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

DIGITAL POWER CORPORATION AND ~~ITS~~ SUBSIDIARY

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

AND COMPREHNSIVE LOSS (Unaudited)

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

Nine months ended
September 30,

Three months ended
September 30,

2016

2015

2016

2015

Unaudited

Revenues
$ 5,603 $ 5,462 $ 1,826 $ 1,415
Cost of revenues 3,526 3,468 1,123 935

Gross profit 2,077 1,994 703 480

Operating expenses:
Engineering and product development 511 663 147 203
Selling and marketing 723 835 235 316
General and administrative 1,115 1,279 404 378

Total operating expenses 2,349 2,777 786 897

Operating income (loss) (272 ) (783 ) (83 ) (417 )
Financial income (expense), net 85 18 23 21
Impairment of investment - (106 ) - -
Income (Loss) before income taxes (187 ) (871 ) (60 ) (396 )

Income taxes 22 - 22 -

Net (loss) income $ (165 ) $ (871 ) $ (38 ) $ (396 )

Basic net income (loss) per share $ (0.02 ) $ (0.129 ) $ (0.01 ) $ (0.059 )

Diluted net income (loss) per share $ (0.02 ) $ (0.129 ) $ (0.01 ) $ (0.059 )

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016

Revenue	$	1,822		$	2,064		$	3,450		$	3,777
Cost of revenue		1,092			1,310			2,012			2,403
Gross profit		730			754			1,438			1,374

Operating expenses
Engineering and product development		265			170			492			364
Selling and marketing		327			233			622			488
General and administrative		1,582			340			2,555			711
Total operating expenses		2,174			743			3,669			1,563

Loss from operations		(1,444	)		11			(2,231	)		(189	)

Interest (expense) income, net		(407	)		55			(614	)		62

Net loss	$	(1,851	)	$	66		$	(2,845	)	$	(127	)

Less: Net loss attributable to non-controlling interest		112			—			112			—

Net loss attributable to Digital Power Corp		(1,739	)		66			(2,733	)		(127	)

Preferred deemed dividends		(319	)		—			(319	)		—
Preferred dividends		(8	)		—			(8	)		—

Loss available to common shareholders	$	(2,066	)	$	66		$	(3,060	)	$	(127	)

Basic and diluted net loss per common share	$	(0.20	)	$	0.01		$	(0.32	)	$	(0.02	)

Basic and diluted weighted average common shares outstanding		10,467,658			6,775,971			9,430,945			6,775,971

Comprehensive Loss
Loss available to common shareholders	$	(2,066	)	$	66		$	(3,060	)	$	(127	)
Other comprehensive income (loss)
Change in net foreign currency translation adjustments		78			(152	)		99			(210	)
Other comprehensive income (loss)		78			(152	)		99			(210	)
Total Comprehensive loss	$	(1,988	)	$	(86	)	$	(2,961	)	$	(337	)

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

DIGITAL POWER CORPORATION AND ~~ITS~~ SUBSIDIARY

CONDENSED CONSOLIDATEDSTATEMENTS OF ~~COMPREHENSIVE LOSS~~

CASH FLOWS (Unaudited)

U.S. dollars in thousands

Nine months ended
September 30,

Three months ended
September 30,

2016

2015

2016

2015

Unaudited

Net (loss) income
$ (165
)
$ (871 ) $ (38 ) $ (396 )
Other Comprehensive income, net of tax:

Change in net foreign currency translation adjustment
(265 ) (55 ) (55 ) (82 )
Other comprehensive income
(265 ) (55 ) (55 ) (82 )
Total comprehensive income (loss):
$ (430 ) $ (926 ) $ (93 ) $ (478 )

	For the Six Months Ended June 30,
	2017			2016

Cash flows from operating activities:
Net loss	$	(2,845	)	$	(127	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		78			84
Amortization		2			—
Interest expense – debt discount		587			—
Accretion of original issue discount on notes receivable – related party		(19	)		—
Interest expense on extinguishment of demand notes to common stock		13			—
Stock-based compensation		752			87
Changes in operating assets and liabilities:
Accounts receivable		651			4
Inventories		216			256
Prepaid expenses and other current assets		(228	)		53
Other assets		(82	)		—
Accounts payable and accrued expenses		(91	)		(25	)
Accounts payable, related parties		100			—
Other current liabilities		(307	)		(198	)

Net cash (used in) provided by operating activities		(1,173	)		134

Cash flows from investing activities:
Purchase of property and equipment		(21	)		(74	)
Investments – related party		(1,527	)		—
Investments – others		(95	)		—
Loan to third party		(489	)		—

Net cash used in investing activities		(2,132	)		(74	)

Cash flows from financing activities:
Gross proceeds from sales of common stock and warrants		300			—
Proceeds from issuance of preferred stock		1,540			—
Financing cost in connection with sales of equity securities		(275	)		—
Proceeds from convertible notes payable		354			—
Proceeds from notes payable – related party		350			—
Proceeds from notes payable		710			—
Payments on revolving credit facility, net		(268	)		—

Net cash provided by financing activities		2,711			—

Effect of exchange rate on cash and cash equivalents		41			(89	)

Net decrease in cash and cash equivalents		(553	)		(29	)

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

Cash and cash equivalents at end of period	$	443		$	1,212

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

DIGITAL POWER CORPORATION AND ~~ITS~~ SUBSIDIARY

~~STATEMENT~~

CONDENSED CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS' EQUITY~~

CASH FLOWS (Unaudited) (continued)

U.S. dollars in thousands ~~except share data~~

Common Shares Number

Additional paid-in capital

Accumulated deficit

Other accumulated comprehensive income (loss)

Total shareholders equity

Balance as of January 1, 2016
6,775,971 $ 14,965 $ (11,036 ) $ (458 ) $ 3,471
Stock compensation related to options granted to employees
- 129 - - 129
Comprehensive loss: Net loss
- - (165 ) - (165 )
Foreign currency translation adjustments
- - - (265 ) (265 )
Balance as of September 30, 2016
6,775,971 $ 15,094 $ (11,201 ) $ (723 ) $ 3,170

Balance as of January 1, 2015
6,775,971 $ 14,739 $ (9,940 ) $ (358 ) $ 4,441

Stock compensation related to options granted to employees
- 181 - - 181
Comprehensive loss:
Net loss - - (871 ) - (871 )
Foreign currency translation adjustments
- - - (55 ) (55 )

Balance as of September 30, 2015 6,775,971 $ 14,920 $ (10,811 ) $ (413 ) $ 3,696

	For the Six Months Ended June 30,
	2017			2016

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

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	$	625		$	-
Cancellation of note payable – related party into series B convertible preferred stock	$	500		$	-

In connection with the Company's acquisiton 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

The accompanying notes are an integral part of ~~the interim~~these unaudited condensed consolidated financial ~~statements~~

statements.

~~DIGITAL POWER CORPORATION AND ITS SUBSIDIARY~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~U.S. dollars in thousands~~

Nine months ended
September 30,

2016

2015

Unaudited

Cash flows from operating activities:

Net loss
$ (165 ) $ (871 )
Adjustments required to reconcile net income to net cash provided by operating activities:

Depreciation
123 108
Amortization of intangible asset
- 66

Stock compensation related to options granted to employees
129 181
Impairment of investment in Telkoor
- 106
Write down of inventory
44
Decrease ( Increase) in trade receivables, net
82 560
Decrease (Increase) in prepaid expenses and other accounts receivable
(60 ) (53 )
Decrease (increase) in inventories
243 (339 )
Decrease in accounts payable and related parties- trade payables
(101 ) (236 )
Increase (decrease) in deferred revenues and other current liabilities
(113 ) (161 )

Net cash provided by operating activities
138 (595 )

Cash flows from investing activities:

Purchase of property and equipment
(78 ) (130
)
Sale of investment
90

Net cash from( used) n investing activities
12 (130
)

Cash flows from financing activities:
- -

Effect of exchange rate changes on cash and cash equivalents
(99 ) (20 )

Increase (Decrease) in cash and cash equivalents
51 (745 )
Cash and cash equivalents at the beginning of the period
1,241 2,110

Cash and cash equivalents at the end of the period
$ 1,292 $ 1,365

~~The accompanying notes are an integral part of the interim consolidated financial statements.~~

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO ~~INTERIM~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

– Unaudited

JUNE 30, 2017

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

1. DESCRIPTION OF BUSINESS

Digital Power Corporation ("Digital Power"

~~NOTE 1:- GENERAL~~

~~Digital Power Corporation (the “Company” or “DPC”~~) was incorporated in 1969, under the General Corporation Law of the State of California. Digital Power and Digital Power Limited ("DP 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 formed Digital Power Lending, LLC, a wholly-owned subsidiary (“DP Lending”). 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. Further, 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. Digital Power, DP Limited, Microphase and DP Lending (collectively, the “Company”) has two reportable geographic segments - North America (sales through Digital Power, Microphase and DP Lending) and Europe (sales through DP Limited).

2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS

As of June 30, 2017, the Company had cash and cash equivalent of $443, an accumulated deficit of $15,218 and a negative working capital of $1,785. The Company has incurred recurring losses and reported losses for the three and six months ended June 30, 2017, totaled $1,739 and $2,733, 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, the Company continues 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 ~~State of California. The~~ Company and Digital Power Limited (“DPL”), a wholly owned subsidiary located in the United Kingdom, are currently engaged in the design, manufacture and sale of switching power supplies and converters. The Company has two reportable geographic segments - North America (sales through DPC) and Europe (sales through DPL).

	b.	~~In January 2016, Telkoor Telecom Ltd. (“Telkoor”) sold its entire commercial assets to Advice Ltd. (“Advice”~~at $0.60 per share (See Note 9). Consequently, the Company depends on Advice for design, to retain product technology up-to-date and manufacturing capabilities for certain of the products that the Company sells. If Advice is unable or unwilling to continue designing or manufacturing the Company's products in required volumes and with a certain level of quality on a timely basis, that could lead to loss of sales and adversely affect the Company's operating results and cash position. The Company also depends on Advice's intellectual property and ability to transfer production to third party manufacturers. Failure to obtain new products in a timely manner or delay in delivery of products to customers will have an adverse effect on the Company's ability to meet its customers’ expectations. In addition, the Company operates in highly competitive markets where the ability to sell Advice’s products could be adversely affected by Advice's agreements with other companies, long lead-times and the high cost of Advice’s products. In 2010, the Company purchased specific IP from Telkoor in order to reduce its dependency on Telkoor with respect to a certain line of products.

	c. ·	On ~~September 5, 2016,~~March 9, 2017, the Company entered into a ~~Securities~~Preferred Stock Purchase Agreement ~~(the “Agreement”)~~ with Philou Ventures LLC ~~a Wyoming limited liability company (the “Purchaser”~~(“Philou”), ~~and Telkoor Telecom Ltd., an Israeli company (the “Seller”)~~a related party, pursuant to which Philou was granted the ~~Purchaser purchased all of the Seller’s 2,714,610 shares of the common stock~~right to invest up to $5,000 in the Company ~~constituting approximately 40.06%~~through the purchase of ~~the Company’s outstanding~~Series B Preferred Stock over a term of 36 months. On March 24, 2017, Philou purchased 25,000 shares of ~~common stock. In consideration for such shares, the Purchaser paid Seller $1.5 million.~~

		~~Pursuant~~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 13).

On March 15, 2017, the Company entered into a ~~Rescission Agreement~~subscription agreement with one investor for the ~~Seller in order to resolve all financial issues between the parties, including the repurchase by the Seller~~sale of ~~1,136,666~~500,000 shares of common stock ~~in Seller beneficially owned by~~at $0.60 per share for the aggregate purchase price of $300 (See Note 13).

	·	On March 20, 2017, the Company ~~for their book value.~~

		~~The closing~~issued $250 in demand promissory note to one of the ~~transactions under~~Company's shareholders (See Note 13). This $250 demand promissory note was converted in shares of the ~~Agreement~~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 ~~Rescission Agreement occurred~~remaining balance of $50 was received on ~~September 22, 2016.~~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 9).

~~NOTE 2:-~~6

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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 Digital Power’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 9).

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 (See Note 13).

Between July 1, 2017 and August 17, 2017, the Company received net cash proceeds of $1,505 from issuances of the Company’s debt and equity securities. Further, $268 in convertible notes were exchanged for shares of the Company’s common stock (See Note 16).

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

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements ashave 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 ~~September 30, 2016~~America (“GAAP”). The Company has made estimates and ~~for~~judgments affecting the ~~three~~amounts reported in our consolidated financial statements and ~~nine months ended September 30, 2016 and 2015 are~~the accompanying notes. The actual results experienced by the Company may differ materially from our estimates. The consolidated financial information is unaudited ~~and reflect~~but reflects all normal adjustments ~~(consisting only of normal recurring adjustments) which~~that are, in the opinion of management, necessary ~~for~~to provide a fair ~~presentation~~statement of ~~the financial position and operating~~ results for the interim ~~periods. The condensed~~periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements ~~and notes thereto, together with management's discussion and analysis of the financial condition and results of operations, contained~~ in the ~~Company's~~Company’s Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2015.~~2016, filed with the Securities and Exchange Commission on April 10, 2017. The ~~results~~consolidated balance sheet as of ~~operations for~~December 31, 2016 was derived from the Company’s audited 2016 financial statements contained in the above referenced Form 10-K. Results of the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017, are not necessarily indicative of the results to be expected for the ~~entire fiscal~~full year ending December 31, ~~2016.~~

~~The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2015 are applied consistently in these financial statements.~~

2017.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO ~~INTERIM~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

– Unaudited (Continued)

JUNE 30, 2017

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

~~NOTE 3:- INVENTORIES~~

September 30,

December 31,

2016

2015

Unaudited

Raw materials, parts and supplies
$ 219 $ 336
Work in progress
213 191
Finished products
754 1,015

$ 1,186 $ 1,542

~~NOTE 4:- ACCOUNTING FOR STOCK-BASED COMPENSATION~~

~~Share Option Plan~~

Under the Company's Digital Power 2012 (as amended) (“Incentive Share Option Plan”), options may be granted to employees, officers, consultants, service providers and directors of the Company or its subsidiary.

As of September 30, 2016, the Company had authorized according to the Incentive Share Option Plan, the grant of options to officers, management, other key employees and others of up to 1,372,630 options for the Company’s common shares. The maximum term of the options is ten years from date of grant. As of September 30, 2016, an aggregate of 812,630 shares of the Company’s common stock were still available for future grant.

	3.	The options granted generally become fully exercisable after four years and expire no later than 10 years from the date of the option grant. Any options that are forfeited or cancelled before expiration become available for future grants.

	4.	~~A summary of the Company’s employee share option activity (except options to consultants and service providers) and related information is as follows:~~

Nine months ended September 30, 2016

Amount
of options

Weighted
average
exercise
price

Weighted average remaining contractual term (years)

Aggregate intrinsic value (*) In thousands

Outstanding at the beginning of the period
1,146,000 $ 1.52 6.74 $ -
Expire
40,000 $ 1.16
Forfeited
105,000 $ 1.38
Outstanding at the end of the period
1,001,000 $ 1.55 6.05 $ 7

Exercisable options at the end of the period
756,000 $ 1.56 5.50 $ 3

~~(*)~~

~~Calculation of aggregate intrinsic value is based upon the share price of the Company’s common stock as of~~ ~~September 30, 2016 $0.77 per share.~~

~~DIGITAL POWER CORPORATION AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~NOTE 4:-~~

~~ACCOUNTING FOR STOCK-BASED COMPENSATION (Cont.)~~

Under the provisions of ASC 718, the fair value of each option is estimated on the date of grant using a Black-Sholes option valuation model that uses the assumptions such as stock price on the date of the grant, exercise price, risk-free interest rate, expected volatility, expected life and expected dividend yield of the option. Expected volatility is based exclusively on historical volatility of the entity's stock as allowed by ASC 718. The Company uses historical information with respect to the employee options exercised to estimate the expected term of options granted, representing the period of time that options granted are expected to be outstanding. The risk-free interest rate of the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

~~No options were granted during the first nine months of 2016.~~

The total employee’s equity-based compensation expense related to all of the Company’s equity-based awards recognized for the three and nine months ended September 30, 2016 and 2015 is comprised as follows:

Nine months ended

Three months ended

September 30, 2016

September 30, 2015

September 30, 2016

September 30, 2015

Unaudited

Unaudited

Unaudited

Unaudited

Cost of goods sold
5 4 1 1
Sales and marketing expenses
3 8 1 2
Research and development
13 14 5 3
General and administrative
108 155 35 38
Total employees equity-based compensation expense
129 181 42 44

As of September 30, 2016, there was $274 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the share option plans. That cost is expected to be recognized over a period of the next 1.66 years.

Principles of Consolidation

~~DIGITAL POWER CORPORATION AND SUBSIDIARY~~

~~NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars~~

The condensed consolidated financial statements include the accounts of Digital Power, its wholly-owned subsidiaries, DP Limited and DP Lending and its majority-owned subsidiary, Microphase. All significant intercompany accounts and transactions have been eliminated in ~~thousands, except share~~consolidation.

Accounting Estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates, judgments and ~~per share data~~

~~NOTE 5:- INCOME (LOSS) PER SHARE~~

assumptions. The ~~following table sets forth~~Company's management believes that the ~~computation of the basic~~estimates, judgments and ~~diluted net income (loss) per share:~~

Nine months ended
September 30,

Three months ended
September 30,

2016

2015

2016

2015

Unaudited

Denominator for basic net income per share of weighted average number of common shares
6,775,971 6,775,971 6,775,971 6,775,971
Effect of dilutive securities:

Employee stock options
-- - -- -

Denominator for diluted net income per common share
6,775,971 6,775,971 6,775,971 6,775,971

Basic net income (loss) per share
$ (0.02 ) $ (0.129 ) $ (0.01 ) $ (0.059 )

Diluted net income (loss) per share
$ (0.02 ) $ (0.129 ) $ (0.01 ) $ (0.059 )

~~NOTE 6:- INVESTMENT IN TELKOOR~~

~~On June 16, 2011 the Company acquired 1,136,666 shares of Telkoor, the Company's major shareholder~~assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and ~~an Israeli company listed in~~assumptions can affect the ~~Tel Aviv stock exchange (at such time), which represented 8.8%~~reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the ~~outstanding~~financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Key estimates include fair value of certain financial instruments, reserve for trade receivables and inventories, carrying amounts of investments, accruals of certain liabilities, and deferred income taxes and related valuation allowance.

Investments in Debt and Equity Securities

The Company classifies its investments in Avalanche International, Corp (“AVLP”), consisting of shares of ~~Telkoor. As~~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 ~~result~~separate component of ~~this transaction, an existing manufacturing agreement between~~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 ~~Telkoor was updated~~extent to which fair value has been below cost basis, the financial condition of the issuer and ~~extended.~~

~~The Company recorded an impairment~~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 of ~~its investment in Telkoor of $0 for~~ the ~~nine months ended September 30, 2016 compared to $106,000 for the nine months ended September 30, 2015 and $110,0000 for the year ended December 31, 2015.~~

~~On September 22, 2016, the Company sold such shares to Telkoor for $90,000. (see Note 1)~~

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. ~~The Company has classified its~~Additionally, the investment in ~~Telkoor's shares using~~debt securities of AVLP qualifies for application of the ~~cost method~~fair value option in accordance with ASC 325-20 "Investments in Other". Paragraphs 320-10-35-17 through 35-35 discuss the methodology for determining impairment and evaluate whether the impairment is other than temporary and therefore should be recognized.

No. 825.

Revenue Recognition

The Company generates revenues from the sale of its products through a direct and indirect sales force. Revenues from products are recognized in accordance with ASC No. 605, Revenue Recognition, when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, 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 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 stock rotation rights are deferred until the products are sold to the end customer or until the rotation rights expire. Service revenues are deferred and recognized on a straight-line basis over the term of the service agreement. Service revenues are immaterial in proportion to the Company's revenues.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO ~~INTERIM~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

– Unaudited (Continued)

JUNE 30, 2017

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

~~NOTE 7:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION~~

Warranty

The Company ~~has~~offers a warranty period for all of its products. Warranty periods range from one to two ~~reportable geographic segments (see Note 1 for~~years depending on the product. The Company estimates the costs that may be incurred under its warranty and records a ~~brief description~~liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include the number of units sold, historical rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary.

As of June 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's business).~~

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 ~~following data presents the revenues, expenditures~~Company assesses classification of its freestanding derivatives at each reporting date to determine whether a change in classification between assets and ~~other operating data~~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's geographic operating segments~~Company, satisfy the criteria for classification as equity instruments as these warrants do not contain cash settlement features or variable settlement provision that cause them to not be indexed to the Company’s own stock.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC ~~218 "Segment Reporting" ("~~No. 718, Compensation – Stock Compensation ("ASC ~~218"~~No. 718").

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

Nine months ended September 30, 2016 (unaudited)

DPC

DPL

Eliminations

Total

Revenues
$ 3,408 $ 2,195 $ - $ 5,603
Intersegment revenues
89 - (89
)
-

Total revenues
$ 3,497 $ 2,195 $ (89
)
$ 5,603

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

Operating income (loss)
$ (147 ) $ (125 ) $ - $ (272 )
Impairment of investment
- - -
Financial expense, net
(12 ) 97 85

Tax
- 22 22

Net income (loss)
$ (159 ) $ (6 ) $ - $ (165 )

Expenditures for segment assets, as of September 30, 2016
$ 23 $ 51 $ - $ 74

Total assets as of September 30, 2016
$ 2,084 $ 2,371 $ - $ 4,455

Nine months ended September 30, 2015 (unaudited)

DPC

DPL

Eliminations

Total

Revenues
$ 2,795 $ 2,667 $ - $ 5,462
Intersegment revenues
277 - (277
)
-

Total revenues
$ 3,072 $ 2,667 $ (277
)
$ 5,462

Depreciation and amortization expense
$ 56 $ 118 $ - $ 174

Operating income (loss)
$ (845 ) $ 62 $ - $ (783 )
Impairment of investment
(106 ) (106 )
Financial expense, net
(4 ) 22 18

Net income (loss)
$ (849 ) $ (22 ) $ - $ (871 )

Expenditures for segment assets, as of September 30, 2015
$ 54 $ 76 $ - $ 130

Total assets as of September 30, 2015
$ 2,252 $ 2,930 $ - $ 5,182
The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC No. 505-50, Equity Based Payments to Non-Employees. Accordingly, the measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Convertible Instruments

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

Three months ended September 30, 2016 (unaudited)

DPC

DPL

Eliminations

Total

Revenues
$ 1,248 $ 578 $ - $ 1,826
Intersegment revenues
27 - (27
)
-

Total revenues
$ 1,275 $ 578 $ (27
)
$ 1,826

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

Operating income (loss)
$ 34 $ (117 ) $ - $ (83 )
Impairment of investment
- - -
Financial income (expense), net
(2 ) 25 23
Tax
- 22 22

Net income (loss)
$ 32 $ (70 ) $ - $ (38 )

Expenditures for segment assets, as of September 30, 2016
$ - $ 4 $ - $ 4

Total assets as of September 30, 2016
$ 2,084 $ 2,371 $ - $ 4,455

Three months ended September 30, 2015 (unaudited)

DPC

DPL

Eliminations

Total

Revenues
$ 808 $ 607 $ - $ 1,415
Intersegment revenues
155 - (155
)
-

Total revenues
$ 963 $ 607 $ (155
)
$ 1,415

Depreciation and amortization expense
$ 19 $ 36 $ - $ 55

Operating income (loss)
$ (316 ) $ (101 ) $ - $ (417 )
Impairment of investment
- - -
Financial expense, net
(4 ) 25 21

Net income (loss)
$ (320 ) $ (76 ) $ - $ (396 )

Expenditures for segment assets, as of September 30, 2015
$ 4 $ 21 $ - $ 25

Total assets as of September 30, 2015
$ 2,252 $ 2,930 $ - $ 5,182

DIGITAL POWER CORPORATION AND SUBSIDIARY

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

JUNE 30, 2017

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

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

The Company accounts for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC No. 470-20, Debt with Conversion and Other Options

(~~Major customer~~“ASC No. 470-20”). Under ASC No. 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC No. 815.

Comprehensive Loss

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

Fair value of Financial Instruments

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

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

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

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations. All significant inputs used in our valuations are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. 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 ~~percentage~~discounted cash flow models.

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

The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, trade receivables and trade 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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

As of June 30, 2017 and December 31, 2016, the fair value of the Company’s investments were $2,582 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 June 30, 2017, the Company's investment in AVLP is comprised of convertible promissory notes of $2,491, net of unamortized discount, and marketable equity securities of $91. 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).

In the first quarter of 2017, the Company purchased at the market shares of common stock of three companies for a total ~~revenues:~~

cost of $20. 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 June 30, 2017, and most recently at August 15, 2017, the Company determined that its cost basis in the shares of common stock for these companies approximates the current fair value and has concluded that its investment in marketable securities is not impaired.

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 ~~customers~~Company’s financial instruments that ~~represented 10%~~were measured at fair value on a recurring basis by level within the fair value hierarchy:

	Fair Value Measurement at June 30, 2017
	Total		Level 1		Level 2		Level 3
Investments – AVLP – a related party	$	2,582	$	91	$	2,491	$	—

Investments in other companies	$	20	$	20	$	—	$	—

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

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 six months ended June 30, 2017, the Company recorded amortization of debt discounts of $397 and $592, respectively. The Company did not recognize any debt discount during the six months ended June 30, 2016.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

Net Loss per Share

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

	2017		2016
Stock options		2,841,000		1,106,000
Warrants		7,426,080		—
Convertible notes		1,296,969		—
Conversion of preferred stock		4,606,131		—
Total		16,170,180		1,106,000

Recently Issued Accounting Standards

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

4. INVESTMENTS – RELATED PARTIES

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

	June 30,			December 31,
	2017			2016
Investment in convertible promissory note of AVLP	$	2,593		$	997
Investment in common stock of AVLP		91			84
Total investment in AVLP P – Gross		2,684			1,081
Less: original issue discount		(102	)		(45	)
Total investment in AVLP P – Net	$	2,582		$	1,036

During the year ended December 31, 2016, the Company made a strategic decision to invest in AVLP, a related party controlled by Philou, an existing majority stockholder. The Company’s investments in AVLP primarily consist of convertible promissory notes and shares of common stock of AVLP.

On October 5, 2016, November 30, 2016, and February 22, 2017, the Company entered into three 12% Convertible Promissory Notes with AVLP (the "AVLP Notes") in the principal amount of $525 each. The AVLP Notes include a 5% original issue discount, resulting in net loans to AVLP of $1,500 and an original issue discount of $75. The AVLP notes accrue interest at 12% per annum and shall be due on or ~~more~~before two years from the origination dates of each note. At any time after six months, the Company has 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, are convertible into 2,113,086 shares of the Company’s ~~total revenues~~common stock.

The Company has funded $970 in excess of the $1,500 net loan amount required pursuant to the terms of the AVLP Notes. The Company and AVLP have agreed that these additional advances shall feature terms mirroring those of the AVLP Notes, including 12% annual interest and an original issue discount of 5%; however, in addition to these terms, the Company and AVLP are in the process of finalizing additional terms that will be incorporated into a new convertible promissory note agreement.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

The original issue discount of $123 on the AVLP Notes, inclusive of the original issue discount attributed to the $970 loaned in excess of the AVLP Notes, is being amortized as interest income through the maturity date using the interest rate method. During the three and six months ended June 30, 2017, the Company recorded $12 and $19, respectively, of interest income for the discount accretion. As of June 30, 2017 and December 31, 2016, the Company recorded contractual interest receivable attributed to the AVLP Notes of $93 and $13, respectively.

The Company has classified the AVLP Notes as Available-for-Sale securities, subject to the guidance in ASC No. 320. The Company elected to apply the Fair Value Option Subsections of Subtopic 320-10 and 825-10 to the AVLP Notes. At June 30, 2017, the closing market price of AVLP’s common Stock was $0.17. Subsequent to quarter-end, the closing market price of AVLP’s common stock was in the range of $0.17 and $ 0.38 and due to the illiquidity and significant volatility of AVLP’s common stock, the Company has determined that its cost basis in AVLP common stock approximates the current fair value.

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. ACQUISITION

Microphase Corporation

On April 28, 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 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 common stock of Microphase (the “MPC Common Stock”), from the Stockholders in exchange (the “Exchange”) for the issuance by the Company of 1,842,448 shares of Digital Power common stock (“Common Stock”) and 378,776 shares of Digital Power Series D Preferred Stock (collectively, the “Exchange Shares”), which shares of Digital Power Series D Preferred Stock are, subject to shareholder approval, convertible into 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 June 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, and the Exchange warrants, valued at $229. The value assigned to the Exchange Shares was based on the closing price of the Common Stock on June 2, 2017. The Company computed the fair value of these warrants using the Black-Scholes option pricing model.

The acquisition of Microphase is being accounted for under the purchase method of accounting in accordance with ASC No. 805, Business Combinations. Under the purchase method, assets acquired and liabilities assumed are recorded at their estimated fair values. Goodwill is recorded to the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired less liabilities assumed at the date of acquisition.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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

Cash and cash equivalents	$	11
Accounts receivable, net		439
Inventories, net		667
Prepaid expenses and other current assets		139
Restricted cash		100
Intangible assets		95
Property and equipment, net		93
Other investments		303
Deposits and loans		44
Accounts payable and accrued expenses		(1,680	)
Revolving credit facility		(880	)
Notes payable		(2,204	)
Notes payable, related parties		(406	)
Convertible notes payable		0
Other current liabilities		(327	)
Net liabilities assumed		(3,606	)
Goodwill		6,002
Minority interest		(945	)
Purchase price	$	1,451

The following pro forma data summarizes the results of operations for the periods indicated as if the Microphase acquisition had been completed as of the beginning of each period presented. The pro forma data gives effect to actual operating results prior to the acquisition. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each period presented or that may be obtained in future periods:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016

Revenue	$	2,714		$	4,017		$	5,408		$	7,848

Net loss	$	(1,924	)	$	(651	)	$	(4,076	)	$	(1,099	)

Less: Net loss attributable to non-controlling interest		127			313			632			424

Net loss attributable to Digital Power Corp	$	(1,797	)	$	(338	)	$	(3,444	)	$	(675	)

Preferred deemed dividends		(319	)		—			(319	)		—
Preferred dividends		(8	)		—			(8	)		—

Loss available to common shareholders	$	(2,124	)	$	(338	)	$	(3,771	)	$	(675	)

Basic and diluted net loss per common share	$	(0.17	)	$	(0.04	)	$	(0.33	)	$	(0.08	)

Basic and diluted weighted average common shares outstanding		12,310,106			8,618,419			11,273,393			8,618,419

Comprehensive Loss
Loss available to common shareholders	$	(2,124	)	$	(338	)	$	(3,771	)	$	(675	)
Other comprehensive income (loss)
Change in net foreign currency translation adjustments		78			(152	)		99			(210	)
Net unrealized gain (loss) on securities available-for- sale, net of income taxes		0			—			130			18
Other comprehensive income (loss)		78			(152	)		229			(192	)
Total Comprehensive loss	$	(2,046	)	$	(490	)	$	(3,542	)	$	(867	)

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

6. STOCK-BASED COMPENSATION

Under the Company's 2016 Stock Incentive Plan (the “2016 Plan”) and the 2012 Stock Option Plan, as amended (the “2012 Plan”) (collectively, the “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 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 June 30, 2017, an aggregate of 1,781,477 of the Company's options are still available for future grant.

During the three and six months ended June 30, 2017, the Company granted nil and 510,000 options, respectively, from the Plans to its employees at an average exercise price of $0.60 per share. These options become fully vested after four years. The Company estimated that the grant date fair value of these options was $229, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the three months ended June 30, 2017, the Company also issued 956,153 shares of common stock to its consultants and service providers pursuant to the 2016 Plan. The Company estimated that the grant date fair value of these shares of common stock was $499, 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 six months ended June 30, 2016.

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

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

	June 30, 2017
Weighted average risk free interest rate		1.89% — 2.14	%
Weighted average life (in years)		5.0
Volatility		98.41% — 98.55	%
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)

JUNE 30, 2017

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

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

Outstanding							Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Exercise	Number		Contractual		Exercise		Number		Exercise
Price	Outstanding		Life (Years)		Price		Exercisable		Price
$0.60 - $0.79		2,375,000		9.38	$	0.66		1,246,667	$	0.66
$1.10 - $1.32		25,000		6.35	$	1.28		15,000	$	1.25
$1.51 - $1.69		441,000		5.36	$	1.61		378,500	$	1.60

$0.60 - 1.69		2,841,000		8.73	$	1.10		1,640,167	$	0.88

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

	Three Months Ended				Six Months Ended
	June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Cost of revenues	$	3	$	2	$	4	$	4
Engineering and product development		6		1		13		2
Selling and marketing		6		4		11		8
General and administrative		557		36		668		73

Total stock-based compensation	$	572	$	43	$	696	$	87

The combination of stock-based compensation of $696 from the issuances of equity based awards pursuant to the Plans and stock-based compensation attributed to restricted stock awards of $10 and warrants of $46, which were issued outside of the Plans, resulted in aggregate stock-based compensation of $752 during the six months ended June 30, 2017. During the three months ended June 30, 2017, aggregate stock-based compensation was $595, which consisted of $572 from the issuances of equity based awards pursuant to the Plans and stock-based compensation attributed to warrants of $23, which were issued outside of the Plans. During the three and six months ended June 30, 2016, the only stock-based compensation expense was from issuances pursuant to the Plans.

A summary of option activity under the Company's stock option plans as of June 30, 2017, and changes during the six months ended are as follows:

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

				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		(956,153	)
Grants		(510,000	)		510,000	$	0.60

June 30, 2017		1,781,477			2,841,000	$	0.81		8.73	$	148

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on June 30, 2017, $0.72 and the exercise price, multiplied by the number of in-the-money-options).

As of June 30, 2017, there was $524 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company's stock option plans. That cost is expected to be recognized over a weighted average period of ~~nine~~2.2 years.

7. WARRANTS

During the six months and ended June 30, 2017, the Company issued a total of 5,567,954 warrants, at an average exercise price of $0.89 per share. These issuances included:

(i)

Between May 24, 2017 and June 19, 2017, the Company issued warrants to purchase 1,820,002 shares of common stock issued in connection with the sale of twenty-one Units at a purchase price of $52 per Unit raising in the aggregate $1,092. Each Unit consisted of 21,667 shares of Series C Preferred Stock and Warrants to purchase 86,667 shares of common stock, at an exercise price of $1.00 per share of common stock (See Note 13).

(ii)

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

(iii)

Between March 24, 2017 and June 2, 2017, the Company issued warrants to purchase 1,428,572 shares of common stock, at an exercise price of $0.70 per share of common stock, in connection with the Preferred Stock Purchase Agreements to purchase 100,000 shares of Series B Preferred Stock by Philou (See Note 13).

(iv)

On June 2, 2017, the Company issued warrants to purchase 1,000,000 shares of common stock, at an exercise price of $1.10 per share of common stock, pursuant to the terms of the Share Exchange Agreement (See Note 5).

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

(v)

On April 5, 2017, the Company issued warrants to purchase 180,002 shares of common stock, at an exercise price of $0.90 per share of common stock, in connection with the cancellation of $270 in demand promissory notes (See Note 9).

(vi)

On April 17, 2017, the Company issued warrants to purchase 166,668 shares of common stock, at an exercise price of $0.90 per share of common stock, in connection with the issuance of two 7% convertible notes in the aggregate principal amount of $250 (See Note 11).

(vii)

Between May 5, 2017 and June 30, 2017, the Company issued warrants to purchase 224,371 shares of common stock in connection with the issuance of short-term loans of $140 that the Company entered into with four accredited investors (See Note 9) of which $75 was from the Company’s corporate counsel, a related party. The exercise price was $0.75 per share of common stock for 135,909 warrants and $0.80 per share of common stock for the remaining 88,462 warrants.

(viii)

On April 26, 2017, the Company issued warrants to purchase 160,000 shares of common stock, at an exercise price of $0.80 per share of common stock, in connection with the issuance of a 7% convertible note in the aggregate principal amount of $104 (See Note 11).

(ix)

Warrants to purchase 333,333 shares of common stock issued in connection with the $400 of 6% demand promissory notes entered into by the Company in February 2017 (See Note 9).

The following table summarizes information about common stock warrants outstanding at 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		9.35	$	0.01		79,364	$	0.01
$0.70		1,761,905		5.20	$	0.70		—		—
$0.72		182,003		4.97	$	0.72		—		—
$0.75		135,909		4.88	$	0.75		—		—
$0.80		1,415,128		2.80	$	0.80		1,166,666	$	0.80
$0.90		611,670		3.85	$	0.90		265,000	$	0.90
$1.00		2,002,005		4.93	$	1.00		—		—
$1.10		1,000,000		2.92	$	1.10		—		—

$0.01 - 1.10		7,426,080		4.42	$	0.84		1,511,030	$	0.78

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. 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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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

	June 30, 2017
Weighted average risk free interest rate		1.42% — 2.01	%
Weighted average life (in years)		4.8
Volatility		98.5% — 107.1	%
Expected dividend yield		0	%
Weighted average grant-date fair value per share of warrants granted	$	0.38

8. REVOLVING CREDIT FACILITY

Microphase entered into a revolving loan agreement with Gerber Finance, Inc. (“Gerber”) in February of 2012, as amended in September 2015 (the “Revolving Credit Facility”). Under the Revolving Credit Facility, Microphase can receive funds based on a borrowing base, which consists of various percentages of eligible accounts receivable, inventories, and equipment plus a restricted cash account in the amount of $100 held by Gerber, up to a maximum revolving amount of $1,400 (the “Maximum Revolving Amount”). Pursuant to the terms of the Revolving Credit Facility, Microphase is subject to an annual facility fee in an amount equal to 1.75% of the Maximum Revolving Amount due on each anniversary, a monthly collateral monitoring fees of $1 and other fees. Interest accrues at the prime rate plus three and three-quarters percent (3.75%) on the unpaid principal. Effective June 15, 2017, the prime rate was increased from 4.00% to 4.25% resulting in a base rate of 8.00%. If borrowings under the Revolving Credit Facility exceed the collateral borrowing base, then Microphase is subject to an additional 2.5% interest charge per month on the over-advance amounts and a separate additional charge of 2.5% if borrowings exceed the Maximum Revolving Amount. At June 30, ~~2016.~~

Total Revenues by Major Customer
(in thousands)

Percentage of Total
Company Revenues

Customer A
1,176 21 %

~~Revenue~~2017, the amount due pursuant to the Revolving Credit Facility, of $612, exceeded the collateral borrowing base by $70. The interest expense for the period from ~~customer A~~June 3, 2017 to June 30, 2017, was ~~attributable~~$14.

On June 20, 2017, Microphase received a notice from Gerber that several events of default had occurred under the Revolving Credit Facility and on July 14, 2017, Microphase and Gerber entered into a Forbearance Agreement. The events of default were primarily related to, ~~DPC.~~

(i) the change in control that occurred on June 2, 2017, when Digital Power acquired a majority interest in Microphase, and (ii) borrowings under the Revolving Credit Facility exceeding the collateral borrowing base.

9. NOTES PAYABLE

Notes Payable at June 30, 2017, and December 31, 2016, are comprised of the following:

	June 30,			December 31,
	2017			2016
10% short-term promissory notes ^(a)	$	705		$	—
Notes payable to Lucosky Brookman, LLP ^(b)		450			—
Notes payable to Wells Fargo ^(c)		308			—
Note payable to Department of Economic and Community Development ^(d)		300			—
Note payable to People's United Bank ^{( e)}		20			—
Other short-term notes payable ^(f)		33			—
Total notes payable		1,816			—
Less: current portion		(1,218	)		—
Notes payable – long-term portion	$	569		$	—

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

(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 period June 3, 2017 to June 30, 2017, Microphase incurred $6 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 June 30, 2017, accrued interest on the 10% Short-Term Notes was $145.

(b)

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 period June 3, 2017 to June 30, 2017, Microphase incurred $3 of interest on the Lucosky Note. As of June 30, 2017, accrued interest on the Lucosky Note was $3.

(c)

At June 30, 2017, Microphase had guaranteed the repayment of two equity lines of credit in the aggregate amount of $308 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 June 30, 2017, the first line of credit, which is secured by residential real estate owned by a former officer, had an outstanding balance of $216, 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 June 30, 2017, the second line of credit, secured by the former CEO’s principal residence, had an outstanding balance of $92, with an annual interest rate of 3.00%. During the period June 3, 2017 to June 30, 2017, Microphase incurred $1 of interest on the Wells Fargo Notes.

(d)

In August 2016, Microphase received a $300 loan 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 is deferred during the initial year and commencing on the thirteenth month, payable in equal monthly installments over the remaining term. During the period June 3, 2017 to June 30, 2017, Microphase did not incur any 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 2, 2017 and June 30, 2017, the Company has utilized $27 of the grant and the balance of $73 is reported within deferred revenue.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

(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 June 30, 2017, the balance of that overdraft credit line was $20.

(f)

Between May 5, 2017 and June 30, 2017, Digital Power 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. 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.

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 Digital Power’s common stock and a price of $0.55 per share. An additional $52 in short-term loans from the Company’s corporate counsel was converted into one of the Series C Units. The Company did not record any additional interest expense as a result of the extinguishment of $107 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.

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 discount in the amount of $151 based on 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 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.

On March 28, 2017, the Company issued $270 in demand promissory notes to several investors. These demand promissory notes accrued interest at the rate 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, the Company canceled these promissory notes by issuing to 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 of the consideration transferred, which was determined from the closing price of the Company’s common stock on the date of extinguishment.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

10. NOTES PAYABLE – RELATED PARTIES

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

	June 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		(278	)		(250	)
Notes payable – long-term portion	$	128		$	—

(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 13). 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 June 30, 2017, the aggregate outstanding balance pursuant to these notes payable agreements was $488, with annual interest rates ranging between 3.00% and 6.00%. During the period June 3, 2017 to June 30, 2017, Microphase incurred $2 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 June 30, 2017, the outstanding principal balance owed under this particular agreement was $152.

11. CONVERTIBLE NOTES

Convertible notes at June 30, 2017, and December 31, 2016, are comprised of the following:

	June 30,		December 31,
	2017		2016
7% Convertible note	$	250	$	—
Convertible note	$	250	$	—

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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 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 not repaid on the maturity date and as such were in default at June 30, 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, non-cash interest expense of $93 was recorded from the amortization of debt discounts. As of June 30, 2017, accrued interest on the 7% Convertible Notes was $4.

Other Convertible Notes Payable

On April 26, 2017, the Company entered into a 7% convertible note in the aggregate principal amount of $104. On June 28, 2017, the noteholder converted the outstanding balance into 189,091 shares of Digital Power’s common stock. 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. As of June 30, 2017, accrued interest on this convertible note was $1.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

12. CONVERTIBLE NOTE ~~8:- SUBSEQUENT EVENTS~~

– RELATED PARTY

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

	June 30,			December 31,
	2017			2016
12% Convertible secured note	$	530		$	530
Less:
Unamortized debt discounts		(398	)		(484	)
Unamortized financing cost		(10	)		(12	)
Convertible note – related party	$	122		$	34

On October 21, 2016, the Company entered into a 12% ~~Convertible Secured Note (“~~convertible secured note (the “Convertible Note”), a warrant to purchase 265,000 shares of common stock each at an exercise price of $0.80 (“$0.80 Warrant”), a warrant to purchase 265,000 shares of common stock each at an exercise price of $0.90 (“$0.90 Warrant” and together with the $0.80 Warrant collectively “Warrants”) and a registration rights agreement with an accredited investor (the “Investor”).

~~The Convertible Note is~~ in the principal amount of ~~$530,000 and was sold for $500,000, bears~~$530. The Convertible Note included an original issue discount (“OID”) of $30 resulting in net proceeds to the Company of $500. Additionally, the Convertible Note accrues interest at 12% simple interest on the principal amount, is secured by all the assets of the Company, and is due on October 20, 2019. Interest only payments are due on a quarterly basis and the principal may be converted into shares of the Company’s common stock at $0.55 per share. Subject to certain beneficial ownership limitations, the ~~Investor~~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 ~~similar~~other standard anti-dilution events.

The Convertible Note contains standard and customary events of default including, but not limited to, failure to make payments when due under the Convertible Note agreement and bankruptcy or insolvency of the Company. Upon 30 ~~days'~~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 ~~force~~compel the ~~holder thereof~~noteholder to convert the principal amount into shares of common stock at the contractual conversion ~~rate.~~

~~On November 3, 2016,~~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 ~~shareholder approval~~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 both the three and six months ended June 30, 2017, non-cash interest expense of $44 was recorded from the amortization of debt discounts and debt financing cost. As of June 30, 2017 and December 31, 2016, accrued interest on the Convertible Note was $16 and $12, respectively.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

13. STOCKHOLDERS’ EQUITY

Preferred Stock

The Company is authorized to issue 2,000,000 shares of Preferred Stock with no par value. The Board of Directors has designated 500,000 shares of its Preferred Stock as Series A cumulative Redeemable Convertible Preferred shares (the “Series A Preferred Stock”), 500,000 shares as Series B Convertible Preferred Stock (the “Series B Preferred Stock”), 460,000 shares as Series C Convertible Preferred Stock (the “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 shares of Preferred Stock have not been determined. The Company’s Board of Directors is authorized to create a new series of preferred shares and determine the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred shares. As of June 30, 2017, there were 100,000 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.

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 ~~Company's next annual~~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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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.

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

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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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 Digital Power’s Common Stock and 378,776 shares of Digital Power’s Series D Preferred Stock, no par value per share, and warrants to purchase an aggregate of 1,000,000 shares of Digital Power’s Common Stock.

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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

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

Common Stock

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

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 common stock and one warrant to purchase one share of common stock (the “Nov. 2016 Warrants”) at an exercise price of $0.80.

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 of Common Stock at an exercise price of $0.80 per share for a period of three years. The Nov. 2016 Warrants are exercisable upon the six-month anniversary of 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 ~~held~~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, the Company issued 666,667 shares of its common stock, an extinguishment price of $0.60 per share, for the cancellation of $400 in demand promissory notes.

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

On March 15, 2017, Company entered into a subscription agreement with a related party for the sale of 500,000 shares of 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

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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.

14. RELATED PARTY TRANSACTION

In anticipation 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 the Company from a strategic investment into AVLP, the Company entered into the AVLP Notes, three 12% Convertible Promissory Notes agreements in the principal amount of $525 each. After six months, the Company has a 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, are convertible into 2,113,086 shares of the Company’s common stock.

During the period from March 29, 2017 to June, 2017, the Company funded $970 in excess of the $1,500 net loan amount required pursuant to the terms of the AVLP Notes. The Company and AVLP have agreed that these additional advances shall feature terms mirroring those of the AVLP Notes, including 12% annual interest and an original issue discount of 5%; however, in addition to these terms, the Company and AVLP are in the process of finalizing additional terms that will be incorporated into a fourth convertible promissory note agreement (See Note 4).

During the six months ended June 30, 2017, the Company invested $1,520 pursuant to the AVLP Notes and acquired 17,080 shares of AVLP common stock in the open market for $7.

During the three months ended December ~~28,~~31, 2016, the Company invested $950 pursuant to the AVLP Notes and acquired 250,900 shares of AVLP common stock in the open market for $85.

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 ~~approved~~of Directors. Mr. William B. Horne is the Chief Financial Officer 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 March 3, 2017, AVLP entered into a Share Exchange Agreement with MTIX and the three current shareholders of MTIX. Upon the terms and subject to the conditions set forth in the Share Exchange Agreement, AVLP will acquire MTIX from the MTIX shareholders through the transfer of all issued and outstanding ordinary shares of MTIX (the “MTIX Shares”) by the MTIX shareholders to AVLP in exchange for the issuance by AVLP of: (a) 7% secured convertible promissory notes in the aggregate principal face amount of $9,500 to the MTIX shareholders 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 ~~Incentive Plan~~to the principal shareholder of MTIX.

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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

During March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the MLSE plasma-laser system.

On September 22, 2016, the Company entered into consulting agreement with Mr. Ault to assist the Company in developing a business strategy, identifying new business opportunities, developing a capital raising program and implementing of a capital deployment program. For his services, Mr. Ault was paid $90 during the six months ended June 30, 2017.

On October 21, 2016, the Company entered into a 12% convertible secured note in the principal amount of $530 and warrants with the Barry Blank Living Trust, an existing stockholder of the Company, for $500 due on October 20, 2019. The principal amount of the 12% convertible secured note may be convertible into shares of the Company’s common stock at $0.55 per share. Subject to certain beneficial ownership limitations, the Barry Blank Living Trust may convert the principal amount of the convertible note at any time into common stock. During the six months ended June 30, 2017 the Company recorded interest expenses of $32 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 six months ended June 30, 2017 the Company recorded interest expenses of $3 on the short term loan from MCKEA.

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 $5,000,000 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 7.5% of the Company’s outstanding shares of common stock, 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 9).

15. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

The Company has two reportable geographic segments; 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.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

	Six months ended June 30, 2017 (unaudited)
	DPC			DPL			Eliminations			Total

Revenues	$	2,329		$	1,121		$	—		$	3,450
Inter-segment revenues	$	37		$	—		$	(37	)	$	—
Total revenues	$	2,366		$	1,121		$	(37	)	$	3,450

Depreciation and amortization expense	$	43		$	37		$	—		$	80

Operating income (loss)	$	(2,140	)	$	(91	)	$	—		$	(2,231	)

Other income, net										$	(614	)

Net loss attributable to non-controlling interest										$	112

Net income (loss)										$	(2,733	)

Capital expenditures for segment assets, as of June 30, 2017	$	8		$	13		$	—		$	21

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

	Six months ended June 30, 2016 (unaudited)
	DPC			DPL			Eliminations			Total

Revenues	$	2,160		$	1,617		$	—		$	3,777
Inter-segment revenues	$	62		$	—		$	(62	)	$	—
Total revenues	$	2,222		$	1,617		$	(62	)	$	3,777

Depreciation and amortization expense	$	38		$	45		$	—		$	83

Operating income (loss)	$	(181	)	$	(8	)	$	—		$	(189	)

Interest income, net										$	62

Net income (loss)										$	(127	)

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

Identifiable assets as of June 30, 2016	$	2,157		$	2,407		$	—		$	4,564

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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

Revenues	$	1,316		$	506		$	—		$	1,822
Inter-segment revenues	$	12		$	—		$	(12	)	$	—
Total revenues	$	1,328		$	506		$	(12	)	$	1,822

Depreciation and amortization expense	$	27		$	20		$	—		$	47

Operating income (loss)	$	(1,396	)	$	(48	)	$	—		$	(1,444	)

Interest expense, net										$	(407	)

Net loss attributable to non-controlling interest										$	112

Net income (loss)										$	(1,739	)

Capital expenditures for segment assets, as of June 30, 2017	$	8		$	11		$	—		$	19

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

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

Revenues	$	1,212	$	852		$	—		$	2,064
Inter-segment revenues	$	6	$	—		$	(56	)	$	—
Total revenues	$	1,268	$	852		$	(56	)	$	2,064

Depreciation and amortization expense	$	19	$	24		$	—		$	43

Operating income (loss)	$	33	$	(22	)	$	—		$	11

Other income, net									$	55

Net income (loss)									$	66

Capital expenditures for segment assets, as of June 30, 2016	$	—	$	3		$	—		$	3

Identifiable assets as of June 30, 2016	$	2,157	$	2,407		$	—		$	4,564

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

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

For the three months ended June 30, 2017

For the six months ended June 30, 2017

Total Revenues

by Major

Percentage of

by Major

Percentage of

Customers

Total Company

Customers

Total Company

(in thousands)

Revenues

(in thousands)

Revenues

Customer A

320

629

	For the three months ended June 30, 2016					For the six months ended June 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	$	443		21	%	$	768		20	%
Customer B	$	287		14	%	$	—		—

Revenue from Customer A was attributable to Digital Power and revenue from Customer B and C attributable to DP Limited.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016

Revenues:
Commercial products	$	1,083	$	1,413	$	2,023	$	2,460
Defense products		739		651		1,427		1,317
Total revenues	$	1,822	$	2,064	$	3,450	$	3,777

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

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016

Revenues:
North America	$	1,184	$	1,287	$	2,180	$	2,226
Europe		386		490		901		1,244
South Korea		116		287		219		297
Other		136		-		150		10
Total revenues	$	1,822	$	2,064	$	3,450	$	3,777

16. SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2017 and has determined that it does not have any material subsequent events to disclose in these financial statements except for the following.

On July 6, 2017, the Company received funding as a result of entering into two Agreements for the Purchase and Sale of Future Receipts with TVT Capital LLC pursuant to which the Company sold in the aggregate $1,091,220 in Future Receipts of the Company for $780,000. Under the terms of the agreements, the Company will be obligated to pay the initial daily amount of $5,456.50 which represents the product of the Company’s average monthly sales times 15% divided by the average business days in a calendar month until the $1,091,220 has been paid in full. The term Future Receipts means cash, check, ACH, credit card, debit card, bank card, charged card or other form of monetary payment.

On July 24 2017, we entered into subscription agreements with six investors, and on July 25, 2017 we entered into securities purchase agreements (the ~~“2016 Stock Incentive Plan”~~“Securities Purchase Agreement”), with an institutional investor, under which ~~options~~we agreed to ~~acquire~~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 $468,250. Of the aggregate purchase price of $468,250, $345,250 will be paid in cash and $123,000 will be in consideration for the cancellation of debt of the Company.

In a concurrent private placement, we agreed to sell to the institutional investor warrants to purchase an aggregate of 163,636 shares of the Company’s common stock, no par value per share (“Common Stock”), at an exercise price equal to $0.55 per share (“Warrant”) (the “Private Placement”).

We expect to receive aggregate net cash proceeds, after deducting estimated expenses related to the registered direct offering and the private placement, in the amount of approximately $335,250. We intend to use the net proceeds from this offering to pay off a convertible note in the aggregate of $125,000 and certain expenses related thereto. The remaining balance will be used for working capital.

On July 28 2017, we entered into an Exchange Agreement with an institutional investor who is an owner of (i) a convertible note in the principal amount of $125,000 (“Convertible Note”) dated April 17, 2017, and due June 2, 2017 and in which the principal is convertible into shares of common stock at $0.75 per share; and (ii) a warrant dated April 17, 2017 to purchase 83,334 shares of our common stock at $0.90 (“Prior Warrant”). Under the terms of the Exchange Agreement, we agreed to exchange (i) the 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 (ii) the Prior Warrant for a new Warrant (“Exchange Warrant”) to purchase 83,334 shares of common stock at $0.55 per share.

Concurrent with entering into the Exchange Agreement, the institutional investor entered into a subscription agreement under which we agreed to issue and sell in a registered direct offering 200,000 shares of common stock at $0.55 per share for an aggregate purchase price of $110,000 (“Registered Direct Offering”). The 200,000 shares of common stock will be purchased through the cancellation of the Exchange Note in the principal amount of $110,000.

DIGITAL POWER CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2017

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

In addition, in a concurrent private placement (the “Private Placement”), the institutional investor entered into a separate securities purchase agreement under which we agreed to issue and sell 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 will be 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 (“Warrant”).

On August 3, 2017, the Company entered into a Securities Purchase Agreement (“Agreement”) to sell a 12% Convertible (“Convertible Note”) and a warrant to purchase 666,666 shares of common stock to an accredited investor (the “Investor”). The principal of the Convertible Note may be converted into shares of common stock at $0.55 per share and under the terms of the Warrant, up to ~~4,000,000~~666,666 shares of common stock may be ~~granted to the Company's directors, officers, employees and consultants.~~ purchased at an exercise price of $0.70 per share.

The ~~2016 Stock Incentive Plan~~Convertible Note is in ~~addition to~~ the ~~Company’s current 2012 Stock Option Plan, as amended (the “2012 Plan”), which provides~~principal amount of $400,000 and was sold for $360,000, bears interest at 12% simple interest on the ~~issuance of~~principal amount, and is due on August 13, 2018. Interest only payments are due on a ~~maximum of 1,372,630~~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.

On August 3, 2017, Coolisys Technologies, Inc., a Delaware corporation and wholly owned subsidiary of the Company, entered into a Securities Purchase Agreement (“Agreement”) to acquire all of the outstanding Membership Interests of Power-Plus Technical Distributors, LLC, a California limited liability company. Power-Plus Technical Distributors is an industrial distributor of value added power supply solutions, UPS systems, fans, filters, line cords, and other power-related components. For the year ended December 31, 2016, Power-Plus Technical Distributor generated revenues of approximately $2,200.

Under the terms of the Agreement, Coolisys Technologies will acquire all of the Membership Interests of Power-Plus Technical Distributors for the purchase price of $850,000. The purchase price of $850,000 will be ~~offered~~paid by (i) the assumption of loans (or pay off of such loans) in the approximate amount of $198,000; (ii) a two year promissory note in the amount of $255,000 payable in 24 monthly installments; and (iii) cash at closing of approximately $397,000. The closing of the acquisition of the Membership Interests in Power-Plus Technical Distributors is subject to certain conditions including entering into agreements with Power-Plus Technical Distributors’ banks to allow Coolisys Technologies to assume such loans or payoff such loans. It is anticipated that the ~~Company’s directors, officers, employees,~~closing will occur on or around September 1, 2017.

On August 10, 2017, Digital Power Corporation, a California corporation (the “Company”), entered into Securities Purchase Agreements (“Agreements”) with five institutional investors (the “Investors”) to sell for an aggregate purchase price of $800,000, 10% Senior Convertible Promissory Notes (“Convertible Notes”) with an aggregate principal face amount of $880,000 and ~~consultants. As of November 4, 2016, 522,500 options, net of cancellations,~~warrants to purchase an aggregate of 1,466,667 shares of ~~Common Stock were granted~~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 ~~2012 Plan. If~~terms of the ~~2016 Stock Incentive Plan~~Warrant, up to 1,466,667 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 $880,000 and were sold for $800,000 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 ~~approved by the Company’s Shareholders, then 4,850,130 options shall be available~~subject to adjustment for ~~future issuance under the 2012 Plan and the 2016 Stock Incentive Plan.~~

customary stock splits, stock dividends, combinations or similar events.

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

~~SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS~~

This quarterly report contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on our expectations, beliefs, forecasts, intentions and future strategies and are signified by the words “expects”, “anticipates”, “intends”, “believes” or similar language. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II, Item 1A. Risk Factors” and elsewhere in this report. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. All forward-looking statements included in this quarterly report are based on information available to us on the date of this report and speak only as of the date hereof. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

In this quarterly report, the “Company,” “Digital Power,” “we,” “us” and “our” refer to Digital Power Corporation, a California corporation, ~~and~~ our wholly-owned subsidiary, Digital Power ~~Limited.~~

Limited and our majority owned subsidiary, Microphase Corporation.

GENERAL

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

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

We ~~are a California corporation originally formed in 1969, and our common stock trades on the NYSE MKT under the symbol “DPW”. Our corporate headquarters are~~have operations located in ~~the heart of the Silicon Valley.~~

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

~~We believe that we are one~~

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

We are a California corporation formed in 1969 and located in the ~~power solutions industry to introduce a product strategy based on~~heart of the ~~premise that products developed with an extremely flexible architecture enable rapid modifications to meet unique customer requirements for non-standard input~~Silicon Valley at 48430 Lakeview Blvd, Fremont, California 94538-3158. Our phone number is 510-657-2635 and ~~output voltages. We continue to sell products with flexible configurations to customers serving diversified applications in telecom, industrial and medical market segments. We believe~~ our ~~high density and high efficiency power products have set an industry standard for providing high-power output in a small packaging sizes.~~

We market and sell our products to many diverse market segments, including the telecom, industrial, medical and military/defense industries. Our products serve a global market, with an emphasis on North America and Europe. We offer a broad product variety, including a full custom product design, standard and modified-standard products. Our unique high-speed switching power rectifiers include but are not limited to defense and commercial custom power products, ruggedized custom military products, Datacom and server power supplies, front-end, open-frame, enclosed, CompactPCI, Capacitor Charger for laser charging, Desktop/Wall-mount Adaptors, Power over Ethernet (POE) and other product solutions. Our product power rangewebsite address is ~~from 10 watts to 75,000 watts.~~

In an effort to provide high quality products, better control our manufacturing costs and sell our products at competitive pricing to support our markets, we have entered into several contract manufacturing agreements with several manufacturers both domestically and in Asia, primarily China. To comply with the US International Traffic in Arms Regulations (“ITAR”) regulations, we manufacture our military products by a domestic manufacturer that complies with US ITAR regulations and is certified to perform such manufacturing services.

We intend to remain an innovative leader in the development of cutting-edge custom power solutions and feature rich products to meet any customer needs and requirements, rugged power systems to meet harsh and extreme operation environment conditions, and high efficiency, high-density and scalable power systems.

www.digipwr.com.

RESULTS OF OPERATIONS

THREE~~AND~~ ~~NINE~~ MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2016~~2017 COMPARED TO THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~201~~5

2016

Revenues

Our revenues ~~increased~~decreased by ~~$411,000,~~$242 or ~~29.0%,~~5.0% to ~~$1,826,000~~$1,822 for the three months ended ~~September~~June 30, ~~2016,~~2017, from ~~$1,415,000~~$2,064 for the three months ended ~~September~~June 30, ~~2015.~~2016. The ~~increase~~decrease in revenue ~~is mostly attributable to~~was primarily the result of a ~~rising sales volume of~~decrease in shipments from commercial and military products manufactured by the Company’s European operation in ~~North America. We had one customer that accounted for more than 10%~~Gresham, U.K. (“DP Limited”). The decrease attributed to DP Limited was partially offset by our acquisition of a majority interest in Microphase. On June 2, 2017, we acquired 56.4% of the outstanding equity interests of Microphase. As such, our consolidated revenues ~~for~~include those revenues generated by Microphase during the ~~nine months ended September~~period from June 3, 2017 to June 30, ~~2016.~~

2017, in the amount of $223.

Revenues from our U.S. operations increased by ~~54.5%~~8.6% to ~~$1,248,000~~$1,316 for the three months ended ~~September~~June 30, ~~2016,~~2017, from ~~$808,000~~$1,212 for the three months ended ~~September~~June 30, ~~2015.~~ 2016. As previously noted, our consolidated revenues include $223 in revenues generated by Microphase. If we had not closed on our acquisition of Microphase, then revenues from our U.S. operations would have been $1,093, a decrease of 9.8%. The slight decrease in revenues from our U.S. operations is attributed to a decrease in sales of our legacy products.

Revenues from our European operations of ~~DPL~~DP Limited decreased by ~~4.8%~~40.6% to ~~$578,000~~$506 for the three months ended ~~September~~June 30, ~~2016,~~2017, from ~~$607,000~~$852 for the three months ended ~~September~~June 30, ~~2015.~~

~~For the nine months ended September 30, 2016, our revenues increased by 2.6%~~2016. The decrease was primarily attributable to ~~$5,603,000 from $5,462,000 for the nine months ended September 30, 2015. The increase in revenues was attributable primarily to the increase in revenue from our U.S operations offset by~~ a decrease of ~~shipments~~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 ~~products~~product sales was attributed to technical changes in design of ~~DPL.~~

one of our development contracts.

Gross Margins

Gross margins increased to ~~38.5%~~40.1% for the three months ended ~~September~~June 30, ~~2016~~2017 compared to ~~33.9%~~36.5% for the three months ended ~~September~~June 30, ~~2015. Gross margins for the nine months ended September 30, 2016 increased slightly to 37.1% compared to gross margins of 36.5% for the nine months ended September 30, 2015.~~2016. The increase in gross margins ~~for the last quarter~~ was mainly attributable to the increase in ~~profitability~~sales of our commercial products sold byin our ~~U.S~~U.S. operations, which have greater gross margins, combined with the decrease in sales from our European operations.

Engineering and Product Development

Engineering and product development expenses ~~decreased~~increased by ~~$56,000~~$95 to ~~$147,000~~$265 for the six months ended June 30, 2017 from $170 for the three months ended ~~September~~June 30, ~~2016~~2016. The increase is partly attributed to our acquisition of Microphase, which reported $55 in engineering and product development expenses. The remaining increase was primarily related to an increase in direct manpower cost from ~~$203,000~~the addition of a new Head of Engineering and Technology, a highly-compensated position that was created during the fourth quarter of 2016.

Selling and Marketing

Selling and marketing expenses were $327 for the three months ended ~~September~~June 30, ~~2015.~~

~~Engineering and product development expenses were $511,000~~2017 compared to $233 for the ~~nine~~three months ended ~~September~~June 30, 2016, ~~as compared~~an increase of $94. Our acquisition of Microphase accounted for $9 of the increase in selling and marketing expenses. The remaining increase is attributed to ~~$663,000 for~~an increase in personnel costs directly attributed to sales and marketing personnel at Digital Power’s U.S. based operations. Beginning in December 2016 and throughout the ~~nine~~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~~June 30, ~~2015. The overall decrease in~~2016, the services of our engineering and product development expenses for the comparative nine month period was primarily related to the completion of custom product development efforts for medical and broadband applications, which decreased the amount of outside contracted engineering services incurred by our U.S operations.

~~Selling and Marketing~~

~~Selling~~current Chief Executive Officer were reported within selling and marketing expenses ~~were $235,000~~due to the significant amount of time in which he devoted to the sales process. The increase in the headcount of our sales and ~~$723,000, respectively,~~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 June 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 ~~and nine months ended September 30, 2016 as compared to $316,000 and $835,000, respectively, for the three and nine months ended September 30, 2015. The decrease in~~new sales and marketing ~~expenses for~~positions and partially offset by the ~~three~~allocation of our Chief Executive Officer’s salary to general and ~~nine month periods of 2016 versus the 2015 comparable periods was primarily the result of a reduction in sales staff.~~

administrative expense.

General and Administrative

General and administrative expenses were ~~$404,000 and $1,115,000, respectively,~~$1,582 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016 as~~2017 compared to ~~$378,000 and $1,279,000, respectively,~~$340 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2015. The decrease~~2016, an increase of $1,242. Our acquisition of Microphase accounted for $167 of the increase in ~~our~~ general and administrative ~~expenses for~~expenses. The adjusted increase of $1,075 from the comparative ~~nine months~~prior period was mainly due to ~~the resignation~~higher stock based compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional consultants to build an infrastructure in anticipation of our ~~former CFO~~future growth and ~~lower stock option expenses.~~the allocation of our Chief Executive Officer’s salary to general and administrative expense. The remaining increase in ~~the~~general and administrative expenses is due to various costs, none of which are significant individually.

In aggregate, we incurred $595 of stock-based compensation during the three months ended June 30, 2017. Of this amount, $572 was from issuances of equity based awards pursuant to our Plans and $23 was from a warrant award which was 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 June 30, 2016 and 2017, and inclusive of equity based awards issued outside the Plans, we recorded $36 and $580, respectively, of stock-based compensation in general and administrative expense.

We experienced an aggregate increase of $189 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 six months ended June 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 $161 in costs attributed to investor relations and other consulting fees.

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

Interest (expense) income, net

Interest expense, net was $407 for the three months ended ~~September~~June 30, ~~2016 was mainly due to increases in legal costs related to the Securities Purchase Agreement with Philou Ventures, LLC.~~

~~Impairment of investment~~

~~The Company did not record an impairment of its investment in Telkoor for the nine months ended September 30, 2016~~2017 compared to ~~an impairment~~income of ~~$106,000 for the nine months ended September 30, 2015.~~

~~Financial Income (Expenses), net~~

~~Financial income, net was $23,000 and $85,000, respectively,~~$55 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016 compared to $21,000 and $18,000~~2016. The increase in interest expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2015. Financial income~~2017 is primarily related to ~~foreign currency exchange gains~~debt discount, in the aggregate amount of $392, resulting from the ~~impact~~issuance of warrants in conjunction with the sale of debt instruments $870. During the three months ended June 30, 2017, as a result of these issuances, non-cash interest expense of $392 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 ~~weakening British Pound~~Company’s total borrowings. At June 30 2017, the outstanding balance of the Company’s convertible notes payable and notes payable was $2,565. Conversely, at June 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 accretion of original issue discount on ~~DPL cash and receivables that are linked to~~ the ~~USD.~~

AVLP 12% Secured Convertible Note of $66.

Operating Loss

The Company recorded an operating loss of ~~$83,000~~$1,444 for the three months ended ~~September~~June 30, ~~2016~~2017 compared to operating ~~loss~~income of ~~$417,000~~$11 for the three months ended ~~September~~June 30, ~~2015.~~2016. The decrease in operating loss was achieved by increased sales in North America and lower operating expenses. For the nine months ended September 30, 2016, the Company recorded an operating loss of $272,000 compared to operating loss of $783,000 for the nine months ended September 30, 2015. The decreaseincrease in operating loss is ~~primarily related to a decrease in operating~~mostly attributable from the increase of general and administrative expenses.

Net ~~Income (Loss)~~

Loss

The Company recorded a net loss of ~~$38,000~~$1,851 for the three months ended ~~September~~June 30, 2017 compared to a net income of $66 for the three months ended June 30, 2016 as a result of the aforementioned changes.

SIX MONTHS ENDED JUNE 30, 2017 COMPARED TO SIX MONTHS ENDED JUNE 30, 2016

Our revenues decreased by $327 or 8.7% to $3,450 for the six months ended June 30, 2017, from $3,777 for the six months ended June 30, 2016. The decrease in revenue was primarily the result of a decrease in shipments from commercial and military products manufactured by the Company’s European operation in Gresham, U.K. (“DP Limited”). The decrease attributed to DP Limited was partially offset by our acquisition of a majority interest in Microphase. On June 2, 2017, we acquired 56.4% of the outstanding equity interests of Microphase. As such, our consolidated revenues include those revenues generated by Microphase during the period from June 3, 2017 to June 30, 2017, in the amount of $223.

Revenues from our U.S. operations increased by 7.8% to $2,329 for the six months ended June 30, 2017, from $2,160 for the six months ended June 30, 2016. As previously noted, our consolidated revenues include $223 in revenues generated by Microphase. If we had not closed on our acquisition of Microphase, then revenues from our U.S. operations would have been $2,106, a decrease of 2.5%. The slight decrease in revenues from our U.S. operations is attributed to a decrease in sales of our legacy products.

Revenues from our European operations of DP Limited decreased by 30.7% to $1,121 for the six months ended June 30, 2017, from $1,617 for the six months ended June 30, 2016. 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 design of one of our development contracts.

Gross Margins

Gross margins increased to 41.7% for the six months ended June 30, 2017 compared to 36.4% for the six months ended June 30, 2016. The increase in gross margins was mainly attributable to the increase in sales 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.

Engineering and Product Development

Engineering and product development expenses increased by $128 to $492 for the six months ended June 30, 2017 from $364 for the six months ended June 30, 2016. The increase is partly attributed to our acquisition of Microphase, which reported $55 in engineering and product development expenses. The remaining increase is attributed to an $81 increase 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 $622 for the six months ended June 30, 2017 compared to $488 for the six months ended June 30, 2016, an increase of $134. Our acquisition of Microphase accounted for $9 of the increase 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 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 six months ended June 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 six months ended June 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 $2,555 for the six months ended June 30, 2017 compared to $711 for the six months ended June 30, 2016, an increase of $1,844. Our acquisition of Microphase accounted for $167 of the increase in general and administrative expenses. The adjusted increase of $1,677 from the comparative prior period was mainly due to higher stock based compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional consultants to build an infrastructure in anticipation of our future growth and the 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 $752 of stock-based compensation during the six months ended June 30, 2017. Of this amount, $696 was from issuances of equity based awards pursuant to our Plans and $56 was from restricted stock and warrant awards 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 June 30, 2016 and 2017, and inclusive of equity based awards issued outside the Plans, we recorded $73 and $651, respectively, of stock-based compensation in general and administrative expense.

We experienced an aggregate increase of $318 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 six months ended June 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 $376 in costs attributed to investor relations and other consulting fees.

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

Interest (expense) income, net

Interest expense, net was $614 for the six months ended June 30, 2017 compared to income of $62 for the six months ended June 30, 2016. The increase in interest expense for the six months ended June 30, 2017 is primarily related to debt discount, in the aggregate amount of $392, resulting from the issuance of warrants in conjunction with the sale of debt instruments of $3,254. During the six months ended June 30, 2017, as a result of these issuances, non-cash interest expense of $592 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 was partially offset by interest income and the accretion of original issue discount on the AVLP 12% Secured Convertible Note of $101.

Operating Loss

The Company recorded an operating loss of $2,231 for the six months ended June 30, 2017 compared to an operating loss of $189 for the six months ended 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 $2,845 for the six months ended June 30, 2017 compared to a net loss of ~~$396,000~~$127 for the ~~three~~six months ended ~~September~~June 30, ~~2015~~2016 as a result of the aforementioned changes. For the nine months ended September 30, 2016, the Company recorded a net loss of $165,000 compared to net loss of $871,000 for the nine months ended September 30, 2015 that included a $106,000 impairment of investment.

~~Other~~~~comprehensive income~~~~(loss)~~40

Other comprehensive loss was $55,000 and $265,000, respectively, for the three and nine months ended September 30, 2016 as compared to other comprehensive income of $82,000 and $55,000, respectively, for the three and nine months ended September 30, 2015. The significant other comprehensive loss for the three and nine month periods ended September 30, 2016, which decreased our equity reflects the impact of the weakening of the British Pound on the equity of our UK-based subsidiary DPL following the referendum in the UK on membership in the European Union.

LIQUIDITY AND CAPITAL RESOURCES

On ~~September~~June 30, ~~2016,~~2017, we had cash and cash equivalents of ~~$1,292,000.~~$443. This compares with cash and cash equivalents of ~~$1,241,000~~$996 at December 31, ~~2015.~~2016. The ~~increase~~decrease in cash and cash equivalents was primarily due to cash used in operating and investing activities in excess of funds provided by financing activities.

Net cash used in operating activities totaled $1,173 for the six months ended June 30, 2017, compared to net ~~cash provided from operating activities.~~

~~Net~~ cash provided by operating activities ~~totaled $138,000~~of $134 for the ~~nine~~six months ended ~~September~~June 30, ~~2016, compared to net cash used by operating activities of $595,000 for~~2016. During the ~~nine~~six months ended ~~September~~June 30, ~~2015. In~~2017, the ~~2016 period, the increase~~decrease in net cash provided ~~from~~by operating activities compared to the ~~2015 period~~six months ended June 30, 2016 was mainly due to ~~a decrease~~the 2017 six months loss of $2,845. The net loss was partially offset by non-cash charges, the amortization of debt discount of $592 and stock-based compensation of $752, and decreases in ~~losses~~our accounts receivable of $651 and ~~a decrease in inventories.~~

inventories of $216.

Net ~~cash provided from investing activities was $12,000 for the nine months ended September 30, 2016 compared to net~~ cash used in investing activities ~~of $130,000~~was $2,132 for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2017 compared to $74 for the six months ended June 30, 2016. The increase of the net usage of cash from investing activities ~~for both periods represented purchases of property and equipment net of retirements, and for the 2016 period includes $90,000 received from sale of~~was primarily related to the investment in ~~Telkoor.~~

~~There were no~~AVLP.

Net cash provided by financing activities inwas $2,711 and nil for the ~~three and nine~~six months ended ~~September~~June 30, 2017 and 2016, respectively. The financing activities related to the sale of 500,000 shares of common stock for net proceeds of $227, gross proceeds from the Company’s debt financings of $2,954 and ~~September 30, 2015.~~

payments on a revolving credit facility of $268.

Historically, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During 2017, as reflected below, the Company continues 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.

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.

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

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

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.

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.

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 ~~provided by operating activities as well as~~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 ~~cash equivalents will be sufficient to~~ meet our ~~anticipated cash needs for at least~~obligations.

Based on the ~~next 12 months.~~

~~We believe we have adequate resources at this time~~above, these matters raise substantial doubt about the Company’s ability to continue our operational and promotional efforts to increase sales and support our current operation. However, if we do not increase our sales, we may have to raise money through debt or equity offerings, which may dilute shareholders’ equity.

as a going concern.

CRITICAL ACCOUNTING POLICIES

In our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, 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. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

During the period covered by this quarterly report, there were no significant changes in our internal control over financial reporting or in other factors 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~~

ITEM 1. LEGAL PROCEEDINGS

None

~~ITEM 1A. RISK FACTORS~~

ITEM 1A. RISK FACTORS

The ~~risk factors listed~~risks described in ~~this section provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe~~Part I, Item 1A, "Risk Factors," in our ~~forward-looking statements. Readers should be aware that the occurrence of any of the events described in these risk factors~~2016 Form 10-K, could ~~have a material adverse effect on~~materially and adversely affect our business, financial condition and results of operations, and ~~financial condition. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.~~

~~We generated an operating and net loss during~~ the ~~three and nine months ended September 30, 2016 and September 30, 2015, we have historically experienced operating and net losses, and we may experience such losses in the future.~~

For the nine months ended September 30, 2016, we had an operating loss of $272,000 and a net loss of $165,000 compared to an operating loss of $1,003,000 and a net loss of $1,096,000 for the year ended December 31, 2015. Although we have actively taken steps to increase our revenue and reduce manufacturing and operating costs, we may incur operating and net losses in the future unless we increase revenues by selling current and custom design products and continue seeking manufacturing cost reductions through contract manufacturers.

~~We depend on Advice Electronics Ltd. (~~“~~Advice~~”) to ~~maintain the technology used to manufacture our products and to~~ ~~manufacture~~ ~~some of our products~~~~. We also~~ ~~depend on~~ ~~the right to~~ ~~manufactur~~~~e certain products~~~~subject to royalty payments~~ ~~with~~ ~~Advice~~.

In January 2016, Telkoor sold its entire commercial assets to Advice (formerly owned by Telkoor) which included without limitation product IP, manufacturing rights, customer base, inventory, staff and technological capabilities. Following such transaction, we entered into a manufacturing and distribution agreement with Advice. This agreement allows us to manufacture certain Advice products through August 2017 against royalty payments. From August 2017 through December 2020, subject to Advice's consent, we will be allowed to continue distributing and selling certain Advice products while keeping product branding under our brand, after which we will be entitled to distribute the products under DPC branding until December 2020.

We depend on Advice to design and retain product technology up to date and for manufacturing capabilities for certain of the products that we sell. If Advice is unable or unwilling to continue designing or manufacturing our products in required volumes and with a certain level of quality on a timely basis, that could lead to loss of sales and adversely affect our operating results and cash position. We also depend on Advice's intellectual property and ability to transfer production to third party manufacturers. Failure to obtain new products in a timely manner or delay in delivery of products to customers will have an adverse effect on our ability to meet our customers’ expectations. In addition, we operate in highly competitive markets where our ability to sell Advice’s products could be adversely affected by Advice's agreements with third parties, long lead-times and the high cost of Advice’s products. Also, in 2012, Telkoor’s products manufacturing lead-times increased, which hindered our ability to respond to our customers’ needs in timely manner. Advice's principal offices, research and development and manufacturing facilities are located in Israel. Political, economic, and military conditions in Israel directly affect Advice operations. We are also dependent upon Advice’s terms and conditions with its contract manufacturers for some of our products, which terms and conditions may not always be in our best interest. In 2010, we purchased certain IP from Telkoor in order to reduce our dependency on Telkoor with respect to a certain line of products. We also entered into a Manufacturing Rights Agreement with Advice in 2016, pursuant to which we were granted the non-exclusive right to directly place purchase orders for certain products from a third party manufacturer in consideration for payment of royalties to Advice. This agreement currently accounts for a significant portion of our sales. In the event this agreement is terminated for any reason, it would materially affect our profitability and cash position.

~~We are dependent upon our ability, and our contract manufacturers’ ability, to timely procure electronic components.~~

Because of the global economy, many raw material vendors have reduced capacities, closed production lines and, in some cases, even discontinued their operations. As a result, there is a global shortage of certain electronic components, which has extended our production lead-time and our production costs. Some materials are no longer available to support some of our products, thereby requiring us to search for cross materials or, even worse, redesign some of our products to support currently-available materials. Such redesign efforts may require certain regulatory and safety agency re-submittals, which may cause further production delays. While we have initiated actions that we believe will limit our exposure to such problems, the dynamic business conditions in many of our markets may challenge the solutions that have been put in place, and issues may recur in the future.

In addition, some of our products are manufactured, assembled and tested by third party subcontractors and contract manufacturers located domestically and in Asia. While we have had relationships with many of these third parties in the past, we cannot predict how or whether these relationships will continue in the future. In addition, changes in management, financial viability, manufacturing demand or capacity, or other factors, at these third parties could hurt our ability to manufacture our products.

~~If we fail to meet NYSE Mkt continued listing standards, our common stock~~ ~~will~~ ~~be delisted from NYSE Mkt which could adversely affect the price and liquidity of our common stock~~

The listing of our common stock on the NYSE MKT is contingent on our compliance with the NYSE MKT's conditions for continued listing. On December 18, 2015, we were notified by the NYSE MKT that we were no longer in compliance with the NYSE MKT continued listing standards because our last reported stockholders' equity was below continued listing standards. The NYSE MKT requires that a listed company's stockholders' equity be $4.0 million or more if it has reported losses from continuing operations and/or net losses in three of its four most recent fiscal years, and that stockholder equity be no less than $6 million if it has net losses in their five most recent fiscal years.

Following submission of our plan demonstrating how we intend to regain compliance with the continued listing standards, we were notified on March 9, 2016 that the NYSE MKT granted us a listing extension on the basis of our plan until June 19, 2017. We are subject to periodic review by NYSE MKT staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in our common stock being delisted from the NYSE MKT.

~~There is no assurance that we will be able to regain compliance with the abovementioned standard or any other applicable NYSE MKT listing standard. Upon such an occurrence,~~ trading of our common stock will be suspended by the NYSE MKT and we may be delisted by the NYSE MKT. In the event our common stock is no longer listed for trading on the NYSE MKT, our trading volume and share price may decrease and we may experience further difficulties in raising capital which could materially affect our operations and financial results.

~~We Will Need to Raise Additional Capital to Increase our Stockholders’ Equity and to Fund our Operations in Furtherance of Our Business Plan.~~

We will need to quickly raise additional capital in order to increase our stockholders’ equity in order to meet the NYSE MKT continued listing standards and to fund our operations in furtherance of our business plan. The proposed financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, debt securities, units consisting of the forgoing securities, equity investments from strategic development partners or some combination of each. Any additional equity financings may be financially dilutive to, and will be dilutive from an ownership perspective to our stockholders, and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available on a timely basis, in needed quantities, or on terms favorable to us, if at all.

~~Our strategic focus on our custom power supply solution competencies and concurrent cost reduction plans may be ineffective or may limit our ability to compete.~~

As a result of our strategic focus on custom power supply solutions, we will continue to devote significant resources to developing and manufacturing custom power supply solutions for a large number of customers, where each product represents a uniquely tailored solution for a specific customer’s requirements. Failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards may put us at risk with one or more of these customers. Moreover, changes in market conditions and strategic changes at the direction of our customers may affect their decision to continue to purchase from us. The loss of one or more of our significant custom power supply solution customers could have a material adverse impact on our revenues, and business or financial condition.

We have also implemented a series of initiatives designed to increase efficiency and reduce costs. While we believe that these actions will reduce costs, they may not be sufficient to achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market or result in the improvements in our business that we anticipate. In such event, we may be forced to take additional cost-reducing initiatives, including those involving our personnel, which may negatively impact quarterly earnings and profitability as we account for severance and other related costs. In addition, there is the risk that such measures could have long-term adverse effects on our business by reducing our pool of talent, decreasing or slowing improvements in our products or services, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our solutions increases and limiting our ability to hire and retain key personnel. These circumstances could cause our earnings to be lower than they otherwise might be.

~~We are dependent upon our ability to attract, retain and motivate our key personnel.~~

Our success depends on our ability to attract, retain and motivate our key management personnel, including, but not limited to, our President and CEO, our V.P. of Finance, marketing and sales personnel, and key engineers necessary to implement our business plan and to grow our business. Competition for certain specific technical and management skill sets is intense. If we are unable to identify and hire the personnel that we need to succeed, or if one or more of our present key employees were to cease to be associated with us, our future results could be adversely affected. Mr. Kohn continues to serve in his role as our President and CEO. However, Mr. Kohn’s employment agreement expired on December 31, 2010. We have been in discussions with Mr. Kohn regarding a new employment agreement and have agreed to terms of a new employment subject to entering into a definitive agreement.

~~We depend upon a few major customers for a majority of our revenues, and th~~~~e loss of any of these customers, or the substantial reduction in the quantity of products that they purchase from us, would significantly reduce our revenues and net income.~~

We currently depend upon a few major OEMs and other customers for a significant portion of our revenues. If our major OEM customers will reduce or cancel their orders scaling back some of their activities, our revenues and net income would be significantly reduced. Furthermore, diversions in the capital spending of certain of these customers to new network elements have and could continue to lead to their reduced demand for our products, which could, in turn, have a material adverse effect on our business and results of operations. If the financial condition of one or more of our major customers should deteriorate, or if they have difficulty acquiring investment capital due to any of these or other factors, a substantial decrease in our revenues would likely result.

~~We are dependent on the electronic equipment industry, and accordingly will be affected by the impact on that industry of current economic conditions.~~

Substantially all of our existing customers are in the electronic equipment industry, and they manufacture products that are subject to rapid technological change, obsolescence, and large fluctuations in demand. This industry is further characterized by intense competition and volatility. The OEMs serving this industry are pressured for increased product performance and lower product prices. OEMs, in turn, make similar demands on their suppliers, such as us, for increased product performance and lower prices. Such demands may adversely affect our ability to successfully compete in certain markets or our ability to sustain our gross margins.

~~Our reliance on subcontract manufacturers to manufacture certain aspects of our products involves risks, including delays in product shipments and reduced control over product quality.~~

Since we do not own significant manufacturing facilities, we must rely on, and will continue to rely on, a limited number of contract manufacturers to manufacture our power supply products. Our reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing costs, delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures on many of the raw materials used in the manufacturing of our power supply products. If we were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, inability of our subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition to our new subcontract manufacturers or other factors, we could experience lost revenues, increased costs, and delays in, or cancellations or rescheduling of, orders or shipments, any of which would materially harm our business.

~~We outsource, and are dependent upon developer partners for the development of some of our custom design products.~~

We made an operational decision to outsource some of our custom design products to numerous developer partners. This business structure will remain in place until the custom design volume justifies expanding our in house capabilities. Incomplete product designs that do not fully comply with the customer specifications and requirements might affect our ability to transition to a volume production stage of the custom designed product where the revenue goals are dependent on the high volume of custom product production. Furthermore, we rely on the design partners’ ability to provide high quality prototypes of the designed product for our customer approval as a critical stage to approve production.

~~We face intense industry competition, price erosion and product obsolescence, which, in turn, could reduce our profitability~~.

We operate in an industry that is generally characterized by intense competition. We believe that the principal bases of competition in our markets are breadth of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share. Product obsolescence can lead to increases in unsaleable inventory that may need to be written off and, therefore, could reduce our profitability. Similarly, price erosion can reduce our profitability by decreasing our revenues and our gross margins. In fact, we have seen price erosion over the last several years on most of the products we sell, and we expect additional price erosion in the future.

~~Our future results are dependent on our ability to establish, maintain and expand our manufacturer’ representative OEM relationships and our other relationships.~~

We market and sell our products through domestic and international OEM relationships and other distribution channels, such as manufacturers’ representatives and distributors. Our future results are dependent on our ability to establish, maintain and expand our relationships with OEMs as well as with manufacturer’ representatives and distributors to sell our products. If, however, the third parties with whom we have entered into such OEM and other arrangements should fail to meet their contractual obligations, cease doing, or reduce the amount of their business with us or otherwise fail to meet their own performance objectives, customer demand for our products could be adversely affected, which would have an adverse effect on our revenues.

~~We may not be able to procure necessary key components for our products, or we may purchase too much inventory or the wrong inventory.~~

The power supply industry, and the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for our products, we may not have adequate supplies of inventory on hand to satisfy our customers' needs. Furthermore, during these periods of growth, our suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that we require to build products so that we can meet our customers' needs. Our inability to secure sufficient components to build products for our customers could negatively impact our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for certain key components. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if there are negative factors impacting our customers’ end markets. If we purchase too much inventory or the wrong inventory, we may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on our gross margins and on our results of operations.

~~Although w~~~~e depend on sales of our legacy products for a meaningful portion of our revenues, these products are mature and their sales will continue to decline.~~

A relatively large portion of our sales have historically been attributable to our legacy products. We expect that these products may continue to account for a meaningful percentage of our revenues for the foreseeable future. However, these sales are declining. Although we are unable to predict future prices for our legacy products, we expect that prices for these products will continue to be subject to significant downward pressure in certain markets for the reasons described above. Accordingly, our ability to maintain or increase revenues will be dependent on our ability to expand our customer base, to increase unit sales volumes of these products and to successfully, develop, introduce and sell new products such as custom design and value added products. We cannot assure you that we will be able to expand our customer base, increase unit sales volumes of existing products or develop, introduce and/or sell new products.

~~Our operating results may vary from quarter to quarter.~~

Our operating results have in the past been subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in magnitude, in future periods. Demand for our products is driven by many factors, including the availability of funding for our products in our customers’ capital budgets. There is a trend for some of our customers to place large orders near the end of a quarter or fiscal year, in part to spend remaining available capital budget funds. Seasonal fluctuations in customer demand for our products driven by budgetary and other concerns can create corresponding fluctuations in period-to-period revenues, and we therefore cannot assure you that our results in one period are necessarily indicative of our revenues in any future period. In addition, the number and timing of large individual sales and the ability to obtain acceptances of those sales, where applicable, have been difficult for us to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm our operating results. It is possible that, in some quarters, our operating results will be below the expectations of public market analysts or investors. In such events, or in the event adverse conditions prevail, the market price of our common stock ~~may decline significantly.~~

~~Failure of~~could decline. These risk factors do not identify all risks that we face - our ~~information technology infrastructure~~operations could also be affected by factors that are not presently known to ~~operate effectively could adversely affect our business.~~

~~We depend heavily on information technology infrastructure~~us or that we currently consider to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

~~We are subject to certain governmental regulatory restrictions relating~~be immaterial to our ~~international sales.~~

~~Some of~~operations. Due to risks and uncertainties, known and unknown, our products are subject to International Traffic In Arms Regulation (“ITAR”), which are interpreted, enforced and administered by the U.S. Department of State. ITAR regulation controls not only the export, import and trade of certain products specifically designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services as well as foreign production. Any delays in obtaining the required export, import or trade licenses for products subject to ITAR regulation and rules could have a material adverse effect on our business,past financial condition, and/or operating results. In addition, changes in United States export and import laws that require us to obtain additional export and import licenses or delays in obtaining export or import licenses currently being sought could cause significant shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions or charges imposed by the United States or any other country on our international sales or foreign subsidiary could have a materially adverse effect on our business, financial condition, and/or operating results. In addition, from time to time, we have entered into contracts with the Israeli Ministry of Defense which were governed by the U.S. Foreign Military Financing program (“FMF”). Any such future sales would be subject to these regulations. Failure to comply with ITAR or FMF rules could have a material adverse effect on our financial condition, and/or operating results.

~~We depend on international operations for a substantial majority of our components and products.~~

We purchase a substantial majority of our components from foreign manufacturers and have a substantial majority of our commercial products assembled, packaged, and tested by subcontractors located outside the United States. These activities are subject to the uncertainties associated with international business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political, or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition, and/or operating results.

~~We depend on international sales for a portion of our revenues.~~

Sales to customers outside of North America accounted for 43% of net revenues in the first nine months of 2016 and 58.1% of net revenues in the year ended December 31, 2015, and we expect that international sales will continue to represent a material portion of our total revenues. International sales are subject to the risks of international business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts receivable, and currency restrictions. In addition, DPL, our wholly-owned subsidiary in the United Kingdom, supports our European and other international customers, distributors, and sales representatives, and therefore is also subject to local regulation. International sales are also subject to the export laws and regulations of the United States and other countries.

~~If our accounting controls and procedures are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.~~

We evaluate our disclosure controls and procedures as of the end of each fiscal quarter, and are annually reviewing and evaluating our internal control over financial reporting in order to comply with Securities and Exchange Commission rules relating to internal control over financial reporting adopted pursuant to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain effective internal control over financial reporting or our management does not timely assess the adequacy of such internal control, we may be subject to regulatory sanctions, and our reputation may decline.

~~The sale of our products is dependent upon our ability to satisfy the proprietary requirements of our customers.~~

We depend upon a relatively narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.

The sale of our products is dependent on our ability to respond to rapid technological change, including evolving industry-wide standards, and may be adversely affected by the development, and acceptance by our customers, of new technologies which may compete with, or reduce the demand for, our products.

Rapid technological change, including evolving industry standards, could render our products obsolete. To the extent our customers adopt such new technology in place of our products, the sales of our products may be adversely affected. Such competition may also increase pricing pressure for our products and adversely affect the revenues from such products.

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others, resulting in claims against us, the results ~~of which could be costly.~~

Many of our products consist entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret laws and contractual obligations, these protections may not be ~~sufficient~~a reliable indicator of future performance and historical trends should not be used to ~~prevent the wrongful appropriation~~anticipate results or trends in future periods. The Risk Factors section of our intellectual property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. In order to defend our proprietary rights2016 Annual Report on Form 10-K remains current in the technology utilized in our products from third party infringement, we may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business. If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results could be adversely affected.

all material respects.

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad.

~~If we are unable to satisfy our customers’ specific product quality, certification or network requirements, our business could be disrupted and our financial condition could be harmed.~~

Our customers demand that our products meet stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying such standards. Defects or failures have occurred in the past, and may in the future occur, relating to our product quality, performance and reliability. From time to time, our customers also require us to implement specific changes to our products to allow these products to operate within their specific network configurations. If we are unable to remedy these failures or defects or if we cannot effect such required product modifications, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts, any of which would harm our business.

~~If we ship products that contain defects, the market acceptance of our products and our reputation will be harmed and our customers could seek to recover their damages from us.~~

Our products are complex, and despite extensive testing, may contain defects or undetected errors or failures that may become apparent only after our products have been shipped to our customers and installed in their network or after product features or new versions are released. Any such defect, error or failure could result in failure of market acceptance of our products or damage to our reputation or relations with our customers, resulting in substantial costs for us and our customers as well as the cancellation of orders, warranty costs and product returns. In addition, any defects, errors, misuse of our products or other potential problems within or out of our control that may arise from the use of our products could result in financial or other damages to our customers. Our customers could seek to have us pay for these losses. Although we maintain product liability insurance, it may not be adequate.

~~Our common stock price is volatile~~.

Our common stock is listed on the NYSE MKT LLC. In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations or business prospects. The exercise of outstanding options and warrants may adversely affect our stock price and a shareholder’s percentage of ownership. As of September 30, 2016, we had outstanding options to purchase an aggregate of 1,001,000 shares of common stock, with a weighted average exercise price of $1.55 per share, exercisable at prices ranging from $0.65 to $1.79 per share.

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

On October 21, 2016, the Company entered into a 12% Convertible Secured Note, a warrant to purchase 265,000 shares of common stock each at an exercise price of $0.80, and a warrant to purchase 265,000 shares of common stock each at an exercise price of $0.90 with an accredited investor. The sale of the 12% Convertible Secured Note and the warrants were exempt from registration under the Securities Act of 1933, as amended, pursuant to an exemption under Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. No commission was paid in connection with the placement.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

~~ITEM 4. MINE SAFETY DISCLOSURES~~

ITEM 4. MINE SAFETY DISCLOSURES

None

~~ITEM 5. OTHER INFORMATION~~

On November 14, 2016, the Company issued a press release announcing its financial results for the third quarter ended September 30, 2016. A copy of the press release is furnished as Exhibit 99.1 hereto.

ITEM 5.

OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit Number	~~Exhibits~~	Description
2.1		Share Exchange Agreement by and among Digital Power Corporation, Microphase Corporation, Microphase Holding Company, RCKJ Trust, Ergul Family Limited Partnership, To Hong Yam and Eagle Advisers, LLC, dated as of April 28, 2017 (Incorporated by reference to Exhibit 2.1 of the Company’s current report filed on Form 8-K with the Securities and Exchange Commission on May 3, 2017)
3.1	~~3.1~~	Amended and Restated Articles of Incorporation of Digital Power Corporation ~~(1)~~

	~~3.2~~	~~Amendment~~ (Incorporated by reference to ~~Articles~~Exhibit 3.1 of ~~Incorporation (1)~~

	~~3.3~~	~~Amendment to Articles of Incorporation (2)~~

	~~3.3~~	~~Bylaws of Digital Power Corporation (1)~~

	~~3.4~~	~~Securities Purchase Agreement, dated as of September 4, 2016 by and among the Company, Philou Ventures, LLC, and Telkoor Telecom Ltd. (3)~~

	~~3.5~~	~~Rescission Agreement, dated as of September 4, 2016 by and among the Company and Telkoor Telecom Ltd. (3)~~

	~~31.1~~	~~Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~ ~~Certific~~
	~~31.2~~	~~Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

	32	~~Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

	~~99.1~~	~~Press Release, dated November 15, 2016, issued by Digital Power Corporation~~

	101.INS**	~~XBRL Instance~~

	101.SCH**	~~XBRL Taxonomy Extension Schema~~

	101.CAL**	~~XBRL Taxonomy Extension Calculation~~

	101.DEF**	~~XBRL Taxonomy Extension Definition~~

	101.LAB**	~~XBRL Taxonomy Extension Labels~~

	101.PRE**	~~XBRL Taxonomy Extension Presentation~~

	~~(1)~~	~~Previously filed with the Commission on October 16, 1996 as an exhibit to~~ the Company’s Registration Statement on Form ~~SB-2.~~

	~~(2)~~	~~Previously~~SB-2 filed with the Securities and Exchange Commission ason October 16, 1996)
3.2		Certificate of Amendment to Articles of Incorporation of Digital Power Corporation (Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on October 16, 1996)
3.3		Certificate of Amendment to Articles of Incorporation of Digital Power Corporation (Incorporated by reference to Exhibit 3.1 toof the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on December 9, ~~2013~~ 2013)
3.4
	~~(3)~~	~~Previously~~ Bylaws of Digital Power Corporation (Incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission ~~as an exhibit~~on October 16, 1996)
3.5		Form of Series C Certificate of Determination (Incorporated by reference to Exhibit 3.1 of the ~~Company's~~Company’s current report filed on Form 8-K ~~filed September 7, 2016~~ with the Securities and Exchange Commission on May 3, 2017)
3.6		Form of Series D Certificate of Determination (Incorporated by reference to Exhibit 3.1 of the Company’s current report filed on Form 8-K with the Securities and Exchange Commission on May 3, 2017)
3.7	**	~~XBRL information is furnished and not filed or a part~~ Form of ~~a registration statement or prospectus for purposes~~Series E Certificate of ~~sections 11 or 12~~ Determination (Incorporated by reference to Exhibit 3.2 of the Company’s current report filed on Form 8-K with the Securities ~~Act~~ 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 ~~1933, as amended, is deemed not~~ the Company’s current report filed ~~for purposes~~on Form 8-K with the Securities and Exchange Commission on March 9, 2017)
31.1*		Certification of ~~section~~Chief Executive and Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1**		Certification of Chief Executive and Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the ~~Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.~~ 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.

~~SIGNATURES~~

*** In accordance with Rule 406T 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 14, 2016~~

August 21, 2017

Digital Power Corporation

By:	/s/ ~~Uri Friedlander~~
	~~Uri Friedlander~~
	~~Vice President of Finance~~ Amos Kohn
	(Amos Kohn
	President, Chief Executive and Financial Officer and Principal Accounting ~~Officer)~~	Officer

California	94-1721931

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Large accelerated filer ☐	☐		Accelerated filer	☐

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

			Page
PART I – FINANCIAL INFORMATION

	Item 1.	Financial Statements	3

		Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2016~~2017 (Unaudited) and December 31, ~~2015~~ 2016	3 1-2

		Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and ~~nine~~ six months ended ~~September~~June 30, 2017 and 2016 ~~and September 30, 2015~~ (Unaudited)	5 3

		~~Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and September 30, 2015~~	6

		~~Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and September 30, 2015~~	7

		Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016 ~~and September 30, 2015~~ (Unaudited)	8 4-5

		Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	9 6 - 35

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17 36

	Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	20 42

	Item 4.	Controls and Procedures	21 42

PART II – OTHER INFORMATION			21

	Item 1.	Legal Proceedings	21 43
	Item 1A.	Risk Factors	21 43
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26 43
	Item 3.	Defaults Upon Senior Securities	26 43
	Item 4.	Reserved	26 43
	Item 5.	Other Information	26 43
	Item 6.	Exhibits	27

~~SIGNATURES~~			28 44

	June 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
June 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 June 30, 2017 and December 31,
2016, respectively (liquidation preference of $1,000 and nil at
June 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 June 30, 2017 and December 31,
2016, respectively (liquidation preference of $1,092 and nil at
June 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 June 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 June 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 June 30, 2017 and December 31, 2016
Common Stock, no par value – 30,000,000 shares authorized; 12,304,546
and 7,677,637 shares issued and outstanding at June 30, 2017 and		—			—
December 31, 2016, respectively
Additional paid-in capital		22,519			16,537
Accumulated deficit		(15,218	)		(12,158	)
Accumulated other comprehensive loss		(721	)		(820	)
TOTAL DIGITAL POWER STOCKHOLDERS' EQUITY		6,580			3,559

Non-controlling interest		833			—

TOTAL EQUITY		7,413			3,559

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	13,981		$	5,472

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

	For the quarterly period ended ~~September~~June 30, ~~2016~~ 2017

☐	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,
	2016		2015
	Unaudited
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1,292	$	1,241
Trade receivables		1,110		1,240
Related parties – trade receivables		-		77
Prepaid expenses and other accounts receivable		239		187
Inventories (Note 3)		1,186		1,542

Total current assets		3,827		4,287

PROPERTY AND EQUIPMENT, NET		615		709

INVESTMENT IN TELKOOR		-		90

LONG-TERM DEPOSITS		13		13

Total Non- current assets		628		812

Total assets	$	4,455	$	5,099

	Nine months ended September 30,						Three months ended September 30,
	2016			2015			2016			2015
	Unaudited

Revenues	$	5,603		$	5,462		$	1,826		$	1,415
Cost of revenues		3,526			3,468			1,123			935

Gross profit		2,077			1,994			703			480

Operating expenses:
Engineering and product development		511			663			147			203
Selling and marketing		723			835			235			316
General and administrative		1,115			1,279			404			378

Total operating expenses		2,349			2,777			786			897

Operating income (loss)		(272	)		(783	)		(83	)		(417	)
Financial income (expense), net		85			18			23			21
Impairment of investment		-			(106	)		-			-
Income (Loss) before income taxes		(187	)		(871	)		(60	)		(396	)

Income taxes		22			-			22			-

Net (loss) income	$	(165	)	$	(871	)	$	(38	)	$	(396	)

Basic net income (loss) per share	$	(0.02	)	$	(0.129	)	$	(0.01	)	$	(0.059	)

Diluted net income (loss) per share	$	(0.02	)	$	(0.129	)	$	(0.01	)	$	(0.059	)

	Common Shares Number		Additional paid-in capital		Accumulated deficit			Other accumulated comprehensive income (loss)			Total shareholders equity

Balance as of January 1, 2016		6,775,971	$	14,965	$	(11,036	)	$	(458	)	$	3,471
Stock compensation related to options granted to employees		-		129		-			-			129
Comprehensive loss: Net loss		-		-		(165	)		-			(165	)
Foreign currency translation adjustments		-		-		-			(265	)		(265	)
Balance as of September 30, 2016		6,775,971	$	15,094	$	(11,201	)	$	(723	)	$	3,170

Balance as of January 1, 2015		6,775,971	$	14,739	$	(9,940	)	$	(358	)	$	4,441

Stock compensation related to options granted to employees		-		181		-			-			181
Comprehensive loss:
Net loss		-		-		(871	)		-			(871	)
Foreign currency translation adjustments		-		-		-			(55	)		(55	)

Balance as of September 30, 2015		6,775,971	$	14,920	$	(10,811	)	$	(413	)	$	3,696