UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

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

 

Commission file number 1-12711

 

DPW HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 94-1721931
   

(State or other jurisdiction of incorporation or

organization)

 (I.R.S. Employer Identification Number)

 

201 Shipyard Way, Suite E

Newport Beach, CA 92663

(Address of principal executive offices)

 

(949) 444-5464

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:    
         
Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A Common Stock, $0.001 par value   DPW   NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding year (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  þ    No  ¨

 

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

 

Large accelerated filer  ¨ Accelerated filer  ¨
Non-accelerated filer  þ Smaller reporting company  þ
Emerging growth company  ¨  

 

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

 

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

 

At November 18, 2019 the registrant had outstanding 3,251,871 shares of common stock.

 

 

  
 

 

DPW HOLDINGS, INC.

TABLE OF CONTENTS

      Page
PART I – FINANCIAL INFORMATION  
       
Item 1.   Financial Statements  
       
   

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and
December 31, 2018 (Audited)

F-1 – F-2
       
    Condensed Consolidated Statements of Operations and Comprehensive Loss for the
three and nine months ended September 30, 2019 and 2018 (Unaudited)
F-3
       
    Condensed Consolidated Statements of Changes in Stockholders' Equity for the three
and nine months ended September 30, 2019 and 2018 (Unaudited)
F-4 – F-7
       
    Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2019 and 2018 (Unaudited)
F-8 – F-9
       
    Notes to Interim Condensed Consolidated Financial Statements (Unaudited) F-10 – F-40
       
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
Operations
1
       
Item 3.    Quantitative and Qualitative Disclosures about Market Risk 12
       
Item 4.   Controls and Procedures 12
       
PART II – OTHER INFORMATION  
       
Item 1.   Legal Proceedings 13
Item 1A.   Risk Factors 14
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3.   Defaults Upon Senior Securities 15
Item 4.   Mine Safety Disclosures 15
Item 5.   Other Information 15
Item 6.   Exhibits 16

 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, 2018, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of November 19, 2019. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.

 

  
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)      
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $756,652   $902,329 
Marketable equity securities   473,314    178,597 
Accounts receivable   2,473,500    1,930,971 
Accounts and other receivable, related party   1,238,856    3,887,654 
Accrued revenue   1,395,171    1,353,411 
Inventories, net   2,724,023    3,261,126 
Prepaid expenses and other current assets   706,967    775,981 
TOTAL CURRENT ASSETS   9,768,483    12,290,069 
Intangible assets   4,078,443    4,359,798 
Digital currencies   6,634    1,535 
Goodwill   8,810,340    8,463,070 
Property and equipment, net   2,509,894    9,313,299 
Right-of-use assets   3,433,794     
Investments - related party, net of original issue discount of $1,475,485          
  and $2,336,693, respectively   9,738,353    5,611,621 
Investments in derivative liabilities and common stock - related party   2,351,970    3,043,499 
Equity investments in private companies   897,957    480,000 
Investment in limited partnership   1,969,000    1,969,000 
Loans receivable   2,170,962    2,572,230 
Other investments, related parties   840,000    862,500 
Other assets   850,148    459,259 
TOTAL ASSETS  $47,425,978   $49,425,880 
LIABILITIES AND STOCKHOLDERS' EQUITY          
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $12,649,593   $13,065,838 
Accounts payable and accrued expenses, related party   62,278    57,752 
Operating lease liability, current   741,433     
Advances on future receipts   2,216,422    2,085,807 
Short term advances, related party   699,261    73,761 
Revolving credit facility   233,490    285,605 
Notes payable, net   6,077,720    6,388,787 
Notes payable, related party   168,589    166,925 
Convertible notes payable   1,146,141    6,742,494 
Other current liabilities   1,859,041    1,868,402 
TOTAL CURRENT LIABILITIES   25,853,968    30,735,371 
LONG TERM LIABILITIES          
Operating lease liability, non-current   2,781,345     
Notes payable   464,809    483,659 
Notes payable, related parties   115,728    142,059 
Convertible notes payable   284,284     
TOTAL LIABILITIES   29,500,134    31,361,089 

 

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

 

 F-1 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)      
           
COMMITMENTS AND CONTINGENCIES          
STOCKHOLDERS' EQUITY          
Series A Cumulative Redeemable Perpetual Preferred Stock, $25.00 stated   7    1 
value per share, $0.001 par value – 1,000,000 shares authorized; 7,040 and          
1,434 shares issued and outstanding at September 30, 2019 and          
December 31, 2018, respectively (redemption amount and liquidation          
preference of $176,000 and $35,850 as of September 30, 2019 and
December 31, 2018, respectively)
          
Series B Convertible Preferred Stock, $10.00 stated value per share,   125    125 
share, $0.001 par value – 500,000 shares authorized; 125,000 shares issued          
and outstanding at September 30, 2019 and December 31, 2018 (liquidation          
preference of $1,250,000 at September 30, 2019 and December 31, 2018          
Class A Common Stock, $0.001 par value – 500,000,000 shares authorized;   2,542    101 
2,541,529 and 100,910 shares issued and outstanding at September 30, 2019          
and December 31, 2018, respectively          
Class B Common Stock, $0.001 par value – 25,000,000 shares authorized;        
nil shares issued and outstanding at September 30, 2019 and December 31, 2018          
Additional paid-in capital   99,883,351    77,647,544 
Accumulated deficit   (76,811,910)   (55,721,115)
Accumulated other comprehensive loss   (5,156,513)   (3,902,523)
TOTAL DPW HOLDINGS STOCKHOLDERS' EQUITY   17,917,602    18,024,133 
Non-controlling interest   8,242    40,658 
TOTAL STOCKHOLDERS' EQUITY   17,925,844    18,064,791 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $47,425,978   $49,425,880 

 

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

 

 F-2 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

 

   For the Three Months Ended  For the Nine Months Ended
   September 30,  September 30,
   2019  2018  2019  2018
             
Revenue  $4,968,440   $5,732,002   $15,061,289   $13,245,419 
Revenue, cryptocurrency mining   307,172    590,165    592,092    1,546,418 
Revenue, related party       352,496        3,911,263 
Revenue, restaurant operations   1,036,834    1,584,891    3,371,465    2,087,383 
Revenue, lending activities   69,217    85,368    443,927    194,120 
Total revenue   6,381,663    8,344,922    19,468,773    20,984,603 
Cost of revenue   4,642,526    6,317,754    14,350,041    16,204,388 
Gross profit   1,739,137    2,027,168    5,118,732    4,780,215 
Operating expenses                    
Engineering and product development   481,902    333,555    1,408,848    1,043,993 
Selling and marketing   392,725    790,603    1,293,181    2,290,934 
General and administrative   4,519,641    5,088,312    14,584,758    12,697,909 
Impairment of property and equipment   4,315,856        4,315,856     
(Gain) loss on digital currency   (951)   2,543    (6,933)   2,543 
Total operating expenses   9,709,173    6,215,013    21,595,710    16,035,379 
Loss from operations   (7,970,036)   (4,187,845)   (16,476,978)   (11,255,164)
Interest income   898,646    712,262    2,647,110    1,955,885 
Interest expense   (2,954,843)   (4,072,539)   (5,586,639)   (11,335,069)
Change in fair value of marketable equity securities   (330,150)       (173,503)    
Loss on extinguishment of convertible debt   (155,448)       (963,232)    
Loss on issuance of warrants           (1,763,481)    
Change in fair value of warrant liability   165,840        1,112,665     
Loss before income taxes   (10,345,991)   (7,548,122)   (21,204,058)   (20,634,348)
Income tax benefit   5,140    23,737    93,284    17,480 
Net loss   (10,340,851)   (7,524,385)   (21,110,774)   (20,616,868)
Less: Net loss attributable to non-controlling interest       74,414    32,416    218,494 
Net loss attributable to DPW Holdings   (10,340,851)   (7,449,971)   (21,078,358)   (20,398,374)
Preferred dividends   (5,284)       (12,437)   (108,049)
Net loss available to common stockholders  $(10,346,135)  $(7,449,971)  $(21,090,795)  $(20,506,423)
Basic and diluted net loss per common share  $(6.47)  $(88.23)  $(24.62)  $(311.53)
Basic and diluted weighted average common shares outstanding   1,599,306    84,441    856,689    65,824 
Comprehensive Loss                    
Loss available to common stockholders  $(10,346,135)  $(7,449,971)  $(21,090,795)  $(20,506,423)
Other comprehensive income (loss)                    
Foreign currency translation adjustment   67,166    (77,686)   259,671    (209,535)

Net unrealized gain (loss) on derivative 

securities of related party

   (1,152,480)   (1,341,977)   (1,513,661)   (6,787,902)
Other comprehensive income (loss)   (1,085,314)   (1,419,663)   (1,253,990)   (6,997,437)
Total Comprehensive loss  $(11,431,449)  $(8,869,634)  $(22,344,785)  $(27,503,860)

  

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

 

 F-3 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended September 30, 2019

 

                           Accumulated         
                   Additional       Other       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Interest   Equity 
BALANCES, June 30, 2019   132,040   $132    1,037,128   $1,037   $92,377,366   $(66,465,775)  $(4,071,199)  $8,242   $21,849,803 
Compensation expense due to stock                                             
 option issuances                   187,125                187,125 
Issuance of common stock for cash           1,140,330    1,141    4,415,624                4,416,765 
Issuance of common stock for services           20,000    20    51,980                52,000 
Issuance of common stock for conversion                                             
  of debt           344,071    344    2,127,493                2,127,837 
Beneficial conversion feature in connection                                             
 with convertible notes                   633,004                633,004 
Fair value of warrants issued in connection                                             
 with convertible notes                    142,070                142,070 
Cash for exchange fees and other financing costs                   (206,759)               (206,759)
Loss on debt extinguishment                       155,448                   155,448 
Comprehensive loss:                                             
Net loss                        (10,340,851)           (10,340,851)
Preferred dividends                       (5,284)           (5,284)
Net unrealized gain on derivatives                                             
  in related party                           (1,152,480)       (1,152,480)
Foreign currency translation adjustments                           67,166        67,166 
BALANCES, September 30, 2019   132,040   $132    2,541,529   $2,542   $99,883,351   $(76,811,910)  $(5,156,513)  $8,242   $17,925,844 

 

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

 

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

 

 F-4 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended September 30, 2018

 

                           Accumulated         
                   Additional       Other       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Interest   Equity 
BALANCES, July 1, 2018   125,000   $125    77,028   $77   $68,492,048   $(36,552,389)  $(1,074,728)  $669,899   $31,535,032 
Compensation expense due to stock                                             
 option issuances                   298,594                298,594 
Compensation expense due to warrant issuances                   23,477                23,477 
Issuance of common stock and warrants for cash           7,900    8    3,695,819                3,695,827 
Issuance of common stock for services           1,250    2    399,998                400,000 
Issuance of common stock in connection                                             
 with convertible notes           500        501,538                501,538 
Beneficial conversion feature in connection                                             
 with convertible notes                   720,000                720,000 
Cash for exchange fees and other financing costs                   (112,803)               (112,803)
Non-controlling interest from Microphase                               (25,000)   (25,000)
Comprehensive loss:                                             
Net loss                       (7,449,971)           (7,449,971)
Net unrealized gain on securities                                             
 available-for-sale, net of income taxes                           (1,341,977)       (1,341,977)
Foreign currency translation adjustments                       4,100    (77,686)       (73,586)
Net loss attributable to non-controlling interest                               (74,414)   (74,414)
BALANCES, September 30, 2018   125,000   $125    86,678   $87   $74,018,671   $(43,998,260)  $(2,494,391)  $570,485   $28,096,717 

 

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

 

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

 

 F-5 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2019

 

                           Accumulated         
                   Additional       Other       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Interest   Equity 
BALANCES, January 1, 2019   126,434   $126    100,910   $101   $77,647,544   $(55,721,115)  $(3,902,523)  $40,658   $18,064,791 
Compensation expense due to stock                                             
 option issuances                   681,079                681,079 
Issuance of common stock for cash           1,331,509    1,333    9,869,176                9,870,509 
Issuance of common stock for services           29,375    29    304,990                305,019 
Issuance of common stock in payment of                                             
  accrued liabilities           9,375    9    108,512                108,521 
Issuance of common stock for conversion                                             
 of debt           370,473    370    4,735,925                4,736,295 
Issuance of common stock upon exercise                                             
 of warrants           699,887    700    6,620,325                6,621,025 
Issuance of Series A preferred stock for cash   5,606    6            140,144                140,150 
Beneficial conversion feature in connection                                             
 with convertible notes                   821,452                821,452 
Fair value of warrants issued in connection                                             
 with convertible notes                   200,518                200,518 
Cash for exchange fees and other financing costs                   (1,401,762)               (1,401,762)
Loss on debt extinguishment                   155,448                155,448 
Comprehensive loss:                                             
Net loss                        (21,078,358)           (21,078,358)
Preferred dividends                       (12,437)           (12,437)
Net unrealized loss on derivatives                                             
  in related party                           (1,513,661)       (1,513,661)
Foreign currency translation adjustments                           259,671        259,671 
Net loss attributable to non-controlling interest                               (32,416)   (32,416)
BALANCES, September 30, 2019   132,040   $132    2,541,529   $2,542   $99,883,351   $(76,811,910)  $(5,156,513)  $8,242   $17,925,844 

 

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

 

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

 

 F-6 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2018

 

                           Accumulated         
                   Additional       Other       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Interest   Equity 
BALANCES, January 31, 2018   478,776   $479    37,778   $38   $36,918,132   $(23,414,151)  $4,503,046   $780,737   $18,788,281 
Compensation expense due to stock                                             
 option issuances                   725,467                725,467 
Compensation expense due to warrant issuances                   70,431                70,431 
Issuance of common stock and warrants for cash           31,721    32    22,247,384                22,247,416 
Issuance of common stock for services           4,604    5    4,158,291                4,158,296 
Issuance of common stock for conversion                                             
 of debt           2,538    3    2,167,841                2,167,844 
Issuance of common stock for conversion                                             
 of short-term advances           4,540    4    2,819,580                2,819,584 
Issuance of common stock upon exercise                                             
 of stock options           75        97,800                97,800 
Issuance of common stock upon exercise                                             
 of warrants           2,682    3    867,163                867,166 
Issuance of Series B preferred stock for                                             
 conversion of short-term advances   25,000    25            249,975                250,000 
Issuance of common stock for conversion                                             
 of Series E preferred stock   (378,776)   (379)   947    1    378                 
Issuance of common stock in connection                                             
 with convertible notes           1,862    1    1,176,758                1,176,759 
Repurchase of common stock           (69)       (55,000)               (55,000)
Beneficial conversion feature in connection                                             
 with convertible notes                   1,008,573                1,008,573 
Fair value of warrants issued in connection                                             
 with convertible notes                   3,408,665                3,408,665 
Cash for exchange fees and other financing costs                   (1,950,816)               (1,950,816)
Non-controlling interest from acquisition of I. AM                               33,242    33,242 
Non-controlling interest from Microphase                               (25,000)   (25,000)
Comprehensive loss:                                             
Net loss                       (20,398,374)           (20,398,374)
Preferred deemed dividends                   108,049    (108,049)            
Net unrealized gain on securities                                             
 available-for-sale, net of income taxes                           (6,787,902)       (6,787,902)
Foreign currency translation adjustments                       (77,686)   (209,535)       (287,221)
Net loss attributable to non-controlling interest                               (218,494)   (218,494)
BALANCES, September 30, 2018   125,000   $125    86,678   $87   $74,018,671   $(43,998,260)  $(2,494,391)  $570,485   $28,096,717 

 

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

 

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

 

 F-7 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

   For the Nine Months Ended September 30, 
   2019   2018 
         
Cash flows from operating activities:          
Net loss  $(21,110,774)  $(20,616,868)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   2,673,352    1,642,422 
Amortization   400,661    100,074 
Amortization of right-of-use assets   260,549     
Interest expense – debt discount   3,034,454    8,812,972 
Fair value in excess of proceeds upon issuance of warrants   1,763,481     
Change in fair value of warrant liability   (1,112,665)    
Accretion of original issue discount on notes receivable – related party   (1,869,778)   (1,524,441)
Accretion of original issue discount on notes receivable   (77,155)    
Increase in accrued interest on notes receivable – related party   (732,542)    
Stock-based compensation   1,354,062    4,164,180 
Impairment of property and equipment   4,315,856     
Realized (gains) losses on sale of digital currencies   (394)   110,523 
Realized (gains) losses on sale of marketable securities   (86,741)   167,779 
Unrealized (gains) losses on marketable equity securities   (294,717)   42,962 
Unrealized gains on equity securities – related party   371,970     
Unrealized gains on equity securities   24,597     
Changes in operating assets and liabilities:          
Accounts receivable   (397,395)   876,378 
Accounts receivable, related party   2,648,798    (3,517,216)
Accrued revenue   (41,760)    
Digital currencies   (599,025)   (1,502,956)
Inventories   619,185    (117,621)
Prepaid expenses and other current assets   (269,047)   198,058 
Other assets   (433,013)   (144,593)
Accounts payable and accrued expenses   1,357,307    1,923,193 
Accounts payable, related parties   4,526    (15,258)
Other current liabilities   (9,505)   (29,643)
Lease liabilities   (171,565)    
           
Net cash used in operating activities   (8,377,278)   (9,430,055)
           
Cash flows from investing activities:          
Purchase of property and equipment   (149,323)   (9,317,726)
Loss on disposition of asset       22,172 
Purchase of intangible asset       (53,643)
Purchase of Enertec       (4,936,562)
Cash received on acquisitions       293,042 
Investments – related party   (1,501,912)   (844,834)
Related party investment in real property       (1,915,000)
Investments in warrants and common stock - related party   (1,102,619)   (2,287,991)
Investments in marketable equity securities       (858,458)
Sales of marketable equity securities   571,741    2,158,724 
Investments - others       (25,000)
Proceeds from loans to related parties       16,088 
Investments in debt and equity securities   (504,393)   (2,166,505)
           
Net cash used in investing activities  $(2,686,506)  $(19,915,693)

 

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

  

 F-8 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

 

 

   For the Nine Months Ended September 30, 
   2019   2018 
         
Cash flows from financing activities:          
Gross proceeds from sales of common stock and warrants  $15,945,371   $22,247,416 
Repurchase of common stock       (54,747)
Proceeds from issuance of Series A Convertible Preferred Stock   131,741     
Financing cost in connection with sales of equity securities   (1,401,764)   (1,951,397)
Proceeds from stock option exercises       97,740 
Proceeds from warrant exercises   127,000    867,166 
Proceeds from convertible notes payable   500,000    11,550,000 
Proceeds from notes payable   4,752,918    12,234,999 
Proceeds from short-term advances – related party   625,500    136,761 
Proceeds from short-term advances       761,000 
Payments on short-term advances       (425,000)
Payments on notes payable   (2,001,474)   (11,781,756)
Payments on convertible notes payable   (7,079,547)   (2,362,281)
Proceeds from advances on future receipts   941,804    2,990,277 
Payments on advances on future receipts   (1,365,435)   (5,158,229)
Payments of preferred dividends   (12,437)    
Payments on revolving credit facilities, net   (80,445)   (360,587)
           
Net cash provided by financing activities   11,083,232    28,791,362 
           
Effect of exchange rate changes on cash and cash equivalents   (165,125)   (220,325)
Net decrease in cash and cash equivalents   (145,677)   (774,711)
Cash and cash equivalents at beginning of period   902,329    1,478,147 
           
Cash and cash equivalents at end of period  $756,652   $703,436 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for interest  $1,850,946   $695,373 
           
Non-cash investing and financing activities:          
Cancellation of convertible note payable into shares of common stock  $4,736,295   $2,167,844 
Payment of accounts payable with digital currency  $594,320   $ 
Issuance of common stock for prepaid services  $   $794,055 
Issuance of common stock in payment of liability  $108,521   $ 
Cancellation of short term advances into shares of common stock  $   $2,774,584 
Cancellation of short term advances, related party into shares          
of common stock  $   $45,000 
Cancellation of short term advances, related party into shares          
of Series B Preferred Stock  $   $250,000 
Conversion of loans receivable for marketable equity securities  $485,000   $ 
Conversion of loans receivable for investments in warrants and          
common stock - related party  $91,483   $ 

 

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

 

 F-9 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

SEPTEMBER 30, 2019

 

 

 

1. DESCRIPTION OF BUSINESS

 

DPW Holdings, Inc., a Delaware corporation (“DPW” or the “Company”), formerly known as Digital Power Corporation, was incorporated in September 2017. The Company is a diversified holding company owning subsidiaries engaged in the following operating businesses: commercial and defense solutions, commercial lending, cryptocurrency blockchain mining, advanced textile technology and restaurant operations. The Company’s wholly-owned subsidiaries are Coolisys Technologies, Inc. (“Coolisys”), Digital Power Limited (“DP Limited”), Enertec Systems 2001 Ltd (“Enertec”), Power-Plus Technical Distributors, LLC (“Power-Plus”), Digital Power Lending, LLC (“DP Lending”) and Digital Farms, Inc. (“Digital Farms”). The Company also has controlling interests in Microphase Corporation (“Microphase”) and I. AM, Inc. (“I.AM”). The Company has five reportable segments – North America with operations conducted by Microphase, Coolisys, Power-Plus and DP Lending, Europe with operations through DP Limited, Middle East with operations through Enertec, digital currency blockchain mining through Digital Farms and restaurant operations through I.AM.

 

On March 14, 2019, pursuant to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s Board of Directors (the “Board”) approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the Common Stock of the Company’s issued and outstanding number of such shares by a ratio of one-for-twenty (the “First Stock Split”). At the Company’s 2019 reconvened Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate a second reverse stock split (the “Second Stock Split”) of the Company’s issued and outstanding Common Stock. Thereafter, on July 23, 2019, the Board approved the Second Stock Split with a ratio of one-for-forty. The Second Stock Split did not affect the number of authorized shares of Common Stock or their par value per share. As a result of the Second Stock Split, each forty shares of common stock issued and outstanding prior to the Second Stock Split were converted into one share of common stock. The Second Stock Split became effective in the State of Delaware on August 5, 2019.

 

2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. As of September 30, 2019, the Company had cash and cash equivalents of $756,652, an accumulated deficit of $76,811,910 and a negative working capital of $16,085,485. The Company has incurred recurring losses and reported losses for the three and nine months ended September 30, 2019, totaled $10,340,851 and $21,110,774, respectively. In the past, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During 2019, the Company continued to successfully obtain additional equity and debt financing and in restructuring existing debt.

 

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. On April 2, 2019, the Company received gross proceeds of approximately $7 million in a public offering of its securities (see Note 20). Management believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities. However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce, eliminating outside consultants and reducing legal fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

 

 F-10 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Principles of Consolidation

 

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

 

Accounting Estimates

 

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

 

Impairment of long-lived assets:

 

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted expected future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by comparing the amount by which the carrying amount of the assets to their fair value. Based on its reviews, management determined that its digital currency miners were impaired by a total of $4,315,856 based upon an assessment as of September 30, 2019, including consideration of the decline in bitcoin values which occurred throughout 2019.

 

Revenue Recognition

 

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

·Step 1: Identify the contract with the customer,
·Step 2: Identify the performance obligations in the contract,
·Step 3: Determine the transaction price,
·Step 4: Allocate the transaction price to the performance obligations in the contract, and
·Step 5: Recognize revenue when the company satisfies a performance obligation.

 

 F-11 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

The Company’s disaggregated revenues consist of the following for the nine months ended September 30, 2019:

 

   Nine Months ended September 30, 2019
            Digital      
   DPC 1  DP Limited  Enertec  Farms  I.AM  Total
                   
Primary Geographical                  
Markets                  
North America  $7,146,478   $   $   $592,092   $3,371,465   $11,110,035 
Europe   90,154    1,193,158                1,283,312 
Middle East   21,348        6,336,852            6,358,200 
Other   296,190    230,813    190,223            717,226 
   $7,554 170   $1,423,971   $6,527,075   $592,092   $3,371,465   $19,468,773 
Major Goods                              
RF/Microwave Filters  $2,245,748   $   $   $   $   $2,245,748 
Detector logarithmic                              
 video amplifiers   558,155                    558,155 
Power Supply Units   4,306,340                    4,306,340 
Power Supply Systems       1,423,971                1,423,971 
Healthcare diagnostic systems           1,503,306            1,503,306 
Defense systems           5,023,769            5,023,769 
Digital Currency Mining               592,092        592,092 
Restaurant operations                   3,371,465    3,371,465 
Lending activities   443,927                    443,927 
   $7,554,170   $1,423,971   $6,527,075   $592,092   $3,371,465   $19,468,773 
Timing of Revenue                              
Recognition                              
Goods transferred at a                              
 a point in time  $7,554,170   $1,287,070   $   $592,092   $3,371,465   $12,804,797 
Services transferred over time       136,901    6,527,075            6,663,976 
   $7,554,170   $1,423,971   $6,527,075   $592,092   $3,371,465   $19,468,773 

 

1 Consists of Microphase, Coolisys, Power-Plus and DP Lending

 

Sales of Products

 

The Company generates revenues from the sale of its products through a direct and indirect sales force. The Company’s performance obligations to deliver products are satisfied at the point in time when products are received by the customer, which is when the customer obtains control over the goods. The Company provides standard assurance warranties, which are not separately priced, that the products function as intended. The Company primarily receives fixed consideration for sales of product. Some of the Company’s contracts with distributors include stock rotation rights after six months for slow moving inventory, which represents variable consideration. The Company uses an expected value method to estimate variable consideration and constrains revenue for estimated stock rotations until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. To date, returns have been insignificant. The Company’s customers generally pay within 30 days from the receipt of a valid invoice.

 

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

 

 F-12 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

Manufacturing Services

 

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

 

For manufacturing services, which include revenues generated by Enertec and in certain instances revenues generated by DPL, the Company’s performance obligation for manufacturing services is satisfied over time as the Company creates or enhances an asset based on criteria that are unique to the customer and that the customer controls as the asset is created or enhanced. Generally, the Company recognizes revenue based upon proportional performance over time using a cost to cost method which measures progress based on the costs incurred to total expected costs in satisfying its performance obligation. This method provides a depiction of the progress in providing the manufacturing service because there is a direct relationship between the costs incurred by the Company and the transfer of the manufacturing service to the customer. Manufacturing services that are recognized based upon the proportional performance method are included in the above table as services transferred over time and to the extent the customer has not been invoiced for these revenues, as accrued revenue in the accompanying consolidated balance sheets. Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified.

 

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

 

The aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of September 30, 2019, for the MLSE units was approximately $48 million, representing 24 MLSE units. Based on our expectations regarding funding of the production process and our experience building the first machines, the Company expects to recognize the remaining revenue related to the partially unsatisfied performance obligation over the next two and a half years. The Company will be paid in installments for this performance obligation over the next two and a half years.

 

Lending Activities

 

DP Lending generates revenue from lending activities primarily through interest, origination fees and late/other fees. Interest income on these products is calculated based on the contractual interest rate and recorded as interest income as earned. The origination fees or original issue discounts are recognized over the life of the loan using the effective interest method.

 

Blockchain Mining

 

The Company has entered into digital asset mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed digital currency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The Company’s factional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.

 

 F-13 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.

 

Fair value of the digital currency award received is determined using the market rate of the related digital currency at the time of receipt.

 

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

 

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

 

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

 

Restaurant Operations

 

The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals and complimentary meals and gift cards. Restaurant cost of sales primarily includes the cost of goods, beverages, and merchandise and disposable paper and plastic goods used in preparing and selling the Company’s menu items and exclude depreciation and amortization. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned.

 

Fair value of Financial Instruments

 

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

 

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

 

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

 

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

 

 F-14 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

 

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

 

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial instruments (see Note 4 and Note 7) that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

   Fair Value Measurement at September 30, 2019 
   Total   Level 1   Level 2   Level 3 
Investments in common stock and derivative
instruments of AVLP – a related party
  $2,145,720   $397,670   $   $1,748,050 
Investment in common stock of Alzamend – a
related party
   206,250            206,250 
Investments in marketable equity securities   473,314    473,314         
Investments in warrants of public companies   9,174            9,174 
Total Investments  $2,834,458   $870,984   $   $1,963,474 

 

 

 

   Fair Value Measurement at December 31, 2018 
   Total   Level 1   Level 2   Level 3 
Investments in common stock and derivative
instruments of AVLP – a related party
  $3,043,499   $812,858   $   $2,230,641 
Investments in marketable equity securities   178,597    178,597         
Investments in warrants of public companies   34,372            34,372 
Total Investments  $3,256,468   $991,455   $   $2,265,013 

 

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

 

Leases

 

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

 

 F-15 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

 

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 6,500 warrants, which are exercisable for shares of the Company’s common stock on a one-for-one basis, in its earnings per share calculation for the three and nine months ended September 30, 2019. Anti-dilutive securities, which are convertible into or exercisable for the Company’s Class A common stock, consist of the following at September 30, 2019 and 2018:

 

 

   September 30, 
   2019   2018 
Stock options   2,906    9,463 
Warrants(1)   72,921    23,410 
Convertible notes   349,486    25,097 
Conversion of preferred stock   2,232    2,232 
Total   427,545    60,202 

 

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

 

Reclassifications

 

Certain prior year amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation. These reclassifications had no effect on previously reported results of operations. In addition, certain prior year amounts from the restated amounts have been reclassified for consistency with the current period presentation.

 

Recently Issued Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Upon adoption the Company recognized cumulative operating lease liabilities and operating right-of-use assets of approximately $4.2 million.

 

 F-16 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

 

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. The Company adopted this standard on January 1, 2019, and the adoption did not have any impact on its consolidated financial statements and related disclosures.

 

4. Marketable Equity Securities

 

Marketable securities in equity securities with readily determinable market prices consisted of the following as of September 30, 2019 and December 31, 2018:

 

 

  Marketable equity securities at September 30, 2019 
      Gross unrealized   Gross realized     
   Cost   gains (losses)   gains (losses)   Fair value 
Common shares  $220,880   $252,434   $   $473,314 

 

 

 

   Marketable equity securities at December 31, 2018 
         Gross unrealized    Gross realized      
    Cost    gains (losses)    gains (losses)    Fair value 
Common shares  $220,880   $(42,283)  $   $178,597 

 

 F-17 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

The following table presents additional information about marketable equity securities:

 

   Marketable Equity
Securities
 
Balance at January 1, 2018  $1,834,570 
Purchases of marketable equity securities   858,458 
Sales of marketable equity securities   (2,188,292)
Realized losses on marketable equity securities   (175,405)
Unrealized gains on marketable equity securities   (150,734)
Balance at December 31, 2018  $178,597 
Purchases of marketable equity securities on
conversion of debt
   485,000 
Sales of marketable equity securities   (571,741)
Realized gains on marketable equity securities   86,741 
Unrealized gains on marketable equity securities   294,717 
Balance at September 30, 2019  $473,314 

 

At September 30, 2019 and December 31, 2018, the Company had invested in the marketable equity securities of certain publicly traded companies. During the three and nine months ended September 30, 2019, unrealized gains of $63,109 and $294,717 were included in net income as a component of change in fair value of equity securities. During the year ended December 31, 2018, the Company recorded an unrealized loss of $42,283. The Company’s investment in marketable equity securities will be revalued on each balance sheet date.  The fair value of the Company’s holdings in marketable equity securities at September 30, 2019 and December 31, 2018 is a Level 1 measurement based on quoted prices in an active market.

 

At September 30, 2019 and December 31, 2018, the Company also held equity investments in private companies and an investment in a limited partnership. These investments do not have readily determinable fair values and have been measured at cost less impairment, if any, and adjusted for observable price changes for identical or similar investments of the issuer.

 

5. PROPERTY AND EQUIPMENT, NET

 

At September 30, 2019 and December 31, 2018 property and equipment consist of:

 

   September 30,  December 31,
   2019  2018
Cryptocurrency machines and related equipment  $4,883,072   $9,168,928 
Computer, software and related equipment   2,512,515    2,495,470 
Restaurant equipment   763,275    752,103 
Office furniture and equipment   366,292    287,583 
Leasehold improvements   1,289,308    1,274,865 
    9,814,462    13,978,949 
Accumulated depreciation and amortization   (7,304,568)   (4,665,650)
Property and equipment, net  $2,509,894   $9,313,299 

 

 F-18 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

Under the guidance of ASC 360, Impairment or Disposal of Long-lived Assets, a long-lived asset or asset group (including intangibles) will be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Based upon the significant decline in the price of bitcoin during the nine months ended September 30, 2019 and the decline in projected cash flows over the life of the cryptocurrency machines, the Company performed an undiscounted cash flow test to determine if the cryptocurrency machines were impaired. The undiscounted cash flows were less than the carrying amount of the Company’s cryptocurrency machines and therefore, the carrying amount of the assets were compared to the fair value of the cryptocurrency machines, and the Company determined that there were impairment charges to be recorded on the cryptocurrency machines. Impairment charges for the nine months ended September 30, 2019 totaled approximately $4,315,856.

 

For the three and nine months ended September 30, 2019, depreciation expense amounted to $846,631 and $2,673,352, respectively. During the three and nine months ended September 30, 2018, depreciation expense amounted to $883,793 and $1,642,422, respectively.

 

6. INTANGIBLE ASSETS, NET

 

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

 

   September 30,   December 31, 
   2019   2018 
Trade name and trademark  $1,562,332   $1,562,332 
Customer list   2,495,097    2,388,139 
Non-competition agreements   150,000    150,000 
Domain name and other intangible assets   808,016    762,807 
    5,015,445    4,863,278 
Accumulated depreciation and amortization   (937,002)   (503,480)
Intangible assets, net  $4,078,443   $4,359,798 

 

The Company’s trade names and trademarks were determined to have an indefinite life. The remaining definite lived intangible assets are primarily being amortized on a straight-line basis over their estimated useful lives. Amortization expense was $101,199 and $400,661, respectively, for the three and nine months ended September 30, 2019 and $33,358 and $100,074, respectively, for the three and nine months ended September 30, 2018.

 

7. INVESTMENTS – RELATED PARTIES

 

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

 

   September 30,   December 31, 
   2019   2018 
Investment in convertible promissory note of AVLP  $9,476,979   $6,943,997 
Accrued interest in convertible promissory note of AVLP   1,736,859    1,004,317 
Total investment in convertible promissory note of AVLP – Gross   11,213,838    7,948,314 
Less: original issue discount   (1,475,485)   (2,336,693)
Total investment in convertible promissory note of AVLP  $9,738,353   $5,611,621 
           
Investment in derivative instruments of AVLP   1,748,050    2,230,641 
Investment in common stock of AVLP   397,670    812,858 
Investment in common stock of Alzamend   206,250     
Investment in derivative instruments and common stock of AVLP and
Alzamend
  $2,351,970   $3,043,499 
           
Total investment in AVLP and Alzamend – Net  $12,090,323   $8,655,120 
           
Investment in warrants and common stock of AVLP and Alzamend  $2,351,970   $3,043,499 
Investment in convertible promissory note of AVLP   9,738,353    5,611,621 
Total investment in AVLP and Alzamend – Net  $12,090,323   $8,655,120 

 

 F-19 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

The following table summarizes the changes in our investments in AVLP and Alzamend during the nine months ended September 30, 2019:

 

   Investment in         
   warrants and   Investment in   Total 
   common stock   convertible   investment 
   of AVLP and   promissory   in AVLP and 
   Alzamend   note of AVLP   Alzamend – Net 
Balance at January 1, 2019  $3,043,499   $5,611,621   $8,655,120 
Investment in convertible promissory notes of AVLP       1,501,912    1,501,912 
Investment in common stock of AVLP and Alzamend   163,032        163,032 
Fair value of derivative instruments issued by AVLP   1,031,070        1,031,070 
Unrealized loss in derivative instruments of AVLP   (1,513,661)       (1,513,661)
Unrealized gain in common stock of AVLP and
Alzamend
   (371,970)       (371,970)
Accretion of discount       1,892,278    1,892,278 
Accrued Interest       732,542    732,542 
Balance at September 30, 2019  $2,351,970   $9,738,353   $12,090,323 

 

The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, an affiliate of the Company, consist of convertible promissory notes, derivative instruments and shares of common stock of AVLP. At September 30, 2019, the Company has provided loans to AVLP in the principal amount $9,476,979 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 18,953,958 shares of AVLP common stock. The warrants entitle the Company to purchase up to 18,953,958 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The warrants were determined by the issuer to be financial derivative instruments. At September 30, 2019 and December 31, 2018, the Company recorded an unrealized loss on its investment in warrants of AVLP of $3,927,042 and $2,413,381, respectively, representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet. During the three and nine months ended September 30, 2019, the Company recognized, in other comprehensive loss, net unrealized loss on derivative securities of related party of $1,152,480 and $1,513,661, respectively, which compares with a net unrealized loss on derivative securities of related party of $1,456,232 and $6,400,899, respectively during the three and nine months ended September 30, 2018. The Company’s investment in AVLP will be revalued on each balance sheet date. The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate, which ranged between 1.50% and 2.60%, was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 89.4% was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million. The warrant valuation is a Level 3 measurement.

 

In accordance with ASC No. 310, Receivables (“ASC 310”), the Company accounts for its convertible promissory notes in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of original issue discount and discount attributed to the fair value of the 18,953,958 warrants that the Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company records interest on an accrual basis and recognizes it as earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected. An aggregate of $5,802,374 of original issue discount and discount attributed to the fair value of the warrants is being amortized as interest income through the maturity date. During the three and nine months ended September 30, 2019, the Company recorded $614,856 and $1,892,278, respectively, of interest income for the discount accretion compared with $535,264 and $1,453,712, respectively, during the three and nine months ended September 30, 2018. During the three and nine months ended September 30, 2019, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $268,428 and $732,542, respectively. During the three and nine months ended September 30, 2018, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $176,946 and $478,119, respectively.

 

 F-20 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

The Company evaluated the collectability of both interest and principal for the convertible promissory notes in AVLP to determine whether there was an impairment. Based on current information and events, the Company determined that it is probable that it will be able to collect amounts due according to the existing contractual terms. Impairment assessments require significant judgments and are based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.

 

During the nine months ended September 30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 91,000 shares of AVLP common stock for $53,032 and 430,942 shares of AVLP common stock for $417,169, respectively. At September 30, 2019, the closing market price of AVLP’s common stock was $0.40, a decline from $0.90 at December 31, 2018. The Company has determined that its investment in AVLP marketable equity securities are accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures and based upon the closing market price of AVLP common stock at September 30, 2019, the Company’s investment in AVLP common stock had an unrealized loss of $348,891.

 

In aggregate, the Company has 994,175 shares of AVLP common stock which represents 18.0% of AVLP’s outstanding shares of common stock. The Company has determined that AVLP is a variable interest entity (“VIE”) as it does not have sufficient equity at risk. The Company does not consolidate AVLP because the Company is not the primary beneficiary and does not have a controlling financial interest. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, among other factors. Although the Company has made a significant investment in AVLP, the Company has determined that Philou, which controls AVLP through its equity investment and deemed to be more closely associated with AVLP, is the primary beneficiary. As a result, AVLP’s financial position and results of operations are not consolidated in our financial position and results of operations.

 

8. INVESTMENTS IN REAL ESTATE

 

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

 

9. OTHER INVESTMENTS, RELATED PARTIES

 

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

 

MTIX, Ltd.

 

On December 5, 2017, the Company entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson two convertible promissory notes in the principal amount of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.

 

 F-21 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

During December 2017, the Company issued 750 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently sold the 750 shares. The proceeds from the sale of shares of common stock received upon the conversion of Note A were sufficient to satisfy the entire $2,267,766 obligation as well as an additional $400,500 of value added tax due to WT Johnson. Concurrent with entering into the exchange agreement, the Company received a promissory note in the amount of $2,668,266 from MTIX and cancelled Note B. At September 30, 2019 and December 31, 2018, the Company has valued the note receivable at $600,000, the carrying amount of Note A. The Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.

 

Israeli Property

 

During the year ended December 31, 2017, our President, Amos Kohn, purchased certain real property that serves as a facility for the Company’s business operations in Israel. The Company made $300,000 of payments to the seller of the property and received a 28% undivided interest in the real property (the “Property”). The Company’s subsidiary, Coolisys, entered into a Trust Agreement and Tenancy in Common Agreement with Roni Kohn, who owns a 72% interest in the Property, the daughter of Mr. Kohn and an Israeli citizen. The Property was purchased to serve as a residence/office facility for the Company in order to oversee its Israeli operations and to expand its business in the high-tech industry located in Israel. Pursuant to the Trust Agreement, Ms. Kohn will hold and manage Coolisys’ undivided 28% interest in the Property. The trust will be in effect until it is terminated by mutual agreement of the parties. During the term of the trust, Ms. Kohn will not sell, lease, sublease, transfer, grant, encumber, change or effect any other disposition with respect to the Property or Coolisys’ interest without the Company’s approval.

 

Under the Tenancy in Common Agreement, Coolisys and its executive officers shall have the exclusive rights to use the Property for the Company and its affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy in Common Agreement, for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right to purchase a portion of the Company’s interest in the Property. Such right shall fully vest at the end of five years of continuous employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal value. The Company will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years. During the three and nine months ended September 30, 2019, the Company recognized $7,500 and $22,500, respectively, in amortization expense. At September 30, 2019 and December 31, 2018, the unamortized balance of the Israeli Property was $240,000 and $262,500, respectively. If Mr. Kohn is not employed by the Company, the Company shall have the right to demand that Ms. Kohn purchase the Company’s remaining interest in the Property that was not subject to vesting for the fair market value of such unvested Property interest.

 

10. ACQUISITIONS

 

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

 

 F-22 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

   For the Nine 
   Months Ended 
   September 30, 2018 
Total Revenue  $22,521,427 
Net loss  $(22,921,424)
Less: Net loss attributable     
to non-controlling interest   218,494 
Net loss attributable to DPW Holdings   (22,702,930)
Preferred dividends   (108,049)
Net loss available to common stockholders  $(22,810,979)
Basic and diluted net loss per common share  $(346.54)
Basic and diluted weighted average     
common shares outstanding   65,824 
Comprehensive Loss     
Loss available to common shareholders  $(22,810,979)
Other comprehensive income (loss)     
Change in net foreign currency     
translation adjustments   (209,535)
Net unrealized loss on derivative     
securities of related party   (6,787,902)
Other comprehensive income (loss)   (6,997,437)
Total Comprehensive loss  $(29,808,416)

 

11. STOCK-BASED COMPENSATION

 

Under the Company's 2018 Stock Incentive Plan (the “2018 Plan”), 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive Plan (the “2016 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. On July 19, 2019, the Company’s stockholders approved an amendment to the 2018 Plan which increased the number of shares of the Company’s common stock that may be issued thereunder to a total of 175,000 shares. The Plans, as amended, provide for the issuance of a maximum of 184,216 shares of the Company’s common stock.

 

Options granted under the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally become fully vested after four years. Any options that are forfeited or cancelled before expiration become available for future grants. The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans are subject to a vesting period determined at the date of grant. As of September 30, 2019, an aggregate of 152,961 of the Company's options are still available for future grant.

 

During the nine months ended September 30, 2019, the Company did not grant any options. During the nine months ended September 30, 2018, the Company granted 1,250 options to its employees from the Plans and also granted 3,622 options outside of the Plans. These options become fully vested after four years. The Company estimated that the grant date fair value of options granted utilizing the Black-Scholes option pricing model during the nine months ended September 30, 2018 was $513,510, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the nine months ended September 30, 2019 and 2018, the Company also issued 29,375 and 1,979, respectively, shares of common stock to its consultants and service providers. The Company estimated the grant date fair value of these shares of common stock was $305,019 and $2,640,102 respectively, which was determined from the closing price of the Company’s common stock on the date of issuance.

 

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

 

 F-23 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

 

   Nine Months Ended 
   September 30, 2018 
Weighted average risk-free interest rate   2.41% — 2.80% 
Weighted average life (in years)   4.75 
Volatility   124.7% — 131.7%  
Expected dividend yield   0% 
Weighted average grant-date fair value per share of
options granted
   $624.33 

 

 

The options outstanding as of September 30, 2019, have been classified by exercise price, as follows:

 

Outstanding   Exercisable
        Weighted            
        Average   Weighted       Weighted
        Remaining   Average       Average
Exercise   Number   Contractual   Exercise   Number   Exercise
Price   Outstanding   Life (Years)   Price   Exercisable   Price
$480.00 - $560.00   1,306   6.32   $544.50   631   $543.76
$1,056.00 - $1,104.00   188   8.17   $1,104.00   86   $1,104.00
$1,208.00 - $1,352.00   38   3.99   $1,338.67   38   $1,338.67
$480.00 - $1,352.00   1,531   6.49   $632.46   755   $647.06

 

Issuances outside of Plans
$640.00 - $1,856.00   1,375   5.03   $827.64   281   $935.11

 

Total Options
$480.00 - 1,856.00   2,906   5.80   $724.80   1,036   $725.26

 

 

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

 

 

 F-24 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

   Three Months Ended   Nine Months Ended 
   Sept. 30, 2019   Sept. 30, 2018   Sept. 30, 2019   Sept. 30, 2018 
Cost of revenues  $   $   $

   $4,874 
Engineering and product development               13,650 
Selling and marketing               11,922 
General and administrative   206,289    697,252    531,379    2,204,433 
Stock-based compensation from Plans  $206,289   $697,252   $531,379   $2,234,879 
Stock-based compensation from issuances
outside of Plans
   155,490    655,388    822,683    1,929,301 
Total Stock-based compensation  $361,779   $1,352,640   $1,354,062   $4,164,180 

 

The combination of stock-based compensation of $531,379 from the issuances of equity-based awards pursuant to the Plans and stock-based compensation attributed to stock awards of $253,019 and options of $569,664, which were issued outside of the Plans, resulted in aggregate stock-based compensation of $361,779 and $1,354,062 during the three and nine months ended September 30, 2019.

 

A summary of option activity under the Company's stock option plans as of September 30, 2019, and changes during the nine months ended are as follows:

 

         Outstanding Options 
                 Weighted     
             Weighted   Average     
   Shares        Average   Remaining   Aggregate 
   Available    Number   Exercise    Contractual   Intrinsic 
    for Grant    of Shares   Price   Life (years)    Value 
January 1, 2019   12,695    4,328   $576.40   7.52   $0 
Amendment to 2018 SIP   162,500                 
Restricted stock awards   (25,000)                
Forfeited   2,766    (2,797)  $377.70         
September 30, 2019   152,961    1,531   $632.46   6.49   $0 

 

As of September 30, 2019, there was $452,427 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.6 years.

 

12. WARRANTS 

 

During the nine months ended September 30, 2019, the Company issued a total of 759,443 warrants at an average exercise price of $10.28 per share. 

 

(i)On April 2, 2019, the Company issued warrants to purchase an aggregate of 388,888 shares of Common Stock at an initial exercise price of $18.00 per share and (the “Common Warrants”) and (b)  pre-funded warrants to purchase up to 317,500 shares of our Common Stock at an initial exercise price of $0.40 per share (the “Pre-Funded Warrants”) in connection with an underwriting agreement with A.G.P./Alliance Global Partners (the “Underwriter”). In addition, the Company has also issued the Underwriter a warrant to purchase a maximum of 15,555 additional shares of common stock at an initial exercise price of $19.80 per share (See Note 20).

 

 F-25 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

(ii)On May 20, 2019, the Company issued warrants to purchase an aggregate of 12,500 shares of common stock at an exercise price equal to $12.00 per share of common stock in connection with the issuance of a 4% Original Issue Discount Convertible Promissory Note in the aggregate principal amount of $660,000.

 

(iii)On July 3, 2019, the Company issued warrants to purchase an aggregate of 25,000 shares of common stock at an exercise price equal to $8.80 per share of common stock in connection with the issuance of a 12% Convertible Promissory Note in the aggregate principal amount of $1,492,000.

 

 

The following table summarizes information about common stock warrants outstanding at September 30, 2019:

 

Outstanding   Exercisable
        Weighted            
        Average   Weighted       Weighted
        Remaining   Average       Average
Exercise   Number   Contractual   Exercise   Number   Exercise
Price   Outstanding   Life (Years)   Price   Exercisable   Price
$0.00   6,500   4.50   $0.00   6,500   $0.00
$8.00   397   7.09   $8.00   397   $8.00
$8.80   25,000   4.76   $8.80   25,000   $8.80
$12.00   12,500   4.61   $12.00   12,500   $12.00
$19.80   15,555   4.50   $19.80   15,555   $19.80
$440.00   355   3.11   $440.00   355   $440.00
$480.00   94   3.59   $480.00   94   $480.00
$528.00   186   3.09   $528.00   186   $528.00
$560.00   2,657   3.12   $560.00   2,657   $560.00
$600.00   170   2.62   $600.00   170   $600.00
$640.00   603   0.94   $640.00   603   $640.00
$752.00   9,614   3.63   $752.00   9,614   $752.00
$800.00   350   3.19   $800.00   350   $800.00
$880.00   947   1.92   $880.00   947   $880.00
$920.00   2,126   3.49   $920.00   2,126   $920.00
$1,040.00   1,243   3.54   $1,040.00   1,243   $1,040.00
$1,760.00   781   3.32   $1,760.00   781   $1,760.00
$1,800.00   140   3.32   $1,800.00   140   $1,800.00
$2,000.00   203   3.32   $2,000.00   203   $2,000.00
$8.00 - $2,000.00   79,421   3.95   $208.77   79,421   $208.77

 

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 warrants. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.

 

 F-26 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

 

   Nine Months Ended 
   September 30, 2019   September 30, 2018 
Weighted average risk-free interest rate  1.75% — 2.28%   2.41% — 2.94% 
Weighted average life (in years)   5.0    4.8 
Volatility   85.5% — 87.5%    124.8% — 138.4% 
Expected dividend yield   0%    0% 
Weighted average grant-date fair value per
share of warrants granted
   $10.34    $629.64 

 

13. OTHER CURRENT LIABILITIES

 

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

 

   September 30,   December 31, 
   2019   2018 
Accrued payroll and payroll taxes  $1,561,671   $1,497,470 
Other accrued expenses   297,370    370,932 
   $1,859,041   $1,868,402 

 

14. LEASES

 

We have operating leases for office space and restaurant locations. Our leases have remaining lease terms of 7 months to 8 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year.

 

The following table provides a summary of leases by balance sheet location as of September 30, 2019:

 

 

   September 30, 2019 
Operating right-of-use assets  $3,433,794 
Operating lease liability - current  $741,433 
Operating lease liability - non-current  $2,781,345 

 

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

 

   Nine 
   Months Ended 
   September 30, 2019 
Operating lease cost  $754,692 
Short-term lease cost   - 
Variable lease cost  $351,491 

 

 F-27 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

   September 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $1,020,499 
Right-of-use assets obtained in exchange for new operating lease liabilities  $- 
Weighted-average remaining lease term - operating leases    5.7 years  
Weighted-average discount rate - operating leases   10% 

 

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

 

Payments due by period   
2019 (Remainder)  $271,420 
2020   1,039,687 
2021   779,008 
2022   501,411 
2023   514,895 
Thereafter   1,582,121 
Total lease payments   4,688,542 
Less interest   (1,165,764)
Present value of lease liabilities  $3,522,778 

 

15. ADVANCES ON FUTURE RECEIPTS

 

During the nine months ended September 30, 2019, the Company received funding as a result of entering into six Agreements for the Purchase and Sale of Future Receipts (collectively, the “Agreements on Future Receipts”). The Company sold in the aggregate $1,517,847 in future receipts of the Company for $1,017,170. During 2019, the Company had repaid $1,365,435. The Company recorded a discount in the amount of $500,677 in connection with these six agreements, based upon the difference between the amount of future receipts sold and the actual proceeds received by the Company. The Company is currently in default on its payment obligations on certain of the Agreements on Future Receipts with an aggregate outstanding balance of $1,650,862 at September 30, 2019. During the three and nine months ended September 30, 2019, non-cash interest expense of $115,706 and $293,602, respectively, was recorded from the amortization of debt discounts.

 

 F-28 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

16. NOTES PAYABLE

 

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

 

   September 30,   December 31, 
   2019   2018 
June 2019 short-term promissory note  $2,510,173   $ 
12% short-term promissory note       1,000,000 
15% May short-term promissory note   780,000     
Other short-term notes payable   805,554    1,033,553 
12% September short-term promissory notes       789,473 
8% short-term promissory notes   318,150    1,272,600 
October short-term promissory note       565,000 
Notes payable to Wells Fargo   289,885    291,988 
Note payable to Dept. of Economic and Community Development   237,069    260,169 
Microphase short-term promissory note       200,000 
Note payable to Power-Plus Member   13,250    13,250 
Note payable to People's United Bank   18,379    18,589 
Short term bank credit   1,677,196    1,586,864 
Total notes payable   6,649,656    7,031,486 
Less:          
Unamortized debt discounts   (74,750)   (151,499)
Unamortized financing cost   (32,377)   (7,541)
Total notes payable, net of financing cost  $6,542,529   $6,872,446 
Less: current portion   (6,077,720)   (6,388,787)
Notes payable – long-term portion  $464,809   $483,659 

 

January 2019 Exchange Agreement

  

On August 16, 2018, as amended on November 29, 2018, the Company entered into a securities purchase agreement with four institutional investors providing for the issuance of 8% promissory notes, each in the principal amount of $318,150, for an aggregate principal face amount of $1,272,600, due February 15, 2019 (individually the “8% Short-Term Promissory Note” and collectively the “8% Short-Term Promissory Notes”).

 

On January 23, 2019, the Company entered into an Exchange Agreement (the “January Exchange Agreement”) with one of the institutional investors pursuant to which the Company issued to the investor two new 8% promissory notes in the aggregate principal amount of $1,043,799 (the “New Notes”) in exchange for one of the 8% Short-Term Promissory Notes in the aggregate principal amount of $318,150, the October short-term promissory note in the aggregate principal amount of $565,000 and accrued interest of $160,649.

 

Pursuant to the January Exchange Agreement, the investor received 10,918 shares of common stock of the Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Notes. Further, since the investor’s proceeds from the sale of all 10,918 shares of common stock received were not equal to the outstanding principal balance of the New Notes, the Company was required to pay to the investor the difference, which amounted to $244,898, in cash or through the delivery of free trading shares of common stock. The Company recognized additional interest expense for the difference of $244,898. On March 19, 2019, the Company issued to the investor an additional 2,551 shares of the Company’s common stock, with a value of $73,016, in partial satisfaction of the liability, resulting in a remaining balance due of $171,882 which was paid during June 2019.

 

 F-29 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

February 2019 Exchange Agreement

 

On February 20, 2019, the Company entered into an Exchange Agreement (the “February Exchange Agreement”) with another one of the institutional investors pursuant to which the Company issued to the investor a new 8% promissory note in the principal amount of $433,884 (the “New Note”) in exchange for principal and accrued interest on the 8% Short-Term Promissory Note (the “Old Note”).

 

Pursuant to the February Exchange Agreement, the investor received 4,520 shares of common stock of the Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Note. Further, since the investor’s proceeds from the sale of all 4,520 shares of common stock received were not equal to the outstanding principal balance of the New Note, the Company is required to pay the difference, which amounted to $289,954, to the investor in cash or through the delivery of free trading shares of common stock. The Company recognized additional interest expense for the difference of $289,954. On April 4, 2019, the Company issued to the investor an additional 9,375 shares of the Company’s common stock, with a value of $108,523, in partial satisfaction of the liability, resulting in a remaining balance due of $183,822 which was paid during June 2019.

 

Enertec Short-Term Promissory Note

 

On December 28, 2018, Enertec entered into a $500,000 secured promissory note (the “Enertec Short-Term Promissory Note”) whereby Enertec agreed to pay interest in an amount of 10% per annum in cash to the investor, until the Enertec Short-Term Promissory Note is paid in full. The proceeds from the Enertec Short-Term Promissory Note were received in January 2019 and repaid on April 2, 2019. In connection with the Enertec Short-Term Promissory Note, Milton C. Ault III provided a personal guarantee for the benefit of the investor.

 

Dominion June 2019 Short-Term Promissory Note

 

On June 18, 2019, the Company entered into a securities purchase agreement with the Investor to sell a 10% senior secured promissory note with a principal face amount of $2,800,000, plus an original issue discount in the amount of $100,000 and issue 12,500 shares of the Company’s common stock subject to the approval thereof by the NYSE American. In addition, Ault & Company has guaranteed to the Investor the prompt and complete payment and performance when of the obligations of the Company pursuant to this.

  

The June 2019 short-term promissory note has a principal face amount of $2,900,000 with a purchase price of $2,800,000, and bears interest at 10% per annum. Pursuant to the terms of the note, the Company was required to make six monthly amortization payments beginning on July 18, 2019. The Company has not made these payments and this note is currently in default. We are in negotiations with the investors to amend the payment terms on this Note.

 

17. NOTES PAYABLE – RELATED PARTIES

 

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

 

   September 30,   December 31, 
   2019   2018 
Notes payable to Microphase former officers and employees  $284,317   $308,984 
Total notes payable   284,317    308,984 
Less: current portion   (168,589)   (166,925)
Notes payable – long-term portion  $115,728   $142,059 

 

 F-30 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

18. CONVERTIBLE NOTES

 

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

 

   September 30,  December 31,
   2019  2018
10% Convertible secured notes  $   $7,997,126 
4% Convertible promissory note   660,000     
12% Convertible promissory note   622,000     
8% Convertible promissory note   815,218     
Total convertible notes payable   2,097,218    7,997,126 
Less:          
Unamortized debt discounts   (666,793)   (1,189,276)
Unamortized financing cost       (65,356)
Total convertible notes payable, net of financing cost  $1,430,425   $6,742,494 
Less: current portion   (1,146,141)   (6,742,494)
Convertible notes payable, net of financing cost – long-term portion  $284,284   $ 

 

On May 15, 2018, the Company entered into a securities purchase agreement to sell a 10% convertible note (the “10% Convertible Note”) in the principal amount of $6,000,000. On July 2, 2018 and August 31, 2018, the Company entered into securities purchase agreements with the institutional investor providing for the issuance of a second 10% convertible note with a principal face amount of $1,000,000 (the “Second 10% Convertible Note”) and a third 10% convertible note with a principal face amount of $2,000,000 (the “Third 10% Convertible Note” and with the Second 10% Convertible Note, the “Additional 10% Convertible Notes”), respectively.

 

On January 9, 2019, the 10% Convertible Note was amended to revise the amortization schedule such that the conversion price on eleven monthly amortization payments in the principal amount $309,193 each, at the request of the holder, shall be satisfied by the issuance of shares of the Company’s common stock. The conversion price on these monthly amortization payments was reduced from $8.00 per share of common stock to a price equal to the greater of (i) $2.40 per share (the closing price of the Company’s common stock on January 9, 2019) or (ii) 80% of the lowest daily VWAP in the three days prior to the date of issuance, but not to exceed $8.00 per share. Further, the Company shall have the right to pay the monthly amortization payment in cash within 72 hours by advising the investor within two hours of receipt of any conversion notice. The amendment to the embedded conversion option of the 10% Convertible Note caused a material change in the fair value of the embedded conversion options and resulted in a loss on extinguishment of $807,784.

 

Between January 4, 2019 and February 21, 2019, the Company issued to the investor 8,412 shares of its common stock upon the conversion of $1,053,351 in principal and accrued interest. The investor received $660,337 from the sale of these shares of common stock. In accordance with the January 9, 2019 amendment, the Company is required to pay the difference between the conversion amount and the proceeds received from the subsequent sale of the shares by the investor, which amounted to $393,014. The Company recognized additional interest expense in the amount of $393,014.

 

On April 2, 2019, the Company repaid principal of $3,000,000 and accrued interest of $1,125,000 on the Additional 10% Convertible Notes and between April 2, 2019 and June 18, 2019 repaid the balance due on the 10% Convertible Note.

 

 F-31 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

Exchange Agreements

 

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

 

On July 2, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for (i) a term promissory note issued by DP Lending to the investor on August 10, 2018 in the principal face amount of $550,000 and (ii) a term promissory note issued by us on August 16, 2018, as amended on November 29, 2018, in the principal face amount of $318,150, we sold to the investor a new convertible promissory note in the principal amount of $1,250,000 (subject to adjustments) with an interest rate of 8% per annum and a maturity date of December 31, 2019. Subject to the approval by the NYSE American, this note shall be convertible into shares of our common stock at conversion price of $8.80.

 

On July 3, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for a term promissory note issued by us to the investor on March 23, 2018 in the principal face amount of $1,000,000, we sold a convertible promissory note in the principal face amount of $1,292,000 plus a default premium of $200,000, and (ii) a five-year warrant to purchase of 25,000 shares of our common stock at an exercise price of $8.80 per share, subject to the approval thereof by the NYSE American.

 

This convertible promissory note is in the aggregate principal amount of $1,492,000 and bears interest at 12% per annum, which principal and all accrued and unpaid interest are due on January 22, 2020, and which interest shall be payable in cash, in arrears, on the first business day of each month, with the first payment of interest due on August 1, 2019. Commencing on July 15, 2019, subject to certain beneficial ownership limitations, the investor may convert the principal amount of this note and accrued interest earned thereon at any time into shares of our common stock at $8.80 per share.

 

19. COMMITMENTS AND CONTINGENCIES

 

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

 

The Complaint alleges violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants as, in the view of the plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions. The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves. The Company and the individual defendants moved to dismiss the Complaint and on February 25, 2019, the Court granted the motion to dismiss but granted plaintiffs leave to amend their Complaint.  On March 11, 2019, plaintiffs filed their amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions. On March 25, 2019, the Company and the individual defendants filed a motion to dismiss the amended complaint.  On May 21, 2019, the Court granted in part and denied in part the Motion to Dismiss the Amended Complaint.  Specifically, the May 21, 2019 Order granted so much of Defendants’ Motion to Dismiss the Amended Complaint that sought to dismiss Directors Robert O. Smith, Jeff Bentz, and Mordechai Rosenberg as parties. Plaintiffs did not further amend the complaint and proceeded with the operative complaint and forewent any claims against Messrs. Smith, Bentz, and Rosenberg.

 

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

 

 F-32 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

On October 21, 2019, the parties mediated the matter before JAMS in Manhattan, New York. At that mediation, the matter was tentatively settled with respect to all claim against the Company and the remaining defendants, Milton C. Ault III, Amos Kohn, and William Horne. The tentative settlement included certain changes to the policies of the Company. The tentative settlement agreement did not have a monetary component. Furthermore, the parties settled any dispute over the attorneys’ fees, which will be paid by AIG, the Company’s insurance carrier. The parties are currently working on finalizing the settlement agreement, and expect to have a finalized settlement agreement prior to end of the calendar year. Upon execution of the finalized settlement agreement, Plaintiff will file a notice of dismissal with prejudice with the Court.

 

On November 28, 2018, Blockchain Mining Supply and Services, Ltd, a vendor who sold computers to the Company’s subsidiary, filed in the United States District Court for the Southern District of New York against Super Crypto Mining, Inc. and the Company (Case No. 18-cv-11099). The Complaint asserted claims for breach of contract and promissory estoppel against the Company and its subsidiary arising from the subsidiary’s failure to satisfy a purchase agreement.  The Complaint seeks damages in the amount of $1,388,495, which approximates the amount of the reserve established.

 

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

 

Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action. However, the Company has established a reserve in the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company received a subpoena from the Commission for the voluntary production of documents. The Company is fully cooperating with this non-public, fact-finding inquiry and believe that the Company has operated our business in compliance with all applicable laws. The subpoena expressly provides that the inquiry is not to be construed as an indication by the Commission or its staff that any violations of the federal securities laws have occurred, nor should it be considered a reflection upon any person, entity or security. However, there can be no assurance as to the outcome of this matter.

 

20. STOCKHOLDERS’ EQUITY

 

Amendments to Certificate of Incorporation

 

On January 3, 2019, the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation, with the Secretary of State of the State of Delaware, to effectuate an increase to the number of authorized shares of common stock of the Company. Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its Class A common stock to 500,000,000 from 200,000,000 (the “Authorized Increase”). The number of authorized shares of the Company’s Class B common stock remains at 25,000,000 and the number of authorized shares of the Company’s preferred stock remains at 25,000,000. As a result of the increase of authorized shares of the Company’s Class A common stock, the aggregate number of the Company’s authorized shares is 550,000,000. The Authorized Increase was approved by the Company’s Board of Directors (the “Board”) as of December 28, 2018, and approved by a vote of the stockholders of the Company at the December 28, 2018 Annual Meeting of Stockholders. The Certificate of Amendment became effective upon filing with the State of Delaware on January 3, 2019.

 

On March 14, 2019, pursuant to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s Board approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the common stock of the Company’s issued and outstanding number of such shares by a ratio of one-for-twenty (the “Reverse Stock Split”). The Company filed the COI Amendment to its Certificate of Incorporation with the State of Delaware effectuating the Reverse Stock Split on March 14, 2019. As a result of the Reverse Stock Split, each twenty (20) shares of common stock issued and outstanding prior to the Reverse Stock Split were converted into one (1) share of common stock, with no change in authorized shares or par value per share.

 

 F-33 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

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

 

Preferred Stock

 

The Company is authorized to issue 25,000,000 shares of Preferred Stock $0.001 par value. The Board has designated 1,000,000 shares as Series A Convertible Preferred Stock (the “Series A Preferred Stock”), 500,000 shares as Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and 2,500 shares as Series C Convertible Redeemable Preferred Stock (the “Series C Preferred Stock”). The rights, preferences, privileges and restrictions on the remaining authorized 23,497,500 shares of Preferred Stock have not been determined. The Board is authorized to designate a new series of preferred shares and determine the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred shares. As of September 30, 2019, there were 7,040 shares of Series A Preferred Stock, 125,000 shares of Series B Preferred Stock and no other shares of Preferred Stock issued or outstanding.

 

Common Stock

 

Common stock confers upon the holders the rights to receive notice to participate and vote at any meeting of stockholders of the Company, to receive dividends, if and when declared, and to participate in a distribution of surplus of assets upon liquidation of the Company. The Class B common stock carries the voting power of 10 shares of Class A common stock.

 

2019 Issuances

 

Issuance of Common Stock pursuant to the At the Market Offering

 

On October 10, 2018, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Wilson-Davis & Co., Inc., as sales agent (the “Agent”) to sell shares of its common stock, having an aggregate offering price of up to $25,000,000 (the “Shares”) from time to time, through an “at the market offering” program (the “WDCO ATM Offering”). During the nine months ended September 30, 2019, the Company had received gross proceeds of $4,656,051 through the sale of 119,791 shares of the Company’s common stock through the WDCO ATM Offering. The offer and sale of the shares through the WDCO ATM Offering were made pursuant to our then effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the WDCO ATM Offering, dated October 15, 2018.

 

 F-34 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

Public Offering

 

On March 29, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (the “Underwriter”), pursuant to which the Company agreed to issue and sell an aggregate of (a) 71,388 shares of its common stock (the “Shares”) together with warrants to purchase 71,388 shares of common stock (the “Common Warrants”) and (b)  pre-funded warrants to purchase up to 317,500 shares of its common stock (the “Pre-Funded Warrants”) together with a number of Common Warrants to purchase 317,500 shares of common stock (the “Offering”). The Shares were sold to the purchasers at the public offering price of $17.60 per share (the “Offering Price”). The Common Warrants were sold at a public offering price of $0.40 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser whose purchase of the Shares and the Common Warrant in the Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of the Company’s outstanding common stock immediately following the consummation of the Offering. The purchase price of each Pre-Funded Warrant equaled the Offering Price at which the Shares were sold to the public in the Offering, minus $0.40, and the exercise price of each Pre-Funded Warrant equaled $0.40 per share. In addition, the Company has also issued the Underwriter a warrant to purchase a maximum of 15,550 additional shares of common stock at an initial exercise price of $19.80 per share, with a term of five years (the “Underwriter Warrants”).

 

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

 

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

 

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

 

The Offering closed on April 2, 2019 and as of September 30, 2019, the Company had issued a total of 771,275 shares of its common stock, inclusive of shares issued pursuant to the exercise of 317,500 Pre-Funded Warrants and 382,387 shares issued pursuant to the cashless exercise of the Common Warrants.

 

Ascendiant ATM Offering

 

On August 6, 2019, the Company entered into an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent to sell shares of the Company’s common stock having an aggregate offering price of up to $5,500,000 (the “ATM Offering”). The offer and sale of the Company’s common stock will be made pursuant to the Company’s effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the Securities and Exchange Commission (the “Commission”) on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated August 6, 2019. Through September 30, 2019, the Company had received gross proceeds of $4,416,765 through the sale of 1,140,330 shares of the Company’s common stock from the ATM Offering.

 

Issuance of Common Stock for Services

 

During the nine months ended September 30, 2019, the Company issued to its consultants a total 29,375 shares of its common stock with an aggregate value of $305,019, an average of $10.38 per share for services rendered.

 

 F-35 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

Issuance of common stock for conversion of debt

 

During the nine months ended September 30, 2019, principal and accrued interest of $4,238,878 and $497,417, respectively, on the Company’s debt securities was satisfied through the issuance of 370,473 shares of the Company’s common stock.

 

Issuance of common stock in payment of accrued liability

 

During the nine months ended September 30, 2019, the Company issued 9,375 shares of its common stock in satisfaction of an accrued liability of $108,521.

 

21. RELATED PARTY TRANSACTIONS

 

a.The Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”) with an effective date of August 21, 2017, pursuant to which the Company will provide AVLP a non-revolving credit facility of up to $10,000,000 for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit. At September 30, 2019, the Company has provided loans to AVLP in the principal amount $9,476,979 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 18,953,958 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. As of September 30, 2019, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $1,736,859.

 

During the nine months ended September 30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 91,000 shares of AVLP common stock for $53,032 and 430,942 shares of AVLP common stock for $417,169, respectively. At September 30, 2019, the Company’s investment in AVLP common stock had an unrealized loss of $348,891.

 

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

 

In March 2017, the Company was awarded a $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system. At June 30, 2019, the Company had recorded a receivable from MTIX of $1,238,856 and during the six months ended June 30, 2019, the Company had received payments from MTIX of $2,676,219. The receivable was primarily the result of revenues recognized during the year ended December 31, 2018, and reflected on the financial statements as accounts receivable, related party.

 

b.During the nine months ended September 30, 2019, the Company acquired 137,500 shares of common stock of Alzamend from a third party for $110,000 consisting of the cancellation of principal and interest due the Company of $91,483 and cash of $18,517. AVLP provides management, consulting and financial services to Alzamend.

 

c.During the nine months ended September 30, 2019, Ault & Company, Inc. (“Ault & Company”) has provided $625,500 in short-term advances. Ault and Company is the Manager of Philou which presently owns 125,000 shares of the Company’s Series B Preferred Stock. Mr. Ault and Mr. Horne serve as the Chief Executive Officer and Chief Financial Officer, respectively, of Ault & Company.

 

d.Ault & Company guaranteed the prompt and complete payment and performance of the June 2019 short-term promissory note with a principal face amount of $2,900,000.

 

 F-36 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

22. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

 

The Company has five reportable segments as of September 30, 2019, and had two reportable segments as of September 30, 2018; see Note 1 for a brief description of the Company’s business.

 

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

 

   Three Months ended September 30, 2019
   DPC  DPL  Enertec  SC Mining  I.AM  Total
Revenue  $2,773,707   $341,529   $1,853,204   $   $   $4,968,440 
Revenue, cryptocurrency                              
mining               307,172        307,172 
Revenue, restaurant
operations
                   1,036,834    1,036,834 
Revenue, lending activities   69,217                    69,217 
Total revenues  $2,842,924   $341,529   $1,853,204   $307,172   $1,036,834   $6,381,663 
Depreciation and                              
amortization expense  $140,278   $36,403   $222,337   $1,433,145   $280,412   $2,112,575 
Loss from operations  $(206,509)  $(84,780)  $(212,585)  $(5,049,622)  $(284,167)  $(5,837,663)
Capital expenditures for                              
segment assets, as of                              
September 30, 2019  $26,081   $12,252   $12,883   $   $4,501   $55,717 
Identifiable assets as of                              
September 30, 2019  $32,186,830   $1,301,273   $11,184,088   $850,984   $1,902,803   $47,425,978 

 

 

 

   Three Months ended September 30, 2018
   DPC  DPL  Enertec  SC Mining  I.AM  Eliminations  Total
Revenue  $2,974,216   $601,679   $2,156,107   $   $   $   $5,732,002 
Revenue, cryptocurrency                                   
mining               590,165            590,165 
Revenue, related party   352,496                        352,496 
Revenue, restaurant
operations
                   1,584,891        1,584,891 
Revenue, lending activities   85,368                        85,368 
Inter-segment revenues   25,168                    (25,168)   - 
Total revenues  $3,437,248   $601,679   $2,156,107   $590,165   $1,584,891   $(25,168)  $8,344,922 
Depreciation and                                   
amortization expense  $74,018   $12,643   $27,538   $802,952   $   $   $917,151 
Loss from operations  $(792,092)  $(47,128)  $(99,201)  $(1,169,739)  $(3,829)  $   $(2,111,989)
Capital expenditures for                                   
segment assets, as of                                   
September 30, 2018  $5,838   $   $6,791   $241,725   $106,074   $   $360,428 
Identifiable assets as of                                   
September 30, 2018  $30,113,607   $1,516,710   $11,024,505   $8,245,136   $2,204,303   $   $53,104,261 

 

 F-37 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

 

 

   Nine Months ended September 30, 2019
   DPC  DPL  Enertec  SC Mining  I.AM  Total
Revenue  $7,110,243   $1,423,971   $6,527,075   $   $   $15,061,289 
Revenue, cryptocurrency                              
mining               592,092        592,092 
Revenue, restaurant
operations
                  $3,371,465    3,371,465 
Revenue, lending activities   443,927                    443,927 
Total revenues  $7,554,170   $1,423,971   $6,527,075   $592,092   $3,371,465   $19,468,773 
Depreciation and                              
amortization expense  $210,424   $56,200   $377,259   $2,149,717   $280,413   $3,074,013 
Loss from operations  $(1,169,851)  $(87,468)  $(372,691)  $(6,538,493)  $(716,637)  $(8,885,140)
Capital expenditures for                              
segment assets, as of                              
September 30, 2019  $34,899   $81,319   $21,045   $   $12,060   $149,323 
Identifiable assets as of                              
September 30, 2019  $32,186,830   $1,301,273   $11,184,088   $850,984   $1,902,803   $47,425,978 

 

 

 

 

   Nine Months ended September 30, 2018 
   DPC   DPL   Enertec   SC Mining   I.AM   Eliminations   Total 
Revenue  $8,532,029   $1,339,413   $3,373,977   $   $   $   $13,245,419 
Revenue, cryptocurrency                                   
mining               1,546,418            1,546,418 
Revenue, related party   3,911,263                        3,911,263 
Revenue, restaurant
operations
                   2,087,383        2,087,383 
Revenue, lending activities   194,120                        194,120 
Inter-segment revenues   29,681                    (29,681)    
Total revenues  $12,667,093   $1,339,413   $3,373,977   $1,546,418   $2,087,383   $(29,681)  $20,984,603 
Depreciation and                                   
amortization expense  $226,639   $43,667   $37,257   $1,434,932   $   $   $1,742,495 
Loss from operations  $(1,861,923)  $(498,536)  $46,961   $(3,019,856)  $(4,838)  $   $(5,338,192)
Capital expenditures for                                   
segment assets, as of                                   
September 30, 2018  $349,190   $1,301   $38,460   $9,048,503   $128,732   $   $9,566,186 
Identifiable assets as of