UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended September 30, 2020  

 

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 13, 2020 the registrant had outstanding 16,517,437 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, 2020 (Unaudited)
and December 31, 2019 (Audited)
F-1 – F-2
       
    Condensed Consolidated Statements of Operations and Comprehensive Loss for the
three and nine months ended September 30, 2020 and 2019 (Unaudited)
F-3
       
    Condensed Consolidated Statements of Changes in Stockholders' Equity for the three
and nine months ended September 30, 2020 and 2019 (Unaudited)
F-4 – F-7
       
    Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2020 and 2019 (Unaudited)
F-8 – F-9
       
    Notes to Condensed Consolidated Financial Statements (Unaudited) F-10 – F-46
       
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 16
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3.   Defaults Upon Senior Securities 16
Item 4.   Mine Safety Disclosures 16
Item 5.   Other Information 16
Item 6.   Exhibits 17

 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “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, 2019, 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 16, 2020. 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 disclaim 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, 
   2020   2019 
   (Unaudited)     
ASSETS        
CURRENT ASSETS        
Cash and cash equivalents  $1,274,408   $483,383 
Marketable equity securities   386,476    639,647 
Accounts receivable   3,028,754    2,438,254 
Accounts and other receivable, related party   1,196,379    1,196,379 
Accrued revenue   1,630,138    2,226,570 
Inventories, net   2,672,873    2,481,511 
Prepaid expenses and other current assets   2,044,605    1,324,161 
Current assets held for sale       281,352 
TOTAL CURRENT ASSETS   12,233,633    11,071,257 
           
Intangible assets   2,959,056    3,206,988 
Goodwill   8,122,437    8,100,947 
Property and equipment, net   1,977,775    1,787,393 
Right-of-use assets   4,130,760    4,177,590 
Investments - related party   7,059,322    6,540,720 
Investments in derivative liabilities and common stock - related party   3,338,266    2,128,224 
Equity investments in private companies   261,767    261,767 
Investment in limited partnership   1,869,000    1,969,000 
Loans receivable   564,169    795,481 
Other investments, related parties   810,000    832,500 
Other assets   318,627    275,273 
Noncurrent assets held for sale       1,603,268 
TOTAL ASSETS  $43,644,812   $42,750,408 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $13,073,937   $14,284,563 
Accounts payable and accrued expenses, related party   38,569    64,604 
Operating lease liability, current   514,910    484,819 
Advances on future receipts   1,534,822    2,210,392 
Short term advances   540,000     
Short term advances, related party   92,141    1,409,331 
Revolving credit facility   177,342    221,705 
Notes payable, net   9,833,928    6,137,015 
Notes payable, related parties   211,253    169,153 
Convertible notes payable   392,044    2,100,990 
Convertible notes payable, related party   400,000     
Other current liabilities   5,502,023    1,545,210 
Current liabilities held for sale   1,572,177    1,593,550 
TOTAL CURRENT LIABILITIES   33,883,146    30,221,332 

 

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, 
   2020   2019 
   (Unaudited)     
LONG TERM LIABILITIES        
Operating lease liability, non-current   3,683,355    3,726,493 
Notes payable   352,032    482,624 
Notes payable, related parties   51,916    115,164 
Convertible notes payable   365,794    304,773 
Noncurrent liabilities held for sale   786,815    951,072 
           
TOTAL LIABILITIES   39,123,058    35,801,458 
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS’ EQUITY          
Series A Convertible Preferred Stock, $25.00 stated value per share,   7    7 
$0.001 par value – 1,000,000 shares authorized; 7,040 shares          
issued and outstanding at September 30, 2020 and December 31, 2019,          
respectively (redemption amount and liquidation preference of $176,000          
as of September 30, 2020 and December 31, 2019)          
Series B Convertible Preferred Stock, $10 stated value per share,   125    125 
share, $0.001 par value – 500,000 shares authorized; 125,000 shares issued          
and outstanding at September 30, 2020 and December 31, 2019 (liquidation          
preference of $1,250,000 at September 30, 2020 and December 31, 2019)          
Class A Common Stock, $0.001 par value – 500,000,000 shares authorized;   11,473    3,318 
11,473,410 and 3,318,390 shares issued and outstanding at September 30, 2020          
and December 31, 2019, respectively          
Class B Common Stock, $0.001 par value – 25,000,000 shares authorized;   -    - 
nil shares issued and outstanding at September 30, 2020 and December 31, 2019          
Additional paid-in capital   122,243,579    101,099,347 
Accumulated deficit   (113,302,229)   (88,650,465)
Accumulated other comprehensive loss   (4,439,443)   (5,511,624)
TOTAL DPW HOLDINGS STOCKHOLDERS’ EQUITY   4,513,512    6,940,708 
           
Non-controlling interest   8,242    8,242 
           
TOTAL STOCKHOLDERS’ EQUITY   4,521,754    6,948,950 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $43,644,812   $42,750,408 

 

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, 
   2020   2019   2020   2019 
                 
Revenue  $5,705,100   $4,968,440   $16,709,118   $15,061,289 
Revenue, cryptocurrency mining   -    307,172    -    592,092 
Revenue, lending activities   (29,536)   69,217    (27,140)   443,927 
Total revenue   5,675,564    5,344,829    16,681,978    16,097,308 
Cost of revenue   3,736,082    4,348,761    11,085,091    13,441,785 
Gross profit   1,939,482    996,068    5,596,887    2,655,523 
                     
Operating expenses                    
Engineering and product development   468,838    481,902    1,371,623    1,408,848 
Selling and marketing   259,649    331,107    892,786    1,130,913 
General and administrative   2,835,940    3,554,043    8,656,841    11,567,180 
Impairment of property and equipment   -    4,315,856    -    4,315,856 
Gain on digital currency   (237)   (951)   (251)   (6,933)
Total operating expenses   3,564,190    8,681,957    10,920,999    18,415,864 
                     
Loss from continuing operations   (1,624,708)   (7,685,889)   (5,324,112)   (15,760,341)
Other income (expenses)                    
Interest income   102,397    898,646    138,653    2,647,110 
Interest expense   (2,365,741)   (2,954,843)   (4,414,618)   (5,585,850)
Change in fair value of marketable equity securities   (29,318)   (330,150)   (57,896)   (173,503)
Loss on extinguishment of debt   (12,823,039)   (155,448)   (13,297,793)   (963,232)
Loss on issuance of warrants   -    -    -    (1,763,481)
Change in fair value of warrant liability   -    165,840    (5,773)   1,112,665 
Total other expenses, net   (15,115,701)   (2,375,955)   (17,637,427)   (4,726,291)
                     
Loss from continuing operations before income taxes   (16,740,409)   (10,061,844)   (22,961,539)   (20,486,632)
Income tax benefit   6,053    5,140    17,846    93,284 
Net loss from continuing operations   (16,734,356)   (10,056,704)   (22,943,693)   (20,393,348)
Net loss from discontinued operations, net of taxes   0    (284,167)   (1,697,744)   (717,426)
Net loss   (16,734,356)   (10,340,871)   (24,641,437)   (21,110,774)
Less: Net loss attributable to non-controlling interest   -    -    -    32,416 
Net loss attributable to DPW Holdings   (16,734,356)   (10,340,871)   (24,641,437)   (21,078,358)
Preferred dividends   (2,933)   (5,284)   (10,327)   (12,437)
Net loss available to common stockholders  $(16,737,289)  $(10,346,155)  $(24,651,764)  $(21,090,795)
                     
Basic and diluted net loss per common share:                    
Continuing operations  $(1.69)  $(6.29)  $(3.40)  $(23.78)
Discontinued operations       (0.18)   (0.25)   (0.84)
Net loss per common share  $(1.69)  $(6.47)  $(3.65)  $(24.62)
                     
Weighted average common shares outstanding, basic and diluted   9,878,980    1,599,306    6,758,864    856,689 
                     
Comprehensive loss                    
Loss available to common stockholders  $(16,737,289)  $(10,346,155)  $(24,651,764)  $(21,090,795)
Other comprehensive income (loss)                    
Foreign currency translation adjustment   43,554    67,166    (7,853)   259,671 
Net unrealized gain (loss) on derivative securities of related party   1,561,247    (1,152,480)   1,080,034    (1,513,661)
Other comprehensive income (loss)   1,604,801    (1,085,314)   1,072,181    (1,253,990)
Total comprehensive loss  $(15,132,488)  $(11,431,469)  $(23,579,583)  $(22,344,785)

 

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

 

 F-3 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended September 30, 2020

 

                           Accumulated         
   Series A & B           Additional       Other       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Interest   Equity 
                                     
BALANCES, July 1, 2020   132,040   $132    6,112,117   $6,112   $105,625,502   $(96,564,940)  $(6,044,244)  $8,242   $3,030,804 
Stock based compensation:                                             
Options                   20,400                20,400 
Common stock           37,500    37    109,088                109,125 
Issuance of common stock for conversion                                             
of debt           5,323,793    5,324    14,016,853                14,022,177 
Beneficial conversion feature in connection                                             
with convertible notes                   15,039                15,039 
Fair value of warrants issued in connection                                             
with convertible notes                    2,481,697                2,481,697 
Cash for exchange fees and other financing costs                   (25,000)               (25,000)
Comprehensive loss:                                             
Net loss                        (16,734,356)           (16,734,356)
Preferred dividends                       (2,933)           (2,933)
Net unrealized gain on derivatives                                             
in related party                           1,561,247        1,561,247 
Foreign currency translation adjustments                           43,554        43,554 
                                              
BALANCES, September 30, 2020   132,040   $132    11,473,410   $11,473   $122,243,579   $(113,302,229)  $(4,439,443)  $8,242   $4,521,754 

 

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

 

 F-4 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended September 30, 2019

 

   Series A & B           Additional       Other       Total 
   Preferred Stock   Common Stock   Paid-In   Accumulated   Comprehensive   Non-Controlling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Interest   Equity 
                                     
BALANCES, July 1, 2019   132,040   $132    1,037,128   $1,037   $92,377,366   $(66,465,775)  $(4,071,199)  $8,242   $21,849,803 
Stock based compensation:                                             
Options                   187,125                187,125 
Common stock           20,000    20    51,980                52,000 
Issuance of common stock for cash           1,140,330    1,141    4,415,624                4,416,765 
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 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, 2020

 

                           Accumulated         
   Series A & B           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, 2020   132,040   $132    3,318,390   $3,318   $101,099,347   $(88,650,465)  $(5,511,624)  $8,242   $6,948,950 
                                              
Stock based compensation:                                             
Options                   60,534                60,534 
Common stock           102,500    102    182,473                182,575 
Issuance of common stock in payment of                                             
short term advances, related party           660,667    661    739,287                739,948 
Issuance of common stock in payment of                                             
accrued liabilities           153,124    153    228,548                228,701 
Issuance of common stock for conversion                                             
of debt           7,238,729    7,239    16,703,564                16,710,803 
Beneficial conversion feature in connection                                             
with convertible notes                   81,621                81,621 
Fair value of warrants issued in connection                                             
with convertible notes                   3,173,205                3,173,205 
Cash for exchange fees and other financing costs                   (25,000)               (25,000)
Comprehensive loss:                                             
Net loss                        (24,641,437)           (24,641,437)
Preferred dividends                       (10,327)           (10,327)
Net unrealized loss on derivatives                                             
in related party                           1,080,034        1,080,034 
Foreign currency translation adjustments                           (7,853)       (7,853)
                                              
BALANCES, September 30, 2020   132,040   $132    11,473,410   $11,473   $122,243,579   $(113,302,229)  $(4,439,443)  $8,242   $4,521,754 

 

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

 

 F-6 
 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2019

 

                           Accumulated         
   Series A & B           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 
                                              
Stock based compensation:                                             
Options                   681,079                681,079 
Common stock           29,375    29    304,990                305,019 
Issuance of common stock for cash           1,331,509    1,333    9,869,176                9,870,509 
Issuance of common stock in payment of                                             
accrued liabilities           9,375    9    108,514                108,523 
Issuance of common stock for conversion                                             
of debt           370,473    370    4,735,924                4,736,294 
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                   (1,401,763)               (1,401,763)
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 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, 
   2020   2019 
         
Cash flows from operating activities:        
Net loss  $(24,641,437)  $(21,110,774)
Less: Net loss from discontinued operations   (1,697,744)   (717,426)
Net loss from continuing operations   (22,943,693)   (20,393,348)
Adjustments to reconcile net loss to net cash (used in) operating activities:          
Depreciation   357,083    2,392,937 
Amortization   251,968    400,661 
Amortization of right-of-use assets   46,830    10,563 
Interest expense – debt discount   2,379,196    3,034,454 
Fair value of warrants issued to extinguish debt   

2,749,259

    

 
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   20,532    (1,869,778)
Accretion of original issue discount on notes receivable   (4,538)   (77,155)
Increase in accrued interest on notes receivable – related party       (732,542)
Stock-based compensation   272,466    1,354,062 
Impairment of property and equipment       4,315,856 
Realized losses on other investments   27,500     
Realized (gains) losses on sale of digital currencies       (394)
Realized (gains) losses on sale of marketable securities   (22,602)   (86,741)
Unrealized (gains) losses on marketable equity securities   132,106    (294,717)
Unrealized losses on equity securities – related party   (25,176)   371,970 
Unrealized losses on equity securities   72,976    24,597 
Changes in operating assets and liabilities:          
Accounts receivable   (590,502)   (398,222)
Accounts receivable, related party       2,648,798 
Accrued revenue   599,604    (41,760)
Digital currencies   (14)   (599,025)
Inventories   (198,930)   613,847 
Prepaid expenses and other current assets   (750,069)   (33,812)
Other assets   (86,143)   (433,013)
Accounts payable and accrued expenses   11,988,091    1,155,024 
Accounts payable, related parties   (26,035)   4,526 
Other current liabilities   407,910    (354,773)
Lease liabilities   (13,047)   16,216 
           
Net cash (used in) continuing operating activities   (5,355,228)   (8,320,953)
Net cash provided by (used in) discontinued operating activities   1,246    62,205 
Net cash used in operating activities   (5,353,982)   (8,258,748)
           
Cash flows from investing activities:          
Purchase of property and equipment   (554,462)   (137,263)
Investments – related party   (516,634)   (1,501,912)
Investments in warrants and common stock - related party   (93,222)   (1,102,619)
Sales of marketable equity securities   143,667    571,741 
Proceeds from loans receivable   139,933     
Investments in debt and equity securities   (13,260)   (504,393)
           
Net cash used in investing activities  $(893,978)  $(2,674,446)

 

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, 
   2020   2019 
         
Cash flows from financing activities:        
Gross proceeds from sales of common stock and warrants  $   $15,945,371 
Proceeds from issuance of Series A Convertible Preferred Stock       131,741 
Financing cost in connection with sales of equity securities   (25,000)   (1,401,764)
Proceeds from warrant exercises       127,000 
Proceeds from convertible notes payable   100,000    500,000 
Proceeds from notes payable   7,122,434    4,752,918 
Proceeds from short-term advances   570,000     
Payments on short-term advances   (30,000)    
Proceeds from short-term advances – related party   653,124    625,500 
Payments on short-term advances – related party   (230,366)    
Payments on notes payable   (289,012)   (2,001,474)
Payments on convertible notes payable       (7,079,547)
Proceeds from advances on future receipts       941,804 
Payments on advances on future receipts   (762,076)   (1,365,435)
Payments of preferred dividends   (10,327)   (12,437)
Payments on revolving credit facilities, net   (44,363)   (80,445)
           
Net cash provided by financing activities   7,054,414    11,083,232 
           
Effect of exchange rate changes on cash and cash equivalents   (15,429)   (165,125)
           
Net increase in cash and cash equivalents   791,025    (15,087)
           
Cash and cash equivalents at beginning of period   483,383    769,619 
           
Cash and cash equivalents at end of period  $1,274,408   $754,532 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for interest  $100,939   $1,850,946 
           
Non-cash investing and financing activities:          
Cancellation of convertible note payable into shares of common stock  $16,710,803   $4,736,295 
Payment of accounts payable with digital currency  $   $594,320 
Issuance of common stock in payment of liability  $228,701   $108,521 
Cancellation of short term advances, related party into shares          
of common stock  $739,948   $ 
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 
Issuance of notes payable and convertible notes payable in          
payment of accrued expenses  $420,000   $ 

 

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, 2020

 

 

 

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 and advanced textile technology. The Company’s wholly-owned subsidiaries are Gresham Worldwide, Inc. (“GWW”), Coolisys Technologies Corp. (“Coolisys”), Gresham Power Electronics Ltd. (f/k/a Digital Power Limited) (“Gresham Power”), Enertec Systems 2001 Ltd (“Enertec”), Digital Power Lending, LLC (“DP Lending”), Ault Alliance, Inc. (“Ault Alliance”), It’sLikeFasion.com, Inc. (“It’sLikeFashion”) and Digital Farms, Inc. (“Digital Farms”). The Company also has a controlling interest in Microphase Corporation (“Microphase”). The Company has three reportable segments – defense solutions through GWW with operations conducted by Microphase, Enertec and Gresham Power, commercial solutions through Coolisys and commercial lending and digital learning through Ault Alliance.

 

During March 2020, the Company ceased operations at Digital Farms, the Company’s blockchain mining subsidiary, and I.AM, Inc. (“I.AM”). Management determined that the permanent closing of the restaurant operations at I.AM, which owned and operated the Prep Kitchen brand restaurants located in the San Diego area, met the criteria for presentation as discontinued operations. Accordingly, the results of the restaurant operations segment are presented as discontinued operations in our condensed consolidated statements of operations and comprehensive loss and are excluded from continuing operations for all periods presented.

 

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 an amendment to the Certificate of Incorporation (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. All share amounts in these financial statements have been updated to reflect these reverse stock splits.

 

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, 2020, the Company had cash and cash equivalents of $1,274,408, an accumulated deficit of $113,302,229 and negative working capital of $21,649,513. The Company has incurred recurring losses and reported net losses attributable to DPW Holdings for the nine months ended September 30, 2020 and 2019, totaling $24,641,437 and $21,078,358, respectively. In the past, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During 2020, the Company continued to successfully obtain additional equity and debt financing and restructured 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 February 10, 2020, the Company entered into a Master Exchange Agreement with Esousa Holdings, LLC, which agreed to purchase up to approximately $7.7 million in certain promissory notes previously issued by the Company. 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, which ability could be adversely affected by the outbreak of a novel coronavirus (“COVID-19”), it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce and eliminating outside consultants 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 AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

Impact of Coronavirus on the Company’s Operations

 

On March 16, 2020, to try and mitigate the spread of the novel coronavirus, San Diego County health officials issued orders mandating that all restaurants must end dine-in services. As a result of these temporary closures by the San Diego County health officials and the deteriorating business conditions at both our cryptocurrency mining and restaurant businesses, management concluded that discontinuing these operations was ultimately in our best interest. Although we have ceased operations at Digital Farms, since the assets and operations have not yet been abandoned, sold or distributed, these assets do not yet meet the requirement for presentation as discontinued operations. However, management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations.

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic which continues to spread throughout the United States and the world. We are monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on our operations, financial position, cash flows, inventory, supply chains, customer purchasing trends, customer payments, and the industry in general, in addition to the impact on our employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on our operations and liquidity is uncertain as of the date of this quarterly report.

 

Our business has been disrupted and materially adversely affected by the recent outbreak of COVID-19. We are still assessing our business operations and system supports and the impact COVID-19 may have on our results of operations and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in our sectors in particular.

 

Our operations are located in Santa Clara County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom and Israel, and members of our senior management work in Seattle, WA and New York, NY. We have been following the recommendations of local health authorities to minimize exposure risk for our employees, including the temporary closures of our offices and having employees work remotely to the extent possible, which has to an extent adversely affected their efficiency.

 

Updates by business unit are as follows:

 

·DPW’s corporate headquarters, located in Newport Beach, CA, remains closed to non-essential employees based on the occupancy and social distancing order from the Orange County Health Officer. Non-essential headquarters staff continues to work remotely utilizing secure remote access systems and technology infrastructure. The Company believes it has adequate internal communications system and can remain operational with a remote staff. The Company is reviewing the reopening guidance by the Orange County Health Agency and the State of California along with COVID-19 General Checklist for Office Workspaces published by the California Department of Public Health. The corporate headquarters will reopen when the Company can provide a safe workspace for its employees.

 

·Coolisys, located in Milpitas, CA, had largely returned to normal operations with adherence to guidelines published by the Santa Clara Public Health Department. Certain individuals deemed to be high risk may work remotely as required. Coolisys has experienced disruption in its supply chain as a result of the COVID-19 impact on its vendors.

 

 F-11 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

·Microphase, located in Shelton, CT, has developed an emergency plan to ensure that its mission critical manufacturing and logistical functions are up and running. Microphase has implemented additional steps to ensure a higher level of cleanliness in its facility. Employees at greater risk of major health issues from COVID-19, which include key members of its finance department, are not required to work on site. The crisis management team meets regularly to monitor the situation, and modifies and communicates the plan as the need arises. Once the COVID-19 crisis has passed, the team will work on transitioning Microphase back to normal operations.

 

·Gresham Power Electronics Limited, located in Salisbury, England, continues to follow UK Government and Public Health England COVID-19 safety guidelines for businesses located in England, which includes a combination of working remotely and adhering to social distancing and health and safety procedures on site. Essential staff are on site for specific work as required.

 

·Enertec, located in Karmiel, Israel, has been granted a waiver by the Israeli government to remain open to complete key projects that impact national security. High risk employees of Enertec are permitted to work remotely.

 

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/A for the year ended December 31, 2019, filed with the Securities and Exchange Commission on June 1, 2020. The condensed consolidated balance sheet as of December 31, 2019 was derived from the Company’s audited 2019 financial statements contained in the above referenced Form 10-K/A. Results of the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of DPW and its wholly-owned subsidiaries, GWW, Coolisys, Digital Power Corporation (a wholly owned subsidiary of Coolisys), Gresham Power, Enertec, DP Lending, Ault Alliance, It’sLikeFashion 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.

 

 F-12 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

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.  During the first quarter of 2020, based upon the deteriorating business conditions for restaurants in the San Diego County as result of the spread of COVID-19 and the decline in projected cash flows over the life of the restaurant long-lived assets, the Company performed an undiscounted cash flow test to determine if the restaurant equipment and right-of-use assets were impaired. The undiscounted cash flows were less than the carrying amount of the Company’s restaurant equipment and right-of-use assets and therefore, the carrying amount of the assets were compared to the fair value of the assets, and the Company determined that there were impairment charges to be recorded on the restaurant long-lived assets. Impairment charges for the nine months ended September 30, 2020 related to restaurant equipment were in an amount equal to the cost of the Company’s restaurant equipment, net of depreciation of $504,802 and the impairment related to the right-of-use assets attributed to the discontinued restaurant operations was the full carrying amount of $1,020,514. The restaurant-related impairment charges are included as a component of net loss from discontinued operations (see Note 4).

 

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-13 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The Company’s disaggregated revenues consist of the following for the nine months ended September 30, 2020 and 2019:

 

   Nine Months ended September 30, 2020 
   GWW   Coolisys   Ault Alliance   Total 
                 
Primary Geographical Markets                
North America  $5,109,672   $3,100,552   $(27,140)  $8,183,084 
Europe   694,478    288,282    -    982,760 
Middle East   6,837,501    -    -    6,837,501 
Other   264,226    414,407    -    678,633 
   $12,905,877   $3,803,241   $(27,140)  $16,681,978 
                     
Major Goods                    
RF/Microwave Filters  $3,886,940   $   $   $3,886,940 
Detector logarithmic video amplifiers   1,318,547            1,318,547 
Power Supply Units       3,803,241        3,803,241 
Power Supply Systems   862,889            862,889 
Healthcare diagnostic systems   784,689            784,689 
Defense systems   6,052,812            6,052,812 
Lending activities           (27,140)   (27,140)
   $12,905,877   $3,803,241   $(27,140)  $16,681,978 
                     
Timing of Revenue Recognition                    
Goods transferred at a point in time  $6,068,376   $3,803,241   $(27,140)  $9,844,477 
Services transferred over time   6,837,501            6,837,501 
   $12,905,877   $3,803,241   $(27,140)  $16,681,978 

 

   Nine Months ended September 30, 2019 
   GWW   Coolisys   Ault Alliance   Total 
                 
Primary Geographical Markets                
North America  $2,703,803   $4,590,840   $443,927   $7,738,570 
Europe   6,341,396    16,804        6,358,200 
Middle East   1,283,312    21,348        1,283,312 
Other   447,786    269,440        717,226 
   $10,776,297   $4,898,432   $443,927   $16,097,308 
                     
Major Goods                    
RF/Microwave filters  $989,114   $   $   $989,114 
Detector logarithmic video amplifiers   473,150            473,150 
Power supply units   3,194,843    4,306,340        7,501,183 
Power supply systems   1,423,971            1,423,971 
Healthcare diagnostic systems   1,260,700            1,260,700 
Defense systems   3,413,171            3,413,171 
Lending activities           443,927    443,927 
Digital currency mining       592,092        592,092 
   $10,754,949   $4,898,432   $443,927   $16,097,308 
                     
Timing of Revenue Recognition                    
Goods transferred at a point in time  $5,944,177   $4,898,432   $443,927   $11,286,536 
Services transferred over time   4,810,772            4,810,772 
   $10,754,949   $4,898,432   $443,927   $16,097,308 

 

 F-14 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

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 an 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.

 

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 is 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 Gresham Power, 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 in one year or less.

 

The aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of September 30, 2020, 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 an estimated three year period. The Company will be paid in installments for this performance obligation over the estimated period that the remaining revenue is recognized.

 

Lending Activities

 

Ault Alliance, through 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.

 

 F-15 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

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.

 

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 5 and Note 9) that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

   Fair Value Measurement at September 30, 2020 
   Total   Level 1   Level 2   Level 3 
Investments in convertible promissory note of
AVLP – a related party
  $7,059,322   $   $   $7,059,322 
Investments in common stock and derivative
instruments of AVLP – a related party
   2,750,580    259,786   $    2,490,794 
Investment in common stock and warrants of
Alzamend – a related party
   587,686            587,686 
Investments in marketable equity securities   386,476    386,476         
Investments in warrants of public companies   103            103 
Total Investments  $10,784,167   $646,262   $   $10,137,905 

 

 F-16 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

   Fair Value Measurement at December 31, 2019 
   Total   Level 1   Level 2   Level 3 
Investments in convertible promissory note of
AVLP – a related party
  $6,540,720   $   $   $6,540,720 
Investments in common stock and derivative
instruments of AVLP – a related party
   1,569,286    238,602        1,330,684 
Investment in common stock of Alzamend – a
related party
   558,938            558,938 
Investments in marketable equity securities   639,647    639,647         
Investments in warrants of public companies   9,174            9,174 
Total Investments  $9,317,765   $878,249   $   $8,439,516 

 

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.

 

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 nine months ended September 30, 2020 and 2019. Anti-dilutive securities, which are convertible into or exercisable for the Company’s common stock, consist of the following at September 30, 2020 and 2019:

 

   September 30, 
   2020   2019 
Stock options   950    2,906 
Warrants (1)   3,582,116    72,921 
Convertible notes   1,396,419    349,486 
Conversion of preferred stock   2,232    2,232 
Total   4,981,717    427,545 

 

(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 Adopted Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which will modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the removal of certain disclosure requirements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the new disclosure requirements for the period ending March 31, 2020. The additional components of this release did not have a material impact on the Company’s consolidated financial statements.

 

 F-17 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes how entities will measure credit losses for most financial assets and other instruments that are not measured at fair value through net income. This update introduces the current expected credit loss (“CECL”) model, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. ASU 2016-13 is effective for public companies in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has completed its evaluation process and the January 1, 2020 adoption did not have a material impact to the Company’s consolidated financial statements for the three and nine months ended September 30, 2020.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. The Company has not early adopted ASU 2019-12 and is currently evaluating its impact on the Company’s financial position, results of operations, and cash flows.

 

4. Discontinued Operations

 

On March 16, 2020, to try and mitigate the spread of COVID-19, San Diego County health officials issued orders mandating that all restaurants must end dine-in services. As a result of these temporary closures and the deteriorating business conditions at both the Company’s cryptocurrency mining and restaurant businesses, the Company concluded that discontinuing the operations of Digital Farms and I.AM was ultimately in its best interest.

 

Digital Farms was established to pursue a variety of digital currencies and mined the top three cryptocurrencies for its own account. Although the Company has ceased operations at Digital Farms, since the assets and operations have not yet been abandoned, sold or distributed, these assets do not yet meet the requirement for presentation as discontinued operations. In the first quarter of 2020, management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations. Accordingly, the results of the restaurant operations are presented as discontinued operations in our condensed consolidated statements of operations and comprehensive loss and are excluded from continuing operations for all periods presented. In addition, the assets and liabilities of the restaurant operations are classified as held for sale in our condensed consolidated balance sheets for all periods presented.

 

 F-18 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The following tables summarize the major classes of assets and liabilities included as part of discontinued operations:

 

   September 30,   December 31, 
   2020   2019 
   (Unaudited)     
Current assets        
Cash and cash equivalents  $   $5,170 
Accounts receivable       83,885 
Inventories, net       60,341 
Prepaid expenses and other current assets       131,956 
Total current assets classified as held for sale       281,352 
           
Property and equipment, net       504,802 
Right-of-use assets       1,098,466 
Total assets classified as held for sale  $   $1,884,620 
           
Current liabilities          
Accounts payable and accrued expenses  $788,314   $881,601 
Operating lease liability, current   322,125    229,574 
Other current liabilities   461,738    482,375 
Total current liabilities classified as held for sale   1,572,177    1,593,550 
           
Long term liabilities          
Operating lease liability, non-current   786,815    951,072 
Total liabilities classified as held for sale  $2,358,992   $2,544,622 

 

The restaurant operations are included in our results as discontinued operations through March 16, 2020, the date of closing of the restaurants. The following tables summarize the major classes of line items included in loss from discontinued operations:

 

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Revenue  $   $1,036,834   $543,327   $3,371,465 
Cost of revenue       (293,765)   (160,310)   (908,256)
Selling and marketing       (61,618)       (162,268)
General and administrative       (964,829)   (555,445)   (3,017,578)
Impairment of property and equipment           (1,525,316)    
Interest expense       (789)       (789)
Loss from discontinued operations  $   $(284,167)  $(1,697,744)  $(717,426)

 

 F-19 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

5. Marketable Equity Securities

 

Marketable securities in equity securities with readily determinable market prices consisted of the following as of September 30, 2020 and December 31, 2019:

 

   Marketable equity securities at September 30, 2020 
       Gross unrealized   Gross realized     
   Cost   gains   gains (losses)   Fair value 
Common shares  $301,960   $84,516   $   $386,476 

 

   Marketable equity securities at December 31, 2019 
       Gross unrealized   Gross realized     
   Cost   gains   gains (losses)   Fair value 
Common shares  $423,025   $216,622   $   $639,647 

 

The following table presents additional information about marketable equity securities:

 

   Marketable 
   Equity Securities 
Balance at January 1, 2020  $639,647 
Sales of marketable equity securities   (143,667)
Realized gains on marketable equity securities   22,602 
Unrealized losses on marketable equity securities   (132,106)
Balance at September 30, 2020  $386,476 

 

At September 30, 2020 and December 31, 2019, the Company had invested in the marketable equity securities of certain publicly traded companies. During the three and nine months ended September 30, 2020, unrealized losses of $184,419 and $132,106, respectively, were included in net income as a component of change in fair value of equity securities. During the year ended December 31, 2019, the Company recognized unrealized gains of $258,905. 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, 2020 and December 31, 2019 is a Level 1 measurement based on quoted prices in an active market.

 

At September 30, 2020 and December 31, 2019, 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.

 

 F-20 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

6. PROPERTY AND EQUIPMENT, NET

 

At September 30, 2020 and December 31, 2019, property and equipment consist of:

 

   September 30,   December 31, 
   2020   2019 
Cryptocurrency machines and related equipment  $567,216   $567,216 
Computer, software and related equipment   2,941,870    2,518,187 
Office furniture and equipment   441,104    441,613 
Leasehold improvements   1,246,301    1,230,407 
    5,196,491    4,757,423 
Accumulated depreciation and amortization   (3,218,716)   (2,970,030)
Property and equipment, net  $1,977,775   $1,787,393 

 

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. During the first quarter of 2020, based upon the deteriorating business conditions for restaurants in the San Diego County as result of the spread of COVID-19 and the decline in projected cash flows over the life of the restaurant equipment, the Company performed an undiscounted cash flow test to determine if the restaurant equipment was impaired. The undiscounted cash flows were less than the carrying amount of the Company’s restaurant equipment and therefore, the carrying amount of the assets were compared to the fair value of the restaurant equipment, and the Company determined that there were impairment charges to be recorded on the restaurant equipment. Impairment charges for the three and nine months ended September 30, 2020 were in an amount equal to the cost of the Company’s restaurant equipment, net of depreciation of $504,802, and are included as a component of net loss from discontinued operations (see Note 4).

 

For the three and nine months ended September 30, 2020, depreciation expense amounted to $97,177 and $357,083 respectively. For the three and nine months ended September 30, 2019, depreciation expense amounted to $846,631 and $2,673,352, respectively.

 

7. INTANGIBLE ASSETS, NET

 

At September 30, 2020 and December 31, 2019 intangible assets consist of:

 

   September 30,   December 31, 
   2020   2019 
Trade name and trademark  $1,039,307   $1,039,307 
Customer list   2,413,054    2,406,434 
Domain name and other intangible assets   644,607    641,809 
    4,096,968    4,087,550 
Accumulated depreciation and amortization   (1,137,912)   (880,562)
Intangible assets, net  $2,959,056   $3,206,988 

 

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 $85,271 and $251,968, respectively, for the three and nine months ended September 30, 2020 and $101,199 and $400,661, respectively, for the three and nine months ended September 30, 2019.

 

 F-21 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

8. GOODWILL

 

The Company’s goodwill relates to the acquisition of a controlling interest in Microphase on June 2, 2017 and the acquisition of Enertec on May 22, 2018. The following table summarizes the changes in our goodwill during the nine months ended September 30, 2020:

 

   Goodwill 
Balance as of January 1, 2020  $8,100,947 
Effect of exchange rate changes   21,490 
Balance as of September 30, 2020  $8,122,437 

 

9. INVESTMENTS – RELATED PARTIES

 

Investments in AVLP and Alzamend Neuro, Inc. (“Alzamend”) at September 30, 2020 and December 31, 2019, are comprised of the following:

 

   September 30,   December 31, 
   2020   2019 
Investment in convertible promissory note of AVLP  $10,153,661   $9,595,079 
Investment in convertible promissory note of Alzamend   50,000     
Accrued interest in convertible promissory note of AVLP   2,025,475    2,025,475 
Total investment in convertible promissory note of AVLP – Gross   12,229,136    11,620,554 
Less: original issue discount   (9,904)    
Less: provision for loan losses   (5,159,910)   (5,079,834)
Total investment in convertible promissory note of AVLP and Alzamend   7,059,322    6,540,720 
           
Investment in derivative instruments of AVLP   2,490,794    1,330,684 
Investment in common stock of AVLP   259,786    238,602 
Investment in common stock and warrants of Alzamend   587,686    558,938 
Investment in derivative instruments and common stock of AVLP and
Alzamend
   3,338,266    2,128,224 
           
Total investment in AVLP and Alzamend – Net  $10,397,588   $8,668,944 
           
Investment in warrants and common stock of AVLP and Alzamend  $3,338,266   $2,128,224 
Investment in convertible promissory note of AVLP and Alzamend   7,059,322    6,540,720 
Total investment in AVLP and Alzamend – Net  $10,397,588   $8,668,944 

 

 F-22 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The following table summarizes the changes in our investments in AVLP and Alzamend during the nine months ended September 30, 2020:

 

   Investment in   Investment in     
   warrants and   convertible   Total 
   common stock   promissory   investment 
   of AVLP and   note of AVLP   in AVLP and 
   Alzamend   and Alzamend   Alzamend – Net 
Balance at January 1, 2020  $2,128,224   $6,540,720   $8,668,944 
Investment in convertible promissory notes of AVLP       478,506    478,506 
Investment in convertible promissory note of Alzamend       38,128    38,128 
Investment in common stock of AVLP and Alzamend   12,884        12,884 
Investment in warrants of Alzamend   11,872        11,872 
Fair value of derivative instruments issued by AVLP   80,076        80,076 
Unrealized loss in derivative instruments of AVLP   1,080,034        1,080,034 
Unrealized loss in common stock of AVLP and Alzamend   25,176        25,176 
Accretion of discount        1,968    1,968 
Balance at September 30, 2020  $3,338,266   $7,059,322   $10,397,588 

 

Investments in AVLP

 

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 AVLP common stock. At September 30, 2020, the Company has provided loans to AVLP in the principal amount $10,153,661 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 20,306,921 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 derivative financial instruments. At September 30, 2020 and December 31, 2019, the Company recorded a cumulative unrealized loss on its investment in warrants of AVLP of $3,284,222 and $4,364,256, 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, 2020, the Company recognized, in other comprehensive loss, net unrealized gain on derivative securities of related party of $1,561,247 and $1,080,034, respectively, which compares with a net unrealized loss on derivative securities of related party of $1,152,480 and $1,513,661, respectively during the three and nine months ended September 30, 2019. 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 0.13% and 2.98%, 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 104.6% 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 had accounted 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 warrants that the Company received in conjunction with its investment. Interest was accreted using the effective interest method. The Company recorded interest on an accrual basis and recognized 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. 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 and  $268,428 and $732,542, respectively, of interest income from the contractual 12% rate provided for by the convertible promissory notes. During the nine months ended September 30, 2020, no interest income was recognized from the Company’s investment in AVLP.

 

 F-23 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

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, primarily the value of the underlying conversion feature and current economic events, the Company concluded that an impairment existed at December 31, 2019. At September 30, 2020, the Company determined that the fair value of the convertible promissory notes in AVLP was approximately $7,059,322. The Company’s determination of fair value was based upon the estimated present value of a future liquidity event combined with the closing price of AVLP’s common stock at September 30, 2020. 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, 2020 and year ended December 31, 2019, the Company acquired 5,000 shares of AVLP common stock for $1,274 and 91,000 shares of AVLP common stock for $53,032, respectively, in each case in the open market. At September 30, 2020, the closing market price of AVLP’s common stock was $0.26, an increase from $0.24 at December 31, 2019. The Company has determined that its investment in AVLP marketable equity securities should be 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, 2020, the Company’s investment in AVLP common stock had an unrealized loss of $488,049.

 

In aggregate, the Company has 999,175 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 the voting power conferred by its equity investment and which is 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.

 

Investments in Alzamend

 

The Company’s investments in Alzamend, a related party, consist of a convertible promissory note, derivative instruments and shares of Alzamend common stock. At September 30, 2020, the Company has provided a loan to Alzamend in the principal amount $50,000 and, in addition to the 8% convertible promissory notes, Alzamend has issued to the Company warrants to purchase 16,667 shares of Alzamend common stock at an exercise price of $3.00 per share for a period of five years. The warrants were determined by the issuer to be derivative financial instruments. At September 30, 2020, the Company recorded a cumulative unrealized loss on its investment in warrants of Alzamend of $111, 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. The Company’s investment in Alzamend will be revalued on each balance sheet date. The fair value of the Company’s holdings in the Alzamend warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 0.28% was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor of 103.7% was determined based on historical stock prices for similar 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 had accounted for its convertible promissory notes in Alzamend at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of the discount attributed to the fair value of the warrants that the Company received in conjunction with its investment. Interest was accreted using the effective interest method. The Company recorded interest on an accrual basis and recognized 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. During the three and nine months ended September 30, 2019, the Company recorded $1,968 of interest income for the discount accretion and $329 of interest income from the contractual 8% rate provided for by the convertible promissory notes.

 

 F-24 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The Company evaluated the collectability of both interest and principal for the convertible promissory notes in Alzamend to determine whether there was an impairment. Based on current information and events, primarily the value of the underlying conversion feature and current economic events, the Company concluded that no impairment existed at September 30, 2020.

 

During the nine months ended September 30, 2020 and year ended December 31, 2019, the Company also acquired 11,325 shares of Alzamend common stock for $9,060 and 372,625 shares of Alzamend common stock for $208,100, respectively. At September 30, 2020, the estimated fair value of Alzamend’s common stock was $1.50. The Company has determined that its investment in Alzamend marketable equity securities should be accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures and based upon the estimated fair value of Alzamend common stock at September 30, 2020, the Company’s investment in Alzamend common stock had an unrealized gain of $358,765.

 

10. INVESTMENTS IN LIMITED PARTNERSHIP

 

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, 2020, the Company had invested an aggregate of $1,869,000 in the NY Partnership. The Company has no obligation to make any capital contributions until the hotel is open for business to the public.

 

11. 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 amounts of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.

 

During December 2017, the Company issued 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, 2020 and December 31, 2019, 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 in payments to the seller of the property and received a 28% undivided interest in the real property (the “Property”). The Company’s indirectly held wholly owned subsidiary, Coolisys Technologies, Inc. (“CTI”), 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 CTI’s 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 CTI’s interest without the Company’s approval.

 

 F-25 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

Under the Tenancy in Common Agreement, CTI 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 price. 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, 2020 and 2019, the Company recognized $7,500 and $22,500, respectively, in amortization expense. At September 30, 2020 and December 31, 2019, the unamortized balance of the Israeli Property was $210,000 and $232,500, 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.

 

12. 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, 2020, an aggregate of 6,668 of the Company’s options are still available for future grant.

 

During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company did not grant any options under the Plans. Generally, options granted under the Plans become fully vested after four years. During the nine months ended September 30, 2020 and 2019, the Company also issued 102,500 and 29,375, respectively, shares of common stock to its consultants and service providers. The grant date fair value of these shares amounted to $182,575 and $338,619 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-26 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The options outstanding as of September 30, 2020, 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 - $560  919  5.19  $537.96  566  $533.08
$1,208 - $1,352  31  2.88  $1,339.20  31  $1,339.20
$480 - $1,352  950  5.11  $564.32  597  $575.23
                
Issuances outside of Plans
$1.79  850,000  9.97  $1.79  0  $0.00
                
Total Options
$480 - 1,856  850,950  9.96  $2.42  597  $575.23

 

On September 30, 2020 and December 31, 2019, the aggregate intrinsic value of stock options that were outstanding was $187,000 and $0, respectively. and exercisable. On September 30, 2020 and December 31, 2019, there was no aggregate intrinsic value of stock options that were exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of such awards as of the period-end date

 

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, 2020 and 2019, is comprised as follows:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2020   2019   2020   2019 
Stock-based compensation from Plans  $202,975   $206,289   $272,466   $531,379 
Stock-based compensation from issuances                    
outside of Plans   -    155,490    -    822,683 
Total Stock-based compensation  $202,975   $361,779   $272,466   $1,354,062 

 

A summary of option activity under the Company's stock option plans as of September 30, 2020, 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   103,105    1,388   $636.47    6.33   $0 
Restricted stock awards   (96,875)                   
Forfeited   438    (438)  $793.14           
September 30, 2020   6,668    950   $564.32    5.11   $0 

 

As of September 30, 2020, there was $147,418 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 1.81 years.

 

 F-27 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

During the nine months ended September 30, 2020, 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, 2020
Weighted average risk-free interest rate  0.280%
Weighted average life (in years)  5.7
Volatility  100.3% — 100.5%
Expected dividend yield  0%
Weighted average grant-date fair value per share
of options granted
  $1.38

 

 

13. WARRANTS 

 

During the nine months ended September 30, 2020, the Company issued warrants to purchase an aggregate of 3,509,598 shares of common stock at an average exercise price of $1.39 per share.

 

(i)On February 20, 2020, pursuant to the Master Exchange Agreement, the Company issued warrants to purchase an aggregate of 1,700,361 shares of common stock at an average exercise price equal to $1.43 per share of common stock (see Note 17).

 

(ii)During the nine months ended September 30, 2020, the Company issued warrants to purchase an aggregate of 890,103 shares of common stock at an average exercise price equal to $1.08 per share of common stock in connection with the issuance of the Esousa 12% short-term promissory notes in the aggregate principal amount of $875,000 (see Note 17).

 

(iii)On April 14, 2020, the Company issued warrants to purchase up to 157,143 shares of common stock at an exercise price equal to $1.17 per share of common stock in connection with the issuance of a convertible promissory note in the principal amount of $100,000 (see Note 19).

 

(iv)On May 28, 2020, the Company issued warrants to purchase an aggregate of 400,000 shares of common stock at an exercise price equal to $1.07 per share of common stock in connection with the issuance of a convertible promissory note in the principal amount of $200,000 (see Note 19).

 

(v)On June 26, 2020, the Company issued warrants to purchase an aggregate of 361,991 shares of common stock at an exercise price equal to $2.43 per share of common stock in connection with the issuance of promissory notes in the aggregate principal face amount of $800,000 (see Note 17).

 

 F-28 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The following table summarizes information about common stock warrants outstanding at September 30, 2020:

 

Outstanding   Exercisable 
        Weighted            
        Average  Weighted       Weighted 
        Remaining  Average       Average 
Exercise   Number   Contractual  Exercise   Number   Exercise 
Price   Outstanding   Life (Years)  Price   Exercisable   Price 
$-    6,500   3.50  $-    6,500   $- 
$0.88    281,250   4.52  $0.88    281,250   $0.88 
$1.07    400,000   4.66  $1.07    400,000   $1.07 
$1.14    144,928   4.44  $1.14    144,928   $1.14 
$1.16    95,238   4.65  $1.16    95,238   $1.16 
$1.17    157,143   4.53  $1.17    157,143   $1.17 
$1.19    277,778   4.41  $1.19    277,778   $1.19 
$1.21    90,909   4.56  $1.21    90,909   $1.21 
$1.43    1,700,361   4.36  $1.43    1,700,361   $1.43 
$2.43    361,991   1.16  $2.43    361,991   $2.43 
$8.00    397   1.09  $8.00    397   $8.00 
$8.80    25,000   3.75  $8.80    25,000   $8.80 
$12.00    12,500   3.61  $12.00    12,500   $12.00 
$19.80    15,555   3.50  $19.80    15,555   $19.80 
$440.00    355   2.11  $440.00    355   $440.00 
$480.00    94   2.58  $480.00    94   $480.00 
$528.00    186   2.09  $528.00    186   $528.00 
$560.00    2,657   2.12  $560.00    2,657   $560.00 
$600.00    170   1.62  $600.00    170   $600.00 
$640.00    200   1.57  $640.00    200   $640.00 
$752.00    9,614   2.62  $752.00    9,614   $752.00 
$800.00    350   2.19  $800.00    350   $800.00 
$880.00    947   0.92  $880.00    947   $880.00 
$920.00    2,126   2.49  $920.00    2,126   $920.00 
$1,040.00    1,243   2.54  $1,040.00    1,243   $1,040.00 
$1,760.00    781   2.31  $1,760.00    781   $1,760.00 
$1,800.00    140   2.32  $1,800.00    140   $1,800.00 
$2,000.00    203   2.32  $2,000.00    203   $2,000.00 
$0.88 - $2,000.00    3,588,616   4.09  $5.91    3,588,616   $5.91 

 

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-29 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The Company utilized the Black-Scholes option pricing model and the assumptions used during the nine months ended September 30, 2020 and 2019:

 

   Nine Months Ended 
   September 30, 2020   September 30, 2019 
Weighted average risk free interest rate   0.17% — 1.38%    1.75% — 2.28% 
Weighted average life (in years)   1.42 — 5    5.0 
Volatility   86.3% — 103.1%    85.5% —87.5% 
Expected dividend yield   0%    0% 
Weighted average grant-date fair value
per share of warrants granted
  $1.39   $10.34 

 

 

14. OTHER CURRENT LIABILITIES

 

Other current liabilities at September 30, 2020 and December 31, 2019 consist of:

 

   September, 30   December 31, 
   2020   2019 
Accrued payroll and payroll taxes  $1,594,038   $1,237,054 
Warrant liability   3,561,067    9,364 
Warranty liability   86,070    80,412 
Other accrued expenses   260,848    218,380 
   $5,502,023   $1,545,210 

 

15. LEASES

 

We have operating leases for office space. Our leases have remaining lease terms of 1 month to 10.8 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 category as of September 30, 2020:

 

   September 30, 2020 
Operating right-of-use assets  $4,130,760 
Operating lease liability - current   514,910 
Operating lease liability - non-current   3,683,355 

 

 

The components of lease expenses for the nine months ended September 30, 2020, were as follows:

 

   Nine Months Ended 
   September 30, 2020 
Operating lease cost  $695,456 
Short-term lease cost   - 
Variable lease cost   106,927 

 

 F-30 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The following tables provides a summary of other information related to leases for the nine months ended September 30, 2020:

   September 30, 2020 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases  $762,356 
Right-of-use assets obtained in exchange for new operating lease liabilities  $- 
Weighted-average remaining lease term - operating leases   7.4 years  
Weighted-average discount rate - operating leases   10% 

 

The Company determined that using a discount rate of 10% is reasonable, as this is consistent with the mortgage rates for commercial properties for the time period commensurate with the terms of the leases.

 

Maturity of lease liabilities under our non-cancellable operating leases as of September 30, 2020, are as follows:

 

Payments due by period    
2020 (remainder)  $247,790 
2021   880,914 
2022   872,599 
2023   895,200 
2024   857,368 
Thereafter   2,233,700 
Total lease payments   5,987,571 
Less interest   (1,789,306)
Present value of lease liabilities  $4,198,265 

 

16. ADVANCES ON FUTURE RECEIPTS

 

The Company has received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts (the “Agreements on Future Receipts”). The Agreements on Future Receipts have been personally guaranteed by the Company’s Chief Executive Officer and in one instance has also been guaranteed by Philou. During the nine months ended September 30, 2020, the Company made payments of $762,076 on the outstanding balance. The Company is in default on its payment obligations on these Agreements on Future Receipts.

 

 F-31 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

17. NOTES PAYABLE

 

Notes Payable at September 30, 2020 and December 31, 2019, are comprised of the following:

 

   September 30,   December 31, 
   2020   2019 
Esousa purchased notes  $431,668   $2,828,323 
Esousa additional purchased notes   1,772,700    632,000 
Esousa short-term promissory notes   4,850,000     
June '20 short-term promissory notes   800,000     
Other short-term notes payable   1,182,401    1,050,339 
Notes payable to Wells Fargo   189,037    290,560 
Note payable to Dept. of Economic and Community Development   204,813    229,096 
Paycheck Protection Program Loans   1,162,302     
SBA Economic Injury Disaster Loan   150,000     
Short term bank credit   1,423,724    1,622,337 
Total notes payable   12,166,645    6,652,655 
Less:          
Unamortized debt discounts   (1,980,685)   (29,348)
Unamortized financing cost       (3,668)
Total notes payable, net of financing cost  $10,185,960   $6,619,639 
Less: current portion   (9,833,928)   (6,137,015)
Notes payable – long-term portion  $352,032   $482,624 

 

Master Exchange Agreement

 

On February 10, 2020, the Company entered into a master exchange agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa” or the “Creditor”) which acquired $4,163,481 in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously issued by the Company to Dominion Capital LLC (the “Dominion Short-Term Promissory Note”) and the Canadian Special Opportunity Fund, LP (the “CSOF Short-Term Promissory Note” and with the Dominion Short-Term Promissory Note, the “Esousa Purchased Notes”) in separate transactions. The Creditor also agreed to purchase additional notes and during the three months ended September 30, 2020, Esousa acquired $2,240,015 in principal amount, plus accrued but unpaid interest, of certain additional promissory notes that had been previously issued by us (the “Esousa Additional Purchased Notes” and collectively, with the Esousa Purchased Notes, the “Notes”). Pursuant to the Master Exchange Agreement, the Creditor has the unilateral right to acquire shares of the Company’s common stock (the “Exchange Shares”) in exchange for the Notes.

 

The first exchange occurred on the date of the Master Exchange Agreement when the Creditor exchanged a portion of the Esousa Purchased Notes for the Exchange Shares (the “Initial Exchange”) and the second exchange (the “Second Exchange” and together with the Initial Exchange, the “Exchange”) began July 8, 2020 when the Company received stockholder approval at a special meeting thereof for the Exchange of the Esousa Additional Purchased Notes for the Company’s common stock, and subsequently, authorization from the NYSE American (together, the “Required Approvals”).

 

 F-32 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The Exchange Agreement provides for two pricing periods, the first of which commenced after the date on which the Creditor received the Exchange Shares pursuant to the Initial Exchange and ended on the date that was 90 days after receipt thereof, and the second of which shall commence on the date on which the Creditor receives the Exchange Shares pursuant to the Second Exchange and ending on the date that is 90 days after receipt thereof, in either case, unless earlier terminated by the Creditor by written notice.

 

The number of shares to be issued upon each Exchange will be equal to (x) the principal and accrued but unpaid interest due on the Notes being exchanged multiplied by 1.35, divided by (y) the closing bid price effective on each date of an exchange notice, provided, however, that the Company shall theretofore have obtained the Required Approvals (the “Exchange Price”). The total number of shares of the Company’s common stock to be issued to Creditor in connection with the applicable Exchange shall be adjusted on the Business Day immediately following the Pricing Period based upon the volume weighted average price (“VWAP”) of the Company’s common stock over the applicable Pricing Period (the “VWAP Shares”). VWAP Shares means the number of shares determined by dividing (x) the Exchange Amount of the applicable Exchange, multiplied by 1.1, by (y) the greater of (I) seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable Pricing Period, or (II) $0.30 per share.

   

Pursuant to the Master Exchange Agreement, the Company issued warrants to purchase an aggregate of 1,832,597 shares of common stock at an average exercise price equal to $1.43 per share of common stock. The warrants became exercisable in July 2020. In connection therewith, the Company agreed to file a registration statement to register the sale of the shares of common stock underlying the exercise of the warrants by the Creditor pursuant to the Master Exchange Agreement. Since the Creditor did not purchase all of the additional notes, the Company has the option to acquire a portion of the warrants from the Creditor for an aggregate price of $1.00. Consequently, at September 30, 2020, the option represented the right to acquire 132,236 of the warrants from the Creditor. Therefore, only 1,700,360 options are deemed outstanding at September 30, 2020.

 

The Company computed the fair value of the 1,700,360 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded a loss on extinguishment in the amount of $2,713,874 based on the estimated fair value of the warrants. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 0.23% to 1.38% was derived from the U.S. Treasury yield curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor of 86.31% to 100.82% was determined based on historical stock prices of similar technology companies.

 

During the nine months ended September 30, 2020, the Company issued to the investor an aggregate of 5,771,580 shares of the Company’s common stock upon the exchange of principal and interest in the amount of $2,396,655 and $1,536,064, respectively. A loss on extinguishment of $10,548,535 was recognized on the issuances of common stock based on the fair value of the Company’s common stock at the date of the exchanges.

 

Esousa short-term promissory notes

 

During the nine months ended September 30, 2020, the Company issued to Esousa 12% short-term promissory notes in the aggregate principal amount of $2,000,000 and five-year warrants to purchase an aggregate of 890,103 shares of common stock at an average exercise price equal to $1.08 per share of common stock. The Esousa 12% short-term promissory notes have a term of three months.

 

The Company computed the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $354,426 based on the estimated fair value of the warrants. During the nine months ended September 30, 2020, the entire amount of debt discount was amortized as non-cash interest expense. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rates ranged from 0.34% and 1.11% and were derived from the U.S. Treasury yield curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor was between 86.31% and 94.51% and was determined based on historical stock prices of similar technology companies. The Company was prohibited from issuing the shares of common stock issuable upon exercise of the warrants until stockholder approval of such issuance of securities was obtained as required by applicable NYSE American listing rules. The Company received stockholder approval of such share issuances on July 8, 2020 and subsequently obtained approval by the NYSE American to issue such shares.

 

 F-33 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

Between August 2020 and September 2020, the Company also received $2,850,000 in loans from Esousa pursuant to which the Company agreed to issue unsecured short-term promissory notes with interest rates of 13% and 14% and warrants with terms of approximately one and a half years to purchase an aggregate of 1,154,927 shares of the Company’s common stock at an average exercise price of $2.71 per share of common stock. Both the notes and warrants were executed subsequent to September 30, 2020 (see Note 25). The notes have a term of three months from the date the Company received the proceeds. The warrants are immediately exercisable if the Company receives stockholder approval at an annual meeting of stockholders to be held on December 30, 2020, and subsequently, authorization from the NYSE American. The warrants may be exercised via cashless exercise at the option of the Investor. These warrants to purchase common stock do not qualify to be treated as equity, and accordingly, were recorded as a liability. The Company is required to present these instruments at fair value at each reporting date and any changes in fair values shall be recorded as an adjustment to earnings.

 

The Company computed the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $2,727,085 based on the estimated fair value of the warrants. During the nine months ended September 30, 2020, non-cash interest expense of $1,190,706 was recorded from the amortization of debt discounts. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 0.17% was derived from the U.S. Treasury yield curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor of 104.56% was determined based on historical stock prices of similar technology companies.

 

June ‘20 short-term promissory notes

 

On June 26, 2020, the Company issued to several institutional investors unsecured 12% short-term promissory notes in the aggregate principal amount of $800,000 and seventeen month warrants to purchase an aggregate of 361,991 shares of the Company’s common stock at an exercise price of $2.43 per share of common stock. These notes have a term of three months. The warrants are immediately exercisable once the Company obtains approval thereof by the NYSE American. The warrants may be exercised via cashless exercise at the option of the Investor. These warrants to purchase common stock do not qualify to be treated as equity, and accordingly, were recorded as a liability. The Company is required to present these instruments at fair value at each reporting date and any changes in fair values shall be recorded as an adjustment to earnings.

 

Paycheck Protection Program

 

In March 2020, U.S. lawmakers agreed on the passage of a $2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic. On March 27, 2020, President Trump signed the bill into law. The main driver of small business stimulus in the CARES Act is contained in the Paycheck Protection Program (“PPP”). PPP Loans may be used to cover payroll, benefits, and salaries, as well as interest payments, rent, and utilities. Fees are waived, and collateral and personal guarantees are not required. Payments are deferred for a minimum of six months, up to one year, and there are no prepayment penalties.

 

During April 2020, the Company received loans under the PPP in the principal amount of $715,101 and the Company’s majority owned subsidiary, Microphase, received loans in the principal amount of $467,333. The principal of the loan may be forgiven up to the total cost of payroll, mortgage interest payments, rent and utility payments made during the eight-week period after origination. In addition to meeting the size requirement (500 or fewer employees for most companies), the Company was required to demonstrate that its business had been negatively impacted by COVID-19. The Company expects that the entire amount received under the PPP is eligible for loan forgiveness.

 

 F-34 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

Economic Injury Disaster Loan

 

On May 27, 2020, the Company received an Economic Injury Disaster Loan in the principal amount of $150,000 with an annual interest rate of 3.75%. The Company shall begin making principal and interest payments of $731 every month beginning on May 27, 2021. All remaining principal and interest is due and payable thirty years from the date of the note.

 

18. NOTES PAYABLE – RELATED PARTIES

 

Notes Payable – Related parties at September 30, 2020 and December 31, 2019, are comprised of the following:

 

   September 30,   December 31, 
   2020   2019 
Notes payable, related parties  $263,169   $284,317 
Less: current portion   (211,253)   (169,153)
Notes payable, related parties – long-term portion  $51,916   $115,164 

 

Microphase is a party to several notes payable agreements with six of its past officers, employees and their family members. As of September 30, 2020, the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $38,569 of accrued interest, was $301,738, with annual interest rates ranging between 3.00% and 6.00%.

 

19. CONVERTIBLE NOTES

 

Convertible Notes Payable at September 30, 2020 and December 31, 2019, are comprised of the following:

 

   September 30,   December 31, 
   2020   2019 
8% Convertible promissory note  $   $935,772 
12% Convertible promissory note       815,218 
4% Convertible promissory note   660,000    660,000 
12% November 2019 convertible promissory note       350,000 
12% August 2020 convertible promissory note   330,000     
April 2020 convertible promissory note   100,000     
Total convertible notes payable   1,090,000    2,760,990 
Less:          
Unamortized debt discounts   (332,162)   (355,227)
Total convertible notes payable, net of financing cost  $757,838   $2,405,763 
Less: current portion   (392,044)   (2,100,990)
Convertible notes payable, net of financing cost – long-term portion  $365,794   $304,773 

 

8% Convertible Promissory Note

 

On November 15, 2019, the Company entered into an exchange agreement with a lender pursuant to which the Company issued to the lender a convertible promissory note in the principal amount of $935,772 with an interest rate of 8% per annum. The 8% convertible promissory note is convertible into shares of the Company’s common stock at conversion price of $1.80. During the nine months ended September 30, 2020, the Company issued 529,425 shares of common stock upon the conversion of principal and interest of $952,965. Since the proceeds received by the investor from the sales of common stock were less than the amount of principal and accrued interest, the investor was due a true up payment in the amount of $210,049, which was recognized as additional interest expense.

 

 F-35 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

12% Convertible Promissory Note

 

On February 5, 2020 the Company entered into an exchange agreement (the “February 2020 Exchange Agreement”) with an institutional investor pursuant to which the Company issued to the investor a 12% convertible promissory note in the principal amount of $295,000 with a conversion price of $1.45 per share of common stock and a 12% promissory note in the principal amount of $585,919. These two notes were issued upon the exchange of the 12% Convertible Promissory Note, in the principal amount of $815,218, issued on September 26, 2019. On February 25, 2020, the Company issued to the investor 203,448 shares of the Company’s common stock upon the conversion of principal of $295,000. Since the exchange provided the institutional investor with a substantive conversion feature, the debt instruments were determined to be substantially different and a loss on extinguishment of $20,345 was recognized. During the three months ended September 30, 2020, Esousa purchased the 12% promissory note in the principal amount of $585,919 from the institutional investor (See Note 17).

 

April 2020 Convertible Promissory Note

 

On April 13, 2020, the Company issued a convertible promissory note in the principal amount of $100,000 with an interest rate of 10% per annum and a five-year warrant to purchase shares of the Company’s common stock equal to 50% of the number of shares of common stock issuable pursuant to the convertible promissory note, at an exercise price equal to $1.17 per share of common stock. The number of shares to be issued upon conversion of the note shall be equal to (x) the principal and accrued but unpaid interest due on the note being exchanged multiplied by 1.35, divided by (y) the closing bid price effective on date of conversion, provided, however, that the Company shall theretofore have obtained the approval of the issuance of the shares of common stock by the NYSE American. The total number of shares of the Company’s common stock to be issued to creditor in connection with the conversion of the note shall be adjusted based upon the VWAP of the Company’s common stock over the applicable pricing period. The amount of the adjustment shall be determined by dividing (x) the aggregate amount of principal and interest converted multiplied by 1.1, by (y) the greater of (I) seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable pricing period, or (II) $0.35 per share.

 

May 2020 Convertible Promissory Note

 

On May 28, 2020, the Company entered into a securities purchase and exchange agreement with an institutional investor. Pursuant to the agreement, the Company exchanged a 12% short-term promissory note in the principal amount of $235,796 for a new note due and payable on June 30, 2020 (the “Exchanged Note”) that would become convertible into common stock of the Company should the Company be in default under the terms of the Exchanged Note. In addition, pursuant to the agreement, the Company issued to the investor a note due and payable on November 28, 2020 in the principal amount of $200,000 that became convertible into the Company’s common stock commencing June 30, 2020 with an original issue discount of twenty percent (20%). In conjunction with the issuance of the Convertible Note, the Company also issued to the investor a warrant to purchase an aggregate of 400,000 shares of Common Stock at an exercise price of $1.07. The exercise of the warrant is subject to approval of the NYSE American. During the three months ended September 30, 2020, Esousa purchased both the Exchanged Note and the Convertible Note from the institutional investor (See Note 17).

 

20. CONVERTIBLE NOTE PAYABLE – RELATED PARTY

 

On February 5, 2020, the Company issued an 8% convertible promissory note in the principal amount of $1,000,000 to Ault & Company (the “Ault & Company Convertible Note”). The principal amount of this note, plus any accrued and unpaid interest at a rate of 8% per annum, shall be due and payable on August 5, 2020. The Ault & Company Convertible Note shall be convertible into shares of the Company’s common stock at a conversion price of $1.45 per share.

 

 F-36 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

At the time of issuance of the Ault & Company Convertible Note, the closing price of the Company’s common stock was in excess of the conversion price, resulting in a beneficial conversion feature (“BCF”). The BCF embedded in the Ault & Company Convertible Note is accounted for under ASC No. 470, Debt (“ASC 470”). At issuance, the intrinsic value of the BCF totaled $68,966, based on the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date of the transaction. The Company was prohibited from issuing the shares of common stock issuable pursuant to the Ault & Company Convertible Note unless stockholder approval of such issuance of securities was obtained as required by applicable NYSE American listing rules resulting in a contingent BCF. The Company received stockholder approval on July 8, 2020. On August 20, 2020, the Company issued 413,793 shares of its common stock upon the conversion of $600,000 in principal.

 

21. COMMITMENTS AND CONTINGENCIES

 

Derivative Action

 

On July 31, 2018, Ethan Young and Greg Young (collectively, “Plaintiffs”) filed a stockholder derivative complaint (the “Complaint”) in the United States District Court for the Central District of California (the “Court”) against the Company as the nominal defendant, as well as its current directors and a former director, in action captioned, 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, (collectively, “Defendants”) Case No. 18-cv-6587 (the “Derivative Action”).

 

The Complaint alleged violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants, in connection with various transactions entered into by the Company.

 

The Defendants moved to dismiss the Complaint, and on February 25, 2019, the Court granted Defendants motion to dismiss, in its entirety, without prejudice, and also granted Plaintiffs leave to amend their Complaint.

 

On March 11, 2019, Plaintiffs filed an amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions (the “Amended Complaint”).

 

On March 25, 2019, Defendants filed a motion to dismiss (the “Motion”) the Amended Complaint. On May 21, 2019, the Court granted in part, and denied in part, the Defendants’ Motion. On February 24, 2020, the Company entered into a definitive settlement agreement (the “Settlement Agreement”) with Plaintiffs to settle the claims asserted in the Amended Complaint.

 

On April 15, 2020, the Court issued an Order (the “Order”) approving a Motion for Preliminary Approval of Settlement in the Derivative Action. On July 16, 2020, the Court issued an Order (the “Final Order”) approving a Motion for Final Approval of Settlement in the Derivative Action filed against DPW as a Nominal Defendant and its directors who served on its board of directors on July 31, 2018 who were not dismissed from the action as a result of the Court’s partial grant of the Motion.

 

On July 16, 2020, the Court entered a Judgment based upon the Final Order

 

Under the terms of the Final Order, the Board shall adopt and/or maintain certain resolutions and amendments to the Company’s committee charters and/or bylaws, to ensure adherence to certain corporate governance policies (collectively, the “Reforms”). The Final Order further provides that such Reforms shall remain in effect for a period of no less than five (5) years and shall be subject to any of the following: (a) a determination by a majority of the independent directors that the Reforms are no longer in the best interest of the Company, including, but not limited to, due to circumstances making the Reforms no longer applicable, feasible, or available on commercially reasonable terms, or (b) modifications which the Company reasonably believes are required by applicable law or regulation.

 

In connection with the Settlement Agreement, the parties have agreed upon a payment of attorneys’ fees in the amount of $600,000, which sum shall be payable by our Director & Officer liability insurance. The Settlement Agreement contains no admission of wrongdoing.

 

 F-37 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

We have always maintained and continue to believe that neither we nor our current or former directors engaged in any wrongdoing or otherwise committed any violation of federal or state securities laws or any other laws or regulations.

 

Blockchain Mining Supply and Services, Ltd.

 

On November 28, 2018, Blockchain Mining Supply and Services, Ltd. (“Blockchain Mining”) a vendor who sold computers to our subsidiary, filed a Complaint (the “Complaint”) in the United States District Court for the Southern District of New York against us and our subsidiary, Digital Farms, Inc. (f/k/a Super Crypto Mining, Inc.), in an action captioned Blockchain Mining Supply and Services, Ltd. v. Super Crypto Mining, Inc. and DPW Holdings, Inc., Case No. 18-cv-11099.

 

The Complaint asserts claims for breach of contract and promissory estoppel against us and our subsidiary arising from the subsidiary’s alleged failure to honor its obligations under the purchase agreement. The Complaint seeks monetary damages in excess of $1,388,495, plus attorneys’ fees and costs.

 

We believe that these claims are without merit and intend to vigorously defend them.

 

On April 13, 2020, we and our subsidiary, jointly filed a motion to dismiss the Complaint in its entirety as against us, and the promissory estoppel claim as against our subsidiary. On the same day, our subsidiary also filed a partial Answer to the Complaint in connection with the breach of contract claim.

 

On April 29, 2020, Blockchain Mining filed an amended complaint (the “Amended Complaint”). The Amended Complaint asserts the same causes of action and seeks the same damages as the initial Complaint.

 

On May 13, 2020, we and our subsidiary, jointly filed a motion to dismiss the Amended Complaint in its entirety as against us, and the promissory estoppel claim as against of our subsidiary. On the same day, our subsidiary also filed a partial Answer to the Amended Complaint in connection with the breach of contract claim.

 

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

 

Ding Gu (a/k/a Frank Gu) and Xiaodan Wang Litigation

 

On January 17, 2020, Ding Gu (a/k/a Frank Gu) (“Gu”) and Xiaodan Wang (“Wang” and with “Gu” collectively, “Plaintiffs”), filed a Complaint (the “Complaint”) in the Supreme Court of the State of New York, County of New York against us and our Chief Executive Officer, Milton C. Ault, III, in an action captioned Ding Gu (a/k/a Frank Gu) and Xiaodan Wang v. DPW Holdings, Inc. and Milton C. Ault III (a/k/a Milton Todd Ault III a/k/a Todd Ault), Index No. 650438/2020.

 

The Complaint asserts causes of action for declaratory judgment, specific performance, breach of contract, conversion, attorneys’ fees, permanent injunction, enforcement of Guaranty, unjust enrichment, money had and received, and fraud arising from: (i) a series of transactions entered into between Gu and us, as well as Gu and Ault, in or about May 2019; and (ii) a term sheet entered into between Plaintiffs and DPW, in or about July 2019. The Complaint seeks, among other things, monetary damages in excess of $1,100,000, plus a decree of specific performance directing DPW to deliver unrestricted shares of DPW’s common stock to Gu, plus attorneys’ fees and costs.

 

We believe that these claims are without merit and intend to vigorously defend them.

 

On May 4, 2020, we and Ault jointly filed a motion to dismiss the Complaint in its entirety, with prejudice.

 

 F-38 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

On July 24, 2020, Plaintiffs filed their opposition papers to our joint motion to dismiss.

 

The motion to dismiss was returnable before the Court on November 17, 2020. The Court is fully briefed and motion is before the court.

 

Based on our assessment of the facts underlying the above claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably estimate the potential loss or range of loss that may result from this action. An unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.

 

Subpoena

 

The Company received a subpoena from the SEC for the voluntary production of documents. The Company is fully cooperating with this non-public, fact-finding inquiry and Management believe that the Company has operated its 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.

 

Other Litigation Matters

 

Several non-trade creditors of the Company commenced litigation against the Company for payment of approximately $4.2 million of debt obligations not paid according to contractual terms. The Company has since repaid approximately $4.1 million of such debt obligations and entered into settlement agreements for the remaining amount of approximately $70,000 which is included within future receipts obligations in the accompanying consolidated balance sheet at September 30, 2020. The Company also recorded approximately $400,000 of trade liabilities for a judgment settled in favor of a trade creditor as of September 30, 2020 and is currently a defendant in several other claims made by trade creditors in which the maximum loss exposure is currently estimated to be approximately $200,000. The outcome of any matters relating to unresolved trade credit obligations cannot be predicted at this time.

 

The Company is involved in litigation arising from other matters in the ordinary course of business. We are regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.

 

Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.

 

With respect to our other outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties. 

 

 F-39 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

22. STOCKHOLDERS’ EQUITY

 

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, 2020, 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.

 

2020 Issuances

 

Issuances of Common Stock for Services

 

During the nine months ended September 30, 2020, the Company issued 102,500 shares of its common stock as payment for services to its consultants. The shares were valued at $182,575, an average of $1.78 per share.

 

Issuance of common stock in payment of short term advances, related party

 

On December 23, 2019, the Company entered into a securities purchase agreement with Ault & Company. Pursuant to the terms of this agreement, Ault & Company agreed to purchase an aggregate of 660,667 shares of the Company’s common stock for a total purchase price of $739,948 at a purchase price per share of $1.12, subject to the approval of the NYSE American. The sale was authorized by the NYSE American on January 15, 2020. As a result, at the closing on January 15, 2020, Ault & Company became the beneficial owner of 666,945 shares of Common Stock.

 

Issuance of common stock in payment of accrued liability

 

On March 4, 2020, pursuant to the terms of the securities purchase agreement for the sale of the Dominion short-term promissory note, the Company issued to Dominion 12,500 shares of its common stock (see Note 17).

 

During the quarter ended June 30, 2020, the Company issued 140,624 shares of its common stock in satisfaction of accrued liabilities of $155,547.

 

Issuance of common stock for conversion of debt

 

During the nine months ended September 30, 2020, principal and accrued interest of $3,977,427 and $1,584,841, respectively, on the Company’s debt securities was satisfied through the issuance of 6,824,936 shares of the Company’s common stock. The Company recognized a loss on extinguishment of $10,548,535 as a result of these issuances.

 

 F-40 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

On August 20, 2020, the Company issued 413,793 shares of its common stock upon the conversion of $600,000 in principal on the Ault & Company Convertible Note.

 

23. 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, 2021, 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, 2020, the Company has provided loans to AVLP in the principal amount $10,153,661 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 20,306,921 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, 2020, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $2,025,475 and a provision for loan losses of $5,159,910.

 

During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company also acquired in the open market 5,000 shares of AVLP common stock for $1,274 and 91,000 shares of AVLP common stock for $53,032, respectively. At September 30, 2020, the Company’s investment in AVLP common stock had an unrealized loss of $488,049.

 

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 systems. On April 12, 2019, the Company received payment of $2,676,219 for manufacturing services performed during the year ended December 31, 2018 on the first MLSE system. At September 30, 2020, the Company had recorded a receivable from MTIX of $1,238,856.

 

b.At September 30, 2020, the Company has provided a loan to Alzamend in the principal amount $50,000 and, in addition to the 8% convertible promissory notes, Alzamend has issued to the Company warrants to purchase 16,667 shares of Alzamend common stock at an exercise price of $3.00 per share for a period of five years. The warrants were determined by the issuer to be derivative financial instruments. At September 30, 2020, the Company recorded a cumulative unrealized loss on its investment in warrants of Alzamend of $111, 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. The Company recorded interest on an accrual basis and recognized 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. During the three and nine months ended September 30, 2019, the Company recorded $1,968 of interest income for the discount accretion and $329 of interest income from the contractual 8% rate provided for by the convertible promissory notes.

 

During the nine months ended September 30, 2020 and year ended December 31, 2019, the Company also acquired 11,325 shares of Alzamend common stock for $9,060 and 372,625 shares of Alzamend common stock for $208,100, respectively. At September 30, 2020, the estimated fair value of Alzamend ’s common stock was $1.50. The Company has determined that its investment in Alzamend marketable equity securities should be accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures and based upon the estimated fair value of Alzamend common stock at September 30, 2020, the Company’s investment in AVLP common stock had an unrealized gain of $358,765.

 

 F-41 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

Mr. Ault is Executive Chairman of Alzamend’s Board of Directors and the Chairman of the Board. Mr. William B. Horne and Mr. Henry Nisser are directors of Alzamend and the Company. Mr. Kenneth S. Cragun is Chief Financial Officer of Alzamend and the Company.

 

c.During the nine months ended September 30, 2020, Ault & Company, Inc. (“Ault & Company”) has provided $422,758 in short-term advances, net of repayments. 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.On December 22, 2019, the Company entered into a securities purchase agreement with Ault & Company. Pursuant to the terms of the agreement, Ault & Company purchased an aggregate of 660,667 shares of the Company’s common stock for a total purchase price of $739,948, at a purchase price per share of $1.12, subject to the approval of the NYSE American. The NYSE American approved the purchase on January 15, 2020.

 

e.On February 5, 2020, the Company issued an 8% convertible promissory note in the principal amount of $1,000,000 and a maturity date of August 5, 2020 to Ault & Company (see Note 20). On August 20, 2020, the Company issued 413,793 shares of its common stock upon the conversion of $600,000 in principal on the Ault & Company Convertible Note.

 

f.Ault & Company guaranteed the prompt and complete payment and performance of the Dominion Short-Term Promissory Note, which was purchased by Esousa, with a principal face amount of $2,900,000.

 

g.Milton C. Ault, III, the Company’s Chairman and Chief Executive Officer and MCKEA guaranteed the Company’s obligation to repay a 12% January 2020 short-term promissory note in the principal amount of $235,796. MCKEA is the majority member of Philou and Kristine L. Ault, a former director and the wife of Mr. Ault III, is the manager and owner of MCKEA.

 

 F-42 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

24. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

 

The Company has three reportable segments; see Note 1 for a brief description of the Company’s business.

 

The following data presents the revenues, expenditures and other operating data of the Company’s operating segments and presented in accordance with ASC No. 280. The total loss from operations of the Company’s reportable segments is less than the Company’s consolidated loss from operations due to DPW Holdings corporate expenses.

 

 

   Three Months ended September 30, 2020 
   GWW   Coolisys   Ault Alliance   Total 
Revenue  $4,329,295   $1,375,805   $   $5,705,100 
Revenue, lending activities           (29,536)   (29,536)
Total revenues  $4,329,295   $1,375,805   $(29,536)  $5,675,564 
                     
Depreciation and                    
amortization expense  $328,302   $21,426   $   $349,728 
                     
Loss from operations  $(65,369)  $126,593   $(40,561)  $20,663 
Capital expenditures for                    
segment assets, as of                    
September 30, 2020  $337,921   $26,425   $   $364,346 
                     
Identifiable assets as of                    
September 30, 2020  $21,186,343   $21,009,613   $1,448,856   $43,644,812 

 

   Three Months ended September 30, 2019 
   GWW   Coolisys   Ault Alliance   Total 
Revenue  $3,355,897   $1,612,543   $   $4,968,440 
Revenue, cryptocurrency                    
mining       307,172        307,172 
Revenue, lending activities           69,217    69,217 
Total revenues  $3,355,897   $1,919,715   $69,217   $5,344,829 
                     
Depreciation and                    
amortization expense  $151,257   $747,034   $   $898,291 
                     
Loss from operations  $(133,909)  $(5,050,617)  $(70,953)  $(5,255,479)
Capital expenditures for                    
segment assets, as of                    
September 30, 2019  $25,135   $30,582   $   $55,717 
                     
Identifiable assets as of                    
September 30, 2019  $19,440,320   $28,079,982   $2,983,046   $50,503,348 

 

 F-43 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

   Nine Months ended September 30, 2020 
   GWW   Coolisys   Ault Alliance   Total 
Revenue  $12,905,877   $3,803,241   $   $16,709,118 
Revenue, lending activities          $(27,140)   (27,140)
Total revenues  $12,905,877   $3,803,241   $(27,140)  $16,681,978 
                     
Depreciation and                    
amortization expense  $478,316   $129,644   $   $607,960 
                     
Loss from operations  $118,642   $(27,460)  $(121,977)  $(30,795)
Capital expenditures for                    
segment assets, as of                    
September 30, 2020  $528,038   $26,425   $   $554,463 
                     
Identifiable assets as of                    
September 30, 2020  $21,170,343   $21,297,286   $1,448,856   $43,916,485 

 

 

   Nine Months ended September 30, 2019 
   GWW   Coolisys   Ault Alliance   Total 
Revenue  $10,754,949   $4,306,340   $   $15,061,289 
Revenue, cryptocurrency                    
mining       592,092        592,092 
Revenue, lending activities           443,927    443,927 
Total revenues  $10,754,949   $4,898,432   $443,927   $16,097,308 
                     
Depreciation and                    
amortization expense  $553,642   $2,239,958   $   $2,793,600 
                     
Loss from operations  $(651,993)  $(7,188,830)  $(29,663)  $(7,870,486)
Capital expenditures for                    
segment assets, as of                    
June 30, 2019  $102,364   $46,959   $   $149,323 
                     
Identifiable assets as of                    
June 30, 2019  $19,138,562   $23,200,317   $3,184,296   $45,523,175 

 

 F-44 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

Concentration Risk:

 

The following tables provide the percentage of total revenues for the three and nine months ended September 30, 2020 and 2019 attributable to a single customer from which 10% or more of total revenues are derived.

 

   For the Three Months Ended  For the Nine Months Ended
   September 30, 2020  September 30, 2020
               
   Total Revenues   Percentage of  Total Revenues   Percentage of
   by Major   Total Company  by Major   Total Company
   Customers   Revenues  Customers   Revenues
Customer A  $1,862,667   33%  $5,596,089   34%
Customer B   1,065,400   19%   2,660,800   16%

 

 

   For the Three Months Ended  For the Nine Months Ended
   September 30, 2019  September 30, 2019
               
   Total Revenues   Percentage of  Total Revenues   Percentage of
   by Major   Total Company  by Major   Total Company
   Customers   Revenues  Customers   Revenues
Customer A  $1,429,455   27%  $2,845,541   18%

 

Revenue from Customer A is attributable to Enertec. Revenue from Customer B is attributable to Microphase. Further, at September 30, 2020, MTIX represented all the Company’s accounts and other receivable, related party.

 

25. SUBSEQUENT EVENTS

 

In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2020, and thru the date of this report being issued and has determined that it does not have any material subsequent events to disclose in these financial statements except for the following.

 

At-The-Market Equity Offering

 

On October 2, 2020 the Company established an “at-the-market” equity offering program under which it may sell, from time to time, shares of its common stock for aggregate gross proceeds of up to $8,975,000. The shares of common stock will be offered through Ascendiant Capital Markets, LLC, which will act in its capacity as sales agent (the “Agent”).

 

Pursuant to a sales agreement with the Agent, sales of shares of the Company's common stock may be made in transactions that are deemed to be “at-the-market” offerings, including sales made by means of ordinary brokers’ transactions on the NYSE American or otherwise at market prices prevailing at the time of sale or as agreed to with the Agent.

 

The Company intends to use the net proceeds from the “at-the-market” equity offering, if any, for the financing of possible acquisitions of companies and technologies, business expansions and investments and for working capital and general corporate purposes, which may include the repayment, refinancing, redemption or repurchase of future indebtedness or capital stock. The Company does not have agreements or commitments for any specific acquisitions at this time.

 

 F-45 
 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2020

 

 

 

The shares of common stock described above are being offered pursuant to a shelf registration statement (File No. 333-222132) which became effective on January 11, 2018. Such shares of common stock may be offered only by means of a prospectus, including a prospectus supplement, forming a part of the effective registration statement.

 

During October and through November 13, 2020 the Company received gross proceeds of $5,375,055 through the sale of 2,935,875 shares of the Company’s common stock through the ATM Offering.

 

Issuance of common stock for conversion of debt

 

During October 2020, principal and accrued interest of $2,277,194 on the Company’s debt securities was satisfied through the issuance of 2,108,152 shares of the Company’s common stock.

 

I.AM Bankruptcy Filing

 

On November 2, 2020, I.AM, Inc. filed a voluntary petition for bankruptcy under Chapter 7 in the United States Bankruptcy Court in the Central District of California, Santa Ana Division, case number 8:20-bk-13076.

 

13% Unsecured Promissory Note

 

On August 5, 2020, the Company received $2,000,000 from Esousa and on October 22, 2020, the Company issued to Esousa a promissory note in the principal face amount of $2,000,000, with an interest rate of 13%. The outstanding principal face amount, plus any accrued and unpaid interest, is due by November 3, 2020, or as otherwise provided in accordance with the terms set forth therein. In connection therewith, the Company delivered to the institutional investor a warrant to purchase 729,927 shares of the Company’s common stock at an exercise price of $3.01. The exercise of the warrant is subject to approval of the NYSE American.

 

14% Unsecured Promissory Notes

 

The Company issued to Esousa two unsecured promissory notes in the aggregate principal face amount of $1,200,000, of which $850,000 was received prior to September 30, 2020. The principal amount of $850,000 of the first Note dated October 27, 2020, together with all accrued unpaid interest at an annual rate of 14%, is due and payable on December 28, 2020. The principal amount of $350,000 of the second Note dated October 27, 2020, together with all accrued unpaid interest at an annual rate of 14%, is due and payable on January 7, 2021.

 

In connection with the two Promissory Notes, the Company delivered to the institutional investor (i) a warrant dated October 27, 2020, to purchase 425,000 shares of the Company’s common stock at an exercise price of $2.20 (the “First Warrant”), and (ii) a warrant dated October 27, 2020, to purchase 148,936 shares of the Company’s common stock at an exercise price of $2.59. The exercise of the warrants is subject to approval of the NYSE American.

 

Pending Acquisiton of Relec Electronics Ltd.

 

On November 9, 2020, GWW entered into a Stock Purchase Agreement (the “Agreement”) with Tabard Holdings Inc., a Delaware corporation and wholly owned subsidiary of GWW (“Tabard”), the legal and beneficial owners (the “Sellers”) of 100% of the issued shares in the capital of Relec Electronics Ltd., a corporation organized under the laws of England and Wales (“Relec”), and Peter Lappin, in his capacity as the representative of the Sellers (the “Sellers’ Representative”).  Upon the terms and subject to the conditions set forth in the Agreement, Tabard shall acquire Relec pursuant to the Agreement whereby the Sellers shall sell to Tabard (i) 100% of the issued shares of Relec. The purchase price is approximately £3,000,000 plus an amount equal to Relec’s cash balance immediately prior to closing of the acquisiton. Tabard has paid the sum of $500,000 to an escrow as a deposit toward payment of the purchase price.

 

 F-46 
 

 

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

 

In this quarterly report, the “Company,” “DPW Holdings,” “we,” “us” and “our” refer to DPW Holdings, Inc., a Delaware corporation, our wholly-owned subsidiaries, Gresham Worldwide, Inc., Coolisys Technologies, Corp, Ault Alliance, Inc., Digital Power Lending, LLC, Digital Farms, Inc., Gresham Power Electronics, Enertec Systems 2001 Ltd. and our majority owned subsidiary, Microphase Corporation.

 

Recent Developments

 

On January 7, 2020, we formed Coolisys Technologies Corp. (“CTC”), a wholly-owned subsidiary, in order to hold Digital Power Corporation which designs, develops, manufactures and sells high-grade customized and flexible power system solutions. Coolisys Technologies, Inc. (“CTI”) is presently owned by Gresham Worldwide, Inc. (“GWW”) and owns Microphase Corporation, Gresham Power Electronics and Enertec Systems. We may merge CTI out of existence in the future, leaving GWW as the direct owner of the three foregoing subsidiaries.

 

On February 10, 2020, we entered into a Master Exchange Agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa” or the “Creditor”) that acquired approximately $4.2 million dollars in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously issued by us to Dominion Capital, LLC, a Connecticut limited liability company (the “Dominion Note”) and the Canadian Special Opportunity Fund, LP (the “CSOF Note” and with the Dominion Note, the “Esousa Purchased Notes”) in separate transactions. The Creditor also agreed to purchase additional notes up to an additional principal amount, plus accrued but unpaid interest, of $3.5 million (the “Additional Notes” and collectively, with the Esousa Purchased Notes, the “Notes”). Pursuant to the Exchange Agreement, the Creditor has the unilateral right to acquire shares of the Company’s common stock (the “Exchange Shares”) in exchange for the Notes, which Notes evidence an aggregate of up to approximately $7.7 million of indebtedness of the Company. In aggregate, we have issued to Esousa a total of 5,771,580 Exchange Shares.

 

Settlement of Derivative Litigation

 

On February 24, 2020, we entered into a definitive settlement agreement (the “Settlement Agreement”) that is intended to settle the previously disclosed derivative litigation captioned 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) (as amended on March 11, 2019, the “Amended Complaint”) against the Company and certain of its officers and directors pending in the United States District Court for the Central District of California (the “Court”). As previously disclosed, the Amended Complaint alleges violations including breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions.

 

On April 15, 2020, the Court issued an Order (the “Order”) approving a Motion for Preliminary Approval of Settlement in the Derivative Action. On July 16, 2020, the Court issued an Order (the “Final Order”) approving a Motion for Final Approval of Settlement in the Derivative Action filed against DPW as a Nominal Defendant and its directors who served on its board of directors on July 31, 2018 who were not dismissed from the action at an earlier stage.

 

On July 16, 2020, the Court entered a Judgment based upon the Final Order.

 

Under the terms of the Final Order, the Board shall adopt and/or maintain resolutions and amendments to committee charters and/or the Company’s bylaws to ensure adherence to certain corporate governance policies (collectively, the “Reforms”), which shall remain in effect for no less than five (5) years, subject to any of the following: (a) a determination by a majority of the independent directors that the Reforms are no longer in the best interest of the Company, including, but not limited to, due to circumstances making the Reform no longer applicable, feasible, or available on commercially reasonable terms, or (b) modifications which the Company reasonably believes are required by applicable law or regulation.

 

 1 
 

 

In connection with the Settlement Agreement, the parties agreed upon a payment of attorneys’ fees in the amount of $600,000 payable by the Company’s Director & Officer liability insurance. The Settlement Agreement contains no admission of wrongdoing. The Company has always maintained and continues to believe that it did not engage in any wrongdoing or otherwise commit any violation of federal or state securities laws or other laws.

 

Other Matters

 

During the first quarter of 2020, we decided to discontinue the operations of Digital Farms and I.AM. On March 16, 2020, to try and mitigate the spread of the novel coronavirus, San Diego County health officials issued orders mandating that all restaurants must end dine-in services. As a result of these temporary closures by the San Diego County health officials and the deteriorating business conditions at both our cryptocurrency mining and restaurant businesses, management concluded that discontinuing these operations was ultimately in our best interest. Although we have ceased operations at Digital Farms, since the assets and operations have not yet been abandoned, sold or distributed, these assets do not yet meet the requirement for presentation as discontinued operations. However, management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations.

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic which continues to spread throughout the United States and the world. We are monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on our operations, financial position, cash flows, inventory, supply chains, customer purchasing trends, customer payments, and the industry in general, in addition to the impact on our employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on our operations and liquidity is uncertain as of the date of this quarterly report.

 

However, our business has been disrupted and materially adversely affected by the recent outbreak of COVID-19. We are still assessing our business operations and system supports and the impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in our sectors in particular.

 

Our operations are located in Santa Clara County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom and Israel, and members of our senior management work in Seattle, WA and New York, NY. We have been following the recommendations of local health authorities to minimize exposure risk for our employees, including the temporary closures of our offices and having employees work remotely to the extent possible, which has to an extent adversely affected their efficiency.

 

GENERAL

 

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

 

From time to time, we engage in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process we initiate. To the extent we believe that a subsidiary partner company’s further growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to sell some or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries or partner companies public through rights offerings and directed share subscription programs. We will continue to consider these (or similar) programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our shareholders.

 

 2 
 

 

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

 

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

 

Results of Operations

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

 

The following table summarizes the results of our operations for the three months ended September 30, 2020 and 2019.

 

   For the Three Months Ended 
   September, 
   2020   2019 
         
Revenue  $5,705,100   $4,968,440 
Revenue, cryptocurrency mining   -    307,172 
Revenue, lending activities   (29,536)   69,217 
Total revenue   5,675,564    5,344,829 
Cost of revenue   3,736,082    4,348,761 
Gross profit   1,939,482    996,068 
           
Total operating expenses   3,564,190    8,681,957 
           
Loss from continuing operations   (1,624,708)   (7,685,889)
Interest income   102,397    898,646 
Interest expense   (2,365,741)   (2,954,843)
Change in fair value of marketable equity securities   (29,318)   (330,150)
Loss on extinguishment of debt   (12,823,039)   (155,448)
Loss on issuance of warrants   -    - 
Change in fair value of warrant liability   -    165,840 
Loss from continuing operations before income taxes   (16,740,409)   (10,061,844)
Income tax benefit   6,053    5,140 
Net loss from continuing operations   (16,734,356)   (10,056,704)
Net loss from discontinued operations, net of taxes   0    (284,167)
Net loss   (16,734,356)   (10,340,871)
Less: Net loss attributable to non-controlling interest   -    - 
Net loss attributable to DPW Holdings   (16,734,356)   (10,340,871)
Preferred dividends   (2,933)   (5,284)
Net loss available to common stockholders  $(16,737,289)  $(10,346,155)
           
Comprehensive loss          
Loss available to common stockholders  $(16,737,289)  $(10,346,155)
Other comprehensive income (loss)          
Foreign currency translation adjustment   43,554    67,166 
Net unrealized loss on derivative securities of related party   1,561,247    (1,152,480)
Other comprehensive income (loss)   1,604,801    (1,085,314)
Total comprehensive loss  $(15,132,488)  $(11,431,469)

 

 3 
 

 

Revenues

 

Our revenues increased by $330,735, or 6.2%, to $5,675,564 for the three months ended September 30, 2020, from $5,344,829 for the three months ended September 30, 2019. The increase from the three months ended September 30, 2019, was caused by an increase in revenue from customized solutions for the military markets as we continue to experience the benefit of capital that was allocated to our defense business during the second half of 2019. The increase in revenue from the military markets was partially offset by a decrease in revenue from our commercial lending segment, attributed to a reduction in our loan portfolio and a decrease in revenue due to our decision to cease operations at our cryptocurrency mining operations.

 

Revenues, cryptocurrency mining

 

In January 2018, we formed Digital Farms, Inc. (“Digital Farms”), then known as Super Crypto Mining, Inc. Digital Farms was established to operate our cryptocurrency business, which was pursuing a variety of digital currencies. During the first quarter of 2020, due to deteriorating business conditions in the cryptocurrency mining sector, we ceased operations at Digital Farms. The market prices of digital currencies have declined since the formation of Digital Farms which, due to power cost considerations, negatively affected the number of active miners we operated. These factors, coupled with a significant increase in the difficulty of mining blocks of cryptocurrency, led to our decision to cease cryptocurrency mining operations. As a result, we did not generate any revenues from our cryptocurrency operations during the three months ended September 30, 2020.

 

Gross Margins

 

Gross margins increased to 34.2% for the three months ended September 30, 2020 compared to 18.6% for the three months ended September 30, 2019. The Company’s gross margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our revenue.

 

Our gross margins of 18.6% recognized during the three months ended September 30, 2019, were impacted by the negative margins at Digital Farms. Excluding the effects of Digital Farms, our adjusted gross margins for the three months ended September 30, 2019, would have been 33.2%, consistent with our historical average.

 

Engineering and Product Development

 

Engineering and product development expenses decreased by $13,064 to $468,838 for the three months ended September 30, 2020, from $481,902 for the three months ended September 30, 2019. The decrease in engineering and product development expenses is due to various costs, none of which are significant individually.

 

Selling and Marketing

 

Selling and marketing expenses were $259,649 for the three months ended September 30, 2020, compared to $331,107 for the three months ended September 30, 2019, a decrease of $71,458. This decrease was the result of decreases in personnel costs directly attributed to a reduction in sales and marketing personnel primarily at Coolisys, which designs, develops, manufactures and sells customized and flexible power system solutions for the commercial markets.

 

General and Administrative

 

General and administrative expenses were $2,835,940 for the three months ended September 30, 2020, compared to $3,554,043 for the three months ended September 30, 2019, a decrease of $718,103. General and administrative expenses decreased from the comparative prior period, mainly due to lower stock compensation expense, as well as cost reductions at Coolisys and corporate headquarters.

 

 4 
 

 

Loss from Continuing Operations

 

The Company recorded a loss from continuing operations of $1,624,708 for the three months ended September 30, 2020, compared to an operating loss of $7,685,889 for the three months ended September 30, 2019. The prior year period included a $4,315,856 impairment charge related to cryptocurrency mining equipment. In addition, the decrease in operating loss is attributable to an increase in our gross margins and the decrease in general and administrative expenses.

 

Interest Income

 

Interest income was $102,397 for the three months ended September 30, 2020 compared to $898,646 for the three months ended September 30, 2019. The decrease in interest income for the three months ended September 30, 2020 is related to a decrease in interest income pursuant to the Loan and Security Agreement entered into on September 6, 2017, with AVLP, a related party. Due to the impaired status of the loan, no interest was recognized during the three months ended September 30, 2020.

 

Interest Expense

 

Interest expense was $2,365,741 for the three months ended September 30, 2020 compared to $2,954,843 for the three months ended September 30, 2019. The decrease in interest expense for the three months ended September 30, 2020 is primarily related to lower financing costs, including default penalties, partially offset by a 6% increase in our level of borrowings.

 

Change in fair value of warrant liability

 

During the three months ended September 30, 2019, the fair value of the warrants that were issued in our Offering decreased by $165,840. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

Loss on extinguishment of debt

 

Loss on extinguishment of debt was $12,823,039 for the three months ended September 30, 2020 compared to $155,448 for the three months ended September 30, 2019. During the three months ended September 30, 2020, principal and accrued interest of $2,396,655 and $699,219, respectively, on the Company’s debt securities was satisfied through the issuance of 4,910,000 shares of the Company’s common stock. The Company recognized a loss on extinguishment of $10,326,303 as a result of these issuances of common stock based on the fair value of the Company’s common stock at the date of the exchanges. The remaining loss on extinguishment is primarily due to the estimated fair value of warrants to purchase an aggregate of 1,430,163 shares of common stock that were issued to Esousa pursuant to the Master Exchange Agreement.

 

Net Loss from Discontinued Operations

 

During the first quarter of 2020, the permanent closing of the restauran