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 ~~November 20, 2017.~~August 16, 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

Item 1. Financial Statements.

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

CURRENT ASSETS

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

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

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

TOTAL LIABILITIES $ 10,798 $ 1,913

	June 30,		December 31,
	2019		2018
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	867,518	$	902,329
Marketable equity securities		410,205		178,597
Accounts receivable		2,629,957		1,930,971
Accounts and other receivable, related party		1,238,856		3,887,654
Accrued revenue		1,284,412		1,353,411
Inventories, net		2,729,243		3,261,126
Prepaid expenses and other current assets		803,880		775,981
TOTAL CURRENT ASSETS		9,964,071		12,290,069

Intangible assets		4,142,699		4,359,798
Digital currencies		19,314		1,535
Goodwill		8,695,079		8,463,070
Property and equipment, net		7,610,362		9,313,299
Right-of-use assets		3,669,613		—
Investments - related party, net of original issue discount of $1,675,274
and $2,336,693, respectively		8,381,004		5,611,621
Investments in derivative liabilities and common stock - related party		3,476,253		3,043,499
Equity investments in private companies		897,958		480,000
Investment in limited partnership		1,969,000		1,969,000
Loans receivable		2,031,312		2,572,230
Other investments, related parties		847,500		862,500
Other assets		719,232		459,259
TOTAL ASSETS	$	52,423,397	$	49,425,880

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	13,508,162	$	13,065,838
Accounts payable and accrued expenses, related party		60,023		57,752
Operating lease liability, current		786,740		—
Advances on future receipts		1,909,203		2,085,807
Short term advances, related party		386,761		73,761
Revolving credit facility		84,999		285,605
Notes payable, net		8,121,751		6,388,787
Notes payable, related party		162,674		166,925
Convertible notes payable		—		6,742,494
Other current liabilities		1,772,234		1,868,402
TOTAL CURRENT LIABILITIES		26,792,547		30,735,371

LONG TERM LIABILITIES
Operating lease liability, non-current		2,944,162		—
Notes payable		451,447		483,659
Notes payable, related parties		121,643		142,059
Convertible notes payable		263,795		—

TOTAL LIABILITIES		30,573,594		31,361,089

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

F-1

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

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

September 30, December 31,
2017 2016
(Unaudited)

COMMITMENTS AND CONTINGENCIES — —

STOCKHOLDERS' EQUITY

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

Non-controlling interest 729 —

TOTAL EQUITY 7,462 3,559

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

	June 30,			December 31,
	2019			2018
	(Unaudited)

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock, $25.00 stated value per share,		7			1
$0.001 par value – 1,000,000 shares authorized; 7,040 and 1,434 shares
issued and outstanding at June 30, 2019 and December 31, 2018,
respectively (redemption amount and liquidation preference of $176,000
and $35,850 as of June 30, 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 June 30, 2019 and December 31, 2018 (liquidation
preference of $1,250,000 at June 30, 2019 and December 31, 2018
Class A Common Stock, $0.001 par value – 500,000,000 shares authorized;		1,037			101
1,037,128 and 100,910 shares issued and outstanding at June 30, 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 June 30, 2019 and December 31, 2018
Additional paid-in capital		92,377,366			77,647,544
Accumulated deficit		(66,465,775	)		(55,721,115	)
Accumulated other comprehensive loss		(4,071,199	)		(3,902,523	)
TOTAL DPW HOLDINGS STOCKHOLDERS' EQUITY		21,841,561			18,024,133

Non-controlling interest		8,242			40,658

TOTAL STOCKHOLDERS' EQUITY		21,849,803			18,064,791

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	52,423,397		$	49,425,880

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

F-2

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

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

(Unaudited)

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

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
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 )

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018

Revenue	$	4,541,198		$	4,347,958		$	10,092,849		$	7,513,417
Revenue, cryptocurrency mining		256,116			718,757			284,920			956,253
Revenue, related party		—			1,765,875			—			3,558,767
Revenue, restaurant operations		1,161,132			502,492			2,334,631			502,492
Revenue, lending activities		189,621			108,752			374,710			108,752
Total revenue		6,148,067			7,443,834			13,087,110			12,639,681
Cost of revenue		4,589,202			6,083,925			9,707,515			9,886,634
Gross profit		1,558,865			1,359,909			3,379,595			2,753,047

Operating expenses
Engineering and product development		471,268			367,415			926,946			710,438
Selling and marketing		426,113			774,860			900,456			1,500,331
General and administrative		4,634,151			4,387,974			10,065,117			7,609,597
Gain on digital currency		(4,479	)		(71,316	)		(5,982	)		—
Total operating expenses		5,527,053			5,458,933			11,886,537			9,820,366

Loss from operations		(3,968,188	)		(4,099,024	)		(8,506,942	)		(7,067,319	)
Interest income		911,537			603,519			1,748,464			1,243,623
Interest expense		(532,255	)		(3,490,310	)		(2,631,796	)		(7,262,530	)
Change in fair value of marketable equity securities		272,689			—			156,647			—
Loss on extinguishment of convertible debt		—			—			(807,784	)		—
Loss on issuance of warrants		(1,763,481	)		—			(1,763,481	)		—
Change in fair value of warrant liability		946,825			—			946,825			—
Loss before income taxes		(4,132,873	)		(6,985,815	)		(10,858,067	)		(13,086,226	)
Income tax benefit		73,976			(10,715	)		88,144			(6,257	)
Net loss		(4,058,897	)		(6,996,530	)		(10,769,923	)		(13,092,483	)
Less: Net loss attributable to non-controlling interest		—			108,649			32,416			144,080
Net loss attributable to DPW Holdings		(4,058,897	)		(6,887,881	)		(10,737,507	)		(12,948,403	)
Preferred dividends		(5,284	)		(108,049	)		(7,153	)		(108,049	)
Net loss available to common stockholders	$	(4,064,181	)	$	(6,995,930	)	$	(10,744,660	)	$	(13,056,452	)

Basic and diluted net loss per common share	$	(5.00	)	$	(104.24	)	$	(22.42	)	$	(231.65	)

Basic and diluted weighted average common shares outstanding		812,355			67,115			479,226			56,362

Comprehensive Loss
Loss available to common stockholders	$	(4,064,181	)	$	(6,995,930	)	$	(10,744,660	)	$	(13,056,452	)
Other comprehensive income (loss)
Foreign currency translation adjustment		162,648			(158,306	)		192,505			(131,849	)
Net unrealized gain (loss) on derivative securities of related party		375,499			(704,811	)		(361,181	)		(5,445,925	)
Other comprehensive income (loss)		538,147			(863,117	)		(168,676	)		(5,577,774	)
Total Comprehensive loss	$	(3,526,034	)	$	(7,859,047	)	$	(10,913,336	)	$	(18,634,226	)

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

F-3

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

Three Months Ended June 30, 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, April 1, 2019		126,504	$	126		231,478	$	231	$	84,903,648		$	(62,401,594	)	$	(4,478,216	)	$	8,242	$	18,032,437
Compensation expense due to stock
option issuances		—		—		—		—		248,340			—			—			—		248,340
Issuance of common stock for cash		—		—		96,388		97		1,056,112			—			—			—		1,056,209
Issuance of common stock in payment of
accrued liabilities		—		—		9,375		9		108,514			—			—			—		108,523
Issuance of common stock upon exercise
of warrants		—		—		699,887		700		6,620,325			—			—			—		6,621,025
Issuance of Series A preferred stock for cash		5,536		6		—		—		138,394			—			—			—		138,400
Beneficial conversion feature in connection
with convertible notes		—		—		—		—		188,448			—			—			—		188,448
Fair value of warrants issued in connection
with convertible notes		—				—		—		58,448			—			—			—		58,448
Cash for exchange fees and other financing costs		—		—		—		—		(944,863	)		—			—			—		(944,863	)
Comprehensive loss:
Net loss		—				—		—		—			(4,058,897	)		—			—		(4,058,897	)
Preferred dividends		—		—		—		—		—			(5,284	)		—			—		(5,284	)
Net unrealized gain on derivatives
in related party		—		—		—		—		—			—			375,499			—		375,499
Foreign currency translation adjustments		—		—		—		—		—			—			31,518			—		31,518
Net loss attributable to non-controlling interest		—		—		—		—		—			—			—			—		—

BALANCES, June 30, 2019		132,040	$	132		1,037,128	$	1,037	$	92,377,366		$	(66,465,775	)	$	(4,071,199	)	$	8,242	$	21,849,803

The above Condensed Consolidated Statement of Changes in Stockholders’ Equity reflects a 1-for-20 reverse stock split effective March 14, 2019, and a 1-for-40 reverse stock split effective August 5, 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 June 30, 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, April 1, 2018		224,276		$	225			52,544		$	53	$	50,772,786		$	(29,474,673	)	$	(211,611	)	$	745,306		$	21,832,086
Compensation expense due to stock
option issuances		—			—			—			—		194,019			—			—			—			194,019
Compensation expense due to warrant issuances		—			—			—			—		23,477			—			—			—			23,477
Issuance of common stock and warrants for cash		—			—			17,420			18		12,308,216			—			—			—			12,308,234
Issuance of common stock for services		—			—			1,250			1		724,999			—			—			—			725,000
Issuance of common stock for conversion
of short-term advances		—			—			4,540			4		2,819,580			—			—			—			2,819,584
Issuance of common stock upon exercise
of warrants		—			—			349			1		(1	)		—			—			—			—
Issuance of Series B preferred stock for
conversion of short-term advances		25,000			25			—			—		249,975			—			—			—			250,000
Issuance of common stock for conversion
of Series E preferred stock		(124,276	)		(125	)		311			—		125			—			—			—			—
Issuance of common stock in connection
with convertible notes		—			—			683			—		321,548			—			—			—			321,548
Repurchase of common stock		—			—			(69	)		—		(55,000	)		—			—			—			(55,000	)
Fair value of warrants issued in connection
with convertible notes		—			—			—			—		2,003,617			—			—			—			2,003,617
Cash for exchange fees and other financing costs		—			—			—			—		(979,342	)		—			—			—			(979,342	)
Non-controlling interest from acquisition of I. AM		—			—			—			—		—			—			—			33,242			33,242
Comprehensive loss:
Net loss		—			—			—			—		—			(6,887,881	)		—			—			(6,887,881	)
Preferred deemed dividends		—			—			—			—		108,049			(108,049	)		—			—			-
Net unrealized gain on securities
available-for-sale, net of income taxes		—			—			—			—		—			—			(704,811	)		—			(704,811	)
Foreign currency translation adjustments		—			—			—			—		—			(81,786	)		(158,306	)		—			(240,092	)
Net loss attributable to non-controlling interest		—			—			—			—		—			—			—			(108,649	)		(108,649	)

BALANCES, June 30, 2018		125,000		$	125			77,028		$	77	$	68,492,048		$	(36,552,389	)	$	(1,074,728	)	$	669,899		$	31,535,032

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

F-5

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

Six Months Ended June 30, 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		100,910		$101		$77,647,544			$(55,721,115)			$(3,902,523)			$40,658			$18,064,791
Compensation expense due to stock
option issuances		—		—		—		—		493,954			—			—			—			493,954
Issuance of common stock for cash		—		—		191,179		192		5,453,552			—			—			—			5,453,744
Issuance of common stock for services		—		—		9,375		9		253,010			—			—			—			253,019
Issuance of common stock in payment of
accrued liabilities		—		—		9,375		9		108,514			—			—			—			108,523
Issuance of common stock for conversion
of debt		—		—		26,402		26		2,608,431			—			—			—			2,608,457
Issuance of common stock upon exercise
of warrants		—		—		699,887		700		6,620,325			—			—			—			6,621,025
Issuance of Series A preferred stock for cash		5,606		6		—		—		140,144			—			—			—			140,150
Beneficial conversion feature in connection
with convertible notes		—		—		—		—		188,448			—			—			—			188,448
Fair value of warrants issued in connection
with convertible notes		—				—		—		58,448			—			—			—			58,448
Cash for exchange fees and other financing costs		—		—		—		—		(1,195,004	)		—			—			—			(1,195,004	)
Comprehensive loss:
Net loss		—				—		—		—			(10,737,507	)		—			—			(10,737,507	)
Preferred dividends		—		—		—		—		—			(7,153	)		—			—			(7,153	)
Net unrealized loss on derivatives
in related party		—		—		—		—		—			—			(361,181	)		—			(361,181	)
Foreign currency translation adjustments		—		—		—		—		—			—			192,505			—			192,505
Net loss attributable to non-controlling interest		—		—		—		—		—			—			—			(32,416	)		(32,416	)

BALANCES, June 30, 2019		132,040	$	132		1,037,128	$	1,037	$	92,377,366		$	(66,465,775	)	$	(4,071,199	)	$	8,242		$	21,849,803

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

F-6

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

Six Months Ended June 30, 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 31, 2018		478,776		$	479			37,778		$	38	$	36,918,132		$	(23,414,151	)	$	4,503,046		$	780,737		$	18,788,281
Compensation expense due to stock option issuances		—			—			—			—		426,873			—			—			—			426,873
Compensation expense due to warrant issuances		—			—			—			—		46,954			—			—			—			46,954
Issuance of common stock and warrants for cash		—			—			23,821			24		18,551,565			—			—			—			18,551,589
Issuance of common stock for services		—			—			3,354			3		3,758,293			—			—			—			3,758,296
Issuance of common stock for conversion of debt		—			—			2,538			3		2,167,841			—			—			—			2,167,844
Issuance of common stock for conversion
of short-term advances		—			—			4,540			4		2,819,580			—			—			—			2,819,584
Issuance of common stock upon exercise
of stock options		—			—			75			—		97,800			—			—			—			97,800
Issuance of common stock upon exercise of warrants		—			—			2,682			3		867,163			—			—			—			867,166
Issuance of Series B preferred stock for
conversion of short-term advances		25,000			25			—			—		249,975			—			—			—			250,000
Issuance of common stock for conversion
of Series E preferred stock		(378,776	)		(379	)		947			1		378			—			—			—			—
Issuance of common stock in connection
with convertible notes		—			—			1,362			1		675,220			—			—			—			675,221
Repurchase of common stock		—			—			(69	)		—		(55,000	)		—			—			—			(55,000	)
Beneficial conversion feature in connection
with convertible notes		—			—			—			—		288,573			—			—			—			288,573
Fair value of warrants issued in connection
with convertible notes		—			—			—			—		3,408,665			—			—			—			3,408,665
Cash for exchange fees and other financing costs		—			—			—			—		(1,838,013	)		—			—			—			(1,838,013	)
Non-controlling interest from acquisition of I. AM		—			—			—			—		—			—			—			33,242			33,242
Comprehensive loss:
Net loss		—			—			—			—		—			(12,948,403	)		—			—			(12,948,403	)
Preferred deemed dividends		—			—			—			—		108,049			(108,049	)		—			—			-
Net unrealized gain on securities
available-for-sale, net of income taxes		—			—			—			—		—			—			(5,445,925	)		—			(5,445,925	)
Foreign currency translation adjustments		—			—			—			—		—			(81,786	)		(131,849	)		—			(213,635	)
Net loss attributable to non-controlling interest		—			—			—			—		—			—			—			(144,080	)		(144,080	)

BALANCES, June 30, 2018		125,000		$	125			77,028		$	77	$	68,492,048		$	(36,552,389	)	$	(1,074,728	)	$	669,899		$	31,535,032

The above Condensed Consolidated Statement of Changes in Stockholders’ Equity reflects a 1 for 20 reverse stock split effective March 14, 2019, and a 1-for-40 reverse stock split effective August 5, 2019. See Note 1 for further information.

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

F-7

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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

For the Nine Months Ended September 30,
2017 2016

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

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

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

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

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

Net cash provided by financing activities 5,194 —

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

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

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

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

	For the Six Months Ended June 30,
	2019			2018

Cash flows from operating activities:
Net loss	$	(10,769,923	)	$	(13,092,483	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,826,721			758,628
Amortization		299,462			66,716
Amortization of right-of-use assets		61,289			—
Interest expense – debt discount		1,676,609			5,779,108
Fair value in excess of proceeds upon issuance of warrants		1,763,481			—
Change in fair value of warrant liability		(946,825	)		—
Accretion of original issue discount on notes receivable – related party		(1,262,422	)		(930,448	)
Accretion of original issue discount on notes receivable		(58,023	)		—
Increase in accrued interest on notes receivable – related party		(464,114	)		—
Stock-based compensation		992,283			2,811,540
Realized (gains) losses on sale of digital currencies		(394	)		100,551
Realized (gains) losses on sale of marketable securities		(86,741	)		157,845
Unrealized gains on marketable equity securities		(231,608	)		—
Unrealized gains on equity securities – related party		(21,288	)		—
Unrealized gains on equity securities		(6,316	)		—
Changes in operating assets and liabilities:
Accounts receivable		(591,839	)		770,266
Accounts receivable, related party		2,648,798			(3,274,267	)
Accrued revenue		68,999			—
Digital currencies		(290,902	)		(914,628	)
Inventories		598,281			(627,697	)
Prepaid expenses and other current assets		(242,575	)		430,780
Other assets		(271,679	)		(157,905	)
Accounts payable and accrued expenses		594,546			2,464,823
Accounts payable, related parties		2,271			—
Other current liabilities		(66,409	)		(7,108	)

Net cash used in operating activities		(4,778,318	)		(5,664,279	)

Cash flows from investing activities:
Purchase of property and equipment		(93,606	)		(9,004,693	)
Purchase of intangible asset		—			(42,557	)
Purchase of Enertec		—			(4,936,562	)
Cash received on acquisitions		—			235,882
Investments – related party		(1,027,847	)		(256,780	)
Investments in warrants and common stock - related party		(681,164	)		(1,807,892	)
Investments in marketable equity securities		—			(855,553	)
Sales of marketable equity securities		571,741			2,132,286
Proceeds from loans to related parties		—			16,088
Investments in debt and equity securities		(383,876	)		(2,401,730	)

Net cash used in investing activities	$	(1,614,752	)	$	(16,921,511	)

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

F-8

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

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

~~U.S. dollars in thousands~~

For the Nine Months Ended September 30,
2017 2016

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

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

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

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

	For the Six Months Ended June 30,
	2019			2018

Cash flows from financing activities:
Gross proceeds from sales of common stock and warrants	$	11,528,605		$	18,551,589
Repurchase of common stock		—			(55,000	)
Proceeds from issuance of Series A Convertible Preferred Stock		131,741			—
Financing cost in connection with sales of equity securities		(1,195,004	)		(1,838,594	)
Proceeds from stock option exercises		—			97,740
Proceeds from warrant exercises		127,000			867,166
Proceeds from convertible notes payable		500,000			8,550,000
Proceeds from notes payable		4,102,918			9,370,000
Proceeds from short-term advances – related party		313,000			63,761
Proceeds from short-term advances		—			761,000
Payments on short-term advances		—			(425,000	)
Payments on notes payable		(1,386,935	)		(10,581,021	)
Payments on convertible notes payable		(7,069,547	)		(1,024,874	)
Proceeds from advances on future receipts		319,729			2,990,277
Payments on advances on future receipts		(674,229	)		(4,241,018	)
Payments of preferred dividends		(7,153	)		—
Payments on revolving credit facilities, net		(217,830	)		(291,843	)

Net cash provided by financing activities		6,472,295			22,794,183

Effect of exchange rate changes on cash and cash equivalents		(114,036	)		(168,118	)

Net (decrease) increase in cash and cash equivalents		(34,811	)		40,275

Cash and cash equivalents at beginning of period		902,329			1,478,147

Cash and cash equivalents at end of period	$	867,518		$	1,518,422

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,644,524		$	600,373

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	$	273,517		$	—
Issuance of common stock for prepaid services	$	—		$	1,359,197
Issuance of common stock in payment of liability	$	108,523		$	—
Cancellation of short-term advances into shares of common stock	$	—		$	2,774,584
Cancellation of short-term advances, related party into shares
of common stock	$	—		$	45,000
Cancellation of short-term advances, related party into shares
of Series B Preferred Stock	$	—		$	250,000
Conversion of loans receivable for marketable equity securities	$	485,000		$	—
Conversion of loans receivable for investments in warrants and
common stock – related party	$	91,483		$	—

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

F-9

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS, INC. AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

~~SEPTEMBER~~

JUNE 30, ~~2017~~

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

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, under~~September 2017. The Company isa diversified holding company owning subsidiaries engaged in the ~~General Corporation Law of the State of California. Digital Power~~following operating businesses: commercial and defense solutions, commercial lending, cryptocurrency blockchain mining, advanced textile technology and restaurant operations. The Company’s wholly-owned subsidiaries areCoolisys Technologies, Inc. (“Coolisys”), Digital Power Limited ("(“DP ~~Limited"~~Limited”), a wholly owned subsidiary, located in the United Kingdom, are currently engaged in the design, manufacture and sale of switching power supplies and converters. On November 30, 2016, Digital Power formedEnertec Systems 2001 Ltd (“Enertec”), Power-Plus Technical Distributors, LLC (“Power-Plus”), Digital Power Lending, LLC (“(“DP Lending”), and ~~on April 25, 2017,~~ Digital ~~Power formed Coolisys Technologies,~~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 businesses~~also 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”~~). Microphase is a design-to-manufacture original equipment manufacturer (“OEM”) delivering radio frequency (“RF”~~) and ~~microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector logarithmic video amplifiers (“DLVA”) to the military, aerospace and telecommunications industries. Microphase is headquartered in Shelton, Connecticut.~~ ~~Further, on September 1, 2017, Coolisys acquired all of the outstanding membership interests in Power-Plus Technical Distributors, LLC, a California limited liability company (“Power-Plus”~~I. AM, Inc. (“I.AM”). ~~Power-Plus is an industrial distributor of value added power supply solutions, UPS systems, fans, filters, line cords, and other power-related components.~~ The ~~Company’s results of~~Company has five reportable segments – North America with operations ~~include the results of Microphase and Power-Plus from their respective acquisition dates forward.~~ ~~Digital Power, DP Limited,~~conducted by Microphase, Coolisys, Power-Plus and DP Lending, ~~(collectively, the~~ ~~“Company”) has two reportable geographic segments - North America (sales~~Europe with operations through DP Limited, Middle East with operations through Enertec, digital currency blockchain mining through Digital ~~Power, Microphase, Coolisys, Power-Plus~~Farms and ~~DP Lending)~~restaurant operations through I.AM.

On March 14, 2019, pursuant to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s Board of Directors (the “Board”) approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the Common Stock of the Company’s issued and ~~Europe (sales through DP Limited)~~outstanding number of such shares by a ratio of one-for-twenty (the “First Stock Split”).

At the Company’s 2019 reconvened Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate a second reverse stock split (the “Second Stock Split”) of the Company’s issued and outstanding Common Stock. Thereafter, on July 23, 2019, the Board approved the Second Stock Split with a ratio of one-for-forty. The Second Stock Split did not affect the number of authorized shares of Common Stock or their par value per share. As a result of the Second Stock Split, each forty shares of common stock issued and outstanding prior to the Second Stock Split were converted into one share of common stock. The Second Stock Split became effective in the State of Delaware on August 5, 2019.

2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS

The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. As of ~~September~~June 30, ~~2017,~~2019, the Company had cash and cash equivalents of ~~$314,~~$867,518, an accumulated deficit of ~~$17,212~~$66,465,775 and a negative working capital of ~~$4,174.~~$16,828,476. The Company has incurred recurring losses and reported losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, totaled ~~$1,967~~$4,058,897 and ~~$4,700,~~$10,769,923, 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 ~~continues~~continued to successfully obtain additional equity and debt financing and in restructuring existing debt. ~~The following financings transactions were consummated during 2017:~~

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

~~On March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou Ventures LLC (“Philou”~~), a related party, pursuant to which Philou was granted the right to invest up to $5,000 in the Company through the purchase of Series B Preferred Stock over a term of 36 months. On March 24, 2017, Philou purchased 25,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement in consideration of cancellation of Company debt of $250 due to MCKEA, an affiliate of Philou. On May 5, 2017, Philou purchased an additional 50,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement for $500 (See Note 14).

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

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

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

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

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

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

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

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

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

The Company expects to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business development initiatives and to support its working capital requirements. ~~In March 2017,~~On April 2, 2019, the Company ~~was awarded~~received gross proceeds of approximately $7 million in a ~~3-year, $50 million purchase order by MTIX Ltd. (“MTIX") to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system. Management believes that the MLSE purchase order will be a source~~public offering of ~~revenue and generate significant cash flows for the Company.~~its securities (see Note 20). Management believes that the Company has access to capital resources through potential public or private ~~issuance~~issuances 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-10

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“(“GAAP”). The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, filed with the Securities and Exchange Commission on April ~~10, 2017.~~16, 2019. The condensed consolidated balance sheet as of December 31, ~~2016~~2018 was derived from the Company’s audited ~~2016~~2018 financial statements contained in the above referenced Form 10-K. Results of the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2017.~~

2019.

Principles of Consolidation

The ~~condensed~~ consolidated financial statements include the accounts of ~~Digital Power,~~DPW and its wholly-owned subsidiaries, Coolisys, DP Limited, ~~Coolisys,~~ Power-Plus, ~~and~~Enertec, DP Lending, Digital Power Corporation, Power-Plus Technical Distributors 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, carrying amounts 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-11

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

~~Investments in Debt and Equity Securities~~

The ~~Company classifies its investments in Avalanche International, Corp (“AVLP”), consisting of shares of common stock and debt securities, in accordance with ASC No. 320,~~ ~~Investment in Debt and Equity Securities~~ (~~“ASC No. 320”) and ASC No. 325,~~ ~~Investment – Other~~ (~~“ASC No. 325”~~). The investment in marketable securities and convertible promissory notes are both classified as “available-for-sale securities” and are carried at fair value, based on quoted market prices. Unrealized gains and losses are reported as a separate component of stockholder’s equity, accumulated other comprehensive loss. When evaluating the Company’s debt and equity investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial conditiondisaggregated revenues consist of the ~~issuer~~following for the six months ended June 30, 2019:

	Six Months ended June 30, 2019
								Digital
	DPC¹		DP Limited		Enertec			Farms		I.AM		Total

Primary Geographical
Markets
North America	$	4,449,820	$	—	$	—		$	284,920	$	2,334,631	$	7,069,371
Europe		67,954		961,611		—			—		—		1,029,565
Middle East		—		—		4,488,553			—		—		4,488,553
Other		193,472		120,831		185,318			—		—		499,621
	$	4,711,246	$	1,082,442	$	4,673,871		$	284,920	$	2,334,631	$	13,087,110

Major Goods
RF/Microwave Filters	$	989,114	$	—	$	—		$	—	$	—	$	989,114
Detector logarithmic
video amplifiers		473,150		—		—			—		—		473,150
Power Supply Units		2,874,272		—		—			—		—		2,874,272
Power Supply Systems		—		1,082,442		—			—		—		1,082,442
Healthcare diagnostic systems		—		—		1,260,700			—		—		1,260,700
Defense systems		—		—		3,413,171			—		—		3,413,171
Digital Currency Mining		—		—		—	��		284,920		—		284,920
Restaurant operations		—		—		—			—		2,334,631		2,334,631
Lending activities		374,710		—		—			—		—		374,710
	$	4,711,246	$	1,082,442	$	4,673,871		$	284,920	$	2,334,631	$	13,087,110

Timing of Revenue
Recognition
Goods transferred at a
a point in time	$	4,711,246	$	945,541	$	—		$	284,920	$	2,334,631	$	8,276,338
Services transferred over time		—		136,901		4,673,871			—		—		4,810,772
	$	4,711,246	$	1,082,442	$	4,673,871		$	284,920	$	2,334,631	$	13,087,110

¹ Consists of Microphase, Coolisys, Power-Plus and ~~any changes thereto, and the Company’s intent to sell, or whether it is more likely than not that it will be required to sell, the investment before recovery~~DP Lending

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

~~Revenue Recognition~~

Products

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

Because the Company’s product sales agreements have an expected duration of one year or less, the Company has elected to adopt the ~~end customer or until the rotation rights expire. Service revenues are deferred and recognized on a straight-line basis over the term~~practical expedient in ASC 606-10-50-14(a) of ~~the service agreement. Service revenues are immaterial in proportion to the Company's revenues.~~ not disclosing information about its remaining performance obligations.

F-12

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

~~Warranty~~

Manufacturing Services

The Company ~~offers~~provides manufacturing services in exchange primarily for fixed fees; however, the initial two MLSE units are subject to variable pricing under the $50 million purchase order from MTIX. Under the terms of the MLSE purchase order, the Company shall be entitled to cost plus $100,000 for the manufacture of the first two MLSE units. The Company has determined that the costs of manufacturing the MLSE units will decline over time because of a ~~warranty period~~learning curve which will result in a greater amount of revenue being recognized for ~~all its products. Warranty periods range from one~~these initial two MLSE units.

For manufacturing services, which include revenues generated by Enertec and in certain instances revenues generated by DPL, the Company’s performance obligation for manufacturing services is satisfied over time as the Company creates or enhances an asset based on criteria that are unique to ~~two years depending~~the customer and that the customer controls as the asset is created or enhanced. Generally, the Company recognizes revenue based upon proportional performance over time using a cost to cost method which measures progress based on the ~~product. The Company estimates~~costs incurred to total expected costs in satisfying its performance obligation. This method provides a depiction of the progress in providing the manufacturing service because there is a direct relationship between the costs incurred by the Company and the transfer of the manufacturing service to the customer. Manufacturing services that ~~may be incurred under its warranty and records a liability~~are recognized based upon the proportional performance method are included in the ~~amount of such costs at the~~above table as services transferred over 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.

~~Common Stock Purchase Warrants and Other Derivative Financial Instruments~~

The Company classifies common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. The Company determined that certain freestanding derivatives, which principally consist of issuance of warrants to purchase shares of common in connection with convertible notes, units and to ~~employees of~~ the ~~Company, satisfy~~extent the ~~criteria~~customer has not been invoiced for ~~classification~~these revenues, as ~~equity instruments as these warrants do not contain cash settlement features or variable settlement provision that cause them to not be indexed~~accrued revenue in the accompanying consolidated balance sheets. Revisions to the Company’s ~~own stock.~~

~~Stock-Based Compensation~~

estimates may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified.

The Company ~~accounts~~has elected the practical expedient to not adjust the promised amount of consideration for ~~stock-based compensation in accordance with ASC No. 718,~~ ~~Compensation – Stock Compensation~~ (~~"ASC No. 718"). Under ASC No. 718, compensation expense~~the effects of a significant financing component to the extent that the period between when the Company transfers its promised good or service to the customer and when the customer pays is one year or less.

The aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of June 30, 2019, for the MLSE units was approximately $48 million, representing 24 MLSE units. Based on our expectations regarding funding of the production process and our experience building the first machines, the Company expects to recognize the remaining revenue related to ~~stock-based payments is recorded~~the partially unsatisfied performance obligation over the ~~requisite service period~~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.

Lending Activities

DP Lending generates revenue from lending activities primarily through interest, origination fees and late/other fees. Interest income on these products is calculated based on the ~~grant date fair value of the awards. Compensation previously~~contractual interest rate and recorded ~~for unvested stock options that~~as interest income as earned. The origination fees or original issue discounts are forfeited is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.

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

~~Convertible Instruments~~

loan using the effective interest method.

Blockchain Mining

The Company ~~accounts~~has entered into digital asset mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for ~~hybrid contracts that feature conversion options in accordance with ASC No. 815,~~ ~~Derivatives and Hedging Activities~~ (~~“ASC No. 815”). ASC No. 815 requires companies~~providing computing power, the Company is entitled to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risksa fractional share of the ~~embedded derivative instrument are not clearly and closely related~~fixed digital currency award the mining pool operator receives (less digital asset transaction fees to the ~~economic characteristics and risks~~mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the ~~host contract, (b)~~blockchain. The Company’s factional share is based on the ~~hybrid instrument that embodies both~~proportion of computing power the ~~embedded derivative instrument and~~Company contributed to the ~~host contract is not re-measured at fair value under otherwise applicable GAAP with changes~~mining pool operator to the total computing power contributed by all mining pool participants in ~~fair value reported in earnings as they occur and (c) a separate instrument with~~solving the ~~same terms as the embedded derivative instrument would be considered a derivative instrument.~~current algorithm.

F-13

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~2019

~~U.S. dollars~~

Providing computing power in ~~thousands, except share and per share data~~

~~Conversion options that contain variable settlement features~~digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of providing such ~~as provisions to adjust~~computing power is the ~~conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured~~only performance obligation in the ~~hybrid~~Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract ~~generally result in their bifurcation from~~inception or the ~~host instrument.~~

~~The Company accounts for convertible instruments, when~~time the Company has ~~determined~~earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the ~~embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC No. 470-20,~~ ~~Debt with Conversion~~consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and ~~Other Options~~ (~~“ASC No. 470-20”). Under ASC No. 470-20~~ the Company ~~records, when necessary, discounts to convertible notes for~~receives confirmation of the ~~intrinsic value of conversion options embedded~~consideration it will receive, at which time revenue is recognized. There is no significant financing component in ~~debt instruments based upon the differences between the fair~~these transactions.

Fair value of the ~~underlying common stock~~digital currency award received is determined using the market rate of the related digital currency at the ~~commitment date~~time of receipt.

There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for digital currencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.

Expenses associated with running the cryptocurrency mining business, such as equipment deprecation and electricity cost are recorded as a component of cost of revenues.

We intend to use the digital assets primarily for operating expenses of Digital Farms. During 2018, we used digital assets for debt reduction, capital purchases, consulting fees, data center costs and other operating expenses.

Restaurant Operations

The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals and complimentary meals and gift cards. Restaurant cost of sales primarily includes the cost of goods, beverages, and merchandise and disposable paper and plastic goods used in preparing and selling the Company’s menu items and exclude depreciation and amortization. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the ~~note transaction~~related food and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC No. 815.

~~Comprehensive Loss~~

~~The Company reports comprehensive loss in accordance with ASC No. 220,~~ ~~Comprehensive Income~~. This statement establishes standards for the reporting and presentation of comprehensive loss and its components in a full set of general purpose financial statements. Comprehensive loss generally represents all changes in equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive loss relate to changes in foreign currency translation adjustments.

beverage costs as earned.

Fair value of Financial Instruments

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

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

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

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

F-14

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

As of September 30, 2017 and December 31, 2016, the fair value of the Company’s investments were $3,782 and $1,036, respectively, and were concentrated in debt and equity securities of AVLP, a related party (See Note 4), which are classified as available-for-sale investments. At September 30, 2017, the Company's investment in AVLP is comprised of convertible promissory notes of $3,670, net of unamortized discount, and marketable equity securities of $112. At December 31, 2016, the Company's investment in AVLP is comprised of convertible promissory notes of $952, net of unamortized discount, and marketable equity securities of $84. For investments in marketable equity securities, the Company took into consideration general market conditions, the duration and extent to which the fair value is below cost, and the Company’s ability and intent to hold the investment for a sufficient period of time to allow for recovery of value in the foreseeable future. As a result of this analysis, the Company has determined that its cost basis in AVLP equitable securities approximates the current fair value.

Consistent with the guidance at ASC No. 835, the Company’s presumption is that the fair value of its convertible promissory notes in AVLP have a present value equivalent to the cash proceeds exchanged. Further, the discount shall be reported in the balance sheet as a direct deduction from the face amount of the convertible promissory notes. Thus, the Company has determined that the amortized cost of its convertible promissory notes approximates fair value and are subject to a periodic impairment review. The interest income, including amortization of the discount arising at acquisition, for the convertible promissory notes are included in earnings. In the future, if the Company does not expect to recover the entire amortized cost basis, the Company shall recognize other-than-temporary impairments in other comprehensive income (loss).

During 2017, the Company purchased at the market shares of common stock of three companies for a total cost of $25. In accordance with ASC No. 320-10, these investments are accounted for pursuant to the fair value method based upon the closing market prices of common stock for these three companies at September 30, 2017.

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

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

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

	Fair Value Measurement at June 30, 2019
	Total		Level 1		Level 2		Level 3
Investments in common stock and derivative instruments of AVLP – a related party	$	3,270,003	$	784,540	$	—	$	2,485,463
Investment in common stock of Alzamend – a related party		206,250		—		—		206,250
Investments in marketable equity securities		410,205		410,205		—		—
Investments in warrants of public companies		40,087		—		—		40,087
Total Investments	$	3,926,545	$	1,194,745	$	—	$	2,731,800

	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 equity 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

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:~~

market.

Leases

Effective January 1, 2019, the Company accounts for its leases under ASC 842,Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases. As of January 1, 2019, we only had operating leases. Operating leases are recognized as Operating lease right-of-use (“ROU”) assets, Operating lease liabilities, current, and Operating lease liabilities, non-current on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis over the lease term without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, are exercised. We do not separate lease and non-lease components for our leases.

The Company continues to account for leases in the prior period financial statements under ASC Topic 840.

·F-15

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

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

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

~~Debt Discounts~~

~~The Company accounts for debt discount according to ASC No. 470-20,~~ ~~Debt with Conversion and Other Options~~. Debt discounts are amortized through periodic charges to interest expense over the term of the related financial instrument using the effective interest method. During the three and nine months ended September 30, 2017, the Company recorded amortization of debt discounts of $652 and $1,239, respectively. The Company did not recognize any debt discount during the three and nine months ended September 30, 2016.

Net Loss per Share

Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. The Company has included ~~317,460~~6,500 warrants, ~~with an exercise price~~which are exercisable for shares of ~~$.01,~~the Company’s common stock on a one-for-one basis, in its earnings per share calculation for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019 and 2018. Anti-dilutive securities, ~~consisted~~which are convertible into or exercisable for the Company’s Class A common stock, consist of the following at ~~September~~June 30,

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

~~At September 30, 2017,~~ 2019 and 2018:

	June 30,
	2019		2018
Stock options		9,006		9,475
Warrants⁽¹⁾		51,465		23,410
Convertible notes		75,000		—
Conversion of preferred stock		2,232		2,232
Total		137,703		35,117

⁽¹⁾

The Company has excluded 6,500 warrants issued in April 2019, which may be exercised by means of a cashless exercise into 6,500 shares of the Company’s common stock, in its anti-dilutive securities but included the warrants in its weighted average shares outstanding.

Reclassifications

Certain prior year amounts have been reclassified for comparative purposes to conform to the ~~20,887,906~~current-year financial statement presentation. These reclassifications had no effect on previously reported results of ~~potential common stock equivalents included 6,926,095 in warrants, convertible notes and preferred stock in which~~operations. In addition, certain prior year amounts from the ~~holders are contractually prohibited from exercising or converting~~restated amounts have been reclassified for consistency with the ~~warrants, convertible notes and preferred stock into shares of the Company’s common stock. The restriction shall remain until shareholder approval is received.~~

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

current period presentation.

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 ~~has considered all other recently issued accounting standards and does not believe~~adopted Topic 842 on January 1, 2019, using the ~~adoption~~optional transition method to apply the new guidance as of ~~such standards will have a material impact on its condensed consolidated financial statements.~~

~~4. INVESTMENTS – RELATED PARTIES~~

~~Investments in AVLP at September 30, 2017, and December 31, 2016, are comprised~~January 1, 2019, rather than as of the ~~following:~~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.

F-16

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

~~SEPTEMBER 30,~~

In July 2017,

~~U.S. dollars~~ the FASB issued ASU No. 2017-11,Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) (“ASU 2017-11”). ASU 2017-11 consists of two parts. The amendments in ~~thousands, except share and~~Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share ~~data~~(“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this update do not require any transition guidance because those amendments do not have an accounting effect. The Company adopted this standard on January 1, 2019, and the adoption did not have any impact on its consolidated financial statements and related disclosures.

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 any 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 June 30, 2019 and December 31, 2018:

	Marketable equity securities at June 30, 2019
			Gross unrealized	Gross realized
	Cost		gains (losses)	gains (losses)	Fair value
Common shares	$	220,880	$189,325	$—	$	410,205

	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

F-17

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

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 on conversion of debt		485,000
Sales of marketable equity securities		(571,741	)
Realized gains on marketable equity securities		86,741
Unrealized gains on marketable equity securities		231,608
Balance at June 30, 2019	$	410,205

At June 30, 2019 and December 31, 2018, the Company had invested in the marketable equity securities of certain publicly traded companies. During the three and six months ended June 30, 2019, unrealized gains of $126,217 and $231,608 were included in net income as a component of change in fair value of equity securities. During the year ended December 31, ~~2016,~~2018, the Company ~~made~~recorded an unrealized loss of $42,283. 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 June 30, 2019 and December 31, 2018 is a ~~strategic decision~~Level 1 measurement based on quoted prices in an active market.

At June 30, 2019 and December 31, 2018, the Company also held equity investments in private companies 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 June 30, 2019 and December 31, 2018 property and equipment consist of:

	June 30,			December 31,
	2019			2018
Cryptocurrency machines and related equipment	$	9,198,928		$	9,168,928
Computer, software and related equipment		2,479,888			2,495,470
Restaurant equipment		758,775			752,103
Office furniture and equipment		364,607			287,583
Leasehold improvements		1,299,558			1,274,865
		14,101,756			13,978,949
Accumulated depreciation and amortization		(6,491,394	)		(4,665,650	)
Property and equipment, net	$	7,610,362		$	9,313,299

For the three and six months ended June 30, 2019, depreciation expense amounted to ~~invest~~$1,027,698 and $1,826,721, respectively. During the three and six months ended June 30, 2018, depreciation expense amounted to $643,482 and $758,628, respectively.

F-18

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

6. INTANGIBLE ASSETS, NET

At June 30, 2019 and December 31, 2018 intangible assets consist of:

	June 30,			December 31,
	2019			2018
Trade name and trademark	$	1,562,332		$	1,562,332
Customer list		2,459,596			2,388,139
Non-competition agreements		150,000			150,000
Domain name and other intangible assets		793,011			762,807
		4,964,939			4,863,278
Accumulated depreciation and amortization		(822,240	)		(503,480	)
Intangible assets, net	$	4,142,699		$	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 $137,047 and $299,462, respectively, for the three and six months ended June 30, 2019 and $33,358 and $66,716, respectively, for the three and six months ended June 30, 2018.

7. INVESTMENTS – RELATED PARTIES

Investments in Avalanche International Corp. (“AVLP”) and Alzamend Neuro, Inc. (“Alzamend”) at June 30, 2019 and December 31, 2018, are comprised of the following:

	June 30,			December 31,
	2019			2018
Investment in convertible promissory note of AVLP	$	8,587,847		$	6,943,997
Accrued interest in convertible promissory note of AVLP		1,468,431			1,004,317
Total investment in convertible promissory note of AVLP – Gross		10,056,278			7,948,314
Less: original issue discount		(1,675,274	)		(2,336,693	)
Total investment in convertible promissory note of AVLP	$	8,381,004		$	5,611,621

Investment in derivative instruments of AVLP		2,485,463			2,230,641
Investment in common stock of AVLP		784,540			812,858
Investment in common stock of Alzamend		206,250			—
Investment in derivative instruments and common stock of AVLP and Alzamend	$	3,476,253		$	3,043,499

Total investment in AVLP and Alzamend – Net	$	11,857,257		$	8,655,120

F-19

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

The following table summarizes the changes in our investments in AVLP and Alzamend during the six months ended June 30, 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		—			1,027,847		1,027,847
Investment in common stock of AVLP and Alzamend		156,644			—		156,644
Fair value of derivative instruments issued by AVLP		616,003			—		616,003
Unrealized loss in derivative instruments of AVLP		(361,181	)		—		(361,181	)
Unrealized loss in common stock of AVLP and Alzamend		21,288			—		21,288
Accretion of discount		—			1,277,422		1,277,422
Accrued Interest		—			464,114		464,114
Balance at June 30, 2019	$	3,476,253		$	8,381,004	$	11,857,257

The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, an ~~existing majority stockholder. The Company’s investments in AVLP primarily~~affiliate of the Company, consist of convertible promissory notes, derivative instruments and shares of common stock of AVLP.

~~On October 5, 2016, November~~ At June 30, ~~2016, and February 22, 2017,~~2019, the Company ~~entered into three 12% Convertible Promissory Notes with~~has provided loans to AVLP ~~(the~~ ~~"AVLP Notes"~~) in the principal amount ~~of $525 each. The AVLP Notes included a 5% original issue discount, resulting~~$8,587,847 and, in net loans to AVLP of $1,500 and an original issue discount of $75. The AVLP notes accrued interest at 12% per annum and were due on or before two years from the origination dates of each note. The Company had the right, at its option, to convert all or any portion of the principal and accrued interest into shares of common stock of AVLP at approximately $0.74536 per share. ~~Subject to adjustment,~~ ~~the~~ ~~AVLP~~ ~~Notes, inclusive of the original issue discount, were convertible into 2,113,086 shares of the Company’s common stock~~. ~~During the period from March 29, 2017 to August 16, 2017, the Company funded $1,809 in excess of the $1,500 net loan amount required pursuant~~addition to the ~~terms of the~~12% convertible promissory notes, AVLP ~~Notes~~

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

In consideration of entering into the AVLP Loan Agreement, the Company and AVLP cancelled the AVLP Notes and consolidated the AVLP Notes and prior advances totaling $3,309 plus original issue discount of $165 and issued a new Convertible Promissory Note in the aggregate principal amount of $3,474 (the ~~“New Note”~~) that is convertible into shares of AVLP at a conversion price of $0.50 per share. The New Note is due in two years and accrues interest at 12% per annum on the principal amount. Prior interest accrued under the AVLP Notes and advances will continue to be an obligation of AVLP. The New Note contains standard events of defaults. In addition, concurrent to issuing the New Note, AVLPhas issued to the Company ~~a five-year Warrant~~warrants to purchase ~~6,948,800~~17,175,694 shares of AVLP Common Stock at $0.50 per share. Future advances under the AVLP Loan Agreement, if any, will be evidenced by a convertible promissory containing a conversion price feature at $0.50 per share and warrant with an exercise price of $0.50 per share. Further, under the terms of the AVLP Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP.

common stock. The ~~Warrant entitles~~warrants entitle the Company to purchase up to ~~6,948,800~~17,175,694 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The ~~exercise price~~warrants were determined by the issuer to be financial derivative instruments. At June 30, 2019 and December 31, 2018, the Company recorded an unrealized loss on its investment in warrants of ~~$0.50~~AVLP of $2,774,562 and $2,413,381, respectively, representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet. During the three and six months ended June 30, 2019, the Company recognized, in other comprehensive loss, net unrealized gain (loss) on derivative securities of related party of $375,499 and ($361,181), respectively, which compares with a net unrealized loss on derivative securities of related party of $671,653 and $4,944,667, respectively during the three and six months ended June 30, 2018. The Company’s investment in AVLP will be revalued on each balance sheet date. The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate, which ranged between 1.75% and 2.60%, was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 85.0% was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million. The warrant valuation is ~~subject to adjustment~~a Level 3 measurement.

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 exercised~~its 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~~accrued interest and accretion of original issue discount and discount attributed to the fair value of ~~$165~~the 17,175,694 warrants that the Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company records interest on an accrual basis and recognizes it as earned in accordance with the ~~New Note~~contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected. An aggregate of $5,387,307 of original issue discount and discount attributed to the fair value of the warrants is being amortized as interest income through the maturity ~~date using the interest rate method.~~date. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company recorded ~~$18~~$657,613 and ~~$38,~~$1,277,422, respectively, of interest income for the discount ~~accretion. As of September~~accretion compared with $428,417 and $918,448, respectively, during the three and six months ended June 30, ~~2017,~~2018. During the three and ~~December 31, 2016,~~six months ended June 30, 2019, the Company recorded contractual interest ~~receivable~~ attributed to the AVLP Notes and AVLP Loan Agreement of ~~$208~~$253,923 and ~~$13,~~$464,114, respectively.

~~The~~ During the three and six months ended June 30, 2018, the Company ~~has classified~~recorded contractual interest attributed to the AVLP Notes ~~as Available-for-Sale securities, subject~~and AVLP Loan Agreement of $157,491 and $301,173, respectively.

F-20

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

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

During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 77,500 shares of AVLP ~~Notes.~~common stock for $46,644 and 430,942 shares of AVLP common stock for $417,169, respectively. At ~~September~~June 30, ~~2017, the closing market price of AVLP’s common Stock was $0.64. Subsequent to quarter-end,~~2019, the closing market price of AVLP’s common stock was $0.80, a decline from $0.90 at December 31, 2018. The Company has determined that its investment in AVLP marketable equity securities are accounted for in accordance with ASC No. 820,Fair Value Measurements and Disclosures and based upon the ~~range~~closing market price of ~~$0.51 and $ 0.85 and due to~~AVLP common stock at June 30, 2019, the ~~illiquidity and significant volatility~~Company’s investment in AVLP common stock had an unrealized gain of $44,368.

In aggregate, the Company has 980,675 shares of AVLP common stock which represents 17.3% of AVLP’s outstanding shares of common ~~stock,~~stock. The Company has determined that AVLP is a variable interest entity (“VIE”) as it does not have sufficient equity at risk. The Company does not consolidate AVLP because the Company is not the primary beneficiary and does not have a controlling financial interest. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, among other factors. Although the Company has made a significant investment in AVLP, the Company has determined that Philou, which controls AVLP through its ~~cost basis~~equity investment and deemed to be more closely associated with AVLP, is the primary beneficiary. As a result, AVLP’s financial position and results of operations are not consolidated in ~~AVLP common stock approximates~~our financial position and results of operations.

8. INVESTMENTS IN REAL ESTATE

On June 8, 2018, the ~~current fair value.~~Company entered into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the “NY Partnership”). The NY Partnership is a limited partner in the partnership that is responsible for the construction and related activities of a hotel in New York City. In connection with this transaction, the Company has agreed to finance a portion of the capital required by the NY Partnership. As of June 30, 2019, the Company had invested an aggregate of $1,869,000 in the NY Partnership and $100,000 in another real estate investment. The Company was initially required to make monthly capital contributions of $500,000 every thirty days until the Company’s commitment of $10 million was funded in full. The Company had received a waiver for its obligation to make monthly capital contributions through September 30, 2019 and on June 12, 2019, the agreement was restructured whereby DPW no longer has any further funding obligations until the hotel is open for business to the public.

9. OTHER INVESTMENTS, RELATED PARTIES

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

MTIX, Ltd.

On December 5, 2017, the Company entered into 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.

F-21

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

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

~~5. ACQUISITIONS~~

~~Microphase Corporation~~

~~On April 28,~~

During December 2017, the Company ~~entered into a Share Exchange Agreement (the~~ ~~“Share Exchange Agreement”) with Microphase; Microphase Holding Company LLC, a limited liability company organized under the laws~~issued 30,000 shares of ~~Connecticut (“MHC”), Ergul Family Limited Partnership, a partnership organized under the laws of Connecticut (“EFLP”) RCKJ Trust, a trust organized under the laws of New Jersey (“RCKJ”~~ ~~and with MHC and EFLP, the~~ ~~“Significant Stockholders”) and those additional persons who have executed the Agreement (collectively, the~~ ~~“Minority Stockholders”~~ ~~and with the Significant Stockholders, the~~ ~~“Stockholders”). Upon the terms and subject to the conditions set forth in the Agreement, the Company acquired 1,603,434 shares (the~~ ~~“Subject Shares”) of the issued and outstanding~~its common stock to WT Johnson & Sons upon the conversion of ~~Microphase (the~~ ~~“MPC Common Stock”~~),Note A and WT Johnson subsequently sold the 30,000 shares. The proceeds from the ~~Stockholders in exchange (the~~ ~~“Exchange”) for the issuance by the Company~~sale of ~~1,842,448~~ shares of ~~Digital Power~~ common stock (~~“Common Stock”) and 378,776 shares~~received upon the conversion of ~~Digital Power Series D Preferred Stock (collectively,~~Note A were sufficient to satisfy the ~~“Exchange Shares”), which shares of Digital Power Series D Preferred Stock are, subject to shareholder approval, convertible into~~entire $2,267,766 obligation as well as an ~~aggregate of 757,552 shares of Common Stock and warrants (the~~ ~~“Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of Common Stock (the~~ ~~“Warrant Shares”). The Exchange Shares and the Exchange Warrants are at times collectively referred to herein as the~~ ~~“Exchange Securities.”~~ ~~At the time of the closing of the acquisition the Exchange Shares constituted~~ ~~56.4% of the outstanding equity interests of Microphase Corporation~~. ~~The operating results of Microphase from the closing date of the acquisition, June 2, 2017, through September 30, 2017, are included in the consolidated financial statements.~~

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

~~Power-Plus Technical Distributors~~

~~On August 3, 2017, Coolisys entered into a Securities Purchase Agreement (the~~ ~~“Purchase Agreement”) to acquire all the outstanding membership Interests of Power-Plus. Power-Plus is an industrial distributor~~additional $400,500 of value added ~~power supply solutions, UPS systems, fans, filters, line cords, and other power-related components. On September 1, 2017, Coolisys completed~~tax due to WT Johnson. Concurrent with entering into the ~~acquisition.~~

~~Under~~exchange agreement, the ~~terms of the Agreement, Coolisys Technologies acquired all the membership Interests of Power-Plus for~~Company received a ~~price of $850, which was reduced by certain debts of Power-Plus in the amount of $186. The purchase price of $664 will be paid by (i) a two-year~~ promissory note in the amount of ~~$255,000 payable~~$2,668,266 from MTIX and cancelled Note B. At June 30, 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 ~~24 monthly installments;~~Israel. The Company made $300,000 of payments to the seller of the property and ~~(ii) cash at closing~~received a 28% undivided interest in the real property (the “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 ~~$409 resulting~~Mr. Kohn and an Israeli citizen. The Property was purchased to serve as a residence/office facility for the Company in ~~a net purchase price~~order to oversee its Israeli operations and to expand its business in the high-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 ~~$664.~~

~~The acquisition~~the parties. During the term of ~~Microphase and Power-Plus is being accounted for under~~ the ~~purchase method of accounting in accordance~~trust, Ms. Kohn will not sell, lease, sublease, transfer, grant, encumber, change or effect any other disposition with ~~ASC No. 805,~~ ~~Business Combinations~~. respect to the Property or Coolisys’ interest without the Company’s approval.

Under the ~~purchase method, assets acquired~~Tenancy in Common Agreement, Coolisys and ~~liabilities assumed are recorded at their estimated fair values. Goodwill is recorded~~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 ~~extent~~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 ~~price exceeds~~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 and six months ended June 30, 2019, the Company recognized $7,500 and $15,000, respectively, 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 market value of ~~the net identifiable tangible and intangible assets acquired less liabilities assumed at the date of acquisition.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

Microphase

Power-Plus

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

such unvested Property interest.

10. ACQUISITIONS

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

F-22

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

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

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

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

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

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

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

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

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

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

	For the Three			For the Six
	Months Ended			Months Ended
	June 30, 2018			June 30, 2018
Total Revenue	$	6,402,873		$	14,177,103
Net loss	$	(8,976,963	)	$	(15,113,577	)
Less: Net loss attributable
to non-controlling interest		108,649			144,080
Net loss attributable to DPW Holdings	$	(8,868,314	)		(14,969,497	)
Preferred dividends		(108,049	)		(108,049	)
Net loss available to common stockholders	$	(8,976,363	)	$	(15,077,546	)

Basic and diluted net loss per common share	$	(133.75	)	$	(267.51	)

Basic and diluted weighted average
common shares outstanding		67,115			56,362

Comprehensive Loss
Loss available to common shareholders	$	(8,976,363	)	$	(15,077,546	)
Other comprehensive income (loss)
Change in net foreign currency
translation adjustments		(158,306	)		(131,849	)
Net unrealized loss on derivative
securities of related party		(704,811	)		(5,445,925	)
Other comprehensive income (loss)		(863,117	)		(5,577,774	)
Total Comprehensive loss	$	(9,839,480	)	$	(20,655,320	)

11. 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 ~~5,372,630~~21,716 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~~June 30, ~~2017,~~2019, an aggregate of ~~1,350,832~~13,014 of the Company's options are still available for future grant.

During the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company did not grant any options. During the six months ended June 30, 2018, the Company granted ~~50,000 and 560,000~~1,250 options ~~respectively,~~to its employees from the Plans ~~to its employees at an average exercise price~~and also granted 3,622 options outside 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 six months ended June 30, 2018 was ~~$251,~~$513,510, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2019 and 2018, the Company also issued ~~380,645~~9,375 and ~~1,336,798,~~1,979, 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 $2,640,102 respectively, which was determined from the closing price of the Company’s common stock on the date of issuance.

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

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

F-23

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

	Six Months Ended
		June 30, 2018
Weighted average risk-free interest rate		2.41% — 2.80%
Weighted average life (in years)		4.75
Volatility		124.7% — 131.7%
Expected dividend yield		0	%
Weighted average grant-date fair value per share of options granted	$	1,527.94

The options outstanding as of ~~September~~June 30, ~~2017,~~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
$480.00 - $560.00	3,725	7.02	$537.76	2,485	$533.15
$1,056.00 - $1,104.00	213	8.03	$1,098.35	99	$1,091.91
$1,208.00 - $1,352.00	72	3.08	$1,306.78	72	$1,306.78
$480.00 - $1,352.00	4,009	7.01	$581.26	2,656	$574.95


Issuances outside of Plans
$640.00 - $1,856.00	4,997	6.90	$1,043.45	1,435	$1,141.96

Total Options
$480.00 - 1,856.00	9,006	6.95	$837.69	4,091	$773.82

The total stock-based compensation expense related to stock options and ~~restricted~~ stock awards issued pursuant to the Plans to the Company’s employees, consultants and directors, included in reported net loss for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, is comprised as follows:

F-24

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 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				Six Months Ended
	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Cost of revenues	$	-	$	-	$	-	$	4,874
Engineering and product development		-		-		-		13,650
Selling and marketing		-		-		-		11,922
General and administrative		162,764		843,016		325,090		1,507,181
Stock-based compensation from Plans	$	162,764	$	843,016	$	325,090	$	1,537,627
Stock-based compensation from issuances outside of Plans		208,231		530,310		667,193		1,273,913
Total Stock-based compensation	$	370,995	$	1,373,326	$	992,283	$	2,811,540

The combination of stock-based compensation of ~~$1,061~~$325,090 from the issuances of ~~equity based~~equity-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,~~$414,174, which were issued outside of the Plans, resulted in aggregate stock-based compensation of ~~$1,269~~$370,995 and $992,283 during the nine months ended September 30, 2017. During the three months ended September 30, 2017, aggregate stock-based compensation was $517, which consisted of $365 from the issuances of equity based awards pursuant to the Plans and stock-based compensation attributed to restricted stock award of $120 warrants and options of $32, which were issued outside of the Plans. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, the only stock-based compensation expense was from issuances pursuant to the Plans.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

2019.

A summary of option activity under the Company's stock option plans as of ~~September~~June 30, ~~2017,~~2019, and changes during the ~~nine~~six 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

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, $0.55 and the exercise price, multiplied by the number of in-the-money-options).

			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		12,695		4,328		$	576.40		7.52	$	0
Forfeited		319		(319	)	$	515.61
June 30, 2019		13,014		4,009		$	581.26		7.01	$	0

As of ~~September~~June 30, ~~2017,~~2019, there was ~~$425~~$484,062 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the ~~Company's stock option plans.~~Plans. That cost is expected to be recognized over a weighted average period of ~~2.3~~2.8 years.

12. WARRANTS

During the ~~nine~~six months ~~and~~ ended ~~September~~June 30, ~~2017,~~2019, the Company issued a total of ~~8,484,073~~734,443 warrants at an average exercise price of ~~$0.81~~$10.33 per share. ~~Warrant issuances during the current quarter ended September 30, 2017, included:~~

(i)

On April ~~17, 2017,~~2, 2019, the Company ~~issued warrants to purchase 166,668 shares of common stock, at an exercise price of $0.90 per share of common stock,~~ ~~in connection with the issuance of two 7% convertible notes in the aggregate principal amount of $250. On July 25, 2017, the Company agreed to~~ ~~reduce the exercise price of warrants to purchase 83,334 shares of common stock from $0.90 per share to $0.55 per share and on July 28, 2017, the Company~~ ~~issued a new warrant to purchase 83,334 shares of common stock at $0.55 per share and cancelled the prior warrant to purchase 83,334 shares of common stock at $0.90 per share (See Note 12).~~

~~(ii)~~

~~On July 25, 2017, we~~ issued warrants to purchase an aggregate of ~~163,636~~388,888 shares of ~~the Company’s common stock~~Common Stock at an initial exercise price ~~equal~~of $18.00 per share and (the “Common Warrants”) and (b) pre-funded warrants to ~~$0.55~~purchase up to 317,500 shares of our Common Stock at an initial exercise price of $0.40 per share (the “Pre-Funded Warrants”) in connection with ~~a private placement~~an underwriting agreement ~~under which we issued and sold 272,727 shares of common stock to~~with A.G.P./Alliance Global Partners (the “Underwriter”). In addition, the ~~investor at $0.55 per share for an aggregate purchase price of $150. At that time, we~~Company has also issued ~~warrants~~the Underwriter a warrant to purchase ~~109,090 shares~~a maximum of the Company’s common stock at an exercise price equal to $0.75 per share to two investors that purchased shares of our common stock at $0.55 per share pursuant to subscription agreements (See Note 14).

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~(iii)~~

On July 28, 2017, we entered into an exchange agreement related to a 7% Convertible Note in the principal amount of $125 in which we exchanged the 7% Convertible Note for three new promissory notes in the principal amounts of $110,000 due August 1, 2017; $35,000 due August 1, 2017; and $34,000 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes). Concurrent with entering into the exchange agreement, the investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,00015,555 additional shares of common stock at ~~$0.55 per share for~~ an ~~aggregate purchase~~initial exercise price of $110,000. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110,000. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55$19.80 per share (See Note ~~12)~~20).

~~(iv)~~(ii)

On ~~August 3, 2017, we~~May 20, 2019, the Company issued warrants to purchase an aggregate of 666,666 shares of the Company’s common stock at an exercise price equal to $0.70 per share in connection with the issuance of a 12% Convertible Promissory Note in the aggregate principal amount of $400 (See Note 12).

~~(v)~~

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

~~(vi)~~

~~On August 23, 2017, the Company issued~~ ~~warrants to purchase 272,727~~12,500 shares of common stock at an exercise price equal to ~~$0.65~~$8.80 per share of common stock in connection with ~~entering into securities purchase agreements to issue and sell 272,727 shares~~the issuance of ~~common stock at to~~a 4% Original Issue Discount Convertible Promissory Note in the ~~investors at $0.55 per share for an~~ aggregate ~~purchase price~~principal amount of ~~$150. The common stock has yet to be issued and is subject to approval from the NYSE American prior to issuance, which had not been received at September 30, 2017.~~

$660,000.

F-25

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

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

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

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

2019:

Outstanding				Exercisable
		Weighted
		Average	Weighted		Weighted
		Remaining	Average		Average
Exercise	Number	Contractual	Exercise	Number	Exercise
Price	Outstanding	Life (Years)	Price	Exercisable	Price
$0.00	6,500	4.76	$0.00	6,500	$0.00
$8.00	397	7.35	$8.00	397	$8.00
$12.00	12,500	4.86	$12.00	12,500	$12.00
$19.80	15,555	4.76	$19.80	0	$19.80
$440.00	355	3.36	$440.00	355	$440.00
$480.00	94	3.84	$480.00	94	$480.00
$528.00	186	3.34	$528.00	186	$528.00
$560.00	2,657	3.37	$560.00	2,657	$560.00
$600.00	170	2.88	$600.00	170	$600.00
$640.00	603	1.20	$640.00	603	$640.00
$696.00	2,155	3.87	$696.00	2,155	$696.00
$752.00	9,614	3.88	$752.00	9,614	$752.00
$800.00	350	3.45	$800.00	350	$800.00
$880.00	947	2.18	$880.00	947	$880.00
$920.00	2,126	3.74	$920.00	2,126	$920.00
$1,040.00	1,243	3.79	$1,040.00	1,243	$1,040.00
$1,080.00	1,389	3.87	$1,080.00	1,389	$1,080.00
$1,760.00	781	3.57	$1,760.00	781	$1,760.00
$1,800.00	140	3.57	$1,800.00	140	$1,800.00
$2,000.00	203	3.57	$2,000.00	203	$2,000.00
$8.00 - $2,000.00	57,965	3.81	$334.01	42,410	$449.25

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

The Company utilized the Black-Scholes option pricing model and the assumptions used during the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2019 and 2018:

	Six Months Ended
	June 30, 2019			June 30, 2018
Weighted average risk-free interest rate		2.18% — 2.28%			2.41% — 2.94%
Weighted average life (in years)		5.0			4.8
Volatility		87.5	%		124.8% — 138.4%
Expected dividend yield		0	%		0	%
Weighted average grant-date fair value per share of warrants granted	$	10.48		$	629.64

F-26

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

13. OTHER CURRENT LIABILITIES

At June 30, 2019 and December 31, 2018 other current liabilities consist of:

	June 30,		December 31,
	2019		2018
Accrued payroll and payroll taxes	$	1,288,503	$	1,497,470
Other accrued expenses		483,731		370,932
	$	1,772,234	$	1,868,402

14. 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 June 30, 2019:

	June 30, 2019
Operating right-of-use assets	$	3,669,613
Operating lease liability - current	$	786,740
Operating lease liability - non-current	$	2,944,162

The components of lease expenses for the six months ended June 30, 2019, were as follows:

	Six
	Months Ended
	June 30, 2019
Operating lease cost	$	534,785
Short-term lease cost		-
Variable lease cost	$	234,327

The following tables provides a summary of other information related to leases for the six months ended June 30, 2019:

	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	710,024
Right-of-use assets obtained in exchange for new operating lease liabilities	$	-
Weighted-average remaining lease term - operating leases		5.75 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-27

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

Maturity of lease liabilities under our non-cancellable operating leases as of June 30, 2019, are as follows:

Payments due by period
2019 (Remainder)	$	581,895
2020		1,039,687
2021		779,008
2022		501,411
2023		514,895
Thereafter		1,582,121
Total lease payments		4,999,017
Less interest		(1,268,115	)
Present value of lease liabilities	$	3,730,902

Information for our leases for the year ended December 31, 2018, under ASC Topic 840, Leases, follows for comparative purposes.

15. ADVANCES ON FUTURE RECEIPTS

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

During the three months ended March 31, 2019, the Company received funding as a result of entering into ~~multiple~~three 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 $674,228. The ~~term future receipts means cash, check, ACH, credit card, debit card, bank card, charged card or other form of monetary payment. The~~ Company recorded a discount in the amount of ~~$813. The discount is being amortized as non-cash interest expense over~~$173,028 in connection with these three agreements, based upon the ~~term~~difference between the amount of future receipts sold and the ~~agreement.~~actual proceeds received by the Company. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, non-cash interest expense of ~~$142~~$82,525 and $177,896, respectively, was recorded from the amortization of debt discounts.

~~9. REVOLVING CREDIT FACILITY~~

~~Microphase entered into a revolving loan agreement with Gerber Finance, Inc. (“Gerber”) in February of 2012, as amended in September 2015~~

16. NOTES PAYABLE

Notes Payable at June 30, 2019 and ~~July 2017 (the~~ ~~“Revolving Credit Facility”~~). Under the Revolving Credit Facility, Microphase can receive funds based on a borrowing base, which consists of a percentage of eligible accounts receivable, up to a maximum revolving amount of $1,400 (the ~~“Maximum Revolving Amount”). Pursuant to the terms~~December 31, 2018, are comprised of the Revolving Credit Facility, Microphase is subject to an annual facility fee in an amount equal to 1.75% of the Maximum Revolving Amount due on each anniversary, a monthly collateral monitoring fees of $1 and other fees. ~~Interest accrues at the~~ ~~prime rate plus three and three-quarters percent (3.75%) on the~~ ~~unpaid principal~~. Effective June 15, 2017, the prime rate was increased from 4.00% to 4.25% resulting in a base rate of 8.00%. If borrowings under the Revolving Credit Facility exceed the collateral borrowing base, then Microphase is subject to an additional 2.5% interest charge per month on the over-advance amounts and a separate additional charge of 2.5% if borrowings exceed the Maximum Revolving Amount. At September 30, 2017, the amount due pursuant to the Revolving Credit Facility, was $310. The interest expense for the three months ended September 30, 2017 and for the period from June 3, 2017 (date loan was assumed) to September 30, 2017, was $35 and $49, respectively.following.

	June 30,			December 31,
	2019			2018
Dominion	$	2,900,000		$	—
12% short-term promissory note		1,000,000			1,000,000
15% May short-term promissory note		805,000			—
Other short-term notes payable		781,699			1,033,553
12% September short-term promissory notes		526,316			789,473
8% short-term promissory notes		636,300			1,272,600
October short-term promissory note		—			565,000
Notes payable to Wells Fargo		291,460			291,988
Note payable to Dept. of Economic and Community Development		244,984			260,169
Microphase short-term promissory note		—			200,000
Note payable to Power-Plus Member		13,250			13,250
Note payable to People's United Bank		20,000			18,589
Short term bank credit		1,661,402			1,586,864
Total notes payable		8,880,411			7,031,486
Less:
Unamortized debt discounts		(237,131	)		(151,499	)
Unamortized financing cost		(70,082	)		(7,541	)
Total notes payable, net of financing cost	$	8,573,198		$	6,872,446
Less: current portion		(8,121,751	)		(6,388,787	)
Notes payable – long-term portion	$	451,447		$	483,659

F-28

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

January Exchange Agreement

On ~~July 14, 2017,~~August 16, 2018, as ~~a result of a notice that Microphase received from Gerber identifying several events of default under~~amended on November 29, 2018, the ~~terms of the Revolving Credit Facility, Microphase and Gerber~~Company entered into a ~~Forbearance Agreement.~~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 in the aggregate principal amount of $318,150, the October short-term promissory note in the aggregate principal amount of $565,000 and accrued interest of $160,649.

Pursuant to the January Exchange Agreement, the investor received 10,918 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 10,918 shares of common stock received were not equal to the outstanding principal balance of the New Notes, the Company was required to pay to the investor the difference, which amounted to $244,898, in cash or through the delivery of free trading shares of common stock. The ~~events~~Company recognized additional interest expense for the difference of ~~default~~$244,898. On March 19, 2019, the Company issued to the investor an additional 2,551 shares of the Company’s common stock, with a value of $73,016, in partial satisfaction of the liability, resulting in a remaining balance due of $171,882 which was paid during June 2019.

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 principal and accrued interest on the 8% Short-Term Promissory Note (the “Old Note”).

Pursuant to the February Exchange Agreement, the investor received 4,520 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 4,520 shares of common stock received were ~~primarily related~~not equal to ~~(i)~~ the ~~change~~outstanding principal balance of the New Note, the Company is required to pay the difference, which amounted to $289,954, to the investor in ~~control that occurred on~~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 9,375 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 which was paid during June ~~2, 2017, when Digital Power acquired~~2019.

Enertec Short-Term Promissory Note

On December 28, 2018, Enertec entered into a ~~majority~~$500,000 secured promissory note (the “Enertec Short-Term Promissory Note”) whereby Enertec agreed to pay interest in ~~Microphase,~~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 ~~(ii) borrowings under~~repaid on April 2, 2019. In connection with the Revolving Credit Facility exceeding the collateral borrowing base. The Forbearance agreement accelerated the repayment of borrowings that were secured by inventories and equipment until such borrowings were repaid and required the Company to provideEnertec Short-Term Promissory Note, Milton C. Ault III provided a ~~corporate~~personal guarantee for ~~amounts advanced under~~ the Revolving Credit Facility, which guarantee was provided on July 20, 2017. As of September 30, 2017, approximately $65 of borrowings subject to acceleration remained outstanding on the Revolving Credit Facility.

~~10. NOTES PAYABLE~~

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

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

investor.

~~(a)~~

In December 2016, Microphase issued $705 in 10% short-term promissory notes to nineteen accredited investors which, after deducting $71 of placement fees to its selling agent, Spartan Capital Securities, LLC (~~“Spartan”), resulted in $634 in net proceeds to Microphase (the~~ ~~“10% Short-Term Notes”). The 10% Short-Term Notes are due one year from the date of issuance. The amount due pursuant to the 10% Short-Term Notes is equal to the entire original principal amount multiplied by 125% (the~~ ~~“Loan Premium”~~) plus accrued interest. During the three months ended September 30, 2017 and the period June 3, 2017 to September 30, 2017, Microphase incurred $19 and $25, respectively, of interest on these 10% short-term promissory notes. Concurrently, Microphase entered into a one-year agreement with Spartan for investment banking services which provided for: (i) $120 of consulting fees that were paid in cash from the proceeds of the 10% Short-Term Notes; and (ii) if Microphase completes an initial public offering, $90 payable in shares of Microphase common stock. As of September 30, 2017, accrued interest on the 10% Short-Term Notes was $237.

~~(b)~~F-29

On June 2, 2017, pursuant to the terms of the Share Exchange Agreement and in consideration of legal services, Microphase issued a $450 8% promissory note with a maturity date of November 25, 2017 to Lucosky Brookman, LLP (the ~~“Lucosky Note”). In conjunction with the issuance of the Lucosky Note, the Company issued Lucosky Brookman 10,000 shares of redeemable convertible Series E preferred stock (the~~ ~~“Series E Preferred Stock”) with a stated value of $45 per share as an alternative to providing a guarantee for the amount of the Lucosky Note.~~ The Company, at its option, may redeem for cash, in whole or in part, at any time and from time to time, the shares of Series E Preferred Stock at the time outstanding, upon written notice to the holder of the shares, at a cash redemption price equal to $45 multiplied by the number of shares being redeemed. Any such optional redemption by the Company shall be credited against the Lucosky Note. ~~During the three months ended September 30, 2017 and the period June 3, 2017 to September 30, 2017, Microphase incurred $3 and $6, respectively, of interest on~~ ~~the Lucosky Note.~~ ~~As of September 30, 2017, accrued interest on the~~ ~~Lucosky Note~~ ~~was $6.~~

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~2019

~~U.S. dollars~~

17. NOTES PAYABLE – RELATED PARTIES

Notes Payable – Related parties at June 30, 2019 and December 31, 2018, are comprised of the following.

	June 30,			December 31,
	2019			2018
Notes payable to Microphase former officers and employees	$	284,317		$	308,984
Total notes payable		284,317			308,984
Less: current portion		(162,674	)		(166,925	)
Notes payable – long-term portion	$	121,643		$	142,059

18. CONVERTIBLE NOTES

Convertible Notes Payable at June 30, 2019 and December 31, 2018 are comprised of the following.

	June 30,			December 31,
	2019			2018
10% Convertible secured notes	$	—		$	7,997,126
4% Convertible promissory note		660,000			—
Total convertible notes payable		660,000			7,997,126
Less:
Unamortized debt discounts		(396,205	)		(1,189,276	)
Unamortized financing cost		—			(65,356	)
Total convertible notes payable, net of financing cost	$	263,795		$	6,742,494

On May 15, 2018, the Company entered into a securities purchase agreement to sell a 10% convertible note (the “10% Convertible Note”) in ~~thousands, except share~~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 to revise 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 issuance of shares of the Company’s common stock. The conversion price on these monthly amortization payments was reduced from $8.00 per share ~~data~~

of common stock to a price equal to the greater of (i) $2.40 per share (the closing price of the Company’s common stock on January 9, 2019) or (ii) 80% of the lowest daily VWAP in the three days prior to the date of issuance, but not to exceed $8.00 per share. Further, the Company shall have the right to pay the monthly amortization payment in cash within 72 hours by advising the investor within two hours of receipt of any conversion notice. The amendment to the embedded conversion option of the 10% Convertible Note caused a material change in the fair value of the embedded conversion options and resulted in a loss on extinguishment of $807,784.

Between January 4, 2019 and February 21, 2019, the Company issued to the investor 8,412 shares of its common stock upon the conversion of $1,053,351 in principal and accrued interest. The investor received $660,337 from the sale 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 shares by the investor, which amounted to $393,014. The Company recognized additional interest expense in the amount of $393,014.

~~(c)~~

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

~~(d)~~

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

~~(e)~~

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

~~(f)~~

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

~~(g)~~

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

~~(h)~~

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~2019

~~U.S. dollars~~

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 between April 2, 2019 and June 18, 2019 repaid the balance due on the 10% Convertible Note.

19. COMMITMENTS AND CONTINGENCIES

On July 31, 2018, a stockholder derivative complaint was filed in ~~thousands, except share and per share data~~

~~During June 2017,~~ the ~~holders of $55 of these short-term loans agreed to cancel their notes~~United States District Court for the ~~purchase~~Central District of ~~100,001 shares~~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”).

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 21, 2019, the Court granted in part and denied in part the Motion to Dismiss the Amended Complaint. Specifically, the May 21, 2019 Order granted so much of Defendants’ Motion to Dismiss the Amended Complaint that sought to dismiss Directors Robert O. Smith, Jeff Bentz, and Mordechai Rosenberg as parties.

On July 8, 2019, the Court held a scheduling conference wherein the Court set a trial date of August 25, 2020.

Based on the Company’s ~~common stock at~~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 ~~price~~material adverse effect on the Company’s business, financial condition and results of ~~$0.55 per share. An additional $75~~operations.

On November 28, 2018,Blockchain Mining Supply and Services, Ltd, a vendor who sold computers to the Company’s subsidiary, filed in ~~short-term loans~~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 ~~Company’s corporate counsel was converted into the Company’s equity securities; $52 was converted into one of the Series C Units and $23 was converted into the Company’s common stock.~~subsidiary’s failure to satisfy a purchase agreement. The ~~Company did not record any additional interest expense as a result of the extinguishment of $130 in short-term loans since the carrying amount of the short-term loans was equivalent to~~ ~~the fair value of the consideration transferred, which was determined from the closing price of the Company’s equity securities on the date of~~ ~~extinguishment. During the three months ended September 30, 2017, the Company also repaid $30 in short-term loans.~~

~~Other Notes Payable~~

~~In February 2017, the Company issued to~~ ~~eight accredited investors~~ $400 in demand promissory notes bearing interest at a rate of 6% per annum. Of the eight accredited investors, one investor was deemed a related party. As additional consideration, the investors received five-year warrants to purchase 333,333 shares of common stock at an exercise price of $0.70 per share (the ~~“Feb. 2017 Warrants”~~). The Feb. 2017 Warrants are exercisable commencing six months after the issuance date and are subject to certain beneficial ownership limitations. The exercise price of the Feb. 2017 Warrants is subject to adjustment for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The Feb. 2017 Warrants may be exercised for cash or on a cashless basis. During the quarter ended March 31, 2017, the Company recorded debt discountComplaint seeks damages in the amount of ~~$151 based on~~$1,388,495, which approximates the estimated fair value of the Feb. 2017 Warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model. As a result of the due on demand feature of the promissory notes, the debt discount was amortized as non-cash interest expense upon issuance of the Feb. 2017 Warrants using the effective interest method.

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

On February 4, 2019, pursuant to the ~~fair value~~Court’s Rules, the Company requested a pre-motion Conference with the Court. On April 16, 2019, the Court held a pre-motion Conference in connection with the Company’s anticipated motion to dismiss. To date, however, the Court has not set a briefing schedule in connection with the Company’s anticipated motion to dismiss.

Based on the Company’s assessment of the ~~consideration transferred, which was determined from~~facts underlying the ~~closing price~~claims, the uncertainty of litigation, and the preliminary stage of the ~~Company’s common stock on the date of~~ ~~extinguishment~~.

~~On March 28, 2017,~~case, the Company ~~issued $270 in demand promissory notes to several investors. These demand promissory notes accrued interest at~~cannot estimate the ~~rate~~reasonably possible loss or range of ~~6% per annum. The Company received gross proceeds of $220 on March 31, 2017. The remaining balance of $50 was received on April 3, 2017. On April 5, 2017,~~loss that may result from this action. However, the Company ~~canceled these promissory notes by issuing to~~has established a reserve in the investors 360,000 shares of common stock, at $0.75 per share, and warrants to purchase 180,002 shares of common stock at $0.90 per share. During the quarter ended June 30, 2017, the Company recorded additional interest expense of $109 as a result of the extinguishment of the $270 in demand promissory notes based on the difference of the carrying amount of the ~~demand promissory notes and~~ ~~the fair value~~unpaid portion of the ~~consideration transferred, which was determined from the closing price of~~purchase agreement. An unfavorable outcome may have a material adverse effect on the Company’s ~~common stock on the date~~business, financial condition and results of ~~extinguishment~~.operations.

F-31

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

~~11. NOTES PAYABLE – RELATED PARTIES~~

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

20. STOCKHOLDERS’ EQUITY

Amendments to Certificate of Incorporation

On January 3, 2019, the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation, with the Secretary of State of the ~~following:~~

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

~~(a)~~

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

~~(b)~~

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

~~12. CONVERTIBLE NOTES~~

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

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

~~12% Convertible secured notes~~

~~On August 3, 2017, the Company entered into a Securities Purchase Agreement (“Agreement”) to sell a 12% Convertible (“Convertible Note”) and a warrant to purchase 666,666~~number of authorized shares of common stock of the Company. Pursuant to ~~an accredited investor~~the Certificate of Amendment, the Company increased the number of authorized shares of its Class A common stock to 500,000,000 from 200,000,000 (the ~~“Investor”~~“Authorized Increase”). The ~~principal~~number of authorized shares of the ~~Convertible Note may be converted into~~Company’s Class B common stock remains at 25,000,000 and the number of authorized shares of the Company’s preferred stock remains at 25,000,000. As a result of the increase of authorized shares of the Company’s Class A common stock, the aggregate number of the Company’s authorized shares is 550,000,000. The Authorized Increase was approved by the Company’s Board of Directors (the “Board”) as of December 28, 2018, and approved by a vote of the stockholders of the Company at the December 28, 2018 Annual Meeting of Stockholders. The Certificate of Amendment became effective upon filing with the State of Delaware on January 3, 2019.

On March 14, 2019, pursuant to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s Board approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the common stock of the Company’s issued and outstanding number of such shares by a ratio of one-for-twenty (the “Reverse Stock Split”). The Company filed 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 ~~at $0.55~~issued and outstanding prior to the Reverse Stock Split were converted into one (1) share of common stock, with no change in authorized shares or par value per ~~share and under~~share.

At the ~~terms~~Company’s reconvened 2019 Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate a second reverse stock split (the “Second Reverse Stock Split”) of the ~~Warrant, up to 666,666~~Company’s issued and outstanding common stock. Thereafter, on July 23, 2019, the Board approved the Second Reverse Stock Split with a ratio of one-for-forty. As a result of the Second Reverse Stock Split, each forty (40) shares of common stock ~~may be purchased at an exercise price of $0.70 per share.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~The Convertible Note is in the principal amount of $400, included an original issue discount (“OID”) of $40 resulting in net proceeds~~outstanding prior to the Company 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. The principal may beSecond Reverse Stock Split were converted into ~~shares of the Company’s common stock at $0.55 per share.~~

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

~~The beneficial conversion feature (“BCF”) embedded in the~~ ~~Convertible Note~~ ~~is accounted for under ASC No.~~ ~~470, Debt. At issuance, the estimated fair value of the BCF totaled $187. The Company, however, is prohibited from issuing shares~~one (1) share of common stock, pursuant 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 fairwith no change in authorized shares or par 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.

~~10% Convertible secured note~~

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

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

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~Other Convertible Notes Payable~~

~~On April 17, 2017, the Company entered into two 7% convertible notes (the~~ ~~“7% Convertible Notes”~~) each in the aggregate principal amount of $125 for a total of $250. The 7% Convertible Notes accrue interest at 7% simple interest on the principal amount and were due on June 2, 2017. The principal may be converted into shares of the Company’s common stock at $0.75 per share. The noteholder may convert the principal amount of the 7% Convertible Notes at any time into common stock. The 7% Convertible Notes contains standard and customary events of default including, but not limited to, failure to make payments when due under the 7% Convertible Note agreements and bankruptcy or insolvency of the Company. The Company has the right to prepay the 7% Convertible Notes. The 7% Convertible Notes were repaid during July 2017.

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

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

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

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

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

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

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

~~13. CONVERTIBLE NOTE – RELATED PARTY~~

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

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

~~On October 21, 2016, the Company entered into a 12% convertible secured note (the~~ ~~“Convertible Note”) in the principal amount of $530. The Convertible Note included an original issue discount (“OID”~~) of $30 resulting in net proceeds to the Company of $500. Additionally, the Convertible Note accrues interest at 12% simple interest on the principal amount, is secured by all the assets of the Company, and is due on October 20,5, 2019. Interest only payments are due on a quarterly basis and the principal may be converted into shares of the Company’s common stock at $0.55 per share. Subject to certain beneficial ownership limitations, the noteholder may convert the principal amount of the Convertible Note at any time into common stock. The conversion price of the Convertible Note is subject to adjustment for customary stock splits, stock dividends, combinations or other standard anti-dilution events.

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

The Convertible Note contains standard and customary events of default including, but not limited to, failure to make payments when due under the Convertible Note agreement and bankruptcy or insolvency of the Company. Upon 30 days’ notice, the Company has the right to prepay the Convertible Note. In addition, provided that the closing price for a share of the Company’s common stock exceeds $3.00 per share for 30 consecutive trading days, the Company has the right to compel the noteholder to convert the principal amount into shares of common stock at the contractual conversion price.

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

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

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

~~14. STOCKHOLDERS’ EQUITY~~

Preferred Stock

The Company is authorized to issue ~~2,000,000~~25,000,000 shares of Preferred Stock ~~with no~~$0.001 par value. The Board ~~of Directors~~ has designated ~~500,000~~1,000,000 shares ~~of its~~as Series A Convertible Preferred Stock as ~~Series A cumulative Redeemable Convertible Preferred shares~~ (the ~~“Series~~“Series A Preferred Stock”), 500,000 shares as Series B Convertible Preferred Stock (the ~~“Series~~“Series B Preferred Stock”)~~, 460,000~~ and 2,500 shares as Series C Convertible Redeemable Preferred Stock (the ~~“Series~~“Series C Preferred Stock”~~), 378,776~~ ~~shares as Series D~~ ~~Convertible Preferred Stock (the~~ ~~“Series D Preferred Stock”), and 10,000~~ ~~shares as Series E~~ ~~Convertible Preferred Stock (the~~ ~~“Series E Preferred Stock”~~). The rights, preferences, privileges and restrictions on the remaining authorized ~~151,224~~23,497,500 shares of Preferred Stock have not been determined. The ~~Company’s~~ Board ~~of Directors~~ is authorized to ~~create~~designate a new series of preferred shares and determine the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred shares. As of ~~September~~June 30, ~~2017,~~2019, there were ~~100,000~~7,040 shares of Series A Preferred Stock, 125,000 shares of Series B Preferred Stock ~~455,002 shares of Series C Preferred Stock, 378,776 shares of Series D Preferred Stock, 10,000 shares of Series E Preferred Stock issued and outstanding~~ and no other shares of Preferred Stock ~~were~~ issued or outstanding. ~~As of December 31, 2016, there were no shares of Preferred Stock issued or outstanding.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~Series B Preferred Stock~~

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

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

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

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

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

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

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

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

~~Series C Preferred Stock~~

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

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

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

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

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

~~Series D Preferred Stock~~

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

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

~~Series E Preferred Stock~~

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

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

Common Stock

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

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

F-32

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

The 2016 Subscription Agreement provides that, until November 15, 2017, investors who purchased at least $100,000 have the right to participate in the purchase of up to 50% of the securities offered by the Company in any future financing transactions, with limited exceptions.

~~The Nov. 2016 Warrants entitle the holders to purchase, in the aggregate, up to 901,666 shares~~

2019 Issuances

Issuance of Common Stock ~~at an exercise price of $0.80 per share for a period of three years. The Nov. 2016 Warrants are exercisable upon~~pursuant to the ~~six-month anniversary of~~At the issuance date. The exercise price of the Nov. 2016 Warrants is subject to adjustment for stock splits, stock dividends, combinations and other standard anti-dilution events. The Nov. 2016 Warrants may be exercised for cash or, upon the failure to maintain an effective registration statement, on a cashless basis.

~~Between February 16, 2017 and February 23, 2017,~~Market Offering

On October 10, 2018, the Company ~~issued 666,667~~entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Wilson-Davis & Co., Inc., as sales agent (the “Agent”) to sell shares of its common stock, having an ~~extinguishment~~aggregate offering price of ~~$0.60 per share, for~~up to $25,000,000 (the “Shares”) from time to time, through an “at the ~~cancellation of $400 in demand promissory notes.~~

~~On March 8, 2017,~~market offering” program (the “WDCO ATM Offering”). During the six months ended June 30, 2019, the Company ~~issued an aggregate~~had received gross proceeds of ~~12,549 shares of its common stock as payment for services to a consultant.~~ ~~The shares were valued at $10, an average of $0.80 per share~~.

~~On March 15, 2017, Company entered into a subscription agreement with a related party for~~$4,656,051 through the sale of ~~500,000 shares of common stock at $0.60 per share for the aggregate purchase price of $300.~~

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

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

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

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

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

~~In a concurrent private placement, we sold to the institutional investor warrants to purchase an aggregate of 163,636~~119,791 shares of the Company’s common stock atthrough 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 ~~exercise price equal~~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 ~~$0.55 per share.~~

the WDCO ATM Offering, dated October 15, 2018.

Public Offering

On ~~July 28, 2017, we~~March 29, 2019, the Company entered into an ~~exchange~~underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (the “Underwriter”), pursuant to which the Company agreed to issue and sell an ~~institutional investor who was~~aggregate of (a) 71,388 shares of its common stock (the “Shares”) together with warrants to purchase 71,388 shares of common stock (the “Common Warrants”) and (b) pre-funded warrants to purchase up to 317,500 shares of its common stock (the “Pre-Funded Warrants”) together with a number of Common Warrants to purchase 317,500 shares of common stock (the “Offering”). The Shares were sold to the ~~owner~~purchasers at the public offering price of ~~(i)~~$17.60 per share (the “Offering Price”). The Common Warrants were sold at a ~~7% Convertible Note~~public offering price of $0.40 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser whose purchase of the Shares and the Common Warrant in the ~~principal amount~~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 ~~$125 and a warrant dated April 17, 2017 to purchase 83,334 shares~~the purchaser, 9.99%) of ~~our~~the Company’s outstanding common stock ~~at $0.90. Under~~immediately following the ~~terms~~consummation of the ~~exchange agreement, we agreed~~Offering. The purchase price of each Pre-Funded Warrant equaled the Offering Price at which the Shares were sold to ~~exchange~~ the ~~7% Convertible Note for three new promissory notes~~public in the ~~principal amounts~~Offering, minus $0.40, and the exercise price of ~~$110 due August 1, 2017; $35 due August 1, 2017; and $34 due August 8, 2017 (individually an Exchange Note and collectively~~each Pre-Funded Warrant equaled $0.40 per share. In addition, the ~~Exchange Notes) and to exchange~~Company has also issued the ~~prior warrant for~~Underwriter a ~~new~~ warrant to purchase ~~83,334~~a maximum of 15,550 additional shares of common stock at ~~$0.55~~an initial exercise price of $19.80 per share, with a term of five years (the “Underwriter Warrants”).

The Common Warrants are exercisable at any time after the date of issuance at an exercise price of $0.45 per share. However, since the volume weighted average price of the Company’s common stock on or after May 2, 2019, was less than $0.45 per share, the Common Warrant is exercisable by means of a cashless exercise such that the holder of the Common Warrant shall receive one common share for each warrant held.

Upon issuance, the Common Warrants, Pre-Funded Warrants and Underwriter Warrants (the “Offering Warrants”) were recorded at fair value and classified as a liability. Since the fair value of the Offering Warrants exceeded the proceeds from the Offering the Company recognized a loss on issuance of warrants of $1,763,481. The fair value of the Offering Warrants was re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The fair value at issuance was calculated using a Black-Scholes option pricing model using a risk-free interest rate of 2.28%, an expected life of 5 years, expected dividends of zero and expected volatility of 87.51%.

The Company received net proceeds from the Offering of $6,204,717, after deducting underwriting discounts and commissions and offering expenses. The Company used the net proceeds from the Offering primarily for the repayment of debt.

F-33

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

~~Concurrent with entering into this exchange agreement,~~

The Offering closed on April 2, 2019 and as of June 30, 2019, the institutional investor entered into a subscription agreement under which we issued and sold in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110. In addition, in a concurrent private placement, the institutional investor entered into a separate securities purchase agreement under which we issued and sold 63,600 shares of common stock at $0.55 per share for an aggregate of purchase price of $35. The 63,600 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $35. Further, weCompany had issued a ~~warrant to purchase 120,000 shares~~total of ~~common stock at $0.55 per share.~~

~~Between August 21, 2017 and September 5, 2017, the Company issued an aggregate of 680,645~~699,887 shares of its common stock, ~~as payment~~inclusive of shares issued pursuant to the exercise of 317,500 Pre-Funded Warrants and 382,387 shares issued pursuant to the cashless exercise of the Common Warrants.

Issuance of Common Stock for ~~services~~Services

During the six months ended June 30, 2019, the Company issued to its ~~consultant.~~ ~~The~~consultants a total 9,375 shares ~~were valued at $424,~~of its common stock with an aggregate value of $253,019, an average of ~~$0.62~~$26.99 per ~~share.~~

~~15.~~share for services rendered.

Issuance of common stock for conversion of debt

During the six months ended June 30, 2019, principal and accrued interest of $2,128,878 and $479,579, respectively, on the Company’s debt securities was satisfied through the issuance of 26,402 shares of the Company’s common stock.

Issuance of common stock in payment of accrued liability

During the six months ended June 30, 2019, the Company issued 9,375 shares of its common stock in satisfaction of an accrued liability of $108,523.

21. RELATED PARTY ~~TRANSACTION~~

TRANSACTIONS

~~In anticipation~~The Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”) with an effective date of ~~the acquisition of MTIX Ltd., an advanced materials and processing technology company located in Huddersfield, West Yorkshire, UK (“MTIX”) by AVLP and the expectation of future business generated by~~August 21, 2017, pursuant to which the Company ~~from~~will provide AVLP a ~~strategic investment into AVLP,~~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 ~~entered into~~having available funds to grant such credit. At June 30, 2019, the Company has provided loans to AVLP ~~Notes, three 12% Convertible Promissory Notes agreements~~ in the principal amount ~~of $525 each. The~~$8,587,847 and, in addition to the 12% convertible promissory notes, AVLP ~~Notes included a 5% original issue discount, resulting in net loans~~has issued to ~~AVLP of $1,500 and an original issue discount of $75. The AVLP notes accrued interest at 12% per annum and were due on or before two years from~~ the ~~origination dates of each note. The~~ Company ~~had the right, at its option,~~warrants to ~~convert all or any portion of the principal and accrued interest into~~purchase 17,175,694 shares of AVLP common ~~stock of AVLP at approximately $0.74536 per share.~~ ~~Subject to adjustment,~~ ~~the~~ ~~AVLP~~ ~~Notes, inclusive of the original issue discount, were convertible into 2,113,086 shares of the Company’s common stock~~. ~~During the period from March 29, 2017 to August 16, 2017, the Company funded $1,809 in excess of the $1,500 net loan amount required pursuant to~~stock. Under the terms of the AVLP ~~Notes~~.

Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. As of June 30, 2019, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $1,468,431.

~~On September 6, 2017,~~

During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company ~~and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”~~) with an effective date of August 21, 2017 pursuant to which the Company provided Avalanche a non-revolving credit facility of up to $5,000, inclusive of prior amounts loaned to AVLP, for a period ending on August 21, 2019, subject to the terms and conditions statedalso acquired in the Loan Agreement, including that the Company having available funds to grant such credit. In consideration of entering into the AVLP Loan Agreement, the Company and AVLP cancelled the AVLP Notes and consolidated the AVLP Notes and prior advances and issued a new Convertible Promissory Note in the aggregate principal amount of $3,474 (the ~~“New Note”~~) that is convertible into shares of AVLP at a conversion price of $0.50 per share. The New Note is due in two years and accrues interest at 12% per annum on the principal amount. Prior interest accrued under the AVLP Notes and advances will continue to be an obligation of AVLP. The New Note contains standard events of defaults. In addition, concurrent to issuing the New Note, AVLP issued to the Company a five-year Warrant to purchase 6,948,800 shares of AVLP Common Stock at $0.50 per share. Future advances under the AVLP Loan Agreement, if any, will be evidenced by a convertible promissory containing a conversion price feature at $0.50 per share and warrant with an exercise price of $0.50 per share. Further, under the terms of the AVLP Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. (See Note 4).

~~During the nine months ended September 30, 2017,~~ ~~the Company invested $2,682 pursuant to~~ ~~the AVLP Loan Agreement and acquired 71,746~~open market 77,500 shares of AVLP common stock ~~in the open market~~ for ~~$28.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

~~U.S. dollars in thousands, except share~~$46,644 and ~~per share data~~

~~During the three months ended December 31, 2016, the Company invested $950 pursuant to~~ ~~the AVLP Loan Agreement and acquired~~ ~~250,900~~430,942 shares of AVLP common stock for $417,169, respectively. At June 30, 2019, the Company’s investment in ~~the open market for $85.~~

AVLP common stock had an unrealized gain of $44,368.

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.~~Board. Mr. William B. Horne is the Chief Financial Officer and a director of AVLP and ~~also the audit committee chairman of~~ the Company.

~~On October 24, 2016, AVLP entered into a letter of intent to acquire MTIX and made an initial payment of $50 towards the purchase.~~ ~~On August 22, 2017, pursuant to the terms of a Share Exchange Agreement dated as of March 3, 2017, and as amended on July 13, 2017 and August 21, 2017 (the~~ ~~“Exchange Agreement”) with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”) and the three (3) shareholders of MTIX (the “Sellers”), AVLP completed its acquisition of MTIX.~~ ~~Upon the terms and subject to the conditions set forth in the Exchange Agreement, AVLP acquired MTIX from the Sellers through the transfer of all issued and outstanding ordinary shares of MTIX (the~~ ~~“MTIX Shares”) by the Sellers to AVLP in exchange (the~~ ~~“Exchange”) for the issuance by AVLP of: (a) 7% secured convertible promissory notes (individually, a~~ ~~“Note”~~ ~~and collectively, the~~ ~~“Notes”~~) in the aggregate principal face amount of $9,500 to the Sellers in pro rata amounts commensurate with their current respective ownership percentages of MTIX’s ordinary shares, (b) (i) $500 in cash, $50, of which was paid on October 26, 2016, and (ii) 100,000 shares of AVLP’s newly designated shares of Class B Convertible Preferred Stock (the ~~“Class B Shares”) to the principal shareholder of MTIX (the~~ ~~“Majority Shareholder”~~).

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

~~During~~

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

At June 30, 2019, the Company had recorded a receivable from MTIX of $1,238,856 and during the six months ended June 30, 2019, the Company had received payments from MTIX of $2,676,219. The receivable was primarily the result of revenues recognized during the year ended December 31, 2018, and reflected on the financial statements as accounts receivable, related party.

~~On September 22, 2016,~~During the six months ended June 30, 2019, the Company ~~entered into consulting agreement with Mr. Ault to assist~~acquired 137,500 shares of common stock of Alzamend from a third party for $110,000 consisting of the cancellation of principal and interest due the Company ~~in developing a business strategy, identifying new business opportunities, developing a capital raising program~~of $91,483 and ~~implementing~~cash of ~~a capital deployment program. For his~~$18,517. AVLP provides management, consulting and financial services ~~Mr. Ault was paid $135 during the nine months ended September 30, 2017.~~to Alzamend.

F-34

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

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

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

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

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

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

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

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

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

~~During the three and nine months ended September 30, 2017, DP Lending made loans to related parties of $54. The loans were made to Alzamend Neuro, Inc. (“Alzamend”~~), ~~Restaurant Capital Group, LLC, a wholly-owned subsidiary of AVLP,~~ ~~and Click Media, Inc. (“Cross Click”) in the amounts of $44, $5, and $5, respectively. The loans are classified as~~ ~~Other investments, related party~~ ~~in the accompanying condensed consolidated balance sheet at September 30, 2017.~~ ~~AVLP is a party to a~~ ~~management services agreement with Alzamend Neuro, Inc. (“Alzamend”) pursuant to which Avalanche provides management, consulting and financial services to Alzamend. MCKEA is the controlling shareholder of Cross Click.~~

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~16.~~

22. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

The Company has five reportable segments as of June 30, 2019, and had two reportable ~~geographic segments;~~segments as of June 30, 2018; 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 June 30, 2019
	DPC			DP Limited			Enertec			SC Mining			I.AM			Total
Revenue	$	1,839,619		$	525,928		$	2,175,651		$	—		$	—		$	4,541,198
Revenue, cryptocurrency
mining		—			—			—			256,116			—			256,116
Revenue, restaurant operations		—			—			—			—			1,161,132			1,161,132
Revenue, lending activities		189,621			—			—			—			—			189,621
Total revenues	$	2,029,240		$	525,928		$	2,175,651		$	256,116		$	1,161,132		$	6,148,067

Depreciation and
amortization expense	$	69,755		$	19,110		$	128,434		$	716,573		$	230,873		$	1,164,745

Loss from operations	$	(445,966	)	$	(1,763	)	$	(110,218	)	$	(746,448	)	$	(328,117	)	$	(1,632,512	)
Capital expenditures for
segment assets, as of
June 30, 2019	$	5,025		$	69,067		$	8,162		$	—		$	1,746		$	84,000

Identifiable assets as of
June 30, 2019	$	31,591,172		$	1,572,830		$	11,553,254		$	5,786,092		$	1,920,049		$	52,423,397

	Three Months ended June 30, 2018
	DPC		DP Limited			Enertec		SC Mining			I.AM			Total
Revenue	$	2,718,117	$	411,971		$	1,217,870	$	—		$	—		$	4,347,958
Revenue, cryptocurrency
mining		—		—			—		718,757			—			718,757
Revenue, related party		1,765,875		—			—		—			—			1,765,875
Revenue, restaurant operations		—		—			—		—			502,492			502,492
Revenue, lending activities		108,752		—			—		—			—			108,752
Total revenues	$	4,592,744	$	411,971		$	1,217,870	$	718,757		$	502,492		$	7,443,834

Depreciation and
amortization expense	$	9,669	$	13,643		$	9,718	$	577,093		$	—		$	610,123

Loss from operations	$	781,523	$	(198,889	)	$	146,162	$	(985,695	)	$	(1,009	)	$	(257,908	)
Capital expenditures for
segment assets, as of
June 30, 2018	$	32,112	$	—		$	31,668	$	1,640,985		$	22,658		$	1,727,423

Identifiable assets as of June 30, 2018	$	28,650,534	$	1,390,132		$	12,500,975	$	8,784,920		$	2,114,739		$	53,441,300

F-35

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

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

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

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

Interest expense, net $ (1,367 )

Net loss attributable to non-controlling interest $ 216

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

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

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

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

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

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

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

Interest income, net $ 85

Income tax benefit $ 22

Net loss $ (165 )

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

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

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

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

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

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

Interest expense, net $ (753 )

Net loss attributable to non-controlling interest $ 104

Net income (loss) $ (1,967 )

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

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

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

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

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

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

Interest income, net $ 23

Income tax benefit $ 22

Net income (loss) $ (38 )

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

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

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~Concentration Risk:~~

	Six Months ended June 30, 2019
	DPC			DP Limited			Enertec			SC Mining			I.AM			Total
Revenue	$	4,336,536		$	1,082,442		$	4,673,871		$	—		$	—		$	10,092,849
Revenue, cryptocurrency
mining		—			—			—			284,920			—			284,920
Revenue, restaurant operations		—			—			—			—		$	2,334,631			2,334,631
Revenue, lending activities		374,710			—			—			—			—			374,710
Total revenues	$	4,711,246		$	1,082,442		$	4,673,871		$	284,920		$	2,334,631		$	13,087,110

Depreciation and
amortization expense	$	139,901		$	38,907		$	283,356		$	1,433,145		$	230,874		$	2,126,183

Loss from operations	$	(963,342	)	$	(2,688	)	$	(160,106	)	$	(1,488,871	)	$	(432,470	)	$	(3,047,477	)
Capital expenditures for
segment assets, as of
June 30, 2019	$	8,818		$	69,067		$	8,162		$	—		$	7,559		$	93,606

Identifiable assets as of
June 30, 2019	$	31,591,172		$	1,572,830		$	11,553,254		$	5,786,092		$	1,920,049		$	52,423,397

	Six Months ended June 30, 2018
	DPC			DP Limited			Enertec		SC Mining			I.AM			Eliminations			Total
Revenue	$	5,557,813		$	737,734		$	1,217,870	$	—		$	—		$	—		$	7,513,417
Revenue, cryptocurrency
mining		—			—			—		956,253			—			—			956,253
Revenue, related party		3,558,767			—			—		—			—			—			3,558,767
Revenue, restaurant operations		—			—			—		—			502,492			—			502,492
Revenue, lending activities		108,752			—			—		—			—			—			108,752
Inter-segment revenues		4,513			—			—		—			—			(4,513	)		—
Total revenues	$	9,229,845		$	737,734		$	1,217,870	$	956,253		$	502,492		$	(4,513	)	$	12,639,681

Depreciation and
amortization expense	$	85,905		$	31,024		$	9,718	$	631,981		$	—		$	—		$	758,628

Loss from operations	$	(1,069,831	)	$	(451,408	)	$	146,162	$	(1,850,117	)	$	(1,009	)	$	—		$	(3,226,203	)
Capital expenditures for
segment assets, as of
June 30, 2018	$	343,335		$	1,319		$	31,668	$	8,806,778		$	22,658		$	—		$	9,205,758

Identifiable assets as of
June 30, 2018	$	28,650,534		$	1,390,132		$	12,500,975	$	8,784,920		$	2,114,739		$	—		$	53,441,300

Concentration Risk:

The following ~~table provides~~tables provide the percentage of total revenues for the three and six months ended June 30, 2019 and 2018 attributable to a single customer from which 10% or more of total revenues are ~~derived:~~derived.

For the Three Months Ended

For the Six Months Ended

June 30, 2019

Total Revenues

Percentage of

Total Revenues

Percentage of

by Major

Total Company

by Major

Total Company

Customers

Revenues

Customers

Revenues

Customer A

$1,429,455

$2,845,541

F-36

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

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

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

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

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

For the Three Months Ended

For the Six Months Ended

June 30, 2018

Total Revenues

Percentage of

Total Revenues

Percentage of

by Major

Total Company

by Major

Total Company

Customers

Revenues

Customers

Revenues

Customer B

$1,765,875

$3,558,767

Revenue from Customer A ~~and B were~~is attributable to ~~Digital Power and revenue~~Enertec. Revenue from Customer CB relates to MTIX, a related party, and is attributable to ~~DP Limited.~~

Coolisys. Further, at June 30, 2019, MTIX represented all the Company’s accounts and other receivable, related party.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~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 September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016

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

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenues:
Commercial products	$	3,458,423	$	5,136,154	$	6,894,273	$	8,801,223
Defense products		2,689,644		2,307,680		6,192,837		3,838,458
Total revenues	$	6,148,067	$	7,443,834	$	13,087,110	$	12,639,681

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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. Other than as shown, no foreign country or region contributed materially to revenues or long-lived assets for these periods:

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

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

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

~~17.~~

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenues:
North America	$	3,320,231	$	5,613,714	$	7,069,371	$	10,432,320
Middle East		2,175,651		1,217,870		4,488,553		1,217,870
Europe		481,566		377,933		1,029,565		644,588
Other		170,619		234,317		499,621		344,903
Total revenues	$	6,148,067	$	7,443,834	$	13,087,110	$	12,639,681

23. SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to ~~September~~June 30, ~~2017~~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.

F-37

~~Common Stock~~

On October 4, 2017, the Company entered into a Securities Purchase Agreement 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.

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

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

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

~~Advance on Future Receipts~~

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

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

~~DIGITAL POWER CORPORATION~~

DPW HOLDINGS AND ~~SUBSIDIARY~~

SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

~~SEPTEMBER~~

JUNE 30, ~~2017~~

2019

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

Ascendiant ATM Offering

On ~~November 1, 2017,~~August 6, 2019, the Company entered into an At-The-Market Issuance Sales Agreement ~~for~~with Ascendiant Capital Markets, LLC, as sales agent to sell shares of the ~~Purchase~~Company’s common stock having an aggregate offering price of up to $5,500,000 (the “ATM Offering”). The offer and ~~Sale~~sale of ~~Future Receipts~~the Company’s common stock will be made pursuant to the Company’s effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with ~~TVT~~the Securities and Exchange Commission (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 August 6, 2019. Through August 16, 2019, the Company had received net proceeds of $140,579 through the sale of 67,981 shares of the Company’s common stock from the ATM Offering.

Exchange Agreements

On July 2, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for a term promissory note issued by us to the ~~Company~~investor on September 21, 2018, in the principal face amount of $526,316, we sold up to ~~$223~~the investor a new convertible promissory note in ~~Future Receipts~~the principal amount of $783,031 with an interest rate of 12% per annum and a maturity date of December 31, 2019. Subject to the approval by the NYSE American, this note shall be convertible into shares of common stock, commencing on July 15, 2019, at conversion price equal to the greater of (A) $8.80 or (B) 80% of the ~~Company~~lowest daily VWAP in the three trading days prior to the date of conversion.

On July 2, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for ~~$150. If~~(i) a term promissory note issued by DP Lending to the ~~Company pays TVT by January 3,~~investor on August 10, 2018 in 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 aggregateprincipal face amount of ~~$223 under~~$550,000 and (ii) a term promissory note issued by us on August 16, 2018, as amended on November 29, 2018, in the ~~following terms. The Company will~~principal face amount of $318,150, we sold to the investor a new convertible promissory note in the principal amount of $1,250,000 (subject to adjustments) with an interest rate of 8% per annum and a maturity date of December 31, 2019. Subject to the approval by the NYSE American, this note shall be ~~obligated to pay $13 on a weekly basis until the purchase~~convertible into shares of our common stock at conversion price of ~~$223 has been paid~~$8.80.

On July 3, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in ~~full. The Agreement also includes warrants~~exchange for a term promissory note issued by us to the investor on March 23, 2018 in the principal face amount of $1,000,000, we sold a convertible promissory note in the principal face amount of $1,292,000 plus a default premium of $200,000, and (ii) a five-year warrant to purchase ~~75,000~~of 25,000 shares of ~~the Company’s~~our common stock at an exercise price of ~~$0.725 per share. In addition, the purchase price of $150 has been personally guaranteed by Mr. Ault.~~

~~Convertible Debentures~~

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

~~10% Original Issue Discount Convertible Debentures~~

The Convertible Debentures have a term of eight months, bear interest at 5% per year and the principal of the Convertible Debentures and interest earned thereon may be converted into shares of common stock at $0.60$8.80 per share, subject to ~~adjustments for lower priced issuances, stock splits, stock dividends, combinations or similar events. In~~ the ~~event that~~approval thereof by the ~~Company consummates any debt or equity financing with gross proceeds to~~NYSE American.

This convertible promissory note is in the ~~Company equal to or greater than $7,500, then the Company shall prepay to the holder in cash 110%~~aggregate principal amount of ~~the outstanding~~$1,492,000 and bears interest at 12% per annum, which principal ~~amounts of the Convertible Debentures~~ and ~~any~~all accrued and unpaid interest ~~if the closing of such transaction occurs within ninety days from the original issue date of a debenture,~~are due on January 22, 2020, and ~~the Company~~which interest shall ~~prepay to the holder~~be payable in cash, ~~115%~~in arrears, on the first business day of the outstanding principal amounts of the Convertible Debentures and any accrued and unpaid interest if the closing of such transaction occurs between 91 days from the original issue date and the maturity date of the Convertible Debenture. The Company has the option to prepay all amounts owed under the Convertible Debentures in cash at a rate of 110% within 90 days from the original issue date and 115% from 91 days from the original issue date through the maturity date.

~~Registration Rights Agreement~~

~~In connection~~each month, with the ~~Nov. Purchase Agreement,~~first payment of interest due on August 1, 2019. Commencing on July 15, 2019, subject to certain beneficial ownership limitations, the ~~Company~~investor may convert the principal amount of this note and accrued interest earned thereon at any time into shares of our common stock at $8.80 per share.

During July 2019, we have entered into ~~a registration rights agreement (the~~ ~~“Registration Rights Agreement”) with~~various short-term promissory notes in the ~~Purchaser, pursuant to which the Company has agreed to file a registration statement with the Securities and Exchange Commission covering the Restricted Shares and the shares~~aggregate principal amount of approximately $900,000.

Issuance of common stock ~~underlying~~for conversion of debt

On August 7, 2019, principal of $250,000 on the ~~First Convertible Debenture within 30 days~~Company’s debt securities was satisfied through the issuance of 28,409 shares of the ~~first closing and the shares of~~Company’s common stock underlying the Second Convertible Debenture within 30 days of the second closing. The Company has agreed to use its best efforts to have the registration statement declared effective within 60 days of each closing date. If the Company is unable to meet its obligations under the Registration Rights Agreement, on each such date of failure or breach and on each monthly anniversary thereof if not cured by such date, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the subscription amount paid pursuant to the Purchase Agreement. Subsequent to the 90^th day from such date of failure or breach, the 1% penalty shall increase to 2%, with an aggregate cap of 20% per year. If the Company fails to pay any partial liquidated damages within seven days after the date payable, the Company will pay interest thereon at a rate of 18% (or such lesser maximum amount that is permitted to be paid by applicable law).stock.

F-38

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

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

~~SEPTEMBER 30, 2017~~

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

~~Warrant Issued to Financial Advisor~~

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

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

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

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

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

Recent Developments

On March 29, 2019, we entered into an underwriting agreement (the “Offering”) pursuant to which on April 2, 2019, we sold 71,388 shares of our common stock, warrants to purchase 388,888 shares of our common stock (the “Common Warrants”) and pre-funded warrants to purchase 317,500 shares of our common stock (the “Pre-Funded Warrants”). 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. The shares of our common stock were sold to the purchasers at the public offering price of $17.60 per share (the “Offering Price”). The Common Warrants were sold at a public offering price of $0.40 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser whose purchase of our shares of common stock 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% of our outstanding common stock immediately following the consummation of the offering. The purchase price of each Pre-Funded Warrant equaled the offering price of $17.60 minus $0.40, and the exercise price of each Pre-Funded Warrant equaled $0.40 per share.

The Common Warrants are exercisable at any time after the date of issuance at an exercise price of $0.45 per share. However, since the volume weighted average price of our common stock on or after May 2, 2019, was less than $0.45 per share, the Common Warrant is exercisable by means of a cashless exercise such that the holder of the Common Warrant shall receive one common share for each warrant held.

The Offering closed on April 2, 2019 and as of June 30, 2019, the Company had issued a total of 699,887 shares of its common stock, inclusive of shares issued pursuant to the exercise of 317,500 Pre-Funded Warrants and 382,387 shares issued pursuant to the cashless exercise of the Common Warrants.

On May 13, 2019, we 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 Promissory Notes will accrue annualized interest of 12% that will be paid rata monthly and will be offered on a continuous basis, in each case as determined by us in our sole discretion. The Company cannot provide any assurance that any Promissory Notes will be sold pursuant this Offering Statement.

At our reconvened 2019 Annual Meeting of Stockholders, our stockholders approved a proposal permitting the our Board of Directors (the “Board”) to effectuate a second reverse stock split (the “Second Reverse Stock Split”) of our issued and outstanding common stock. Thereafter, on July 23, 2019, the Board approved the Second Reverse Stock Split with a ratio of one-for-forty. As a result of the Second Reverse Stock Split, each forty (40) shares of common stock issued and outstanding prior to the Second Reverse Stock Split were converted into one (1) share of common stock, with no change in authorized shares or par value per share. The Second Reverse Stock Split became effective in the State of Delaware on August 5, 2019.

On August 6, 2019, we entered into an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent to sell shares of our common stock having an aggregate offering price of up to $5,500,000 (the “ATM Offering”). The offer and sale of our common stock will be made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the Securities and Exchange Commission (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 August 6, 2019.

GENERAL

We are a growth company seeking to increase our revenues through acquisitions. ~~Our~~We continually assess acquisition opportunities and are exploring acquisitions in the financial sector.

Over the recent past we have provided capital and relevant expertise to fuel the growth of businesses in defense/aerospace, industrial, telecommunications, medical, crypto-mining, textiles and a select portfolio of commercial hospitality properties. We have provided capital to subsidiaries as well as partner companies in which we have an equity interest or may be actively involved, influencing development through board representation and management support.

Through our lending subsidiary, DP Lending, we have launched an online fintech portal, MonthlyInterest.com, that facilitates investments that pay monthly interest. As a holding company, we have been developing DP Lending to enable the capacity to fund entrepreneurs, our subsidiaries and partner companies. We believe MonthlyInterest.com will provide investors the opportunity to invest directly into companies and technology that will have a global impact, bypassing traditional banking and lending institutions.

Realizing Value

As a holding company, our business strategy ~~reflects~~is designed to increase shareholder value. Under this strategy, we are focused on managing and financially supporting our ~~management~~existing subsidiaries and ~~Board’s current philosophy that occurred~~partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to shareholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual partner companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as ~~a result~~well as other opportunities to maximize shareholder value. We anticipate returning value to shareholders after satisfying our debt obligations and working capital needs.

From time to time, we engage in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a ~~change in control completed in September 2016. Our acquisition~~process we initiate. To the extent we believe that a subsidiary partner company’s further growth and development ~~target strategy includes companies that have developed~~can best be supported by a ~~“new way~~different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to sell some or all 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~~position in the ~~commercial~~subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers and ~~defense industries;~~acquisitions, public offerings of the subsidiary or partner company’s securities and, ~~companies that will enhance our overall revenues. It is our goal to substantially increase our gross revenues~~ in the ~~near future.~~

~~We were originally a solution-driven organization that designs, develops, manufactures~~case of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries or partner companies public through rights offerings and ~~sells high-grade customized and flexible power system solutions for the medical, military, telecom and industrial markets. Although we intend to seek growth through acquisitions, we~~directed share subscription programs. We will continue to ~~focus on high-grade~~consider these (or similar) programs and ~~custom product designs~~the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our shareholders.

We are a Delaware corporation with our corporate office located at 201 Shipyard Way, Suite E, Newport Beach, California 92663. Our phone number is 949-444-5464 and our website address is www.dpwholdings.com.

Results of Operations

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

The following table summarizes the results of our operations for the ~~commercial, medical~~three months ended June 30, 2019 and ~~military/defense markets, where customers demand high density, high efficiency and ruggedized products~~2018.

	For the Three Months Ended
	June 30,
	2019			2018

Revenue	$	4,541,198		$	4,347,958
Revenue, cryptocurrency mining		256,116			718,757
Revenue, related party		—			1,765,875
Revenue, restaurant operations		1,161,132			502,492
Revenue, lending activities		189,621			108,752
Total revenue		6,148,067			7,443,834
Cost of revenue		4,589,202			6,083,925
Gross profit		1,558,865			1,359,909
Operating expenses
Engineering and product development		471,268			367,415
Selling and marketing		426,113			774,860
General and administrative		4,634,151			4,387,974
Gain on digital currency		(4,479	)		(71,316	)
Total operating expenses		5,527,053			5,458,933

Loss from operations		(3,968,188	)		(4,099,024	)
Interest income		911,537			603,519
Interest expense		(532,255	)		(3,490,310	)
Change in fair value of marketable equity securities		272,689			—
Loss on extinguishment of convertible debt		—			—
Loss on issuance of warrants		(1,763,481	)		—
Change in fair value of warrant liability		946,825			—
Loss before income taxes		(4,132,873	)		(6,985,815	)
Income tax benefit		73,976			(10,715	)
Net loss		(4,058,897	)		(6,996,530	)
Less: Net loss attributable to non-controlling interest		—			108,649
Net loss attributable to DPW Holdings	$	(4,058,897	)	$	(6,887,881	)
Preferred dividends		(5,284	)		(108,049	)
Net loss available to common stockholders	$	(4,064,181	)	$	(6,995,930	)

Basic and diluted net loss per common share	$	(5.00	)	$	(104.24	)

Basic and diluted weighted average common shares outstanding		812,355			67,115

Comprehensive Loss
Loss available to common stockholders	$	(4,064,181	)	$	(6,995,930	)
Other comprehensive income (loss)
Foreign currency translation adjustment		162,648			(158,306	)
Net unrealized loss on derivative securities of related party		375,499			(704,811	)
Other comprehensive income (loss)		538,147			(863,117	)
Total Comprehensive loss	$	(3,526,034	)	$	(7,859,047	)

Revenues

Our revenues decreased by $1,295,767, or 17.4%, to ~~meet the harshest and/or military mission critical operating conditions.~~

~~We have operations located in Europe through our wholly-owned subsidiary, Digital Power Limited ("DP Limited"), Salisbury, England, which operates under the brand name of “Gresham Power Electronics” (“Gresham”). DP Limited designs, manufactures and sells power products and system solutions mainly~~$6,148,067 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 inthree months ended June 30, 2019, from $7,443,834 for the ~~field of naval power distribution products.~~

~~On November~~three months ended June 30, ~~2016, Digital Power formed Digital Power Lending, LLC (“DP Lending”), a wholly-owned subsidiary. DP Lending is engaged in providing commercial loans to companies throughout~~2018. Further, during 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.~~

~~On June 2, 2017, Digital Power~~ ~~purchased 56.4%~~year ended December 31, 2018 we acquired 98.1% of the outstanding equity interests of ~~Microphase Corporation (the~~ ~~“Microphase”). Microphase is~~I.AM and all the equity securities of Enertec. During the three months ended June 30, 2019 and 2018, these acquisitions represented $3,336,783 and $1,720.362, respectively, of our revenues. Excluding revenues from these acquisitions, we would have recognized revenues of $2,811,284 and $5,723,472, respectively, during the three months ended June 30, 2019 and 2018, a ~~design-to-manufacture original equipment manufacturer (“OEM”~~decrease of $2,912,188. As discussed below, the decrease of $2,912,188 from the three months ended June 30, 2018, was primarily due to a decrease in revenue from the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) ~~industry leader delivering world-class radio frequency (“RF”~~)plasma-laser system and ~~microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies~~from our cryptocurrency mining operations and, ~~detector logarithmic video amplifiers (“DLVA”~~) to ~~the military, aerospace and telecommunications industries. Microphase is headquartered~~a lesser extent, a decrease in ~~Shelton, Connecticut.~~

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

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

We are a California corporation formed in 1969 and located in the heart of the Silicon Valley at 48430 Lakeview Blvd, Fremont, California 94538-3158. Our phone number is 510-657-2635 and our website address is www.digipwr.com.

~~RESULTS OF OPERATIONS~~

~~THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016~~

~~Revenues~~

~~Our revenues increased by $1,394 or 76% to $3,220~~ The following table shows revenue for the three months ended ~~September~~June 30, 2019 and 2018 generated from acquisitions completed during the year ended December 31, 2018.

			For the Three Months Ended June 30,
Company acquired	Date of Acquisition		2019		2018

Enertec Systems 2001 Ltd.		May 22, 2018	$	2,175,651	$	1,217,870
I.AM, Inc.		May 23, 2018		1,161,132		502,492
			$	3,336,783	$	1,720,362

Revenues, cryptocurrency mining

In January 2018, we formed Digital Farms, Inc. (“Digital Farms”), a wholly-owned subsidiary formerly known as Super Crypt Mining, Inc. Digital Farms was established to operate our cryptocurrency business, which is pursuing a variety of digital currencies. We are mining the top three cryptocurrencies for our own account, consisting of Bitcoin, Litecoin and Ethereum. The market prices of digital currencies were lower during the three months ended June 30, 2019 compared to the prior-year period, as a result we curtailed our mining operations, which resulted in a decrease in revenues of $462,641.

Revenues, related party

During the three months ended June 30, 2018, we recognized $1,765,875 in revenues from our purchase order with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”). Due to working capital constraints discussed below, we did not recognize any revenues from MTIX during the three months ended June 30, 2019. MTIX was acquired by AVLP on August 22, 2017, ~~from $1,826~~and is therefore a related party. In March 2017, the Company was awarded a purchase order by MTIX to manufacture, install and service MLSE plasma-laser system. Over the next several years, management believes that the MLSE purchase order will be a source of revenue and generate significant cash flows. The lack of revenue during the three months ended June 30, 2019, was due to an emphasis on reducing the debt obligations incurred in May 2018 to acquire Enertec. Payments, and the related manufacturing services, that otherwise would have gone to subcontractors of the MLSE plasma-laser system have been delayed in order to enable us to restructure and reduce our overall debt obligations.

Gross Margins

Gross margins increased to 25.4% for the three months ended ~~September~~June 30, ~~2016.~~2019 compared to 18.3% for the three months ended June 30, 2018. The ~~increase in revenue was primarily due to~~Company’s gross margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our ~~acquisition of 56.4%~~ ~~of 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~~revenue. Our gross margins during the three months ended ~~September~~June 30, ~~2017,~~2018, of 18.3%, were ~~$1,340 and $224, respectively. Excluding revenues that were generated~~affected by ~~our recent acquisitions~~the lower margin related party revenue of ~~Microphase and Power-Plus, the Company generated~~$1,765,875 from MTIX combined with negative margins on revenues of ~~$1,656, a decrease of $170~~$718,757 at Digital Farms. The negative gross margins at Digital Farms resulted from monthly recurring fixed costs at our colocation facilities which temporarily exceed the ~~three months ended September 30, 2016.~~

~~Revenues~~revenues from our ~~U.S. operations increased by 130.5% to $2,877~~mining operations. Excluding the effects of Digital Farms and our contract with MTIX, then our adjusted gross margins for the three months ended ~~September~~June 30, ~~2017, from $1,248~~2018, would have been 36.8%.

Our gross margin of 25.4% recognized during the three months ended June 30, 2019, was also impacted by the negative margins at Digital Farms. Excluding the effects of Digital Farms, our adjusted gross margin for the three months ended ~~September~~June 30, ~~2016.~~ As previously noted, our consolidated revenues include $1,564 in revenues generated from our recent acquisitions of Microphase and Power-Plus. If we had not closed on these acquisition, then revenues from our U.S. operations2019, would have been ~~$1,313, an increase of 5.2%~~37.4%. The increase in revenues from our U.S. operations is attributed to the recognition of $109 in revenue from the MLSE $50 million purchase order contract which was offset by a slight decrease in sales of our legacy products. The recognition of revenue from the MLSE contract during the three months ended September 30, 2017, represents the first revenues recognized from this contract, which is ~~expected to extend over several years.~~

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

~~Gross Margins~~

Gross margins decreased to 34.0% for the three months September 30, 2017 compared to 38.5% for the three months ended September 30, 2016. The decrease in gross margins was mainly attributable to the decrease in sales from our European operations combined with slightly lower margins of 34.5% generated by our Microphase and Power-Plus subsidiaries. As the Company integrates its recent acquisitions of Microphase and Power-Plus, it expects that gross margins from its U.S. based operations will be fairly consistent among the three companies.

historical average.

Engineering and Product Development

Engineering and product development expenses increased by ~~$159~~$103,853 to ~~$306~~$471,268 for the three months ended ~~September~~June 30, ~~2017~~2019, from ~~$147~~$367,415 for the three months ended ~~September~~June 30, ~~2016.~~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 increase~~due to the timing of the acquisition was ~~primarily related to an increase in direct manpower cost~~partially excluded 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.

Selling and Marketing

Selling and marketing expenses were ~~$423~~$426,113 for the three months ended ~~September~~June 30, ~~2017~~2019, compared to ~~$235~~$774,860 for the three months ended ~~September~~June 30, ~~2016,~~2018, a decrease of $348,747. 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~~$67,684. This increase ~~in selling and marketing expenses. The remaining increase is attributed to an increase~~was offset by decreases in personnel costs directly attributed to a reduction in sales and marketing personnel ~~at the Company’s U.S. based~~throughout 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~~$4,634,151 for the three months ended ~~September~~June 30, ~~2017~~2019, compared to ~~$404~~$4,387,974 for the three months ended ~~September~~June 30, ~~2016,~~2018, an increase of ~~$1,281.~~$246,177. Our ~~acquisition~~acquisitions of ~~Microphase accounted for $410 of the~~Enertec and I.AM represented an increase in general and administrative ~~expenses. The adjusted increase~~expenses for $1,018,295. Excluding the impact of ~~$871~~acquisitions, general and administrative expenses decreased of $772,118 from the comparative prior period, ~~was~~ mainly due to ~~higher~~lower stock ~~based~~ compensation ~~expenses,~~expense and legal fees partially offset by an increase in ~~legal and audit costs, an increase in investor relationship costs and~~cost attributed to the hiring of ~~additional consultants to build an infrastructure in anticipation~~a Chief Accounting Officer and Senior Vice President of ~~our future growth and the allocation of our Chief Executive Officer’s salary to general and administrative expense.~~Finance. The remaining increase in general and administrative expenses is due to various costs, none of which are significant individually.

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

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

Beginning during the quarter ended December 31, 2016, we spent significant effort on expanding our investor base and on hiring additional consultants to assist building an infrastructure to support our anticipated growth. As a result, we experienced an increase of $220 in costs attributed to investor relations and other consulting fees.

Finally, during the three months ended September 30, 2016, our Chief Executive Officer’s salary was reflected in selling and marketing expenses. As discussed above, our current practice is to record the salary and benefits of our Chief Executive Officer to general and administrative expense.

~~Interest (expense) income, net~~

~~Interest expense, net was $753~~

Operating Loss

The Company recorded an operating loss of $3,968,188 for the three months ended ~~September~~June 30, ~~2017~~2019, compared to ~~income~~an operating loss of ~~$23~~$4,099,024 for the three months ended ~~September~~June 30, ~~2016.~~2018. The decrease in operating loss is mostly attributable higher gross profit and lower selling and marketing expenses, partially offset by an increase in general and administrative expenses.

Interest Income

Interest income was $911,537 for the three months ended June 30, 2019 compared to $603,519 for the three months ended June 30, 2018. The increase in interest income for the three months ended June 30, 2019 is primarily related to an increase in interest income pursuant to the Loan and Security Agreement entered into on September 6, 2017, with AVLP, a related party.

Interest Expense

Interest expense was $532,255 for the three months ended June 30, 2019 compared to $3,490,310 for the three months ended June 30, 2018. The decrease in interest expense for the three months ended ~~September~~June 30, ~~2017~~2019 is primarily related to a reduction of amortization of debt discount ~~in the aggregate amount of $669,~~ 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~~June 30, ~~2017,~~2019 and 2018, as a result of these issuances, non-cash interest expense of ~~$669~~$185,544 and $2,727,960, respectively, was recorded from the amortization of debt discount and debt financing costs. ~~The remaining increase in interest expense, net, was due to an increase in the amount~~

Loss on issuance of ~~the Company’s total borrowings. At September 30, 2017, the outstanding balance~~warrants

We recognized a loss on issuance of the Company’s convertible notes payable and notes payable was $3,458. Conversely, at September 30, 2016, the Company did not have any outstanding convertible notes payable or notes payable. Interest expense was partially offset by interest income and the accretionwarrants 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~~$1,763,481 for the three months ended ~~September~~June 30, ~~2017 compared to an operating~~2019, based upon the fair value of the warrants issued in our Offering in excess of the proceeds received from the Offering.

Change in fair value of warrant liability

During the three months ended June 30, 2019, the fair value of the warrants that were issued in our Offering decreased by $946,825. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Net Loss

For the foregoing reasons, our net loss ~~of $83~~ for the three months ended ~~September~~June 30, ~~2016. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.~~

~~Net Loss~~

~~The Company recorded a net loss of $2,071 for the three months ended September 30, 2017~~2019, was $4,058,897 compared to a net loss of ~~$38~~$6,996,530 for the three months ended ~~September~~June 30, ~~2016 as a result of the aforementioned changes.~~2018. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase during the three months ended June 30, 2019 and 2018, of nil and $108,649, respectively, and preferred dividends of $5,284 and $108,049, respectively, the net loss ~~attributable~~available to common shareholders during the ~~Company~~three months ended June 30, 2019 and 2018, was ~~$1,967~~$4,064,181 and 38$6,995,930, respectively.

During the three months ended June 30, 2019 and 2018, our reported net loss included non-cash charges of $1,908,433 and $4,332,708, respectively. A summary of these non-cash charges is as follows:

	For the Three Months Ended
	June 30,
	2019			2018
Interest expense – debt discount	$	185,544		$	2,727,960
Stock-based compensation		370,995			1,373,326
Depreciation and amortization		1,164,745			676,839
Amortization of right-of-use assets		29,124			—
Accretion of original issue discount on notes receivable – related party		(650,113	)		(445,417	)
Accretion of original issue discount on notes receivable		(8,518	)		—
Fair value in excess of proceeds upon issuance of warrants		1,763,481			—
Change in fair value of warrant liability		(946,825	)		—
Non-cash items included in net loss	$	1,908,433		$	4,332,708

Other comprehensive income (loss)

Other comprehensive income (loss) was $538,147 and ($863,117), respectively, for the three months ended June 30, 2019 and 2018. Other comprehensive income for the three months ended June 30, 2019, which increased our equity, was primarily due to unrealized gains in the warrant derivative securities that we received as a result of our investment in Avalanche International, Corp., or AVLP, a related party. During the three months ended June 30, 2018, unrealized losses in the warrant derivative securities of AVLP was the primary component of other comprehensive loss.

~~NINE~~

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017 COMPARED TO NINE MONTHS ENDED SEPTEMBER~~2019 AND 2018

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

2019 and 2018.

	For the Six Months Ended
	June 30,
	2019			2018

Revenue	$	10,092,849		$	7,513,417
Revenue, cryptocurrency mining		284,920			956,253
Revenue, related party		—			3,558,767
Revenue, restaurant operations		2,334,631			502,492
Revenue, lending activities		374,710			108,752
Total revenue		13,087,110			12,639,681
Cost of revenue		9,707,515			9,886,634
Gross profit		3,379,595			2,753,047
Operating expenses
Engineering and product development		926,946			710,438
Selling and marketing		900,456			1,500,331
General and administrative		10,065,117			7,609,597
Gain on digital currency		(5,982	)		—
Total operating expenses		11,886,537			9,820,366

Loss from operations		(8,506,942	)		(7,067,319	)
Interest income		1,748,464			1,243,623
Interest expense		(2,631,796	)		(7,262,530	)
Change in fair value of marketable equity securities		156,647			—
Loss on extinguishment of convertible debt		(807,784	)		—
Loss on issuance of warrants		(1,763,481	)		—
Change in fair value of warrant liability		946,825			—
Loss before income taxes		(10,858,067	)		(13,086,226	)
Income tax benefit		88,144			(6,257	)
Net loss		(10,769,923	)		(13,092,483	)
Less: Net loss attributable to non-controlling interest		32,416			144,080
Net loss attributable to DPW Holdings	$	(10,737,507	)	$	(12,948,403	)
Preferred dividends		(7,153	)		(108,049	)
Net loss available to common stockholders	$	(10,744,660	)	$	(13,056,452	)

Basic and diluted net loss per common share	$	(22.42	)	$	(231.65	)

Basic and diluted weighted average common shares outstanding		479,226			56,362

Comprehensive Loss
Loss available to common stockholders	$	(10,744,660	)	$	(13,056,452	)
Other comprehensive income (loss)
Foreign currency translation adjustment		192,505			(131,849	)
Net unrealized loss on derivative securities of related party		(361,181	)		(5,445,925	)
Other comprehensive income (loss)		(168,676	)		(5,577,774	)
Total Comprehensive loss	$	(10,913,336	)	$	(18,634,226	)

Revenues

Our revenues increased by ~~$1,067~~$447,429, or ~~19%~~3.5%, to ~~$6,670~~$13,087,110 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, from ~~$5,603~~$12,639,681 for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The increase in revenue was primarily due to~~2018. During the six months ended June 30, 2019 and 2018, our ~~acquisition~~acquisitions of ~~56.4%~~ Enertec and I.AM represented $7,008,502 and $1,720,362, respectively, of ~~the outstanding equity interests~~our revenues. Excluding revenues from these acquisitions, we would have recognized revenues 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~~$6,078,608 and ~~Power-Plus~~$10,919,319, respectively, during the ~~nine~~six months ended ~~September~~June 30, ~~2017, were $1,563~~2019 and ~~$224, respectively. Excluding revenues that were generated by our recent acquisitions~~2018, a decrease of ~~Microphase and Power-Plus, the Company generated revenues of $4,883.~~$4,840,711. As discussed below, the decrease of ~~$720~~$4,840,711 from the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, was primarily due to a decrease in ~~revenues from our European operations.~~

~~Revenues from our U.S. operations increased by $1,798, or 52.8%, to $5,206 for the nine months ended September 30, 2017, from $3,408 for the nine months ended September 30, 2016.~~ As previously noted, our consolidated revenues include $1,787 in revenues generated from our recent acquisitions of Microphase and Power-Plus. If we had not closed on these acquisition, then revenues from our U.S. operations would have been $3,419, an increase of 0.3%. The increase in revenues from our U.S. operations is attributed to the recognition of $109 in revenue from the manufacture of the MLSE ~~$50 million~~plasma-laser system and from our cryptocurrency mining operations. The following table shows revenue for the six months ended June 30, 2019 and 2018, generated from acquisitions completed during the year ended December 31, 2018.

			For the six Months Ended June 30,
Company acquired	Date of Acquisition		2019		2018

Enertec Systems 2001 Ltd.		May 22, 2018	$	4,673,871	$	1,217,870
I.AM, Inc.		May 23, 2018		2,334,631		502,492
			$	7,008,502	$	1,720,362

Revenues, cryptocurrency mining

In January 2018, we formed Digital Farms, a wholly-owned subsidiary. Digital Farms was established to operate our cryptocurrency business, which is pursuing a variety of digital currencies. We are mining the top three cryptocurrencies for our own account, consisting of Bitcoin, Litecoin and Ethereum. During the six months ended June 30, 2019, due to the overall decline in market prices of digital currencies we curtailed our mining operations which resulted in a decrease in revenues $671,333.

Revenues, related party

During the six months ended June 30, 2018, we recognized $3,558,767 in revenues resulting from our purchase order ~~contract which was offset by a slight decrease in sales of our legacy products.~~

~~Revenues~~with MTIX. Conversely, we did not recognize any revenues from ~~our European operation in Gresham, U.K. (“DP Limited”) decreased by $731 to $1,464 for~~MTIX during the ~~nine~~six months ended ~~September~~June 30, 2019. MTIX was acquired by AVLP on August 22, 2017, ~~from $2,195 for~~and is therefore a related party. The lack of revenue during the ~~nine~~six months ended ~~September~~June 30, ~~2016, a decrease of 33.3%. The decrease~~2019, was ~~primarily attributable~~due to ~~a decrease of military and commercial products sales~~an emphasis on reducing the debt obligations incurred in May 2018 to acquire Enertec. Payments, and the ~~impact of a weakening~~related manufacturing services, that otherwise would have gone to subcontractors of the ~~British Pound~~MLSE plasma-laser system have been delayed in order to enable us to restructure and Euro against the USD. The decline in commercial product sales was mainly attributed to standard commodity products. The decline in military product sales was attributed to technical changes in the design of one ofreduce our ~~development contracts.~~

overall debt obligations.

Gross Margins

Gross margins increased to ~~38.0%~~25.8% for the ~~nine~~three months ~~September~~ended June 30, ~~2017~~2019, compared to ~~37.1%~~21.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2016. The increase in~~2018. Our gross margins during the six months ended June 30, 2018, of 21.8%, were affected by the lower margin related party revenue of $3,558,797 from MTIX combined with negative margins on revenues of $956,253 at Digital Farms. Excluding the effects of Digital Farms and our contract with MTIX, then our adjusted gross margins for the six months ended June 30, 2018, would have been 35.5%.

Our gross margin of 25.8% recognized during the six months ended June 30, 2019, was ~~mainly attributable to~~also impacted by the ~~increase in sales~~negative margins at Digital Farms. Excluding the effects of Digital Farms, our adjusted gross margin for the six months ended June 30, 2019 would have been 37.1%. which is consist with our historical average which has typically ranged between 33% and 37%, with slight variations depending on the overall composition of our ~~commercial products sold in our U.S. operations, which have greater gross margins, combined with the decrease in sales from our European operations.~~

revenue.

Engineering and Product Development

Engineering and product development expenses increased by ~~$287~~$216,508 to ~~$798~~$926,946 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, from ~~$511~~$710,438 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The increase in engineering and product development expenses is ~~partly~~ attributed to our acquisition of ~~Microphase,~~Enertec, which ~~reported $173~~due to the timing of the acquisition was partially excluded from the prior period amount.

Selling and Marketing

Selling and marketing expenses were $900,456 for the six months ended June 30, 2019, compared to $1,500,331 for the six months ended June 30, 2018, a decrease of $599,875. Our acquisition of Enertec and I.AM resulted in ~~engineering and product development expenses. The remaining~~an increase ~~is attributed to a $95~~of $255,631. This increase was offset by decreases in personnel costs directly attributed to ~~engineering and product development at Digital Power’s U.S. based operations. During the fourth quarter of 2016, as part of its growth plan, Digital Power hired~~ a ~~new Head of Engineering and Technology, a highly-compensated position.~~

~~Selling and Marketing~~

Selling and marketing expenses were $1,045 for the nine months ended September 30, 2017 compared to $723 for the nine months ended September 30, 2016, an increase of $322. Our acquisition of Microphase and Power-Plus accounted for $55 and $65, respectively, of the increasereduction in ~~selling and marketing expenses. The remaining increase is attributed to an increase in personnel costs directly attributed to~~ sales and marketing personnel ~~at Digital Power’s U.S. based~~throughout 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 nine months ended September 30, 2016, the services of our current Chief Executive Officer were reported within selling and marketing expenses due to the significant amount of time in which he devoted to the sales process. The increase in the headcount of our sales and marketing team allowed our CEO to spend the majority of his time on general corporate matters related to our restructuring and expansion. As such, during the nine months ended September 30, 2017, the salary of our Chief Executive officer, which is $300 per year, was reported within general and administrative expenses. The increase in selling and marketing expenses is 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 ~~$4,240~~$10,065,117 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$1,115~~$7,609,597 for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, an increase of ~~$3,125.~~$2,455,520. Our ~~acquisition~~acquisitions of ~~Microphase~~Enertec and I.AM accounted for ~~$577~~$2,288,657 of the increase in general and administrative expenses. The adjusted increase of ~~$2,548~~$166,863 from the comparative prior period was mainly due to ~~higher stock based compensation expenses, an~~the increase in ~~legal and audit costs, an increase in investor relationship costs and~~cost attributed to the hiring of ~~additional consultants to build an infrastructure in anticipation~~a Chief Accounting Officer and Senior Vice President of our future growth and the allocation of our Chief Executive Officer’s salary to general and administrative expense. The remaining increase in general and administrative expenses is due to various costs, none of which are significant individually.

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

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

Beginning during the quarter ended December 31, 2016, we spent significant effort on expanding our investor base and on hiring additional consultants to assist building an infrastructure to support our anticipated growth. As a result, we experienced an increase of $589 in costs attributed to investor relations and other consulting fees.

Finally, during the nine months ended September 30, 2016, our Chief Executive Officer’s salary was reflected in selling and marketing expenses. As discussed above, our current practice is to record the salary and benefits of our Chief Executive Officer to general and administrative expense.

~~Interest (expense) income, net~~

Interest expense, net was $1,367 for the nine months ended September 30, 2017 compared to income of $85 for the nine months ended September 30, 2016. The increase in interest expense for the nine months ended September 30, 2017 is primarily related to debt discount, in the aggregate amount of $1,269, resulting from the issuance of warrants in conjunction with the sale of debt and equity instruments of $6,706. During the nine months ended September 30, 2017, as a result of these issuances, non-cash interest expense of $1,269 was recorded from the amortization of debt discount and debt financing costs. The remaining increase in interest expense, net, was due to an increase in the amount of the Company’s total borrowings. Interest expense wasFinance partially offset by ~~interest income~~lower stock compensation expense and ~~the accretion of original issue discount on the AVLP Loan Agreement of $242.~~

legal fees.

Operating Loss

The Company recorded an operating loss of ~~$3,549~~$8,506,942 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, compared to an operating loss of ~~$272~~$7,067,319 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The increase in operating loss is mostly attributable from the increase of general and administrative expenses, partially offset by higher gross profit and lower selling and marketing expenses.

Interest Income

Interest income was $1,748,464 for the six months ended June 30, 2019 compared to $1,243,623 for the three months ended June 30, 2018. The increase in interest income for the six months ended June 30, 2019 is primarily related to an increase in interest income pursuant to the Loan and Security Agreement entered into on September 6, 2017, with AVLP, a related party.

Interest expense

Interest expense was $2,631,796 for the six months ended June 30, 2019, compared to $7,262,530 for the six months ended June 30, 2018. The decrease in interest expense for the six months ended June 30, 2019 is primarily related to a reduction of amortization of debt discount resulting from original issue discount from the issuance of warrants in conjunction with the sale of debt instruments. During the six months ended June 30, 2019 and 2018, as a result of these issuances, non-cash interest expense of $1,676,609 and $5,779,108, respectively, was recorded from the amortization of debt discount and debt financing costs.

Loss on issuance of warrants

We recognized a loss on issuance of warrants of $1,763,481 for the six months ended June 30, 2019, based upon the fair value of the warrants issued in our Offering in excess of the proceeds received from the Offering.

Change in fair value of warrant liability

During the six months ended June 30, 2019, the fair value of the warrants that were issued in our Offering decreased by $946,825. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Net Loss

~~The Company recorded a~~

For the foregoing reasons, our net loss ~~of $4,916~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, was $10,769,923 compared to a net loss of ~~$187~~$13,092,483 for the ~~nine~~six months ended ~~September~~June 30, ~~2016 as a result of the aforementioned changes.~~2018. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase ~~and an income tax benefit that was recognized~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2019 and 2018, of $32,416 and $144,080, respectively, and preferred dividends of $7,153 and $108,049, respectively, the net loss ~~attributable~~available to common shareholders during the ~~Company~~six months ended June 30, 2019 and 2018, was ~~$4,700~~$10,744,660 and ~~$165,~~$13,056,452, respectively.

As reflected in our consolidated statement of cash flows for the six months ended June 30, 2019 and 2018, our reported net loss is comprised of non-cash charges of $4,352,575 and $8,485,544, respectively. A summary of these non-cash charges is as follows:

	For the Six Months Ended
	June 30,
	2019			2018
Interest expense – debt discount	$	1,676,609		$	5,779,108
Stock-based compensation		992,283			2,811,540
Depreciation and amortization		2,126,183			825,344
Amortization of right-of-use assets		61,289			—
Accretion of original issue discount on notes receivable – related party		(1,262,422	)		(930,448	)
Accretion of original issue discount on notes receivable		(58,023	)		—
Fair value in excess of proceeds upon issuance of warrants		1,763,481			—
Change in fair value of warrant liability		(946,825	)		—
Non-cash items included in net loss	$	4,352,575		$	8,485,544

Other comprehensive loss

Other comprehensive loss was $168,676 and $5,577,774, respectively, for the six months ended June 30, 2019 and 2018. Other comprehensive income for the six months ended June 30, 2019, which decreased our equity, was primarily due to unrealized losses in the warrant derivative securities that we received as a result of our investment in AVLP, a related party. During the six months ended June 30, 2018, unrealized losses in the warrant derivative securities of AVLP was also the primary component of other comprehensive loss.

LIQUIDITY AND CAPITAL RESOURCES

On ~~September~~June 30, ~~2017,~~2019, we had cash and cash equivalents of ~~$314.~~$867,518. This compares with cash and cash equivalents of ~~$996~~$902,329 at December 31, ~~2016.~~2018. The decrease 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~~$4,778,318 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~net cash provided by operating activities of $138~~$5,664,279 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the decrease in net cash ~~provided by~~used in operating activities compared to the ~~nine~~three months ended ~~September~~June 30, ~~2016~~2018, was mainly due to a reduction in our net loss for the ~~September~~six months ended June 30, ~~2017 nine~~2019 compared to the six months ~~loss of $4,916.~~ended June 30, 2018. The net loss was partially offset by several non-cash charges, ~~the~~a decrease in amortization of debt discount of ~~$1,239~~$4,102,499 and stock-based compensation of ~~$1,269,~~$1,819,257, an increase in ~~accounts payable~~depreciation and ~~accrued expenses~~amortization of ~~$2,083~~$1,300,839 and ~~decreases~~a decrease in ~~our~~ accounts receivable, related party due to a payment of ~~$737 and other current liabilities of $595.~~

$2,676,219 in April 2019.

Net cash used in investing activities was ~~$4,384~~$1,614,752 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, compared to ~~$12 of net cash provided by investing activities~~$16,921,511 for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The ~~increase~~decrease of the net usage of cash from investing activities was primarily ~~related~~attributed to ~~the investment in AVLP, loans to third parties and~~ the purchase of ~~Power-Plus.~~

property and equipment at Digital Farms and our acquisition of Enertec during the six months ended June 30, 2018.

Net cash provided by financing activities was ~~$5,194~~$6,472,295 and ~~nil~~$22,794,183 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. ~~The financing~~Financing activities during the six months ended June 30, 2019, primarily related to the sale of ~~1,309,545~~shares of our common stock through an “at the market offering” program with Wilson-Davis & Co., Inc. and through an underwriting agreement with A.G.P./Alliance Global Partners. The proceeds that we received from the sale of our shares of common stock ~~for~~was partially offset by net ~~proceeds~~cash outflows of ~~$672, the sale of Series B and Series C Preferred Stock of $1,540, gross proceeds from the Company’s~~$4,112,893 associated with our debt ~~financings of $2,649, gross proceeds from advances of future receipts of $1,772 and payments on debt facilities of $626.~~

arrangements.

Historically, ~~the Company has~~we have financed ~~its~~our operations principally through issuances of convertible debt, promissory notes and equity securities. During ~~2017,~~2019, as reflected below, ~~the Company continues~~we continued to successfully obtain additional equity and debt financing and in restructuring existing debt. ~~The following financings transactions were consummated during 2017:~~

~~In February 2017,~~On October 15, 2018, we entered into an At-The-Market Issuance Sales Agreement with WDCO (the “WDCO ATM Offering”) to sell shares of our common stock. Between January 1, 2019 and April 1, 2019, the date the WDCO ATM Offering was terminated, the Company ~~issued demand promissory notes and warrants to purchase 333,333~~received gross proceeds of $4,656,050 through the sale of 119,791 shares of our common stock ~~at $ 0.70 per share for aggregate proceeds of $400. Further in February 2017,~~through the ~~holders of $400 in demand promissory notes agreed to extinguish their $400 of debt by cancelling their notes to purchase 666,667 shares of common stock of the Company at $0.60 per share.~~WDCO ATM Offering.

On March ~~15, 2017, the Company~~29, 2019, we entered into ~~a subscription~~an underwriting agreement ~~with one investor~~pursuant to which we sold 71,388 shares of our common stock, warrants to purchase 388,888 shares of our common stock and pre-funded warrants to purchase 317,500 shares of our common stock on April 2, 2019. We received gross proceeds from this offering of $6,999,555 and used approximately $6,000,000 of the proceeds from this offering for the ~~sale~~repayment of ~~500,000 shares of common stock at $0.60 per share for the aggregate purchase price of $300.~~debt.

On ~~March 20, 2017,~~May 13, 2019, we filed an Offering Statement on Form 1-A pursuant to Regulation A promulgated by the ~~Company issued $250 in demand promissory note to one of the Company's shareholders.~~

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

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

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

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

~~Between July 6, 2017 and September 13, 2017, the Company received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts with TVT Capital LLC~~, pursuant to which ~~the Company sold in the aggregate $2,585 in Future Receipts~~up to $50 million of ~~the Company for $1,772. Under the terms of the agreements, the Company~~3-year, non-convertibles promissory notes (“Promissory Notes”) will be obligated to pay the initial daily amount of $13 until the $2,585 has been paid in full. The term Future Receipts means cash, check, ACH, credit card, debit card, bank card, charged card or other form of monetary payment.

On July 28, 2017, we entered into an exchange agreement with an institutional investor who was the owner of (i) a 7% Convertible Note in the principal amount of $125 and a warrant dated April 17, 2017 to purchase 83,334 shares of our common stock at $0.90. Under the terms of the exchange agreement, we agreed to exchange the 7% Convertible Note for three new promissory notes in the principal amounts of $110 due August 1, 2017; $35 due August 1, 2017; and $34 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes) and to exchange the prior warrant for a new warrant to purchase 83,334 shares of common stock at $0.55 per share. Concurrent with entering into this exchange agreement, the institutional investor entered into a subscription agreement under which we issuedoffered and sold once the Commission has qualified the Offering Statement. We anticipate 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 ~~a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110.~~each case as determined by us in our sole discretion. The 200,000 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110. In addition, in a concurrent private placement, the institutional investor entered into a separate securities purchase agreement under which we issued andCompany cannot provide any assurance that any Promissory Notes will be sold 63,600 shares of common stock at $0.55 per share for an aggregate of purchase price of $35. The 63,600 shares of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $35. Further, we issued a warrant to purchase 120,000 shares of common stock at $0.55 per share.pursuant this Offering Statement.

On August ~~3, 2017, the Company~~6, 2019, we entered into ~~a Securities Purchase~~an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent to sell ~~a 12% Convertible (“12% Convertible Note”~~shares of our common stock having an aggregate offering price of up to $5,500,000 (the “ATM Offering”). The offer and sale of our common stock will be made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the Commission on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a ~~warrant~~prospectus supplement related to ~~purchase 666,666 shares of common stock to an accredited investor (the “Investor”). The principal of~~ the Convertible Note may be converted into shares of common stock at $0.55 per share and under the terms of the Warrant, up to 666,666 shares of common stock may be purchased at an exercise price of $0.70 per share. The Convertible Note is in the principal amount of $400 and was sold for $360, bears interest at 12% simple interest on the principal amount, and is due onATM Offering, dated August ~~13, 2018. Interest only payments are due on a quarterly basis and the principal is due on August 3, 2018. The principal may be converted into shares of the Company’s common stock at $0.55 per share.~~ 6, 2019.

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. 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~~our ability to continue as a going concern and amounts reported in our financial statements do not reflect the effects of any adjustments to the carrying amounts of our assets and liabilities should we be unable 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~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

~~ITEM 4.~~

~~CONTROLS AND PROCEDURES~~

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

~~(i)~~1.

We do not have sufficient resources in our accounting function, which restricts our ability to gather, analyze and properly review information related to financial reporting in a ~~lack of sufficient internal accounting resources to provide reasonable assurance that~~ ~~information is accumulated and communicated~~timely manner. In addition, due to our ~~management, including~~size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our ~~chief executive officer and chief financial officer, as appropriate,~~failure to ~~allow timely decisions regarding required disclosure~~ ~~and~~

~~(ii)~~

~~a lack of~~have segregation of duties during our assessment of our disclosure controls and procedures and concluded that the control deficiency that resulted represented a material weakness

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

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.

~~Until such time as~~

In January 2018, we ~~hire~~hired 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. Finally, in May 2019, we hired an Executive Vice President and General Counsel. 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 ~~the Company’s~~our financial ~~statements.~~statements

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

Changes in Internal Controls over Financial Reporting.

~~During~~

Except as detailed above, during the most recent fiscal quarter ~~2017~~2019 there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On July 31, 2018, a 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”).

On July 8, 2019, the Court held a scheduling conference wherein the Court set a trial date of August 25, 2020.

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, which approximates the amount of the reserve established.

~~ITEM 1.~~

~~LEGAL PROCEEDINGS~~13

~~None~~

On February 4, 2019, pursuant to the Court’s Rules, the Company requested a pre-motion Conference with the Court. On April 16, 2019, the Court held a pre-motion Conference in connection with the Company’s anticipated motion to dismiss. To date, however, the Court has not set a briefing schedule in connection with the Company’s anticipated motion to dismiss.

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.

~~ITEM 1A.~~

~~RISK FACTORS~~

ITEM 1A. RISK FACTORS

The risks described in Part I, Item 1A, ~~"Risk~~“Risk Factors,"” in our ~~2016~~2018 Annual Report on Form 10-K, could materially and adversely affect our business, financial condition and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face - our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. The Risk Factors section of our ~~2016~~2018 Annual Report on Form 10-K remains current in all material ~~respects except that we identified~~ ~~material weaknesses in our internal control over financial reporting and in our disclosure controls and procedures~~.

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

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

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

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

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

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

respects.

~~ITEM 2.~~

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

~~On July 7, 2017,~~

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

During the ~~Company entered into an asset purchase agreement~~six months ended June 30, 2019, we issued to ~~acquire the intellectual property of Coolisys.com, in consideration for, in part, 50,000~~our consultants a total 9,375 shares of ~~common stock. The seller of the intellectual property and purchaser of the~~its common stock with an aggregate value of $253,019, an average of $26.99 per share for services rendered.

During the six months ended June 30, 2019, principal and accrued interest of $2,128,878 and $479,579, respectively, on our debt securities was ~~an accredited investor.~~

~~On August 16, 2017, the Company approved~~satisfied through the issuance ~~and sale~~ of ~~(i) 272,727~~26,402 shares of our common stock.

During the six months ended June 30, 2019, we issued 9,375 shares of our common stock ~~at a purchase price equal to $0.55 per share and (ii) warrants to purchase up to 272,727 shares~~in satisfaction of ~~our common stock at $0.65 per share, which become exercisable six months after the issuance date, to two accredited investors for~~ an ~~aggregate purchase price~~accrued liability of ~~$150. The shares have yet to be issued by the Company and are subject to approval from the NYSE American prior to issuance.~~

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

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

$108,523.

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

~~ITEM 3.~~

~~DEFAULTS UPON SENIOR SECURITIES~~

~~None.~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

On June 18, 2019, we issued a promissory note in the principal face amount of $2,900,000. Pursuant to the terms of the note, we were supposed to make the first of six amortization payments on July 18, 2019. We have not made this payment and this note is currently in default. We are in negotiations with the investors to amend the payment terms on this Note.

~~ITEM 4.~~

~~MINE SAFETY DISCLOSURES~~

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None

~~ITEM 5.~~

~~OTHER INFORMATION~~14

~~None~~

ITEM 6. EXHIBITS

~~ITEM 6.~~

~~EXHIBITS~~

Exhibit Number		Description
~~2.1~~1.1		~~Share Exchange~~Underwriting Agreement ~~by and among Digital Power Corporation, Microphase Corporation, Microphase Holding Company, RCKJ Trust, Ergul Family Limited Partnership, To Hong Yam and Eagle Advisers, LLC,~~with A.G.P/Alliance Global Partners, dated ~~as of April 28, 2017 (Incorporated~~March 29, 2019. Incorporated by reference to ~~Exhibit 2.1 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with the Securities and Exchange Commission~~filed on ~~May 3, 2017)~~April 1, 2018 as Exhibit 1.1 thereto.

3.1		~~Amended and Restated Articles~~Certification of Incorporation, ~~of Digital Power Corporation (Incorporated~~dated September 22, 2017. Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.1 ~~of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on October 16, 1996)~~thereto.

3.2		~~Certificate of Amendment to Articles of Incorporation of Digital Power Corporation (Incorporated~~Bylaws, dated September 25, 2017. Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.2 ~~of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on October 16, 1996)~~thereto.

3.3		Certificate of Amendment to ~~Articles~~Certificate of Incorporation, ~~of Digital Power Corporation (Incorporated~~dated January 2, 2019. Incorporated by reference to the Current Report on Form 8-K filed on January 3, 2019 as Exhibit 3.1 thereto.

3.4		Certificate of Amendment to Certificate of Incorporation (1-for-20 Reverse Stock Split of Common Stock), dated March 14, 2019. Incorporated herein by reference to the ~~Company’s current~~Current Report on Form 8-K filed on March 14, 2019 as Exhibit 3.1 thereto.

3.5		Certificate of Designations of Rights and Preferences of 10% Series A Cumulative Redeemable Perpetual Preferred Stock, dated September 13, 2018. Incorporated herein by reference to the Current Report on Form 8-K filed on September 14, 2018 as Exhibit 3.1 thereto.

3.6		Form of Certificate of Determination of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, dated March 3, 2017. Incorporated by reference to the Current Report on Form 8-K filed on March 9, 2017 as Exhibit 3.1 thereto.

3.7		Certificate of Designations of Rights and Preferences of Series C Convertible Redeemable Preferred Stock, dated February 27, 2019. Incorporated herein by reference to the Current report on Form 8-K filed ~~with the Securities and Exchange Commission~~ on ~~December 9, 2013)~~February 28, 2019 as Exhibit 3.1 thereto.
~~3.4~~
4.1		~~Bylaws~~Form of ~~Digital Power Corporation (Incorporated~~Common Stock Purchase Warrant, dated April 2, 2019. Incorporated by reference to ~~Exhibit 3.3 of~~ the ~~Company’s Registration Statement~~Current Report on Form ~~SB-2~~8-K filed ~~with the Securities and Exchange Commission~~ on ~~October 16, 1996)~~April 1, 2018 as Exhibit 4.1 thereto.
~~3.5~~
4.2		Form of ~~Series C Certificate of Determination (Incorporated~~Pre-Funded Common Stock Purchase Warrant, dated April 2, 2019. Incorporated by reference to ~~Exhibit 3.1 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with the Securities and Exchange Commission~~filed on ~~May 31, 2017)~~April 1, 2018 as Exhibit 4.2 thereto.
~~3.6~~
4.3		Form of ~~Series D Certificate of Determination (Incorporated~~Underwriter’s Common Stock Purchase Warrant, dated April 2, 2019. Incorporated by reference to ~~Exhibit 3.1 of~~ the ~~Company’s current report filed~~Current Report on Form 8-K ~~with the Securities and Exchange Commission~~filed on ~~May 3, 2017)~~April 1, 2018 as Exhibit 4.3 thereto.
~~3.7~~		~~Form of Series E Certificate of Determination (Incorporated by reference to Exhibit 3.2 of the Company’s current report filed on Form 8-K with the Securities and Exchange Commission on May 3, 2017)~~
~~10.1~~		Preferred Stock Purchase Agreement date March 9, 2017 between Digital Power Corporation, and Philou Ventures, LLC. (Incorporated by reference to Exhibit 10.1 of the Company’s current report filed on Form 8-K with the Securities and Exchange Commission on March 9, 2017)
31.1*		Certification of Chief Executive ~~and~~Officer required by Rule 13a-14(a) or Rule 15d-14(a)

31.2*		Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)

32.1**		Certification of Chief Executive and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code

101.INS***		XBRL Instance Document
101.SCH***		XBRL Taxonomy Extension Schema Document
101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***		XBRL Taxonomy Extension Label Linkbase Document
101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document

~~______________________~~

* Filed herewith.

** Furnished herewith.

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

SIGNATURES

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

Dated: ~~November 20, 2017~~

~~Digital Power Corporation~~

August 19, 2019

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

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


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

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

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

			Page
PART I – FINANCIAL INFORMATION

	Item 1.		Financial Statements

		Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 (Unaudited) and December 31, ~~2016~~2018 (Audited)	~~1-2~~F-1 – F-2

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and ~~nine~~ six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	3F-3

		Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2019 and 2018 (Unaudited)	F-4 – F-7

		Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~ June 30, ~~2017~~ 2019 and ~~2016~~2018 (Unaudited)	~~4-5~~F-8 – F-9

		Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	~~6 - 42~~F-10 – F-38

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

Item 3.	~~Item 3.~~	Quantitative and Qualitative Disclosures about Market Risk	5111

	Item 4.		Controls and Procedures	5112

PART II – OTHER INFORMATION

	Item 1.		Legal Proceedings	5213
	Item 1A.		Risk Factors	5214
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	5314
	Item 3.		Defaults Upon Senior Securities	5314
	Item 4.	~~Reserved~~	54Mine Safety Disclosures	14
	Item 5.		Other Information	5414
	Item 6.		Exhibits	55
			15

☑	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended ~~September~~June 30, ~~2017~~2019

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

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

CURRENT ASSETS

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

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


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

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

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

TOTAL LIABILITIES	$	10,798	$	1,913

Large accelerated filer ☐¨

Accelerated filer ☐¨

Non-accelerated filer ☐þ

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

Smaller reporting company ☑þ

Emerging growth company ☐¨