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 |
☐ | 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
DPW HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
94-1721931 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
201 Shipyard Way, Suite E
Newport Beach, CA 94538-3158
(Address of principal executive offices)
(949) 444-5464
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A Common Stock, $0.001 par value | DPW | NYSE American |
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.
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).
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 | Smaller reporting company | |||||
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 NovemberMay 17, 20172019 the registrant had outstanding 15,817,39337,735,115 shares of common stock.
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, 2016,2018, 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 NovemberMay 20, 2017.2019. 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
DPW HOLDINGS, INC. AND SUBSIDIARY
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,283,607 | $ | 902,329 | ||||
Marketable equity securities | 283,988 | 178,597 | ||||||
Accounts receivable | 2,819,484 | 1,930,971 | ||||||
Accounts and other receivable, related party | 3,915,075 | 3,887,654 | ||||||
Accrued revenue | 1,535,704 | 1,353,411 | ||||||
Inventories, net | 2,864,324 | 3,261,126 | ||||||
Prepaid expenses and other current assets | 802,429 | 775,981 | ||||||
TOTAL CURRENT ASSETS | 13,504,611 | 12,290,069 | ||||||
Intangible assets | 4,252,454 | 4,359,798 | ||||||
Digital currencies | 4,225 | 1,535 | ||||||
Goodwill | 8,613,429 | 8,463,070 | ||||||
Property and equipment, net | 8,605,306 | 9,313,299 | ||||||
Right-of-use assets | 3,948,834 | — | ||||||
Investments - related party, net of original issue discount of $1,974,791 | ||||||||
and $2,336,693, respectively | 6,972,378 | 5,611,621 | ||||||
Investments in derivative instruments and common stock - related party | 2,561,332 | 3,043,499 | ||||||
Investments in preferred stock of private company | 480,000 | 480,000 | ||||||
Investment in limited partnership | 1,969,000 | 1,969,000 | ||||||
Loans receivable | 2,413,122 | 2,572,230 | ||||||
Other investments, related parties | 855,000 | 862,500 | ||||||
Other assets | 594,100 | 459,259 | ||||||
TOTAL ASSETS | $ | 54,773,791 | $ | 49,425,880 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 15,776,556 | $ | 13,065,838 | ||||
Accounts payable and accrued expenses, related party | 60,224 | 57,752 | ||||||
Operating lease liability, current | 856,475 | — | ||||||
Advances on future receipts | 2,187,685 | 2,085,807 | ||||||
Short term advances | 47,000 | — | ||||||
Short term advances, related party | 127,961 | 73,761 | ||||||
Revolving credit facility | 289,911 | 285,605 | ||||||
Notes payable, net | 5,650,699 | 6,388,787 | ||||||
Notes payable, related party | 166,925 | 166,925 | ||||||
Convertible notes payable | 6,260,294 | 6,742,494 | ||||||
Other current liabilities | 1,577,548 | 1,868,402 | ||||||
TOTAL CURRENT LIABILITIES | 33,001,278 | 30,735,371 | ||||||
LONG TERM LIABILITIES | ||||||||
Operating lease liability, non-current | 3,124,524 | — | ||||||
Notes payable | 473,243 | 483,659 | ||||||
Notes payable, related parties | 142,309 | 142,059 | ||||||
TOTAL LIABILITIES | 36,741,354 | 31,361,089 |
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-1 |
DPW HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Series A Convertible Preferred Stock, $25.00 stated value per share, | 1 | 1 | ||||||
$0.001 par value – 1,000,000 shares authorized; 1,504 and 1,434 shares | ||||||||
issued and outstanding at March 31, 2019 and December 31, 2018, | ||||||||
respectively (redemption amount and liquidation preference of $37,600 | ||||||||
and $35,850 as of March 31, 2019 and December 31, 2018, respectively) | ||||||||
Series B Convertible Preferred Stock, $10 stated value per share, | 125 | 125 | ||||||
share, $0.001 par value – 500,000 shares authorized; 125,000 shares issued | ||||||||
and outstanding at March 31, 2019 and December 31, 2018 (liquidation | ||||||||
preference of $1,250,000 at March 31, 2019 and December 31, 2018 | ||||||||
Class A Common Stock, $0.001 par value – 500,000,000 shares authorized; | 9,259 | 4,036 | ||||||
9,259,115 and 4,036,407 shares issued and outstanding at March 31, 2019 | ||||||||
and December 31, 2018, respectively | ||||||||
Class B Common Stock, $0.001 par value – 25,000,000 shares authorized; | — | — | ||||||
nil shares issued and outstanding at March 31, 2019 and December 31, 2018 | ||||||||
Additional paid-in capital | 84,894,620 | 77,643,609 | ||||||
Accumulated deficit | (62,270,464 | ) | (55,721,115 | ) | ||||
Accumulated other comprehensive loss | (4,609,346 | ) | (3,902,523 | ) | ||||
TOTAL DPW HOLDINGS STOCKHOLDERS' EQUITY | 18,024,195 | 18,024,133 | ||||||
Non-controlling interest | 8,242 | 40,658 | ||||||
TOTAL STOCKHOLDERS' EQUITY | 18,032,437 | 18,064,791 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 54,773,791 | $ | 49,425,880 |
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-2 |
DPW HOLDINGS, INC. AND SUBSIDIARY
For the Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Revenue | $ | 5,551,651 | $ | 3,165,459 | ||||
Revenue, cryptocurrency mining | 28,804 | 237,496 | ||||||
Revenue, related party | — | 1,792,892 | ||||||
Revenue, restaurant operations | 1,173,499 | — | ||||||
Revenue, lending activities | 185,089 | — | ||||||
Total revenue | 6,939,043 | 5,195,847 | ||||||
Cost of revenue | 5,118,313 | 3,802,709 | ||||||
Gross profit | 1,820,730 | 1,393,138 | ||||||
Operating expenses | ||||||||
Engineering and product development | 455,678 | 343,023 | ||||||
Selling and marketing | 474,343 | 725,471 | ||||||
General and administrative | 5,430,966 | 3,221,623 | ||||||
Change in fair value of marketable equity securities | 116,042 | — | ||||||
Impairment (gain) loss on digital currency | (1,503 | ) | 71,316 | |||||
Total operating expenses | 6,475,526 | 4,361,433 | ||||||
Loss from operations | (4,654,796 | ) | (2,968,295 | ) | ||||
Interest expense | (1,262,614 | ) | (3,132,116 | ) | ||||
Loss on extinguishment of convertible debt | (807,784 | ) | — | |||||
Loss before income taxes | (6,725,194 | ) | (6,100,411 | ) | ||||
Income tax benefit | 14,168 | 4,458 | ||||||
Net loss | (6,711,026 | ) | (6,095,953 | ) | ||||
Less: Net loss attributable to non-controlling interest | 32,416 | 35,431 | ||||||
Net loss attributable to DPW Holdings | (6,678,610 | ) | (6,060,522 | ) | ||||
Preferred dividends on Series A Preferred Stock | (1,869 | ) | — | |||||
Net loss available to common stockholders | $ | (6,680,479 | ) | $ | (6,060,522 | ) | ||
Basic and diluted net loss per common share | $ | (1.17 | ) | $ | (3.33 | ) | ||
Basic and diluted weighted average common shares outstanding | 5,695,740 | 1,819,598 | ||||||
Comprehensive Loss | ||||||||
Loss available to common stockholders | $ | (6,680,479 | ) | $ | (6,060,522 | ) | ||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment | 29,857 | 26,457 | ||||||
Net unrealized (loss) gain on securities available-for-sale | (736,680 | ) | (4,741,114 | ) | ||||
Other comprehensive income (loss) | (706,823 | ) | (4,714,657 | ) | ||||
Total Comprehensive loss | $ | (7,387,302 | ) | $ | (10,775,179 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 | ) |
F-3 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
Three Months Ended March 31, 2018
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Non-Controlling | Stockholders' | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Interest | Equity | ||||||||||||||||||||||||||||
BALANCES, January 1, 2018 | 478,776 | $ | 479 | 1,511,115 | $ | 1,511 | $ | 36,916,659 | $ | (23,414,151 | ) | $ | 4,503,046 | $ | 780,737 | $ | 18,788,281 | |||||||||||||||||||
Compensation expense due to stock | ||||||||||||||||||||||||||||||||||||
option issuances | — | — | — | — | 232,854 | — | — | — | 232,854 | |||||||||||||||||||||||||||
Compensation expense due to warrant issuances | — | — | — | — | 23,477 | — | — | — | 23,477 | |||||||||||||||||||||||||||
Issuance of common stock and warrants for cash | — | — | 256,040 | 256 | 6,243,099 | — | — | — | 6,243,355 | |||||||||||||||||||||||||||
Issuance of common stock for services | — | — | 84,152 | 84 | 3,033,212 | — | — | — | 3,033,296 | |||||||||||||||||||||||||||
Issuance of common stock for conversion | ||||||||||||||||||||||||||||||||||||
of debt | — | — | 101,500 | 102 | 2,167,742 | — | — | — | 2,167,844 | |||||||||||||||||||||||||||
Issuance of common stock upon exercise | ||||||||||||||||||||||||||||||||||||
of stock options | — | — | 3,000 | 3 | 97,797 | — | — | — | 97,800 | |||||||||||||||||||||||||||
Issuance of common stock upon exercise | ||||||||||||||||||||||||||||||||||||
of warrants | — | — | 93,323 | 93 | 867,073 | — | — | — | 867,166 | |||||||||||||||||||||||||||
Issuance of common stock for conversion | ||||||||||||||||||||||||||||||||||||
of Series E preferred stock | (254,500 | ) | (254 | ) | 25,450 | 26 | (26 | ) | — | — | — | — | ||||||||||||||||||||||||
Issuance of common stock in connection | ||||||||||||||||||||||||||||||||||||
with convertible notes | — | — | 27,173 | 27 | 353,646 | — | — | — | 353,673 | |||||||||||||||||||||||||||
Beneficial conversion feature in connection | ||||||||||||||||||||||||||||||||||||
with convertible notes | — | — | — | — | 288,573 | — | — | — | 288,573 | |||||||||||||||||||||||||||
Fair value of warrants issued in connection | ||||||||||||||||||||||||||||||||||||
with convertible notes | — | — | — | — | 1,405,048 | — | — | — | 1,405,048 | |||||||||||||||||||||||||||
Cash for exchange fees and other financing costs | — | — | (858,671 | ) | — | — | — | (858,671 | ) | |||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (6,060,522 | ) | — | — | (6,060,522 | ) | |||||||||||||||||||||||||
Net unrealized gain on securities | ||||||||||||||||||||||||||||||||||||
available-for-sale, net of income taxes | — | — | — | — | — | — | (4,741,114 | ) | — | (4,741,114 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | 26,457 | — | 26,457 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | — | — | — | — | — | — | — | (35,431 | ) | (35,431 | ) | |||||||||||||||||||||||||
BALANCES, March 31, 2018 | 224,276 | $ | 225 | 2,101,753 | $ | 2,102 | $ | 50,770,483 | $ | (29,474,673 | ) | $ | (211,611 | ) | $ | 745,306 | $ | 21,832,086 |
The above Condensed Consolidated Statement of Changes in Stockholders’ Equity reflects a 1 for 20 reverse stock split effective March 14, 2019, see Note 1 for further information.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
Three Months Ended March 31, 2019
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In | Accumulated | Comprehensive | Non-Controlling | Stockholders' | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Interest | Equity | ||||||||||||||||||||||||||||
BALANCES, January 1, 2019 | 126,434 | $ | 126 | 4,036,407 | $ | 4,036 | $ | 77,643,609 | $ | (55,721,115 | ) | $ | (3,902,523 | ) | $ | 40,658 | $ | 18,064,791 | ||||||||||||||||||
Compensation expense due to stock | ||||||||||||||||||||||||||||||||||||
option issuances | — | — | — | — | 245,614 | — | — | — | 245,614 | |||||||||||||||||||||||||||
Issuance of common stock for cash | — | — | 3,791,642 | 3,792 | 4,393,743 | — | — | — | 4,397,535 | |||||||||||||||||||||||||||
Issuance of common stock for services | — | — | 375,000 | 375 | 252,644 | — | — | — | 253,019 | |||||||||||||||||||||||||||
Issuance of common stock for conversion | ||||||||||||||||||||||||||||||||||||
of debt | — | — | 1,056,066 | 1,056 | 2,607,401 | — | — | — | 2,608,457 | |||||||||||||||||||||||||||
Issuance of Series A preferred stock for cash | 70 | — | — | — | 1,750 | — | — | — | 1,750 | |||||||||||||||||||||||||||
Cash for exchange fees and other financing costs | — | — | — | — | (250,141 | ) | — | — | — | (250,141 | ) | |||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | (6,678,610 | ) | — | — | (6,678,610 | ) | ||||||||||||||||||||||||||
Preferred dividends | — | — | — | — | — | (1,869 | ) | — | — | (1,869 | ) | |||||||||||||||||||||||||
Net unrealized loss on derivatives | ||||||||||||||||||||||||||||||||||||
in related party | — | — | — | — | — | — | (736,680 | ) | — | (736,680 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | 131,130 | 29,857 | — | 160,987 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | — | — | — | — | — | — | — | (32,416 | ) | (32,416 | ) | |||||||||||||||||||||||||
BALANCES, March 31, 2019 | 126,504 | $ | 126 | 9,259,115 | $ | 9,259 | $ | 84,894,620 | $ | (62,270,464 | ) | $ | (4,609,346 | ) | $ | 8,242 | $ | 18,032,437 |
The above Condensed Consolidated Statement of Changes in Stockholders’ Equity reflects a 1 for 20 reverse stock split effective March 14, 2019, see Note 1 for further information.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5 |
DPW HOLDINGS, INC. AND SUBSIDIARY
U.S. dollars in thousands except shares and per share data
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (6,711,026 | ) | $ | (6,095,953 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 799,023 | 115,147 | ||||||
Amortization | 162,415 | 33,358 | ||||||
Amortization of right-of-use assets | 32,165 | — | ||||||
Interest expense – debt discount | 1,491,065 | 3,051,148 | ||||||
Accretion of original issue discount on notes receivable – related party | (612,309 | ) | (485,031 | ) | ||||
Accretion of original issue discount on notes receivable | (49,505 | ) | — | |||||
Stock-based compensation | 621,288 | 1,438,214 | ||||||
Realized losses on sale of digital currencies | 654 | — | ||||||
Realized losses on sale of marketable equity securities | 13,344 | 41,784 | ||||||
Unrealized gains on marketable equity securities | (105,391 | ) | — | |||||
Unrealized losses on equity securities – related party | 139,184 | — | ||||||
Unrealized losses on equity securities | 699 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (824,120 | ) | 344,137 | |||||
Accounts receivable, related party | (27,421 | ) | (1,792,892 | ) | ||||
Accrued revenue | (182,293 | ) | — | |||||
Digital currencies | (30,307 | ) | (166,180 | ) | ||||
Inventories | 453,775 | (215,786 | ) | |||||
Prepaid expenses and other current assets | (102,479 | ) | 604,485 | |||||
Other assets | (155,616 | ) | (380,714 | ) | ||||
Accounts payable and accrued expenses | 3,180,861 | 527,189 | ||||||
Accounts payable, related parties | 2,472 | 11,022 | ||||||
Other current liabilities | (358,717 | ) | 10,946 | |||||
Net cash used in operating activities | (2,262,239 | ) | (2,959,126 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (9,606 | ) | (7,478,335 | ) | ||||
Purchase of intangible asset | — | (3,025 | ) | |||||
Investments – related party | (740,948 | ) | (146,780 | ) | ||||
Investments in derivative instruments and common stock - related party | (302,214 | ) | (1,555,461 | ) | ||||
Investments in marketable equity securities | — | (657,273 | ) | |||||
Sales of marketable equity securities | 286,656 | 430,375 | ||||||
Proceeds from loans to related parties | — | 16,088 | ||||||
Investments in debt and equity securities | (205,125 | ) | (370,500 | ) | ||||
Net cash used in investing activities | $ | (971,237 | ) | $ | (9,764,911 | ) |
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-6 |
DPW HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
U.S. dollars in thousands
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from financing activities: | ||||||||
Gross proceeds from sales of common stock and warrants | $ | 4,397,535 | $ | 6,243,355 | ||||
Proceeds from issuance of Series A Convertible Preferred Stock | 1,645 | — | ||||||
Financing cost in connection with sales of equity securities | (250,141 | ) | (858,668 | ) | ||||
Proceeds from stock option exercises | — | 97,740 | ||||||
Proceeds from warrant exercises | — | 867,166 | ||||||
Proceeds from convertible notes payable | — | 1,000,000 | ||||||
Proceeds from notes payable | 500,000 | 8,550,000 | ||||||
Proceeds from short-term advances – related party | 54,200 | 50,000 | ||||||
Proceeds from short-term advances | 47,000 | 762,000 | ||||||
Payments on short-term advances | — | (425,000 | ) | |||||
Payments on notes payable | (228,749 | ) | (5,246,875 | ) | ||||
Payments on convertible notes payable | (809,253 | ) | — | |||||
Proceeds from advances on future receipts | 319,729 | 2,990,277 | ||||||
Payments on advances on future receipts | (313,221 | ) | (1,916,523 | ) | ||||
Payments of preferred dividends | (1,869 | ) | — | |||||
Payments on revolving credit facilities, net | (7,375 | ) | (220,815 | ) | ||||
Net cash provided by financing activities | 3,709,501 | 11,892,657 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (94,747 | ) | (16,753 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 381,278 | (848,133 | ) | |||||
Cash and cash equivalents at beginning of period | 902,329 | 1,478,147 | ||||||
Cash and cash equivalents at end of period | $ | 1,283,607 | $ | 630,014 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 232,925 | $ | 100,000 | ||||
Non-cash investing and financing activities: | ||||||||
Cancellation of convertible note payable into shares of common stock | $ | 2,608,458 | $ | 2,167,844 | ||||
Payment of accounts payable with digital currency | $ | 26,963 | $ | — | ||||
Issuance of common stock for prepaid services | $ | — | $ | 1,924,339 |
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-7 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
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,Farms, Inc. (“Coolisys”(“Digital Farms”). 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 controlling interests 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 (salesEurope with operations through DP Limited, Middle East with operations through Enertec, digital currency blockchain mining through Digital Power, Microphase, Coolisys, Power-PlusFarms and DP Lending)restaurant operations through I.AM.
On March 14, 2019, pursuant to the authorization provided by the Company’s stockholdersat a Special Meeting of Stockholders, the Company’s Board of Directors approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the Common Stock affecting both the authorized and Europe (sales through DP Limited)issued and outstanding number of such shares by a ratio of one-for-twenty (the “Reverse Stock Split”).
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,March 31, 2019, the Company had cash and cash equivalents of $314,$1,283,607, an accumulated deficit of $17,212$62,720,464 and a negative working capital of $4,174.$19,496,667. The Company has incurred recurring losses and reported losses for the three and nine months ended September 30, 2017,March 31, 2019 and 2018, totaled $1,967$6,711,026 and $4,700,$6,095,953, 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,2019, the Company continuescontinued to successfully obtain additional equity and debt financing and in restructuring existing debt. The following financings transactions were consummated during 2017:
The Company expects to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business development initiatives and to support its working capital requirements. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX Ltd. (“MTIX"(“MTIX”) to manufacture, install and service the Multiplex Laser Surface Enhancement (“(“MLSE”) plasma-laser system. Management believesCurrently, the Company has subcontracted out a significant amount of these services to third parties. Although the manufacture of the $50 million of MLSE plasma-laser systems is expected to exceed four years, management continues to believe that the MLSE purchase order will be a source of revenue and generate significant cash flows for the Company. Additionally, on April 2, 2019, the Company received gross proceeds of approximately $7 million in a public offering of its securities (See Note 22). Management believes that the Company has access to capital resources through potential public or private issuanceissuances 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.
F-8 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
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, 2016,2018, filed with the Securities and Exchange Commission on April 10, 2017.16, 2019. The condensed consolidated balance sheet as of December 31, 20162018 was derived from the Company’s audited 20162018 financial statements contained in the above referenced Form 10-K. Results of the three and nine months ended September 30, 2017,March 31, 2019, are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
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 Digital Farms 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. |
F-9 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
The Company classifies its investments in Avalanche International, Corp (
Three Months ended March 31, 2019 | ||||||||||||||||||||||||
Digital | ||||||||||||||||||||||||
DPC | DPL | Enertec | Farms | I.AM | Total | |||||||||||||||||||
Primary Geographical | ||||||||||||||||||||||||
Markets | ||||||||||||||||||||||||
North America | $ | 2,546,837 | $ | — | $ | — | $ | 28,804 | $ | 1,173,499 | $ | 3,749,140 | ||||||||||||
Europe | 66,402 | 481,597 | — | — | — | 547,999 | ||||||||||||||||||
Middle East | — | — | 2,312,902 | — | — | 2,312,902 | ||||||||||||||||||
Other | 68,767 | 74,917 | 185,318 | — | — | 329,002 | ||||||||||||||||||
$ | 2,682,006 | $ | 556,514 | $ | 2,498,220 | $ | 28,804 | $ | 1,173,499 | $ | 6,939,043 | |||||||||||||
Major Goods | ||||||||||||||||||||||||
RF/Microwave Filters | $ | 652,559 | $ | — | $ | — | $ | — | $ | — | $ | 652,559 | ||||||||||||
Detector logarithmic | ||||||||||||||||||||||||
video amplifiers | 435,365 | — | — | — | — | 435,365 | ||||||||||||||||||
Power Supply Units | 1,408,993 | — | — | — | — | 1,408,993 | ||||||||||||||||||
Power Supply Systems | — | 556,514 | — | — | — | 556,514 | ||||||||||||||||||
Healthcare diagnostic systems | — | — | 648,668 | — | — | 648,668 | ||||||||||||||||||
Defense systems | — | — | 1,849,552 | — | — | 1,849,552 | ||||||||||||||||||
Digital Currency Mining | — | — | — | 28,804 | — | 28,804 | ||||||||||||||||||
Restaurant operations | — | — | — | — | 1,173,499 | 1,173,499 | ||||||||||||||||||
Lending activities | 185,089 | — | — | — | — | 185,089 | ||||||||||||||||||
$ | 2,682,006 | $ | 556,514 | $ | 2,498,220 | $ | 28,804 | $ | 1,173,499 | $ | 6,939,043 | |||||||||||||
Timing of Revenue | ||||||||||||||||||||||||
Recognition | ||||||||||||||||||||||||
Goods transferred at a | ||||||||||||||||||||||||
a point in time | $ | 2,682,006 | $ | 419,613 | $ | — | $ | 28,804 | $ | 1,173,499 | $ | 4,303,922 | ||||||||||||
Services transferred over time | — | 136,901 | 2,498,220 | — | — | 2,635,121 | ||||||||||||||||||
$ | 2,682,006 | $ | 556,514 | $ | 2,498,220 | $ | 28,804 | $ | 1,173,499 | $ | 6,939,043 |
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.
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,
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.
F-10 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
Manufacturing Services
The Company offers a warranty periodprovides manufacturing services in exchange primarily for all its products. Warranty periods rangefixed fees, however, the initial two MLSE units are subject to variable pricing under the $50 million purchase order from one to two years depending onMTIX. Under the product. The Company estimatesterms of the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include the number of units sold, historical rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. As of September 30, 2017 and December 31, 2016, the Company’s accrued warranty liability was $86.
For manufacturing services, which include revenues generated by Enertec and Other Options
The Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component to the extent that the period between when the fair valueCompany transfers its promised good or service to the customer and when the customer pays is one year or less.
The aggregate amount of the underlying common stocktransaction price allocated to the performance obligation that is partially unsatisfied as of March 31, 2019 for the MLSE units was approximately $48 million. The Company expects to recognize the remaining 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 commitmentpoint in time that which the Company is awarded a unit of digital currency through its participation in the applicable network and network participants benefit from 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 note transactioncryptocurrency mining business, such as equipment deprecation and the effective conversion price embedded in the note. electricity cost are recorded as a component of cost of revenues.
Restaurant Operations
The Company accounts for convertible instruments (whenrecords revenue from restaurant sales at the Company has determined thattime of sale, net of discounts, coupons, employee meals and complimentary meals and gift cards. Restaurant cost of sales primarily includes the embedded conversion options should be bifurcated from their host instruments)cost of good, beverages, and merchandise and disposable paper and plastic goods used in accordancepreparing and selling the Company’s menu items and exclude depreciation and amortization. Vendor allowances received in connection with ASC No. 815.
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.
F-11 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
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 orLevel 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.
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.
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 (See Note 4 and Note 7) that were measured at fair value on a recurring basis by level within the fair value hierarchy:
Fair Value Measurement at March 31, 2019 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Investments in common stock and derivative instruments of AVLP – a related party | $ | 2,385,082 | $ | 633,214 | $ | — | $ | 1,751,868 | ||||||||
Investment in common stock of Alzamend – a related party | 176,250 | — | — | 176,250 | ||||||||||||
Investments in marketable equity securities | 283,988 | 283,988 | — | — | ||||||||||||
Investments in warrants of public companies | 33,673 | — | — | 33,673 | ||||||||||||
Total Investments | $ | 2,878,993 | $ | 917,202 | $ | — | $ | 1,961,791 |
Fair Value Measurement at December 31, 2018 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Investments in common stock and derivative instruments of AVLP – a related party | $ | 3,043,499 | $ | 812,858 | $ | — | $ | 2,230,641 | ||||||||
Investments in marketable securities | 178,597 | 178,597 | — | — | ||||||||||||
Investments in warrants of public companies | 34,372 | — | — | 34,372 | ||||||||||||
Total Investments | $ | 3,256,468 | $ | 991,455 | $ | — | $ | 2,265,013 |
F-12 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
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 | $ | — |
We assess the inputs used to measure fair value using athe three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:
Leases Effective January 1, 2019, the |
The Company did not recognize any debt discount duringcontinues to account for leases in 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, 2017. Anti-dilutive securities, consistedwhich are convertible into the Company’s Class A common stock, consist of the following at September 30,March 31, 2019 and 2018:
March 31, | ||||||||
2019 | 2018 | |||||||
Stock options | 360,250 | 222,875 | ||||||
Warrants | 936,381 | 323,743 | ||||||
Convertible notes | 1,438,456 | — | ||||||
Conversion of preferred stock | 89,286 | 83,856 | ||||||
Total | 2,824,373 | 630,474 |
Reclassifications
Certain prior year amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation. These reclassifications had no effect on previously reported results of operations. In addition, certain prior year amounts from the restated amounts have been reclassified for consistency with the current period presentation.
F-13 |
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 |
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 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Upon adoption the Company recognized cumulative operating lease liabilities and operating right-of-use assets of approximately $4.2 million which were reflected as non-cash items in the consolidated statement of cash flows.
In July 2017,
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 December 15, 2018, including interim periods within that fiscal year. The Company adopted this standard on January 1, 2019 and the adoption did not have a material impact on its consolidated financial statements and related disclosures.
4. Marketable Equity Securities
Marketable securities in equity securities with readily determinable market prices consisted of the following as of March 31, 2019 and December 31, 2018:
Marketable equity securities at March 31, 2019 | ||||||||||||||||
Gross unrealized | Gross realized | |||||||||||||||
Cost | gains (losses) | gains (losses) | Fair value | |||||||||||||
Common shares | $ | 220,880 | $ | 63,108 | $ | — | $ | 283,988 |
F-14 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
Marketable equity securities at December 31, 2018 | ||||||||||||||||
Gross unrealized | Gross realized | |||||||||||||||
Cost | gains (losses) | gains (losses) | Fair value | |||||||||||||
Common shares | $ | 220,880 | ($ | 42,283 | ) | $ | — | $ | 178,597 |
The following table presents additional information about marketable equity securities:
Marketable Equity Securities | ||||
Balance at January 1, 2018 | $ | 1,834,570 | ||
Purchases of marketable equity securities | 858,458 | |||
Sales of marketable equity securities | (2,188,292 | ) | ||
Realized losses on marketable equity securities | (175,405 | ) | ||
Unrealized gains on marketable equity securities | (150,734 | ) | ||
Balance at December 31, 2018 | $ | 178,597 | ||
Purchases of marketable equity securities | 300,000 | |||
Sales of marketable equity securities | (286,656 | ) | ||
Realized losses on marketable equity securities | (13,344 | ) | ||
Unrealized gains on marketable equity securities | 105,391 | |||
Balance at March 31, 2019 | $ | 283,988 |
At March 31, 2019 and December 31, 2018, the Company had invested in the marketable equity securities of certain publicly traded companies. During the yearthree months ended March 31, 2019, unrealized gains of $105,391 were included in net income as a component of change in fair value of equity securities. During the three months ended March 31, 2018, the Company recorded an unrealized loss of $150,734 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 equity securities in the Company’s consolidated statements of comprehensive income (loss). The Company’s investment in marketable equity securities will be revalued on each balance sheet date. The fair value of the Company’s holdings in marketable equity securities at March 31, 2019 and December 31, 2016,2018 is a Level 1 measurement based on quoted prices in an active market.
At March 31, 2019 and December 31, 2018, the Company madealso held an investment in preferred stock of a strategic decisionprivate company and an investment in a limited partnership. These investments do not have readily determinable fair values and have been measured at cost less impairment, if any, and adjusted for observable price changes for identical or similar investments of the issuer.
5. PROPERTY AND EQUIPMENT, NET
At March 31, 2019 and December 31, 2018 property and equipment consist of:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Cryptocurrency machines and related equipment | $ | 9,198,928 | $ | 9,168,928 | ||||
Computer, software and related equipment | 2,476,156 | 2,495,470 | ||||||
Restaurant equipment | 757,029 | 752,103 | ||||||
Office furniture and equipment | 359,937 | 287,583 | ||||||
Leasehold improvements | 1,304,302 | 1,274,865 | ||||||
14,096,352 | 13,978,949 | |||||||
Accumulated depreciation and amortization | (5,491,046 | ) | (4,665,650 | ) | ||||
Property and equipment, net | $ | 8,605,306 | $ | 9,313,299 |
F-15 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
For the three months ended March 31, 2019 and 2018, depreciation expense amounted to invest$799,023 and $115,147, respectively.
6. INTANGIBLE ASSETS, NET
At March 31, 2019 and December 31, 2018 intangible assets consist of:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Trade name and trademark | $ | 1,562,332 | $ | 1,562,332 | ||||
Customer list | 2,434,448 | 2,388,139 | ||||||
Non-competition agreements | 150,000 | 150,000 | ||||||
Domain name and other intangible assets | 782,381 | 762,807 | ||||||
4,929,161 | 4,863,278 | |||||||
Accumulated depreciation and amortization | (676,707 | ) | (503,480 | ) | ||||
Intangible assets, net | $ | 4,252,454 | $ | 4,359,798 |
The Company’s trade names and trademarks were determined to have an indefinite life. The remaining definite lived intangible assets are primarily being amortized on a straight-line basis over their estimated useful lives. Amortization expense was $162,415 and $33,358 for the three months ended March 31, 2019 and 2018, respectively.
7. INVESTMENTS – RELATED PARTIES
Investments in AVLP and Alzamend at March 31, 2019 and December 31, 2018, are comprised of the following:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Investment in convertible promissory note of AVLP | $ | 7,732,660 | $ | 6,943,997 | ||||
Accrued interest in convertible promissory note of AVLP | 1,214,509 | 1,004,317 | ||||||
Total investment in convertible promissory note of AVLP – Gross | 8,947,169 | 7,948,314 | ||||||
Less: original issue discount | (1,974,791 | ) | (2,336,693 | ) | ||||
Total investment in convertible promissory note of AVLP | $ | 6,972,378 | $ | 5,611,621 | ||||
Investment in derivative instruments of AVLP | 1,751,868 | 2,230,641 | ||||||
Investment in common stock of AVLP | 633,214 | 812,858 | ||||||
Investment in common stock of Alzamend | 176,250 | — | ||||||
Investment in derivative instruments and common stock of AVLP and Alzamend | $ | 2,561,332 | $ | 3,043,499 | ||||
Total investment in AVLP and Alzamend – Net | $ | 9,533,710 | $ | 8,655,120 |
F-16 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
The following table summarizes the changes in our investments in AVLP and Alzamend during the three months ended March 31, 2019:
Investment in | ||||||||||||
warrants and | Investment in | Total | ||||||||||
common stock | convertible | investment | ||||||||||
of AVLP and | promissory | in AVLP and | ||||||||||
Alzamend | note of AVLP | Alzamend – Net | ||||||||||
Balance at January 1, 2019 | $ | 3,043,499 | $ | 5,611,621 | $ | 8,655,120 | ||||||
Investment in convertible promissory notes of AVLP | — | 530,756 | 530,756 | |||||||||
Investment in common stock of AVLP and Alzamend | 135,790 | — | 135,790 | |||||||||
Fair value of derivative instruments issued by AVLP | 257,907 | — | 257,907 | |||||||||
Unrealized loss in derivative instruments of AVLP | (736,680 | ) | — | (736,680 | ) | |||||||
Unrealized loss in common stock of AVLP and Alzamend | (139,184 | ) | — | (139,184 | ) | |||||||
Accretion of discount | — | 619,809 | 619,809 | |||||||||
Accrued Interest | — | 210,192 | 210,192 | |||||||||
Balance at March 31, 2019 | $ | 2,561,332 | $ | 6,972,378 | $ | 9,533,710 |
The Company’s investments in AVLP, a related party controlled by Philou an existing majority stockholder. The Company’s investments in AVLP primarilyVentures, LLC, or Philou, a significant stockholder of the Company, consist of convertible promissory notes, derivative instruments and shares of common stock of AVLP.
In accordance with ASC No. 310, Receivables (“ASC 310”), the Company accounts for customary stock splits, stock dividends, combinations or similar events. The Warrant may be exercisedits convertible promissory notes in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for cash or on a cashless basis.
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.
F-17 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
During the three months ended March 31, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 71,000 shares of AVLP Notes.common stock for $41,790 and 430,942 shares of AVLP common stock for $417,169, respectively. At September 30, 2017, the closing market price of AVLP’s common Stock was $0.64. Subsequent to quarter-end,March 31, 2019, 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$0.65, a decline from $0.90 at December 31, 2018. 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 AVLP common stock at March 31, 2019, the Company’s investment in AVLP common stock approximateshad an unrealized loss of $102,104.
8. OTHER INVESTMENTS, RELATED PARTIES
The Company’s other related party investments primarily consist of two investments.
MTIX, Ltd.
On December 5, 2017, the currentCompany entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson two convertible promissory notes in the principal amount of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.
During December 2017, the Company issued 30,000 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently sold the 30,000 shares. The proceeds from the sale of shares of common stock received upon the conversion of Note A were sufficient to satisfy the entire $2,267,766 obligation as well as an additional $400,500 of value added tax due to WT Johnson. Concurrent with entering into the exchange agreement, the Company received a promissory note in the amount of $2,668,266 from MTIX and cancelled Note B. At March 31, 2019 and December 31, 2018, the Company has valued the note receivable at $600,000, 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 Israel. The Company made $300,000 of payments to the seller of the property and 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.
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 $300,000 investment over ten years, subject to a cliff vesting after five years. During the three months ended March 31, 2019 and 2018, the Company recognized $7,500 in amortization expense. If 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 value.market value of such unvested Property interest.
F-18 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
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 |
9. ACQUISITIONS
The following pro forma data for the three months ended March 31, 2018 summarizes the results of operations for the periodsperiod indicated as if the Microphase and Power-Plus acquisitionsEnertec acquisition, which closed on May 23, 2018 had been completed as of the beginning of eachthe 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 eachthe 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 | ) |
For the Three | ||||
Months Ended | ||||
March 31, 2018 | ||||
Total Revenue | $ | 7,774,229 | ||
Net loss | $ | (6,136,615 | ) | |
Less: Net loss attributable | ||||
to non-controlling interest | 35,431 | |||
Loss available to common shareholders | $ | (6,101,184 | ) | |
Basic and diluted net loss per common share | $ | (3.35 | ) | |
Basic and diluted weighted average | ||||
common shares outstanding | 1,819,598 | |||
Comprehensive Loss | ||||
Loss available to common shareholders | $ | (6,101,184 | ) | |
Other comprehensive income (loss) | ||||
Change in net foreign currency | ||||
translation adjustments | 26,457 | |||
Net unrealized loss on derivative | ||||
securities of related party | (4,741,114 | ) | ||
Other comprehensive income (loss) | (4,714,657 | ) | ||
Total Comprehensive loss | $ | (10,815,841 | ) |
10. STOCK-BASED COMPENSATION
Under the Company's 2018 Stock Incentive Plan (the “2018 Plan”), 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 5,372,630868,632 shares of the Company’s common stock. The Company also has 206,000 outstanding options that were granted between 2009 and 2011 pursuant to the terms of the Company's 2002 Stock Option Plan (the “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,March 31, 2019, an aggregate of 1,350,832520,539 of the Company's options are still available for future grant.
During the three and nine months ended September 30, 2017,March 31, 2019, the Company granted 50,000 and 560,000did not grant any options.During the three months ended March 31, 2018, the Company did not grant any options respectively, from the PlansPlans; however, the Company did grant 38,750options to its employees at an average exercise priceoutside of $0.61 per share.the 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 three months ended March 31, 2018 was $251,$1,480,195 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, 2017,March 31, 2019 and 2018, the Company also issued 380,645375,000 and 1,336,798,64,153, respectively, shares of common stock to its consultants and service providers pursuant to the 2016 Plan.providers. The Company estimated that the grant date fair value of these shares of common stock was $742, $253,019 and $2,457,102, respectively, which was determined from the closing price of the Company’s common stock on the date of issuance.
F-19 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
The Company did not grant any options or restricted stock awards during the three and nine months ended September 30, 2016.
During the ninethree months ended September 30, 2017,March 31, 2018, 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 |
Three Months Ended | ||||
March 31, 2018 | ||||
Weighted average risk-free interest rate | 2.41% — 2.43% | |||
Weighted average life (in years) | 5.0 | |||
Volatility | 124.7% | |||
Expected dividend yield | 0% | |||
Weighted average grant-date fair value per share of options granted | $ | 38.20 |
The options outstanding as of September 30, 2017,March 31, 2019, have been classified by exercise price, as follows:
Outstanding | Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
Remaining | Average | Average | ||||||||||||||||||
Exercise | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
Price | Outstanding | Life (Years) | Price | Exercisable | Price | |||||||||||||||
$0.57 - $0.79 | 2,425,000 | 9.14 | $ | 0.66 | 1,249,167 | $ | 0.66 | |||||||||||||
$1.10 - $1.32 | 25,000 | 6.10 | $ | 1.28 | 20,000 | $ | 1.27 | |||||||||||||
$1.51 - $1.69 | 441,000 | 5.11 | $ | 1.61 | 378,500 | $ | 1.60 | |||||||||||||
$0.57 - 1.69 | 2,891,000 | 8.50 | $ | 1.10 | 1,647,667 | $ | 0.88 |
Outstanding | Exercisable | |||||||||
Weighted | ||||||||||
Average | Weighted | Weighted | ||||||||
Remaining | Average | Average | ||||||||
Exercise | Number | Contractual | Exercise | Number | Exercise | |||||
Price | Outstanding | Life (Years) | Price | Exercisable | Price | |||||
$12.00 - $14.00 | 149,000 | 7.27 | $13.44 | 96,751 | $13.31 | |||||
$26.40 - $27.60 | 8,500 | 8.28 | $27.46 | 3,500 | $27.26 | |||||
$30.20 - $33.80 | 2,875 | 3.33 | $32.67 | 2,875 | $32.67 | |||||
$12.00 - $33.80 | 160,375 | 7.25 | $14.53 | 103,126 | $14.32 |
Issuances outside of Plans | ||||||||||
$16.00 - $46.40 | 199,875 | 7.15 | $26.09 | 47,121 | $28.87 | |||||
Total Options | ||||||||||
$12.00 - 46.40 | 360,250 | 7.20 | $20.94 | 150,247 | $18.88 |
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, 2017March 31, 2019 and 2016,2018, is comprised as follows:
F-20 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
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 | ||||||||
March 31, 2019 | March 31, 2018 | |||||||
Cost of revenues | $ | - | $ | 4,874 | ||||
Engineering and product development | - | 13,650 | ||||||
Selling and marketing | - | 11,922 | ||||||
General and administrative | 162,326 | 664,165 | ||||||
Stock-based compensation from Plans | $ | 162,326 | $ | 694,611 | ||||
Stock-based compensation from issuances outside of Plans | 458,962 | 743,603 | ||||||
Total Stock-based compensation | $ | 621,288 | $ | 1,438,214 |
The combination of stock-based compensation of $1,061$162,326 from the issuances of equity basedequity-based awards pursuant to the Plans and stock-based compensation attributed to restricted stock awards of $130 and warrants$253,019 and options of $78,$205,943, which were issued outside of the Plans, resulted in aggregate stock-based compensation of $1,269$621,288 during the ninethree months ended September 30, 2017.March 31, 2019. During the three months ended September 30, 2017, aggregateMarch 31, 2018, stock-based compensation was $517, which consistedcomprised of $365$694,611 from the issuances of equity basedequity-based awards pursuant to the Plans and stock-based compensation attributed to restricted stock awardawards of $120$576,194 and warrants and options of $32,$167,409, which were issued outside of the Plans. During the three and nine months ended September 30, 2016, the onlyPlans, resulted in aggregate stock-based compensation expense was from issuances pursuant to the Plans.
A summary of option activity under the Company's stock option plans as of September 30, 2017,March 31, 2019, and changes during the ninethree 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 |
Outstanding Options | |||||||||
Weighted | |||||||||
Weighted | Average | ||||||||
Shares | Average | Remaining | Aggregate | ||||||
Available | Number | Exercise | Contractual | Intrinsic | |||||
for Grant | of Shares | Price | Life (years) | Value | |||||
January 1, 2019 | 507,789 | 173,125 | $14.41 | 7.52 | $0 | ||||
Forfeited | 12,750 | (12,750) | $12.89 | ||||||
March 31, 2019 | 520,539 | 160,375 | $14.53 | 7.25 | $0 |
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, $0.55March 31, 2019 of $0.29 and the exercise price, multiplied by the number of in-the-money-options).
As of September 30, 2017,March 31, 2019, there was $425$403,373 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 2.32.4 years.
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DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
11. WARRANTS
During the three months ended March 31, 2019, the Company did not issue any warrants. 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 |
Outstanding | Exercisable | |||||||||
Weighted | ||||||||||
Average | Weighted | Weighted | ||||||||
Remaining | Average | Average | ||||||||
Exercise | Number | Contractual | Exercise | Number | Exercise | |||||
Price | Outstanding | Life (Years) | Price | Exercisable | Price | |||||
$0.20 | 15,873 | 7.59 | $0.20 | 15,873 | $0.20 | |||||
$11.00 | 14,182 | 3.61 | $11.00 | 14,182 | $11.00 | |||||
$12.00 | 3,750 | 4.09 | $12.00 | 3,750 | $12.00 | |||||
$13.20 | 7,407 | 3.59 | $13.20 | 7,407 | $13.20 | |||||
$14.00 | 106,286 | 3.62 | $14.00 | 106,286 | $14.00 | |||||
$15.00 | 6,795 | 3.13 | $15.00 | 6,795 | $15.00 | |||||
$16.00 | 24,083 | 1.45 | $16.00 | 24,083 | $16.00 | |||||
$17.40 | 86,207 | 4.12 | $17.40 | 86,207 | $17.40 | |||||
$18.80 | 384,589 | 4.13 | $18.80 | 384,589 | $18.80 | |||||
$20.00 | 14,000 | 3.70 | $20.00 | 14,000 | $20.00 | |||||
$22.00 | 37,974 | 2.43 | $22.00 | 37,974 | $22.00 | |||||
$23.00 | 85,000 | 3.99 | $23.00 | 85,000 | $23.00 | |||||
$26.00 | 49,679 | 4.04 | $26.00 | 49,679 | $26.00 | |||||
$27.00 | 55,556 | 4.12 | $27.00 | 55,556 | $27.00 | |||||
$44.00 | 31,250 | 3.82 | $44.00 | 31,250 | $44.00 | |||||
$45.00 | 5,625 | 3.82 | $45.00 | 5,625 | $45.00 | |||||
$50.00 | 8,125 | 3.82 | $50.00 | 8,125 | $50.00 | |||||
$0.20 - $50.00 | 936,381 | 3.93 | $20.19 | 936,381 | $20.19 |
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 theThe Company utilized the Black-Scholes option pricing model and the assumptions used during the ninethree months ended September 30, 2017:March 31, 2018:
2018 | ||||
Weighted average risk-free interest rate | 2.41% — 2.61% | |||
Weighted average life (in years) | 4.0 | |||
Volatility | 124.8% — 138.4% | |||
Expected dividend yield | 0% | |||
Weighted average grant-date fair value per share of warrants granted | $ | 23.20 |
F-22 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
12. OTHER CURRENT LIABILITIES
At March 31, 2019 and December 31, 2018 other current liabilities consist of:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Accrued payroll and payroll taxes | $ | 1,274,875 | $ | 1,497,470 | ||||
Other accrued expenses | 302,673 | 370,932 | ||||||
$ | 1,577,548 | $ | 1,868,402 |
13. LEASES
We have operating leases for office space and restaurant locations. Our leases have remaining lease terms of 3 months to 9 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year.
The following table provides a summary of leases by balance sheet location as of March 31, 2019:
March 31, 2019 | ||||
Operating right-of-use assets | $ | 3,948,834 | ||
Operating lease liability - current | 856,475 | |||
Operating lease liability - non-current | 3,124,524 |
The components of lease expenses for the three months ended March 31, 2019 were as follows:
Three | ||||
Months Ended | ||||
March 31, 2019 | ||||
Operating lease cost | $ | 386,134 | ||
Short-term lease cost | - | |||
Variable lease cost | - |
The following tables provides a summary of other information related to leases for the three months ended March 31, 2019:
March 31, 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 355,070 | ||
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | - | ||
Weighted-average remaining lease term - operating leases | 5.76 years | |||
Weighted-average discount rate - operating leases | 10% |
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 |
F-23 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
Maturity of lease liabilities under our non-cancellable operating leases as of March 31, 2019, are as follows:
Payments due by period | ||||
2019 (Remainder) | $ | 936,849 | ||
2020 | 1,039,687 | |||
2021 | 779,008 | |||
2022 | 501,411 | |||
2023 | 514,895 | |||
Thereafter | 1,582,121 | |||
Total lease payments | 5,353,971 | |||
Less interest | (1,372,972 | ) | ||
Present value of lease liabilities | $ | 3,980,999 |
Information for our leases for the year ended December 31, 2018 under ASC Topic 840, Leases, follows for comparative purposes.
Minimum future payments under all operating leases as of December 31, 2018, were as follows:
Payments due by period | ||||
2019 | $ | 1,291,919 | ||
2020 | 1,039,687 | |||
2021 | 779,008 | |||
2022 | 501,411 | |||
2023 | 514,895 | |||
Thereafter | 1,582,121 | |||
Total lease payments | $ | 5,709,041 |
14. ADVANCES ON FUTURE RECEIPTS
During the three months ended March 31, 2019, the Company received funding as a result of entering into multiplethree Agreements for the Purchase and Sale of Future Receipts with TVT Capital, LLC pursuant to which(collectively, the “Agreements on Future Receipts”). The Company sold in the aggregate $2,585$568,123 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. As of September 30, 2017,$395,095. During 2019, the Company had paid back $439.repaid $388,587. The term future receipts means cash, check, ACH, credit card, debit card, bank card, charged card or other form of monetary payment. The
F-24 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
15. NOTES PAYABLE
Notes Payable at September 30, 2017,March 31, 2019 and December 31, 2018, are comprised of the following. At December 31, 2016
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
12% short-term promissory note | $ | 1,000,000 | $ | 1,000,000 | ||||
Other short-term notes payable | 853,379 | 1,033,553 | ||||||
12% September 2018 short-term promissory note | 743,847 | 789,473 | ||||||
8% short-term promissory notes | 636,300 | 1,272,600 | ||||||
October 2018 short-term promissory note | — | 565,000 | ||||||
Enertec short-term promissory note | 500,000 | — | ||||||
Notes payable to Wells Fargo | 291,913 | 291,988 | ||||||
Note payable to Dept. of Economic and Community Development | 250,071 | 260,169 | ||||||
Microphase short-term promissory note | 200,000 | 200,000 | ||||||
Note payable to Power-Plus Member | 13,250 | 13,250 | ||||||
Note payable to People's United Bank | 17,082 | 18,589 | ||||||
Short term bank credit | 1,636,182 | 1,586,864 | ||||||
Total notes payable | 6,142,024 | 7,031,486 | ||||||
Less: | ||||||||
Unamortized debt discounts | (18,082 | ) | (151,499 | ) | ||||
Unamortized financing cost | — | (7,541 | ) | |||||
Total notes payable, net of financing cost | $ | 6,123,942 | $ | 6,872,446 | ||||
Less: current portion | (5,650,699 | ) | (6,388,787 | ) | ||||
Notes payable – long-term portion | $ | 473,243 | $ | 483,659 |
January Exchange Agreement
On August 16, 2018, as amended on November 29, 2018, the Company didentered into a securities purchase agreement with four institutional investors providing for the issuance of 8% promissory notes, each in the principal amount of $318,150, for an aggregate principal face amount of $1,272,600, due February 15, 2019 (individually the “8% Short-Term Promissory Note” and collectively the “8% Short-Term Promissory Notes”).
On January 23, 2019 the Company entered into an Exchange Agreement (the “January Exchange Agreement”) with one of the institutional investors pursuant to which the Company issued to the investor two new 8% promissory notes in the aggregate principal amount of $1,043,799 (the “New Notes”) in exchange for one of the 8% Short-Term Promissory Notes and the October short-term promissory note in the principal amount of $565,000.
Pursuant to the January Exchange Agreement, the investor received 436,753 shares of common stock of the Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Notes. Further, since the investor’s proceeds from the sale of all 436,753 shares of common stock received were not have anyequal to the outstanding principal balance of the New 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 |
February 2019 Exchange Agreement
On February 20, 2019 the Company entered into an Exchange Agreement (the “February Exchange Agreement”) with another one of the institutional investors pursuant to which the Company issued to the investor a new 8% promissory note in the principal amount of $433,884 (the “New Note”) in exchange for the 8% Short-Term Promissory Note (the “Old Note”).
Pursuant to the February ’19 Exchange Agreement, the investor received 180,785 shares of common stock of the Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Note. Further, since the investor’s proceeds from the sale of all 180,785 shares of common stock received were not equal to the outstanding principal balance of the New Note, the Company is required to pay the difference, which amounted to $289,954, to the investor in cash or through the delivery of free trading shares of common stock. The Company recognized additional interest expense for the difference of $289,954. On April 4, 2019, the Company issued to the investor an additional 375,000 shares of the Company’s common stock, with a value of $108,523, in partial satisfaction of the liability, resulting in a remaining balance due of $183,822.
F-25 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
Enertec Short-Term Promissory Note On December 28, 2018, Enertec entered into a $500,000 secured promissory note (the “Enertec Short-Term Promissory Note”) whereby Enertec agreed to pay interest in an amount of 10% per annum in cash to the investor, until the Enertec Short-Term Promissory Note is paid in full. The proceeds from the Enertec Short-Term Promissory Note were received in January 2019 and repaid on April 2, 2019. In connection with the Enertec Short-Term Promissory Note, Milton C. Ault III provided a personal guarantee for the benefit of the investor. 16. NOTES PAYABLE – RELATED PARTIES Notes Payable – Related parties at March 31, 2019 and December 31, 2018, are comprised of the following.
17. CONVERTIBLE NOTES Convertible Notes Payable at March 31, 2019 and December 31, 2018, are comprised of the following.
On May 15, 2018, the Company entered into a securities purchase agreement to sell a 10% convertible note (the “10% Convertible Note”) in the principal amount of $6,000,000. On July 2, 2018 and August 31, 2018, the Company entered into securities purchase agreements with the institutional investor providing for the issuance of a second 10% convertible note with a principal face amount of $1,000,000 (the “Second 10% Convertible Note”) and a third 10% convertible note with a principal face amount of $2,000,000 (the “Third 10% Convertible Note” and with the Second 10% Convertible Note, the “Additional 10% Convertible Notes”), respectively. On January 9, 2019, the 10% Convertible Note was amended revising the amortization schedule such that the conversion price on eleven monthly amortization payments in the principal amount $309,193 each, at the request of the holder, shall be satisfied by the |
Between January 4, 2019 and February 21, 2019, the Company issued to the investor 336,487 shares of its common stock upon the conversion of $1,053,351 in principal and accrued interest. The investor received $660,337 from the closing pricesale of these shares of common stock. In accordance with the January 9, 2019 amendment, the Company is required to pay the difference between the conversion amount and the proceeds received from the subsequent sale of the Company’s common stock onshares by the dateinvestor, which amounted to $393,014. The Company recognized additional interest expense in the amount of
F-26 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
On April 2, 2019, the Company repaid principal of $3,000,000 and accrued interest of $1,125,000 on the Additional 10% Convertible Notes and made a payment of $353,308 towards the 10% Convertible Note.
18. COMMITMENTS AND CONTINGENCIES
On July 31, 2018 a stockholder derivative complaint was filed in thousands, except sharethe United States District Court for the Central District of California against the Company as the nominal defendant, as well as its current directors and per share data
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. The Company and the individual defendants moved to dismiss the Complaint and on February 25, 2019, the Court granted the motion to dismiss but granted plaintiffs leave to amend their Complaint. On March 11, 2019, plaintiffs filed their amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions. On March 25, 2019, the Company and the individual defendants filed a motion to dismiss the amended complaint. On May 6, 2019, the Motion to Dismiss was fully submitted to the Court without oral argument. The Motion is now pending before the Court.
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 the Company’s business, financial condition and results of operations.
On November 28, 2018,Blockchain Mining Supply and Services, Ltd, a vendor who sold computers to the Company’s subsidiary, filed in the United States District Court for the Southern District of New York against Super Crypto Mining, Inc. and the Company (Case No. 18-cv-11099). The Complaint asserted claims for breach of contract and promissory estoppel against the Company and its subsidiary arising from the subsidiary’s failure to satisfy a purchase agreement. The Complaint seeks damages in the amount of $1,388,495.
On February 4, 2019, pursuant to the Court’s Rules, the Company requested a pre-motion Conference with the Court. The Company’s time to file its motion to dismiss is stayed until the Court’ holds the pre-motion Conference, which has not yet been scheduled by the Court.
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, the Company has established a reserve in the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.
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 |
F-27 |
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 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
19. STOCKHOLDERS’ EQUITY
Amendments to Certificate of Incorporation
On January 3, 2019, the principal amountCompany filed a certificate of $400, includedamendment (the “Certificate of Amendment”) to its Certificate of Incorporation, with the Secretary of State of the State of Delaware, to effectuate an original issue discount (“OID”) of $40 resulting in net proceedsincrease to the number of authorized shares of common stock of the Company. Pursuant to the Certificate of Amendment, the Company increased the number of $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.authorized shares of its Class A common stock to 500,000,000 from 200,000,000 (the “Authorized Increase”). The principal may be converted intonumber of authorized shares of the Company’s Class B common stock remains at $0.55 per share.
On March 14, 2019, pursuant to the authorization provided by the Company’s stockholdersat a Special Meeting of Stockholders, the Company’s Board of Directors approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the Common Stock affecting both the authorized and issued and outstanding number of such shares by a ratio of one-for-twenty (the “Reverse Stock Split”). The Company however, is prohibited from issuingfiled the COI Amendment to its Certificate of Incorporation with the State of Delaware effectuating the Reverse Stock Split on March 14, 2019. As a result of the Reverse Stock Split, each twenty (20) shares of common stock pursuantissued and outstanding prior to the Convertible Note 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. The fair 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 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 $207 based on the relative fair values of the 666,666 warrants and OID of $40. During the three and nine months ended September 30, 2017, non-cash interest expense of $37 was recorded from the amortization of debt discounts.
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 |
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 500,0001,000,000 shares of itsas Series A Convertible Preferred Stock as
On February 27, 2019, the Company filed a Certificate of December 31, 2016, there were noDesignations of Rights and Preferences of Series C Convertible Redeemable Preferred Stock to its Certificate of Incorporation, as amended on January 2, 2019, with the Secretary of State of the State of Delaware to establish the preferences, limitations and relative rights of the Series C Convertible Redeemable Preferred Stock. The holders of Series C Preferred Stock shall not be entitled to receive dividends. Unless previously converted into shares of common stock, any shares of Series C Preferred Stock issued and outstanding sixty (60) months from their date of issuance (the “Redemption Date”), shall be mandatorily redeemed and repurchased by the Company at the stated value. In addition, upon the voluntary or outstanding.
Holders of the Series BC Preferred Stock
On March 9, 2017,February 27, 2019, the Company entered into a Preferred StockSecurities Purchase Agreement with Philou,Ault & Company, Inc., a related party.Delaware corporation and a stockholder of the Company (“Ault & Company”). Pursuant to the terms of the Preferred Stock Purchase Agreement, Philou mayAult & Company will invest at its sole and absolute discretion up to $5,000$2,500,000 in the Company through the purchase of Series B Preferred Stock over the term of 36 months.
F-28 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
Common Stock
Common stock confers upon the holders the rights to receive notice to participate and vote in the general meeting of shareholdersstockholders 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.
2018 Issuances
Issuance of Common Stock pursuant to the At the Market Offering
On November 15, 2016,October 10, 2018, the Company entered into subscription agreementsan At-The-Market Issuance Sales Agreement (the “2016 Subscription Agreements”“Sales Agreement”) with nine accredited investors. PursuantWilson-Davis & Co., Inc., as sales agent (the “Agent”) to sell shares of its common stock, having an aggregate offering price of up to $25,000,000 (the “Shares”) from time to time, through an “at the market offering” program (the “WDCO ATM Offering”). During the three months ended March 31, 2019, the Company had received gross proceeds of $4,397,535 through the sale of 3,791,642 shares of the Company’s common stock through the WDCO ATM Offering. The offer and sale of the shares through the WDCO ATM Offering were made pursuant to our then 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 termsWDCO ATM Offering, dated October 15, 2018.
Issuance of Common Stock for Services
During the 2016 Subscription Agreements,three months ended March 31, 2019, the Company sold 901,666 units at $0.60 forissued to its consultants a total 375,000 shares of its common stock with an aggregate purchase pricevalue of approximately $541. Each unit consists$253,019, an average of one$0.67 per share for services rendered.
Issuance of common stock for conversion of debt
During the three months ended March 31, 2019, principal and one warrant to purchase one shareaccrued interest of $2,128,878 and $651,462, respectively, on the Company’s debt securities was satisfied through the issuance of 1,056,066 shares of the Company’s common stock.
20. RELATED PARTY TRANSACTIONS
a. | 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 AVLP a non-revolving credit facility of up to $10,000,000 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. At March 31, 2019, the Company has provided loans to AVLP in the principal amount $7,732,660 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 15,465,320 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. As of March 31, 2019, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $1,214,509. |
During the three months ended March 31, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 71,000 shares of AVLP common stock (the “Nov. 2016 Warrants”) atfor $41,790 and 430,942 shares of AVLP common stock for $417,169, respectively. At March 31, 2019, the Company’s investment in AVLP common stock had an exercise priceunrealized loss of $0.80.$102,104.
F-29 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
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 and a director of AVLP and also the audit committee chairman of the Company.
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.
b. |
During the three months ended |
21. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has five reportable segments as of March 31, 2019 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.
Three Months ended March 31, 2019 | ||||||||||||||||||||||||
DPC | DPL | Enertec | SC Mining | I.AM | Total | |||||||||||||||||||
Revenue | $ | 2,496,917 | $ | 556,514 | $ | 2,498,220 | $ | — | $ | — | $ | 5,551,651 | ||||||||||||
Revenue, cryptocurrency | ||||||||||||||||||||||||
mining | — | — | — | 28,804 | — | 28,804 | ||||||||||||||||||
Revenue, related party | — | — | — | — | — | - | ||||||||||||||||||
Revenue, restaurant operations | — | — | — | — | 1,173,499 | 1,173,499 | ||||||||||||||||||
Revenue, lending activities | $ | 185,089 | — | — | — | — | 185,089 | |||||||||||||||||
Total revenues | $ | 2,682,006 | $ | 556,514 | $ | 2,498,220 | $ | 28,804 | $ | 1,173,499 | $ | 6,939,043 | ||||||||||||
Depreciation and | ||||||||||||||||||||||||
amortization expense | $ | 70,146 | $ | 19,797 | $ | 154,922 | $ | 716,572 | $ | — | $ | 961,437 | ||||||||||||
Loss from operations | $ | (517,376 | ) | $ | (925 | ) | $ | (49,888 | ) | $ | (742,423 | ) | $ | (104,353 | ) | $ | (1,414,965 | ) | ||||||
Capital expenditures for | ||||||||||||||||||||||||
segment assets, as of | ||||||||||||||||||||||||
March 31, 2019 | $ | 3,793 | $ | - | $ | - | $ | - | $ | 5,813 | $ | 9,606 | ||||||||||||
Identifiable assets as of | ||||||||||||||||||||||||
March 31, 2019 | $ | 33,120,205 | $ | 1,578,448 | $ | 11,590,778 | $ | 6,420,076 | $ | 2,064,284 | $ | 54,773,791 |
F-30 |
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 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
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 |
Three Months ended March 31, 2018 | ||||||||||||||||||||
DPC | DPL | SC Mining | Eliminations | Total | ||||||||||||||||
Revenue | $ | 2,839,696 | $ | 325,763 | $ | 237,496 | $ | — | $ | 3,402,955 | ||||||||||
Revenue, related party | 1,792,892 | — | — | — | 1,792,892 | |||||||||||||||
Inter-segment revenues | 4,513 | — | — | (4,513 | ) | — | ||||||||||||||
Total revenues | $ | 4,637,101 | $ | 325,763 | $ | 237,496 | $ | (4,513 | ) | $ | 5,195,847 | |||||||||
Depreciation and | ||||||||||||||||||||
amortization expense | $ | 76,236 | $ | 17,381 | $ | 54,888 | $ | — | $ | 148,505 | ||||||||||
Loss from operations | $ | (1,851,354 | ) | $ | (252,519 | ) | $ | (864,422 | ) | $ | — | $ | (2,968,295 | ) | ||||||
Capital expenditures for | ||||||||||||||||||||
segment assets, as of | ||||||||||||||||||||
March 31, 2018 | $ | 311,143 | $ | 1,399 | $ | 7,165,793 | $ | — | $ | 7,478,335 | ||||||||||
Identifiable assets as of | ||||||||||||||||||||
March 31, 2018 | $ | 29,104,475 | $ | 1,487,674 | $ | 7,901,237 | $ | — | $ | 38,493,386 |
Concentration Risk:
The following table providestables provide the percentage of total revenues for the three months ended March 31, 2019 and 2018 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 | ||||||||
March 31, 2019 | ||||||||
Total Revenues | Percentage of | |||||||
by Major | Total Company | |||||||
Customers | Revenues | |||||||
Customer A | $ | 1,416,086 | 20 | % |
For the Three Months Ended | ||||||||
March 31, 2018 | ||||||||
Total Revenues | Percentage of | |||||||
by Major | Total Company | |||||||
Customers | Revenues | |||||||
Customer B | $ | 1,792,892 | 35 | % |
Revenue from Customer A and B wereis attributable to Digital Power and revenueEnertec. Revenue from Customer CB relates to MTIX, a related party, and is attributable to DP Limited.
For the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, total revenues from external customers divided on the basis of the Company’s product lines are as follows:
For the Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Commercial products | $ | 3,435,850 | $ | 3,665,069 | ||||
Defense products | 3,503,193 | 1,530,778 | ||||||
Total revenues | $ | 6,939,043 | $ | 5,195,847 |
F-31 |
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
MARCH 31, 2019
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 |
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, 2017March 31, 2019 and 2016.2018. Other than as shown, no foreign country or region contributed materially to revenues or long-lived assets for these periods:
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 |
For the Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
North America | $ | 3,749,140 | $ | 4,747,546 | ||||
Middle East | 2,312,902 | — | ||||||
Europe | 547,999 | 266,655 | ||||||
Other | 329,002 | 181,646 | ||||||
Total revenues | $ | 6,939,043 | $ | 5,195,847 |
22. SUBSEQUENT EVENTS
In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2017March 31, 2019 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.
Public Offering
On October 4, 2017,March 29, 2019, the Company entered into a Securities Purchase Agreementan underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (the “Underwriter”), pursuant to sell 75,000 shares 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.
Pursuant to the Underwriting Agreement, the Company also granted the Underwriter the option to purchase up to 428,325 additional shares of common stock, and/or Pre-funded Warrants to purchase up to 1,905,000 additional shares of common stock and/or Common Warrants to purchase up to 2,333,325 additional shares of common stock to cover over-allotments, if any. The option is exercisable 45 days after entry into the investors at $0.60 per share for an aggregate purchase price of $435. $180 ofUnderwriting Agreement. The Offering was made pursuant to the aggregate purchase priceshelf registration statement on Form S-3 (File No. 333-222132), as amended, that was paid in cash and $255 was paid through the cancellation of debt incurredfiled by the Company.Company with the SEC on January 8, 2019 and declared effective by the SEC on January 11, 2018, and a related prospectus supplement.
F-32 |
DPW HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
MARCH 31, 2019
The Common Warrants are exercisable at any time after the Company entered into an Agreement for the Purchase and Saledate of Future Receipts with TVT pursuant to which the Company sold up to $223 in Future Receipts of the Company for $150. If the Company pays TVT by January 3, 2018, the purchased amount will be discounted to $177. Until that date, no specific payment schedules are required. After January 3, 2018, if the Company has not paid the $177, the Company agrees to pay an aggregate amount of $223 under the following terms. The Company will be obligated to pay $13 on a weekly basis until the purchase price of $223 has been paid in full. The Agreement also includes warrants to purchase 75,000 shares of the Company’s common stockissuance at an exercise price of $0.725$0.45 per share. In addition,share and will expire on the purchase price of $150 has been personally guaranteed by Mr. Ault.
The Pre-Funded Warrants are exercisable at any time after the date of issuance and may be exercised at any time until all the Pre-Funded Warrants are exercised in full. As an alternative to payment in immediately available funds, the holder may elect to exercise the Pre-Funded Warrant through a periodcashless exercise.
In addition, the Company has also issued the Underwriter a warrant to purchase a maximum of 622,220 additional shares of common stock (equal to 4% of the Shares sold in the Offering plus the number of shares of common stock underlying the Pre-Funded Warrants) at an initial exercise price of $0.50 per share, with a term of five years (the “Underwriter’s Warrant”). The Underwriter’s Warrant contains demand and piggy-back registration rights. If at the time of exercise, there is no effective registration statement registering, or no current prospectus available for, the issuance of the shares of common stock underlying the Underwriter’s Warrant, then the Underwriter’s Warrant may be exercised through a cashless exercise.
The Company received net proceeds from the dateOffering of issue.
The Offering closed on April 2, 2019 and as of May 8, 2019 the Company had issued a total of 27,101,000 shares of its common stock, inclusive of shares issued pursuant to the exercise of a total of 12,700,000 Pre-Funded Warrants and 11,545,500 shares issued pursuant to the cashless exercise of the Common Warrants.
WDCO ATM Offering
On NovemberApril 1, 2019, the Company received net proceeds of $248,172 through the sale of 1,000,000 shares of the Company’s common stock through the WDCO ATM Offering.
Payment of related party receivable
During the years ended December 31, 2018 and 2017, the Company recognized $3,907,280 and I.AM, Inc. ($173,751 in revenues from MTIX, a related party, to manufacture the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser systems. On April 12, 2019, the Company received payment of $2,676,219 for manufacturing services performed on the first MLSE system.
Offering Statement
“I.AMOn May 13, 2019, the Company filed an Offering Statement on Form 1-A pursuant to Regulation A promulgated by the Securities and Exchange Commission (the “Commission”), pursuant to which up to $50 million of 3-year, non-convertibles promissory notes (“Promissory Notes”) will be offered and sold once the Commission has qualified the Offering Statement. The Company anticipates that the Promissory Notes will accrue annualized interest of between 5% and 15% that will be paid rata monthly and will be offered on a continuous basis, in each case as determined by the Company in its sole discretion. The Company cannot provide any assurance that any notes will be sold pursuant this Offering Statement”).
Convertible Promissory Note
On May 13, 2019, the Company entered into a Loan and Security Agreement (“Loan Agreement”)securities purchase agreement pursuant to which the Company will provide I.AMit issued a non-revolving credit facilityfive year $660,000 4% convertible promissory note and a warrant to purchase 500,000 shares of upcommon stock to $1,300, for a period ending on September 25, 2022, subject to the terms and conditions statedan accredited investor.The promissory note is in the Loan Agreement, including that the Company having available funds to grant such credit. Advances on the credit facility accrue at a rateprincipal amount 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.$660,000 and was sold for $500,000.
F-33 |
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, Digital Farms, Inc., Digital Power Limited, Enertec Systems 2001 Ltd. and our majority owned subsidiary,subsidiaries, Microphase Corporation.
Recent Developments
On October 15, 2018, we entered into an At-The-Market Issuance Sales Agreement with Wilson-Davis & Co., Inc., (“WDCO”) 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 “WDCO ATM Offering”). The offer and sale of our common stock was 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, WDCO used 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 paid to WDCO a commission in an amount equal to 4.0% of the gross sales price per share of common stock sold through the WDCO ATM Offering as sales agent under the At-The-Market Issuance Sales Agreement. The WDCO ATM Offering was terminated effective April 1, 2019.
On March 29, 2019, we entered into an underwriting agreement pursuant to which we sold an aggregate of (a) 2,855,500 shares of our common stock (the “Shares”) together with warrants to purchase 2,855,500 shares of common stock (the “Common Warrants”) and (b) pre-funded warrants to purchase up to an aggregate of 12,700,000 shares of our common stock (the “Pre-Funded Warrants”) together with a number of Common Warrants to purchase 12,700,000 shares of common stock (the “Offering”). The Shares were sold to the purchasers at the public offering price of $0.44 per share (the “Offering Price”). The Common Warrants were sold at a public offering price of $0.01 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser whose purchase of the Shares and the Common Warrant in the Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock immediately following the consummation of the Offering. The purchase price of each Pre-Funded Warrant equaled the Offering Price at which the Shares were sold to the public in the Offering, minus $0.01, and the exercise price of each Pre-Funded Warrant equaled $0.01 per share. We received net proceeds from the Offering of $6,204,717, after deducting underwriting discounts and commissions and offering expenses. We used the net proceeds from the Offering primarily for the repayment of debt.
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.
1 |
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”(“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.
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 510-657-2635949-444-5464 and our website address is www.digipwr.com.
Results of Operations
RESULTS OF OPERATIONS
The following table summarizes the results of our operations for the three months ended September 30, 2017, from $1,826March 31, 2019 and 2018.
For the Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Revenue | $ | 5,551,651 | $ | 3,165,459 | ||||
Revenue, cryptocurrency mining | 28,804 | 237,496 | ||||||
Revenue, related party | — | 1,792,892 | ||||||
Revenue, restaurant operations | 1,173,499 | — | ||||||
Revenue, lending activities | 185,089 | — | ||||||
Total revenue | 6,939,043 | 5,195,847 | ||||||
Cost of revenue | 5,118,313 | 3,802,709 | ||||||
Gross profit | 1,820,730 | 1,393,138 | ||||||
Total operating expenses | 6,475,526 | 4,361,433 | ||||||
Loss from operations | (4,654,796 | ) | (2,968,295 | ) | ||||
Interest expense | (1,262,614 | ) | (3,132,116 | ) | ||||
Loss on extinguishment of convertible debt | (807,784 | ) | — | |||||
Loss before income taxes | (6,725,194 | ) | (6,100,411 | ) | ||||
Income tax benefit | 14,168 | 4,458 | ||||||
Net loss | (6,711,026 | ) | (6,095,953 | ) | ||||
Less: Net loss attributable to non-controlling interest | 32,416 | 35,431 | ||||||
Net loss attributable to DPW Holdings | $ | (6,678,610 | ) | $ | (6,060,522 | ) | ||
Preferred dividends | (1,869 | ) | — | |||||
Net loss available to common stockholders | $ | (6,680,479 | ) | $ | (6,060,522 | ) | ||
Basic and diluted net loss per common share | $ | (1.17 | ) | $ | (3.33 | ) | ||
Basic and diluted weighted average common shares outstanding | 5,695,740 | 1,819,598 | ||||||
Comprehensive Loss | ||||||||
Loss available to common stockholders | $ | (6,680,479 | ) | $ | (6,060,522 | ) | ||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment | 29,857 | 26,457 | ||||||
Net unrealized loss on derivative securities of related party | (736,680 | ) | (4,741,114 | ) | ||||
Other comprehensive income (loss) | (706,823 | ) | (4,714,657 | ) | ||||
Total Comprehensive loss | $ | (7,387,302 | ) | $ | (10,775,179 | ) |
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Revenues
Our revenues increased by $1,743,196, or 33.6%, to $6,939,043 for the three months ended September 30, 2016.March 31, 2019, from $5,195,847 for the three months ended March 31, 2018. 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, combined withMay 23, 2018, and our acquisition of allEnertec on May 23, 2018. During the three months ended March 31, 2019, these acquisitions represented $3,671,719 of our revenues. Excluding revenue from our acquisitions of I.AM and Enertec, the Company generated revenues of $3,267,324, which represented a decrease of $1,928,523. As discussed below, the decrease of $1,928,523 from the three months ended March 31, 2018, was primarily due to a decrease in revenue from our cryptocurrency mining operations and from the manufacture of the outstanding equity interestsMultiplex Laser Surface Enhancement (“MLSE”) plasma-laser system.
Revenues, cryptocurrency mining
In January 2018, we formed Digital Farms, Inc. (“Digital Farms”), a wholly-owned subsidiary. Digital Farms was established to operate our cryptocurrency business, which is pursuing a variety of Power-Plus on September 1, 2017. 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 March 31, 2019, due to the overall decline in market prices of digital currencies we curtailed our mining operations which resulted in a decrease in revenues $208,692.
Revenues, generated by Microphaserelated party
During the three months ended March 31, 2018, we recognized $1,792,892 in revenues resulting from our purchase order with MTIX Limited, a company formed under the laws of England and Power-PlusWales (“MTIX”). Conversely, we did not recognize any revenues from MTIX during the three months ended September 30,March 31, 2019. MTIX was acquired by AVLP on August 22, 2017 were $1,340 and $224, respectively. Excluding revenues that were generated by our recent acquisitions of Microphase and Power-Plus,is therefore a related party. In March 2017, the Company generated revenueswas awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system. Over the next several years, management believes that the MLSE purchase order will be a source of $1,656, a decreaserevenue and generate significant cash flows. The lack of $170 fromrevenue during the three months ended September 30, 2016.
Gross Margins
Gross margins decreased to 26.2% for the three months ended September 30, 2017, from $1,248March 31, 2019 compared to 26.8% for the three months ended September 30, 2016. As previously noted,March 31, 2018. The Company’s gross margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our consolidated revenues include $1,564revenue. During the three months ended March 31, 2018, our gross margins were 26.8%. The decrease in revenues generatedgross margins from our recent acquisitionshistorical average was partially attributable to the lower margin related party revenue of Microphase and Power-Plus.$1,792,892 from MTIX, with gross margins of 22.6%, combined with negative margins at Digital Farms. The negative gross margins at Digital Farms resulted from monthly recurring fixed costs at our colocation facilities which temporarily exceed the revenues from our mining operations. If we had not closed on these acquisition,recognized revenue, and the related cost of revenue, from Digital Farms and our contract with MTIX, then revenues from our U.S. operationsadjusted gross margins for the three months ended March 31, 2018 would have been $1,313, an increase33.6%. During the three months ended March 31, 2019, gross margins of 5.2%. The increase in revenues from our U.S. operations is attributed to26.2% were negatively affected by Digital Farms. Excluding the recognitioncontribution of $109 in revenue from the MLSE $50 million purchase order contract which was offset by a slight decrease in sales of our legacy products. The recognition of revenue from the MLSE contractDigital Farms, gross margins during the three months ended September 30, 2017, represents the first revenues recognized from this contract, which is expected to extend over several years.
Engineering and Product Development
Engineering and product development expenses increased by $159$112,655 to $306$455,678 for the three months ended September 30, 2017March 31, 2019 from $147$343,023 for the three months ended September 30, 2016.March 31, 2018. The increase in engineering and product development expenses is partly attributed to our acquisition of Microphase,Enertec, which reported $118 in engineering and product development expenses. The remaining increasedue to the timing of the acquisition was primarily related to an increase in direct manpower costexcluded from the addition of a new Head of Engineering and Technology, a highly-compensated position that was created during the fourth quarter of 2016.prior period amount.
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Selling and Marketing
Selling and marketing expenses were $423$474,343 for the three months ended September 30, 2017March 31, 2019 compared to $235$725,471 for the three months ended September 30, 2016,March 31, 2018, a decrease of $251,128. Our acquisition of Enertec and I.AM resulted in an increase of $188. Our acquisition of Microphase and Power-Plus accounted for $46 and $55, respectively, of the$187,947. This increase in selling and marketing expenses. The remaining increase is attributed to an increasewas offset by increases in personnel costs directly attributed to sales and marketing personnel at the Company’s U.S. basedthroughout our operations. Beginning in December 2016 and throughout the quarter ended March 31, 2017, we augmented our sales and marketing team with the addition of a Vice President of Business Development and two regional sales managers. During the three months ended September 30, 2016, the services of our current Chief Executive Officer were reported within selling and marketing expenses due to the significant amount of time in which he devoted to the sales process. The increase in the headcount of our sales and marketing team allowed our CEO to spend the majority of his time on general corporate matters related to our restructuring and expansion. As such, during the three months ended September 30, 2017, the salary of our Chief Executive officer, which is $300 per year, or $75 per quarter, was reported within general and administrative expenses. The increase in selling and marketing expenses is 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$5,430,966 for the three months ended September 30, 2017March 31, 2019 compared to $404$3,221,623 for the three months ended September 30, 2016,March 31, 2018, an increase of $1,281.$2,209,343. Our acquisitionacquisitions of MicrophaseEnertec and I.AM accounted for $410$1,270,362 of the increase in general and administrative expenses. The adjusted increase of $871$938,981 from the comparative prior period was mainly due to higher stock based compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional consultants to build an infrastructure in anticipation of our future growth and the allocationincrease in cost attributed to the hiring of oura Chief Executive Officer’s salary to generalAccounting Officer and administrative expense.Senior Vice President of Finance. The remaining increase in general and administrative expenses is due to various costs, none of which are significant individually.
Interest (expense) income, net
Interest expense net was $753$2,099,541 for the three months ended September 30, 2017March 31, 2019 compared to income of $23$3,731,436 for the three months ended September 30, 2016.March 31, 2018. The increasedecrease in interest expense for the three months ended September 30, 2017March 31, 2019 is primarily related to a reduction of amortization of debt discount, in the aggregate amount of $669,$1,559,935, resulting from original issue discount from the issuance of warrants in conjunction with the sale of debt and equity instruments of $3,452.instruments. During the three months ended September 30, 2017,March 31, 2019 and 2018, as a result of these issuances, non-cash interest expense of $669$1,491,065 and $3,051,000, respectively, was recorded from the amortization of debt discount and debt financing costs. The remaining increasedecrease 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.
Operating Loss
The Company recorded an operating loss of $1,318$4,654,796 for the three months ended September 30, 2017March 31, 2019 compared to an operating loss of $83$2,968,295 for the three months ended September 30, 2016.March 31, 2018. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.
Net Loss
For the foregoing reasons, our net loss of $2,071 for the three months ended September 30, 2017March 31, 2019, was $6,711,026 compared to a net loss of $38$6,095,953 for the three months ended September 30, 2016 as a result of the aforementioned changes.March 31, 2018. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase during the three months ended March 31, 2019 and 2018, of $32,416 and $35,431, respectively, and preferred dividends of $1,869 and nil, respectively, the net loss attributableavailable to common shareholders during the Companythree months ended March 31, 2019 and 2018, was $1,967$6,680,479 and 38$6,060,522, respectively.
As reflected in our consolidated statement of cash flows for the ninethree months ended September 30, 2017, from $5,603March 31, 2019 and 2018, our reported net loss is comprised of non-cash charges of $2,444,142 and $4,152,000, respectively. A summary of these non-cash charges is as follows:
For the Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Interest expense – debt discount | $ | 1,491,065 | $ | 3,051,000 | ||||
Stock-based compensation | 621,288 | 1,438,000 | ||||||
Depreciation and amortization | 961,438 | 148,000 | ||||||
Amortization of right-of-use assets | 32,165 | — | ||||||
Accretion of original issue discount on notes receivable – related party | (612,309 | ) | (485,000 | ) | ||||
Accretion of original issue discount on notes receivable | (49,505 | ) | — | |||||
Non-cash items included in net loss | $ | 2,444,142 | $ | 4,152,000 |
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Other comprehensive loss
Other comprehensive loss was $706,823 and $4,714,114, respectively, for the ninethree months ended September 30, 2016. The increase in revenue was primarily due to our acquisition of 56.4% ofMarch 31, 2019 and 2018. Other comprehensive loss for the outstanding equity interests of Microphase on June 2, 2017, combined with our acquisition of all of the outstanding equity interests of Power-Plus on September 1, 2017. Revenues generated by Microphase and Power-Plus during the ninethree months ended September 30, 2017, were $1,563 and $224, respectively. Excluding revenues that were generated byMarch 31, 2019, which decreased our recent acquisitions of Microphase and Power-Plus, the Company generated revenues of $4,883. As discussed below, the decrease of $720 from the nine months ended September 30, 2016, was primarily due to a decrease in revenues from our European operations.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2017,March 31, 2019, we had cash and cash equivalents of $314.$1,283,607. This compares with cash and cash equivalents of $996$902,329 at December 31, 2016.2018. 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 $1,577$2,262,239 for the ninethree months ended September 30, 2017,March 31, 2019, compared to net cash providedused by operating activities of $138$2,959,126 for the ninethree months ended September 30, 2016.March 31, 2018. During the ninethree months ended September 30, 2017,March 31, 2019, the decrease in net cash provided byused in operating activities compared to the ninethree months ended September 30, 2016March 31, 2018 was mainly due to the September 30, 2017 ninenet loss for the three months lossended March 31, 2019 of $4,916.$6,711,026. The net loss was partially offset by several non-cash charges, the amortization of debt discount of $1,239$1,491,065 and stock-based compensation of $1,269,$621,288, an increase in depreciation and amortization of $812,933 and accounts payable and accrued expenses of $2,083 and decreases in our accounts receivable$3,180,861.
Net cash provided by investing activities was $971,237 for the three months ended March 31, 2019 compared to $9,764,911 of $737 and other current liabilities of $595.
Net cash provided by financing activities was $5,194$3,709,501 and nil$11,892,657 for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The financing activities primarily related to the sale of 1,309,5453,791,642 shares of common stock through our ATM Offering for net proceeds of $672, the sale of Series B and Series C Preferred Stock of $1,540, gross$4,147,394, net proceeds from the Company’s debt financings of $2,649, gross proceedsand from advances of future receipts of $1,772 and$920,929 which was offset by payments on debt facilitiesinstruments of $626.
Historically, the Company haswe have financed itsour operations principally through issuances of convertible debt, promissory notes and equity securities. During 2017,2019, 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:
· |
· | On March |
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· | On |
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 will contribute to generate meaningful revenue and corresponding cash in 2017.2020. In addition, we have been successful over the last 12 months in raising capital to support our working capital requirements. We anticipate that we will continue to raise capital through public and private equity offerings, debt financings, or other means. If we are unable to secure additional capital, we may be required to curtail our current operations and take additional measures to reduce costs expenses, including reducing our workforce, eliminating outside consultants, ceasing or reducing our due diligence of potential future acquisitions, including the associated legal fees, in order to conserve cash in order to sustain operations and meet our obligations.
Based on the above, these matters raise substantial doubt about the Company’s ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
In our Annual Report on Form 10-K for the year ended December 31, 2016,2018, 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
Not applicable for a smaller reporting company.
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 June 30, 2017March 31, 2019 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:
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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 |
2. | We have inadequate controls to ensure |
3. | We did not design or maintain effective general information technology (“IT”) controls over certain information systems that are relevant to the mitigation of the risk pertaining to the misappropriation of assets. Specifically, we did not design and implement: |
· | Program change management controls for certain financially relevant systems to ensure that IT program and data changes affecting the Company’s (i) financial IT applications, (ii) digital currency mining equipment, (iii) digital currency hardware wallets, and (iv) underlying accounting records, are identified, tested, authorized and implemented appropriately; and |
· | Physical security controls to ensure that the (i) digital currency hardware wallets, (ii) digital currency hardware wallet master seed phrases, (iii) digital currency hardware wallet pin codes, and (iv) the digital currency mining equipment were safeguarded, monitored, validated, and restorable, both physically and electronically. |
Planned Remediation
Management, in coordination with the input, oversight and support of our Board of Directors,Audit Committee, has identified the measures below to strengthen our control environment and internal control over financial reporting.
In January 2018 we hirehired a new Chief Financial Officer and engaged the services of a financial accounting advisory firm. In September 2018, we hired a Chief Accounting Officer and in January 2019, we hired a Senior Vice President of Finance. We have tasked these individuals 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, as we continue to 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 |
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.
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Changes in Internal Controls over Financial Reporting.
Except as detailed above, during the most recent fiscal quarter 20172019 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
On July 31, 2018 a stockholder 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. 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. The Company and the individual defendants moved to dismiss the Complaint and on February 25, 2019, the Court granted the motion to dismiss but granted plaintiffs leave to amend their Complaint. On March 11, 2019, plaintiffs filed their amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions. On March 25, 2019, the Company and the individual defendants filed a motion to dismiss the amended complaint. The motion to dismiss is returnable before the Court on May 6, 2019.
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 the Company’s business, financial condition and results of operations.
On November 28, 2018,Blockchain Mining Supply and Services, Ltd, a vendor who sold computers to the Company’s subsidiary, filed in the United States District Court for the Southern District of New York against Super Crypto Mining, Inc. and the Company (Case No. 18-cv-11099). The Complaint asserted claims for breach of contract and promissory estoppel against the Company and its subsidiary arising from the subsidiary’s failure to satisfy a purchase agreement. The Complaint seeks damages in the amount of $1,388,495.
On February 4, 2019, pursuant to the Court’s Rules, the Company requested a pre-motion Conference with the Court. The Company’s time to file its motion to dismiss is stayed until the Court’ holds the pre-motion Conference, which has not yet been scheduled by the Court.
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, the Company has established a reserve in the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.
The risks described in Part I, Item 1A, "Risk“Risk Factors,"” in our 20162018 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 20162018 Annual Report on Form 10-K remains current in all material respects except that we identified
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2019, the Company entered into an asset purchase agreementissued to acquire the intellectual property of Coolisys.com, in consideration for, in part, 50,000its consultants a total 375,000 shares of common stock. The seller of the intellectual property and purchaser of theits common stock was an accredited investor.
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
On August 16, 2018, the Company issued secured promissory Notes dated August 16, 2018 (the “Notes”), and amended on November 29, 2018 (the “Amendment”), that had a maturity date of February 15, 2019 (the “Maturity Date”). The Notes, in the principal amount of $636,300, provide for an interest rate of eight percent (8%), payable on the Maturity Date. The Company did not pay these Notes on the Maturity Date and these Notes are currently in default. The Company is in negotiations with the investors to amend the payment terms on these Notes.
* | Filed herewith. |
** | Furnished herewith. |
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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: NovemberMay 20, 2017
DPW HOLDINGS, INC. | |||
By: | /s/ Milton C. Ault, III | ||
Milton C. Ault, III | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
By: | /s/ William B. Horne | ||
William B. Horne | |||
Chief Financial Officer | |||
(Principal Accounting |
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