanding 15,817,39373,192,808 shares of common stock.

 

DIGITAL POWER CORPORATION

DPW HOLDINGS, INC.

TABLE OF CONTENTS

  Page
PART I – FINANCIAL INFORMATION 
    
Item 1.Financial Statements 
    
  
Condensed Consolidated Balance Sheets as of September 30, 20172018 (Unaudited) and
December
31, 20162017 (Audited)
1-2F-1 – F-2
    
  
Condensed Consolidated Statements of Operations and Comprehensive Loss for the
three and
nine months ended September 30, 2018 and 2017 and 2016 (Unaudited)
3F-3
    
  
Condensed Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended September 30, 2018 (Unaudited)
F-4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30,
2018 and 2017 and 2016 (Unaudited)
4-5F-5 – F-7
    
  Notes to Interim Condensed Consolidated Financial Statements (Unaudited)6 - 42F-8 – F-46
    
Item 2.Management's Discussion and Analysis of Financial Condition and Results of
Operations		431
    
Item 3. Item 3. Quantitative and Qualitative Disclosures about Market Risk5114
    
Item 4.Controls and Procedures5114
    
PART II – OTHER INFORMATION 
    
Item 1.Legal Proceedings5215
Item 1A.Risk Factors5215
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5316
Item 3.Defaults Upon Senior Securities5316
Item 4.Reserved54Mine Safety Disclosures16
Item 5.Other Information5416
Item 6.Exhibits55
17

Forward-Looking Statements

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 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 NovemberAugust 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

  September 30,  December 31, 
  2018  2017 
   (Unaudited)     
ASSETS        
         
CURRENT ASSETS        
Cash and cash equivalents $703  $1,478 
Marketable securities  366   1,835 
Accounts receivable, net of allowance of $5 at September 30, 2018 and December 31,
2017		  3,884   1,898 
Accounts and other receivable, related party  3,888   174 
Inventories, net  3,732   1,993 
Prepaid expenses and other current assets  2,053   1,407 
TOTAL CURRENT ASSETS  14,626   8,785 
Intangible assets  2,851   2,898 
Digital currencies  30   — 
Goodwill  10,419   3,652 
Property and equipment, net  10,890   1,217 
Investments - related party, net of original issue discount of $2,579        
  and $2,115, respectively  4,630   2,333 
Investments in warrants and common stock - related party  3,228   7,728 
Investments in preferred stock of private company  1,000   1,000 
Investments in real estate  1,915     
Other investments  2,140   1,637 
Other investments, related parties  870   917 
Other assets  505   343 
TOTAL ASSETS $53,104  $30,510 
LIABILITIES AND STOCKHOLDERS' EQUITY        
CURRENT LIABILITIES        
Accounts payable and accrued expenses $8,641  $4,273 
Accounts payable and accrued expenses, related party  55   70 
Advances on future receipts  1,689   1,963 
Short term advances  —   2,439 
Short term advances, related party  87   245 
Revolving credit facility  215   388 
Notes payable, net  5,539   402 
Notes payable, related party  166   134 
Convertible notes payable  7,194   398 
Other current liabilities  784   708 
TOTAL CURRENT LIABILITIES  24,370   11,020 
LONG TERM LIABILITIES        
Notes payable  494   525 
Notes payable, related parties  143   175 
TOTAL LIABILITIES $25,007  $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, 
  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 September 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 September 30, 2018 and December 31, 2017,
   respectively (liquidation preference of $1,250 and $1,000 at September 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 September 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 September 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 September 30, 2018 and December 31, 2017		  —   — 
Preferred Stock, $0.001 par value – 23,651,224 shares authorized; nil shares
  issued and outstanding at September 30, 2018 and December 31, 2017		  —   — 
Class A Common Stock, $0.001 par value – 200,000,000 shares authorized;
69,341,486 and 30,222,299 shares issued and outstanding at September 30, 2018
and December 31, 2017, respectively		  69   30 
Class B Common Stock, $0.001 par value – 25,000,000 shares authorized;
nil shares issued and outstanding at September 30, 2018 and December 31, 2017		  —   — 
Additional paid-in capital  73,950   36,888 
Accumulated deficit  (43,998)  (23,412)
Accumulated other comprehensive loss  (2,495)  4,503 
TOTAL DPW HOLDINGS STOCKHOLDERS' EQUITY  27,526   18,009 
Non-controlling interest  571   781 
TOTAL STOCKHOLDERS' EQUITY  28,097   18,790 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $53,104  $30,510 

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

  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 
F-2
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
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

  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
             
Revenue $5,731  $3,220  $13,245  $6,670 
Revenue, cryptocurrency mining  590   —   1,546   — 
Revenue, related party  353   —   3,912   — 
Revenue, restaurant operations  1,585   —   2,087   — 
Revenue, lending activities  85   —   194   — 
Total revenue  8,344   3,220   20,984   6,670 
Cost of revenue  6,317   2,124   16,204   4,136 
Gross profit  2,027   1,096   4,780   2,534 
Operating expenses                
Engineering and product development  334   306   1,044   798 
Selling and marketing  791   423   2,291   1,045 
General and administrative  5,088   1,685   12,698   4,240 
Impairment loss on digital currency  3   —   3   — 
Total operating expenses  6,216   2,414   16,036   6,083 
Loss from operations  (4,189)  (1,318)  (11,256)  (3,549)
Interest expense  (3,359)  (753)  (9,378)  (1,367)
Loss before income taxes  (7,548)  (2,071)  (20,634)  (4,916)
Income tax benefit  23   —   17   — 
Net loss  (7,525)  (2,071)  (20,617)  (4,916)
Less: Net loss attributable to                
non-controlling interest  74   104   218   216 
Net loss attributable to DPW Holdings $(7,451) $(1,967) $(20,399) $(4,700)
Preferred deemed dividends on Series B                
and Series C Preferred Stock  —   —   (108)  (319)
Preferred dividends on Series C                
Preferred Stock  —   (27)  —   (35)
Net loss available to common stockholders $(7,451) $(1,994) $(20,507) $(5,054)
Basic and diluted net loss per common share $(0.11) $(0.15) $(0.39) $(0.46)
Basic and diluted weighted average common                
shares outstanding  67,869,778   13,745,540   52,977,059   10,884,948 
                 
Comprehensive Loss                
Loss available to common stockholders $(7,451) $(1,994) $(20,507) $(5,054)
Other comprehensive income (loss)                
Foreign currency translation adjustment  (78)  42   (210)  141 
Net unrealized loss on securities                
available-for-sale  (1,342)  (43)  (6,788)  (43)
Other comprehensive income (loss)  (1,420)  (1)  (6,998)  98 
Total comprehensive loss $(8,871) $(1,995) $(27,505) $(4,956)

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

  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 
F-3
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
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)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
DIGITAL POWER CORPORATION

                 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  —   —   —   725   —   —   —   725 
Compensation expense due to warrant issuances  —   —   —   70   —   —   —   70 
Issuance of common stock and warrants for cash  —   25,376,527   25   22,222   —   —   —   22,247 
Issuance of common stock for services  —   3,683,059   4   4,153   —   —   —   4,157 
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  —   1,489,232   1   1,177   —   —   —   1,178 
Repurchase of common stock  —   (54,998)  —   (55)  —   —   —   (55)
Beneficial conversion feature in connection with convertible notes  —   —   —   1,008   —   —   —   1,008 
Fair value of warrants issued in connection with convertible notes  —   —   —   3,411   —   —   —   3,411 
Cash for exchange fees and other financing costs  —   —   —   (1,951)  —   —   —   (1,951)
Non-controlling interest from acquisition of I. AM  —   —   —   —   —   —   33   33 
Non-controlling interest from Microphase  —   —   —   —   —   —   (25)  (25)
Comprehensive loss:                                
Net loss  —   —   —   —   (20,399)  —   —   (20,399)
Preferred deemed dividends  —   —   —   108   (108)  —   —   — 
Net unrealized gain on securities available-for-sale, net of income taxes  —   —   —   —   —   (6,788)  —   (6,788)
Foreign currency translation adjustments  —   —   —   —   (79)  (210)  —   (289)
Net loss attributable to non-controlling interest  —   —   —   —   —   —   (218)  (218)
                                 
BALANCES, September 30, 2018  125,000   69,341,486  $69 $73,950  $(43,998) $(2,495) $571  $28,097 

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

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, 
  2018  2017 
       
Cash flows from operating activities:        
Net loss $(20,617) $(4,916)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  1,642   128 
Amortization  101   6 
Interest expense – debt discount  8,813   1,239 
Accretion of original issue discount on        
notes receivable – related party  (1,524)  (36)
Interest expense on conversion of promissory notes        
to common stock  —   13 
Stock-based compensation  4,163   1,269 
Realized losses on sale of digital currencies  111   — 
Realized losses on sale of marketable securities  168   — 
Unrealized losses on trading securities  43     
Changes in operating assets and liabilities:        
Accounts receivable  876   (737)
Accounts receivable, related party  (3,517)  — 
Digital currencies  (1,503)  — 
Inventories  (117)  228 
Prepaid expenses and other current assets  198   (166)
Other assets  (145)  (197)
Accounts payable and accrued expenses  1,923   2,083 
Accounts payable, related parties  (15)  104 
Other current liabilities  (30)  (595)
Net cash used in operating activities  (9,430)  (1,577)
Cash flows from investing activities:        
Purchase of property and equipment  (9,318)  (22)
Loss on disposition of asset  22   — 
Purchase of intangible asset  (54)  (50)
Purchase of Power Plus  —   (409)
Purchase of Enertec  (4,937)  — 
Cash received on acquisitions  293   — 
Investments – related party  (845)  (2,710)
Related party investment in real property  (1,915)  — 
Investment in real property  —   (300)
Investments in warrants and common stock - related party  (2,288)  — 
Investments in marketable securities  (858)  — 
Sales of marketable securities  2,159   — 
Investments - others  (25)  (25)
Loans to third party  —   (814)
Loans to related parties  —   (54)
Proceeds from loans to related parties  16   — 
Investments in debt and equity securities  (2,166)  — 
Net cash used in investing activities $(19,916) $(4,384)

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

  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 
F-5
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
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, 
  2018  2017 
       
Cash flows from financing activities:        
Gross proceeds from sales of common stock and warrants $22,247  $745 
Repurchase of common stock  (55)  — 
Proceeds from issuance of preferred stock  —   1,540 
Financing cost in connection with sales of equity securities  (1,951)  (275)
Proceeds from stock option exercises  98   — 
Proceeds from warrant exercises  867   — 
Proceeds from convertible notes payable  11,550   1,514 
Proceeds from notes payable – related party  —   350 
Proceeds from notes payable  12,235   785 
Proceeds from short-term advances – related party  137   — 
Proceeds from short-term advances  761   — 
Payments on short-term advances  (425)  — 
Payments on notes payable  (11,782)  (30)
Payments on convertible notes payable  (2,362)  (157)
Proceeds from advances on future receipts  2,990   1,772 
Payments on advances on future receipts  (5,158)  (439)
Payments of preferred dividends  —   (8)
Financing cost in connection with sales of debt securities  —   (122)
Payments on revolving credit facilities, net  (361)  (481)
Net cash provided by financing activities  28,791   5,194 
Effect of exchange rate changes on cash and cash equivalents  (220)  85 
Net decrease in cash and cash equivalents  (775)  (682)
Cash and cash equivalents at beginning of period  1,478   996 
Cash and cash equivalents at end of period $703  $314 

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

  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     

F-6

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

U.S. dollars in thousands

  

For the Nine Months Ended

September 30,

 
  2018  2017 
       
Supplemental disclosures of cash flow information:        
Cash paid during the period for interest $695  $69 
         
Non-cash investing and financing activities:        
Cancellation of convertible note payable into shares of common stock $2,168  $145 
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 Preferred Stock		 $250  $— 
Issuance of common stock for prepaid services $794  $— 
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 

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
5
DIGITAL POWER CORPORATION

DPW HOLDINGS, INC. AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

SEPTEMBER 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, underSeptember 2017. The Company isa diversified holding company owning subsidiaries engaged in the General Corporation Law of the State of California. Digital Powerfollowing 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 formedEnertecSystems 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 businessesalso 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”)and I. AM, Inc. (“I.AM”)“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”). 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 ofCompany 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 (saleswith 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 30, 2017,2018, the Company had cash and cash equivalents of $314,$703, an accumulated deficit of $17,212$43,998 and a negative working capital of $4,174.$9,744. The Company has incurred recurring losses and reported losses for the three and nine months ended September 30, 2017,2018, totaled $1,967$7,525 and $4,700,$20,617, 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 continuescontinued 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).
6
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).

·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 at a price of $0.55 per share (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).
7
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. Currently, the Company has subcontracted out a significant amount of these services to third parties. 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.

8
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, 20162017 was derived from the Company’s audited 20162017 financial statements contained in the above referenced Form 10-K. Results of the three and nine months ended September 30, 2017,2018, are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.

2018.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 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, andEnertec, 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 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.

Revenue Recognition

The Company recognizes revenue under ASC 606,Revenue from Contracts with Customers. The 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 an amount that reflects the consideration to which the 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, and
·Step 5: Recognize revenue when the company satisfies a performance obligation.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

 
Investments in Debt and Equity Securities

The Company classifies its investments in Avalanche International, Corp (“AVLP”), consisting of shares of common stock and debt securities, in accordance with ASC No. 320, Investment in Debt and Equity Securities (“ASC No. 320”) and ASC No. 325, Investment – Other (“ASC No. 325”). The investment 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 evaluating the Company’s debt and equity investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial conditiondisaggregated revenues consist of the issuer and any changes thereto, andfollowing 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 recoverynine months ended September 30, 2018:

  Nine Months ended September 30, 2018 
  DPC  DPL  Enertec  SC Mining  I.AM  Total 
                   
Primary Geographical Markets                        
North America $11,957  $9  $—  $1,546  $2,087  $15,599 
Europe  107   1,231   —   —   —   1,338 
Middle East  —   —   3,374   —   —   3,374 
Other  574   99   —   —   —   673 
  $12,638  $1,339  $3,374  $1,546  $2,087  $20,984 
                         
Major Goods                        
RF/Microwave Filters $2,949  $—  $—  $—  $—  $2,949 
Detector logarithmic video amplifiers  840   —   —   —   —   840 
Power Supply Units  4,743   —   —   —   —   4,743 
Power Supply Systems  —   1,339   —   —   —   1,339 
Healthcare diagnostic systems  —   —   1,156   —   —   1,156 
Defense systems  —   —   2,218   —   —   2,218 
Digital Currency Mining  —   —   —   1,546   —   1,546 
Restaurant operations  —   —   —   —   2,087   2,087 
Lending activities  194   —   —   —   —   194 
MLSE Systems  3,912   —   —   —   —   3,912 
  $12,638  $1,339  $3,374  $1,546  $2,087  $20,984 
                         
Timing of Revenue Recognition                        
Goods transferred at a point in time $8,726  $1,339  $—  $1,546  $2,087  $13,698 
Services transferred over time  3,912   —   3,374   —   —   7,286 
  $12,638  $1,339  $3,374  $1,546  $2,087  $20,984 
                         

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.

Revenue Recognition

Products

The Company generates revenues from the sale of its products through a direct and indirect sales force. Revenues fromThe Company’s performance obligations to deliver products are recognizedsatisfied 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 evidencecustomer 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 toproducts 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, certainCompany’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 toinclude stock rotation rights are deferredafter 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 soldamount 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 end customer or until the rotation rights expire. Service revenues are deferred and recognized on a straight-line basis over the termpractical expedient in ASC 606-10-50-14(a) of the service agreement. Service revenues are immaterial in proportion to the Company's revenues. 

9
DIGITAL POWER CORPORATIONnot disclosing information about its remaining performance obligations.

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
Warranty

Manufacturing Services

The Company offersprovides 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 warranty period for all its products. Warranty periods range from onecost to two years dependingcost method which measures progress based on the product.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 customer.

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 September 30, 2018 was $48,338. The Company estimatesexpects to recognize the costsremaining revenue related to the partially unsatisfied performance obligation over the next two and a half years. The Company will be paid in installments for this performance obligation over the next two and a half years.

Blockchain Mining

The Company derives its 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 may be incurred underwhich the Company is awarded a unit of digital currency through its warranty and records a liabilityparticipation in the amountapplicable network and network participants benefit from 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 date of receipt. Expenses associated with running the cryptocurrency mining business, such costsas equipment deprecation and electricity cost are recorded as a component of cost of revenues.

Restaurant Operations

The Company records revenue from restaurant sales at the time product revenue is recognized. Factors that affectof 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 numbercost of units sold, historical rates of warranty claimsgood, beverages, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilitymerchandise and adjusts the amounts as necessary. As of September 30, 2017disposable paper and December 31, 2016,plastic goods used in preparing and selling the Company’s accrued warranty liability was $86.

Common Stock Purchase Warrantsmenu items, and Other Derivative Financial Instruments

The Company classifies common stock purchase warrantsexclude 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 employeesthe purchase of a vendor’s products are recognized as a reduction of the Company, satisfyrelated food and beverage costs as earned.

Property and Equipment, Net

Property and equipment as 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 criteriastraight-line method over the estimated useful lives of the assets, at the following annual rates:

Useful lives (in years)
Cryptocurrency machines and related equipment3 - 5
Computer, software and related equipment3 - 5
Office furniture and equipment5 - 10
Leasehold improvementsOver the term of the lease or the life of the asset, whichever is shorter.

Digital Currencies

Digital currencies consist of Bitcoin, Bitcoin Cash and Litecoin received from mining for classification 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.

Stock-Based Compensation

Theaccount. Given that there is limited precedent regarding the classification and measurement of cryptocurrencies under current GAAP, the Company accountshas determined to account for stock-based compensationthese digital currencies as indefinite-lived intangible assets in accordance with ASC No. 718, Compensation350,Intangibles – 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 termGoodwill 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 dateOther, for the fair value of the equity instrumentsperiod covered by this report and in future reports unless and until further guidance is 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”Financial Accounting Standards Board (“FASB”). 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.
10

DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

Conversion options

Indefinite-lived intangible assets are recorded at cost and are not subject to amortization, but shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise pricesit is more favorablelikely than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

The Company accounts for convertible instruments, when the Company has determinednot that the embedded conversion options should not be bifurcated from their host instruments,asset is impaired. If, at the time of an impairment test, the carrying amount of an intangible asset exceeds its fair value, an impairment loss in accordance with ASC No. 470-20, Debt with Conversion and Other Options (“ASC No. 470-20”). Under ASC No. 470-20an amount equal to 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 fairexcess is recognized. Fair value of the underlying common stock atdigital currencies is based on the commitment date of the note transaction and the effective conversion price embeddedquoted market prices. The Company recorded an impairment charge in the note. The Company accountsamount of $3, which is reported as a component of operating expenses in the accompanying condensed consolidated statements of operations for convertible instruments (whenboth 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, Comprehensive Income. This statement establishes standards for the reportingthree 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.

nine months ended September 30, 2018.

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.


11

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, tradeaccounts receivables and tradeaccounts 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 30, 20172018 and December 31, 2016,2017, the fair value of the Company’s investments were $3,782$3,663 and $1,036,$9,563, respectively, and were concentrated in debt and equity securities of Avalanche International Corp., which we refer to as AVLP, a related party (See Note 4)9), which are classified as available-for-sale investments. At September 30, 2018, the Company's investment in AVLP included marketable equity securities of $810 and warrants to purchase 12,814,440 shares of AVLP common stock at an exercise price of $0.50 per share of common stock. At December 31, 2017, the Company's investment in AVLP is comprised of convertible promissory notes of $3,670, net of unamortized discount, andincluded marketable equity securities of $112. At December 31, 2016, the Company's investment in$826 and warrants to purchase 8,248,440 shares of AVLP is comprisedcommon stock at an exercise price of convertible promissory notes$0.50 per share of $952, net of unamortized discount, and marketable equity securities of $84.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 belowabove 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 basisinvestment in AVLP equitableAVLP’s marketable equity securities approximatesare valued based upon the current fair value.

closing market price of common stock at September 30, 2018 and December 31, 2017, which resulted in an unrealized gain of $163 and $550, respectively.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 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 September 30, 2018, the Company has determinedheld shares of common stock in four companies 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 Companyit had purchased at the market, shares of common stock of three companies for a total cost of $25.$257. 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 at September 30, 2017.
2018 and December 31, 2017, resulting in an unrealized gain $109 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 September 30, 2018 
  Total  Level 1  Level 2  Level 3 
Investments in common stock and warrants of AVLP – a related party $3,228  $810  $—  $2,418 
Investments in marketable securities  366   366   —   — 
Investment in warrants  69   —   —   69 
Total Investments $3,663  $1,176  $—  $2,487 

  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.
12
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

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 months ended September 30, 2018 and 2017. Anti-dilutive securities, consistedwhich are convertible into the Company’s Class A common stock, consist of the following at September 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.
Recently Issued Accounting Standards

The Company has considered all other recently issued accounting standards and does not believe the adoption of such standards will have a material impact on its condensed consolidated financial statements.

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 
13
DIGITAL POWER CORPORATION2017:

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

  2018  2017 
Stock options  7,570,000   2,891,000 
Warrants1  18,410,160   10,233,199 
Convertible notes  20,077,330   3,157,576 
Conversion of preferred stock  1,785,714   4,606,131 
Total  47,843,204   20,887,906 

(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 adopted ASC 606 effective January 1, 2018 to all contracts using the modified retrospective approach. The adoption of 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 and related disclosures but does not expect it to have a material impact.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 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 September 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, 2017 $— 
Additions of digital currencies  1,505 
Realized loss on sale of digital currencies  (110)
Impairment loss on digital currencies  (3)
Payment on convertible notes payable  (726)
Purchase of fixed assets  (250)
Payments to vendors  (386)
Balance at September 30, 2018 $30 

At September 30, 2018, the Company’s digital currencies consisted of Bitcoin, Bitcoin Cash and Litecoin. Digital currencies are recorded at cost on the date they are received as revenues and are tested for impairment 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 September 30, 2018 and December 31, 2017:

  Available-for-sale securities at September 30, 2018 
      Gross unrealized  Gross realized     
  Cost  gains  gains (losses)  Fair value 
Common shares $257  $109  $—  $366 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

  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 

The following table presents additional information about marketable securities:

Balance at January 1, 2018 $1,835 
Purchases of marketable securities  858 
Sales of marketable securities  (2,159)
Realized losses on marketable securities  (168)
Balance at September 30, 2018 $366 

Available-for-sale Securities

At September 30, 2018 and December 31, 2017, the Company had invested in the marketable securities of certain publicly traded companies. At September 30, 2018 and December 31, 2017, the Company recorded an unrealized loss of nil 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 will be revalued on each balance sheet date.  The fair value of the Company’s holdings in marketable securities at September 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 September 30, 2018 and December 31, 2017, property and equipment consist of:

  September 30,  December 31, 
  2018  2017 
Cryptocurrency machines and related equipment $9,326  $— 
Computer, software and related equipment  2,507   2,432 
Restaurant equipment  1,089   — 
Office furniture and equipment  295   289 
Buildings and improvements  305   — 
Leasehold improvements  1,258   788 
   14,780   3,509 
Accumulated depreciation and amortization  (3,890)  (2,292)
Property and equipment, net $10,890  $1,217 

For the three and nine months ended September 30, 2018, depreciation expense amounted to $884 and $1,642, respectively. During the yearthree and nine months ended September 30, 2017, depreciation expense amounted to $50 and $128, respectively.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

7. INTANGIBLE ASSETS, NET

At September 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  (61)
Balance as of December 31, 2017 $2,898 
Trade name and trademark  3 
Start-up costs  51 
Accumulated amortization  (101)
Balance as of September 30, 2018 $2,851 

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 $33 and $101, respectively, for the three and nine months ended September 30, 2018 and $4 and $6, respectively, for the three and nine months ended September 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 September 30, 2018 and December 31, 2017, are comprised of the following:

  September 30,  December 31, 
  2018  2017 
Investment in convertible promissory note of AVLP $6,407  $4,124 
Investment in warrants of AVLP  2,418   6,902 
Investment in common stock of AVLP  810   826 
Accrued interest in convertible promissory note of AVLP  803   324 
Total investment in AVLP – Gross  10,438   12,176 
Less: original issue discount  (2,580)  (2,115)
Total investment in AVLP – Net $7,858  $10,061 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 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 nine months ended September 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  —   1,474   1,474 
Payment of convertible promissory notes of AVLP  —   (1,108)  (1,108)
Investment in common stock of AVLP  371   —   371 
Fair value of warrants issued by AVLP  1,917   —   1,917 
Unrealized loss in warrants of AVLP  (6,401)  —   (6,401)
Unrealized loss in common stock of AVLP  (387)  —   (387)
Accretion of discount  —   1,452   1,452 
Accrued Interest  —   479   479 
Balance at September 30, 2018 $3,228  $4,630  $7,858 

The Company has made a strategic decision to invest in AVLP, a related party controlled by Philou an existing majority stockholder.Ventures, LLC, or Philou, 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 AvalancheAVLP a non-revolving credit facility of up to $5,000, inclusive of prior amounts loaned to AVLP,$10,000 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 September 30, 2018, the Company andhas 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$6,407 and, in addition to the 12% convertible into shares ofpromissory 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 Warrantwarrants to purchase 6,948,80012,814,440 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 entitleswarrants entitle the Company to purchase up to 6,948,80012,814,440 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 Warrantwarrant may be exercised for cash or on a cashless basis. At September 30, 2018 and December 31, 2017, the Company recorded an unrealized gain (loss) on its investment in warrants of AVLP of ($1,888) 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 nine months ended September 30, 2018, the Company’s investment in warrants and common stock of AVLP represented $387 and $6,401, respectively, of the Company’s aggregate $1,339 and $6,787, respectively, in net unrealized loss on securities available-for-sale. The Company’s investment in AVLP will be revalued on each balance sheet date. The fair value of the Company’s holdings in the AVLP 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 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 12,814,440 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 $4,306 are being amortized as interest income through the maturity date usingdate. During the three and nine months ended September 30, 2018, the Company recorded $535 and $1,454, respectively, of interest rate method.income for the discount accretion. During the three and nine months ended September 30, 2017, the Company recorded $18 and $38, respectively, of interest income for the discount accretion.accretion As of September 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$803 and $13,$324, respectively.


The Company has classifiedevaluated the collectability of both interest and principal for the convertible promissory notes in AVLP Notes as Available-for-Sale securities, subjectto 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 320-10existing contractual terms. Impairment assessments require significant judgments and 825-10are based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.

During the nine months ended September 30, 2018 and the year ended December 31, 2017, the Company also acquired in the open market 389,391 shares of AVLP Notes.common stock for $371 and 221,333 shares of AVLP common stock for $192, respectively. At September 30, 2017, the closing market price of AVLP’s common Stock was $0.64. Subsequent to quarter-end,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$0.94, a decline from $1.75 at December 31, 2017. The Company has determined that its cost basisinvestment in AVLP marketable equity securities are accounted for pursuant to the fair value method and based upon the closing market price of common stock approximatesat September 30, 2018, the currentCompany has recognized an unrealized gain of $163.

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.

F-19
14
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

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 13).

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 investmentmade additional investments in debt and equity securities of AVLP.


5. ACQUISITIONS

Microphase Corporation

various entities. At September 30, 2018 and December 31, 2017, the outstanding balance of these investments was $2,140 and $1,637, respectively.

11. INVESTMENTS IN REAL ESTATE

On April 28,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 related activities of a hotel in New York City. In connection with this transaction, the Company has agreed to finance a portion of the capital required by the NY Partnership. The Company used $1,000 from the proceeds of the August 16, 2018 Notes as an additional capital contribution in the partnership. As of September 30, 2018, the Company had invested an aggregate of $1,815 in the NY Partnership and $100 in another real estate investments Subject to the occurrence of certain events and other conditions over which the Company has no control, it is required to make monthly capital contributions of $500,000 every thirty days until DPW’s commitment is funded in full, which is expected to occur in January 2020. If the Company fails to make a monthly contribution when due, then the other entities affiliated with the NY Partnership have the right to acquire fifty percent (50%) of the capital contributions that the Company will have made to the NY Partnership at that time.

12. OTHER INVESTMENTS, RELATED PARTIES

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

MTIX, Ltd.

On December 5, 2017, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”)an exchange agreement with Microphase; Microphase HoldingWT Johnson pursuant to which the Company LLC, a limited liability company organized underissued to WT Johnson two convertible promissory notes in the lawsprincipal 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 1,603,434issued 600,000 shares (the “Subject Shares”) of the issued and outstandingits 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”) forsale 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 intoentire $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 distributoradditional $400 of value added power supply solutions, UPS systems, fans, filters, line cords, and other power-related components. On September 1, 2017, Coolisys completedtax due to WT Johnson. Concurrent with entering into the acquisition.

Underexchange agreement, the terms of the Agreement, Coolisys Technologies acquired all the membership Interests of Power-Plus forCompany 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 September 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, the daughter of Mr. Kohn and 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 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 nine months ended September 30, 2018, the Company recognized $8 and $22, 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 AVLP 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.

13. 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 $1, 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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


The acquisition of MicrophaseEnertec and Power-Plus isI. 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.

15
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
SEPTEMBER 30, 2017
U.S. dollars in thousands, except share The initial accounting for the acquisition is not yet complete, and per share data
the Company is still performing procedures to determine the appropriate accounting.

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   1,054 
Other assets  96   3 
Accounts payable and accrued expenses  (2,615)  (104)
Short term bank credit  (4,236)  — 
Accrued severance pay  (132)  — 
Net liabilities assumed  (1,506)  1,022 
Goodwill  6,357   576 
Non-controlling interest  —   (33)
Purchase price $4,851  $1,565 

The following pro forma data for the three and nine months ended September 30, 2017 summarizes the results of operations for the periodsperiod indicated as if the Microphase, Power-Plus and Power-PlusEnertec 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 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)
16
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
6.

  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
Total Revenue $8,344  $5,025  $22,521  $16,417 
Net loss $(7,525) $(2,669) $(22,921) $(8,854)
Less: Net loss attributable                
to non-controlling interest  74   104   218   726 
Net loss attributable to                
common stockholders $(7,451) $(2,565) $(22,703) $(8,128)
Preferred deemed dividends  —   —   (108)  (319)
Preferred dividends  —   (27)  —   (35)

Loss available to common

shareholders

 $(7,451) $(2,592) $(22,811) $(8,482)
                 

Basic and diluted net loss per

common share

 $(0.11) $(0.19) $(0.43) $(0.78)
                 
Basic and diluted weighted average                
common shares outstanding  67,869,778   13,745,540   52,977,059   10,884,948 
                 
Comprehensive Loss                

Loss available to common

shareholders

 $(7,451) $(2,592) $(22,811) $(8,482)
Other comprehensive income (loss)                
Change in net foreign currency                
translation adjustments  (78)  42   (210)  141 
Net unrealized gain (loss) on                
securities available-for-sale  (1,342)  (43)  (6,788)  (43)
Other comprehensive income
(loss)		  (1,420)  (1)  (6,998)  98 
Total comprehensive loss $(8,871) $(2,593) $(29,809) $(8,384)

14. STOCK-BASED COMPENSATION

Under the 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 5,372,6307,372,630 shares of the Company’s common stock. The Company also has 206,000196,000 outstanding options that were granted between 2009 and 2011 pursuant to the terms of the 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 30, 2017,2018, an aggregate of 1,350,83255,773 of the Company's options are still available for future grant.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

 

During the threenine months ended September 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 nine months ended September 30, 2017, the Company granted 50,000 and 560,000 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 nine months ended September 30, 2018 and 2017 was $514 and $251, respectively, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the three and nine months ended September 30, 2018 and 2017, the Company also issued 380,6451,583,059 and 1,336,798, respectively, shares of common stock to its consultants and service providers pursuant to the 2016 Plan.Plans. The Company estimated that the grant date fair value of these shares of common stock was $2,640 and $742, respectively, 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 months ended September 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:

  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 
17
DIGITAL POWER CORPORATION

  Nine Months Ended 
  September 30, 2018  September 30, 2017 
Weighted average risk-free interest rate 2.41% — 2.80%  1.73% — 2.14% 
Weighted average life (in years)  4.75   5.0 
Volatility  124.7% — 131.7%   98.4% — 107.2% 
Expected dividend yield  0%  0%

Weighted average grant-date fair value per share of

options granted

 $0.92  $0.45 

The options outstanding as of September 30, 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 - $0.80  3,340,000  7.74 $0.67   1,817,499  $0.67 
$1.00 - $1.38  170,000  8.78 $1.37   51,250  $1.36 
$1.51 - $1.69  62,500  3.96 $1.64   62,500  $1.64 
$0.57 - $1.69  3,572,500  7.72 $0.72   1,931,249  $0.71 

Issuances outside of Plans
$0.80 - $2.32  3,997,500  7.65 $1.30  325,694 $1.61 

Total Options 
$0.57 - 2.32  7,570,000  7.68 $1.03  2,256,943 $0.84 

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
The options outstanding as of September 30, 2017, 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 

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 months ended September 30, 20172018 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  Nine Months Ended 
  Sept. 30, 2018  Sept. 30, 2017  Sept. 30, 2018  Sept. 30, 2017 
Cost of revenues $—  $2  $5  $6 
Engineering and product development  —   6   14   20 
Selling and marketing  —   8   12   18 
General and administrative  697   349   2,204   1,017 
Stock-based compensation from Plans $697  $365  $2,235  $1,061 

Stock-based compensation from

issuances outside of Plans

  655   152   1,928   208 
Total Stock-based compensation $1,352  $517  $4,163  $1,269 

The combination of stock-based compensation of $1,061$2,235 from the issuances of equity basedequity-based awards pursuant to the Plans and stock-based compensation attributed to restrictedstock awards of $1,361 and warrants and options of $567, which were issued outside of the Plans, resulted in aggregate stock-based compensation of $1,352 and $4,163 during the three and nine months ended September 30, 2018. During the nine months ended September 30, 2018, the Company issued 2,897,500 options to purchase shares of common stock at an average exercise price of $1.30 per share to its directors and officers. These shares were issued outside of the Plans and are subject to shareholder approval. During the nine months ended September 30, 2017, stock-based compensation was comprised of $1,061 from the issuances of equity-based awards pursuant to the Plans and stock-based compensation attributed to stock awards of $130 and warrants and options of $78, which were issued outside of the Plans, resulted in aggregate stock-based compensation of $1,269 during the nine months ended September 30, 2017. During the three months ended September 30, 2017, aggregate stock-based compensation was $517, which consisted of $365 from the issuances of equity based awards pursuant to the Plans and stock-based compensation attributed to restricted stock award of $120 warrants and options of $32, which were issued outside of the Plans. During the three and nine months ended September 30, 2016, the only stock-based compensation expense was from issuances pursuant to the Plans.

18
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

A summary of option activity under the Company's stock option plans as of September 30, 2017,2018, and changes during the nine 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         
Forfeited1  100,000   (110,000) $1.33         
Exercised  —   (60,000) $1.63         
September 30, 2018  55,773   3,572,500  $0.72   7.72  $0 

1 Includes 10,000 options that were issued pursuant to the Company’s 2002 Plan and are not available for future issuance.

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on September 30, 2017, $0.552018 of $0.42 and the exercise price, multiplied by the number of in-the-money-options).

As of September 30, 2017,2018, there was $425$860 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 2.33.2 years.

7. WARRANTS
During the nine months and ended September 30, 2017, the Company issued a total of 8,484,073 warrants, at an average exercise price of $0.81 per share.  Warrant issuances during the current quarter ended September 30, 2017, included:
(i)
On April 17, 2017, 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).
19
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

15. WARRANTS

During the three months ended March 31, 2018, the Company issued a total of 2,450,000 warrants at an average exercise price of $1.16 per share.

(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)(i)On August 3, 2017, weJanuary 23, 2018, the Company 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 272,727625,000 shares of common stock at an exercise price equal to $0.65$2.20 per share of common stock in connection with enteringthe issuance of a 10% senior convertible promissory note in the aggregate principal amount of $1,250 (See Note 19c).

(ii)On January 25, 2018, the Company entered into securitiesthree 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 272,727purchase 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 16).

(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 apromissory note in the principal amount of $1,750,000 with a term of two months, subject to the investorsCompany’s ability to prepay within one month (See Note 17a).

(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 investorif 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 17b).

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 $0.55an 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 19b).

(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 21).

(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 21). 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 yetfor 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 and is subject to approval from the NYSE American prior to issuance, which had not been received at September 30, 2017.an exercise price of $0.94 per share of common stock(See Note 21).

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

 

(v)On May 15, 2018, the Company entered into a securities purchase agreement with an institutional investor to sell and issue a senior secured convertible promissory note with a principal face amount of $6,000 and (i) a five-year warrant to purchase 1,111,111 shares of the 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 purchase 1,724,138 shares of the Company’s Class B common stock at an exercise price of $0.87 per share of Class A common stock (See Note 19a). 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 17b).

The following table summarizes information about common stock warrants outstanding at September 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 
20
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   8.09  $0.01   277,774  $0.01 
$0.55  283,636   4.11  $0.55   283,636  $0.55 
$0.60  75,000   4.59  $0.60   75,000  $0.60 
$0.66  148,133   4.09  $0.66   148,133  $0.66 
$0.70  2,125,715   4.12  $0.70   1,768,572  $0.70 
$0.75  135,909   3.62  $0.75   135,909  $0.75 
$0.80  481,666   1.95  $0.80   481,666  $0.80 
$0.87  1,724,138   4.62  $0.87   1,724,138  $0.87 
$0.94  7,691,778   4.63  $0.94   7,691,778  $0.94 
$1.00  280,000   4.19  $1.00   280,000  $1.00 
$1.10  759,486   2.93  $1.10   759,486  $1.10 
$1.15  1,700,000   4.49  $1.15   1,700,000  $1.15 
$1.30  993,588   4.54  $1.30   993,588  $1.30 
$1.35  1,111,111   4.62  $1.35   1,111,111  $1.35 
$2.20  625,000   4.32  $2.20   625,000  $2.20 
$2.25  112,500   4.32  $2.25   112,500  $2.25 
$2.50  162,500   4.32  $2.50   162,500  $2.50 
$0.01 - $2.50  18,727,620   4.43  $1.01   18,330,791  $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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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


The Company utilized the Black-Scholes option pricing model and the assumptions used during the nine months ended September 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 
8.

  2018 2017
Weighted average risk-free interest rate  2.41% — 2.94%  1.42% — 2.01%
Weighted average life (in years)  4.8  4.9
Volatility  124.8% — 138.4%  98.5% — 107.5%
Expected dividend yield  0%  0%
Weighted average grant-date fair value per
share of warrants granted		 $0.79 $0.41

16. 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. The term future receipts“future receipts” means cash, check, ACH, credit card, debit card, bank card, chargedcharge 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.

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. During the three and nine months ended September 30, 2017,2018, non-cash interest expense of $142$499 and $2,152, 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”) in February of 2012, as amended in September 2015 and July 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 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.
21
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 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.

17. NOTES PAYABLE


Notes Payable at September 30, 2018 and December 31, 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 

  September 30,  December 31, 
  2018  2017 
12% short-term promissory note(b) $1,000  $— 
Other short-term notes payable(c)  1,143   — 
Notes payable to Wells Fargo(d)  295   300 
Note payable to Dept. of Economic and Community Development(e)  265   292 
Power-Plus Credit Facilities(f)  —   171 
Note payable to Power-Plus Member(g)  34   130 
Note payable to People's United Bank(h)  18   19 
8% short-term promissory note(i)  1,212     
12% September '18 short-term promissory note(j)  789     
10% short-term promissory notes(k)  —   15 
Short term bank credit(l)  1,800   — 
Total notes payable  6,556   927 
Less:        
Unamortized debt discounts  (482)  — 
Unamortized financing cost  (41)  — 
Total notes payable, net of financing cost $6,033  $927 
Less: current portion  (5,539)  (402)
Notes payable – long-term portion $494  $525 
(a)
In December 2016, MicrophaseOn February 20, 2018, the Company issued $705promissory note in 10% short-termthe principal face amount of $900 to an accredited investor. This promissory notes to nineteen accredited investors which, after deducting $71noteincluded an original issue discount (“OID”) of placement fees to its selling agent, Spartan Capital Securities, LLC (“Spartan”), resulted in $634$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 Microphase (the “10% Short-Term Notes”).the Company’ ability to prepay within one month. The 10% Short-Term Notes are duenew promissory noteincluded an OID of $350 if paid within one yearmonth 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 dateFebruary 20, 2018 promissory note. The interest on the February 20, 2018 note in the amount of issuance. The amount due pursuant$150 was paid to the 10% Short-Term Noteslender 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 equalsubject 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 recorded debt discount in the entire original principal amount multiplied by 125% (the “Loan Premium”) plus accrued interest.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 nine months ended September 30, 20172018, non-cash interest expense of nil and the period June 3, 2017 to September 30, 2017, Microphase incurred $19 and $25,$604, respectively, of interest on these 10% short-term promissory notes. Concurrently, Microphase entered into a one-year agreement with Spartan for investment banking services which provided for: (i) $120 of consulting fees that were paid in cashwas recorded from the proceedsamortization of debt discount and interest expense of nil and $350 was recorded from the amortization of the 10% Short-Term Notes; and (ii) if Microphase completes an initial public offering, $90 payable in shares of Microphase common stock. As of September 30, 2017, accrued interestOID on the 10% Short-Term Notes was $237.

(b)new promissory note. On June 2, 2017, pursuant toApril 23, 2018, the terms of Company paidthe Share Exchange Agreement and in consideration of legal services, Microphase issued a $450 8%entire outstanding principal on the new promissory note with a maturity date of November 25, 2017 to Lucosky Brookman, LLP (the “Lucosky Note”$2,100). In conjunction with the issuance of the Lucosky Note, 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 the amount of the Lucosky Note.The Company, at its option, may redeem for cash, in whole or in part, at any timenew promissory note had been guaranteed by our Chief Executive Officer 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 multipliedhad also been guaranteed by the number of shares being redeemed. Any such optional redemption by the Company shall be credited against the Lucosky Note. During the three months ended September 30, 2017 and the period June 3, 2017 to September 30, 2017, Microphase incurred $3 and $6, respectively, of interest on the Lucosky Note. As of September 30, 2017, accrued interest on the Lucosky Note was $6.Philou.
22
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

(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 investorif 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 with a 10% OID. The promissory note is in 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, however, since payment was not made on the specified maturity date this unsecured 12% promissory note is currently in default. 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. 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 was amortized as non-cash interest expense over the term of the debt. During the three and nine months ended September 30, 2018, non-cash interest expense of nil and $271, respectively, was recorded from the amortization of debt discount and interest expense of nil 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 nine months ended September 30, 2018, the Company entered into the following short-term promissory notes:

(i)On February 7, 2018, the Company issued demand promissory notes in the aggregate principal face amount of $440 to accredited investors. These promissory notesincluded an aggregate OID of $40 resulting in net proceeds to the Company of $400.The principal and OID on these notes were due and payable on demand after April 24, 2018. These loans were paid on April 27, 2018. During the three and nine months ended September 30, 2018, the Company recognized nil and $40, respectively, fromthe amortization of OID on these demand promissory notes.

(ii)On February 26, 2018, the Company issued a 10% promissory note in the principal amount of $330 to an accredited investor. This promissory noteincluded an OID of $30 resulting in net proceeds to the Company of $300.The principal and accrued interest on this note was due and payable on April 12, 2018, subject to a 30-day extension available to the Company. This 10% promissory note was paid on April 27, 2018. During the three and nine months ended September 30, 2018, the Company recognized nil and $36 from interest andthe amortization of OID on this 10% promissory note.

(iii)On March 27, 2018, the Company issued a 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 Company paid $50 and $150, respectively, on this 10% promissory note of $200.

(iv)On May 23, 2018, the Company issued a promissory note in the aggregate principal face amount of $81 to an accredited investor. The promissory noteincluded an aggregate OID of $6 resulting in net proceeds to the Company of $75.The principal and OID on this note were due and payable on August 20, 2018. This promissory note was paid on July 25, 2018. During the three and nine months ended September 30, 2018, the Company recognized $3 and $6, respectively, fromthe amortization of OID on this promissory note.

(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 noteincluded an aggregate OID of $60 resulting in net proceeds to the Company of $300.The principal and OID on this note were due and payable on June 22, 2018. The outstanding balance on this note was paid on July 2, 2018. During the three and nine months ended September 30, 2018, the Company recognized nil and $60, respectively, fromthe amortization of OID on this promissory note.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

 

(c)(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 noteincluded an aggregate OID of $67 resulting in net proceeds to the Company of $445.The principal and OID on this note were due and payable on July 9, 2018. At September 30, 2018, the outstanding balance on this note was $137. Since payment was not made on the specified maturity date this unsecured promissory note is currently in default. During the three and nine months ended September 30, 2018, the Company recognized $19 and $67, respectively, fromthe amortization of OID on this promissory note.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.

(viii)On July 13, 2018, the Company issued a 15% promissory note in the principal amount of $176 to an accredited investor. This promissory note included an OID of $16 and debt issuance costs of $5 resulting in net proceeds of $155.At September 30, 2018, the outstanding balance on this note was $156.The principal and accrued interest on this note is due and payable on October 11, 2018. Mr. Ault personally guaranteed the repayment of this note.

(ix)On August 10, 2018, DP Lending issued a 12% promissory note in the principal amount of $550 to an accredited investor. This promissory note included an OID of $50 resulting in net proceeds of $500. The principal and accrued interest on this note is due and payable on August 10, 2019.

(x)On August 16, 2018, the Company issued an 8% promissory note in the principal amount of $225 to an accredited investor. This promissory note included an OID of $25 resulting in net proceeds of $200.At September 30, 2018, the outstanding balance on this note was $215.The principal and accrued interest on this note is due and payable on October 5, 2018 subject to a 50-day cure period available to the Company. Mr. Ault personally guaranteed the repayment of this note.

(xi)On August 23, 2018, DP Lending issued a promissory note in the principal amount of $85 to an accredited investor. This promissory note included an OID of $10 resulting in net proceeds of $75.At September 30, 2018, the outstanding balance on this note was $85.The principal and accrued interest on this note was due and payable on September 24, 2018, subject to a 28-day extension available to DP Lending. However, since payment was not made on the specified maturity date this unsecured promissory note is currently in default.

(xii)On August 28, 2018, DP Lending issued a promissory note in the principal amount of $115 to an accredited investor. This promissory note included an OID of $15 resulting in net proceeds of $100. The principal and accrued interest on this note was due and payable on September 14, 2018, subject to a 10-business day cure period available to DP Lending. This promissory note was paid on September 21, 2018.

(d)At September 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 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,$212, 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 30, 2017,2018, the second line of credit, secured by the former CEO’s principal residence, had an outstanding balance of $90,$83, with an annual interest rate of 3.00%. During the three and nine months ended September 30, 2017 and the period June 3, 2017 to September 30, 2017,2018, Microphase incurred $3 and $4,$15, respectively, of interest on the Wells Fargo Notes.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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


(d)
(e)
In August 2016, Microphase received a $300 loan, of which $2$35 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 nine months ended September 30, 2017 and the period June 3, 2017 to September 30, 2017,2018, Microphase incurred $3 and $8 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 matchMicrophase to spend an equal amount of cash on behalf of Microphase. As of June 30, 2017, theeligible expense. The Company has utilized $18 of the grant and the balance of $82 is reported within deferred revenue and classified in Accountsaccounts payable and accrued in the accompanying condensed consolidated balance sheet at September 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 Septemberthree months ended June 30, 2017, Power-Plus incurred $1 of interest on2018, 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, ofentered 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 224,371Company 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.$93. The warrants are exercisable commencing sixoutstanding balance on this note was $130 at December 31, 2017. During the three and nine months afterended September 30, 2018, the Company paid $32 and $96, respectively, in principal payments.

(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 September 30, 2018, the balance of that overdraft credit line was $18.

(i)On August 16, 2018, the Company entered into a securities purchase agreement with certain institutional investors providing for the issuance dateof (i) secured promissory 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 are subject(ii) an aggregate of 400,000 shares of common stock to certain beneficial ownership limitations. The exercisebe issued by the Company. During October 2018, the 400,000 shares of common stock was issued to the investors.

(j)During September 2018, we issued to institutional investors 12% term promissory notes in the principal face amount of $789, with an interest rate of 12% for a purchase price of these warrants$750. The outstanding principal face amount, plus any accrued and unpaid interest, is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cashdue by December 31, 2018, or on a cashless basis.as otherwise provided in accordance with the terms set forth therein. During October 2018, in accordance with the quarter ended June 30, 2017,notes, the Company recorded debt discount inissued 450,000 shares of its common stock to the amountinvestors. The notes contain standard and customary events 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.default.
23
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
During June

(k)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.

(l)At September 30, 2018, Enertec had short term bank credit of $1,800 that bears interest of prime plus 0.7% through 3.85% paid either on a monthly or weekly basis. Further, the Company has undertaken to comply with certain covenants under its bank loan. During the three and nine months ended September 30, 2018, the Company recorded interest expense of $21 and $31, respectively, from Enertec’s short term bank credit.

(m)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 purchase1,000 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 the5% promissory notesof $5,101.

18. NOTES PAYABLE – RELATED PARTIES

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

  September 30,  December 31, 
  2018  2017 
Notes payable to former officer and employee $309  $309 
Total notes payable  309   309 
Less: current portion  (166)  (134)
Notes payable – long-term portion $143  $175 

Microphase is a party to several notes payable agreements with seven of its past officers, employees and their family members. As of September 30, 2018, the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $55 of accrued interest, was $364, with annual interest rates ranging between 3.00% and 6.00%. During the three and nine months ended September 30, 2018, Microphase incurred $11 and $18 of interest on these short-term loansnotes payable agreements. In July 2016, one of these 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 forpay 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

19. CONVERTIBLE NOTES

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

  September 30,  December 31, 
  2018  2017 
10% Convertible secured notes(a) $8,031  $— 
5% Convertible secured notes(b)  —   550 
12% Convertible secured note(c)  —   202 
Total convertible notes payable  8,031   752 
Less:        
Unamortized debt discounts  (670)  (351)
Unamortized financing cost  (167)  (3)
Total convertible notes payable, net of financing cost $7,194  $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. Initially, the 10% Convertible Note was convertible into the Company’s common stock at $0.75 per share, but could only be converted if an event of default thereunder had occurred and not been cured on a timely basis. On September 25, 2018, the Company entered into an agreement to amend the maturity date on the 10% Convertible Note, pursuant to which amendment the amortization schedule of the 10% Convertible Note provides for 13 monthly payments in the amount of $309, and for the fourteenth payment to be in the amount of $1,011, plus accrued and unpaid interest. Each such amortization payment shall be made in cash or Bitcoin. The Company has not made the monthly amortization payments due during September 2018 and October 2018 and this secured 10% convertible note is currently in default. The Company is in negotiations with the investor to amend the payment terms on this secured 10% convertible note.

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. 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 100,001150,000 shares of the Company’s common stock at awith 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 fromwarrants using the closing priceBlack-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 computedestimated 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 thegrant date fair value of the consideration transferred,shares of common stock was $405, which was determined from the closing price of the Company’s common stock on the datedates of extinguishment.

On March 28, 2017,issuance. In aggregate, the Company issued $270recorded debt discount in demand promissory notes to several investors. These demand promissory notes accruedthe amount of $2,170 based on the relative fair values of the warrants, common stock and debt issuance costs of $367. During the three and nine months ended September 30, 2018, non-cash interest expense of $1,053 and $1,504, respectively, 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 ratemeasurement date. The volatility factor of 6% per annum. The Company received gross proceeds of $220127.9% was determined based on March 31, 2017. The remaining balance of $50 was received on April 3, 2017. the Company’s historical stock prices.

On April 5, 2017,July 2, 2018, the Company canceled these promissory notes by issuing toentered into a securities purchase agreement with the investors 360,000 sharesinstitutional investor providing for the issuance of (i) a second 10% convertible note (the “Second 10% Convertible Note”) with a principal face amount of $1,000 which Second 10% Convertible Note was convertible into the Company’s common stock at $0.75 per share and warrants(ii) an additional 400,000 of the Company’s common stock to be issued in connection with the 10% Convertible Note. The Second 10% Convertible Note matures on January 1, 2019.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

On August 31, 2018, the Company entered into a securities purchase 180,002agreement with the institutional investor providing for the issuance of a third 10% convertible note (the “Third 10% Convertible Note” and with the 10% Convertible Note and the Second 10% Convertible Note, the “10% Convertible Notes”) with a principal face amount of $2,000, which Third Convertible Note is convertible into 5,000,000 shares of the Company’s common stock at $0.40 per share and (ii) an additional 620,000 of the Company’s common stock. The shares of common stock at $0.90 per share. Duringissuable pursuant to the quarter ended June 30, 2017,Third 10% Convertible Note will not be issued to the institutional investor until the Company recorded additional interest expense of $109 as a resultshall have obtained approval of the extinguishmentNYSE American and the Company’s stockholders. The Third 10% Convertible Note matures on February 15, 2019.

At the time of issuance of the $270Third 10% Convertible Note, the closing price of the Company’s common stock was in demand promissory notesexcess of the conversion price, resulting in a beneficial conversion feature (“BCF”). The BCF embedded in the Third 10% Convertible Note is accounted for under ASC No.470, Debt (“ASC 470”). At issuance, the intrinsic value of the BCF totaled $827, based on the difference ofbetween the carrying amount of the demand promissory noteseffective conversion price and the fair value of the consideration transferred, whichCompany’s common stock at the commitment date of the transaction, and the relative fair value of the 400,000 shares of common stock was determined$177. The Company, however, is prohibited from issuing the 400,000 shares of common stock or the shares of common stock issuable pursuant to the Third 10% Convertible Note unless stockholder approval of such issuance of securities is obtained as required by applicable NYSE American 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.

The Company recorded debt issuance costs of $200 from the Third 10% Convertible Note. The debt issuance costs are being amortized as non-cash interest expense over the term of the debt. During the three months ended September 30, 2018, non-cash interest expense of $33 was recorded from the amortization of the debt issuance costs.

Pursuant to an amendment dated as of August 31, 2018 to the 10% Convertible Note and the Second 10% Convertible Note, the Company reduced the conversion price to $0.40 from $0.75. The amendment to the embedded conversion options of the 10% Convertible Note and the Second 10% Convertible Note caused a material change in the fair value of the embedded conversion options on these two notes and resulted in a loss on extinguishment of $666. At the time of the amendment, the closing price of the Company’s common stock was in excess of the conversion price, resulting in a BCF. The intrinsic value of the BCF was $1,132 on the 10% Convertible Note and $225 on the Second 10% Convertible Note based on the difference between the effective conversion price and the fair value of the Company’s common stock. The Company, however, is only allowed to issue 8 million shares of common stock pursuant to the 10% Convertible Note and is prohibited from issuing any shares of common stock pursuant to the Second 10% Convertible Note unless stockholder approval of such issuance of securities is obtained as required by applicable NYSE American 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. During the three months ended September 30, 2018, non-cash interest expense of $51 was recorded from the amortization of debt discounts attributed to the portion of the shares currently issuable from the 10% Convertible Note.

(b)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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

��

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 accounted for under ASC 470. 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 extinguishment.

24
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
SEPTEMBER 30, 2017
U.S. dollarsissuance of the 5% Convertible Note.

In the aggregate, the Company recorded debt discount in thousands, except sharethe amount of $550 based on the relative fair values of the 150,000 shares of common stock of $256, BCF of $244 and per share data

11. NOTES PAYABLE – RELATED PARTIES

Notes Payable – Related parties at September 30, 2017, andOID 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, 2016, are comprised2017, 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 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 
Company’s common stock based upon the contractual rights included in the 5% Convertible Note (See Note 21).

(a)(c)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 Chairmanaccredited 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 MCKEA12% 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 tounder the terms of the Preferred Stock Purchase Agreement entered into on March 9, 2017 (See Note 14). Since there was no difference between the reacquisitionWarrant, 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.
25
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 iswas in the principal amount of $400, included an original issue discount (“OID”)OID of $40 resulting in net proceeds to the Company of $360, bearsaccrued interest at 12% simple interest on the principal amount, and iswas due on August 13, 2018. Interest only payments arewere 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 fairintrinsic value of the BCF totaled $187. The Company, however, iswas prohibited from issuing shares of common stock pursuant to the 12% Convertible Note unlessuntil stockholder approval of such issuance of securities iswas obtained as required by applicable NYSE MKTAmerican listing rules. The Company has not yet received stockholder approval of suchfor the share issuances.issuances on December 28, 2017. The fairintrinsic 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 monthsyear ended September 30,December 31, 2017, non-cash interest expense of $37$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 21). 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

 
10%

(d)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 secured note

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 areNote is in the aggregate principal amount of $880,$1,722, included an OID of $80$172 resulting in net proceeds to the Company of $800, bear$1,550 and bears interest at 12% simple interest at 10% on the principal amount, andamount. The Company is required to make monthly principal and interest are due on February 10, 2018. Subject to certain beneficial ownership limitations, each Investor may convertpayments until the principal amount of the12% April 2018 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.
satisfied in full on October 16, 2018.

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$539 based on the estimated fair value of the 1,475,000 warrants.

The beneficial conversion feature (“BCF”) embedded inCompany estimated that the Convertible Notes is accounted for under ASC No. 470, Debt. At issuance, the estimatedgrant date 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, 2017, non-cash interest expense of $212 was recorded from the amortization of debt discounts.
26
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
Other Convertible Notes Payable
On April 17, 2017, the Company entered into two 7% convertible notes (the “7% Convertible Notes”) each 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 shares 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,$129, 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.
27
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. issuance.

In aggregate, the Company recorded debt discount in the amount of $51$885 based on the relative fair values of the warrants, common stock, OID and debt issuance costs of $25 and BCF of $26.$45. During the three and nine months ended JuneSeptember 30, 2017,2018, non-cash interest expense of $51$522 and $885, respectively, 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 The fair value 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,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. Beginning on May 16, 2018, the Company entered into a 12% convertible secured note (the “Convertible Note”)was required to make six monthly cash payments in the principalaggregate amount of $530. The Convertible Note included an original issue discount (“OID”) of $30 resulting in net proceeds to$304. On August 31, 2018, the Company made its final payment and in aggregate paid principal and accrued interest of $500. Additionally, the Convertible Note accrues interest at 12% simple interest$1,722 and $103, respectively, on the principal amount, is secured by all12% April 2018 Convertible Note.

(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 21).

20. COMMITMENTS AND CONTINGENCIES

On July 31, 2018 a shareholder derivative complaint was filed in the assetsUnited 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 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.

28
DIGITAL POWER CORPORATIONdate hereof.

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

The Convertible Note contains standardComplaint alleges violations of state law and customary eventsbreaches of default including, but not limited to, failure to make payments when due underfiduciary duty, unjust enrichment and gross mismanagement by the Convertible Note agreement and bankruptcy or insolvencyindividual defendants as, in the view 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 rightindividual defendants believe that these claims are without merit and intend to prepayvigorously defend themselves. Based on the Convertible Note. In addition, provided that the closing price for a shareCompany’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 hascannot estimate the right to compel the noteholder to convert the principal amount into sharesreasonably 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, atloss 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 sharematerial 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.

21. STOCKHOLDERS’ EQUITY


Preferred Stock


The Company is authorized to issue 2,000,00025,000,000 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 151,22423,651,224 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 30, 2017,2018, there were 100,000125,000 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.

29
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. PursuantApril 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 outstandingpurchased 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 debtshort-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 1,428,572357,143 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.
30
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 beare recorded as a non-cash return to preferred shareholders through accumulated deficit upon resolution of the contingency.

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.
31
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 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.
deficit.

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.


On November 15, 2016, the Company entered into subscription agreements (the “2016 Subscription Agreements”) with nine accredited investors. Pursuant to the terms of the 2016 Subscription Agreements, the Company sold 901,666 units at $0.60 for an aggregate purchase price of approximately $541. Each unit consists of one share of The Class B common stock and one warrant to purchase one sharecarries the voting power of 10 shares of Class A common stock (the “Nov. 2016 Warrants”) at an exercise price of $0.80.stock.

F-38
32
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
The 2016 Subscription Agreement provides that, until November 15, 2017, investors who purchased at least $100,000 have

Issuance of Common Stock pursuant to the rightAt the Market Offering

On February 27, 2018, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to participate insell shares of the purchaseCompany’s common stock, having an aggregate offering price of up to 50%$50 million from time to time, through an “at the market offering” program (the “HCW ATM Offering”) under which HCW acts as sales agent. Between February 27, 2018 and September 30, 2018, the Company had received net proceeds of $18,059 through the sale of 21,241,911 shares of the securities offered byCompany’s common stock through the Company in any future financing transactions, with limited exceptions.

HCW ATM Offering. The Nov. 2016 Warrants entitle the holders to purchase, in the aggregate, up to 901,666 shares of Common Stock at an exercise price of $0.80 per share for a period of three years. The Nov. 2016 Warrants are exercisable upon the six-month anniversaryoffer and sale of the issuance date. The exercise price ofshares through the Nov. 2016 Warrants is subjectHCW ATM Offering were made pursuant to adjustment for stock splits, stock dividends, combinations and other standard anti-dilution events. The Nov. 2016 Warrants may be exercised for cash or, upon the failure to maintain anCompany’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 cashless basis.

Betweenprospectus supplement related to the HCW ATM Offering, dated February 16, 2017 and February27, 2018. The HCW ATM Offering was terminated effective September 23, 2017,2018.

In connection with the termination of the HCW ATM Offering, HCW released DPW from the right of first refusal provisions set forth in the sales agreement. In consideration for the release, the Company issued 666,667agreed to issue HCW 500,000 shares of its common stock and to pay HCW a fee until February 28, 2020 of three percent fee of aggregate gross proceeds received on future financings by the Company and a one percent fee of aggregate gross proceeds received on future financings by the Company’s subsidiaries.

Issuance of Common Stock for Services

During the three and nine months ended September 30, 2018, the Company issued to its consultants a total of 1,000,000 shares and 3,683,059 shares, respectively, of its common stock with an extinguishment priceaggregate value of $0.60$4,158, an average of $1.13 per share for services rendered.

Issuance of common stock for conversion of debt

On January 3, 2018, accrued interest of $23 on the cancellation10% Convertible Notes was satisfied through the issuance of $400 in demand promissory notes.


38,750 shares of the Company’s common stock.

On March 8, 2017,January 10, 2018, principal and 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 19d).

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 19c).

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 19e).

Issuances of Common Stock upon Exercise of Stock Options

During January 2018, the Company issued an aggregatea total of 12,54960,000 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 payment for services to a consultant.  The shares were valued at $10, an averageresult of $0.80 per share.


On March 15, 2017, Company entered into a subscription agreement with a related party for the salethese option exercises.

Issuances of 500,000 sharesCommon Stock upon Exercise of common stock at $0.60 per share for the aggregate purchase price of $300.


On April 5, 2017,Warrants

During January 2018, the Company issued 360,002a total of 1,866,471 shares of its common stock at a price of $0.75 per share, forupon 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 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 cancellationcashless exercise of debt of the Company. The company granted warrants to purchase 109,090 shares of common stock to two of the investors that entered into the subscription agreements at $0.75 per share.
In a concurrent private placement, we sold to the institutional investor warrants to purchase an aggregate of 163,6362,187,646 shares of its common stock. These warrants were issued between August 2017 and December 2017 in conjunction with various common stock and debt financings. The Company received cash of $867 as a result of these warrant exercises.

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 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 an exercise price equal to $0.55$0.72 per share.

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 $125share and a second warrant dated April 17, 2017 to purchase 83,334182,003 shares of ourthe Company’s 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$1.00 per share.

F-39
33
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
Concurrent

Issuances of common stock in connection with entering into this exchangeconvertible notes

On February 9, 2018, in conjunction with the securities purchase agreement to sell the January 2018 10% Convertible Note in the principal amount of $1,250, the Company issued 543,478 shares of restricted common stock to the institutional investor (See Note 19c).

On April 16, 2018, in conjunction with the securities purchase agreements to sell the 12% April 2018 Convertible Note in the principal amount of $1,722, the Company issued 200,926 shares of restricted common stock to the institutional investor (See Note 19d).

On May 15, 2018, in conjunction with the securities purchase agreements to sell the 10% Convertible Note in the principal amount of $6,000, the Company issued 344,828 shares of restricted common stock to the institutional investor (See Note 19a). On August 10, 2018, pursuant to an amendment to 10% Convertible Note entered into a subscription agreement under which weon July 2, 2018, the Company issued and sold in a registered direct offering 200,000an additional 400,000 shares of restricted common stock to the holder of the note.

Issuances of Common Stock upon Conversion of Series D Preferred Stock

During the nine months ended September 30, 2018, pursuant to the conversion terms of the Series D Preferred Stock, 378,776 shares of the Series D Preferred Stock was converted into 757,552 shares of the Company’s common stock.

Issuances of Common Stock for cash and cancellation of short-term advances

On October 5, 2017, Ault & Company purchased 75,000 shares of the Company’s common stock at $0.55$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 $110.$45. The 200,000 shares of common stockand warrants were purchased throughissued by the cancellation ofCompany on May 8, 2018.  Ault & Company is controlled by Mr. Milton Ault, the Exchange Note inCompany’s Chairman and Chief Executive Officer.

On May 15, 2018, the principal amount of $110. In addition, in a concurrent private placement, the institutional investorCompany entered into a separate securities purchase agreement underagreements with certain investors in which we issued andthe Company 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 680,6457,691,775 shares of its common stock, as paymentand five-year warrants to purchase such number of shares of common stock equal to the shares of common stock purchased by the investors. The 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 issued pursuant to our registration statement filed with the Securities and Exchange Commission (File No. 333-222132) which became effective on January 11, 2018.

Treasury Stock

The Company utilizes the cost method of accounting for services to its consultant.  treasury stock. The cost of reissued shares were valued at $424, an average of $0.62 per share.


15.is determined under the last-in, first-out method. The Company purchased 54,998 shares for $55 during the nine months ended September 30, 2018.

22. RELATED PARTY TRANSACTION


TRANSACTIONS

a.
In anticipationThe Company has made a strategic investment in AVLP in expectation of future business generated by the acquisition ofCompany 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 expectationconsist 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 $1,809and 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 AVLP a non-revolving credit facility of up to $10,000 for a period ending on August 21, 2019, subject to the terms and conditions stated in excessthe Loan Agreement, including that the Company having available funds to grant such credit. At September 30, 2018, the Company has provided loans to AVLP in the principal amount $6,407 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 12,814,440 shares of the $1,500 net loan amount required pursuant toAVLP 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 September 30, 2018 and December 31, 2017, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $803 and $324, respectively.
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.
34
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

During the threenine months ended September 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 250,900open market 389,391 shares of AVLP common stock for $371 and 221,333 shares of AVLP common stock for $192, respectively. At September 30, 2018, the closing market price of AVLP’s common stock was $0.94, 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 openfair value method and based upon the closing market for $85.

price of common stock at September 30, 2018, the Company has recognized an unrealized gain of $163.

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 chairmanChief Financial Officer and a director of the Company.

On October 24, 2016,

During the three and nine months ended September 30, 2018, the Company recognized $353 and $3,912 in revenues resulting from its relationship with MTIX, which was acquired by AVLP entered into a letter of intent to acquire MTIX and made an initial payment of $50 towards the purchase. Onon August 22, 2017 pursuantand is therefore deemed to the terms ofbe 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.

Duringrelated party. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the MLSEMultiplex 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 September 30, 2018, $3,887 in revenues recognized during the nine months ended September 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.

b.On September 22, 2016,April 13, 2018, the Company entered into an amended and restated consulting agreement with Mr. Ault pursuant to assistwhich 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 programthe Agreement, Mr. Ault shall continue to serve as the Company’s Chief Executive Officer and implementingChairman 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 $300 during the three and nine months ended September 30, 2018 and $208 during the year ended December 31, 2017.

c.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.

d.
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.
35
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

e.
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.

f.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 100,000125,000 shares of Series B Preferred Stock pursuant to the terms of the Preferred Stock Purchase Agreement.

g.On March 15, 2017, Company entered into a subscription agreement with a related partyAgreement, the most recent purchase having occurred on April 24, 2018 for the salepurchase of 500,00025,000 shares of common stock at $0.60 per share for the aggregate purchase price of $300.

h.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.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).
j.
Between July 6, 2017 and September 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) $400and $4,781 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.
During the three months 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.
l.
During the three and nine months ended September 30, 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 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. 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 the controlling shareholder of Cross Click.
36
DIGITAL POWER CORPORATION

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

16.

e.During the year ended December 31, 2017, DP Lending made loans to Alzamend Neuro, Inc. (“Alzamend”), in the amount of $44. AVLP is a party to a management services agreement pursuant to which AVLP provides management, consulting and financial services to Alzamend. At June 30, 2018, the outstanding principal under these loans had been repaid. 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.

23. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION


The Company has five reportable segments as of September 30, 2018 and had two reportable geographic segments;segments as of September 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.

  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 
37
DIGITAL POWER CORPORATION

  Nine Months ended September 30, 2018 
  DPC  DPL  Enertec  SC Mining  I.AM  Eliminations  Total 
Revenue $8,532  $1,339  $3,374  $—  $—  $—  $13,245 
Revenue,
cryptocurrency		                            
mining  —   —   —   1,546   —   —   1,546 
Revenue, related party  3,912   —   —   —   —   —   3,912 

Revenue, restaurant

operations

  —   —   —   —  $2,087   —   2,087 
Revenue, lending
activities		  194   —   —   —   —   —   194 
Inter-segment revenues  30   —   —   —   —   (30)  — 
Total revenues $12,668  $1,339  $3,374  $1,546  $2,087  $(30) $20,984 
                             
Depreciation and                            
amortization expense $127  $44  $37  $1,434  $—  $—  $1,642 
                             
Loss from operations $(1,862) $(498) $47  $(3,020) $(5) $—  $(5,338)
Capital expenditures for                            
segment assets, as of                            
September 30, 2018 $349  $1  $38  $9,051  $129  $—  $9,568 
                             
Identifiable assets as of                            
September 30, 2018 $30,113  $1,517  $11,025  $8,245  $2,204  $—  $53,104 

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 
  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 
38
DIGITAL POWER CORPORATION

  Nine Months ended September 30, 2017 
  DPC  DPL  Eliminations  Total 
Revenue $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)
Capital expenditures for                
segment assets, as of                
September 30, 2018 $8  $13  $—  $21 
                 
Identifiable assets as of                
September 30, 2018 $12,315  $1,666  $—  $13,981 

  Three Months ended September 30, 2018 
  DPC  DPL  Enertec  SC Mining  I.AM  Eliminations  Total 
Revenue $2,974  $601  $2,156  $—  $—  $—  $5,731 
Revenue,
cryptocurrency		                            
mining  —   —   —   590   —   —   590 
Revenue, related party  353   —   —   —   —   —   353 
Revenue, restaurant
operations		  —   —   —   —  $1,585   —   1,585 
Revenue, lending
activities		  85   —   —   —   —   —   85 
Inter-segment revenues  25   —   —   —   —   (25)  — 
Total revenues $3,437  $601  $2,156  $590  $1,585  $(25) $8,344 
                             
Depreciation and                            
amortization expense $40  $13  $28  $803  $—  $—  $884 
                             
Loss from operations $(792) $(47) $(99) $(1,170) $(4) $—  $(2,112)
Capital expenditures for                            
segment assets, as of                            
September 30, 2018 $5  $—  $7  $242  $106  $—  $360 
                             
Identifiable assets as of                            
September 30, 2018 $30,113  $1,517  $11,025  $8,245  $2,204  $—  $53,104 

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

Concentration Risk:
 

  Three Months ended September 30, 2017 
  DPC  DPL  Eliminations  Total 
Revenue $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)
Capital expenditures for                
segment assets, as of                
September 30, 2018 $—  $—  $—  $— 
                 
Identifiable assets as of                
September 30, 2018 $12,315  $1,666  $—  $13,981 

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  For the Nine Months Ended 
  September 30, 2018  September 30, 2018 
             
   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 $—   —  $3,911   19%

  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2017  September 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 B $433   13% $1,062   16%

Revenue from Customer A and B wereis related party revenue attributable to Digital PowerCoolisys and revenue from Customer CB is also attributable to DP Limited.

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

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2018

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

 

For the three and nine months ended September 30, 20172018 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  For the Nine Months Ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
Revenues:            
Commercial products $5,073  $1,342  $13,874  $3,362 
Defense products  3,271   1,878   7,110   3,308 
Total revenues $8,344  $3,220  $20,984  $6,670 

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 ended September 30, 20172018 and 2016.2017. Other than as shown, no foreign country or region contributed materially to revenues or long-lived assets for these periods:

39
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
  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.

  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30, 
  2018  2017  2018  2017 
Revenues:            
North America $5,167  $2,671  $15,599  $4,746 
Europe  693   342   1,338   1,244 
Middle East  2,156   —   3,374   — 
Other  328   207   673   680 
Total revenues $8,344  $3,220  $20,984  $6,670 
                 

24. SUBSEQUENT EVENTS


In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to September 30, 20172018 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, 2017,5, 2018, I.AM entered into a management agreement (the “Management Agreement”) with 876CO LLC (the “Manager”). David J. Krause and Deborah J. Krause are the Companysole members of the Manager. Pursuant to the Management Agreement, I.AM engaged the Manager to manage the operations of four “Prep Kitchen” restaurants, and such other hospitality venues that I.AM acquires through the efforts of the Manager or David Krause. I.AM agreed to pay the Manager a management fee for each restaurant, (a) for each month that such restaurant is not profitable, $5 per month, or (b) for each month that such restaurant achieves a gross profit, the greater of 6% of the gross revenue for such month, or $5, provided that in the event that payment of the 6% management fee would cause such restaurant to become unprofitable, the Manager will only be entitled to receive as much of the 6% management fee, if greater than $5, as would cause such restaurant to break even. Pursuant to the Management Agreement, if I.AM terminates the Management Agreement without cause, I.AM will be required to pay to the Manager the sum of $1,000. DP Lending entered into a guarantee of payments solely with respect to this termination provision.

On October 11, 2018, we entered into a Securities Purchase Agreement to sell 75,000 shareswith a certain institutional investor providing for the issuance 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(i) an Original Issue Discount Promissory Note in the aggregate 452,239principal face amount of $565 due December 8, 2018, for a purchase price of $510, and (ii) 400,000 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 through the cancellation of debt incurredbe issued 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 agreedsubject 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. $180approval 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.
40
DIGITAL POWER CORPORATIONNYSE American.

DPW HOLDINGS AND SUBSIDIARY

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2017

2018

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

 

On November 1, 2017,October 15, 2018, the Company entered into an At-The-Market Issuance Sales Agreement for the Purchase and Sale of Future Receipts with TVT pursuantWilson-Davis & Co., Inc., (“Wilson-Davis”) 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 75,000sell shares of the Company’s common stock, athaving an exerciseaggregate offering price of $0.725 per share. In addition,up to $25 million from time to time, through an “at the purchase pricemarket offering” program (the “ATM Offering”) under which Wilson-Davis acts as sales agent. Between October 23, 2018 and November 12, 2018, the Company had received net proceeds of $150 has been personally guaranteed by Mr. Ault.


Convertible Debentures

On November 2, 2017, Digital Power entered into a Securities Purchase Agreement (the “Nov. Purchase Agreement”) with an institutional investor (the “Purchaser”),$771 through the sale of 3,001,322 shares of the Company’s common stock through the ATM Offering. The offer and sale of the shares through the ATM Offering were made pursuant to which the Company has agreed, uponCompany’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 October 15, 2018.

During October 2018, in accordance with the terms and subject toof 12% term promissory notes in 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 with a principal face amount of $1,111 (the “First Convertible Debenture”) and (ii) at$789, 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 andissued 450,000 shares of its 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. 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 with the Securities and Exchange Commission covering the Restricted Shares and the shares of common stock underlying 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 the registration statement declared effective within 60 days of each closing date. If the Company is unable to meet its obligations under the Registration Rights Agreement, on each such date of failure or breach and on each monthly anniversary thereof if not cured by such date, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the subscription amount paid pursuant to the Purchase Agreement. Subsequent to the 90th day from such date of failure or breach, the 1% penalty shall increase to 2%, with an aggregate cap of 20% per year. If the Company fails to pay any partial liquidated damages within seven days after the date payable, 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).

41
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 to the terms and conditions stated in the Loan Agreement, including 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.
42

investors.

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 CaliforniaDelaware corporation, our wholly-owned subsidiaries, Coolisys Technologies, Inc., Power-Plus Technical Distributors, LLC, Digital Power Lending, LLC, Super Crypto Mining, Inc., Digital Power Limited, Enertec Systems 2001 Ltd. and our majority owned subsidiary,subsidiaries, Microphase Corporation.

Corporation and I.AM, LLC.

Recent Developments

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 “HWC ATM Offering”) under which HCW acted as sales agent. The offer and sale of our common stock was 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 HCW ATM Offering, dated February 27, 2018.The HCW ATM Offering was terminated effective September 23, 2018

On October 15, 2018, we entered into an At-The-Market Issuance Sales Agreement with Wilson-Davis & Co., Inc., (“Wilson-Davis”) as sales agent to sell shares of our common stock, having an aggregate offering price of up to $25 million from time to time, through an “at the market offering” program. The offer and sale of our common stock will be made pursuant to the 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 October 15, 2018. Subject to the terms and conditions of the At-The-Market Issuance Sales Agreement, Wilson-Davis will use its commercially reasonable efforts to sell shares of our common stock, based upon our instructions, consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and rules of the NYSE American. We will pay to Wilson-Davis a commission in an amount equal to 4.0% of the gross sales price per share of common stock sold through the ATM Offering as sales agent under the At-The-Market Issuance Sales Agreement.

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 awhich we began implementing upon the change in control that was completed inon September 22, 2016. Our acquisition and development target strategy includesinclude 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, manufacturesdesigned, developed, manufactured and sellssold 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 PowerDPW 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 PowerDPW 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 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.


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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”). 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 May 23, 2018, DP Lending entered into and closed a securities purchase agreement to acquire 98.1% of I.AM, Inc. (“I.AM”), for a purchase price of $1. 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.

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 30, 2018 AND 2017 COMPARED TO THREE MONTHS ENDED SEPTEMBER

The following table summarizes the results of our operations for the three months ended September 30, 2016

2018 and 2017.U.S dollar amounts are in thousands, except shares and per share data.

  For the Three Months Ended 
  September 30, 
  2018  2017 
       
Revenue $5,731  $3,220 
Revenue, cryptocurrency mining  590   — 
Revenue, related party  353   — 
Revenue, restaurant operations  1,585   — 
Revenue, lending activities  85   — 
Total revenue  8,344   3,220 
Cost of revenue  6,317   2,124 
Gross profit  2,027   1,096 
Total operating expenses  6,216   2,414 
         
Loss from operations  (4,189)  (1,318)
Interest expense  (3,359)  (753)
Loss before income taxes  (7,548)  (2,071)
Income tax benefit  23   — 
Net loss  (7,525)  (2,071)
Less: Net loss attributable to non-controlling interest  74   104 
Net loss attributable to DPW Holdings $(7,451) $(1,967)
Preferred deemed dividends on Series B and Series C Preferred Stock  -   - 
Preferred dividends on Series C Preferred Stock  —   (27)
Net loss available to common stockholders $(7,451) $(1,994)
         
Basic and diluted net loss per common share $(0.11) $(0.15)
         
Basic and diluted weighted average common shares outstanding  67,869,778   13,745,540 
         
Comprehensive Loss        
Loss available to common stockholders $(7,451) $(1,994)
Other comprehensive income (loss)        
Foreign currency translation adjustment  (78)  42 
Net unrealized loss on securities available-for-sale  (1,342)  (43)
Other comprehensive income (loss)  (1,420)  (1)
Total Comprehensive loss $(8,871) $(1,995)
         

Revenues

Our revenues increased by $1,394$5,124, or 76%159%, to $8,344 for the three months ended September 30, 2018, from $3,220 for the three months ended September 30, 2017, from $1,826 for the three months ended September 30, 2016.2017. The increase in revenue was primarily due to our acquisition of 56.4% 98.1% of the outstanding equity interests of MicrophaseI.AM on June 2, 2017,May 23, 2018, combined with our acquisitionacquisitions 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-Plusthese three acquisitions during the three months ended September 30, 2017, were $1,340 and $224, respectively.2018, represented $3,877 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$4,468, which represented an increase of $170$1,248. As discussed below, the increase of $944 from the three months ended September 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 September 30, 2018, we recognized $590 of revenues generated by SC Mining.

Revenues, related party

During the three months ended September 30, 2018, we recognized $353 in revenues resulting from our U.S. operations increasedrelationship with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”). MTIX was acquired by 130.5%AVLP on August 22, 2017 and is therefore deemed to $2,877be 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 September 30, 2018, $3,888 was reflected on the financial statements as accounts receivable, related party.

Gross Margins

Gross margins decreased to 24.3% for the three months ended September 30, 2017, from $1,2482018 compared to 34.0% for the three months ended September 30, 2016. 2017. The decrease in gross margins was partially attributable to the lower margin revenue of $353 from MTIX, a related party, with gross margins ofAs previously noted,22.6% combined with negative margins of (158.9%) on revenues of $590 at SC Mining. The negative gross margins at SC Mining are attributed to monthly recurring fixed costs at our consolidatedcolocation facilities which temporarily exceed the revenues include $1,564 in revenues generated from our recent acquisitions of Microphase and Power-Plus.mining operations while we place our miners in service. 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 torecognized revenue, and 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 recognitionrelated cost of revenue, from the MLSESC Mining and our 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 fromwith MTIX, then our European operation in Gresham, U.K. (“DP Limited”) decreased by $235 to $343adjusted gross margins for the three months ended September 30, 2017,2018 would have been 38.9%. The increase in gross margins from $57834.0% to 38.9% is mainly attributable to higher gross margins related to restaurant operations.

Engineering and Product Development

Engineering and product development expenses increased by $28 to $334 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. The decrease in gross margins was mainly attributable to the decrease in sales2018 from our European 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 gross margins from its U.S. based operations will be fairly consistent among the three companies.
Engineering and Product Development
Engineering and product development expenses increased by $159 to $306 for the three months ended September 30, 20172017. The increase is primarily attributed to our acquisition of Enertec. Due to the timing of the acquisition of Enertec, May 23, 2018, during the three months ended September 30, 2018 Enertec reported $58 in engineering and product development expenses and was excluded from $147the prior-year period.

Selling and Marketing

Selling and marketing expenses were $791 for the three months ended September 30, 2016. The increase is partly attributed2018 compared to our acquisition of Microphase, which reported $118 in engineering and product development expenses. The remaining increase was primarily related 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 during the fourth quarter of 2016.


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Selling and Marketing
Selling and marketing expenses were $423 for the three months ended September 30, 2017, compared to $235 for the three months ended September 30, 2016, an increase of $188.$368. Our acquisition of MicrophasePower-Plus, Enertec and Power-PlusI.AM accounted for $46$131, $133 and $55,$85, respectively, of the increase in selling and marketing expenses. The remaining increase of $19 is attributed to an increase in personnel costs directly attributed to sales and marketing personnel at the Company’s U.S.our UK based operations. Beginning in December 2016

General and throughout the quarter ended March 31, 2017, we augmented our salesAdministrative

General and marketing team with the addition of a Vice President of Business Development and two regional sales managers. Duringadministrative expenses were $5,088 for the three months ended September 30, 2016, the services of our current Chief Executive Officer were reported within selling and marketing expenses due2018 compared 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 attributed to the increase in salaries and benefits and travel related costs for the three new sales and marketing positions and partially offset by the allocation of our Chief Executive Officer’s salary to general and administrative expense.


General and Administrative
General and administrative expenses were $1,685 for the three months ended September 30, 2017, compared to $404 for the three months ended September 30, 2016, an increase of $1,281.$3,403. Our acquisitionacquisitions of MicrophaseEnertec and I.AM accounted for $410$1,399 of the increase in general and administrative expenses. The adjusted increase of $871$2,004 from the comparative prior period was mainly due to higher stock basedstock-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 allocationincrease in cost attributed to the hiring of oura 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$1,352 of stock-based compensation during the three months ended September 30, 2017.2018. Of this amount, $365$697 was from issuances of equity basedequity-based awards pursuant to our Plans and $152$655 was from stock, options and warrants which were issued outside the Plans. It has been our policy to allocate the majority of stock basedstock-based compensation to general and administrative expense. During the three months ended September 30, 20162018 and 2017, and inclusive of equity basedequity-based awards issued outside the Plans, we recorded $35$1,352 and $311,$517, respectively, of stock-based compensation in general and administrative expense.

·We experienced an aggregate increase of $168 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 30, 2017.
·

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 experiencedThese efforts were continued during the three months ended September 30, 2018 and resulted in an increase of $220$113 in costs attributed to investor relations and other consulting fees.

·Finally,

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 $98 during the three months ended September 30, 2016,2018.

·

Finally, in January 2018 we established SC Mining, our Chief Executive Officer’s salary was reflected in sellingdigital currency blockchain mining subsidiary and marketing expenses. As discussed above,DP Lending, our current practice is to recordcommercial lending subsidiary. During the salary and benefits of our Chief Executive Officer tothree months ended September 30, 2018, general and administrative expense.costs attributed to these subsidiaries were $534.

Interest (expense) income, net

Interest expense net was $3,359 for the three months ended September 30, 2018 compared to $753 for the three months ended September 30, 2017 compared to income of $23 for the three months ended September 30, 2016.2017. The increase in interest expense for the three months ended September 30, 20172018 is primarily related to the amortization of debt discount, in the aggregate amount of $669,$3,034, resulting from original issue discount from the issuance of warrants in conjunction with the sale of debt and equity instruments in the aggregate amount of $3,452.$27,673. During the three months ended September 30, 2017,2018, as a result of these issuances, non-cash interest expense of $669$3,034 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 payableborrowings and notes payablewhich was $3,458. Conversely, at September 30, 2016, the Company did not have any outstanding convertible notes payable or notes payable. Interest expense was partiallyprimarily 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.


45
$712.

Operating Loss


The Company recorded an operating loss of $4,189 for the three months ended September 30, 2018 compared to an operating loss of $1,318 for the three months ended September 30, 2017 compared to an operating loss of $83 for the three months ended September 30, 2016.2017. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.


Net Loss


          The Company recorded

For the foregoing reasons, our net loss for the three months ended September 30, 2018, was $7,525 compared to a net loss of $2,071 for the three months ended September 30, 2017 compared to a net loss of $38 for the three months ended September 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 September 30, 2018 and 2017, of $74 and $104, respectively, and preferred dividends of nil and $27 during the three months ended September 30, 2018 and 2017, respectively, the net loss attributableavailable to common shareholders during the Companythree months ended September 30, 2018 and 2017, was $1,967$7,451 and 38$1,994, respectively.


As reflected in our consolidated statement of cash flows for the three months ended September 30, 2018 and 2017, our reported net loss is comprised of non-cash charges of $4,710 and $1,206, respectively. A summary of these non-cash charges is as follows:

  For the Three Months Ended 
  September 30, 
  2018  2017 
Interest expense – debt discount $3,034  $652 
Stock-based compensation  1,352   517 
Depreciation and amortization  918   54 
Interest expense on conversion of promissory notes to common stock  —   0 
Accretion of original issue discount on notes receivable – related party  (594)  (17)
Non-cash items included in net loss $4,710  $1,206 
         

Other comprehensive loss

Other comprehensive loss was $1,420 and $1, respectively, for the three months ended September 30, 2018 and 2017. Other comprehensive loss for the three months ended September 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., or AVLP, a related party. During the three months ended September 30, 2017, the effect of the foreign currency adjustment of the British Pound was offset by unrealized losses in our investments in marketable securities.

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

The following table summarizes the results of our operations for the nine months ended September 30, 2016

2018 and 2017. U.S dollar amounts are in thousands, except shares and per share data.

  For the Nine Months Ended 
  September 30, 
  2018  2017 
       
Revenue $13,245  $6,670 
Revenue, cryptocurrency mining  1,546   — 
Revenue, related party  3,912   — 
Revenue, restaurant operations  2,087   — 
Revenue, lending activities  194   — 
Total revenue  20,984   6,670 
Cost of revenue  16,204   4,136 
Gross profit  4,780   2,534 
Total operating expenses  16,036   6,083 
         
Loss from operations  (11,256)  (3,549)
Interest expense  (9,378)  (1,367)
Loss before income taxes  (20,634)  (4,916)
Income tax benefit  17   — 
Net loss  (20,617)  (4,916)
Less: Net loss attributable to non-controlling interest  218   216 
Net loss attributable to DPW Holdings $(20,399) $(4,700)
Preferred deemed dividends on Series B and Series C Preferred
Stock		  (108)  (319)
Preferred dividends on Series C Preferred Stock  —   (35)
Net loss available to common stockholders $(20,507) $(5,054)
         
Basic and diluted net loss per common share $(0.39) $(0.46)
         
Basic and diluted weighted average common shares outstanding  52,977,059   10,884,948 
         
Comprehensive Loss        
Loss available to common stockholders $(20,507) $(5,054)
Other comprehensive income (loss)        
Foreign currency translation adjustment  (210)  141 
Net unrealized loss on securities available-for-sale  (6,788)  (43)
Other comprehensive income (loss)  (6,998)  98 
Total Comprehensive loss $(27,505) $(4,956)
         

Revenues

Our revenues increased by $1,067$14,314 or 19%215% to $20,984 for the nine months ended September 30, 2018, from $6,670 for the nine months ended September 30, 2017, from $5,603 for the nine months ended September 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-Plusthese four acquisitions during the nine months ended September 30, 2017, were $1,563 and $224, respectively.2018, represented $8,783 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.$12,202, which represented an increase of $5,532. As discussed below, the decreaseincrease of $720$5,532 from the nine months ended September 30, 2016,2017, was primarily due to a decreaseour 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 nine months ended September 30, 2018, we recognized $1,546 of revenues generated by SC Mining.

Revenues, related party

During the nine months ended September 30, 2018, we recognized $3,912 in revenues resulting from our European operations.

Revenues from our U.S. operations increasedrelationship with MTIX. In March 2017, the Company was awarded a 3-year, $50 million purchase order by $1,798, or 52.8%,MTIX to $5,206manufacture, install and service the MLSE plasma-laser system.

Gross Margins

Gross margins decreased to 22.8% for the nine months ended September 30, 2017, from $3,4082018 compared to 38.0% for the nine months ended September 30, 2016. As previously noted,2017. The decrease in gross margins was partially attributable to the lower margin revenue of $3,912 from MTIX, a related party, with gross margins of 21.6% combined with negative margins of (118.8%) on revenues of $1,546 at SC Mining. The negative gross margins at SC Mining are attributed to monthly recurring fixed costs at our consolidatedcolocation facilities which temporarily exceed the revenues include $1,787 in revenues generated from our recent acquisitions of Microphase and Power-Plus.mining operations while we place our miners in service. If we had not closed on these acquisition, then revenues from our U.S. operations would have been $3,419, an increaserecognized revenue, and the related cost 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 orderSC Mining and our contract which was offset by a slight decrease in sales ofwith MTIX, then our legacy products.


Revenues from our European operation in Gresham, U.K. (“DP Limited”) decreased by $731 to $1,464adjusted gross margins for the nine months ended September 30, 2017, from $2,195 for the nine months ended September 30, 2016, a decrease of 33.3%2018 would have been 38.6%. 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 wasfrom 38.0% to 38.6% is mainly attributable to thean increase in salescosts 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 Europeanoffset by higher gross margins related to restaurant operations.
46

Engineering and Product Development

Engineering and product development expenses increased by $287$246 to $1,044 for the nine months ended September 30, 2018 from $798 for the nine months ended September 30, 2017. The increase is primarily attributed to our acquisition of Microphase. Due to the timing of the acquisitions of Microphase, June 2, 2017, from $511and Enertec, May 23, 2018. Enertec engineering and product development costs for the nine months ended September 30, 2016. The increase is partly attributed to our acquisition of2018 were $58. During the prior-year period, Microphase which reported $173 in engineering and product development expenses. The remaining increase is attributedexpenses 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$354 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.


nine months ended September 30, 2018.

Selling and Marketing

Selling and marketing expenses were $2,291 for the nine months ended September 30, 2018 compared to $1,045 for the nine months ended September 30, 2017, compared to $723 for the nine months ended September 30, 2016, an increase of $322.$1,246. Our acquisition of Microphase, Power-Plus, Enertec and Power-PlusI.AM accounted for $55$95, $559, $231 and $65,$99, respectively, of the increase in selling and marketing expenses. The remaining increase of $262 is attributed to an increase in personnel costs directly attributed to sales and marketing personnel at Digital Power’sour U.S. and UK based operations. Beginning in December 2016 and throughoutThroughout 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 andpositions. Due to the timing of these personnel additions, the full cost was only partially offset byrealized during the allocation ofthree 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 $12,698 for the nine months ended September 30, 2018 compared to $4,240 for the nine months ended September 30, 2017, compared to $1,115 for the nine months ended September 30, 2016, an increase of $3,125.$8,458. Our acquisitionacquisitions of Microphase, Enertec and I.AM accounted for $577$2,294 of the increase in general and administrative expenses. The adjusted increase of $2,548$6,164 from the comparative prior period was mainly due to higher stock basedstock-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 allocationincrease in cost attributed to the hiring of oura 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$4,163 of stock-based compensation during the nine months ended September 30, 2017.2018. Of this amount, $1,061$2,235 was from issuances of equity basedequity-based awards pursuant to our Plans and $208$1,928 was from stock, options and warrants which were issued outside the Plans. It has been our policy to allocate the majority of stock basedstock-based compensation to general and administrative expense. During the nine months ended September 30, 20162018 and 2017, and inclusive of equity basedequity-based awards issued outside the Plans, we recorded $108$4,133 and $980,$1,225, respectively, of stock-based compensation in general and administrative expense.

·

We experienced an aggregate increase of $486$284 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 months ended September 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 experiencedThese efforts were continued during the nine months ended September 30, 2018 and resulted in an increase of $589$848 in costs attributed to investor relations and other consulting fees.

47
·Finally,

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 $330 during the nine months ended September 30, 2016,2018.

·

Finally, we recently established SC Mining, our Chief Executive Officer’s salary was reflected in sellingdigital currency blockchain mining subsidiary, and marketing expenses. As discussed above,DP Lending, our current practice is to recordcommercial lending subsidiary. During the salary and benefits of our Chief Executive Officer tonine months ended September 30, 2018, general and administrative expense.costs attributed to these subsidiaries were $1,050.

Interest (expense) income, net

Interest expense net was $9,378 for the nine months ended September 30, 2018 compared to $1,367 for the nine months ended September 30, 2017 compared to income of $85 for the nine months ended September 30, 2016.2017. The increase in interest expense for the nine months ended September 30, 20172018 is primarily related to the amortization of debt discount, in the aggregate amount of $1,269,$8,813 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.$27,673. During the nine months ended September 30, 2017,2018, as a result of these issuances, non-cash interest expense of $1,269$8,813 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 expenseborrowings and which was partiallyprimarily 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 AgreementAgreement”) of $242.


$1,931.

Operating Loss


The Company recorded an operating loss of $11,326 for the nine months ended September 30, 2018 compared to an operating loss of $3,549 for the nine months ended September 30, 2017 compared to an operating loss of $272 for the nine months ended September 30, 2016.2017. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.


Net Loss


          The Company recorded

For the foregoing reasons, our net loss for the nine months ended September 30, 2018, was $20,617 compared to a net loss of $4,916 for the nine months ended September 30, 2017 compared to a net loss of $187 for the nine months ended September 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 $218 and an income tax benefit that was recognized$216 and preferred dividends of $108 and $319 during the nine months ended September 30, 2016,2018 and 2017, respectively, the net loss attributableavailable to common shareholders during the Companynine months ended September 30, 2018 and 2017, was $4,700$20,507 and $165,$5,054, respectively.


As reflected in our consolidated statement of cash flows for the nine months ended September 30, 2018 and 2017, our reported net loss is comprised of non-cash charges of $13,195 and $2,619, respectively. A summary of these non-cash charges is as follows:

  For the Nine Months Ended 
  September 30, 
  2018  2017 
Interest expense – debt discount $8,813  $1,239 
Stock-based compensation  4,163   1,269 
Depreciation and amortization  1,743   134 
Interest expense on conversion of promissory notes to common stock  —   13 
Accretion of original issue discount on notes receivable – related party  (1,524)  (36)
Non-cash items included in net loss $13,195  $2,619 
         

Other comprehensive income (loss)

Other comprehensive income (loss) was ($6,998) and $98, respectively, for the nine months ended September 30, 2018 and 2017. Other comprehensive loss for the nine months ended September 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 AVLP, a related party. During the nine months ended September 30, 2017, the effect of the foreign currency adjustment from the weakening of the British Pound was partially offset by unrealized losses in our investments in marketable securities.

LIQUIDITY AND CAPITAL RESOURCES

On September 30, 2017,2018, we had cash and cash equivalents of $314.$703. This compares with cash and cash equivalents of $996$1,478 at December 31, 2016.2017. The decreaseincrease 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 $9,430 for the nine months ended September 30, 2018, compared to net cash used by operating activities of $1,577 for the nine months ended September 30, 2017, compared to net cash provided by operating activities of $138 for the nine months ended September 30, 2016.2017. During the nine months ended September 30, 2017,2018, the decreaseincrease in net cash provided byused in operating activities compared to the nine months ended September 30, 20162017 was mainly due to the net loss for the nine months ended September 30, 2017 nine months loss2018 of $4,916.$20,617. The net loss was partially offset by a number of non-cash charges, the amortization of debt discount of $1,239$8,813 and stock-based compensation of $1,269,$4,163, an increase in accounts receivable, related party of $3,517 and accounts payable and accrued expenses of $2,083$1,923 and decreases in our accounts receivable of $737 and other current liabilities of $595.

$876.

Net cash used in investing activities was $4,384$19,916 for the nine months ended September 30, 20172018 compared to $12$4,384 of net cash provided byused in investing activities for the nine months ended September 30, 2016.2017. The increase of the net usage of cash from investing activities was primarily relatedattributed to the purchase of property and equipment at SC Mining, the investment in AVLP, loans to third partiesthe acquisition of Enertec and the purchase of Power-Plus.


investments in debt and equity securities.

Net cash provided by financing activities was $5,194$28,791 and nil$5,194 for the nine months ended September 30, 20172018 and 2016,2017, respectively. The financing activities primarily related to the sale of 1,309,54521,241,911 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$18,059, net proceeds from the Company’s debt financings of $2,649, gross proceedsand from advances of future receipts of $1,772 and$27,673 which was offset by payments on debt facilitiesinstruments of $626.


48
$20,088 and proceeds from the exercise of options and warrants of $965.

Historically, the Company haswe have financed itsour operations principally through issuances of convertible debt, promissory notes and equity securities. During 2017,2018, as reflected below, the Company continueswe 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 demandOn 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 notes and warrantsnote (the “Note”) with an aggregate principal face amount of $1,250, a warrant to purchase 333,333an 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 Note is convertible into 625,000 shares of our common stock, a conversion price of $2.00 per share, subject to adjustment. The exercise price of the 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 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 a new promissory note in the principal amount of $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 was twenty percent per thirty calendar days, payable in a lump sum on the maturity date. We also issued to the lender a warrant to purchase 1,250,000 shares of our common stock at $ 0.70an exercise price of $1.15 per share, for aggregatepursuant to a consulting agreement. The principal amount of the new promissory note consisted of net proceeds of $400. Further$1,000 and the cancellation of the 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 2017,26, 2018, we issued a 10% promissory note in the holdersprincipal face amount of $400$330 to an accredited investor. This promissory note included an OID of $30 resulting in demandnet proceeds to us of $300. The principal and accrued interest on this note was due and payable on April 12, 2018, subject to a 30-day extension available to us.This 10% promissory notes agreednote was paid on April 27, 2018.

·

On February 27, 2018, we entered into a Sales Agreement with H.C. Wainwright & Co., LLC (“HCW”) to extinguish their $400 of debt by cancelling their notes to purchase 666,667sell shares of common stock having an aggregate offering price of up to $50,000 (the “Shares”) from time to time, through an “at the market offering” program (the “HCW ATM Offering”) under which HCW acted as sales agent. The offer and sale of the Company at $0.60 per share.


·
On March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou Ventures LLC (“Philou”), a related party,Shares was made pursuant to which Philou was grantedour effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the right to invest up to $5,000 inSEC on December 18, 2017, amended on January 8, 2018, and declared effective by the Company through the purchase of Series B Preferred Stock overSEC on January 11, 2018, and a term of 36 months.   On March 24, 2017, Philou purchased 25,000 shares of Series B Preferred Stock pursuantprospectus supplement related 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.
HCW ATM Offering, dated February 27, 2018.The HCW ATM Offering was terminated effective September 23, 2018.


·On March 15, 2017, the Company23, 2018, we 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.

·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.

·
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.

·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 Digital Power’s common stock.

·
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.
49
·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”) 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.

·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.
·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 666,666300,000 shares of common stock to an accredited investor (the “Investor”). The principal ofif the Convertible Note may be converted intopromissory 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 underif 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 Notepromissory 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 quarterlymonthly basis and the principal is duecommencing on August 3,April 23, 2018. The principal may be converted into sharesexercise price of the Company’s common stock at $0.55warrant 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 fivethree 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 1,475,000993,588 shares of our common stock, and an aggregate of 200,926 shares of our common stock. The Convertible Notes bear simple interest at 12% on the principal amount with a guarantee of interest during the initial six months in the amount of $103. Beginning on May 16, 2018, we were required to make six monthly cash payments in the aggregate amount of $304 until the Convertible Notes are satisfied in full, which was to occur on October 16, 2018. On August 31, 2018, the Company made its final payment and in aggregate paid principal and accrued interest earned thereon may be converted intoof $1,722 and $103, respectively, on the 12% April 2018 Convertible Notes. The warrants entitle the holders to purchase, in the aggregate, up to 993,588 shares of our 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$1.30 per share.share for a period of five years subject to certain beneficial ownership limitations.

·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 10% senior secured convertible promissory note (the “10% Convertible Note”) with a principal face amount of $6,000, (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. Initially, the 10% Convertible Note was convertible into our common stock at $0.75 per share, but could only be converted if an event of default thereunder had occurred and not been cured on a timely basis. Pursuant to an amendment dated as of August 31, 2018, we reduced the conversion price to $0.40 from $0.75. Further, on September 25, 2018, we entered into an agreement to amend the maturity date on the 10% Convertible Note, pursuant to which amendment the amortization schedule of the 10% Convertible Note provides for 13 monthly payments in the amount of $309, and for the fourteenth payment to be in the amount of $1,011, plus accrued and unpaid interest. Each such amortization payment shall be made in cash or Bitcoin

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 second 10% senior secured convertible promissory note (the “Second 10% Convertible Note”) with a principal face amount of $1,000, which Second 10% Convertible Note was initially convertible into our common stock at $0.75 per share and (ii) an additional 400,000 of the Company’s common stock to be issued in connection with the 10% Convertible Note. Pursuant to an amendment dated as of August 31, 2018, we reduced the conversion price to $0.40 from $0.75. The Second 10% Convertible Notes areNote matures on January 1, 2019.

·

On August 31, 2018, we entered into a securities purchase agreement with the institutional investor providing for the issuance of (i) a third 10% convertible note (the “Third 10% Convertible Note” and with the 10% Convertible Note and the Second 10% Convertible Note, the “10% Convertible Notes”) with a principal face amount of $2,000, which Third Convertible Note is convertible into 5,000,000 shares of our common stock at $0.40 per share and (ii) an additional 620,000 of our common stock. The shares of common stock issuable pursuant to the Third 10% Convertible Note will not be issued to the institutional investor until we shall have obtained approval of the NYSE American and our stockholders. The Third 10% Convertible Note matures on February 15, 2019.

·On August 10, 2018, DP Lending issued a 12% promissory note in the principal amount of $550 to an accredited investor. This promissory note included an OID of $50 resulting in net proceeds of $500. The principal and accrued interest on this note is due and payable on August 10, 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 $880$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 were sold for $800 and bear simple interest at 10% on(ii) an aggregate of 400,000 shares of common stock to be issued by us, subject to approval of the principal amount, and principal and interest are due on February 10, 2018. Subject to certain beneficial ownership limitations, each Investor may convertNYSE American.

·On August 23, 2018, DP Lending issued a promissory note in the principal amount of the Convertible Note$85 to an accredited investor. This promissory note included an OID of $10 resulting in net proceeds of $75. The principal and accrued interest earned thereon aton this note was due and payable on September 24, 2018, subject to a 28-day extension available to DP Lending.

·On August 28, 2018, DP Lending issued a promissory note in the principal amount of $115 to an accredited investor. This promissory note included an OID of $15 resulting in net proceeds of $100. The principal and accrued interest on this note was due and payable on September 14, 2018, subject to a 10-business day cure period available to DP Lending. This promissory note was paid on September 21, 2018.

·During September 2018, we issued to institutional investors 12% term promissory notes in the principal face amount of $789, with an interest rate of 12% for a purchase price of $750. The outstanding principal face amount, plus any timeaccrued and unpaid interest, is due by December 31, 2018, or as otherwise provided in accordance with the terms set forth therein. In accordance with the notes, we also agreed to issue 450,000 shares of our common stock to the investors. The notes contain standard and customary events of default.

·On October 11, 2018, we entered into a Securities Purchase Agreement with a certain institutional investor providing for the issuance of (i) an Original Issue Discount Promissory Note in the principal face amount of $565 due December 8, 2018, for a purchase price of $510, and (ii) 400,000 shares of common stock at $0.60 per share. The conversionto be issued by the Company, subject to approval of the NYSE American.

·

On October 15, 2018, we entered into an At-The-Market Issuance Sales Agreement with Wilson-Davis & Co., Inc. (“Wilson-Davis”) to sell shares of our common stock, having an aggregate offering price of up to $25 million from time to time, through an “at the Convertible Notes is subjectmarket offering” program (the “ATM Offering”) under which Wilson-Davis acts as sales agent. The offer and sale of the shares through the ATM Offering will be made pursuant to adjustment for customary stock splits, stock dividends, combinations or similar events.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 October 15, 2018.

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.


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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 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 JuneSeptember 30, 20172018 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.

14

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.


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Until such time as

During January 2018 we hirehired a new Chief Financial Officer and engaged the services of a financial accounting advisory firm. During September 2018 we hired a Chief Accounting Officer to tasked with expanding and monitoring the Company’s internal controls, to provide an additional level of review of complex financial issues and to assist with financial reporting. 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 20172018 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
None

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.

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 20162017 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 20162017 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.

respects.


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.
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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:
15
1.
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.
2.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.
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 nine months ended September 30, 2018, pursuant to the Company’s 2017 Stock Incentive Plan, the Company entered intoissued an asset purchase agreement to acquire the intellectual propertyaggregate of Coolisys.com, in consideration for, in part, 50,0001,583,059 shares of common stock. The seller of the intellectual property and purchaser of theits common stock wasas payment for services to its consultants. The shares were valued at $2,640, an accredited investor.


average of $1.67 per share.

On August 16,October 5, 2017, theAult & Company approved the issuance and sale of (i) 272,727purchased 75,000 shares of our common stock at a purchase price equal to $0.55$0.60 per share

and (ii) warrantsa warrant to purchase up to 272,72775,000 shares of our common stock at $0.65$0.60 per share which become exercisable six months after the issuance date, to two accredited investors for an aggregate purchase price of $150. The$45. These shares have yet to beand warrants were issued by the Company on May 8, 2018.  Ault & Company is controlled by Mr. Milton Ault, our Chairman and are subjectChief Executive Officer.

The Company engaged Divine Capital Markets, LLC (“Divine”) to approval fromact as Placement Agent (the “Placement Agent”) for the NYSE American prior2017 private placement of the Series C Preferred Stock and warrants. For its services, the Placement Agent received, in addition to issuance.


In addition,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 have yet to bewere issued by the Company and are subjecton May 8, 2018.

On May 8, 2018, the Company issued to approval fromits consultant 400,000 shares of its common stock with an aggregate value of $328 for services rendered.

On August 10, 2018, the NYSE American priorCompany issued to issuance.

its consultant 1,000,000 shares of its common stock with an aggregate value of $400 for services rendered.

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 bewere 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.

On October 11, 2018, we entered into a Securities Purchase Agreement with a certain institutional investor providing for the issuance of (i) an Original Issue Discount Promissory Note in the principal face amount of $565 due December 8, 2018, for a purchase price of $510, and (ii) 400,000 shares of common stock to be issued by the Company, subject to approval of the NYSE American.

During October 2018, in accordance with the terms of 12% term promissory notes in the principal face amount of $789, the Company issued 450,000 shares of its common stock to the investors.

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.DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 3.           DEFAULTS UPON SENIOR SECURITIES

On May 15, 2018, the Company entered into a securities purchase agreement to sella 10% convertible note (the “10% Convertible Note”), On September 25, 2018, the Company entered into an agreement to amend the maturity date on the 10% Convertible Note, pursuant to which amendment the amortization schedule of the 10% Convertible Note provides for 13 monthly payments in the amount of $309, and for the fourteenth payment to be in the amount of $1,011, plus accrued and unpaid interest. Each such amortization payment shall be made in cash or Bitcoin. The Company has not made the monthly amortization payments due during September 2018 and October 2018 and this 10% Convertible Note is currently in default. The Company is in negotiations with the investor to amend the payment terms on this 10% Convertible Note.

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 4.            MINE SAFETY DISCLOSURES

None

ITEM 5.OTHER INFORMATION

ITEM 5.            OTHER INFORMATION

None

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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.  
3.2Bylaws, 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.  
3.3Amended and Restated Articles of Incorporation of Digital Power Corporation (Incorporatedthe 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 
BylawsForm of Digital Power Corporation (IncorporatedCertificate 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 StatementCurrent Report on Form SB-28-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 (IncorporatedConvertible Preferred Stock, dated May 15, 2017.  Incorporated by reference to Exhibit 3.1 of the Company’s current report filedCurrent Report on Form 8-K with the Securities and Exchange Commissionfiled 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 (IncorporatedConvertible Preferred Stock.  Incorporated by reference to Exhibit 3.1 of the Company’s current report filedCurrent Report on Form 8-K with the Securities and Exchange Commissionfiled 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.
4.1Form 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.
4.2Form of Series E Certificate of Determination (IncorporatedA Common Stock Purchase Warrant, dated May 17, 2018.  Incorporated by reference to Exhibit 3.2 of the Company’s current report filedCurrent Report on Form 8-K with the Securities and Exchange Commissionfiled on May 3, 2017)16, 2018 as Exhibit 4.1 thereto.
4.3Form 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.
4.4Form 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.
4.5Form 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.
4.6Form 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.
4.7Form 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 StockForm of Securities Purchase Agreement, date March 9, 2017 between Digital Power Corporation, and Philou Ventures, LLC. (Incorporateddated April 16, 2018.  Incorporated by reference to Exhibit 10.1 of the Company’s current report filedCurrent Report on Form 8-K withfiled on April 16, 2018 as Exhibit 10.1 thereto.
10.2Form 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.
10.3Form 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.
10.4Form 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.
10.5Form 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.
10.6Form 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.
10.7Form of Security and Exchange CommissionPledge 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.
10.8Form 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
10.9Form 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.
10.10Form 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 andOfficer 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 Chief 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.
55

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 20, 2017

Digital Power Corporation

15, 2018

By:/s/ Amos KohnDPW HOLDINGS, INC.
 
 Amos KohnBy:/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 OfficerOfficer)

19

 
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