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 SeptemberJune 30, 20192020 

 

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)

 

Delaware94-1721931
  

(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  þSmaller reporting company  þ
Emerging growth company  ¨ 

 

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

 

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

 

At November 18, 2019August 17, 2020 the registrant had outstanding 3,251,87111,059,617 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 SeptemberJune 30, 20192020 (Unaudited) and

December 31, 20182019 (Audited)

F-1 – F-2
    
  

Condensed Consolidated Statements of Operations and Comprehensive Loss for the

three and ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 (Unaudited)

F-3
    
  

Condensed Consolidated Statements of Changes in Stockholders' Equity for the three

and ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 (Unaudited)

F-4 – F-7
    
  

Condensed Consolidated Statements of Cash Flows for the ninesix months ended
September

June 30, 2020 and 2019 and 2018 (Unaudited)

F-8 – F-9
    
  Notes to Interim Condensed Consolidated Financial Statements (Unaudited)F-10 – F-40F-41
    
Item 2. 

Management's Discussion and Analysis of Financial Condition and Results of

Operations

1
    
Item 3.  Quantitative and Qualitative Disclosures about Market Risk1211
    
Item 4. Controls and Procedures1211
    
PART II – OTHER INFORMATION 
    
Item 1. Legal Proceedings13
Item 1A. Risk Factors1416
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds1416
Item 3. Defaults Upon Senior Securities1516
Item 4. Mine Safety Disclosures1516
Item 5. Other Information1516
Item 6. Exhibits1617

 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, 2018,2019, 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 NovemberAugust 19, 2019.2020. 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 disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.

 

  
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 September 30, December 31,  June 30, December 31, 
 2019  2018  2020  2019 
 (Unaudited)       (Unaudited)     
ASSETS                
                
CURRENT ASSETS                
Cash and cash equivalents $756,652  $902,329  $1,691,289  $483,383 
Marketable equity securities  473,314   178,597   596,313   639,647 
Accounts receivable  2,473,500   1,930,971   2,225,091   2,438,254 
Accounts and other receivable, related party  1,238,856   3,887,654   1,196,379   1,196,379 
Accrued revenue  1,395,171   1,353,411   2,185,895   2,226,570 
Inventories, net  2,724,023   3,261,126   2,485,795   2,481,511 
Prepaid expenses and other current assets  706,967   775,981   1,110,350   1,324,161 
Current assets held for sale     281,352 
TOTAL CURRENT ASSETS  9,768,483   12,290,069   11,491,112   11,071,257 
Intangible assets  4,078,443   4,359,798   3,034,445   3,206,988 
Digital currencies  6,634   1,535 
Goodwill  8,810,340   8,463,070   8,086,723   8,100,947 
Property and equipment, net  2,509,894   9,313,299   1,694,220   1,787,393 
Right-of-use assets  3,433,794      3,930,609   4,177,590 
Investments - related party, net of original issue discount of $1,475,485        
and $2,336,693, respectively  9,738,353   5,611,621 
Investments - related party  6,739,234   6,540,720 
Investments in derivative liabilities and common stock - related party  2,351,970   3,043,499   1,604,349   2,128,224 
Equity investments in private companies  897,957   480,000   261,767   261,767 
Investment in limited partnership  1,969,000   1,969,000   1,969,000   1,969,000 
Loans receivable  2,170,962   2,572,230   553,568   795,481 
Other investments, related parties  840,000   862,500   817,500   832,500 
Other assets  850,148   459,259   311,628   275,273 
Noncurrent assets held for sale     1,603,268 
TOTAL ASSETS $47,425,978  $49,425,880  $40,494,155  $42,750,408 
LIABILITIES AND STOCKHOLDERS' EQUITY                
CURRENT LIABILITIES                
Accounts payable and accrued expenses $12,649,593  $13,065,838  $13,571,731  $14,284,563 
Accounts payable and accrued expenses, related party  62,278   57,752   40,805   64,604 
Operating lease liability, current  741,433      471,651   484,819 
Advances on future receipts  2,216,422   2,085,807   2,276,898   2,210,392 
Short term advances, related party  699,261   73,761   175,212   1,409,331 
Revolving credit facility  233,490   285,605   290,045   221,705 
Notes payable, net  6,077,720   6,388,787   9,014,567   5,505,015 
Notes payable, related party  168,589   166,925 
Notes payable, related parties  193,222   169,153 
Convertible notes payable  1,146,141   6,742,494   741,550   2,732,990 
Convertible notes payable, related party  1,000,000    
Other current liabilities  1,859,041   1,868,402   3,018,344   1,545,210 
Current liabilities held for sale  1,515,972   1,593,550 
TOTAL CURRENT LIABILITIES  25,853,968   30,735,371   32,309,997   30,221,332 
LONG TERM LIABILITIES                
Operating lease liability, non-current  2,781,345      3,505,559   3,726,493 
Notes payable  464,809   483,659   369,185   482,624 
Notes payable, related parties  115,728   142,059   90,285   115,164 
Convertible notes payable  284,284      345,305   304,773 
Noncurrent liabilities held for sale  843,020   951,072 
TOTAL LIABILITIES  29,500,134   31,361,089   37,463,351   35,801,458 

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

 

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

   June 30,   December 31, 
   2020   2019 
   (Unaudited)     
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 June 30, 2020 and December 31, 2019,        
respectively (redemption amount and liquidation preference of $176,000        
as of June 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 June 30, 2020 and December 31, 2019 (liquidation        
preference of $1,250,000 at June 30, 2020 and December 31, 2019)        
Class A Common Stock, $0.001 par value – 500,000,000 shares authorized;  6,112   3,318 
6,112,117 and 3,318,390 shares issued and outstanding at June 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 June 30, 2020 and December 31, 2019        
Additional paid-in capital  105,625,502   101,099,347 
Accumulated deficit  (96,564,940)  (88,650,465)
Accumulated other comprehensive loss  (6,044,244)  (5,511,624)
TOTAL DPW HOLDINGS STOCKHOLDERS' EQUITY  3,022,562   6,940,708 
         
Non-controlling interest  8,242   8,242 
         
TOTAL STOCKHOLDERS' EQUITY  3,030,804   6,948,950 
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $40,494,155  $42,750,408 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
             
Revenue $5,434,736  $4,541,198  $11,004,018  $10,092,849 
Revenue, cryptocurrency mining     256,116      284,920 
Revenue, lending activities  (33,756)  189,621   2,396   374,710 
Total revenue  5,400,980   4,986,935   11,006,414   10,752,479 
Cost of revenue  3,495,574   4,267,194   7,349,009   9,093,024 
Gross profit  1,905,406   719,741   3,657,405   1,659,455 
Operating expenses                
Engineering and product development  462,159   471,268   902,785   926,946 
Selling and marketing  294,974   382,184   633,137   799,806 
General and administrative  2,917,999   3,510,839   5,820,901   8,013,157 
Provision for credit losses  (1,000,000)         
Loss on digital currency  (106)  (4,479)  (14)  (5,982)
Total operating expenses  2,675,026   4,359,812   7,356,809   9,733,927 
Loss from continuing operations  (769,620)  (3,640,071)  (3,699,404)  (8,074,472)
Other income (expenses)                
Interest income  35,936   911,537   36,256   1,748,464 
Interest expense  (962,714)  (532,255)  (2,048,877)  (2,631,007)
Change in fair value of marketable equity securities  336,781   272,689   (28,578)  156,647 
Loss on extinguishment of debt  (11,620)     (474,754)  (807,784)
Loss on issuance of warrants     (1,763,481)     (1,763,481)
Change in fair value of warrant liability  (10,184)  946,825   (5,773)  946,825 
Total other expenses, net  (611,801)  (164,685)  (2,521,726)  (2,350,336)
Loss from continuing operations before income taxes  (1,381,421)  (3,804,756)  (6,221,130)  (10,424,808)
Income tax benefit  5,888   73,976   11,793   88,144 
Net loss from continuing operations  (1,375,533)  (3,730,780)  (6,209,337)  (10,336,664)
Net loss from discontinued operations, net of taxes     (328,117)  (1,697,744)  (433,259)
Net loss  (1,375,533)  (4,058,897)  (7,907,081)  (10,769,923)
Less: Net loss attributable to non-controlling interest           32,416 
Net loss attributable to DPW Holdings  (1,375,533)  (4,058,897)  (7,907,081)  (10,737,507)
Preferred dividends  (2,934)  (5,284)  (7,394)  (7,153)
Net loss available to common stockholders $(1,378,467) $(4,064,181) $(7,914,475) $(10,744,660)
Basic and diluted net loss per common share:                
Continuing operations $(0.24) $(4.60) $(1.20) $(21.52)
Discontinued operations     (0.40)  (0.33)  (0.90)
Net loss per common share $(0.24) $(5.00) $(1.52) $(22.42)
Weighted average common shares outstanding, basic and diluted  5,864,395   812,355   5,198,806   479,226 
Comprehensive loss                
Loss available to common stockholders $(1,378,467) $(4,064,181) $(7,914,475) $(10,744,660)
Other comprehensive income (loss)                
Foreign currency translation adjustment  97,200   

162,648

   (51,407)  

192,505

 
Net unrealized gain (loss) on derivative securities of related party  760,881   375,499   (481,213)  (361,181)
Other comprehensive loss  858,081   

538,147

   (532,620)  

(168,676

)
Total comprehensive loss $(520,386) $

(3,526,034

) $(8,447,095) $

(10,913,336

)

 

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

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSCHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

Three Months Ended June 30, 2020

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

Net unrealized gain (loss) on derivative 

securities of related party

  (1,152,480)  (1,341,977)  (1,513,661)  (6,787,902)
Other comprehensive income (loss)  (1,085,314)  (1,419,663)  (1,253,990)  (6,997,437)
Total Comprehensive loss $(11,431,449) $(8,869,634) $(22,344,785) $(27,503,860)
                    Accumulated       
              Additional     Other     Total 
  Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Loss  Interest  Equity 
                            
BALANCES, April 1, 2020  132,040  $132   5,401,721  $5,402  $104,558,973  $(95,186,473) $(6,902,325) $8,242  $2,483,951 
Stock based compensation:                                    
Options              20,178            20,178 
Issuance of common stock in payment of                                    
  accrued liabilities        140,624   140   155,407            155,547 
Issuance of common stock for conversion                                    
  of debt        569,772   570   568,094            568,664 
Beneficial conversion feature in connection                                    
 with convertible notes              46,237            46,237 
Fair value of warrants issued in connection                                    
 with convertible notes               276,613            276,613 
Comprehensive loss:                                    
Net loss                  (1,375,533)        (1,375,533)
Preferred dividends                 (2,934)        (2,934)
Net unrealized gain on derivatives                                    
  in related party                    760,881      760,881 
Foreign currency translation adjustments                    97,200      97,200 
                                     
BALANCES, June 30, 2020  132,040  $132   6,112,117  $6,112  $105,625,502  $(96,564,940) $(6,044,244) $8,242  $3,030,804 

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

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended SeptemberJune 30, 2019

 

              Accumulated                    Accumulated      
          Additional     Other     Total           Additional     Other     Total 
 Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders'  Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders' 
 Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Interest  Equity  Shares  Amount  Shares  Amount  Capital  Deficit  Loss  Interest  Equity 
BALANCES, June 30, 2019  132,040  $132   1,037,128  $1,037  $92,377,366  $(66,465,775) $(4,071,199) $8,242  $21,849,803 
Compensation expense due to stock                                    
option issuances              187,125            187,125 
                   
BALANCES, April 1, 2019  126,504  $126   231,478  $231  $84,903,648  $(62,401,594) $(4,478,216) $8,242  $18,032,437 
Stock based compensation:                                    
Options              248,340            248,340 
Issuance of common stock for cash        1,140,330   1,141   4,415,624            4,416,765         96,388   97   1,056,112            1,056,209 
Issuance of common stock for services        20,000   20   51,980            52,000 
Issuance of common stock for conversion                                    
of debt        344,071   344   2,127,493            2,127,837 
Issuance of common stock in payment of                                    
accrued liabilities        9,375   9   108,514            108,523 
Issuance of common stock upon exercise                                    
of warrants        699,887   700   6,620,325            6,621,025 
Issuance of Series A preferred stock for cash  5,536   6         138,394            138,400 
Beneficial conversion feature in connection                                                                        
with convertible notes              633,004            633,004               188,448            188,448 
Fair value of warrants issued in connection                                                                        
with convertible notes               142,070            142,070                58,448            58,448 
Cash for exchange fees and other financing costs              (206,759)           (206,759)              (944,864)           (944,864)
Loss on debt extinguishment                  155,448               155,448 
Comprehensive loss:                                                                        
Net loss                  (10,340,851)        (10,340,851)                  (4,058,897)        (4,058,897)
Preferred dividends                 (5,284)        (5,284)                 (5,284)        (5,284)
Net unrealized gain on derivatives                                                                        
in related party                    (1,152,480)     (1,152,480)                    375,499      375,499 
Foreign currency translation adjustments                    67,166      67,166                     31,518      31,518 
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 
                                    
BALANCES, June 30, 2019  132,040  $132   1,037,128  $1,037  $92,377,365  $(66,465,775) $(4,071,199) $8,242  $21,849,802 

 

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

 

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

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

ThreeSix Months Ended SeptemberJune 30, 20182020

 

                    Accumulated       
              Additional     Other     Total 
  Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Interest  Equity 
BALANCES, July 1, 2018  125,000  $125   77,028  $77  $68,492,048  $(36,552,389) $(1,074,728) $669,899  $31,535,032 
Compensation expense due to stock                   ��                
 option issuances              298,594            298,594 
Compensation expense due to warrant issuances              23,477            23,477 
Issuance of common stock and warrants for cash        7,900   8   3,695,819            3,695,827 
Issuance of common stock for services        1,250   2   399,998            400,000 
Issuance of common stock in connection                                    
 with convertible notes        500      501,538            501,538 
Beneficial conversion feature in connection                                    
 with convertible notes              720,000            720,000 
Cash for exchange fees and other financing costs              (112,803)           (112,803)
Non-controlling interest from Microphase                       (25,000)  (25,000)
Comprehensive loss:                                    
Net loss                 (7,449,971)        (7,449,971)
Net unrealized gain on securities                                    
 available-for-sale, net of income taxes                    (1,341,977)     (1,341,977)
Foreign currency translation adjustments                 4,100   (77,686)     (73,586)
Net loss attributable to non-controlling interest                       (74,414)  (74,414)
BALANCES, September 30, 2018  125,000  $125   86,678  $87  $74,018,671  $(43,998,260) $(2,494,391) $570,485  $28,096,717 
                    Accumulated       
              Additional     Other     Total 
  Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Interest  Equity 
BALANCES, January 1, 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              40,134            40,134 
Common stock        65,000   65   73,385            73,450 
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        1,914,936   1,915   2,686,711            2,688,626 
Beneficial conversion feature in connection                                    
 with convertible notes              66,582            66,582 
Fair value of warrants issued in connection                                    
 with convertible notes               691,508            691,508 
Comprehensive loss:                                    
Net loss                  (7,907,081)        (7,907,081)
Preferred dividends                 (7,394)        (7,394)
Net unrealized loss on derivatives                                    
  in related party                    (481,213)     (481,213)
Foreign currency translation adjustments                    (51,407)     (51,407)
                                     
BALANCES, June 30, 2020  132,040  $132   6,112,117  $6,112  $105,625,502  $(96,564,940) $(6,044,244) $8,242  $3,030,804 

 

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

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Nine Months Ended September 30, 2019

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

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

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

NineSix Months Ended SeptemberJune 30, 20182019

 

                    Accumulated       
              Additional     Other     Total 
  Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Interest  Equity 
BALANCES, January 31, 2018  478,776  $479   37,778  $38  $36,918,132  $(23,414,151) $4,503,046  $780,737  $18,788,281 
Compensation expense due to stock                                    
 option issuances              725,467            725,467 
Compensation expense due to warrant issuances              70,431            70,431 
Issuance of common stock and warrants for cash        31,721   32   22,247,384            22,247,416 
Issuance of common stock for services        4,604   5   4,158,291            4,158,296 
Issuance of common stock for conversion                                    
 of debt        2,538   3   2,167,841            2,167,844 
Issuance of common stock for conversion                                    
 of short-term advances        4,540   4   2,819,580            2,819,584 
Issuance of common stock upon exercise                                    
 of stock options        75      97,800            97,800 
Issuance of common stock upon exercise                                    
 of warrants        2,682   3   867,163            867,166 
Issuance of Series B preferred stock for                                    
 conversion of short-term advances  25,000   25         249,975            250,000 
Issuance of common stock for conversion                                    
 of Series E preferred stock  (378,776)  (379)  947   1   378             
Issuance of common stock in connection                                    
 with convertible notes        1,862   1   1,176,758            1,176,759 
Repurchase of common stock        (69)     (55,000)           (55,000)
Beneficial conversion feature in connection                                    
 with convertible notes              1,008,573            1,008,573 
Fair value of warrants issued in connection                                    
 with convertible notes              3,408,665            3,408,665 
Cash for exchange fees and other financing costs              (1,950,816)           (1,950,816)
Non-controlling interest from acquisition of I. AM                       33,242   33,242 
Non-controlling interest from Microphase                       (25,000)  (25,000)
Comprehensive loss:                                    
Net loss                 (20,398,374)        (20,398,374)
Preferred deemed dividends              108,049   (108,049)         
Net unrealized gain on securities                                    
 available-for-sale, net of income taxes                    (6,787,902)     (6,787,902)
Foreign currency translation adjustments                 (77,686)  (209,535)     (287,221)
Net loss attributable to non-controlling interest                       (218,494)  (218,494)
BALANCES, September 30, 2018  125,000  $125   86,678  $87  $74,018,671  $(43,998,260) $(2,494,391) $570,485  $28,096,717 
                    Accumulated       
              Additional     Other     Total 
  Preferred Stock  Common Stock  Paid-In  Accumulated  Comprehensive  Non-Controlling  Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Income (Loss)  Interest  Equity 
BALANCES, January 1, 2019  126,434  $126   100,910  $101  $77,647,544  $(55,721,115) $(3,902,523) $40,658  $18,064,791 
Stock based compensation:                                    
Options              493,954            493,954 
Common stock        9,375   9   253,010            253,019 
Issuance of common stock for cash        191,179   192   5,453,552            5,453,744 
Issuance of common stock in payment of                                    
  accrued liabilities        9,375   9   108,514            108,523 
Issuance of common stock for conversion                                    
 of debt        26,402   26   2,608,431            2,608,457 
Issuance of common stock upon exercise                                    
 of warrants        699,887   700   6,620,325            6,621,025 
Issuance of Series A preferred stock for cash  5,606   6         140,144            140,150 
Beneficial conversion feature in connection                                    
 with convertible notes              188,448            188,448 
Fair value of warrants issued in connection                                    
 with convertible notes               58,448            58,448 
Cash for exchange fees and other financing costs              (1,195,005)           (1,195,005)
Comprehensive loss:                                    
Net loss                  (10,737,507)        (10,737,507)
Preferred dividends                 (7,153)        (7,153)
Net unrealized loss on derivatives                                    
  in related party                    (361,181)     (361,181)
Foreign currency translation adjustments                    192,505      192,505 
Net loss attributable to non-controlling interest                       (32,416)  (32,416)
                                     
BALANCES, June 30, 2019  132,040  $132   1,037,128  $1,037  $92,377,365  $(66,465,775) $(4,071,199) $8,242  $21,849,802 

 

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

 

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

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 For the Nine Months Ended September 30,  For the Six Months Ended June 30, 
 2019  2018  2020  2019 
          
Cash flows from operating activities:                
Net loss $(21,110,774) $(20,616,868) $(7,907,081) $(10,769,923)
Adjustments to reconcile net loss to net cash used in operating activities:        
Less: Net loss from discontinued operations  (1,697,744)  (433,259)
Net loss from continuing operations  (6,209,337)  (10,336,664)
Adjustments to reconcile net loss to net cash (used in) operating activities:        
Depreciation  2,673,352   1,642,422   259,906   1,595,847 
Amortization  400,661   100,074   166,697   299,462 
Amortization of right-of-use assets  260,549      246,981   19,059 
Interest expense – debt discount  3,034,454   8,812,972   907,480   1,676,609 
Fair value in excess of proceeds upon issuance of warrants  1,763,481         1,763,481 
Change in fair value of warrant liability  (1,112,665)     10,184   (946,825)
Accretion of original issue discount on notes receivable – related party  (1,869,778)  (1,524,441)  15,000   (1,262,422)
Accretion of original issue discount on notes receivable  (77,155)     (4,137)  (58,023)
Increase in accrued interest on notes receivable – related party  (732,542)        (464,114)
Stock-based compensation  1,354,062   4,164,180   142,941   992,283 
Impairment of property and equipment  4,315,856    
Realized losses on other investments  27,500    
Realized (gains) losses on sale of digital currencies  (394)  110,523      (394)
Realized (gains) losses on sale of marketable securities  (86,741)  167,779   (14,708)  (86,741)
Unrealized (gains) losses on marketable equity securities  (294,717)  42,962   (52,313)  (231,608)
Unrealized gains on equity securities – related party  371,970    
Unrealized gains on equity securities  24,597    
Unrealized losses on equity securities – related party  64,639   (21,288)
Unrealized losses on equity securities  73,077   (6,316)
Changes in operating assets and liabilities:                
Accounts receivable  (397,395)  876,378   198,620   (594,491)
Accounts receivable, related party  2,648,798   (3,517,216)     2,648,798 
Accrued revenue  (41,760)     33,829   68,999 
Digital currencies  (599,025)  (1,502,956)  (14)  (290,902)
Inventories  619,185   (117,621)  (34,907)  598,777 
Prepaid expenses and other current assets  (269,047)  198,058   181,531   (53,576)
Other assets  (433,013)  (144,593)  (39,418)  (271,679)
Accounts payable and accrued expenses  1,357,307   1,923,193   1,365,505   405,708 
Accounts payable, related parties  4,526   (15,258)  (23,799)  2,271 
Other current liabilities  (9,505)  (29,643)  659,795   (158,201)
Lease liabilities  (171,565)     (234,102)   
                
Net cash (used in) continuing operating activities  (2,259,050)  (4,711,950)
Net cash provided by (used in) discontinued operating activities  1,246   42,230 
Net cash used in operating activities  (8,377,278)  (9,430,055)  (2,257,804)  (4,669,720)
                
Cash flows from investing activities:                
Purchase of property and equipment  (149,323)  (9,317,726)  (190,117)  (86,048)
Loss on disposition of asset     22,172 
Purchase of intangible asset     (53,643)
Purchase of Enertec     (4,936,562)
Cash received on acquisitions     293,042 
Investments – related party  (1,501,912)  (844,834)  (198,514)  (1,027,847)
Related party investment in real property     (1,915,000)
Investments in warrants and common stock - related party  (1,102,619)  (2,287,991)  (10,367)  (681,164)
Investments in marketable equity securities     (858,458)
Sales of marketable equity securities  571,741   2,158,724   110,355   571,741 
Investments - others     (25,000)
Proceeds from loans to related parties     16,088 
Proceeds from loans receivable  139,933    
Investments in debt and equity securities  (504,393)  (2,166,505)  (3,060)  (383,876)
                
Net cash used in investing activities $(2,686,506) $(19,915,693) $(151,770) $(1,607,194)

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

 

 For the Nine Months Ended September 30,  For the Six Months Ended June 30, 
 2019  2018  2020  2019 
          
Cash flows from financing activities:                
Gross proceeds from sales of common stock and warrants $15,945,371  $22,247,416  $  $11,528,605 
Repurchase of common stock     (54,747)
Proceeds from issuance of Series A Convertible Preferred Stock  131,741         131,741 
Financing cost in connection with sales of equity securities  (1,401,764)  (1,951,397)     (1,195,004)
Proceeds from stock option exercises     97,740 
Proceeds from warrant exercises  127,000   867,166      127,000 
Proceeds from convertible notes payable  500,000   11,550,000   100,000   500,000 
Proceeds from notes payable  4,752,918   12,234,999   3,147,434   4,102,918 
Proceeds from short-term advances – related party  625,500   136,761   604,254   313,000 
Proceeds from short-term advances     761,000 
Payments on short-term advances     (425,000)
Payments on short-term advances – related party  (98,425)   
Payments on notes payable  (2,001,474)  (11,781,756)  (185,583)  (1,386,935)
Payments on convertible notes payable  (7,079,547)  (2,362,281)     (7,069,547)
Proceeds from advances on future receipts  941,804   2,990,277      319,729 
Payments on advances on future receipts  (1,365,435)  (5,158,229)  (20,000)  (674,229)
Payments of preferred dividends  (12,437)     (7,394)  (7,153)
Payments on revolving credit facilities, net  (80,445)  (360,587)  68,340   (217,830)
                
Net cash provided by financing activities  11,083,232   28,791,362   3,608,626   6,472,295 
                
Effect of exchange rate changes on cash and cash equivalents  (165,125)  (220,325)  8,854   (114,036)
Net decrease in cash and cash equivalents  (145,677)  (774,711)
Net increase in cash and cash equivalents  1,207,906   81,345 
Cash and cash equivalents at beginning of period  902,329   1,478,147   483,383   769,619 
                
Cash and cash equivalents at end of period $756,652  $703,436  $1,691,289  $850,964 
        
                
Supplemental disclosures of cash flow information:                
Cash paid during the period for interest $1,850,946  $695,373  $70,727  $1,644,524 
                
Non-cash investing and financing activities:                
Cancellation of convertible note payable into shares of common stock $4,736,295  $2,167,844  $2,688,626  $2,608,458 
Payment of accounts payable with digital currency $594,320  $ 
Issuance of common stock for prepaid services $  $794,055 
Payment of debt with digital currency $  $273,517 
Issuance of common stock in payment of liability $108,521  $  $228,701  $108,523 
Cancellation of short term advances into shares of common stock $  $2,774,584 
Cancellation of short term advances, related party into shares                
of common stock $  $45,000  $739,948  $ 
Cancellation of short term advances, related party into shares        
of Series B Preferred Stock $  $250,000 
Conversion of loans receivable for marketable equity securities $485,000  $  $  $485,000 
Conversion of loans receivable for investments in warrants and                
common stock - related party $91,483  $  $  $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.

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

SEPTEMBERJUNE 30, 20192020

 

 

 

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 isa diversified holding company owning subsidiaries engaged in the following operating businesses: commercial and defense solutions, commercial lending cryptocurrency blockchain mining,and advanced textile technology and restaurant operations.technology. The Company’s wholly-owned subsidiaries areGresham Worldwide, Inc. (“GWW”), Coolisys Technologies Inc.Corp. (“Coolisys”), Gresham Power Electronics Ltd. (f/k/a Digital Power LimitedLimited) (“DP Limited”Gresham Power”), EnertecSystems 2001 Ltd (“Enertec”),Power-Plus Technical Distributors, LLC (“Power-Plus”), Digital Power Lending, LLC (“DP Lending”) and Digital Farms, Inc. (“Digital Farms”). The Company also has a controlling interestsinterest in Microphase Corporation (“Microphase”)and I. AM, Inc. (“I.AM”). The Company has fivethree reportable segments – North Americadefense solutions through GWW with operations conducted by Microphase, Enertec and Gresham Power, commercial solutions through Coolisys Power-Plus and DP Lending, Europe with operationscommercial lending through DP Limited, Middle East withLending.

During March 2020, the Company ceased operations through Enertec, digital currencyat Digital Farms, the Company’s blockchain mining through Digital Farmssubsidiary, and I. AM, Inc. (“I. AM”). Management determined that the permanent closing of the restaurant operations through I.AM.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 stockholdersat a Special Meeting of Stockholders, the Company’s Board of Directors (the “Board”) approved an amendment to the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the Common Stock of the Company’s issued and outstanding number of such shares by a ratio of one-for-twenty (the “First Stock Split”). At the Company’s 2019 reconvened Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate a second reverse stock split (the “Second Stock Split”) of the Company’s issued and outstanding Common Stock. Thereafter, on July 23, 2019, the Board approved the Second Stock Split with a ratio of one-for-forty. The Second Stock Split did not affect the number of authorized shares of Common Stock or their par value per share. As a result of the Second Stock Split, each forty shares of common stock issued and outstanding prior to the Second Stock Split were converted into one share of common stock. The Second Stock Split became effective in the State of Delaware on August 5, 2019. 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 SeptemberJune 30, 2019,2020, the Company had cash and cash equivalents of $756,652,$1,691,289, an accumulated deficit of $76,811,910$96,564,940 and a negative working capital of $16,085,485.$20,818,885. The Company has incurred recurring losses and reported losses for the three and ninesix months ended SeptemberJune 30, 2020 and 2019, totaled $10,340,851totaling $7,907,081 and $21,110,774,$10,769,923, respectively. In the past, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During 2019,2020, the Company continued to successfully obtain additional equity and debt financing and in restructuringrestructured existing debt.

 

The Company expects to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business development initiatives and to support its working capital requirements. On April 2, 2019,During February 2020, the Company received gross proceeds ofentered into a Master Exchange Agreement with an entity that has agreed to purchase up to approximately $7$7.7 million in a public offering of its securities (see Note 20).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 COVID-19, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce and eliminating outside consultants and reducing legal fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

Coronavirus disease 2019 and 2020 pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to spread throughout the United States and the world.  The Company is 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 operations, financial position, cash flows, inventory, supply chains, customer purchasing trends, customer payments, and the industry in general, in addition to the impact on its employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company's operations and liquidity is uncertain as of the date of this report. 

However, the Company’s business has been disrupted and materially adversely affected by the outbreak of COVID-19. The Company is still assessing its business operations and system supports and the impact COVID-19 may have on its results and financial condition, but there can be no assurance that this analysis will enable the Company 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 its sectors in particular.

The Company’s operations are located in Alameda County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom, Israel and members of senior management work in Seattle, WA and New York, NY. The Company has been following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary closures of its 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 Holdings’ corporate headquarters, located in Newport Beach, CA, continues to work remotely, based on the occupancy and social distancing order from the Orange County Health Officer (http://www.ochealthinfo.com/phs/about/epidasmt/epi/dip/prevention/novel_coronavirus). The headquarters staff has tested the secure remote access systems and technology infrastructure to adjust working arrangements for its employees and 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 Technologies Corp., located in Fremont, CA, had temporarily suspended operations as a result of the Alameda County Public Health Department’s order to cease all activities at facilities located within the County. Currently, manufacturing and logistics personnel operate on site whereas administrative personnel work remotely.

·Microphase Corporation, 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, UK, continues to follow UK Government and Public Health England COVID-19 safety guidelines, 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 Systems 2001 Ltd., located in Karmiel, Israel, has been granted a waiver by the Israeli government to remain open to complete key projects that impact national security. Approximately 50% of the Enertec workforce is working remotely.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

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-K10-K/A for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission on April 16, 2019.June 1, 2020. The condensed consolidated balance sheet as of December 31, 20182019 was derived from the Company’s audited 20182019 financial statements contained in the above referenced Form 10-K.10-K/A. Results of the three and ninesix months ended SeptemberJune 30, 2019,2020, are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.2020.

 

Principles of Consolidation

 

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

 

Accounting Estimates

 

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

 

Impairment of long-lived assets:

 

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted expected future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by comparing the amount by which the carrying amount of the assets to their fair value. Based on its reviews,During the six months ended June 30, 2020, management determined that its digital currency minersoperating right-of-use assets attributed to the discontinued operations of I.AM were impaired by a total of $4,315,856 based upon an assessment as of September$1,020,514.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019, including consideration of the decline in bitcoin values which occurred throughout 2019.2020

 

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.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

The Company’s disaggregated revenues consist of the following for the ninesix months ended SeptemberJune 30, 2019:2020:

 

  Six Months ended June 30, 2020 
  GWW  Coolisys  DP Lending  Total 
             
Primary Geographical Markets                
North America $3,370,374  $1,965,465  $2,396  $5,338,235 
Europe  447,603   287,157      734,760 
Middle East  4,605,482         4,605,482 
Other  153,123   174,814      327,937 
  $8,576,582  $2,427,436  $2,396  $11,006,414 
                 
Major Goods                
RF/Microwave Filters $2,545,967  $  $  $2,545,967 
Detector logarithmic video amplifiers  878,372         878,372 
Power Supply Units     2,427,436      2,427,436 
Power Supply Systems  546,761         546,761 
Healthcare diagnostic systems  523,228         523,228 
Defense systems  4,082,254         4,082,254 
Lending activities        2,396   2,396 
  $8,576,582  $2,427,436  $2,396  $11,006,414 
                 
Timing of Revenue Recognition                
Goods transferred at a point in time $3,971,100  $2,427,436  $2,396  $6,400,932 
Services transferred over time  4,605,482         4,605,482 
  $8,576,582  $2,427,436  $2,396  $11,006,414 

DPW HOLDINGS AND SUBSIDIARIES

  Nine Months ended September 30, 2019
        Digital    
  DPC1 DP Limited Enertec Farms I.AM Total
             
Primary Geographical            
Markets            
North America $7,146,478  $  $  $592,092  $3,371,465  $11,110,035 
Europe  90,154   1,193,158            1,283,312 
Middle East  21,348      6,336,852         6,358,200 
Other  296,190   230,813   190,223         717,226 
  $7,554 170  $1,423,971  $6,527,075  $592,092  $3,371,465  $19,468,773 
Major Goods                        
RF/Microwave Filters $2,245,748  $  $  $  $  $2,245,748 
Detector logarithmic                        
 video amplifiers  558,155               558,155 
Power Supply Units  4,306,340               4,306,340 
Power Supply Systems     1,423,971            1,423,971 
Healthcare diagnostic systems        1,503,306         1,503,306 
Defense systems        5,023,769         5,023,769 
Digital Currency Mining           592,092      592,092 
Restaurant operations              3,371,465   3,371,465 
Lending activities  443,927               443,927 
  $7,554,170  $1,423,971  $6,527,075  $592,092  $3,371,465  $19,468,773 
Timing of Revenue                        
Recognition                        
Goods transferred at a                        
 a point in time $7,554,170  $1,287,070  $  $592,092  $3,371,465  $12,804,797 
Services transferred over time     136,901   6,527,075         6,663,976 
  $7,554,170  $1,423,971  $6,527,075  $592,092  $3,371,465  $19,468,773 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

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

  Six Months ended June 30, 2019 
  GWW  Coolisys  DP Lending  Total 
             
Primary Geographical Markets                
North America $1,569,939  $2,790,091  $374,710  $4,734,740 
Europe  1,012,761   16,804      1,029,565 
Middle East  4,488,553         4,488,553 
Other  327,799   171,822      499,621 
  $7,399,052  $2,978,717  $374,710  $10,752,479 
                 
Major Goods                
RF/Microwave filters $989,114  $  $  $989,114 
Detector logarithmic video amplifiers  473,150         473,150 
Power supply units  180,475   2,693,797      2,874,272 
Power supply systems  1,082,442         1,082,442 
Healthcare diagnostic systems  1,260,700         1,260,700 
Defense systems  3,413,171         3,413,171 
Lending activities        374,710   374,710 
Digital currency mining     284,920      284,920 
  $7,399,052  $2,978,717  $374,710  $10,752,479 
                 
Timing of Revenue Recognition                
Goods transferred at a point in time $2,588,280  $2,978,717  $374,710  $5,941,707 
Services transferred over time  4,810,772         4,810,772 
  $7,399,052  $2,978,717  $374,710  $10,752,479 

 

Sales of Products

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

Manufacturing Services

 

The Company provides manufacturing services in exchange primarily for fixed fees; however, the initial two MLSE units are subject to variable pricing under the $50 million purchase order from MTIX. Under the terms of the MLSE purchase order, the Company shall beis 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.

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

For manufacturing services, which include revenues generated by Enertec and in certain instances revenues generated by DPL,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 isin one year or less.

 

The aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of SeptemberJune 30, 2019,2020, 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 the next two and a half years.an estimated three year period. The Company will be paid in installments for this performance obligation over the next two and a half years.estimated period that the remaining revenue is recognized.

 

Lending Activities

 

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

 

Blockchain Mining

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

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

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

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

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

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

Restaurant Operations

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

Fair value of Financial Instruments

 

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

 

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

 

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

 

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

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

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 45 and Note 7)9) that were measured at fair value on a recurring basis by level within the fair value hierarchy:

 

 Fair Value Measurement at September 30, 2019  Fair Value Measurement at June 30, 2020 
 Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Investments in convertible promissory note of
AVLP – a related party
 $6,739,234  $  $  $6,739,234 
Investments in common stock and derivative
instruments of AVLP – a related party
 $2,145,720  $397,670  $  $1,748,050   1,028,424   169,860      858,564 
Investment in common stock of Alzamend – a
related party
  206,250         206,250   575,925         575,925 
Investments in marketable equity securities  473,314   473,314         596,313   596,313       
Investments in warrants of public companies  9,174         9,174   2         2 
Total Investments $2,834,458  $870,984  $  $1,963,474  $8,939,898  $766,173  $  $8,173,725 

 

 

 

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

  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.

 

Leases

F-16

 

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

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

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

 

Net Loss per Share

 

Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. The Company has included 6,500 warrants, which are exercisable for shares of the Company’s common stock on a one-for-one basis, in its earnings per share calculation for the three and ninesix months ended SeptemberJune 30, 2020 and 2019. Anti-dilutive securities, which are convertible into or exercisable for the Company’s Class A common stock, consist of the following at SeptemberJune 30, 20192020 and 2018:2019:

 

 September 30,  June 30, 
 2019  2018  2020  2019 
Stock options  2,906   9,463   950   9,006 
Warrants(1)  72,921   23,410   2,151,953   51,465 
Convertible notes  349,486   25,097   551,104   75,000 
Conversion of preferred stock  2,232   2,232   2,232   2,232 
Total  427,545   60,202   2,706,239   137,703 

 

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

 

Reclassifications

 

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

 

Recently Issued Accounting Standards

 

In February 2016,December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,2019-12, LeasesIncome Taxes (Topic 842)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 orderTopic 740 and also clarifies and amends existing guidance to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. For public companies,improve consistent application. ASU 2016-022019-12 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using2021. 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 the novel coronavirus (“COVID-19”), San Diego County health officials issued orders mandating that all restaurants must end dine-in services. As a modified retrospective approachresult of these temporary closures and early adoption is permitted. In transition, entities may also elect a packagethe deteriorating business conditions at both the Company’s cryptocurrency mining and restaurant businesses, the Company concluded that discontinuing the operations of practical expedients that must be appliedDigital Farms and I. AM was ultimately in its entiretybest interest.

Digital Farms was established to all leases commencing beforepursue a variety of digital currencies and mined the adoption date, unlesstop three cryptocurrencies for its own account. Although the lease is modified,Company has ceased operations at Digital Farms, since the assets and permits entities tooperations have not reassess (a)yet been abandoned, sold or distributed, these assets do not yet meet the existencerequirement for presentation as discontinued operations. In the first quarter of a lease, (b) lease classification or (c) determination of initial direct costs, as2020, management determined that the permanent closing of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018,restaurant operations met the FASB issued ASU 2018-11,Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to applycriteria for presentation as discontinued operations. Accordingly, the guidance under Topic 842 asresults of the adoption date, rather thanrestaurant 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 earliest periodrestaurant operations are classified as held for sale in our condensed consolidated balance sheets for all periods presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Upon adoption the Company recognized cumulative operating lease liabilities and operating right-of-use assets of approximately $4.2 million.

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

In July 2017,

The following tables summarize the FASB issued ASU No. 2017-11,Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivativesmajor classes of assets and Hedging (Topic 815) (“ASU 2017-11”). ASU 2017-11 consistsliabilities included as part of two parts. discontinued operations:

  June 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  265,920   229,574 
Other current liabilities  461,738   482,375 
Total current liabilities classified as held for sale  1,515,972   1,593,550 
Long term liabilities        
Operating lease liability, non-current  843,020   951,072 
Total liabilities classified as held for sale $2,358,992  $2,544,622 

The amendmentsrestaurant operations are included in Part Iour results as discontinued operations through March 16, 2020, the date of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a resultclosing of the existencerestaurants. The following tables summarize the major classes of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”)line items included in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this update do not require any transition guidance because those amendments do not have an accounting effect. The Company adopted this standard on January 1, 2019, and the adoption did not have any impact on its consolidated financial statements and related disclosures.loss from discontinued operations:

 

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

  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
Revenue $  $1,161,132  $543,327  $2,334,631 
Cost of revenue     (322,008)  (160,310)  (614,491)
Selling and marketing     (43,929)     (100,650)
General and administrative     (1,123,312)  (555,445)  (2,052,749)
Impairment of property and equipment        (1,525,316)   
Loss from discontinued operations $  $(328,117) $(1,697,744) $(433,259)

 

4.5. Marketable Equity Securities

 

Marketable securities in equity securities with readily determinable market prices consisted of the following as of SeptemberJune 30, 20192020 and December 31, 2018:2019:

 

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

  Marketable equity securities at December 31, 2018 
       Gross unrealized   Gross realized     
   Cost   gains (losses)   gains (losses)   Fair value 
Common shares $220,880  $(42,283) $  $178,597 
  Marketable equity securities at June 30, 2020 
       Gross unrealized   Gross realized     
   Cost   gains (losses)   gains (losses)   Fair value 
Common shares $327,378  $268,935  $  $596,313 

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

  Marketable equity securities at December 31, 2019 
       Gross unrealized   Gross realized     
   Cost   gains (losses)   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, 2018 $1,834,570 
Purchases of marketable equity securities  858,458 
Sales of marketable equity securities  (2,188,292)
Realized losses on marketable equity securities  (175,405)
Unrealized gains on marketable equity securities  (150,734)
Balance at December 31, 2018 $178,597 
Purchases of marketable equity securities on
conversion of debt
  485,000 
Sales of marketable equity securities  (571,741)
Realized gains on marketable equity securities  86,741 
Unrealized gains on marketable equity securities  294,717 
Balance at September 30, 2019 $473,314 
  Marketable 
  Equity Securities 
Balance at January 1, 2020 $639,647 
Sales of marketable equity securities  (110,355)
Realized gains on marketable equity securities  14,708 
Unrealized losses on marketable equity securities  52,313 
Balance at June 30, 2020 $596,313 

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company had invested in the marketable equity securities of certain publicly traded companies. During the three and ninesix months ended SeptemberJune 30, 2019,2020, unrealized gains of $63,109$173,381 and $294,717$52,313, respectively, were included in net income as a component of change in fair value of equity securities. During the year ended December 31, 2018,2019, the Company recorded anrecognized unrealized lossgains of $42,283.$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 SeptemberJune 30, 20192020 and December 31, 20182019 is a Level 1 measurement based on quoted prices in an active market.

 

At SeptemberJune 30, 20192020 and December 31, 2018,2019, 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.

 

5.6. PROPERTY AND EQUIPMENT, NET

 

At SeptemberJune 30, 20192020 and December 31, 20182019, property and equipment consist of:

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

  June 30,  December 31, 
  2020  2019 
Cryptocurrency machines and related equipment $567,216  $567,216 
Computer, software and related equipment  2,595,114   2,518,187 
Office furniture and equipment  412,234   441,613 
Leasehold improvements  1,186,796   1,230,407 
   4,761,360   4,757,423 
Accumulated depreciation and amortization  (3,067,140)  (2,970,030)
Property and equipment, net $1,694,220  $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. BasedDuring the first quarter of 2020, based upon the significant declinedeteriorating business conditions for restaurants in the priceSan Diego County as result of bitcoin during the nine months ended September 30, 2019spread of COVID-19 and the decline in projected cash flows over the life of the cryptocurrency machines,restaurant equipment, the Company performed an undiscounted cash flow test to determine if the cryptocurrency machines wererestaurant equipment was impaired. The undiscounted cash flows were less than the carrying amount of the Company’s cryptocurrency machinesrestaurant equipment and therefore, the carrying amount of the assets were compared to the fair value of the cryptocurrency machines,restaurant equipment, and the Company determined that there were impairment charges to be recorded on the cryptocurrency machines.restaurant equipment. Impairment charges for the ninethree and six months ended SeptemberJune 30, 2019 totaled approximately $4,315,856.2020 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).

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

For the three and ninesix months ended SeptemberJune 30, 2020, depreciation expense amounted to $84,959 and $259,906, respectively. For the three and six months ended June 30, 2019, depreciation expense amounted to $846,631$1,027,698 and $2,673,352, respectively. During the three and nine months ended September 30, 2018, depreciation expense amounted to $883,793 and $1,642,422,$1,826,721, respectively.

 

6.7. INTANGIBLE ASSETS, NET

 

At SeptemberJune 30, 20192020 and December 31, 20182019 intangible assets consist of:

 

 September 30, December 31,  June 30, December 31, 
 2019  2018  2020  2019 
Trade name and trademark $1,562,332  $1,562,332  $1,039,307  $1,039,307 
Customer list  2,495,097   2,388,139   2,402,054   2,406,434 
Non-competition agreements  150,000   150,000 
Domain name and other intangible assets  808,016   762,807   639,957   641,809 
  5,015,445   4,863,278   4,081,318   4,087,550 
Accumulated depreciation and amortization  (937,002)  (503,480)  (1,046,873)  (880,562)
Intangible assets, net $4,078,443  $4,359,798  $3,034,445  $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 $101,199$83,412 and $400,661,$166,697, respectively, for the three and ninesix months ended SeptemberJune 30, 20192020 and $33,358$137,047 and $100,074,$299,462, respectively, for the three and ninesix months ended SeptemberJune 30, 2018.2019.

 

7. INVESTMENTS – RELATED PARTIES8. GOODWILL

 

InvestmentsThe Company’s goodwill relates to the acquisition of a controlling interest in Avalanche International Corp.Microphase on June 2, 2017 and the acquisition of Enertec Systems 2001 Ltd. (“AVLP”Enertec”) and Alzamend Neuro, Inc. (“Alzamend”) at Septemberon May 22, 2018.  The following table summarizes the changes in our goodwill during the six months ended June 30, 2019 and December 31, 2018, are comprised of the following:2020:

 

  September 30,  December 31, 
  2019  2018 
Investment in convertible promissory note of AVLP $9,476,979  $6,943,997 
Accrued interest in convertible promissory note of AVLP  1,736,859   1,004,317 
Total investment in convertible promissory note of AVLP – Gross  11,213,838   7,948,314 
Less: original issue discount  (1,475,485)  (2,336,693)
Total investment in convertible promissory note of AVLP $9,738,353  $5,611,621 
         
Investment in derivative instruments of AVLP  1,748,050   2,230,641 
Investment in common stock of AVLP  397,670   812,858 
Investment in common stock of Alzamend  206,250    
Investment in derivative instruments and common stock of AVLP and
Alzamend
 $2,351,970  $3,043,499 
         
Total investment in AVLP and Alzamend – Net $12,090,323  $8,655,120 
         
Investment in warrants and common stock of AVLP and Alzamend $2,351,970  $3,043,499 
Investment in convertible promissory note of AVLP  9,738,353   5,611,621 
Total investment in AVLP and Alzamend – Net $12,090,323  $8,655,120 
  Goodwill 
Balance as of January 1, 2020 $8,100,947 
Effect of exchange rate changes  (14,224)
Balance as of June 30, 2020 $8,086,723 

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

9. INVESTMENTS – RELATED PARTIES

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

  June 30,  December 31, 
  2020  2019 
Investment in convertible promissory note of AVLP $9,802,686  $9,595,079 
Accrued interest in convertible promissory note of AVLP  2,025,475   2,025,475 
Total investment in convertible promissory note of AVLP – Gross  11,828,161   11,620,554 
Less: provision for loan losses  (5,088,927)  (5,079,834)
Total investment in convertible promissory note of AVLP $6,739,234  $6,540,720 
         
Investment in derivative instruments of AVLP  858,564   1,330,684 
Investment in common stock of AVLP  169,860   238,602 
Investment in common stock of Alzamend  575,925   558,938 
Investment in derivative instruments and common stock of AVLP and
Alzamend
 $1,604,349  $2,128,224 
         
Total investment in AVLP and Alzamend – Net $8,343,583  $8,668,944 
         
Investment in warrants and common stock of AVLP and Alzamend $1,604,349  $2,128,224 
Investment in convertible promissory note of AVLP  6,739,234   6,540,720 
Total investment in AVLP and Alzamend – Net $8,343,583  $8,668,944 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

The following table summarizes the changes in our investments in AVLP and Alzamend during the ninesix months ended SeptemberJune 30, 2019:2020:

 

  Investment in       
  warrants and  Investment in  Total 
  common stock  convertible  investment 
  of AVLP and  promissory  in AVLP and 
  Alzamend  note of AVLP  Alzamend – Net 
Balance at January 1, 2019 $3,043,499  $5,611,621  $8,655,120 
Investment in convertible promissory notes of AVLP     1,501,912   1,501,912 
Investment in common stock of AVLP and Alzamend  163,032      163,032 
Fair value of derivative instruments issued by AVLP  1,031,070      1,031,070 
Unrealized loss in derivative instruments of AVLP  (1,513,661)     (1,513,661)
Unrealized gain in common stock of AVLP and
Alzamend
  (371,970)     (371,970)
Accretion of discount     1,892,278   1,892,278 
Accrued Interest     732,542   732,542 
Balance at September 30, 2019 $2,351,970  $9,738,353  $12,090,323 
  Investment in       
  warrants and  Investment in  Total 
  common stock  convertible  investment 
  of AVLP and  promissory  in AVLP and 
  Alzamend  note of AVLP  Alzamend – Net 
Balance at January 1, 2020 $2,128,224  $6,540,720  $8,668,944 
Investment in convertible promissory notes of AVLP     198,514   198,514 
Investment in common stock of AVLP and Alzamend  12,884      12,884 
Fair value of derivative instruments issued by AVLP  9,093      9,093 
Unrealized loss in derivative instruments of AVLP  (481,213)     (481,213)
Unrealized loss in common stock of AVLP and
Alzamend
  (64,639)     (64,639)
Balance at June 30, 2020 $1,604,349  $6,739,234  $8,343,583 

 

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 of AVLP.stock. At SeptemberJune 30, 2019,2020, the Company has provided loans to AVLP in the principal amount $9,476,979$9,802,686 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 18,953,958 shares of AVLP common stock. The warrants entitle the Company to purchase up to 18,953,95819,605,372 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 derivative instruments. At SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company recorded ana cumulative unrealized loss on its investment in warrants of AVLP of $3,927,042$4,845,469 and $2,413,381,$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 ninesix months ended SeptemberJune 30, 2019, the Company recognized, in other comprehensive loss, net unrealized lossgain (loss) on derivative securities of related party of $1,152,480$760,881 and $1,513,661,($1,242,094), respectively, which compares with a net unrealized lossgain (loss) on derivative securities of related party of $1,456,232$375,499 and $6,400,899,($361,181), respectively during the three and ninesix months ended SeptemberJune 30, 2018.2019. 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 1.50%0.23% and 2.60%, was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 89.4% was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million. The warrant valuation is a Level 3 measurement.

 

In accordance with ASC No. 310, Receivables (“ASC 310”), the Company accountshad 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 18,953,958 warrants that the Company received in conjunction with its investment. Interest iswas accreted using the effective interest method. The Company recordsrecorded interest on an accrual basis and recognizesrecognized it as earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected. An aggregate of $5,802,374 of original issue discount and discount attributed to the fair value of the warrants is being amortized as interest income through the maturity date. During the three and ninesix months ended SeptemberJune 30, 2019, the Company recorded $614,856$657,613 and $1,892,278,$1,277,422, respectively, of interest income for the discount accretion compared with $535,264 and  $1,453,712,$253,923 and $464,114, respectively, duringof interest income from the three and ninecontractual 12% rate provided for by the convertible promissory notes. During the six months ended SeptemberJune 30, 2018. During2020, no interest income was recognized from the three and nine months ended September 30, 2019, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $268,428 and $732,542, respectively. During the three and nine months ended September 30, 2018, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $176,946 and $478,119, respectively.Company’s investment in AVLP.

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

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 June 30, 2020, the Company determined that it is probable that it will be able to collect amounts due according to the existing contractual terms.fair value of the convertible promissory notes in AVLP was approximately $6,739,234. 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 June 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 ninesix months ended SeptemberJune 30, 20192020 and the year ended December 31, 2018,2019, 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, and 430,942 shares of AVLP common stock for $417,169, respectively. At SeptemberJune 30, 2019,2020, the closing market price of AVLP’s common stock was $0.40,$0.17, a decline from $0.90$0.24 at December 31, 2018.2019. The Company has determined that its investment in AVLP marketable equity securities areshould 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 SeptemberJune 30, 2019,2020, the Company’s investment in AVLP common stock had an unrealized loss of $348,891.$577,975.

 

In aggregate, the Company has 994,175999,175 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.

 

8.10. INVESTMENTS IN REAL ESTATELIMITED 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“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 SeptemberJune 30, 2019,2020, the Company had invested an aggregate of $1,869,000 in the NY Partnership and $100,000 in another real estate investment. The Company was initially required to make monthly capital contributions of $500,000 every thirty days until the Company’s commitment of $10 million was funded in full. The Company had received a waiver for itshas no obligation to make monthlyany capital contributions through September 30, 2019 and on June 12, 2019, the agreement was restructured whereby DPW no longer has any further funding obligations until the hotel is open for business to the public.

 

9.11. 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 amountamounts 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.

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

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 SeptemberJune 30, 20192020 and December 31, 2018,2019, 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 ofin 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 Coolisys’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 Coolisys’CTI’s interest without the Company’s approval.

 

Under the Tenancy in Common Agreement, CoolisysCTI and its executive officers shall have the exclusive rights to use the Property for the Company and its affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy in Common Agreement, for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right to purchase a portion of the Company’s interest in the Property. Such right shall fully vest at the end of five years of continuous employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal value.price. The Company will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years. During the three and ninesix months ended SeptemberJune 30, 2020 and 2019, the Company recognized $7,500 and $22,500,$15,000, respectively, in amortization expense. At SeptemberJune 30, 20192020 and December 31, 2018,2019, the unamortized balance of the Israeli Property was $240,000$217,500 and $262,500,$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.

 

10. ACQUISITIONS

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

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

11.12. 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 SeptemberJune 30, 2019,2020, an aggregate of 152,96153,543 of the Company's options are still available for future grant.

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

During the ninesix months ended SeptemberJune 30, 2020 and the year ended December 31, 2019, the Company did not grant any options. During the nine months ended September 30, 2018, the Company granted 1,250 options to its employees from the Plans and also granted 3,622 options outside ofunder the Plans. TheseGenerally, options granted under the Plans become fully vested after four years. The Company estimated thatDuring the grant date fair value of options granted utilizing the Black-Scholes option pricing model during the ninesix months ended SeptemberJune 30, 2018 was $513,510, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the nine months ended September 30,2020 and 2019, and 2018, the Company also issued 29,37565,000 and 1,979,9,375, respectively, shares of common stock to its consultants and service providers. The Company estimated the grant date fair value of these shares of common stock was $305,019amounted to $73,450 and $2,640,102$253,019 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.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

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

Nine Months Ended
September 30, 2018
Weighted average risk-free interest rate2.41% — 2.80%
Weighted average life (in years)4.75
Volatility124.7% — 131.7%
Expected dividend yield0%
Weighted average grant-date fair value per share of
options granted
$624.33

The options outstanding as of SeptemberJune 30, 2019,2020, 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
$480.00 - $560.00 1,306 6.32 $544.50 631 $543.76
$1,056.00 - $1,104.00 188 8.17 $1,104.00 86 $1,104.00
$1,208.00 - $1,352.00 38 3.99 $1,338.67 38 $1,338.67
$480.00 - $1,352.00 1,531 6.49 $632.46 755 $647.06
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 5.44 $537.96 525 $530.95
$1,208 - $1,352 31 3.13 $1,339.20 31 $1,339.20
$480 - $1,352 950 5.36 $564.32 556 $576.36

 

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

 

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

On June 30, 2020 and December 31, 2019, there was no aggregate intrinsic value of stock options that were outstanding and 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 ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, is comprised as follows:

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
Stock-based compensation from Plans $20,178  $162,764  $110,691  $325,090 
Stock-based compensation from issuances                
outside of Plans     208,231   32,250   667,193 
Total Stock-based compensation $20,178  $370,995  $142,941  $992,283 

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

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

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

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

 

A summary of option activity under the Company's stock option plans as of SeptemberJune 30, 2019,2020, and changes during the ninesix months ended are as follows:

 

       Outstanding Options 
             Weighted    
          Weighted  Average    
  Shares      Average  Remaining  Aggregate 
  Available   Number  Exercise   Contractual  Intrinsic 
   for Grant   of Shares  Price  Life (years)   Value 
January 1, 2019  12,695   4,328  $576.40  7.52  $0 
Amendment to 2018 SIP  162,500             
Restricted stock awards  (25,000)            
Forfeited  2,766   (2,797) $377.70       
September 30, 2019  152,961   1,531  $632.46  6.49  $0 
      Outstanding Options 
               Weighted     
           Weighted   Average     
   Shares       Average   Remaining   Aggregate 
   Available   Number   Exercise    Contractual   Intrinsic 
   for Grant   of Shares   Price   Life (years)    Value 
January 1, 2020  103,105   1,388  $636.47   6.33  $0 
Restricted stock awards  (50,000)               
Forfeited  438   (438) $793.14         
June 30, 2020  53,543   950  $564.32   5.36  $0 

 

As of SeptemberJune 30, 2019,2020, there was $452,427$167,818 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.62.02 years.

 

12.13. WARRANTS 

 

During the ninesix months ended SeptemberJune 30, 2019,2020, the Company issued a total of 759,4432,079,435 warrants at an average exercise price of $10.28$1.37 per share.

 

(i)On April 2, 2019,February 20, 2020, pursuant to the Master Exchange Agreement, the Company issued warrants to purchase an aggregate of 388,888 shares of Common Stock at an initial exercise price of $18.00 per share and (the “Common Warrants”) and (b)  pre-funded warrants to purchase up to 317,500 shares of our Common Stock at an initial exercise price of $0.40 per share (the “Pre-Funded Warrants”) in connection with an underwriting agreement with A.G.P./Alliance Global Partners (the “Underwriter”). In addition, the Company has also issued the Underwriter a warrant to purchase a maximum of 15,555 additional270,198 shares of common stock at an initialaverage exercise price of $19.80equal to $1.43 per share (Seeof common stock (see Note 20)17).

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 

(ii)On May 20, 2019,During the six months ended June 30, 2020, the Company issued warrants to purchase an aggregate of 12,500890,103 shares of common stock at an average exercise price equal to $12.00$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 4% Original Issue Discount Convertible Promissory Noteconvertible promissory note in the aggregate principal amount of $660,000.$100,000 (see Note 19).

 

(iii)(iv)On July 3, 2019,May 28, 2020, the Company issued warrants to purchase an aggregate of 25,000400,000 shares of common stock at an exercise price equal to $8.80$1.07 per share of common stock in connection with the issuance of a 12% Convertible Promissoryconvertible 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 $1,492,000.$800,000 (see Note 17).

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

 

The following table summarizes information about common stock warrants outstanding at SeptemberJune 30, 2019:2020:

 

Outstanding Exercisable
    Weighted      
    Average Weighted   Weighted
    Remaining Average   Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$0.00 6,500 4.50 $0.00 6,500 $0.00
$8.00 397 7.09 $8.00 397 $8.00
$8.80 25,000 4.76 $8.80 25,000 $8.80
$12.00 12,500 4.61 $12.00 12,500 $12.00
$19.80 15,555 4.50 $19.80 15,555 $19.80
$440.00 355 3.11 $440.00 355 $440.00
$480.00 94 3.59 $480.00 94 $480.00
$528.00 186 3.09 $528.00 186 $528.00
$560.00 2,657 3.12 $560.00 2,657 $560.00
$600.00 170 2.62 $600.00 170 $600.00
$640.00 603 0.94 $640.00 603 $640.00
$752.00 9,614 3.63 $752.00 9,614 $752.00
$800.00 350 3.19 $800.00 350 $800.00
$880.00 947 1.92 $880.00 947 $880.00
$920.00 2,126 3.49 $920.00 2,126 $920.00
$1,040.00 1,243 3.54 $1,040.00 1,243 $1,040.00
$1,760.00 781 3.32 $1,760.00 781 $1,760.00
$1,800.00 140 3.32 $1,800.00 140 $1,800.00
$2,000.00 203 3.32 $2,000.00 203 $2,000.00
$8.00 - $2,000.00 79,421 3.95 $208.77 79,421 $208.77
 Outstanding  Exercisable 
      Weighted          
      Average  Weighted     Weighted 
      Remaining  Average     Average 
 Exercise Number  Contractual  Exercise  Number  Exercise 
 Price Outstanding  Life (Years)  Price  Exercisable  Price 
$     6,500   3.75  $   6,500  $ 
$0.88  281,250   4.77  $0.88     $0.88 
$1.07  400,000   4.91  $1.07   400,000  $1.07 
$1.14  144,928   4.69  $1.14     $1.14 
$1.16  95,238   4.91  $1.16     $1.16 
$1.17  157,143   4.79  $1.17   157,143  $1.17 
$1.19  277,778   4.66  $1.19     $1.19 
$1.21  90,909   4.81  $1.21     $1.21 
$1.43  270,198   4.61  $1.43     $1.43 
$2.43  361,991   1.41  $2.43   361,991  $2.43 
$8.00  397   1.34  $8.00   397  $8.00 
$8.80  25,000   4.01  $8.80   25,000  $8.80 
$12.00  12,500   3.86  $12.00   12,500  $12.00 
$19.80  15,555   3.75  $19.80   15,555  $19.80 
$440.00  355   2.36  $440.00   355  $440.00 
$480.00  94   2.84  $480.00   94  $480.00 
$528.00  186   2.34  $528.00   186  $528.00 
$560.00  2,657   2.37  $560.00   2,657  $560.00 
$600.00  170   1.87  $600.00   170  $600.00 
$640.00  200   1.82  $640.00   200  $640.00 
$752.00  9,614   2.88  $752.00   9,614  $752.00 
$800.00  350   2.44  $800.00   350  $800.00 
$880.00  947   1.17  $880.00   947  $880.00 
$920.00  2,126   2.74  $920.00   2,126  $920.00 
$1,040.00  1,243   2.79  $1,040.00   1,243  $1,040.00 
$1,760.00  781   2.56  $1,760.00   781  $1,760.00 
$1,800.00  140   2.57  $1,800.00   140  $1,800.00 
$2,000.00  203   2.57  $2,000.00   203  $2,000.00 
 $ 0.88  -  $ 2,000.00  2,158,453   4.16  $8.88   998,152  $17.85 

 

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.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

The Company utilized the Black-Scholes option pricing model and the assumptions used during the ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:

 

 Nine Months Ended  Six Months Ended 
 September 30, 2019  September 30, 2018  June 30, 2020  June 30, 2019 
Weighted average risk-free interest rate 1.75% — 2.28% 2.41% — 2.94% 
Weighted average risk free interest rate  0.17% — 1.38%   2.18% — 2.28% 
Weighted average life (in years)  5.0   4.8   1.42 — 5   5.0 
Volatility  85.5% — 87.5%   124.8% — 138.4%   86.3% — 103.1%   87.5%
Expected dividend yield  0%   0%   0%  0%
Weighted average grant-date fair value per
share of warrants granted
  $10.34   $629.64  $0.78  $10.48 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

  

13.

14. OTHER CURRENT LIABILITIES

 

At SeptemberOther current liabilities at June 30, 20192020 and December 31, 2018 other current liabilities2019 consist of:

 

 September 30, December 31,  June 30, December 31, 
 2019  2018  2020  2019 
Accrued payroll and payroll taxes $1,561,671  $1,497,470  $1,818,109  $1,237,054 
Warrant liability  833,982   9,364 
Warranty liability  86,070   80,412 
Other accrued expenses  297,370   370,932   280,183   218,380 
 $1,859,041  $1,868,402  $3,018,344  $1,545,210 

 

14.15. LEASES

 

We have operating leases for office space and restaurant locations. Our leases have remaining lease terms of 7 months1 month to 811 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 locationcategory as of SeptemberJune 30, 2019:2020:

 

 September 30, 2019  June 30, 2020 
Operating right-of-use assets $3,433,794  $3,930,609 
Operating lease liability - current $741,433   471,651 
Operating lease liability - non-current $2,781,345   3,505,559 

 

The components of lease expenses for the ninesix months ended SeptemberJune 30, 2019,2020, were as follows:

 

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

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

  Six Months Ended 
  June 30, 2020 
Operating lease cost $452,725 
Short-term lease cost  —  
Variable lease cost  106,927 

 

The following tables provides a summary of other information related to leases for the ninesix months ended SeptemberJune 30, 2019:2020:

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

  June 30, 2020 
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows from operating leases $540,561 
Right-of-use assets obtained in exchange for new operating lease liabilities $ 
Weighted-average remaining lease term - operating leases   7.8 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 SeptemberJune 30, 2019,2020, are as follows:

 

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

15. ADVANCES ON FUTURE RECEIPTS

Payments due by period    
 2020 (remainder)  $444,385 
 2021   787,506 
 2022   776,229 
 2023   786,645 
 2024   755,298 
 Thereafter   2,233,700 
 Total lease payments   5,783,763 
 Less interest   (1,806,553)
 Present value of lease liabilities  $3,977,210 

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

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

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 six months ended June 30, 2020, the Company made payments of $20,000 on the outstanding balance. The Company is in default on its payment obligations on these Agreements on Future Receipts.

17. NOTES PAYABLE

 

Notes Payable at SeptemberJune 30, 20192020 and December 31, 2018,2019, are comprised of the following.following:

 

 September 30, December 31,  June 30,  December 31, 
 2019  2018  2020  2019 
June 2019 short-term promissory note $2,510,173  $ 
Esousa Purchased promissory notes $2,828,323  $2,828,323 
June '20 short-term promissory notes  800,000    
12% short-term promissory note     1,000,000   585,919    
15% May short-term promissory note  780,000    
Other short-term notes payable  805,554   1,033,553   1,537,760   1,050,339 
12% September short-term promissory notes     789,473 
8% short-term promissory notes  318,150   1,272,600 
October short-term promissory note     565,000 
12% May '20 promissory note  354,781    
Esousa short-term promissory notes  875,000    
Notes payable to Wells Fargo  289,885   291,988   197,362   290,560 
Note payable to Dept. of Economic and Community Development  237,069   260,169   212,968   229,096 
Microphase short-term promissory note     200,000 
Note payable to Power-Plus Member  13,250   13,250 
Note payable to People's United Bank  18,379   18,589 
Paycheck Protection Program Loans  1,162,302    
SBA Economic Injury Disaster Loan  150,000    
Short term bank credit  1,677,196   1,586,864   1,484,193   1,622,337 
Total notes payable  6,649,656   7,031,486   10,188,608   6,020,655 
Less:                
Unamortized debt discounts  (74,750)  (151,499)  (804,856)  (29,348)
Unamortized financing cost  (32,377)  (7,541)     (3,668)
Total notes payable, net of financing cost $6,542,529  $6,872,446  $9,383,752  $5,987,639 
Less: current portion  (6,077,720)  (6,388,787)  (9,014,567)  (5,505,015)
Notes payable – long-term portion $464,809  $483,659  $369,185  $482,624 

 

January 2019Master Exchange Agreement

 

On August 16, 2018, as amended on November 29, 2018,February 10, 2020, the Company entered into a securities purchasemaster exchange agreement (the “Master Exchange Agreement”) with four institutional investors providing forEsousa Holdings, LLC (“Esousa” or the issuance“Creditor”) which acquired $4,163,481 in principal amount, plus accrued but unpaid interest, of 8%certain promissory notes each inthat had been previously issued by us to Dominion (the “Dominion Short-Term Promissory Note”) and the principal amount of $318,150, for an aggregate principal face amount of $1,272,600, due February 15, 2019 (individually the “8%Canadian Special Opportunity Fund, LP (the “CSOF Short-Term Promissory Note” and collectivelywith the “8%Dominion Short-Term Promissory Note, the “Esousa Purchased Notes”).

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

$3.5 million (the “Additional Notes” and collectively, with the Esousa Purchased Notes, the “Notes”). Pursuant to the JanuaryMaster Exchange Agreement, the investor received 10,918 shares of common stock ofCreditor has the Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Notes. Further, since the investor’s proceeds from the sale of all 10,918 shares of common stock received were not equalunilateral right to the outstanding principal balance of the New Notes, the Company was required to pay to the investor the difference, which amounted to $244,898, in cash or through the delivery of free trading shares of common stock. The Company recognized additional interest expense for the difference of $244,898. On March 19, 2019, the Company issued to the investor an additional 2,551acquire shares of the Company’s common stock with a value of $73,016,(the “Exchange Shares”) in partial satisfactionexchange for the Notes.

The first exchange occurred on the date of the liability, resultingMaster Exchange Agreement upon which the Creditor may exchange, in whole or in part, 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”) shall occur if the Company receives stockholder approval at a remaining balance duespecial meeting thereof for the Exchange of $171,882 which was paid during June 2019.the Additional Notes for the Company’s common stock, and subsequently, authorization from the NYSE American (together, the “Required Approvals”).

 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

  

February 2019

The Exchange Agreement provides for two pricing periods, the first of which shall commence after the date on which the Creditor receives the Exchange Shares pursuant to the Initial Exchange and ending on the date that is 90 days after receipt thereof, subject to extension as provided for in the Exchange Agreement, 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.

 

On February 20, 2019,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 entered into anshall 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 “February Exchange Agreement”) with another onethe 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 shall be exercisable commencing on the date upon which the Company receives the Required Approvals therefor. In connection therewith, the Company has agreed to file a registration statement to register the sale of the institutional investorsshares of common stock underlying the exercise of the warrants by the Creditor pursuant to whichthe Master Exchange Agreement. In the event that the Creditor does not purchase all of the Additional Notes, the Company shall have the option to acquire a portion of the warrants from the Creditor for an aggregate price of $1.00. Consequently, at June 30, 2020, since the Creditor had not purchased all of the Additional Notes, the option represented the right to acquire 1,562,399 of the warrants from the Creditor. Therefore, only 270,198 options are deemed outstanding at June 30, 2020.

The Company computed the fair value of the 270,198 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded a loss on extinguishment in the amount of $232,177 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 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% was determined based on historical stock prices of similar technology companies. The Company, however, is prohibited from issuing the shares of common stock issuable upon exercise of the warrants unless stockholder approval of such issuance of securities is obtained as required by applicable NYSE American listing rules. On July 8, 2020, the Company received stockholder approval of such share issuances.

During the six months ended June 30, 2020, the Company issued to the investor an aggregate of 861,580 shares of the Company’s common stock upon the exchange of interest in the amount of $836,845. A loss on extinguishment of $222,232 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.

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 new 8%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, shall be 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

12% short-term promissory note

On February 5, 2020, the Company issued a 12% promissory note in the principal face amount of $585,919. The 12% short-term promissory note was issued pursuant to the February 2020 Exchange Agreement (see Note 19) and was due upon issuance.

12% January '20 short-term promissory note

On January 29, 2020, the Company issued a 12% promissory note in the principal amount of $433,884 (the “New Note”$235,796 to an accredited investor. The maturity date of the promissory note was February 28, 2020 and included an OID of $28,296 and debt issuance costs of $7,500, resulting in net proceeds of $200,000. The Company received cash of $150,000 and cancelled $50,000 of accrued liabilities due the investor. In addition, Mr. Ault and MCKEA Holdings, LLC (“MCKEA”) in exchange for principal and accrued interest onguaranteed the 8% Short-Term Promissory Note (the “Old Note”).Company’s obligation to repay this note pursuant to a Guaranty.

  

PursuantEsousa short-term promissory notes

During the six months ended June 30, 2020, the Company issued to Esousa 12% short-term promissory notes in the February Exchange Agreement, the investor received 4,520aggregate principal amount of $875,000 and five-year warrants to purchase an aggregate of 890,103 shares of common stock of the Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Note. Further, since the investor’s proceeds from the sale of all 4,520 shares of common stock received were notat an average exercise price equal to the outstanding principal balance of the New Note, the Company is required to pay the difference, which amounted to $289,954, to the investor in cash or through the delivery of free trading shares$1.08 per share of common stock. The Esousa 12% short-term promissory notes have a term of three months.

The Company recognized additional interest expense forcomputed the difference of $289,954. On April 4, 2019, the Company issued to the investor an additional 9,375 sharesfair value of the Company’s common stock, withwarrants using the Black-Scholes option pricing model and, as a valueresult of $108,523, in partial satisfaction of the liability, resulting in a remaining balance due of $183,822 which was paid during June 2019.

Enertec Short-Term Promissory Note

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

Dominion June 2019 Short-Term Promissory Note

On June 18, 2019, the Company entered into a securities purchase agreement with the Investor to sell a 10% senior secured promissory note with a principal face amount of $2,800,000, plus an original issuethis calculation, recorded debt discount in the amount of $100,000$354,426 based on the estimated fair value of the warrants. During the six months ended June 30, 2020, non-cash interest expense of $310,957 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 rates ranged from 0.34% and issue 12,5001.11% 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 the Company’s common stock subject 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.

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 approval thereofimpact of an economic downturn set in motion by the NYSE American. In addition, Ault & Company has guaranteedglobal 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 the Investor the promptcover payroll, benefits, and complete paymentsalaries, as well as interest payments, rent, and performance whenutilities. Fees are waived, and collateral and personal guarantees are not required. Payments are deferred for a minimum of the obligations of the Company pursuantsix months, up to this.one year, and there are no prepayment penalties.

 

The June 2019 short-term promissory note has aDuring April 2020, the Company received loans under the PPP in the principal face amount of $2,900,000 with a purchase price$715,101 and the Company’s majority owned subsidiary, Microphase, received loans in the principal amount of $2,800,000, and bears interest at 10% per annum. Pursuant$467,333. The principal of the loan may be forgiven up to the termstotal cost of payroll, mortgage interest payments, rent and utility payments made during the note,eight-week period after origination. In addition to meeting the size requirement (500 or fewer employees for most companies), the Company was required to make six monthly amortizationdemonstrate 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 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 July 18, 2019. The Company has not made these paymentsMay 27, 2021. All remaining principal and this noteinterest is currently in default. We are in negotiations withdue and payable thirty years from the investors to amenddate of the payment terms on this Note.

note.

 

17.18. NOTES PAYABLE – RELATED PARTIES

 

Notes Payable – Related parties at SeptemberJune 30, 20192020 and December 31, 2018,2019, are comprised of the following.following:

 

  September 30,  December 31, 
  2019  2018 
Notes payable to Microphase former officers and employees $284,317  $308,984 
Total notes payable  284,317   308,984 
Less: current portion  (168,589)  (166,925)
Notes payable – long-term portion $115,728  $142,059 
 June 30,  December 31, 
  2020  2019 
Notes payable, related parties $283,507  $284,317 
Less: current portion  (193,222)  (169,153)
Notes payable, related parties – long-term portion $90,285  $115,164 

 

Microphase is a party to several notes payable agreements with seven of its past officers, employees and their family members. As of June 30, 2020, the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $39,982 of accrued interest, was $323,489, with annual interest rates ranging between 3.00% and 6.00%.

19. CONVERTIBLE NOTES

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

 June 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% July 2019 convertible promissory note  632,000   632,000 
12% November 2019 convertible promissory note     350,000 
May 2020 convertible promissory note  200,000    
April 2020 convertible promissory note  100,000    
Total convertible notes payable  1,592,000   3,392,990 
Less:        
Unamortized debt discounts  (505,145)  (355,227)
Total convertible notes payable, net of financing cost $1,086,855  $3,037,763 
Less: current portion  (741,550)  (2,732,990)
Convertible notes payable, net of financing cost – long-term portion $345,305  $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 six months ended June 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.

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

18. CONVERTIBLE NOTES

12% Convertible Promissory Note

 

Convertible Notes Payable at September 30, 2019On 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 December 31, 2018 are compriseda 12% promissory note in the principal amount of $585,919 (see Note 17). These two notes were issued upon the exchange of the following.12% Convertible 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.

 

April 2020 Convertible Promissory Note

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

On 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 15, 2018,28, 2020, the Company entered into a securities purchase and exchange agreement with an institutional investor. Pursuant to sell a 10% convertiblethe agreement, the Company exchanged the 12% January ’20 short-term promissory note (the “10% Convertible Note”) in the principal amount of $6,000,000. On July 2, 2018$235,796 for a new note due and August 31, 2018,payable on June 30, 2020 (the “Exchanged Note”) that would become convertible into common stock of the Company entered into securities purchase agreements withshould the institutional investor providing forCompany be in default under the issuance of a second 10% convertible note with a principal face amount of $1,000,000 (the “Second 10% Convertible Note”) and a third 10% convertible note with a principal face amount of $2,000,000 (the “Third 10% Convertible Note” and with the Second 10% Convertible Note, the “Additional 10% Convertible Notes”), respectively.

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

Between January 4, 2019 and February 21, 2019,agreement, the Company issued to the investor 8,412a note due and payable on November 28, 2020 in the principal amount of $200,000 that becomes convertible into the Company’s common stock commencing June 30, 2020 (the “Convertible Note” and with the Exchanged Note, the “Notes”) 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 itsCommon Stock at an exercise price of $1.07. The conversion of the Notes and the exercise of the warrant is subject to approval of the NYSE American.

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 uponat a conversion price of $1.45 per share, subject to the conversionapproval of $1,053,351 in principalthe Company’s stockholders at a special meeting thereof, and accrued interest. The investor received $660,337subsequently, authorization from the sale of these shares of common stock. In accordance with the January 9, 2019 amendment, the Company is required to pay the difference between the conversion amount and the proceeds received from the subsequent sale of the shares by the investor, which amounted to $393,014. The Company recognized additional interest expense in the amount of $393,014.

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

NYSE American.

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

Exchange Agreements

On July 2, 2019, we entered into an exchange agreement with an institutional investor pursuant to which,At the time of issuance of the Ault & Company Convertible Note, the closing price of the Company’s common stock was in exchange forexcess of the conversion price, resulting in a term promissory note issued by us to the investor on September 21, 2018,beneficial conversion feature (“BCF”). The BCF embedded in the principal face amountAult & Company Convertible Note is accounted for under ASC No. 470, Debt (“ASC 470”). At issuance, the intrinsic value of $526,316, we sold to the investor a new convertible promissory note inBCF totaled $68,966, based on the principal amountdifference between the effective conversion price and the fair value of $783,031 with an interest rate of 12% per annum and a maturitythe Company’s common stock at the commitment date of December 31, 2019. Subject to the approval bytransaction. The Company was prohibited from issuing the NYSE American, this note shall be convertible into shares of common stock commencing on July 15, 2019, at conversion price equalissuable pursuant to the greaterAult & Company Convertible Note unless stockholder approval of (A) $8.80 or (B) 80%such issuance of securities was obtained as required by applicable NYSE American listing rules. The Company received stockholder approval subsequent to June 30, 2020. This provision resulted in a contingent BCF that shall be recognized during the lowest daily VWAP in the three trading days prior to the date of conversion.quarter ended September 30, 2020.

 

On July 2, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for (i) a term promissory note issued by DP Lending to the investor on August 10, 2018 in the principal face amount of $550,000 and (ii) a term promissory note issued by us on August 16, 2018, as amended on November 29, 2018, in the principal face amount of $318,150, we sold to the investor a new convertible promissory note in the principal amount of $1,250,000 (subject to adjustments) with an interest rate of 8% per annum and a maturity date of December 31, 2019. Subject to the approval by the NYSE American, this note shall be convertible into shares of our common stock at conversion price of $8.80.21. COMMITMENTS AND CONTINGENCIES

 

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

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

19. COMMITMENTS AND CONTINGENCIESDerivative Action

 

On July 31, 2018, Ethan Young and Greg Young (collectively, “Plaintiffs”) filed a stockholder derivative complaint was filed(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, styledin 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, (Case(collectively, “Defendants”) Case No. 18-cv-6587)18-cv-6587 (the “Complaint”“Derivative Action”).

 

The Complaint allegesalleged violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants, as, in the view of the plaintiffs, the Company hasconnection with various transactions entered into poorly advised loan transactions and related party transactions. by the Company.

The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves. The Company and the individual defendantsDefendants moved to dismiss the Complaint, and on February 25, 2019, the Court granted theDefendants motion to dismiss, butin its entirety, without prejudice, and also granted plaintiffsPlaintiffs leave to amend their Complaint. 

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

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

On April 15, 2020, the May 21, 2019Court issued an Order granted so much(the “Order”) approving a Motion for Preliminary Approval of Defendants’Settlement in the Derivative Action. On July 16, 2020, the Court issued an Order (the “Final Order”) approving a Motion to Dismissfor Final Approval of Settlement in the Amended Complaint that sought to dismiss Directors Robert O. Smith, Jeff Bentz,Derivative Action filed against DPW as a Nominal Defendant and Mordechai Rosenbergits directors who served on its board of directors on July 31, 2018 who were not dismissed from the action as parties. Plaintiffs did not further amenda result of the complaint and proceeded withCourt’s partial grant of the operative complaint and forewent any claims against Messrs. Smith, Bentz, and Rosenberg.Motion.

 

On July 8, 2019,16, 2020, the Court heldentered a scheduling conference whereinJudgment based upon the Court setFinal 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 trial dateperiod of August 25, 2020.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.

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

  

On October 21, 2019, the parties mediated the matter before JAMS

We have always maintained and continue to believe that neither we nor our current or former directors engaged in Manhattan, New York. At that mediation, the matter was tentatively settled with respect to all claim against the Companyany wrongdoing or otherwise committed any violation of federal or state securities laws or any other laws or regulations.

Blockchain Mining Supply and the remaining defendants, Milton C. Ault III, Amos Kohn, and William Horne. The tentative settlement included certain changes to the policies of the Company. The tentative settlement agreement did not have a monetary component. Furthermore, the parties settled any dispute over the attorneys’ fees, which will be paid by AIG, the Company’s insurance carrier. The parties are currently working on finalizing the settlement agreement, and expect to have a finalized settlement agreement prior to end of the calendar year. Upon execution of the finalized settlement agreement, Plaintiff will file a notice of dismissal with prejudice with the Court.Services, Ltd.

 

On November 28, 2018,Blockchain Mining Supply and Services, Ltd,Ltd. (“Blockchain Mining”) a vendor who sold computers to the Company’sour 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 the Company (CaseDPW Holdings, Inc., Case No. 18-cv-11099). 18-cv-11099.

The Complaint assertedasserts claims for breach of contract and promissory estoppel against the Companyus and itsour subsidiary arising from the subsidiary’s alleged failure to satisfy ahonor its obligations under the purchase agreement. The Complaint seeks monetary damages in the amountexcess of $1,388,495, which approximates the amount of the reserve established.plus attorneys’ fees and costs.

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

 

On February 4, 2019, pursuantApril 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 Court’s Rules, the Company requested a pre-motion Conference with the Court.  On April 16, 2019, the Court held a pre-motion ConferenceComplaint in connection with the Company’s anticipatedbreach 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.  To date, however,dismiss the Court has not setAmended 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 briefing schedulepartial Answer to the Amended Complaint in connection with the Company’s anticipated motion to dismiss.breach of contract claim.

 

Based on the Company’sour assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Companywe cannot reasonably estimate the reasonably possiblepotential loss or range of loss that may result from this action. However, the Company hasNotwithstanding, 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 the Company’sour 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.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

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

The return date for the motion to dismiss is presently set for August 25, 2020.

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 CommissionSEC 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 ourits business in compliance with all applicable laws. The subpoena expressly provides that the inquiry is not to be construed as an indication by the Commission or its staff that any violations of the federal securities laws have occurred, nor should it be considered a reflection upon any person, entity or security. However, there can be no assurance as to the outcome of this matter.

20. STOCKHOLDERS’ EQUITY

Amendments to Certificate of IncorporationOther Litigation Matters

On January 3, 2019, the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation, with the Secretary of State of the State of Delaware, to effectuate an increase to the number of authorized shares of common stock of the Company. Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its Class A common stock to 500,000,000 from 200,000,000 (the “Authorized Increase”). The number of authorized shares of the Company’s Class B common stock remains at 25,000,000 and the number of authorized shares of the Company’s preferred stock remains at 25,000,000. As a result of the increase of authorized shares of the Company’s Class A common stock, the aggregate number of the Company’s authorized shares is 550,000,000. The Authorized Increase was approved by the Company’s Board of Directors (the “Board”) as of December 28, 2018, and approved by a vote of the stockholdersSeveral 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 $3.6 million of such debt obligations and entered into settlement agreements for the remaining amount of approximately $600,000 which are included within future receipts obligations in the accompanying consolidated balance sheet at June 30, 2020. The Company also recorded approximately $400,000 of trade liabilities for a judgment settled in favor of a trade creditor as of June 30, 2020 and is currently a defendant in several other claims made by trade creditors in which the December 28, 2018 Annual Meetingmaximum loss exposure is currently estimated to be approximately $800,000.  The outcome of Stockholders. The Certificate of Amendment became effective upon filing with the State of Delaware on January 3, 2019.any matters relating to unresolved trade credit obligations cannot be predicted at this time.

 

On March 14, 2019, pursuantThe 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 authorization provided byamount can be reasonably estimated. If we determine that a loss is reasonably possible and the Company’s stockholdersatloss 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 Special Meetingloss related to such matters.

With respect to our other outstanding matters, based on our current knowledge, we believe that the amount or range of Stockholders,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 Company’s Board approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split of the common stock of the Company’s issued and outstanding numberoutcome of such shares by a ratio of one-for-twenty (the “Reverse Stock Split”). The Company filed the COI Amendmentmatters is inherently unpredictable and subject to its Certificate of Incorporation with the State of Delaware effectuating the Reverse Stock Split on March 14, 2019. As a result of the Reverse Stock Split, each twenty (20) shares of common stock issued and outstanding prior to the Reverse Stock Split were converted into one (1) share of common stock, with no change in authorized shares or par value per share.significant uncertainties. 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

  

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

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 SeptemberJune 30, 2019,2020, 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.

 

20192020 Issuances

Issuances of Common Stock for Services

During March 2020, the Company issued 65,000 shares of its common stock as payment for services to its consultants. The shares were valued at $73,450, an average of $1.13 per share.

 

Issuance of Common Stock pursuant to the At the Market Offeringcommon stock in payment of short term advances, related party

 

On October 10, 2018,December 23, 2019, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”)a securities purchase agreement with Wilson-DavisAult & Co., Inc., as sales agent (the “Agent”)Company. Pursuant to sell sharesthe terms of its common stock, havingthis agreement, Ault & Company agreed to purchase an aggregate offering price of up to $25,000,000 (the “Shares”) from time to time, through an “at the market offering” program (the “WDCO ATM Offering”). During the nine months ended September 30, 2019, the Company had received gross proceeds of $4,656,051 through the sale of 119,791660,667 shares of the Company’s common stock through the WDCO ATM Offering. The offer and sale of the shares through the WDCO ATM Offering were made pursuant to our then effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, andfor a prospectus supplement related to the WDCO ATM Offering, dated October 15, 2018.

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

Public Offering

On March 29, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global Partners (the “Underwriter”), pursuant to which the Company agreed to issue and sell an aggregate of (a) 71,388 shares of its common stock (the “Shares”) together with warrants to purchase 71,388 shares of common stock (the “Common Warrants”) and (b)  pre-funded warrants to purchase up to 317,500 shares of its common stock (the “Pre-Funded Warrants”) together with a number of Common Warrants to purchase 317,500 shares of common stock (the “Offering”). The Shares were sold to the purchasers at the public offering price of $17.60 per share (the “Offering Price”). The Common Warrants were sold at a public offering price of $0.40 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser whose purchase of the Shares and the Common Warrant in the Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of the Company’s outstanding common stock immediately following the consummation of the Offering. Thetotal purchase price of each Pre-Funded Warrant equaled the Offering Price$739,948 at which the Shares were solda purchase price per share of $1.12, subject to the public inapproval of the Offering, minus $0.40, andNYSE American. The sale was authorized by the exercise priceNYSE American on January 15, 2020. As a result, at the closing on January 15, 2020, Ault & Company became the beneficial owner of each Pre-Funded Warrant equaled $0.40 per share.In addition, the Company has also issued the Underwriter a warrant to purchase a maximum of 15,550 additional666,945 shares of common stock at an initial exercise price of $19.80 per share, with a term of five years (the “Underwriter Warrants”).

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

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

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

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

Ascendiant ATM Offering

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

 

Issuance of Common Stockcommon stock in payment of accrued liability

On March 4, 2020, pursuant to the terms of the securities purchase agreement for Services

During the nine months ended September 30, 2019,sale of the Dominion short-term promissory note, the Company issued to its consultants a total 29,375Dominion 12,500 shares of its common stock with an aggregate value of $305,019, an average of $10.38 per share for services rendered.(see Note 17).

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERDuring the quarter ended June 30, 20192020, 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 ninesix months ended SeptemberJune 30, 2019,2020, principal and accrued interest of $4,238,878$1,580,772 and $497,417,$885,622, respectively, on the Company’s debt securities was satisfied through the issuance of 370,4731,914,936 shares of the Company’s common stock. The Company recognized a loss on extinguishment of $222,232 as a result of these issuances.

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

Issuance of common stock in payment of accrued liability

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

21.23. 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, 2019,2021, subject to the terms and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit. At SeptemberJune 30, 2019,2020, the Company has provided loans to AVLP in the principal amount $9,476,979$9,802,686 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 18,953,95819,605,372 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 SeptemberJune 30, 2019,2020, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $1,736,859.$2,025,475 and a provision for loan losses of $5,088,927.

 

During the ninesix months ended SeptemberJune 30, 20192020 and the year ended December 31, 2018,2019, 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, and 430,942 shares of AVLP common stock for $417,169, respectively. At SeptemberJune 30, 2019,2020, the Company’s investment in AVLP common stock had an unrealized loss of $348,891.$577,975.

 

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 June 30, 2019,2020, the Company had recorded a receivable from MTIX of $1,238,856 and during the six months ended June 30, 2019, the Company had received payments from MTIX of $2,676,219. The receivable was primarily the result of revenues recognized during the year ended December 31, 2018, and reflected on the financial statements as accounts receivable, related party.$1,238,856.

 

b.During the ninesix months ended SeptemberJune 30, 2019,2020, the Company acquired 137,500 sharesrecognized an unrealized gain of $5,377 resulting from its investment in Alzamend common stock of Alzamend from a third party for $110,000 consisting of the cancellation of principal and interest due the Company of $91,483 and cash of $18,517. AVLP provides management, consulting and financial services to Alzamend.stock.

 

c.During the ninesix months ended SeptemberJune 30, 2019,2020, Ault & Company, Inc. (“Ault & Company”) has provided $625,500$505,829 in short-term advances.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.

d.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).

f.Ault & Company guaranteed the prompt and complete payment and performance of the June 2019 short-term promissory noteDominion 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 the 12% January ’20 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.

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

 

22.

24. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

 

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

 

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

 

 Three Months ended September 30, 2019 Three Months ended June 30, 2020 
 DPC DPL Enertec SC Mining I.AM Total GWW Coolisys DP Lending Total 
Revenue $2,773,707  $341,529  $1,853,204  $  $  $4,968,440  $4,189,135  $1,245,601  $  $5,434,736 
Revenue, cryptocurrency                        
mining           307,172      307,172 
Revenue, restaurant
operations
              1,036,834   1,036,834 
Revenue, lending activities  69,217               69,217        ($33,756)  (33,756)
Total revenues $2,842,924  $341,529  $1,853,204  $307,172  $1,036,834  $6,381,663  $4,189,135  $1,245,601  $(33,756) $5,400,980 
Depreciation and                                        
amortization expense $140,278  $36,403  $222,337  $1,433,145  $280,412  $2,112,575  $157,742  $10,629  $  $168,371 
Loss from operations $(206,509) $(84,780) $(212,585) $(5,049,622) $(284,167) $(5,837,663) $88,255  $64,491  $(45,703) $108,994 
Capital expenditures for                                        
segment assets, as of                                        
September 30, 2019 $26,081  $12,252  $12,883  $  $4,501  $55,717 
June 30, 2020 $25,611  $887  $7 638  $34,136 
Identifiable assets as of                                        
September 30, 2019 $32,186,830  $1,301,273  $11,184,088  $850,984  $1,902,803  $47,425,978 
June 30, 2020 $21,386,419  $17,543,671  $1,564,065  $40,494,155 

  

  Three Months ended June 30, 2019 
  GWW  Coolisys  DP Lending  Total 
Revenue $3,256,394  $1,284,804  $  $4,541,198 
Revenue, cryptocurrency                
mining     256,116      256,116 
Revenue, lending activities        189,621   189,621 
Total revenues $3,256,394  $1,540,920  $189,621  $4,986,935 
Depreciation and                
amortization expense $187,604  $746,267  $  $933,871 
Loss from operations $(235,178) $(1,035,212) $(34,005) $(1,304,395)
Capital expenditures for                
segment assets, as of                
June 30, 2019 $77,229  $6,771  $  $84,000 
Identifiable assets as of                
June 30, 2019 $19,440,320  $28,079,982  $2,983,046  $50,503,348 

  

 Three Months ended September 30, 2018 Six Months ended June 30, 2020 
 DPC DPL Enertec SC Mining I.AM Eliminations Total GWW  Coolisys  DP Lending  Total 
Revenue $2,974,216  $601,679  $2,156,107  $  $  $  $5,732,002  $8,576,582  $2,427,436  $  $11,004,018 
Revenue, cryptocurrency                            
mining           590,165         590,165 
Revenue, related party  352,496                  352,496 
Revenue, restaurant
operations
              1,584,891      1,584,891 
Revenue, lending activities  85,368                  85,368        $2,396   2,396 
Inter-segment revenues  25,168               (25,168)  - 
Total revenues $3,437,248  $601,679  $2,156,107  $590,165  $1,584,891  $(25,168) $8,344,922  $8,576,582  $2,427,436  $2,396  $11,006,414 
Depreciation and                                            
amortization expense $74,018  $12,643  $27,538  $802,952  $  $  $917,151  $307,756  $118,847  $  $426,603 
Loss from operations $(792,092) $(47,128) $(99,201) $(1,169,739) $(3,829) $  $(2,111,989) $184,011  $(154,053) $(81,416) $(51,458)
Capital expenditures for                                            
segment assets, as of                                            
September 30, 2018 $5,838  $  $6,791  $241,725  $106,074  $  $360,428 
June 30, 2020 $164,283  $1,556  $24,278  $190,117 
Identifiable assets as of                                            
September 30, 2018 $30,113,607  $1,516,710  $11,024,505  $8,245,136  $2,204,303  $  $53,104,261 
June 30, 2020 $21,386,419  $17,543,671  $1,564,065  $40,494,155 

DPW HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBERJUNE 30, 20192020

 

 

  

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

 Nine Months ended September 30, 2018  Six Months ended June 30, 2019 
 DPC  DPL  Enertec  SC Mining  I.AM  Eliminations  Total  GWW Coolisys DP Lending Total 
Revenue $8,532,029  $1,339,413  $3,373,977  $  $  $  $13,245,419  $7,399,052  $2,693,797  $  $10,092,849 
Revenue, cryptocurrency                                            
mining           1,546,418         1,546,418      284,920      284,920 
Revenue, related party  3,911,263                  3,911,263 
Revenue, restaurant
operations
              2,087,383      2,087,383 
Revenue, lending activities  194,120                  194,120         374,710   374,710 
Inter-segment revenues  29,681               (29,681)   
Total revenues $12,667,093  $1,339,413  $3,373,977  $1,546,418  $2,087,383  $(29,681) $20,984,603  $7,399,052  $2,978,717  $374,710  $10,752,479 
Depreciation and                                            
amortization expense $226,639  $43,667  $37,257  $1,434,932  $  $  $1,742,495  $402,385  $1,492,924  $  $1,895,309 
Loss from operations $(1,861,923) $(498,536) $46,961  $(3,019,856) $(4,838) $  $(5,338,192) $(518,084) $(2,138,213) $41,290  $(2,615,007)
Capital expenditures for                                            
segment assets, as of                                            
September 30, 2018 $349,190  $1,301  $38,460  $9,048,503  $128,732  $  $9,566,186 
June 30, 2019 $77,229  $16,377  $  $93,606 
Identifiable assets as of                                            
September 30, 2018 $30,113,607  $1,516,710  $11,024,505  $8,245,136  $2,204,303  $  $53,104,261 
June 30, 2019 $19,440,320  $28,079,982  $2,983,046  $50,503,348 

 

Concentration Risk:

 

The following tables provide the percentage of total revenues for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 attributable to a single customer from which 10% or more of total revenues are derived.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

 For the Three Months Ended For the Six Months Ended 
 June 30, 2020 June 30, 2020 
       
 Total Revenues Percentage of Total Revenues Percentage of 
 by Major Total Company by Major Total Company 
 Customers Revenues Customers Revenues 
Customer A $1,427,134  26% $3,281,429  30% 

 

  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 $1,424,982   22% $4,270,523   22%

 

 

  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2018  September 30, 2018 
  Total Revenues  Percentage of  Total Revenues  Percentage of 
  by Major  Total Company  by Major  Total Company 
  Customers  Revenues  Customers  Revenues 
Customer B       $3,911,263   19%
 For the Three Months Ended For the Six Months Ended 
 June 30, 2019 June 30, 2019 
       
 Total Revenues Percentage of Total Revenues Percentage of 
 by Major Total Company by Major Total Company 
 Customers Revenues Customers Revenues 
Customer A $1,429,455  29% $2,845,541  26% 

 

Revenue from Customer A is attributable to Enertec. Revenue from Customer B relates to MTIX, a related party, and is attributable to Coolisys. Further, at SeptemberJune 30, 2019,2020, MTIX represented all the Company’s accounts and other receivable, related party.

 

For the three and nine months ended September 30, 2019 and 2018, total revenues from external customers divided on the basis of the Company’s product lines are as follows:

  For the Three Months Ended For the Nine Months Ended
  September 30, September 30,
  2019 2018 2019 2018
Revenues:        
Commercial products $3,326,936  $5,073,698  $10,221,209  $13,874,921 
Defense products  3,054,727   3,271,224   9,247,564   7,109,682 
Total revenues $6,381,663  $8,344,922  $19,468,773  $20,984,603 

Financial data relating to geographic areas:

The Company’s total revenues are attributed to geographic areas based on the location. The following table presents total revenues for the three and nine months ended September 30, 2019 and 2018. Other than as shown, no foreign country or region contributed materially to revenues or long-lived assets for these periods:

  For the Three Months Ended For the Nine Months Ended
  September 30, September 30,
  2019 2018 2019 2018
Revenues:        
North America $4,040,664  $5,166,899  $11,110,035  $15,599,219 
Middle East  1,869,647   2,156,106   6,358,200   3,373,976 
Europe  253,747   693,725   1,283,312   1,338,313 
Other  217,605   328,192   717,226   673,095 
Total revenues $6,381,663  $8,344,922  $19,468,773  $20,984,603 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

SEPTEMBER 30, 2019

23.25. SUBSEQUENT EVENTS

 

In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to SeptemberJune 30, 2019,2020, 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.

 

Ascendiant ATM OfferingEsousa short-term promissory notes

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2020

 

During October 2019 the Company received gross proceeds of $1,083,234 through the sale of 679,496 shares of the Company’s common stock through the ATM Offering.

Issuance of common stock in payment of accrued liability

On November 1, 2019,July 24, 2020, the Company issued 25,602 shares of its common stock in satisfaction of an accrued liability of $30,722.

Exchange Agreements

On November 4, 2019, the Company entered into an exchange agreement withto Esousa a certain investor (the “Investor”) pursuant to which, in exchange for an original issue discount promissory note issued by the Company for the benefit of the Investor on July 25, 2019, as amended, the Company sold to the Investor a new convertible12% short-term promissory note in the aggregate principal amount of $350,000 with$1,125,000. The note has a term of two weeks.

August '20 short-term promissory notes

On August 5, 2020, the Company issued to Esousa a secured 13% short-term promissory note in the aggregate principal amount of $2,000,000 and eighteen month warrants to purchase an interest rateaggregate of 12% per annum. Subject to the approval by the NYSE American, this note shall be convertible into729,927 shares of the Company’s common stock at conversionan exercise price of $1.20$3.01 per share subjectof 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 adjustments.purchase common stock do not qualify to be treated as equity, and accordingly, shall be 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.

 

On November 15, 2019, the Company entered into anIssuances of Common Stock for exchange agreement with a lender (the “Lender”) pursuant to whichof Debt

Between July 2020 and August 5, 2020 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, in exchange for those certain promissory notes (i) in the original principal amount of $575,000 issued on May 10, 2019, and (ii) in the original principal amount of $230,000 issued on May 21, 2019 held by the Lender. Subject to the approval by the NYSE American, this note shall be convertible intoEsousa 4,910,000 shares of the Company’s common stock pursuant to the terms of the Master Exchange Agreement.

Issuances of Common Stock for Services

During August 2020, the Company issued 37,500 shares of its common stock as payment for services to its consultants. The shares were valued at conversion price$100,965, an average of $1.80.$2.69 per share.

Failure to Satisfy a Continued Listing Rule

On July 24, 2020, the Company was notified by the NYSE American (the “Exchange”) that the Company has failed to comply with Section 1003(a)(ii) and (iii) of the Exchange’s Company Guide (the “Listing Standards”), which require that the Company maintain stockholders’ equity of no less than $6,000,000 because the Company has reported losses from continuing operations and/or net losses in five of its most recent fiscal years ended December 31, 2019. The Company had disclosed in its Form 10-Q filed for the fiscal period ended March 31, 2020 that its stockholders’ equity was approximately $2.5 million. Under the applicable NYSE American listing rules, the Company must by August 23, 2020 submit a compliance plan that demonstrates how it intends to regain compliance with the Listing Standards within 18 months of the receipt of the notice, or January 24, 2022.

 

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, Inc., Power-Plus Technical Distributors, LLC,Corp, Digital Power Lending, LLC, Digital Farms, Inc., DigitalGresham Power Limited,Electronics, Enertec Systems 2001 Ltd. and our majority owned subsidiaries,subsidiary, Microphase Corporation and I.AM, LLC.Corporation.

 

Recent Developments

 

On May 13,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 dispose of CTI 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, wethe “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 Offering Statementearlier 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 Form 1-A pursuant to Regulation A promulgatedcommercially 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 payable by the Securities and Exchange Commission (the “Commission”), pursuant to which up to $50 millionCompany’s Director & Officer liability insurance. The Settlement Agreement contains no admission of 3-year, non-convertibles promissory notes (“Promissory Notes”) will be offered and sold once the Commission has qualified the Offering Statement. The Promissory Notes will accrue annualized interest of 12% that will be paid rata monthly and will be offered on a continuous basis, in each case as determined by us in our sole discretion.wrongdoing. The Company cannot providehas always maintained and continues to believe that it did not engage in any assurance thatwrongdoing or otherwise commit any Promissory Notes will be sold pursuant this Offering Statement.violation of federal or state securities laws or other laws.

 

At our reconvened 2019 Annual MeetingOther Matters

During the first quarter of Stockholders, our stockholders approved a proposal permitting our Board2020, we made the decision to discontinue the operations of Directors (the “Board”)Digital Farms and I. AM. On March 16, 2020, to effectuate a second reverse stock split (the “Second Reverse Stock Split”)try and mitigate the spread of ourthe novel coronavirus (“COVID-19”), San Diego County health officials issued and outstanding common stock. Thereafter, on July 23, 2019, the Board approved the Second Reverse Stock Split with a ratio of one-for-forty.orders mandating that all restaurants must end dine-in services. As a result of these temporary closures by the Second Reverse Stock Split, each forty (40) sharesSan 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 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. However, management determined that the permanent closing of common stock issuedthe 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 outstanding priorthe World.  The Company is 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 operations, financial position, cash flows, inventory, supply chains, customer purchasing trends, customer payments, and the industry in general, in addition to the Second Reverse Stock Split were converted into one (1) shareimpact on its employees. Due to the rapid development and fluidity of common stock, with no change in authorized shares or par value per share. The Second Reverse Stock Split became effective inthis situation, the Statemagnitude and duration of Delawarethe pandemic and its impact on August 5, 2019.the Company's operations and liquidity is uncertain as of the date of this report. 

 

On August 6, 2019, we entered into an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agentHowever, the Company’s 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 which we sold sharesbusiness sentiment generally or in our sectors in particular.

Our operations are located in Alameda County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom, Israel and members of our common stocksenior management work in Seattle, WA and New York, NY. The Company has been following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary closures of its offices and having an aggregate offering price of $5,500,000 (the “ATM Offering”). The offer and sale of our common stock was made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the Securities and Exchange Commission (the “Commission”) on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement relatedemployees work remotely to the ATM Offering, dated August 6, 2019.extent possible, which has to an extent adversely affected their efficiency.

 

GENERAL

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

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

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

Realizing Value

 

As a holding company, our business strategy 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.

 

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 SEPTEMBERJUNE 30, 20192020 AND 20182019

 

The following table summarizes the results of our operations for the three months ended SeptemberJune 30, 20192020 and 2018.2019.

 

 For the Three Months Ended  For the Three Months Ended 
 September 30,  June 30, 
 2019  2018  2020  2019 
          
Revenue $4,968,440  $5,732,002  $5,434,736  $4,541,198 
Revenue, cryptocurrency mining  307,172   590,165      256,116 
Revenue, related party     352,496 
Revenue, restaurant operations  1,036,834   1,584,891 
Revenue, lending activities  69,217   85,368   (33,756)  189,621 
Total revenue  6,381,663   8,344,922   5,400,980   4,986,935 
Cost of revenue  4,642,526   6,317,754   3,495,574   4,267,194 
Gross profit  1,739,137   2,027,168   1,905,406   719,741 
Operating expenses        
Engineering and product development  481,902   333,555 
Selling and marketing  392,725   790,603 
General and administrative  4,519,641   5,088,312 
Impairment of property and equipment  4,315,856    
(Gain) loss on digital currency  (951)  2,543 
Total operating expenses  9,709,173   6,215,013   2,675,026   4,359,812 
Loss from operations  (7,970,036)  (4,187,845)
Loss from continuing operations  (769,620)  (3,640,071)
Interest income  898,646   712,262   35,936   911,537 
Interest expense  (2,954,843)  (4,072,539)  (962,714)  (532,255)
Change in fair value of marketable equity securities  (330,150)     336,781   272,689 
Loss on extinguishment of convertible debt  (155,448)   
Loss on extinguishment of debt  (11,620)   
Loss on issuance of warrants           (1,763,481)
Change in fair value of warrant liability  165,840      (10,184)  946,825 
Loss before income taxes  (10,345,991)  (7,548,122)
Loss from continuing operations before income taxes  (1,381,421)  (3,804,756)
Income tax benefit  5,140   23,737   5,888   73,976 
Net loss  (10,340,851)  (7,524,385)
Less: Net loss attributable to non-controlling interest     74,414 
Net loss from continuing operations  (1,375,533)  (3,730,780)
Net loss from discontinued operations, net of taxes     (328,117)
Net loss attributable to DPW Holdings $(10,340,851) $(7,449,971)  (1,375,533)  (4,058,897)
Preferred dividends  (5,284)     (2,934)  (5,284)
Net loss available to common stockholders $(10,346,135) $(7,449,971) $(1,378,467) $(4,064,181)
Basic and diluted net loss per common share $(6.47) $(88.23)
Basic and diluted weighted average common shares outstanding  1,599,306   84,441 
Comprehensive Loss        
Comprehensive loss        
Loss available to common stockholders $(10,346,135) $(7,449,971) $(1,378,467) $(4,064,181)
Other comprehensive income (loss)                
Foreign currency translation adjustment  67,166   (77,686)  97,200   

162,648

 
Net unrealized loss on derivative securities of related party  (1,152,480)  (1,341,977)  760,881   375,499 
Other comprehensive income (loss)  (1,085,314)  (1,419,663)
Total Comprehensive loss $(11,431,449) $(8,869,634)
Other comprehensive loss  858,081   

538,147

 
Total comprehensive loss $(520,386) $

(3,526,034

)

Revenues

 

Our revenues decreasedincreased by $1,963,259,$414,045, or 23.5%8.3%, to $6,381,663$5,400,980 for the three months ended SeptemberJune 30, 2019,2020, from $8,344,922$4,986,935 for the three months ended SeptemberJune 30, 2018. As discussed below the decrease2019. The increase from the three months ended SeptemberJune 30, 2018,2019, was due to a decrease in revenue from our restaurant operations, the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system and from our cryptocurrency mining operations and, to a lesser extent, a decreasecaused by an increase in revenue from customized solutions for the military markets causedas 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 temporary shortagesa decrease in components required for the manufacture of these solutions.revenue from our commercial lending segment, attributed to a reduction in our loan portfolio and our decision to cease operations at our cryptocurrency mining operations.

 

Revenues, cryptocurrency mining

 

In January 2018, we formed Digital Farms, Inc. (“Digital Farms”), a wholly-owned subsidiary formerlythen known as Super CryptCrypto Mining, Inc. Digital Farms was established to operate our cryptocurrency business, which iswas pursuing a variety of digital currencies. We areDuring the first quarter of 2020, due to deteriorating business conditions in the cryptocurrency mining the top three cryptocurrencies for our own account, consisting of Bitcoin, Litecoin and Ethereum. Although thesector, we ceased operations at Digital Farms. The market prices of digital currencies were significantly higher duringhave declined since the three months ended September 30, 2019 compared to the prior-year period,formation of Digital Farms which, due to power cost considerations, we reducednegatively affected the number of active miners from 1,512 in the prior year period to 978 during the current quarter.we operated. These factors, coupled with a significant increase in the difficulty factor, which increases when market prices of digital currencies are increasing as more computational power is addedmining blocks of cryptocurrency, led to the network, resulted inour decision to cease cryptocurrency mining operations. As a decrease in revenues of $282,993.

Revenues, related party

During the three months ended September 30, 2018,result, we recognized $352,496 indid not generate any revenues from our purchase order with MTIX Limited, a company formed under the laws of England and Wales (“MTIX”). Due to working capital constraints discussed below, we did not recognize any revenues from MTIXcryptocurrency operations during the three months ended SeptemberJune 30, 2019. MTIX was acquired by AVLP on August 22, 2017, and is therefore a related party. In March 2017, the Company was awarded a purchase order by MTIX to manufacture, install and service MLSE plasma-laser system. Over the next several years, management believes that the MLSE purchase order will be a source of revenue and generate significant cash flows. The lack of revenue during the three months ended September 30, 2019, was due to an emphasis on reducing the debt obligations incurred in May 2018 to acquire Enertec. Payments, and the related manufacturing services, that otherwise would have gone to subcontractors of the MLSE plasma-laser system have been delayed in order to enable us to restructure and reduce our overall debt obligations.

Revenues, restaurant operations

During the three months ended September 30, 2019, we recognized a decrease in revenues from our restaurant operations of $548,057 compared to the prior-year period. The decrease was primarily due to significant construction projects that hampered access to our restaurant locations and, to a lesser extent, competition from restaurants recently opened near two of our locations.2020.

 

Gross Margins

 

Gross margins increased to 27.3%35.3% for the three months ended SeptemberJune 30, 20192020 compared to 24.3%14.4% for the three months ended SeptemberJune 30, 2018.2019. 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 during the three months ended September 30, 2018, of 24.3%, were affected by the negative margins on revenues of $307,172 at Digital Farms. The negative gross margins at Digital Farms resulted from monthly recurring fixed costs at our colocation facilities which temporarily exceed the revenues from our mining operations. Excluding the effects of Digital Farms, then our adjusted gross margins for the three months ended September 30, 2018, would have been 38.9%, slightly higher than our historical range. The increase is mainly attributable to higher gross margins related to our restaurant operations.

Our gross margin of 27.3%14.4% recognized during the three months ended SeptemberJune 30, 2019, was alsowere impacted by the negative margins at Digital Farms. Excluding the effects of Digital Farms, our adjusted gross marginmargins for the three months ended SeptemberJune 30, 2019, would have been 39.7%. which is consistent with28.9%, slightly less than our historical average.average as a result of lower revenues in our defense business to allocate manufacturing overhead during the quarter ended June 30, 2019

 

Engineering and Product Development

 

Engineering and product development expenses increaseddecreased by $148,347$9,109 to $481,902$462,159 for the three months ended SeptemberJune 30, 2019,2020, from $333,555$471,268 for the three months ended SeptemberJune 30, 2018.2019. The increasedecrease in engineering and product development expenses is attributeddue to an increase in spending at Enertec as it pursues additional contracts in the defense industry.various costs, none of which are significant individually.

 

Selling and Marketing

 

Selling and marketing expenses were $392,725$294,974 for the three months ended SeptemberJune 30, 2019,2020, compared to $790,603$382,184 for the three months ended SeptemberJune 30, 2018,2019, a decrease of $397,878.$87,210. This increasedecrease was the result of decreases in personnel costs directly attributed to a reduction in sales and marketing personnel throughout our operations.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 $4,519,641$2,917,999 for the three months ended SeptemberJune 30, 2019,2020, compared to $5,088,312$3,510,839 for the three months ended SeptemberJune 30, 2018,2019, a decrease of $568,671.$592,840. General and administrative expenses decreased from the comparative prior period, mainly due to lower stock compensation expense and legalcost reductions at Coolisys.

Provision for Credit Losses

Loans are generally carried at the amount of unpaid principal, adjusted for unearned loan fees partially offset by an increase in cost attributed to the hiring of a Chief Accounting Officer and Senior Vice President of Finance. The remaining increase in general and administrative expenses is due to various costs, none oforiginal issue discount, which are significant individually.

Asset Impairment Charges

Asset impairment chargesamortized over the term of $4,315,856the loan using the effective interest rate method. Interest on loans is accrued based on the principal amounts outstanding. During the year ended December 31, 2019 we determined that our investment in the convertible promissory notes of AVLP were recognized duringimpaired. During the three months ended SeptemberJune 30, 2019. The impairment charges related to impairments2020, we determined that the fair value of the convertible promissory notes in AVLP was approximately $6,739,234, resulting in a decrease in our cryptocurrency equipment.provision for credit loss of $1,000,000.

 

Operating Loss from Continuing Operations

 

The Company recorded an operatinga loss from continuing operations of $7,970,036$769,620 for the three months ended SeptemberJune 30, 2019,2020, compared to an operating loss of $4,187,845$3,640,071 for the three months ended SeptemberJune 30, 2018.2019. The increasedecrease in operating loss is mostly attributable to the impairment of property and equipment coupled with a higher gross profit and lower selling and marketing expenses, partially offset by an increase in our gross margins and the decrease in general and administrative expenses.

 

Interest Income

 

Interest income was $898,646$35,936 for the three months ended SeptemberJune 30, 20192020 compared to $712,262$911,537 for the three months ended SeptemberJune 30, 2018.2019. The increasedecrease in interest income for the three months ended SeptemberJune 30, 20192020 is related to an increasea 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 June 30, 2020.

 

Interest Expense

 

Interest expense was $2,954,843$962,714 for the three months ended SeptemberJune 30, 20192020 compared to $4,072,539$532,255 for the three months ended SeptemberJune 30, 2018.2019. The decreaseincrease in interest expense for the three months ended SeptemberJune 30, 20192020 is primarily related to a reductionan overall increase in our level of amortizationborrowings.

Loss on issuance of debt discount resulting from original issue discountwarrants

On March 29, 2019, we entered into an underwriting agreement (the “Offering”) pursuant to which on April 2, 2019, we sold 71,388 shares of our common stock, warrants to purchase 388,888 shares of our common stock and pre-funded warrants to purchase 317,500 shares of our common stock. We received net proceeds from the Offering of $6,204,717, after deducting underwriting discounts and commissions and offering expenses. We recognized a loss on issuance of warrants in conjunction with the sale of debt instruments. During$1,763,481 for the three months ended SeptemberJune 30, 2019, and 2018, as a resultbased upon the fair value of these issuances, non-cash interest expensethe warrants issued in our Offering in excess of $1,357,845 and $3,033,864, respectively, was recordedthe proceeds received from the amortization of debt discount and debt financing costs.Offering.

Change in fair value of warrant liability

 

During the three months ended SeptemberJune 30, 2019, the fair value of the warrants that were issued in our Offering decreased by $165,840.$946,825. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

Net Loss from Discontinued Operations

During the first quarter of 2020, 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. As a result of the permanent closing of the restaurants, we did not incur any additional costs during the three months ended June 30, 2020.

Net Loss

 

For the foregoing reasons, our net loss for the three months ended SeptemberJune 30, 2019,2020, was $10,340,851$1,375,533 compared to a net loss of $7,524,385$4,058,897 for the three months ended SeptemberJune 30, 2018.2019. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase during the three months ended September 30, 2019 and 2018, of nil and $74,414, respectively, and preferred dividends of $5,284$2,934 and nil,$5,284, respectively, the net loss available to common shareholders during the three months ended SeptemberJune 30, 2020 and 2019, was $1,378,467 and 2018, was $10,346,135 and $7,449,971,$4,064,181, respectively.

 

During the three months ended SeptemberJune 30, 20192020 and 2018,2019, our reported net loss included non-cash charges of $6,390,242$440,703 and $4,709,663,$1648,435, respectively. A summary of these non-cash charges is as follows:

  For the Three Months Ended 
  September 30, 
  2019  2018 
Interest expense – debt discount $1,357,845  $3,033,864 
Stock-based compensation  361,779   1,352,640 
Depreciation and amortization  947,830   917,152 
Impairment of property and equipment  4,315,856    
Amortization of right-of-use assets  199,260    
Accretion of original issue discount on notes receivable – related party  (607,356)  (593,993)
Accretion of original issue discount on notes receivable  (19,132)   
Change in fair value of warrant liability  (165,840)   
Non-cash items included in net loss $6,390,242  $4,709,663 

  For the Three Months Ended 
  June 30, 
  2020  2019 
Interest expense – debt discount $230,458  $185,544 
Stock-based compensation  20,178   370,995 
Depreciation and amortization  168,371   933,871 
Accretion of original issue discount on notes receivable – related party  7,500   (650,113)
Accretion of original issue discount on notes receivable  (399)  (8,518)
Fair value in excess of proceeds upon issuance of warrants     1,763,481 
Change in fair value of warrant liability  14,595   (946,825)
Non-cash items included in net loss $440,703  $1,648,435 

 

Other comprehensive income (loss)

 

Other comprehensive lossincome was $11,431,449$858,081 and 8,869,634,$538,147, respectively, for the three months ended SeptemberJune 30, 20192020 and 2018.2019. Other comprehensive lossincome for the three months ended SeptemberJune 30, 2019,2020, which decreasedincreased our equity, was primarily due to unrealized lossgains in the warrant derivative securities that we received as a result of our investment in Avalanche International, Corp., or AVLP, a related party.party, and from fluctuations in exchange rates between the U.S. dollar and the Israeli Shekel. During the three months ended SeptemberJune 30, 2018,2019, unrealized losses in the warrant derivative securities of AVLP was the primary component of other comprehensive loss.income.

RESULTS OF OPERATIONS FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20192020 AND 20182019

 

The following table summarizes the results of our operations for the ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.

 

 For the Nine Months Ended  For the Six Months Ended 
 September 30,  June 30, 
 2019  2018  2020  2019 
          
Revenue $15,061,289  $13,245,419  $11,004,018  $10,092,849 
Revenue, cryptocurrency mining  592,092   1,546,418      284,920 
Revenue, related party     3,911,263 
Revenue, restaurant operations  3,371,465   2,087,383 
Revenue, lending activities  443,927   194,120   2,396   374,710 
Total revenue  19,468,773   20,984,603   11,006,414   10,752,479 
Cost of revenue  14,350,041   16,204,388   7,349,009   9,093,024 
Gross profit  5,118,732   4,780,215   3,657,405   1,659,455 
Operating expenses        
Engineering and product development  1,408,848   1,043,993 
Selling and marketing  1,293,181   2,290,934 
General and administrative  14,584,758   12,697,909 
Impairment of property and equipment  4,315,856    
(Gain) loss on digital currency  (6,933)  2,543 
Total operating expenses  21,595,710   16,035,379   7,356,809   9,733,927 
Loss from operations  (16,476,978)  (11,255,164)
Loss from continuing operations  (3,699,404)  (8,074,472)
Interest income  2,647,110   1,955,885   36,256   1,748,464 
Interest expense  (5,586,639)  (11,335,069)  (2,048,877)  (2,631,007)
Change in fair value of marketable equity securities  (173,503)     (28,578)  156,647 
Loss on extinguishment of convertible debt  (963,232)   
Loss on extinguishment of debt  (474,754)  (807,784)
Loss on issuance of warrants  (1,763,481)        (1,763,481)
Change in fair value of warrant liability  1,112,665      (5,773)  946,825 
Loss before income taxes  (21,204,058)  (20,634,348)
Loss from continuing operations before income taxes  (6,221,130)  (10,424,808)
Income tax benefit  93,284   17,480   11,793   88,144 
Net loss from continuing operations  (6,209,337)  (10,336,664)
Net loss from discontinued operations, net of taxes  (1,697,744)  (433,259)
Net loss  (21,110,774)  (20,616,868)  (7,907,081)  (10,769,923)
Less: Net loss attributable to non-controlling interest  32,416   218,494      32,416 
Net loss attributable to DPW Holdings $(21,078,358) $(20,398,374)  (7,907,081)  (10,737,507)
Preferred dividends  (12,437)  (108,049)  (7,394)  (7,153)
Net loss available to common stockholders $(21,090,795) $(20,506,423) $(7,914,475) $(10,744,660)
Basic and diluted net loss per common share $(24.62) $(311.53)
Basic and diluted weighted average common shares outstanding  856,689   65,824 
Comprehensive Loss        
Comprehensive loss        
Loss available to common stockholders $(21,090,795) $(20,506,423) $(7,914,475) $(10,744,660)
Other comprehensive income (loss)                
Foreign currency translation adjustment  259,671   (209,535)  (51,407)  

192,505

 
Net unrealized loss on derivative securities of related party  (1,513,661)  (6,787,902)  (481,213)  (361,181)
Other comprehensive income (loss)  (1,253,990)  (6,997,437)  (532,620)  

(168,676

)
Total Comprehensive loss $(22,344,785) $(27,503,860)
Total comprehensive loss $(8,447,095) $

(10,913,336

)

Revenues

 

Our revenues decreasedincreased by $1,515,830,$253,935, or 7.2%2.4%, to $19,468,773$11,006,414 for the ninesix months ended SeptemberJune 30, 2020, from $10,752,479 for the six months ended June 30, 2019. The increase from the six months ended June 30, 2019, was caused by an increase in revenue from $20,984,603customized solutions for the nine months ended September 30, 2018. Duringmilitary markets as we continue to experience the nine months ended September 30, 2019 and 2018,benefit of capital that was allocated to our acquisitions of Enertec and I.AM represented $9,898,540 and $5,461,360, respectively, of our revenues. Excluding revenues from these acquisitions, we would have recognized revenues of $9,570,233 and $15,523,243, respectively,defense business during the nine months ended September 30, 2019 and 2018, a decreasesecond half of $5,953,010. As discussed below, the decrease of $5,953,0102019. The increase in revenue from the nine months ended September 30, 2018,military markets was primarily due topartially offset by a decrease in revenue from our restaurantcommercial lending segment, attributed to a reduction in our loan portfolio and our decision to cease operations from the manufacture of the MLSE plasma-laser system and fromat our cryptocurrency mining operations. The following table shows revenue for the nine months ended September 30, 2019 and 2018, generated from acquisitions completed during the year ended December 31, 2018.

    For the Nine Months Ended September 30, 
Company acquired Date of Acquisition 2019  2018 
         
 Enertec Systems 2001 Ltd.  May 22, 2018 $6,527,075  $3,373,977 
 I.AM, Inc.  May 23, 2018  3,371,465   2,087,383 
    $9,898,540  $5,461,360 

 

Revenues, cryptocurrency mining

 

In January 2018, we formed Digital Farms, a wholly-owned subsidiary. Digital Farms was established to operate our cryptocurrency business, which is pursuing a variety of digital currencies. We are miningDuring the top three cryptocurrencies for our own account, consisting of Bitcoin, Litecoin and Ethereum. The market prices of digital currencies were slightly lower during the ninesix months ended SeptemberJune 30, 2019 compared to the prior-year period. Further, due to power cost considerations,2020, we reduced the number of active miners from 1,512 in the prior year period to 978 during the current quarter. These factors, coupled withceased operations at Digital Farms. As a significant increase in the difficulty factor during the current quarter resulted in a decrease in revenues $954,326.

Revenues, related party

During the nine months ended September 30, 2018, we recognized $3,911,263 in revenues resulting from our purchase order with MTIX. Conversely,result, we did not recognizegenerate any revenues from MTIXour cryptocurrency operations during the ninesix months ended SeptemberJune 30, 2019. MTIX was acquired by AVLP on August 22, 2017, and is therefore a related party. The lack of revenue during the nine months ended September 30, 2019, was due to an emphasis on reducing the debt obligations incurred in May 2018 to acquire Enertec. Payments, and the related manufacturing services, that otherwise would have gone to subcontractors of the MLSE plasma-laser system have been delayed in order to enable us to restructure and reduce our overall debt obligations.2020.

 

Gross Margins

 

Gross margins increased to 26.3%33.2% for the ninesix months ended SeptemberJune 30, 2019,2020 compared to 22.8%15.4% for the ninesix months ended SeptemberJune 30, 2018.2019. Our gross margins during the ninesix months ended SeptemberJune 30, 2018, of 22.8%,2020 were affected by the lower margin related party revenue of $3,911,263 from MTIX combined with negative margins on no revenues of $1,546,418 at Digital Farms. Excluding the effects of Digital Farms, and our contract with MTIX, then our adjusted gross margins for the ninethree months ended SeptemberJune 30, 2018,2020 would have been 38.6%34.1%, within our historical range of 33% and 37%.

 

Our gross marginmargins of 26.3%15.4% recognized during the ninesix months ended SeptemberJune 30, 2019, was also impacted by the negative margins at Digital Farms. Excluding the effects of Digital Farms, our adjusted gross marginmargins for the ninethree months ended SeptemberJune 30, 2019, would have been 37.9%. which is consist with28.9%, slightly less than our historical average which has typically ranged between 33% and 37%, with slight variations depending onas a result of lower revenues in our defense business to allocate manufacturing overhead during the overall composition of our revenue.six months ended June 30, 2019.

 

Engineering and Product Development

 

Engineering and product development expenses increaseddecreased by $364,855$24,161 to $1,408,848$902,785 for the ninesix months ended SeptemberJune 30, 2019,2020, from $1,043,993$926,649 for the ninesix months ended SeptemberJune 30, 2018.2019. The increasedecrease in engineering and product development expenses is attributed to our acquisition of Enertec, which due to the timingvarious costs, none of the acquisition was partially excluded from the prior period amount.which are significant individually.

Selling and Marketing

 

Selling and marketing expenses were $1,293,181$633,137 for the ninesix months ended SeptemberJune 30, 2019,2020, compared to $2,290,934$799,806 for the ninesix months ended SeptemberJune 30, 2018,2019, a decrease of $997,753. Our acquisition$166,669. This decrease was the result of Enertec and I.AM resulted in an increase of $196,962. This increase was offset by decreases in personnel costs directly attributed to a reduction in sales and marketing personnel throughout our operations.primarily at Coolisys.

 

General and Administrative

 

General and administrative expenses were $14,584,758$5,820,901 for the ninesix months ended SeptemberJune 30, 2020, compared to $8,013,157 for the six months ended June 30, 2019, compared to $12,697,909 for the nine months ended September 30, 2018, an increasea decrease of $1,886,849. Our acquisitions of Enertec and I.AM accounted for $2,119,118 of the increase in general$2,192,256. General and administrative expenses. The adjusted decrease of $232,269expenses decreased from the comparative prior period, was mainly due to the lower stock compensation expense, other third party fees and legal fees partially offset by an increase in cost attributed totravel related costs, which represented a significant decrease during the hiringsix months ended June 30, 2020 because of a Chief Accounting Officer and Senior Vice President of Finance.travel restrictions from COVID-19.

 

Asset Impairment ChargesLoss from Continuing Operations

 

Asset impairment charges of $4,315,856 were recognized during the nine months ended September 30, 2019. The impairment charges related to impairments of our cryptocurrency equipment.

Operating Loss

The Company recorded an operatinga loss from continuing operations of $16,476,978$3,699,404 for the ninesix months ended SeptemberJune 30, 2019,2020, compared to an operating loss of $11,255,164$8,074,472 for the ninesix months ended SeptemberJune 30, 2018.2019. The increasedecrease in operating loss is mostly attributable to the impairment of property and equipment coupled with an increase ofin our gross margins and the decrease in general and administrative expenses, partially offset by higher gross profit and lower selling and marketing expenses.

 

Interest Income

 

Interest income was $2,647,110$36,256 for the ninesix months ended SeptemberJune 30, 20192020 compared to $1,955,885$1,748,464 for the threesix months ended SeptemberJune 30, 2018.2019. The increasedecrease in interest income for the ninesix months ended SeptemberJune 30, 20192020 is primarily related to an increasea 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 six months ended June 30, 2020.

 

Interest expenseExpense

 

Interest expense was $5,586,639$2,048,877 for the ninesix months ended SeptemberJune 30, 2019,2020 compared to $11,335,069$2,631,007 for the ninesix months ended SeptemberJune 30, 2018.2019. The decrease in interest expense for the ninesix months ended SeptemberJune 30, 20192020 is primarily related to a reduction of amortization of debt discount resulting from original issue discount from the issuance of warrants in conjunction with the sale of debt instruments. During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, as a result of these issuances, non-cash interest expense of $3,034,454$1,129,711 and $8,812,972,$1,676,609, respectively, was recorded from the amortization of debt discount and debt financing costs.

 

Loss on issuance of warrants

 

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

 

Change in fair value of warrant liability

 

During the ninesix months ended SeptemberJune 30, 2019, the fair value of the warrants that were issued in our Offering decreased by $1,112,665.$946,825. The fair value of these warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Net Loss from Discontinued Operations

During the first quarter of 2020, the permanent closing of the restaurant operations at I. AM met the criteria for presentation as discontinued operations. We determined that the assets of I. AM, primarily consisting of restaurant equipment and right-of-use assets related to I. AM’s operating leases, were impaired in the amount of $1,525,316. These impairment charges represented the majority of our net loss from discontinued operations of $1,697,744 during the six months ended June 30, 2020. The remaining increase in our net loss from discontinued operations is attributed to an overall decline in revenues at the restaurants and general inefficiencies during the final months of operations.

Net Loss

 

For the foregoing reasons, our net loss for the ninesix months ended SeptemberJune 30, 2019,2020, was $21,110,774$7,907,081 compared to a net loss of $20,616,868$10,769,923 for the ninesix months ended SeptemberJune 30, 2018.2019. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of Microphase during the ninesix months ended SeptemberJune 30, 2020 and 2019, of nil and 2018, of $32,416, and $218,494, respectively, and preferred dividends of $12,437$7,394 and $108,049,$7,153, respectively, the net loss available to common shareholders during the ninesix months ended SeptemberJune 30, 2020 and 2019, was $7,914,475 and 2018, was $21,090,795 and $20,506,423,$10,744,660, respectively.

 

As reflected in our consolidated statement of cash flows forDuring the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, our reported net loss is comprised ofincluded non-cash charges of $10,742,817$3,023,387 and $13,195,207,$4,060,412, respectively. A summary of these non-cash charges is as follows:

 For the Nine Months Ended  For the Six Months Ended 
 September 30,  June 30, 
 2019  2018  2020  2019 
Interest expense – debt discount $3,034,454  $8,812,972  $907,480  $1,676,609 
Stock-based compensation  1,354,062   4,164,180   142,941   992,283 
Depreciation and amortization  3,074,013   1,742,496   426,603   1,895,309 
Impairment of property and equipment  4,315,856      1,525,316    
Amortization of right-of-use assets  260,549    
Accretion of original issue discount on notes receivable – related party  (1,869,778)  (1,524,441)  15,000   (1,262,422)
Accretion of original issue discount on notes receivable  (77,155)     (4,137)  (58,023)
Fair value in excess of proceeds upon issuance of warrants  1,763,481         1,763,481 
Change in fair value of warrant liability  (1,112,665)     10,184   (946,825)
Non-cash items included in net loss $10,742,817  $13,195,207  $3,023,387  $4,060,412 

 

Other comprehensive lossincome (loss)

 

Other comprehensive loss was $22,344,785$532,620 and $27,503,860,$168,676, respectively, for the ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. Other comprehensive loss for the ninesix months ended SeptemberJune 30, 2019,2020, which decreased our equity, was primarily due to unrealized losses in the warrant derivative securities that we received as a result of our investment in Avalanche International, Corp., or AVLP, a related party.party, and from fluctuations in exchange rates between the U.S. dollar and the Israeli Shekel. During the ninesix months ended SeptemberJune 30, 2018,2019, unrealized losses in the warrant derivative securities of AVLP was also the primary component of other comprehensive loss.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On SeptemberJune 30, 2019,2020, we had cash and cash equivalents of $756,652.$1,691,289. This compares with cash and cash equivalents of $902,329$483,383 at December 31, 2018.2019. The decreaseincrease in cash and cash equivalents was primarily due to cash provided by financing activities being slightly in excess of the amount of cash used in operating and investing activities with the remaining variance attributed to the effect of exchange rates caused by a decreasefluctuations in exchange rates between the U.S. dollar and the Israeli Shekel.

 

Net cash used in operating activities totaled $8,377,278$2,257,804 for the ninesix months ended SeptemberJune 30, 2019,2020, compared to $9,430,055$4,669,720 for the ninesix months ended SeptemberJune 30, 2018.2019. During the ninesix months ended SeptemberJune 30, 2019,2020, the decrease in net cash used in operating activities compared to the ninesix months ended SeptemberJune 30, 2018,2019, was mainly due to a reduction in our net loss for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The net loss was partially offset by several non-cash charges, a decrease in amortization of debt discount of $5,778,518 and$769,129, stock-based compensation of $2,810,118, an increase in$849,342, and depreciation and amortization of $1,331,517and$1,468,706. Additionally, we experienced significant variations in changes in operating assets and liabilities. The most significant change was a decrease in cash provided from payments on accounts receivable, related party due toparty. During April 2019, we received a payment of $2,676,219 in April 2019.and no payments were received during the six months ended June 30, 2020.

Net cash used in investing activities was $2,686,506$151,770 for the ninesix months ended SeptemberJune 30, 2019,2020, compared to $19,915,693$1,607,194 for the ninesix months ended SeptemberJune 30, 2018.2019. The decrease of the net usage of cash from investing activities was primarily attributed to the purchase of property and equipment at Digital Farms and our acquisition of Enertec during the nine months ended September 30, 2018.a decrease in related party investments.

 

Net cash provided by financing activities was $11,083,232$3,608,626 and $28,791,362$6,472,295 for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Financing activities during the ninesix months ended SeptemberJune 30, 2020, primarily related to proceeds from notes payable and short-term advances, related party. During the six months ended June 30, 2019, the financing activities primarily related to the sale of shares of our common stock through an “at the market offering” program and through an underwriting agreement with A.G.P./Alliance Global Partners. Theour at-the-market offering, net proceeds that we received from the sale of our shares of common stock was partially offset by net cash outflows of $3,706,679 associated with our debt arrangements.financings and from advances on future receipts.

 

Historically, we have financed our operations principally through issuances of convertible debt, promissory notes and equity securities. During 2019,2020, as reflected below, we continued to successfully obtain additional equity and debt financing and in restructuring existing debt.

 

·On October 15, 2018,February 10, 2020, we entered into an At-The-Market Issuance Salesa Master Exchange Agreement with WDCO (the “WDCO ATM Offering”)Esousa, which acquired approximately $4.2 million dollars in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously issued by the Company. Esousa also agreed to sellpurchase additional notes up to an additional principal amount, plus accrued but unpaid interest, of $3.5 million (collectively, the “Notes”). Pursuant to the Master Exchange Agreement, Esousa has the unilateral right to acquire shares of our common stock. Between January 1, 2019 and April 1, 2019, the date the WDCO ATM Offering was terminated, the Company received gross proceeds of $4,656,050 through the sale of 119,791 shares of ourCompany’s common stock through the WDCO ATM Offering.

·On March 29, 2019, we entered into an underwriting agreement pursuant to which we sold 71,388 shares of our common stock, warrants to purchase 388,888 shares of our common stock and pre-funded warrants to purchase 317,500 shares of our common stock on April 2, 2019. We received gross proceeds from this offering of $6,999,555 and used approximately $6,000,000 of the proceeds from this offeringin exchange for the repayment of debt.

·On May 13, 2019, we filed an Offering Statement on Form 1-A pursuant to Regulation A promulgated by the Commission, pursuant to which up to $50 million of 3-year, non-convertibles promissory notes (“Promissory Notes”) will be offered and sold once the Commission has qualified the Offering Statement.Notes. We anticipate that Esousa will in the Promissory Notes will accrue annualized interestsecond exchange acquire an additional $3.5 million of between 5%certain promissory notes and 15% that this will be paid rata monthly and will be offered on a continuous basis, in each case as determined by us in our sole discretion. The Company cannot provide any assurance that any Promissory Notes will be sold pursuant this Offering Statement.

·On August 6, 2019, we entered into an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent in which we sold shares of our common stock having an aggregate offering price of $5,500,000 (the “ATM Offering”). The offer and sale of our common stock was made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed withcompleted during the Commission on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated August 6, 2019.quarter ended September 30, 2020.

 

We expect to continue to incurincurring losses for the foreseeable future and will be required to raise additional capital to continue to support our working capital requirements. We have been successful over the last 12 months in raising capital to support our working capital requirements. We anticipate that we will continue to raise capital through public and private equity offerings, debt financings, or other means. If we are unable to secure additional capital, we may be required to curtail our current operations and take additional measures to reduce costs expenses, including reducing our workforce, eliminating outside consultants, ceasing or reducing our due diligence of potential future acquisitions, including the associated legal fees, in order to conserve cash in order to sustain operations and meet our obligations.

 

Based on the above, these matters raise substantial doubt about our ability to continue as a going concern and amounts reported in our financial statements do not reflect the effects of any adjustments to the carrying amounts of our assets and liabilities should we be unable to continue as a going concern.

CRITICAL ACCOUNTING POLICIES

 

In our Annual Report on Form 10-K for the year ended December 31, 2018,2019, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.  The basis for developing the estimates and assumptions within our critical accounting policies is based on historical information and known current trends and factors.  The estimates and assumptions are evaluated on an ongoing basis and actual results have been within our expectations.  We have not changed these policies from those previously disclosed in our Annual Report.

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable for a smaller reporting company.

ITEM 4.           CONTROLS AND PROCEDURES

ITEM 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Our principal executive officer and principal financial officer, with the assistance of other members of the Company's management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon our evaluation, our principal executive officer and principal financial officer has concluded that the Company’s internal control over financial reporting was not effective as of the end of the period covered by this Quarterly Report on Form 10-Q because the Company has not yet completed its remediation of the material weakness previously identified and disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, the end of its most recent fiscal year.

 

Specifically, management has determined that we do not have sufficient resources to ensure an appropriate level of segregation of duties in our accounting function, we have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated and we did not design or maintain effective general information technology controls over certain information systems that are relevant to the mitigation of the risk pertaining to the misappropriation of assets.

 

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

Planned Remediation

 

Management, in coordination with the input, oversight and support of our Audit Committee, has identified the measures below to strengthen our control environment and internal control over financial reporting.

 

In January 2018, we hired a new Chief Financial Officer and engaged the services of a financial accounting advisory firm. In September 2018, we hired a Chief Accounting Officer and in January 2019, we hired a Senior Vice President of Finance. Finally, in May 2019, we hired an Executive Vice President and General Counsel. We have tasked these individuals with expanding and monitoring the Company’s internal controls, to provide an additional level of review of complex financial issues and to assist with financial reporting. On October 7, 2019, we created an Executive Committee comprised of our Chief Executive Officer, Chief Financial Officer and Executive Vice President and General Counsel. The Executive Committee meets on a daily basis to address the Company’s critical needs and provides a forum to approve transactions. Further, as we continue to expand our internal accounting department, the Chairman of the Audit Committee shall perform the following:

 

·assists with documentation and implementation of policies and procedures and monitoring of controls,

·reviews all anticipated transactions that are not considered in the ordinary course of business to assist in the early identification of accounting issues and ensure that appropriate disclosures are made in ourthe Company’s financial statements

 

We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. These material weaknesses will not be considered to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Despite the existence of these material weaknesses, the Company believes that the consolidated financial statements included in the period covered by this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles. 

Changes in Internal Controls over Financial Reporting.

 

Except as detailed above, during the most recent fiscal quarter 20192020 there were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

 

ITEM 1.           LEGAL PROCEEDINGSDerivative Action

 

On July 31, 2018, Ethan Young and Greg Young (collectively, “Plaintiffs”) filed a stockholder derivative complaint was filed(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, styledin 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, (CaseCase No. 18-cv-6587)18-cv-6587 (the “Complaint”Derivative Action).

 

The Complaint allegesalleged violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants, as, in the view of the plaintiffs, the Company hasconnection with various transactions entered into poorly advised loan transactions and related party transactions. The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves. The Company and the individual defendantsby us.

We moved to dismiss the Complaint, and on February 25, 2019, the Court granted theour motion to dismiss, butin its entirety, without prejudice, and also granted plaintiffsPlaintiffs leave to amend their Complaint. 

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

On March 25, 2019, the Company and the individual defendantswe filed a motion to dismiss (the “Motion”) the amended complaint.Amended Complaint. On May 21, 2019, the Court granted in part, and denied in part, our Motion. On February 24, 2020, the MotionCompany entered into a definitive settlement agreement (the “Settlement Agreement”) with Plaintiffs to Dismisssettle the claims asserted in the Amended Complaint.  Specifically,

On April 15, 2020, the May 21, 2019Court issued an Order granted so much(the “Order”) approving a Motion for Preliminary Approval of Defendants’Settlement in the Derivative Action. On July 16, 2020, the Court issued an Order (the “Final Order”) approving a Motion to Dismissfor Final Approval of Settlement in the Amended Complaint that sought to dismiss Directors Robert O. Smith, Jeff Bentz,Derivative Action filed against DPW as a Nominal Defendant and Mordechai Rosenbergits directors who served on its board of directors on July 31, 2018 who were not dismissed from the action as parties. Plaintiffs did not further amenda result of the complaint and proceeded withCourt’s partial grant of the operative complaint and forewent any claims against Messrs. Smith, Bentz, and Rosenberg.Motion.

 

On July 8, 2019,16, 2020, the Court heldentered a scheduling conference whereinJudgment based upon the Court set a trial date of August 25, 2020.Final Order.

 

On October 21, 2019,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 mediated the matter before JAMS in Manhattan, New York. At that mediation, the matter was tentatively settled with respect to all claim against the Company and the remaining defendants, Milton C. Ault III, Amos Kohn, and William Horne. The tentative settlement included certain changes to the policieshave agreed upon a payment of the Company. The tentative settlement agreement did not have a monetary component. Furthermore, the parties settled any dispute over the attorneys’ fees in the amount of $600,000, which willsum shall be paidpayable by AIG, the Company’s insurance carrier.our Director & Officer liability insurance. The parties are currently working on finalizing the settlement agreement,Settlement Agreement contains no admission of wrongdoing.

We have always maintained and expectcontinue to have a finalized settlement agreement prior to endbelieve that neither we nor our current or former directors engaged in any wrongdoing or otherwise committed any violation of the calendar year. Upon execution of the finalized settlement agreement, Plaintiff will file a notice of dismissal with prejudice with the Court.federal or state securities laws or any other laws or regulations.

On November 28, 2018,

Blockchain Mining Supply and Services, LtdLtd.,

On November 28, 2018, Blockchain Mining Supply and Services, Ltd. (“Blockchain Mining”) a vendor who sold computers to the Company’sour 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 the Company (CaseDPW Holdings, Inc., Case No. 18-cv-11099). 18-cv-11099.

The Complaint assertedasserts claims for breach of contract and promissory estoppel against the Companyus and itsour subsidiary arising from the subsidiary’s alleged failure to satisfy ahonor its obligations under the purchase agreement. The Complaint seeks monetary damages in the amountexcess of $1,388,495, which approximates the amount of the reserve established.plus attorneys’ fees and costs.

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

 

On February 4, 2019, pursuantApril 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 Court’s Rules, the Company requested a pre-motion Conference with the Court.  On April 16, 2019, the Court held a pre-motion ConferenceComplaint in connection with the Company’s anticipatedbreach 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.  To date, however,dismiss the Court has not setAmended 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 briefing schedulepartial Answer to the Amended Complaint in connection with the Company’s anticipated motion to dismiss.breach of contract claim.

 

Based on the Company’sour assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Companywe cannot reasonably estimate the reasonably possiblepotential loss or range of loss that may result from this action. However, the Company hasNotwithstanding, 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 the Company’sour 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.

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

The return date for the motion to dismiss is presently set for August 25, 2020.

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 our business in compliance with all applicable laws. The subpoena expressly provides that the inquiry is not to be construed as an indication by the Commission or its staff that any violations of the federal securities laws have occurred, nor should it be considered a reflection upon any person, entity or security. However, there can be no assurance as to the outcome of this matter.

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 $3.6 million of such debt obligations and entered into settlement agreements for the remaining amount of approximately $600,000 which are included within future receipts obligations in the accompanying consolidated balance sheet at June 30, 2020. The Company also recorded approximately $400,000 of trade liabilities for a judgment settled in favor of a trade creditor as of June 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 $800,000.  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. 

ITEM 1A.        RISK FACTORS

ITEM 1A.RISK FACTORS

 

The risks described in Part I, Item 1A, “Risk Factors,” in our 20182019 Annual Report on Form 10-K, could materially and adversely affect our business, financial condition and results of operations, and the trading price of our common stock could decline. These risk factors do not identify all risks that we face - our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. Other than the additional risk factor identified below, theThe Risk Factors section of our 20182019 Annual Report on Form 10-K remains current in all material respects.

 

We received a subpoena from the Commission.

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

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

During March 2020, the Company issued 65,000 shares of its common stock as payment for services to its consultants. The shares were valued at $73,450, an average of $1.13 per share.

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.

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.

 

During the nine monthsquarter ended SeptemberJune 30, 2019, we2020, the Company issued to our consultants a total 29,375140,624 shares of ourits common stock with an aggregate valuein satisfaction of $305,019, an averageaccrued liabilities of $10.38 per share for services rendered.$155,547.

During the ninesix months ended SeptemberJune 30, 2019,2020, principal and accrued interest of $4,238,878$1,580,772 and $497,416,$885,622, respectively, on ourthe Company’s debt securities was satisfied through the issuance of 370,4731,914,936 shares of ourthe Company’s common stock.

During the nine months ended September 30, 2019, we issued 9,375 shares The Company recognized a loss on extinguishment of our common stock in satisfaction$222,232 as a result of an accrued liability of $108,523.these issuances.

 

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

ITEM 3.          
ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

 

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

ITEM 4.           MINE SAFETY DISCLOSURES

ITEM 4.MINE SAFETY DISCLOSURES

 

None

ITEM 5.           OTHER INFORMATION

ITEM 5.OTHER INFORMATION

 

None

ITEM 6.           EXHIBITS

ITEM 6.EXHIBITS

 

Exhibit
Number
 Description
1.1Underwriting Agreement with A.G.P/Alliance Global Partners, dated March 29, 2019.  Incorporated by reference to the Current Report on Form 8-K filed on April 1, 2018 as Exhibit 1.1 thereto.
3.1 Certification of Incorporation, dated September 22, 2017.  Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.1 thereto.
3.2 Bylaws, dated September 25, 2017.  Incorporated herein by reference to the Current Report on Form 8-K filed on December 29, 2017 as Exhibit 3.2 thereto.
3.3 Certificate of Amendment to Certificate of Incorporation, dated January 2, 2019. Incorporated by reference to the Current Report on Form 8-K filed on January 3, 2019 as Exhibit 3.1 thereto.
3.4 Certificate of Amendment to Certificate of Incorporation (1-for-20 Reverse Stock Split of Common Stock), dated March 14, 2019. Incorporated herein by reference to the Current Report on Form 8-K filed on March 14, 2019 as Exhibit 3.1 thereto.
3.5 Certificate of Designations of Rights and Preferences of 10% Series A Cumulative Redeemable Perpetual Preferred Stock, dated September 13, 2018. Incorporated herein by reference to the Current Report on Form 8-K filed on September 14, 2018 as Exhibit 3.1 thereto.
3.6 Form of Certificate of Determination of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, dated March 3, 2017.  Incorporated by reference to the Current Report on Form 8-K filed on March 9, 2017 as Exhibit 3.1 thereto.
3.7 Certificate of Designations of Rights and Preferences of Series C Convertible Redeemable Preferred Stock, dated February 27, 2019. Incorporated herein by reference to the Current report on Form 8-K filed on February 28, 2019 as Exhibit 3.1 thereto.
3.8 
4.1Form of Common Stock Purchase Warrant,Amended Bylaws dated April 2,October 4, 2019.  Incorporated herein by reference to the Current Reportreport on Form 8-K filed on April 1, 2018October 7, 2019 as Exhibit 4.13.1 thereto.
4.2Form of Pre-Funded Common Stock Purchase Warrant, dated April 2, 2019.  Incorporated by reference to the Current Report on Form 8-K filed on April 1, 2018 as Exhibit 4.2 thereto.
4.3Form of Underwriter’s Common Stock Purchase Warrant, dated April 2, 2019.  Incorporated by reference to the Current Report on Form 8-K filed on April 1, 2018 as Exhibit 4.3 thereto.
31.1* Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2* Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)
32.1** Certification of Chief Executive and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

** Furnished herewith.

*Filed herewith.
**Furnished herewith.

 

SIGNATURES

 

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

 

Dated:  NovemberAugust 19, 20192020

 

 

  DPW HOLDINGS, INC.
    
  By:/s/ Milton C. Ault, III
   Milton C. Ault, III
   Chief Executive Officer
   (Principal Executive Officer)
    
    
  By:/s/ William B. Horne
   William B. Horne
   Chief Financial Officer
   (Principal Accounting Officer)

 

 

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