The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The above Consolidated Statements of Stockholders’
Equity reflects a 1 for 20 reverse stock split effective March 14, 2019, see Note 1 for further information.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
1. DESCRIPTION OF BUSINESS
DPW Holdings, Inc.,
a Delaware corporation (“DPW” or the “Company”), formerly known as Digital Power Corporation, was incorporated
in September 2017. The Company is
a diversified holding company owning subsidiaries engaged in the
following operating businesses: commercial and defense solutions, commercial lending, cryptocurrency blockchain mining, advanced
textile technology and restaurant operations. The Company’s wholly-owned subsidiaries are
Coolisys Technologies, Inc.
(“Coolisys”), Digital Power Limited (“DP Limited”), Enertec
Systems
2001 Ltd (“
Enertec
”),
Power-Plus Technical Distributors, LLC (“Power-Plus”),
Digital Power Lending, LLC (“DP Lending”) and Digital Farms, Inc. (“Digital Farms”), formerly known as
Super Crypto Mining, Inc
. The Company also has controlling interests in Microphase
Corporation (“Microphase”)
and I. AM, Inc. (“I.AM”)
. The Company
has five reportable segments – North America with operations conducted by Microphase, Coolisys, Power-Plus and DP Lending,
Europe with operations through DP Limited, Middle East with operations through Enertec, digital currency blockchain mining through
Digital Farms and restaurant operations through I.AM.
On March 14, 2019,
pursuant
to the authorization provided by the Company’s stockholders
at a Special Meeting of Stockholders, the Company’s
Board of Directors approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse
stock split of the Common Stock affecting both the authorized and issued and outstanding number of such shares by a ratio of one-for-twenty
(the “Reverse Stock Split”)
.
2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying consolidated
financial statements have been prepared on the basis that the Company will continue as a going concern.
As
of December 31, 2018, the Company had cash and cash equivalents of $902,329, an accumulated deficit of $55,721,115 and a negative
working capital of $18,445,302. The Company has incurred recurring losses and reported losses for the years ended December 31,
2018 and 2017, totaled $32,233,881 and $10,616,231, respectively. In the past, the Company has financed its operations principally
through issuances of convertible debt, promissory notes and equity securities. During 2018, the Company continued to successfully
obtain additional equity and debt financing and in restructuring existing debt.
The Company expects
to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business development
initiatives and to support its working capital requirements. In March 2017, the Company was awarded a 3-year, $50 million purchase
order by MTIX Ltd. (“MTIX”) to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”)
plasma-laser system. Currently, the Company has subcontracted out a significant amount of these services to third parties. Management
believes that the MLSE purchase order will be a source of revenue and generate significant cash flows for the Company. Additionally,
on April 2, 2019, the Company received gross proceeds of approximately $7 million in a public offering of its securities (See Note
28). Management believes that the Company has access to capital resources through potential public or private issuances of debt
or equity securities. However, if the Company is unable to raise additional capital, it may be required to curtail operations and
take additional measures to reduce costs, including reducing its workforce, eliminating outside consultants and reducing legal
fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These matters raise substantial
doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any
adjustments that might become necessary should the Company be unable to continue as a going concern.
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“U.S. GAAP”).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Principles of Consolidation
The consolidated financial
statements include the accounts of DPW and its wholly-owned subsidiaries, Coolisys, DP Limited, Power-Plus, Enertec, DP Lending
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, fair value
of digital currencies, accruals of certain liabilities including product warranties, useful lives and depreciation, and deferred
income taxes and related valuation allowance.
Revenue Recognition
The Company recognizes
revenue under ASC 606,
Revenue from Contracts with Customers
. The core principle of the new revenue standard is that a company
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve
that core principle:
|
·
|
Step 1: Identify the contract with the
customer,
|
|
·
|
Step 2: Identify the performance obligations
in the contract,
|
|
·
|
Step 3: Determine the transaction price,
|
|
·
|
Step 4: Allocate the transaction price
to the performance obligations in the contract, and
|
|
·
|
Step 5: Recognize revenue when the company
satisfies a performance obligation.
|
The Company’s disaggregated revenues
consist of the following for the year ended December 31, 2018:
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
|
|
|
|
|
|
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Enertec
|
|
|
Farms
|
|
|
I.AM
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,875,883
|
|
|
$
|
11,804
|
|
|
$
|
—
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
19,025,376
|
|
Europe
|
|
|
159,350
|
|
|
|
1,656,516
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,815,866
|
|
Middle East
|
|
|
—
|
|
|
|
—
|
|
|
|
5,226,075
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,226,075
|
|
Other
|
|
|
718,692
|
|
|
|
368,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,086,902
|
|
|
|
$
|
14,753,925
|
|
|
$
|
2,036,530
|
|
|
$
|
5,226,075
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
27,154,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave Filters
|
|
$
|
3,331,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,331,575
|
|
Detector logarithmic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
video amplifiers
|
|
|
1,338,912
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,338,912
|
|
Power Supply Units
|
|
|
5,829,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,829,125
|
|
Power Supply Systems
|
|
|
—
|
|
|
|
2,036,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,036,530
|
|
Healthcare diagnostic systems
|
|
|
—
|
|
|
|
—
|
|
|
|
1,715,512
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,715,512
|
|
Defense systems
|
|
|
—
|
|
|
|
—
|
|
|
|
3,510,563
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,510,563
|
|
Digital Currency Mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,675,549
|
|
|
|
—
|
|
|
|
1,675,549
|
|
Restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,462,140
|
|
|
|
3,462,140
|
|
Lending activities
|
|
|
347,033
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
347,033
|
|
MLSE Systems
|
|
|
3,907,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,907,280
|
|
|
|
$
|
14,753,925
|
|
|
$
|
2,036,530
|
|
|
$
|
5,226,075
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
27,154,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a point in time
|
|
$
|
10,846,645
|
|
|
$
|
1,411,798
|
|
|
$
|
—
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
17,396,132
|
|
Services transferred over time
|
|
|
3,907,280
|
|
|
|
624,732
|
|
|
|
5,226,075
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,758,087
|
|
|
|
$
|
14,753,925
|
|
|
$
|
2,036,530
|
|
|
$
|
5,226,075
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
27,154,219
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
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 has
title and the significant risks and rewards of ownership. The Company provides standard assurance warranties, which are not separately
priced, that the products function as intended. The Company primarily receives fixed consideration for sales of product. Some of
the Company’s contracts with distributors include stock rotation rights after six months for slow moving inventory, which
represents variable consideration. The Company uses an expected value method to estimate variable consideration and constrains
revenue for estimated stock rotations until it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur. To date, returns have been insignificant. The Company’s customers generally pay within 30 days from the receipt
of a valid invoice.
Because the Company’s
product sales agreements have an expected duration of one year or less, the Company has elected to adopt the practical expedient
in ASC 606-10-50-14(a) of not disclosing information about its remaining performance obligations.
Manufacturing Services
The Company provides
manufacturing services in exchange primarily for fixed fees, however, the initial two MLSE units are subject to variable pricing
under the $50 million purchase order from MTIX. Under the terms of the MLSE purchase order, the Company shall be entitled to cost
plus $100,000 for the manufacture of the first two MLSE units. The Company has determined that the costs of manufacturing the MLSE
units will decline over time due to the effects of a learning curve which will result in a great amount of revenue being recognized
for these initial two MLSE units.
For manufacturing services,
which include revenues generated by Enertec and in certain instances revenues generated by DPL, the Company’s performance
obligation for manufacturing services is satisfied over time as the Company creates or enhances an asset that the customer controls
as the asset is created or enhanced. Generally, the Company recognizes revenue based upon proportional performance over time using
a cost to cost method which measures progress based on the costs incurred to total expected costs in satisfying its performance
obligation. This method provides a depiction of the progress in providing the manufacturing service because there is a direct relationship
between the costs incurred by the Company and the transfer of the manufacturing service to the customer. Manufacturing services
that are recognized based upon the proportional performance method are included in the above table as services transferred over
time and to the extent the customer has not been invoiced for these revenues, as accrued revenue in the accompanying consolidated
balance sheets. Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are
reflected in the consolidated financial statements in the periods in which they are first identified.
The Company has elected
the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component
to the extent that the period between when the Company transfers its promised good or service to the customer and when the customer
pays is one year or less.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The aggregate amount of the transaction price allocated to the performance obligation that is partially
unsatisfied as of December 31, 2018 for the MLSE units was approximately $48 million. The Company expects to recognize the remaining
revenue related to the partially unsatisfied performance obligation over the next two and a half years. The Company will be paid
in installments for this performance obligation over the next two and a half years.
Blockchain Mining
The Company derives
its revenue by providing transaction verification services within the digital currency networks of cryptocurrencies, such as Bitcoin,
Bitcoin Cash and Litecoin. The Company satisfies its performance obligation at the point in time that which the Company is awarded
a unit of digital currency through its participation in the applicable network and network participants benefit from the Company’s
verification service. In consideration for these services, the Company receives digital currencies which are recorded as revenue,
using the closing U. S. dollar price of the related cryptocurrency on the date of receipt. Expenses associated with running the
cryptocurrency mining business, such as equipment deprecation and electricity cost are recorded as a component of cost of revenues.
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 good, 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.
Foreign Currency Translation
A substantial portion
of the Company’s revenues are generated in U.S. dollars (“U.S. dollar”). In addition, a substantial portion
of the Company’s costs are incurred in U.S. dollars. Company management has determined that the U.S. dollar is the functional
currency of the primary economic environment in which it operates.
Accordingly, monetary
accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) No. 830, Foreign Currency
Matters (“ASC No. 830”). All transaction gains and losses from the re-measurement of monetary balance sheet items
are reflected in the statements of operations as financial income or expenses as appropriate.
The financial statements
of DPL and Enertec, whose functional currencies have been determined to be their local currencies, the British Pound (“GBP”)
and the Israeli Shekel (“ILS”), have been translated into U.S. dollars in accordance with ASC No. 830. All
balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations
amounts have been translated using the average exchange rate in effect for the reporting period. The resulting translation adjustments
are reported as other comprehensive income (loss) in the consolidated statement of comprehensive income (loss) and accumulated
comprehensive income (loss) in statement of changes in stockholders' equity (deficit).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Cash and Cash Equivalents
The Company considers
all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Financial
instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s
cash is maintained in checking accounts, money market funds and certificates of deposits with reputable financial institutions.
These balances may, at times, exceed the U.S. Federal Deposit Insurance Corporation insurance limits. The Company has cash and
cash equivalents of $409,945 and $292,153 at December 31, 2018 and 2017, respectively, in the United Kingdom (“U.K”)
and $60,040 and nil, respectively, in Israel. The Company has not experienced any losses on deposits of cash and cash equivalents.
Accounts Receivable and Allowance
for Doubtful Accounts
The Company’s
receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying amount
of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.
The Company individually reviews all accounts receivable balances and based upon an assessment of current creditworthiness, estimates
the portion, if any, of the balance that will not be collected. The Company estimates the allowance for doubtful accounts based
on historical collection trends, age of outstanding receivables and existing economic conditions. If events or changes in circumstances
indicate that a specific receivable balance may be impaired, further consideration is given to the collectability of those balances
and the allowance is adjusted accordingly. A customer’s receivable balance is considered past-due based on its contractual
terms. Past-due receivable balances are written-off when the Company’s internal collection efforts have been unsuccessful
in collecting the amount due. Based on an assessment as of December 31, 2018 and 2017, of the collectability of invoices, accounts
receivable are presented net of an allowance for doubtful accounts of $5,000 and $5,000, respectively.
Inventories
Inventories are stated
at the lower of cost or net realizable value. Inventory write-offs are provided to cover risks arising from slow-moving items or
technological obsolescence.
Cost of inventories is determined
as follows:
Raw materials,
parts and supplies - using the “first-in, first-out” method.
Work-in-progress and finished products
- on the basis of direct manufacturing costs with the addition of indirect manufacturing costs.
The Company periodically
assesses its inventories valuation in respect of obsolete and slow-moving items by reviewing revenue forecasts and technological
obsolescence. When inventories on hand exceed the foreseeable demand or become obsolete, the value of excess inventory, which at
the time of the review was not expected to be sold, is written off.
During the years ended
December 31, 2018 and 2017, the Company did not record inventory write-offs within the cost of revenue.
Property and Equipment, Net
Property and equipment
as well as an intangible asset are stated at cost, net of accumulated depreciation and amortization. Repairs and maintenance costs
are expensed as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful
lives of the assets, at the following annual rates:
|
|
Useful lives (in years)
|
|
|
|
Computer, software and related equipment
|
|
3 - 5
|
Office furniture and equipment
|
|
5 - 10
|
Leasehold improvements
|
|
Over the term of the lease or the life of the asset, whichever is shorter.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Goodwill
The Company evaluates
its goodwill for impairment in accordance with ASC 350,
Intangibles – Goodwill and Other
. Goodwill is recorded
when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible
assets acquired.
The Company tests the
recorded amount of goodwill for impairment on an annual basis on December 31 of each fiscal year or more frequently if there are
indicators that the carrying amount of the goodwill exceeds its carried value. At December 31, 2018, the Company had five reporting
units. The Company performed a qualitative assessment and concluded that no impairment existed as of December 31, 2018.
Intangible Assets
The Company acquired
amortizable intangibles assets as part of three asset purchase agreements consisting of customer lists and non-compete agreements.
The Company also has the trade names and trademarks associated with the acquisitions of Microphase and I.AM which were determined
to have an indefinite life. The Company’s intangible assets, net also include definite lived intangible assets, which are
being amortized on a straight-line basis over their estimated useful lives as follows:
|
|
Useful lives (in years)
|
Customer list
|
|
5 - 14
|
Non-competition agreements
|
|
3
|
Domain name and other intangible assets
|
|
3
|
The Company reviews
intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the
assets might not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant
underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant
changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability,
the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived
asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result
from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value
of the impaired asset over its fair value, determined based on discounted cash flows. No impairments were recorded on intangible
assets as no impairment indicators were noted for the periods presented in these consolidated financial statements.
Long-Lived Assets
The long-lived assets
of the Company are reviewed for impairment in accordance with ASC No. 360,
Property, Plant, and Equipment
, 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 the future undiscounted cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2018 and 2017, no impairment
charges were necessary.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Warranty
The Company offers
a warranty period for all its manufactured products. Warranty periods range from one to two years depending on the product. The
Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the
time product revenue is recognized. Factors that affect the Company's warranty liability include the number of units sold, historical
rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability
and adjusts the amounts as necessary. As of December 31, 2018 and 2017, the Company’s accrued warranty liability was $86,495.
Income Taxes
The Company determines
its income taxes under the asset and liability method in accordance with FASB ASC No. 740,
Income Taxes
, which requires
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between
the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which
the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes
it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income
and Comprehensive Income in the period that includes the enactment date.
The Company accounts
for uncertain tax positions in accordance with ASC No. 740-10-25
.
ASC No. 740-10-25 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC
No. 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such
differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related
to accrued liabilities for potential tax assessments are included in income tax expense. ASC No. 740-10-25 also requires management
to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that
more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated
tax positions taken by the Company and has concluded that as of December 31, 2018 and 2017, there are no uncertain tax positions
taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.
The Company has not yet filed its 2016 or 2017 tax returns.
Common Stock Purchase Warrants and
Other Derivative Financial Instruments
The Company classifies
common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require
physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its
own shares (physical settlement or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement
(including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company),
(ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement),
or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding
derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
The Company determined that certain freestanding derivatives, which principally consist of issuance of warrants to purchase shares
of common stock in connection with convertible notes and to employees of the Company, satisfy the criteria for classification as
equity instruments as these warrants do not contain cash settlement features or variable settlement provision that cause them to
not be indexed to the Company’s own stock.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Stock-Based Compensation
The Company accounts
for stock-based compensation in accordance with ASC No. 718,
Compensation – Stock Compensation
(
“ASC No.
718”
). Under ASC No. 718, compensation expense related to stock-based payments is recorded over the requisite service
period based on the grant date fair value of the awards. Compensation previously recorded for unvested stock options that are forfeited
is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for
stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards,
including the option’s expected term and the price volatility of the underlying stock.
The Company’s
accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions
of ASC No. 505-50,
Equity Based Payments to Non-Employees
. Accordingly, the measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor
is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments
issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Convertible Instruments
The Company accounts
for hybrid contracts that feature conversion options in accordance with ASC No. 815,
Derivatives and Hedging Activities
(
“ASC No. 815”
). ASC No. 815 requires companies to bifurcate conversion options from their host instruments
and account for them as freestanding derivative financial instruments according to certain criteria. The criteria includes circumstances
in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair
value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument
would be considered a derivative instrument.
Conversion options
that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity
or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their
bifurcation from the host instrument.
The Company accounts
for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from
their host instruments, in accordance with ASC No. 470-20,
Debt with Conversion and Other Options
(
“ASC No.
470-20”
). Under ASC No. 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts
for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their
host instruments) in accordance with ASC No. 815.
Concentration of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade
receivables.
Cash and cash equivalents
are invested in banks in the U.S., UK and Israel. Such deposits in the United States may be in excess of insured limits and are
not insured in other jurisdictions.
Trade receivables of
the Company and its subsidiaries are mainly derived from sales to customers located primarily in the U.S., Europe and Israel. The
Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance
for doubtful accounts is determined with respect to those amounts that the Company and its subsidiaries have determined to be doubtful
of collection.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Comprehensive Income (Loss)
The Company reports
comprehensive loss in accordance with ASC No. 220,
Comprehensive Income
. This statement establishes standards for the reporting
and presentation of comprehensive loss and its components in a full set of general purpose financial statements. Comprehensive
loss generally represents all changes in equity during the period except those resulting from investments by, or distributions
to, stockholders. The Company determined that its items of other comprehensive loss relate to changes in foreign currency translation
adjustments, unrealized gains on its marketable securities and unrealized gains and losses in its warrants and common stock in
AVLP, a related party.
Fair value of Financial Instruments
In accordance with
ASC No. 820,
Fair Value Measurements and Disclosures
, fair value is defined as the exit price, or the amount that would
be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of
the measurement date.
The guidance also establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants
would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use
in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1: Quoted market prices in active
markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 that
are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or model-derived valuations. All significant inputs used in our valuations are observable or can be derived
principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level
2 inputs also include quoted prices that were adjusted for security-specific restrictions which are compared to output from internally
developed models such as a discounted cash flow models.
Level 3: Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts
of financial instruments carried at cost, including cash and cash equivalents, 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.
As of December
31, 2018 and 2017, the fair value of the Company’s investments were $3,256,468 and $9,562,571, respectively, and were
concentrated in equity securities of Avalanche International Corp., which we refer to as AVLP, a related party (See Note 10), which
are classified as available-for-sale investments. At December 31, 2018, the Company's investment in AVLP included marketable equity
securities of $812,858 and warrants to purchase 13,887,993 shares of AVLP common stock at an exercise price of $0.50 per share
of common stock with an aggregate fair value of $3,043,499. At December 31, 2017, the Company's investment in AVLP included marketable
equity securities of $826,408 and warrants to purchase 8,248,440 shares of AVLP common stock at an exercise price of $0.50 per
share of common stock with an aggregate fair value of $7,728,001. For investments in marketable equity securities, the Company
took into consideration general market conditions, the duration and extent to which the fair value is above cost, and the Company’s
ability and intent to hold the investment for a sufficient period of time to allow for recovery of value in the foreseeable future.
As a result of this analysis, the Company has determined that its investment in AVLP’s marketable equity securities are valued
based upon the closing market price of common stock at December 31, 2018 and 2017, which resulted in an unrealized gain of $119,329
and $550,048, respectively.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
At December 31, 2018,
the Company held shares of common stock in one company that it had purchased at the market, for a total cost of $220,880 with an
aggregate fair value of $178,597. In accordance with ASC No. 320-10, this investment is accounted for based upon the closing market
price of the respective common stock at December 31, 2018 and 2017, resulting in an unrealized loss of $42,283 and unrealized gain
of $133,067, respectively.
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 that were measured at fair value on a recurring basis by level within
the fair value hierarchy:
|
|
Fair Value Measurement at December 31, 2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in common stock and warrants of
AVLP – a related party
|
|
$
|
3,043,499
|
|
|
$
|
812,858
|
|
|
$
|
—
|
|
|
$
|
2,230,641
|
|
Investments in marketable 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, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in common stock and warrants of
AVLP – a related party
|
|
$
|
7,728,001
|
|
|
$
|
826,408
|
|
|
$
|
—
|
|
|
$
|
6,901,593
|
|
Investments in marketable securities
|
|
|
1,834,570
|
|
|
|
1,834,570
|
|
|
|
—
|
|
|
$
|
—
|
|
Total Investments
|
|
$
|
9,562,571
|
|
|
$
|
2,660,978
|
|
|
$
|
—
|
|
|
$
|
6,901,593
|
|
We assess the inputs used to measure fair
value using thee three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market.
Debt Discounts
The Company accounts
for debt discount according to ASC No. 470-20,
Debt with Conversion and Other Options
. Debt discounts are amortized through
periodic charges to interest expense over the term of the related financial instrument using the effective interest method. During
the years ended December 31, 2018 and 2017, the Company recorded amortization of debt discounts of $11,191,056 and $4,688,630,
respectively.
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. Anti-dilutive securities,
which are convertible into the Company’s Class A common stock, consist of the following at December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
373,000
|
|
|
|
192,125
|
|
Warrants
|
|
|
936,381
|
|
|
|
219,443
|
|
Convertible notes
|
|
|
999,641
|
|
|
|
64,197
|
|
Preferred stock
|
|
|
127,551
|
|
|
|
109,306
|
|
Total
|
|
|
2,436,573
|
|
|
|
585,071
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
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 May 2014, the FASB
issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”)
and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number
of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity 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 Company adopted
ASC 606 effective January 1, 2018 to all contracts using the modified retrospective approach. The adoption of ASU 2014-09 did not
have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
In February 2016, the
FASB issued ASU 2016-02,
Leases (Topic 842)
, (“ASU 2016-02”) in order to increase transparency and comparability
among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases
classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption
is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety
to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence
of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows
entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11,
Leases
(Topic 842): Targeted Improvements
, which provides entities an optional transition method to apply the guidance under Topic
842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1,
2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period
presented, and elected the package of practical expedients described above. The Company expects to recognize additional operating
liabilities of approximately $4.2 million, with corresponding ROU assets of approximately the same amount as of January 1, 2019
based on the present value of the remaining lease payments.
In July 2017, the FASB
issued ASU No. 2017-11,
Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives
and Hedging (Topic 815)
(“ASU 2017-11”). ASU 2017-11 consists of two parts. The amendments in Part I of this update
change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked
financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as
a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require
entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round
feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders
in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized
guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options),
including related EPS guidance (in Topic 260). The amendments in Part II of this update re-characterize the indefinite deferral
of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments
do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments
in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an
entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal
year that includes that interim period. 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 is currently evaluating the impact of adopting this standard on
its consolidated financial statements and related disclosures but does not expect it to have a material impact.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
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 Dec. 15, 2018, including interim periods within that
fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s
adoption date of Topic 606. The Company is currently evaluating the impact of adopting this standard on its consolidated financial
statements and related disclosures but does not expect it to have a material impact.
4. Digital Currencies
The following table
presents additional information about digital currencies:
|
|
Digital
Currencies
|
|
Balance at January 1, 2017
|
|
$
|
—
|
|
Additions of digital currencies
|
|
|
1,634,941
|
|
Payment on convertible notes payable
|
|
|
(739,967
|
)
|
Payments to vendors
|
|
|
(449,479
|
)
|
Purchase of fixed assets
|
|
|
(250,460
|
)
|
Realized loss on sale of digital currencies
|
|
|
(127,602
|
)
|
Cash proceeds
|
|
|
(64,587
|
)
|
Unrealized loss on digital currencies
|
|
|
(1,311
|
)
|
Balance at December 31, 2018
|
|
$
|
1,535
|
|
At December 31, 2018,
the Company’s digital currencies consisted of Bitcoin Cash and Litecoin. Digital currencies are recorded at cost on the date
they are received as revenues and are tested for impairment at each reporting date. Fair value is determined by taking the closing
price from the most liquid exchanges.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
5. Marketable Securities
Marketable securities in equity securities
with readily determinable market prices consisted of the following as of December 31, 2018 and December 31, 2017:
|
|
|
Available-for-sale securities at December 31, 2018
|
|
|
|
|
|
|
|
Gross unrealized
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains (losses)
|
|
gains (losses)
|
|
Fair value
|
|
|
Common shares
|
|
|
$
|
220,880
|
|
|
($42,283)
|
|
$
|
—
|
|
$
|
178,597
|
|
|
|
|
Available-for-sale securities at December 31, 2017
|
|
|
|
|
|
|
|
Gross unrealized
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains (losses)
|
|
gains (losses)
|
|
Fair value
|
|
|
Common shares
|
|
|
$
|
1,701,503
|
|
|
$133,067
|
|
$
|
—
|
|
$
|
1,834,570
|
|
The following table presents additional information about marketable
securities:
Balance at January 1, 2018
|
|
$
|
1,834,570
|
|
Purchases of marketable securities
|
|
|
858,458
|
|
Sales of marketable securities
|
|
|
(2,188,292
|
)
|
Realized losses on marketable securities
|
|
|
(175,405
|
)
|
Unrealized gains on marketable securities
|
|
|
(150,734
|
)
|
Balance at December 31, 2018
|
|
$
|
178,597
|
|
Available-for-sale Securities
At December 31, 2018
and 2017, the Company had invested in the marketable securities of certain publicly traded companies. At December 31, 2018 and
2017, the Company recorded an unrealized loss of $42,283 and an unrealized gain of $133,067, respectively, representing the difference
between the cost basis and the estimated fair value, as accumulated other comprehensive income in the stockholder's equity section
of the Company’s consolidated balance sheet and as a change in unrealized gains and losses on marketable securities in the
Company’s consolidated statements of comprehensive income (loss). The Company’s investment in marketable securities
will be revalued on each balance sheet date. The fair value of the Company’s holdings in marketable securities
at December 31, 2018 and 2017 is a Level 1 measurement based on quoted prices in an active market.
6. INVENTORIES
At December 31, 2018 and 2017,
inventories consist of:
|
|
2018
|
|
|
2017
|
|
Raw materials, parts and supplies
|
|
$
|
2,026,839
|
|
|
$
|
541,816
|
|
Work-in-progress
|
|
|
483,706
|
|
|
|
685,410
|
|
Finished products
|
|
|
750,581
|
|
|
|
765,639
|
|
Total inventories
|
|
$
|
3,261,126
|
|
|
$
|
1,992,865
|
|
7. PROPERTY AND EQUIPMENT, NET
At December 31, 2018 and 2017,
property and equipment consist of:
|
|
2018
|
|
|
2017
|
|
Cryptocurrency machines and related equipment
|
|
$
|
9,168,928
|
|
|
$
|
—
|
|
Computer, software and related equipment
|
|
|
2,495,470
|
|
|
|
2,431,906
|
|
Restaurant equipment
|
|
|
752,103
|
|
|
|
—
|
|
Office furniture and equipment
|
|
|
287,583
|
|
|
|
289,288
|
|
Leasehold improvements
|
|
|
1,274,865
|
|
|
|
788,057
|
|
|
|
|
13,978,949
|
|
|
|
3,509,251
|
|
Accumulated depreciation and amortization
|
|
|
(4,665,650
|
)
|
|
|
(2,292,404
|
)
|
Property and equipment, net
|
|
$
|
9,313,299
|
|
|
$
|
1,216,847
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
For the years ended
December 31, 2018, depreciation expense amounted to $2,447,249 and $193,671, respectively.
8. INTANGIBLE ASSETS, NET
At December 31, 2018 and 2017
intangible assets consist of:
|
|
2018
|
|
|
2017
|
|
Trade name and trademark
|
|
$
|
1,562,332
|
|
|
$
|
1,739,307
|
|
Customer list
|
|
|
2,388,139
|
|
|
|
988,041
|
|
Non-competition agreements
|
|
|
150,000
|
|
|
|
150,000
|
|
Domain name and other intangible assets
|
|
|
762,807
|
|
|
|
81,000
|
|
|
|
|
4,863,278
|
|
|
|
2,958,348
|
|
Accumulated depreciation and amortization
|
|
|
(503,480
|
)
|
|
|
(60,335
|
)
|
Property and equipment, net
|
|
$
|
4,359,798
|
|
|
$
|
2,898,013
|
|
During the years ended
December 31, 2018 and 2017, the Company acquired the trade names and trademarks of I.AM and Microphase, both which were determined
to have an indefinite life, for $520,000 and $1,739,307, respectively. The remaining definite lived intangible assets are being
amortized on a straight-line basis over their estimated useful lives. Amortization expense was $459,656 and $60,335 for the years
ended December 31, 2018 and 2017, respectively.
The customer
list and non-competition agreements are subject to amortization over their estimated useful lives, which range between
3 and 14 years. The following table presents estimated amortization expense for each of the succeeding five calendar years and
thereafter.
2019
|
|
|
$
|
506,271
|
|
2020
|
|
|
|
382,251
|
|
2021
|
|
|
|
242,503
|
|
2022
|
|
|
|
224,003
|
|
2023
|
|
|
|
210,670
|
|
Thereafter
|
|
|
|
1,044,254
|
|
|
|
|
$
|
2,609,952
|
|
9. GOODWILL
The Company’s
goodwill relates to the acquisitions of a controlling interest in Microphase on June 2, 2017 and I. AM, Inc. (“I. AM”)
on May 23, 2018, the acquisition of Enertec Systems 2001 Ltd. (“Enertec”) on May 22, 2018, and the acquisition of all
of the outstanding membership interests in Power Plus on September 1, 2017.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
10. INVESTMENTS – RELATED PARTIES
Investments in AVLP at December 31, 2018
and 2017, are comprised of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Investment in convertible promissory note of AVLP
|
|
$
|
6,943,997
|
|
|
$
|
4,124,220
|
|
Investment in warrants of AVLP
|
|
|
2,230,641
|
|
|
|
6,901,593
|
|
Investment in common stock of AVLP
|
|
|
812,858
|
|
|
|
826,408
|
|
Accrued interest in convertible promissory note of AVLP
|
|
|
1,004,317
|
|
|
|
324,400
|
|
Total investment in AVLP – Gross
|
|
|
10,991,813
|
|
|
|
12,176,621
|
|
Less: original issue discount
|
|
|
(2,336,693
|
)
|
|
|
(2,115,710
|
)
|
Total investment in AVLP – Net
|
|
$
|
8,655,120
|
|
|
$
|
10,060,911
|
|
The following table
summarizes the changes in our investments in AVLP during the year ended December 31, 2018:
|
|
Investment in
|
|
|
Investment in
|
|
|
|
|
|
|
warrants and
|
|
|
convertible
|
|
|
Total
|
|
|
|
common stock
|
|
|
promissory
|
|
|
investment
|
|
|
|
of AVLP
|
|
|
note of AVLP
|
|
|
in AVLP – Net
|
|
Balance at January 1, 2017
|
|
$
|
84,578
|
|
|
$
|
952,073
|
|
|
$
|
1,036,651
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
620,091
|
|
|
|
620,091
|
|
Investment in common stock of AVLP
|
|
|
191,782
|
|
|
|
—
|
|
|
|
191,782
|
|
Fair value of warrants issued by AVLP
|
|
|
2,388,681
|
|
|
|
—
|
|
|
|
2,388,681
|
|
Unrealized gain in warrants of AVLP
|
|
|
4,512,912
|
|
|
|
—
|
|
|
|
4,512,912
|
|
Unrealized gain in common stock of AVLP
|
|
|
550,048
|
|
|
|
—
|
|
|
|
550,048
|
|
Accretion of discount
|
|
|
—
|
|
|
|
436,346
|
|
|
|
436,346
|
|
Accrued Interest
|
|
|
—
|
|
|
|
324,400
|
|
|
|
324,400
|
|
Balance at December 31, 2018
|
|
$
|
7,728,001
|
|
|
$
|
2,332,910
|
|
|
$
|
10,060,911
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
1,671,936
|
|
|
|
1,671,936
|
|
Payment of convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
(1,107,500
|
)
|
|
|
(1,107,500
|
)
|
Investment in common stock of AVLP
|
|
|
417,169
|
|
|
|
—
|
|
|
|
417,169
|
|
Fair value of warrants issued by AVLP
|
|
|
2,255,341
|
|
|
|
—
|
|
|
|
2,255,341
|
|
Unrealized loss in warrants of AVLP
|
|
|
(6,926,293
|
)
|
|
|
—
|
|
|
|
(6,926,293
|
)
|
Unrealized loss in common stock of AVLP
|
|
|
(430,719
|
)
|
|
|
—
|
|
|
|
(430,719
|
)
|
Accretion of discount
|
|
|
—
|
|
|
|
2,034,358
|
|
|
|
2,034,358
|
|
Accrued Interest
|
|
|
—
|
|
|
|
679,917
|
|
|
|
679,917
|
|
Balance at December 31, 2018
|
|
$
|
3,043,499
|
|
|
$
|
5,611,621
|
|
|
$
|
8,655,120
|
|
The Company has made
a strategic decision to invest in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, a significant stockholder
of the Company. The Company’s investments in AVLP consist of convertible promissory notes, warrants and shares of common
stock of AVLP. On September 6, 2017, the Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”)
with an effective date of August 21, 2017 pursuant to which the Company will provide AVLP a non-revolving credit facility
of up to $10 million for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement,
including the Company having available funds to grant such credit. At December 31, 2018, the Company has provided loans to AVLP
in the principal amount $6,943,997 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants
to purchase 13,887,994 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP to the
Company are secured by the assets of AVLP.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The warrants entitle
the Company to purchase up to 13,887,994 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five
years. The exercise price of $0.50 is subject to adjustment for customary stock splits, stock dividends, combinations or similar
events. The warrant may be exercised for cash or on a cashless basis. At December 31, 2018 and 2017, the Company recorded an unrealized
gain (loss) on its investment in warrants of AVLP of ($6,926,293) and $4,512,912 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 and as a change in net unrealized gains on securities
available-for-sale in the Company’s consolidated statements of comprehensive loss. During the years ended December 31, 2018
and 2017, the Company recognized, in other comprehensive income (loss), net unrealized gain (loss) on securities available-for-sale
of ($8,027,746) and $5,171,743, respectively. The Company’s investment in warrants and common stock of AVLP represented ($7,357,012)
and $5,062,960, respectively, of the net unrealized gain (loss) on securities available-for-sale. 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 1.92% and 2.98%, was derived from the U.S.
Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor which ranged
between 68.7% and 80.4% was determined based on historical stock prices for similar technology companies with market capitalizations
under $100 million. The warrant valuation is a Level 3 measurement.
In accordance with
ASC No. 310,
Receivables
(“ASC 310”), the Company accounts for its convertible promissory notes in
AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued
interest and accretion of original issue discount and discount attributed to the fair value of the 13,887,994 warrants that the
Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company records
interest on an accrual basis and recognizes it as earned in accordance with the contractual terms of the convertible promissory
notes, to the extent that such amounts are expected to be collected. The original issue discount of $165,448 and the discount attributed
to the fair value of the warrants of $4,644,022 are being amortized as interest income through the maturity date. During the years
ended December 31, 2018 and 2017, the Company recorded $2,034,358 and $436,346, respectively, of interest income for the discount
accretion. During the years ended December 31, 2018 and 2017, the Company recorded contractual interest receivable attributed to
the AVLP Notes and AVLP Loan Agreement of $679,917 and $324,400, respectively.
The Company evaluated
the collectability of both interest and principal for the convertible promissory notes in AVLP to determine whether there was an
impairment. Based on current information and events, the Company determined that it is probable that it will be able to collect
amounts due according to the existing contractual terms. Impairment assessments require significant judgments and are based on
significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair
value of the collateral.
During the years ended
December 31, 2018 and 2017, the Company also acquired in the open market 430,942 shares of AVLP common stock for $417,169 and 221,333
shares of AVLP common stock for $191,782, respectively. At December 31, 2018, the closing market price of AVLP’s common stock
was $0.90, a decline from $1.75 at December 31, 2017. The Company has determined that its investment in AVLP marketable equity
securities are accounted for pursuant to the fair value method and based upon the closing market price of AVLP common stock at
December 31, 2018, the Company’s investment in AVLP common stock had an unrealized gain of $119,329.
11. INVESTMENTS IN PREFERRED STOCK OF PRIVATE COMPANY AND
OTHER INVESTMENTS
We hold a portfolio of investments in equity
and debt securities in other entities that are accounted for under the cost method.
Investment in Preferred Stock of Private
Company
On December
15, 2017, the Company and Sandstone Diagnostics, Inc. (“Sandstone”) entered into a Series A1 Preferred Stock Purchase
Agreement (“Loan Agreement”) pursuant to which the Company purchased 976,286 shares of Sandstone’s Series A1
Preferred Shares for $1,000,000. Sandstone is a medical device company focused on a data-driven approach to men’s reproductive
health. Founded in 2012 in part by government scientists from Sandia National Laboratories, Sandstone’s mission is to provide
innovative, data-driven tools to help men assess, manage, and improve their reproductive health. The funding from the Series
A1 Preferred Stock financing will support sales growth and continued product development leveraging the company’s unique
technology platform, Sandstone’s Trak™ Male Fertility Testing System.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The Company followz
the guidance of ASC No. 321,
Equity Securities
(“ASC 321”), which provides a measurement alternative to
the requirement to carry equity interests at fair value in accordance with ASC 820, Fair value measurement, for certain equity
interests without readily determinable fair values. Equity interests measured in accordance with the measurement alternative in
ASC 321 are not required to be included within the fair value hierarchy. The Company’s equity investment in Sandstone is
recorded at cost. However, any change to the carrying amount will be subsequently adjusted up or down for observable price changes
(i.e., prices in orderly transactions for the identical investment or similar investment of the same issuer) and any adjustments
to the carrying amount shall be recorded in net income.
Other Investments
On November 1,
2017, the Company and I. AM, Inc. (“I. AM”) entered into a Loan and Security Agreement pursuant to which the Company
provided I. AM with a non-revolving credit facility of up to $1,600,000. On May 23, 2018, DP Lending entered into and closed a
securities purchase agreement with I. AM. At the date of the acquisition, I. AM owed DP Lending $1,715,330 in outstanding principal,
pursuant to the loan and security agreement. The purchase agreement provides that as I. AM repays the outstanding loan to DP Lending
in accordance with the loan agreement, DP Lending will on a pro rata basis transfer shares of common stock of I. AM to David
J. Krause, up to an aggregate of 471 shares (see Note 14).
The Company, primarily
through DP Lending, has made additional investments in debt and equity securities of various entities. At December 31, 2018 and
2017, the outstanding balance of these investments was $2,572,230 and $1,637,672, respectively.
12. INVESTMENTS IN REAL ESTATE
On June 8, 2018, the
Company entered into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the “
NY
Partnership
”). The NY Partnership is a limited partner in the partnership that is responsible for the construction and
related activities of a hotel in New York City. In connection with this transaction, the Company has agreed to finance a portion
of the capital required by the NY Partnership. The Company used $1,000,000 from the proceeds of the August 16, 2018 Notes as an
additional capital contribution in the partnership. As of December 31, 2018, the Company had invested an aggregate of $1,869,000
in the NY Partnership and $100,000 in another real estate investment. Subject to the occurrence of certain events and other conditions
over which the Company has no control, it was required to make monthly capital contributions of $500,000 every thirty days until
the Company’s commitment of $10 million is funded in full. The Company has received a waiver for its obligation to make monthly
capital contributions through September 30, 2019.
13. OTHER INVESTMENTS, RELATED PARTIES
The Company’s
other related party investments primarily consist of two investments.
MTIX, Ltd.
On December 5, 2017,
the Company entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson two convertible
promissory notes in the principal amount of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange
for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
During December 2017,
the Company issued 30,000 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently
sold the 30,000 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 December 31, 2018 and 2017, the Company has valued the note receivable at $600,000, the carrying amount of Note A. The
Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.
Israeli Property
During the year ended
December 31, 2017, our President, Amos Kohn, purchased certain real property that serves as a facility for the Company’s
business operations in Israel. The Company made $300,000 of payments to the seller of the property and received a 28% undivided
interest in the real property (“Property”). The Company’s subsidiary, Coolisys, entered into a Trust Agreement
and Tenancy In Common Agreement with Roni Kohn, who owns a 72% interest in the Property, the daughter of Mr. Kohn and an Israeli
citizen. The Property was purchased to serve as a residence/office facility for the Company in order to oversee its Israeli operations
and to expand its business in the hi-tech industry located in Israel. Pursuant to the Trust Agreement, Ms. Kohn will hold and manage
Coolisys’ undivided 28% interest in the Property. The trust will be in effect until it is terminated by mutual agreement
of the parties. During the term of the trust, Ms. Kohn will not sell, lease, sublease, transfer, grant, encumber, change or effect
any other disposition with respect to the Property or Coolisys’ interest without the Company’s approval.
Under the Tenancy In
Common Agreement, Coolisys and its executive officers shall have the exclusive rights to use the Property for the Company and its
affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy In Common Agreement,
for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right to purchase a portion
of the Company’s interest in the Property. Such right shall fully vest at the end of five years of continuous employment
and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal value. The Company
will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years. During the years ended December
31, 2018 and 2017, the Company recognized $30,000 and $7,500, respectively, in amortization expense. In the event that 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.
Other investments and interest receivable
During the year ended
December 31, 2017, DP Lending made loans to Alzamend Neuro, Inc. (“Alzamend”), in the amount of $44,000, these loans
were repaid during 2018. AVLP is a party to a management services agreement pursuant to which AVLP provides management, consulting
and financial services to Alzamend. As additional consideration, the Company received a warrant to purchase 22,000 shares of Alzamend’s
common stock at an exercise price of $0.30 per share of common stock. The warrants were determined to have a de minimis value.
14. BUSINESS COMBINATIONS
Business
combinations are accounted for under the acquisition method of accounting in accordance with ASC No. 805,
Business Combinations
.
Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values. Goodwill is
recorded to the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired
less liabilities assumed at the date of acquisition. Two acquisitons were completed during 2018: Enertec Systems 2001 Ltd. (“Enertec”)
and I. AM, Inc. (“I. AM”). The final accounting for the acquisition of Enertec was completed during 2018 whereas the
initial accounting for the acquisition of I. AM is not yet complete and the Company is still performing procedures to determine
the appropriate accounting.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Acquisitions during 2018
Enertec Systems
2001 Ltd.
On
December 31, 2017, CooliSys entered into a share purchase agreement with Micronet Enertec Technologies, Inc. (“MICT”),
a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary of MICT (“EML”
and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”), an Israeli corporation,
pursuant to which Coolisys acquired Enertec (the “Acquisition”). Enertec is a manufacturer of specialized electronic
systems for the military market. On May 23, 2018, Coolisys acquired Enertec for an aggregate cash purchase price of $4,850,099.
I. AM, Inc.
On May 23, 2018,
DP Lending entered into and closed a securities purchase agreement with I. AM, David J. Krause and Deborah J. Krause. Pursuant
to the securities purchase agreement, I. AM sold to DPL, 981 shares of common stock for a purchase price of $981, representing,
upon the closing, 98.1% of I. AM’s outstanding common stock.
I. AM owns and
operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715,330 in outstanding principal,
pursuant to a loan and security agreement, between I. AM and DP Lending, which I. AM used to acquire the restaurants. The purchase
agreement provides that, as I. AM repays the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending will
on a pro rata basis transfer shares of common stock of I. AM to David J. Krause, up to an aggregate of 471 shares.
Components of the purchase price for acquisitions
completed during the year ended December 31, 2018:
|
|
Enertec
|
|
|
I. AM
|
|
Accounts receivable
|
|
$
|
3,184,227
|
|
|
$
|
29,319
|
|
Inventories
|
|
|
1,343,053
|
|
|
|
40,581
|
|
Property and equipment
|
|
|
648,649
|
|
|
|
700,291
|
|
Trade name and trademark
|
|
|
2,094,741
|
|
|
|
520,000
|
|
Domain name and other intangible assets
|
|
|
—
|
|
|
|
90,000
|
|
Other assets
|
|
|
29,056
|
|
|
|
1,492
|
|
Accounts payable and accrued expenses
|
|
|
(2,702,306
|
)
|
|
|
(103,961
|
)
|
Deferred tax liability
|
|
|
(160,311
|
)
|
|
|
—
|
|
Notes payable
|
|
|
(4,235,725
|
)
|
|
|
—
|
|
Accrued severance pay
|
|
|
(131,811
|
)
|
|
|
—
|
|
Net assets assumed
|
|
|
69,573
|
|
|
|
1,277,722
|
|
Goodwill
|
|
|
4,780,526
|
|
|
|
265,252
|
|
Non-controlling interest
|
|
|
—
|
|
|
|
(33,242
|
)
|
Purchase price
|
|
$
|
4,850,099
|
|
|
$
|
1,509,732
|
|
Acquisitions during 2017
Microphase Corporation
On April 28, 2017,
the Company entered into a
share exchange agreement
with Microphase; Microphase Holding Company LLC, a limited liability company organized under the laws of Connecticut (“MHC”),
Ergul Family Limited Partnership, a partnership organized under the laws of Connecticut (“EFLP”) RCKJ Trust, a trust
organized under the laws of New Jersey (“RCKJ” and with MHC and EFLP, the “Significant Stockholders”)
and those additional persons who have executed the share exchange agreement (collectively, the “Minority Stockholders”
and with the Significant Stockholders, the “Stockholders”). Upon the terms and subject to the conditions
set forth in the share exchange agreement, the Company acquired 1,603,434 shares (the “Subject Shares”) of the issued
and outstanding common stock of Microphase (the “MPC Common Stock”), from the Stockholders in exchange for the issuance
by the Company of 92,122 shares of DPW common stock (“Common Stock”) and 378,776 shares of DPW Series D Preferred
Stock (collectively, the “Exchange Shares”), which shares of DPW Series D Preferred Stock are convertible into an
aggregate of 757,552 shares of Common Stock and warrants to purchase an aggregate of 50,000 shares of Common Stock. At the time
of the closing of the acquisition the Exchange Shares constituted 56.4% of the outstanding equity interests of Microphase Corporation.
The operating results of Microphase from the closing date of the acquisition, June 2, 2017, are included in the consolidated financial
statements.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
At
closing, the purchase price of the Company’s 56.4% interest in Microphase was determined to be $1,451,040 comprised of the
Exchange Shares, valued at $1,222,000 based on the closing price of the Company’s common stock on June 2, 2017 of $9.40
per share, and the warrants, valued at $229,040.
The
Company computed the fair value of these warrants using the Black-Scholes option pricing model. The risk-free rate of 1.4% was
derived from the U.S. Treasury yield curve, matching the warrant’s term, in effect at the measurement date. The volatility
factor of 105.9% was determined based on the Company’s historical stock prices.
Power-Plus Technical Distributors
On August 3, 2017,
Coolisys entered into a Securities Purchase Agreement to acquire all the outstanding membership Interests of Power-Plus. Power-Plus
is an industrial distributor of value-added power supply solutions, UPS systems, fans, filters, line cords, and other power-related
components. On September 1, 2017, Coolisys completed the acquisition.
Under the terms
of the agreement, Coolisys Technologies acquired all the membership Interests of Power-Plus for a price of $850,000, which was
reduced by certain debts of Power-Plus in the amount of $185,927. The purchase price of $664,073 was paid by (i) a two-year promissory
note in the amount of $255,000 payable in 24 monthly installments; and (ii) cash at closing of $409,073 resulting in a net purchase
price of $664,073.
Components of the purchase price for acquisitions
completed during the year ended December 31, 2017:
|
|
Microphase
|
|
|
Power-Plus
|
|
Cash and cash equivalents
|
|
$
|
10,982
|
|
|
$
|
31,411
|
|
Accounts receivable
|
|
|
438,456
|
|
|
|
235,358
|
|
Inventories
|
|
|
667,020
|
|
|
|
240,843
|
|
Prepaid expenses and other current assets
|
|
|
139,665
|
|
|
|
2,068
|
|
Restricted cash
|
|
|
100,000
|
|
|
|
—
|
|
Intangible assets
|
|
|
2,627,348
|
|
|
|
250,000
|
|
Property and equipment
|
|
|
406,432
|
|
|
|
22,925
|
|
Other investments
|
|
|
303,333
|
|
|
|
—
|
|
Deposits and loans
|
|
|
43,479
|
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
|
(1,577,281
|
)
|
|
|
(388,746
|
)
|
Deferred tax liability
|
|
|
(225,488
|
)
|
|
|
—
|
|
Revolving credit facility
|
|
|
(879,666
|
)
|
|
|
(210,739
|
)
|
Notes payable
|
|
|
(2,203,835
|
)
|
|
|
—
|
|
Notes payable, related parties
|
|
|
(406,194
|
)
|
|
|
—
|
|
Convertible notes payable
|
|
|
—
|
|
|
|
—
|
|
Other current liabilities
|
|
|
(219,685
|
)
|
|
|
—
|
|
Net (liabilities) assets assumed
|
|
|
(775,434
|
)
|
|
|
183,119
|
|
Goodwill
|
|
|
3,171,029
|
|
|
|
480,953
|
|
Non-controlling interest
|
|
|
(944,555
|
)
|
|
|
—
|
|
Purchase price
|
|
$
|
1,451,040
|
|
|
$
|
664,073
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The
following pro forma data for the years ended December 31, 2018 and 2017 summarizes the results of operations for the period indicated
as if the Microphase, Power-Plus and Enertec acquisitions, which closed on June 2, 2017, September 1, 2017, and May 23, 2018, respectively,
had been completed as of the beginning of each period presented. At the time of the acquisition, I. AM was not material to the
Company’s operations and has not been included in the pro forma data. The pro forma data gives effect to actual operating
results prior to the acquisition. These pro forma amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisition occurred as of the beginning of each period presented or that may be obtained in future periods:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total Revenue
|
|
$
|
28,691,641
|
|
|
$
|
20,807,590
|
|
Net loss
|
|
$
|
(35,627,242
|
)
|
|
$
|
(16,877,041
|
)
|
Less: Net loss attributable
|
|
|
|
|
|
|
|
|
to non-controlling interest
|
|
|
748,320
|
|
|
|
772,596
|
|
Net loss attributable to
|
|
|
|
|
|
|
|
|
common stockholders
|
|
$
|
(34,878,922
|
)
|
|
$
|
(16,104,445
|
)
|
Preferred deemed dividends
|
|
|
(108,049
|
)
|
|
|
(584,182
|
)
|
Preferred dividends
|
|
|
—
|
|
|
|
(54,059
|
)
|
Loss available to common shareholders
|
|
$
|
(34,986,971
|
)
|
|
$
|
(16,742,686
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(12.06
|
)
|
|
$
|
(26.85
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
|
|
|
|
|
|
|
|
|
common shares outstanding
|
|
|
2,899,888
|
|
|
|
623,583
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(34,986,971
|
)
|
|
$
|
(16,742,686
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Change in net foreign currency
|
|
|
|
|
|
|
|
|
translation adjustments
|
|
|
(377,823
|
)
|
|
|
152,078
|
|
Net unrealized gain (loss) on
|
|
|
|
|
|
|
|
|
securities available-for-sale
|
|
|
(8,027,746
|
)
|
|
|
5,171,743
|
|
Other comprehensive income (loss)
|
|
|
(8,405,569
|
)
|
|
|
5,323,821
|
|
Total Comprehensive loss
|
|
$
|
(43,392,540
|
)
|
|
$
|
(11,418,865
|
)
|
15. 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.
The Plans, as amended, provide for the issuance of a maximum of 868,632 shares of the Company’s common stock. The Company
also has 1,500 outstanding options that were granted between 2009 and 2011 pursuant to the terms of the Company's 2002 Stock Option
Plan (the “2002 Plan”). Options granted pursuant to the 2002 Plan expire between December 2020 and February 2021.
Options granted under
the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and
become exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally become
fully vested after four years. Any options that are forfeited or cancelled before expiration become available for future grants.
The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans are subject
to a vesting period determined at the date of grant. As of December 31, 2018, an aggregate of 507,789 of the Company's options
are still available for future grant.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
During the year ended
December 31, 2018, the Company granted 50,000 options to its employees from the Plans and also granted 144,875 options outside
of the Plans. During the year ended December 31, 2017, the Company granted 40,500 options from the Plans. These options become
fully vested after four years. The Company estimated the grant date fair value of options granted utilizing the Black-Scholes option
pricing model during the year ended December 31, 2018 and 2017 was $513,510 and $482,055, respectively, which is being recognized
as stock-based compensation expense over the requisite four-year service period. During the year ended December 31, 2018 and 2017,
the Company also issued 79,153 and 97,440, respectively, shares of common stock to its consultants and service providers pursuant
to the Plans. The Company estimated the grant date fair value of these shares of common stock was $2,640,102 and $1,532,702, 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.
During the year ended
December 31, 2018 and 2017, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing
model with the following weighted average assumptions:
|
|
|
|
|
2018
|
|
2017
|
Weighted average risk-free interest rate
|
|
2.41% — 2.80%
|
|
1.73% — 2.14%
|
Weighted average life (in years)
|
|
4.70
|
|
5.0
|
Volatility
|
|
124.7% — 131.7%
|
|
98.4% — 115.8%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Weighted average grant-date fair value per share of
options granted
|
|
$ 15.61
|
|
$ 12.00
|
The options outstanding
as of December 31, 2018, have been classified by exercise price, as follows:
Outstanding
|
|
Exercisable
|
x
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
Weighted
|
|
Weighted
|
|
|
Remaining
|
Average
|
|
Average
|
Exercise
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
Price
|
Outstanding
|
Life (Years)
|
Price
|
Exercisable
|
Price
|
$11.40 - $16.00
|
|
161,500
|
|
7.54
|
|
$13.37
|
|
92,876
|
|
$13.32
|
$20.00 - $27.60
|
|
8,500
|
|
8.52
|
|
$27.46
|
|
3,031
|
|
$27.20
|
$30.20 - $33.80
|
|
3,125
|
|
3.71
|
|
$32.73
|
|
3,125
|
|
$32.73
|
$11.40 - $33.80
|
|
173,125
|
|
7.52
|
|
$14.41
|
|
99,032
|
|
$14.35
|
|
|
|
|
|
|
|
|
|
|
|
Issuances outside of Plans
|
$16.00 - $46.40
|
|
199,875
|
|
7.39
|
|
$26.09
|
|
36,842
|
|
$29.36
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
$11.40 - 46.40
|
|
373,000
|
|
7.45
|
|
$20.67
|
|
135,874
|
|
$18.42
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
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 years ended December 31, 2018 and 2017, is comprised as follows:
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
4,874
|
|
|
$
|
8,466
|
|
Engineering and product development
|
|
|
13,650
|
|
|
|
21,449
|
|
Selling and marketing
|
|
|
11,922
|
|
|
|
46,431
|
|
General and administrative
|
|
|
2,921,532
|
|
|
|
1,501,544
|
|
Stock-based compensation from Plans
|
|
$
|
2,951,978
|
|
|
$
|
1,577,890
|
|
Stock-based compensation from issuances outside of Plans
|
|
|
1,767,287
|
|
|
|
253,395
|
|
Total stock-based compensation
|
|
$
|
4,719,265
|
|
|
$
|
1,831,285
|
|
The combination of
stock-based compensation of $2,951,978 from the issuances of equity-based awards pursuant to the Plans and stock-based compensation
attributed to stock awards of $965,220 and warrants and options of $802,066, which were issued outside of the Plans, resulted in
aggregate stock-based compensation of $4,719,265 during the year ended December 31, 2018. During the years ended December 31, 2018
and 2017, the Company issued 144,875 and 55,000 options, respectively, to purchase shares of common stock at an average exercise
price of $26.09 per share to its directors and officers. During the year ended December 31, 2017, stock-based compensation was
comprised of $1,577,890 from the issuances of equity-based awards pursuant to the Plans and stock-based compensation attributed
to stock awards of $130,000 and warrants and options of $123,395, which were issued outside of the Plans.
A summary of option
activity under the Company's stock option plans as of December 31, 2018 and 2017, and changes during the years 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, 2017
|
|
|
161,382
|
|
|
|
118,300
|
|
|
$16.59
|
|
|
9.08
|
|
|
$0
|
|
Adoption of 2017 SIP
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
(97,440
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(40,500
|
)
|
|
|
40,500
|
|
|
$16.84
|
|
|
|
|
|
|
|
Forfeited
|
|
|
3,500
|
|
|
|
(3,500
|
)
|
|
$12.57
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(18,175
|
)
|
|
$31.26
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
126,942
|
|
|
|
137,125
|
|
|
$15.43
|
|
|
8.80
|
|
|
$6,688
|
|
Adoption of 2018 SIP
|
|
|
500,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
(79,153
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(50,000
|
)
|
|
|
50,000
|
|
|
$14.00
|
|
|
|
|
|
|
|
Forfeited
1
|
|
|
10,000
|
|
|
|
(11,000
|
)
|
|
$20.27
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(3,000
|
)
|
|
$32.60
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
507,789
|
|
|
|
173,125
|
|
|
$14.41
|
|
|
7.52
|
|
|
$0
|
|
1
Includes 1,000 options that were issued
pursuant to the Company’s 2002 Plan and are not available for future issuance.
The aggregate intrinsic
value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on December
31, 2018 of $2.00 and the exercise price, multiplied by the number of in-the-money-options).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
As of December 31,
2018, there was $752,529 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 3.2 years.
16. WARRANTS
During the years ended
December 31, 2018 and 2017, the Company issued a total of 1,166,681 warrants at an average exercise price of $19.80 per share.
Warrant issuances during 2017
During the year ended
December 31, 2017, the Company issued a total of 431,543 warrants at an average exercise price of $16.60 per share.
|
(i)
|
In February 2017, the Company issued five-year warrants to purchase 16,667 shares of common stock
at a per share exercise price of $14.00 in connection with $400,000 of 6% demand promissory notes entered into by the Company (See
Note 20o).
|
|
(ii)
|
Between March 24, 2017 and June 2, 2017, the Company issued warrants to purchase 71,429 shares
of common stock, at an exercise price of $14.00 per share of common stock, in connection with preferred stock purchase agreements
to purchase 100,000 shares of Series B Preferred Stock by Philou (See Note 24).
|
|
(iii)
|
On April 5, 2017, the Company issued warrants to purchase 9,000 shares of common stock, at an exercise
price of $18.00 per share of common stock, in connection with the cancellation of $270,000 in demand promissory notes (See Note
20p).
|
|
(iv)
|
On April 17, 2017, the Company issued warrants to purchase 8,333 shares of common stock, at an
exercise price of $18.00 per share of common stock, in connection with the issuance of two 7% convertible notes in the aggregate
principal amount of $250,000. On July 25, 2017, the Company agreed to reduce the exercise price of warrants to purchase 4,167 shares
of common stock from $18.00 per share to $11.00 per share and on July 28, 2017, the Company issued a new warrant to purchase 4,167
shares of common stock at $11.00 per share and cancelled the prior warrant to purchase 4,167 shares of common stock at $18.00 per
share (See Note 22h).
|
|
(v)
|
On April 26, 2017, the Company issued warrants to purchase 8,000 shares of common stock, at an
exercise price of $16.00 per share of common stock, in connection with the issuance of a 7% convertible note in the aggregate principal
amount of $104,000 (See Note 22i).
|
|
(vi)
|
Between May 5, 2017 and June 30, 2017, the Company issued warrants to purchase 11,219 shares of
common stock in connection with the issuance of short-term loans of $140,000 that the Company entered into with four accredited
investors (See Note 20n) of which $75,000 was from the Company’s corporate counsel, a related party. The exercise price was
$15.00 per share of common stock for 6,795 warrants and $16.00 per share of common stock for the remaining 4,423 warrants.
|
|
(vii)
|
Between May 24, 2017 and June 19, 2017, the Company issued warrants to purchase 91,000 shares of
common stock issued in connection with the sale of twenty-one units (the “Units”) at a purchase price of $52,000 per
Unit raising in the aggregate $1,092,000. Each Unit consisted of 21,667 shares of Series C Preferred Stock and Warrants to purchase
4,333 shares of common stock, at an exercise price of $20.00 per share of common stock (See Note 24).
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(viii)
|
The Company engaged Divine Capital Markets, LLC (“Divine”) to act as Placement Agent
(the “Placement Agent”) for the private placement of the Series C Preferred Stock and Warrants. For its services, the
Placement Agent received, in addition to a 10.0% commission on the sale of each Unit and a 3.0% non-refundable expense allowance,
warrants to purchase 10% of the Units sold at 120% of the Unit purchase price. The warrants to purchase 2.1 Units equates to a
warrant to purchase 9,100 shares of the Company’s common stock at $14.40 per share and a second warrant to purchase 9,100
shares of the Company’s common stock at $20.00 per share (See Note 24).
|
|
(ix)
|
On June 2, 2017, the Company issued warrants to purchase 50,000 shares of common stock, at an exercise
price of $22.00 per share of common stock, pursuant to the terms of a share exchange agreement (See Note 14).
|
|
(x)
|
On July 25, 2017, the Company issued warrants to purchase an aggregate of 8,182 shares of
common stock at an exercise price equal to $11.00 per share of common stock in connection with a private placement agreement under
which we issued and sold 13,636 shares of common stock to the investor at $11.00 per share for an aggregate purchase price of $150,000.
(See Note 24).
|
|
(xi)
|
On July 28, 2017, the Company entered into an exchange agreement related to a 7% Convertible Note
in the principal amount of $125,000 in which the Company exchanged the 7% Convertible Note for three new promissory notes in the
principal amounts of $110,000 due August 1, 2017; $35,000 due August 1, 2017; and $34,000 due August 8, 2017 (individually an Exchange
Note and collectively the Exchange Notes). Concurrent with entering into the exchange agreement, the investor entered into a subscription
agreement under which the Company issued and sold in a registered direct offering 10,000 shares of common stock at $11.00 per share
for an aggregate purchase price of $110,000. The 10,000 shares of common stock were purchased through the cancellation of the Exchange
Note in the principal amount of $110,000. Further, the Company issued a warrant to purchase 6,000 shares of common stock at
$11.00 per share (See Note 22h).
|
|
(xii)
|
On August 3, 2017, the Company issued warrants to purchase an aggregate of 33,333 shares of
common stock at an exercise price equal to $14.00 per share of common stock in connection with the issuance of a 12% Convertible
Promissory Note in the aggregate principal amount of $400,000 (See Note 22c).
|
|
(xiii)
|
On August 10, 2017, the Company issued warrants to purchase an aggregate of 73,750 shares of the
common stock at an exercise price equal to $13.20 per share of common stock in connection with the issuance of 10% Convertible
Promissory Notes in the aggregate principal amount of $880,000 (See Note 22g).
|
|
(xiv)
|
On November 2, 2017, the Company paid to Aegis Capital Corp. (“Aegis”), its financial
advisor, a cash fee of $80,800 and issued to Aegis a warrant to purchase 7,407 shares of common stock with an exercise price of
$13.20 per share of common stock in connection with the issuance of 10% Convertible Promissory Notes in the aggregate principal
amount of $1,111,000 (See Note 22f).
|
|
(xv)
|
On December 5, 2017, the Company entered into an exchange agreement (the “Exchange Agreement”)
with several accredited investors, pursuant to which the Company issued an aggregate of 76,193 shares of common stock and warrants
to purchase 19,023 shares of common stock with an exercise price of $22.00 per share of common stock, in exchange for cancellation
of $690,000 of outstanding debt owed to the investors by Microphase Corporation (See Note 20l).
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Warrant issuances during 2018
During the year ended
December 31, 2018, the Company issued a total of 735,291 warrants at an average exercise price of $21.80 per share.
|
(i)
|
On January 23, 2018, the Company issued warrants to purchase an aggregate of 31,250 shares
of common stock at an exercise price equal to $44.00 per share of common stock in connection with the issuance of a 10% senior
convertible promissory note in the aggregate principal amount of $1,250,000 (See Note 22e).
|
|
(ii)
|
On January 25, 2018, the Company entered into three agreements for the Purchase and Sale of Future
Receipt, pursuant to which the Company sold up to (i) $562,125 of the Company’s future receipts for a purchase price of $375,000,
(ii) $337,275 in future receipts for a purchase price of $225,000 and (iii) $118,000 in future receipts for a purchase price of
$100,000. Under the terms of these agreements, the Company issued warrants to purchase an aggregate of 5,625 shares of common stock
at an exercise price of $45.00 per share of common stock and warrants to purchase 8,125 shares of common stock at an exercise price
of $50.00 per share of common stock (See Note 18).
|
|
(iii)
|
On March 22, 2018, the Company issued warrants to purchase an aggregate of 62,500 shares of
common stock at an exercise price equal to $23.00 per share of common stock in connection with the issuance of a
promissory
note in the principal amount of $1,750,000 with a term of two months, subject to the Company’s ability to prepay within one
month (See Note 20s)
.
|
|
(iv)
|
On March 23, 2018, the Company entered into a securities purchase agreement to sell and issue a
12% promissory note in the principal amount of $1,000,000 and a warrant to purchase 15,000 shares of common stock to an accredited
investor. Since the
promissory note was not paid in full on or before May 23, 2018,
the
Company issued an additional warrant to purchase 7,500 shares of common stock, at an exercise price of $23.00 per share of common
stock (See Note 20a).
|
|
(v)
|
On April 16, 2018, the Company issued warrants to purchase an aggregate of 49,679 shares of
common stock at an exercise price equal to $26.00 per share of common stock in connection with the issuance of 12% secured convertible
promissory notes in the aggregate principal amount of $1,722,222 (See Note 22d).
|
|
(vi)
|
On April 24, 2018, the Company issued warrants to purchase 25,510 shares of common stock, at an
exercise price of $14.00 per share of common stock, in connection with the Preferred Stock Purchase Agreement to purchase 25,000
shares of Series B Preferred Stock by Philou (See Note 24).
|
|
(vii)
|
On October 5, 2017, Ault & Company purchased 3,750 shares of the Company’s common stock
at $12.00 per share and a warrant to purchase up to 3,750 shares of the Company’s common stock at $12.00 per share for an
aggregate purchase price of $45,000. The shares and warrants were issued by the Company on May 8, 2018, the date all necessary
approvals to issue the shares were received. Ault & Company is controlled by Mr. Milton Ault, the Company’s Chairman
and Chief Executive Officer (See Note 24).
|
|
(viii)
|
On May 15, 2018, the Company entered into securities purchase agreements with certain investors
in which it sold an aggregate of 384,589 shares of its common stock for aggregate consideration of $6,000,000. In connection with
this financing, the Company issued (i) five-year warrants to purchase 96,147 shares of the Company’s Class A common stock
and (ii) five-year warrants to purchase 288,442 shares of the Company’s Class A common stock. The warrants were issued at
an exercise price of $18.80 per share of common stock
(See Note 24)
.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(ix)
|
On May 15, 2018, the Company entered into a securities purchase agreement with an institutional
investor to sell and issue a senior secured convertible promissory note with a principal face amount of $6,000,000 and (i) a five-year
warrant to purchase 55,556 shares of the Company’s Class A common stock at an exercise price of $27.00 per share of Class
A common stock (the “Series A Warrant”) and (ii) a five-year warrant to purchase 86,207 shares of the Company’s
Class B common stock at an exercise price of $17.40 per share of Class A common stock (See Note 22a). In connection with the financing,
the Company issued the placement agent a warrant to purchase 7,500 shares of common stock with an exercise price of $20.00.
|
The following table
summarizes information about common stock warrants outstanding at December 31, 2018:
Outstanding
|
|
|
|
Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
Weighted
|
|
Weighted
|
|
|
Remaining
|
Average
|
|
Average
|
Exercise
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
Price
|
Outstanding
|
Life (Years)
|
Price
|
Exercisable
|
Price
|
$0.20
|
|
15,873
|
|
7.84
|
|
$0.20
|
|
15,873
|
|
$0.20
|
$11.00
|
|
14,182
|
|
3.86
|
|
$11.00
|
|
14,182
|
|
$11.00
|
$12.00
|
|
3,750
|
|
4.33
|
|
$12.00
|
|
3,750
|
|
$12.00
|
$13.20
|
|
7,407
|
|
3.84
|
|
$13.20
|
|
7,407
|
|
$13.20
|
$14.00
|
|
106,286
|
|
3.87
|
|
$14.00
|
|
106,286
|
|
$14.00
|
$15.00
|
|
6,795
|
|
3.37
|
|
$15.00
|
|
6,795
|
|
$15.00
|
$16.00
|
|
24,083
|
|
1.69
|
|
$16.00
|
|
24,083
|
|
$16.00
|
$17.40
|
|
86,207
|
|
4.37
|
|
$17.40
|
|
86,207
|
|
$17.40
|
$18.80
|
|
384,589
|
|
4.38
|
|
$18.80
|
|
384,589
|
|
$18.80
|
$20.00
|
|
14,000
|
|
3.94
|
|
$20.00
|
|
14,000
|
|
$20.00
|
$22.00
|
|
37,974
|
|
2.68
|
|
$22.00
|
|
37,974
|
|
$22.00
|
$23.00
|
|
85,000
|
|
4.24
|
|
$23.00
|
|
85,000
|
|
$23.00
|
$26.00
|
|
49,679
|
|
4.29
|
|
$26.00
|
|
49,679
|
|
$26.00
|
$27.00
|
|
55,556
|
|
4.37
|
|
$27.00
|
|
55,556
|
|
$27.00
|
$44.00
|
|
31,250
|
|
4.06
|
|
$44.00
|
|
31,250
|
|
$44.00
|
$45.00
|
|
5,625
|
|
4.07
|
|
$45.00
|
|
5,625
|
|
$45.00
|
$50.00
|
|
8,125
|
|
4.07
|
|
$50.00
|
|
8,125
|
|
$50.00
|
$0.20 - $50.00
|
|
936,381
|
|
4.18
|
|
$20.19
|
|
936,381
|
|
$20.19
|
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.
The Company utilized
the Black-Scholes option pricing model and the assumptions used during the years ended December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Weighted average risk-free interest rate
|
|
|
2.41% — 2.94%
|
|
|
|
1.42% — 2.01%
|
|
Weighted average life (in years)
|
|
|
4.8
|
|
|
|
4.8
|
|
Volatility
|
|
|
124.8% — 138.4%
|
|
|
|
98.5% — 128.7%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average grant-date fair value per
share of warrants granted
|
|
$
|
15.80
|
|
|
$
|
8.20
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
17. OTHER CURRENT LIABILITIES
Other current liabilities at
December 31, 2018 and 2017 consist of:
|
|
2018
|
|
|
2017
|
|
Accrued payroll and payroll taxes
|
|
$
|
1,497,470
|
|
|
$
|
359,512
|
|
Warranty liability
|
|
|
86,495
|
|
|
|
86,495
|
|
Other accrued expenses
|
|
|
284,437
|
|
|
|
262,384
|
|
|
|
$
|
1,868,402
|
|
|
$
|
708,391
|
|
18. ADVANCES ON FUTURE RECEIPTS
During
2017, the Company received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future
Receipts (collectively, the “Agreements on Future Receipts”) pursuant to which the Company sold in the aggregate $4,068,352
in future receipts of the Company for $2,889,175. Future receipts include cash, check, ACH, credit card, debit card, bank card,
charge card or other form of monetary payment. During 2017, the Company had repaid $1,525,547 and during the year ended December
31, 2018, the Company entered into a total of nine additional Agreements on Future Receipts pursuant to which the Company sold
up to $5,632,400 in future receipts for a purchase price in the amount of $4,100,000. 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
2018, the Company recorded a discount in the amount of $1,651,193 in connection with these nine additional agreements, based upon
the difference between the amount of future receipts sold and the actual proceeds received by the Company. Under the terms of these
agreements, the Company also issued warrants to purchase an aggregate of 5,625 shares of common stock at an exercise price of $45.00
per share of common stock and warrants to purchase 8,125 shares of common stock at an exercise price of $50.00 per share of common
stock. The Company recorded an additional discount of $258,370 based on the estimated fair value of these warrants. The Company
computed the fair value of these warrants using the Black-Scholes option pricing model. These discounts are reflected as a reduction
on the outstanding liability and are being amortized as non-cash interest expense over the term of the agreement. During the years
ended December 31, 2018 and 2017, non-cash interest expense of $2,489,403 and $599,337, respectively, was recorded from the amortization
of debt discounts.
19. REVOLVING CREDIT FACILITY
Microphase entered
into a revolving loan agreement with Gerber Finance, Inc. (“Gerber”) in February of 2012, as amended in September 2015
and July 2017 (the “Revolving Credit Facility”). Under the Revolving Credit Facility, Microphase received funds
based on a borrowing base, which consisted of a percentage of eligible accounts receivable, up to a maximum revolving amount of
$1,400,000 (the “Maximum Revolving Amount”). Interest accrued at the prime rate plus three and three-quarters percent
(3.75%) on the unpaid principal. Effective June 15, 2017, the prime rate was increased from 4.00% to 4.25% resulting in a base
rate of 8.00%. In December 2017, the Company paid off the Revolving Credit Facility in cash.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
On November 6, 2017,
Microphase entered into a factoring agreement with CSNK Working Capital Finance Corp. (the “Factoring Agreement”).
Under the Factoring Agreement, Microphase received funds based on a borrowing base, which consisted solely of eligible accounts
receivable.
20. NOTES PAYABLE
Notes Payable at December
31, 2018 and 2017, are comprised of the following.
|
|
2018
|
|
|
2017
|
|
12% short-term promissory note
(a)
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
Other short-term notes payable
(b)
|
|
|
1,033,553
|
|
|
|
—
|
|
Notes payable to Wells Fargo
(c)
|
|
|
291,988
|
|
|
|
300,130
|
|
Note payable to Dept. of Economic and Community Development
(d)
|
|
|
260,169
|
|
|
|
292,509
|
|
Power-Plus Credit Facilities
(e)
|
|
|
—
|
|
|
|
170,473
|
|
Note payable to Power-Plus Member
(f)
|
|
|
13,250
|
|
|
|
130,125
|
|
Note payable to People's United Bank
(g)
|
|
|
18,589
|
|
|
|
19,489
|
|
8% short-term promissory note
(h)
|
|
|
1,272,600
|
|
|
|
—
|
|
12% September 2018 short-term promissory note
(i)
|
|
|
789,473
|
|
|
|
—
|
|
October '18 short-term promissory note
(j)
|
|
|
565,000
|
|
|
|
|
|
Microphase December 2018 short-term promissory note
(k)
|
|
|
200,000
|
|
|
|
|
|
10% short-term promissory notes
(l)
|
|
|
—
|
|
|
|
15,000
|
|
Short term bank credit
(m)
|
|
|
1,558,197
|
|
|
|
—
|
|
Total notes payable
|
|
|
7,002,819
|
|
|
|
927,726
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(151,499
|
)
|
|
|
—
|
|
Unamortized financing cost
|
|
|
(7,541
|
)
|
|
|
—
|
|
Total notes payable, net of financing cost
|
|
$
|
6,843,779
|
|
|
$
|
927,726
|
|
Less: current portion
|
|
|
(6,360,120
|
)
|
|
|
(402,234
|
)
|
Notes payable – long-term portion
|
|
$
|
483,659
|
|
|
$
|
525,492
|
|
|
(a)
|
On March 23, 2018, the Company entered into a securities purchase agreement pursuant to which it
issued a 12% promissory note and a warrant to purchase 22,500 shares of common stock to an accredited investor
.
The promissory note was issued with a 10% OID. The promissory note is in the principal amount of $1,000,000, was sold for
$900,000, accrued simple interest at 12% and was due on June 22, 2018. The Company is in negotiations with the investor to amend
the payment terms on this 12% promissory note, however, since payment was not made on the specified maturity date this unsecured
12% promissory note is currently in default. Interest only payments are due, in arrears, on a monthly basis commencing on April
23, 2018. The exercise price of the warrant is $23.00 per share. The Company recorded debt discount in the amount of $271,565 based
on the estimated fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option
pricing model. The debt discount was amortized as non-cash interest expense over the term of the debt. During the year ended December
31, 2018, non-cash interest expense of $271,565 was recorded from the amortization of debt discount and interest expense of $100,000
was recorded from the amortization of the OID on this 12% promissory note. The 12% promissory note is unsecured by any of the Company’s
assets but is guaranteed by our Chief Executive Officer.
|
|
(b)
|
During the year ended December 31, 2018, the Company entered into the following short-term promissory
notes:
|
|
(i)
|
On February 7, 2018, the Company issued demand promissory
notes in the aggregate principal face amount of $440,000 to accredited investors. These promissory notes
included an OID
of $40,000 resulting in net proceeds to the Company of $400,000.
The principal and OID on
these notes were due and payable on demand after April 24, 2018. These loans were paid on April 27, 2018. During the year ended
December 31, 2018, the Company recognized $40,000 from
the amortization of OID on these demand promissory notes.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(ii)
|
On February 26, 2018, the Company issued a 10% promissory
note in the principal amount of $330,000 to an accredited investor. This promissory note
included an OID of $30,000 resulting
in net proceeds to the Company of $300,000.
The principal and accrued interest on this note
was due and payable on April 12, 2018, subject to a 30-day extension available to the Company. This 10% promissory note was paid
on April 27, 2018. During the year ended December 31, 2018, the Company recognized $35,991 from interest and
the amortization
of OID on this 10% promissory note.
|
|
(iii)
|
On March 27, 2018, the Company issued a 10% promissory note
in the principal amount of $200,000 to an accredited investor
.
Between March 29, 2018
and April 24, 2018, the Company paid the outstanding principal amount of $200,000 on this 10% promissory note.
|
|
(iv)
|
On May 23, 2018, the Company issued a promissory note in
the aggregate principal face amount of $81,000 to an accredited investor. The promissory note
included an OID of $6,000
resulting in net proceeds to the Company of $75,000 and was due and
payable on August 20,
2018. This promissory note was paid on July 25, 2018. During the year ended December 31, 2018, the Company recognized $6,000 from
the amortization of OID on this promissory note.
|
|
(v)
|
On May 23, 2018, the Company issued a promissory note in
the aggregate principal face amount of $360,000 to an accredited investor. The promissory note
included an OID of $60,000
resulting in net proceeds to the Company of $300,000 and was
due and payable on June 22,
2018. The outstanding balance on this note was paid on July 2, 2018. During the year ended December 31, 2018, the Company recognized
$60,000 from
the amortization of OID on this promissory note.
|
|
(vi)
|
On June 5, 2018, the Company received loans in the aggregate amount of $75,000 from accredited investors.
The principal and interest on these loans was paid on July 16, 2018
.
|
|
(vii)
|
On June 8, 2018, the Company issued a promissory note in
the aggregate principal face amount of $511,750 to an accredited investor. The promissory note
included an OID of $66,750
resulting in net proceeds to the Company of $445,000 and was
due and payable on July 9, 2018.
At December 31, 2018, the outstanding principal balance on this note was $54,750.
Since payment was not made on the specified
maturity date this unsecured promissory note is currently in default.
During the year ended
December 31, 2018, the Company recognized $66,750 from
the amortization of OID on this promissory note.
On
August 3, 2018, the Company and lender entered into an agreement to extend the maturity date from July 9, 2018 to August 31, 2018.
The Company agreed to pay the lender an extension fee of 100,000 shares of common stock. The Company remains in default and continues
to negotiate with the investor on extended payment terms.
|
|
(viii)
|
On July 13, 2018, the Company issued a 15% promissory note in the principal amount of $176,000
to an accredited investor. This promissory note included an OID of $16,000 and debt issuance costs of $5,000 resulting in net proceeds
of $155,000.
At December 31, 2018, the outstanding balance on this note was $124,303.
The
principal and accrued interest on this note was due and payable on October 11, 2018 and is currently in default. Mr. Ault personally
guaranteed the repayment of this note.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(ix)
|
On August 10, 2018, DP Lending issued a 12% promissory note in the principal amount of $550,000
to an accredited investor. This promissory note included an OID of $50,000 resulting in net proceeds of $500,000. The principal
and accrued interest on this note is due and payable on August 10, 2019.
|
|
(x)
|
On August 16, 2018, the Company issued an 8% promissory note in the principal amount of $225,000
to an accredited investor. This promissory note included an OID of $25,000 resulting in net proceeds of $200,000.
At
December 31, 2018, the outstanding balance on this note was $159,500.
This note was due and payable on October 5, 2018 and
is currently in default. Mr. Ault personally guaranteed the repayment of this note.
|
|
(xi)
|
On August 23, 2018, DP Lending issued a promissory note in the principal amount of $85,000 to an
accredited investor. This promissory note included an OID of $10,000 resulting in net proceeds of $75,000.
At
December 31, 2018, the outstanding balance on this note was $85,000.
This note was due and payable on September 24, 2018,
subject to a 28-day extension available to DP Lending. However, since payment was not made on the specified maturity date this
unsecured promissory note is currently in default.
|
|
(xii)
|
On August 28, 2018, DP Lending issued a promissory note in the principal amount of $115,000 to
an accredited investor. This promissory note included an OID of $15,000 resulting in net proceeds of $100,000. The principal and
accrued interest on this note was due and payable on September 14, 2018, subject to a 10-business day cure period available to
DP Lending. This promissory note was paid on September 21, 2018.
|
|
(xiii)
|
On October 9, 2018, DP Lending issued a promissory note in the principal amount of $60,000 to an
accredited investor. This promissory note included an OID of $10,000 resulting in net proceeds of $50,000.
At
December 31, 2018, the outstanding balance on this note was $60,000.
This note was due and payable on October 23, 2018.
However, since payment was not made on the specified maturity date this unsecured promissory note is currently in default.
|
|
(c)
|
At December 31, 2018, Microphase had guaranteed the repayment of two equity lines of credit in
the aggregate amount of $291,988 with Wells Fargo Bank, NA (“Wells Fargo”) (collectively, the “Wells Fargo Notes”).
These loans originated prior to the Company’s acquisition of Microphase and Microphase was the recipient of the actual proceeds
from the loans. Microphase had previously guaranteed the payment under the first Wells Fargo equity line during 2008, the proceeds
of which Microphase had received from a concurrent loan from Edson Realty Inc., a related party owned real estate holding company.
As of December 31, 2018, the first line of credit, which is secured by residential real estate owned by a former officer, had an
outstanding balance of $210,822, with an annual interest rate of 4.00%. Microphase had guaranteed the payment under the second
Wells Fargo equity line in 2014. Microphase had received working capital loans from the former CEO from funds that were drawn against
the second Wells Fargo equity line. As of December 31, 2018, the second line of credit, secured by the former CEO’s principal
residence, had an outstanding balance of $81,166, with an annual interest rate of 3.00%. During the years ended December 31, 2018,
Microphase incurred $17,629 of interest on the Wells Fargo Notes.
|
|
(d)
|
In August 2016, Microphase received a $300,000 loan, of which $39,831 has been repaid, pursuant to the
State of Connecticut Small Business Express Job Creation Incentive Program which is administered through the Department of Economic
and Community Development (“DECD”) (the “DECD Note”). The DECD Note accrues
interest
at a rate of 3% per annum and is due in August 2026. Payment of principal and interest commenced in September 2017, payable in
equal monthly installments over the remaining term. During the year ended December 31, 2018, Microphase incurred $9,286 of interest
on the DECD Note.
|
|
(e)
|
At December 31, 2017, Power-Plus had guaranteed the repayment of two lines of credit in the aggregate
amount of $170,473 with Bank of America NA and Wells Fargo (collectively, the “Power-Plus Lines”). During 2018, the
Power-Plus Lines had been paid.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(f)
|
Pursuant to the terms of the Purchase Agreement with Power-Plus, the Company entered into a two-year
promissory note in the amount of $255,000 payable to the former owner as part of the purchase consideration. The $255,000 note
is payable in 24 equal monthly installments. On October 18, 2017, for cancellation of debt, the Company entered into a subscription
agreement with the former owner under which the Company sold 6,940 shares of common stock at $13.40 per share for an aggregate
purchase price of $93,000. The outstanding balance on this note was $13,250 at December 31, 2018. During the year ended December
31, 2018, the Company paid $116,875 in principal payments.
|
|
(g)
|
In December 2016, Microphase utilized a $20,000 overdraft credit line at People’s United
Bank with an annual interest rate of 15%. As of December 31, 2018, the balance of that overdraft credit line was $18,589.
|
|
(h)
|
On August 16, 2018, the Company entered into a securities purchase agreement with certain institutional
investors providing for the issuance of (i) secured promissory notes in the aggregate principal face amount of $1,212,000 due February
15, 2019, at an interest rate of eight percent (8%) per annum for which the Company received an aggregate of $1,010,000, and (ii)
issued an aggregate of 20,000 shares of common stock to the investors. On November 29, 2018, these 8% short-term promissory notes
were amended and the Company incurred an additional OID of $60,600 resulting in an outstanding principal balance of $1,272,600
at December 31, 2018.
|
|
(i)
|
During September 2018, the Company issued to institutional investors 12% term promissory notes
in the principal face amount of $789,473, with an interest rate of 12% for a purchase price of $750,000. The outstanding principal
face amount, plus any accrued and unpaid interest, was due by December 31, 2018. During October 2018, in accordance with the notes,
the Company issued 22,500 shares of its common stock to the investors. Since payment was not made on the specified maturity date
these 12% term promissory notes are currently in default.
|
|
(j)
|
On October 11, 2018, the Company entered into a securities purchase agreement with an institutional
investor providing for the issuance of (i) a secured promissory note in the aggregate principal face amount of $565,000 due December
8, 2018, for which the Company received an aggregate of $510,000, and (ii) issued an aggregate of 20,000 shares of common stock
to the investor. Upon maturity, the Company was required to pay $27,500 of interest. The note was not paid on the maturity date
and was in default at December 31, 2018.
|
|
(k)
|
On December 28, 2018, Microphase entered into a secured promissory note with an institutional investor
providing for the issuance of (i) a secured promissory note in the aggregate principal face amount of $200,000, with an interest
rate of 10% per annum and a maturity date of March 31, 2019. In connection with the Microphase Note, Mr. Ault entered into a personal
guarantee agreement for the benefit of the investor.
|
|
(l)
|
In December 2016, Microphase issued $705,000 in 10% short-term promissory notes to nineteen accredited
investors which, after deducting $70,500 of placement fees to its selling agent, Spartan Capital Securities, LLC (“Spartan”),
resulted in $634,500 in net proceeds to Microphase (the “10% Short-Term Notes”). The 10% Short-Term Notes were due
one year from the date of issuance. The amount due pursuant to the 10% Short-Term Notes was equal to the entire original principal
amount multiplied by 125% (the “Loan Premium”) plus accrued interest. On December 5, 2017, in exchange for the cancellation
of $690,000 of outstanding principal and $250,323 of accrued interest owed to the investors by Microphase Corporation, the Company
entered into an Exchange Agreement pursuant to which the Company issued an aggregate of 76,193 shares of common stock and warrants
to purchase 19,023 shares of common stock with an exercise price of $22.00 per share of common stock. During 2018, the Company
paid the remaining balance of principal and accrued interest of $15,000 and $5,615, respectively.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(m)
|
At December 31, 2018, Enertec had short term bank credit of $1,558,197 that bears interest at prime
plus 0.7% through 3.85% paid either on a monthly or weekly basis. Further, the Company has undertaken to comply with certain covenants
under its bank loan. During the period May 22 to December 31, 2018, the Company incurred $47,076 of interest from Enertec’s
short term bank credit.
|
Other Notes Payable
|
(n)
|
Between May 5, 2017 and December 31, 2017, the Company received additional short-term loans of
$297,000 from five accredited investors, of which $75,000 was from the Company’s corporate counsel, a related party. As additional
consideration, the investors received five-year warrants to purchase 11,219 shares of common stock at a weighted average exercise
price of $15.40 per share. The warrants are exercisable commencing six months after the issuance date and are subject to
certain beneficial ownership limitations. The exercise price of these warrants is subject to adjustment for customary stock splits,
stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cash or on a cashless
basis. During the quarter ended June 30, 2017, the Company recorded debt discount in the amount of $95,000 based on the estimated
fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model.
As a result of the short-term feature of these loans and advances, the debt discount was amortized as non-cash interest expense
upon issuance of the warrants using the effective interest method.
|
During June 2017, the holders
of $55,000 of these short-term loans agreed to cancel their notes for the purchase of 5,000 shares of the Company’s common
stock at a price of $11.00 per share. An additional $75,000 in short-term loans from the Company’s corporate counsel was
converted into the Company’s equity securities; $52,000 was converted into one of the Series C Units and $23,000 was converted
into the Company’s common stock. The Company did not record any additional interest expense as a result of the extinguishment
of $130,000 in short-term loans since the carrying amount of the short-term loans was equivalent to the fair value of the consideration
transferred, which was determined from the closing price of the Company’s equity securities on the date of extinguishment.
During the year ended December 31, 2017, the Company also repaid $157,000 in short-term loans.
|
(o)
|
In February 2017, the Company issued to eight accredited investors $400,000 in demand promissory
notes bearing interest at a rate of 6% per annum. Of the eight accredited investors, one investor was deemed a related party. As
additional consideration, the investors received five-year warrants to purchase 16,667 shares of common stock at an exercise price
of $14.00 per share (the “Feb. 2017 Warrants”). The Feb. 2017 Warrants are exercisable commencing six months after
the issuance date. The exercise price of the Feb. 2017 Warrants is subject to adjustment for customary stock splits, stock dividends,
combinations and other standard anti-dilution events. The Feb. 2017 Warrants may be exercised for cash or on a cashless basis.
During the quarter ended March 31, 2017, the Company recorded debt discount in the amount of $151,000 based on the estimated fair
value of the Feb. 2017 Warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model.
As a result of the due on demand feature of the promissory notes, the debt discount was amortized as non-cash interest expense
upon issuance of the Feb. 2017 Warrants using the effective interest method.
|
Between February 16, 2017 and
February 23, 2017, the holders of the $400,000 in demand promissory notes agreed to cancel their demand promissory notes for the
purchase of 33,333 shares of the Company’s common stock, an extinguishment price of $12.00 per share. During the quarter
ended March 31, 2017, the Company recorded additional interest expense of $13,333 as a result of the extinguishment of the $400,000
in demand promissory notes based on the difference of the carrying amount of the demand promissory notes and
the
fair value of the consideration transferred, which was determined from the closing price of the Company’s common stock on
the date of extinguishment.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(p)
|
On March 28, 2017, the Company issued $270,000 in demand promissory notes to several investors.
These demand promissory notes accrued interest at the rate of 6% per annum. On April 5, 2017, the Company canceled these promissory
notes by issuing to the investors 18,000 shares of common stock, at $15.00 per share, and warrants to purchase 9,000 shares of
common stock at $18.00 per share. During the quarter ended June 30, 2017, the Company recorded additional interest expense of $109,000
as a result of the extinguishment of the $270,000 in demand promissory notes based on the difference of the carrying amount of
the demand promissory notes and the fair value of the consideration transferred, which was determined from the closing price of
the Company’s common stock on the date of extinguishment.
|
|
(q)
|
On June 2, 2017, pursuant to the terms of the Share Exchange Agreement and in consideration of
legal services, Microphase issued a $450,000 8% promissory note with a maturity date of November 25, 2017 to Lucosky Brookman,
LLP (the “Lucosky Note”). In conjunction with the issuance of the Lucosky Note, the Company issued Lucosky Brookman
10,000 shares of redeemable convertible Series E preferred stock (the “Series E Preferred Stock”) with a stated value
of $45 per share as an alternative to providing a guarantee for the amount of the Lucosky Note. The Company, at its option, had
the right to redeem for cash the outstanding shares of Series E Preferred Stock, upon written notice to the holder of the shares,
at a cash redemption price equal to $45 multiplied by the number of shares being redeemed. Any such optional redemption by the
Company would have resulted in a credit against the Lucosky Note. During the period June 3, 2017 to December 29, 2017, Microphase
incurred $21,000 of interest on the Lucosky Note. On December 29, 2017, the Lucosky Note was satisfied through the conversion of
the 10,000 shares of Series E Preferred Stock into 30,000 shares of the Company’s common stock (See Note 24).
|
|
(r)
|
On January 25, 2018, the Company issued two 5% promissory notes, each in the principal face amount
of $2,500,000 for an aggregate debt of $5,000,000 to two institutional investors. The entire unpaid balance of the principal
and accrued interest on each of the 5% promissory notes was due and payable on February 23, 2018, subject to a 30-day extension
available to the Company.
The proceeds from these two 5%
promissory notes were used
to purchase
1,000 Antminer S9s manufactured by Bitmain Technologies, Inc. in connection with
our crypto mining operations. The Company repaid the entire outstanding principal and accrued interest on the
5% promissory
notes
of $5,101,127 during 2018.
|
|
(s)
|
On February 20, 2018, the Company issued a promissory note
in the principal face amount of $900,000 to an accredited investor. This promissory note
included an original issue discount
(“OID”) of $150,000 resulting in net proceeds of $750,000.
The principal and
OID on this note was due and payable on March 22, 2018. On March 23, 2018, the Company entered into a new promissory note in the
principal amount of $2,100,000 for a term of two months, subject to the Company’ ability to prepay within one month. The
new promissory note
included an OID of $350,000, resulting in net proceeds of $1,750,000.
The
Company also issued to the lender a warrant to purchase 62,500 shares of the Company’s common stock at an exercise price
of $23.00 per share.
The principal amount of the new promissory note consisted of cash of $1,000,000 and the cancellation
of principal of $750,000 from the February 20, 2018 promissory note. The interest on the February 20, 2018 note in the amount of
$150,000 was paid to the lender prior to entering into the new promissory note. The warrants are exercisable commencing on the
issuance date for a term of three years. The exercise price of these warrants is subject to adjustment for customary stock splits,
stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cash or on a cashless
basis. The Company recorded debt discount in the amount of $604,227 based on the estimated fair value of these warrants. The Company
computed the fair value of these warrants using the Black-Scholes option pricing model. The debt discount was amortized as non-cash
interest expense over the term of the debt. During the year ended December 31, 2018, non-cash interest expense of $604,227 was
recorded from the amortization of debt discount and interest expense of $350,000 was recorded from the amortization of the OID
on the new promissory note. On April 23, 2018, the Company paid
the entire outstanding principal
on the new promissory note of $2,100,000
. The new promissory note had been guaranteed by our Chief Executive Officer and
had also been guaranteed by Philou.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
21. NOTES PAYABLE – RELATED PARTIES
Notes Payable –
Related parties at December 31, 2018 and 2017, are comprised of the following:
|
|
2018
|
|
|
2017
|
|
Notes payable to former officer and employee
(a)
|
|
$
|
308,984
|
|
|
$
|
309,317
|
|
Total notes payable
|
|
|
308,984
|
|
|
|
309,317
|
|
Less: current portion
|
|
|
(166,925
|
)
|
|
|
(133,569
|
)
|
Notes payable – long-term portion
|
|
$
|
142,059
|
|
|
$
|
175,748
|
|
|
(a)
|
Microphase is a party to several notes payable agreements with seven of its past officers, employees
and their family members. As of December 31, 2018, the aggregate outstanding balance pursuant to these notes payable agreements,
inclusive of $57,752 of accrued interest, was $366,736, with annual interest rates ranging between 3.00% and 6.00%. During the
year ended December 31, 2018, Microphase incurred $10,897 of interest on these notes payable agreements. In July 2016, one of these
noteholders initiated litigation to collect the balance owed under the terms of his respective agreement. In October 2017, Microphase
and the noteholder entered into a settlement agreement whereby Microphase agreed to pay the outstanding principal and interest
of $122,000 and $43,000, respectively, by issuing to the noteholder 95,834 shares of Microphase common stock valued at $115,000
and paying $25,000 in cash. The value of the Microphase common stock was derived from the Company’s recent acquisition of
a majority interest in Microphase. Further, the parties agreed a final $25,000 would be paid within 18 months of the settlement
agreement or Microphase would be required to pay the noteholder an additional $25,000.
|
|
(b)
|
On December 29, 2016, the Company entered into an agreement with MCKEA Holdings, LLC (“MCKEA”).
MCKEA is the majority member of Philou Ventures, LLC, which is the Company’s controlling stockholder. Kristine L. Ault, a
director and the wife of Milton C. Ault III, Executive Chairman of the Company’s Board of Directors, is the manager and owner
of MCKEA, for a demand promissory note (The “MCKEA Note”) in the amount of $250,000 bearing interest at the rate of
6% per annum on unpaid principal. On March 24, 2017, the MCKEA Note was cancelled to purchase the Company’s Series B Preferred
Stock pursuant to the terms of the Preferred Stock Purchase Agreement entered into on March 9, 2017 (See Note 24). Since there
was no difference between the reacquisition price and the net carrying value of the cancelled debt, no gain or loss was recognized
as a result of this transaction.
|
22. CONVERTIBLE NOTES
Convertible Notes Payable
at December 31, 2018 and 2017, are comprised of the following:
|
|
2018
|
|
|
2017
|
|
10% Convertible secured notes
(a)
|
|
$
|
7,997,126
|
|
|
$
|
—
|
|
5% Convertible secured notes
(b)
|
|
|
—
|
|
|
|
550,000
|
|
12% Convertible secured note
(c) (d) (e)
|
|
|
—
|
|
|
|
202,000
|
|
Total convertible notes payable
|
|
|
7,997,126
|
|
|
|
752,000
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(1,189,276
|
)
|
|
|
(351,573
|
)
|
Unamortized financing cost
|
|
|
(65,356
|
)
|
|
|
(2,549
|
)
|
Total convertible notes payable, net of financing cost
|
|
$
|
6,742,494
|
|
|
$
|
397,878
|
|
|
(a)
|
On May 15, 2018, the Company entered into a securities purchase agreement to sell (i) a 10% convertible
note (the “10% Convertible Note”), (ii) a five-year warrant to purchase 55,556 shares of the Company’s common
stock at an exercise price of $27.00 per share; (iii) a five-year warrant to purchase 86,207 shares of the Company’s Class
A common stock at an exercise price of $17.40 per share; and (iv) 17,241 shares of the Company’s common stock to an institutional
investor. Initially, the 10% Convertible Note was convertible into the Company’s common stock at $15.00 per share, but could
only be converted if an event of default thereunder had occurred and not been cured on a timely basis. On September 25, 2018, the
Company entered into an agreement to amend the maturity date on the 10% Convertible Note, pursuant to which amendment the amortization
schedule of the 10% Convertible Note provides for 13 monthly payments in the amount of $309,193, and for the fourteenth payment
to be in the amount of $1,011,427, plus accrued and unpaid interest. Each such amortization payment shall be made in cash or Bitcoin.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The 10% Convertible Note is in
the principal amount of $6,000,000 and bears interest at 10% simple interest on the principal amount with 50% of the total interest
due on the principal payable at the closing and the remaining 50% payable over the term of the 10% Convertible Note. In connection
with the financing, the Company agreed to pay the placement agent, Alliance Global Partners, a cash fee of $300,000 and a warrant
to purchase 7,500 shares of the Company’s common stock with an exercise price of $20.00 per share.
The Company computed the fair
value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount
in the amount of $1,397,389 based on the estimated fair value of the warrants. The Company estimated that the grant date fair value
of the shares of common stock was $405,024, which was determined from the closing price of the Company’s common stock on
the dates of issuance. In aggregate, the Company recorded debt discount in the amount of $2,169,613 based on the relative fair
values of the warrants, common stock and debt issuance costs of $367,200. During the year ended December 31, 2018, non-cash interest
expense of $2,169,613 was recorded from the amortization of debt discounts. The fair value of the warrants was estimated using
the Black-Scholes option-pricing method. The risk-free rate of 2.94% was derived from the U.S. Treasury yield curve, matching the
term of the warrant, in effect at the measurement date. The volatility factor of 127.9% was determined based on the Company’s
historical stock prices.
On July 2, 2018, the Company
entered into a securities purchase agreement with the institutional investor providing for the issuance of (i) a second 10% convertible
note (the “Second 10% Convertible Note”) with a principal face amount of $1,000,000 which Second 10% Convertible Note
was convertible into the Company’s common stock at $15.00 per share and (ii) an additional 20,000 of the Company’s
common stock to be issued in connection with the 10% Convertible Note. The Second 10% Convertible Note, as amended, matures on
February 15, 2019, as to fifty percent (50%) of the amount due thereunder, and the remaining fifty percent (50%) due thereunder
to May 15, 2019.
On August 31, 2018, the Company
entered into a securities purchase agreement with the institutional investor providing for the issuance of a third 10% convertible
note (the “Third 10% Convertible Note” and with the 10% Convertible Note and the Second 10% Convertible Note, the “10%
Convertible Notes”) with a principal face amount of $2,000,000, which Third Convertible Note is convertible into 250,000
shares of the Company’s common stock at $8.00 per share and (ii) an additional 31,000 of the Company’s common stock.
The shares of common stock issuable pursuant to the Third 10% Convertible Note have not been issued to the institutional investor.
The Third 10% Convertible Note, as amended, matures on February 15, 2019, as to fifty percent (50%) of the amount due thereunder,
and the remaining fifty percent (50%) due thereunder to May 15, 2019.
At the time of issuance of the
Third 10% Convertible Note, the closing price of the Company’s common stock was in excess of the conversion price, resulting
in a beneficial conversion feature (“BCF”). The BCF embedded in the Third 10% Convertible Note is accounted for under
ASC No.
470, De
bt (“ASC 470”). At issuance, the intrinsic value of the BCF totaled $910,419, based on the
difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date
of the transaction, and the relative fair value of the 31,000 shares of common stock was $259,919. Initially, the Company was prohibited
from issuing the 31,000 shares of common stock or the shares of common stock issuable pursuant to the Third 10% Convertible Note
until stockholder approval of such issuance of securities is obtained as required by applicable NYSE American listing rules, which
was received on December 28, 2018.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The Company recorded debt issuance
costs of $200,500 from the Third 10% Convertible Note. The debt issuance costs are being amortized as non-cash interest expense
over the term of the debt. During the year ended December 31, 2018, non-cash interest expense of $135,144 was recorded from the
amortization of the debt issuance costs.
Pursuant to an amendment dated
as of August 31, 2018 to the 10% Convertible Note and the Second 10% Convertible Note, the Company reduced the conversion price
to $8.00 from $15.00. The amendment to the embedded conversion options of the 10% Convertible Note and the Second 10% Convertible
Note caused a material change in the fair value of the embedded conversion options on these two notes and resulted in a loss on
extinguishment of $665,346. At the time of the amendment, the closing price of the Company’s common stock was in excess of
the conversion price, resulting in a BCF. The intrinsic value of the BCF was $1,131,960 on the 10% Convertible Note and $225,000
on the Second 10% Convertible Note based on the difference between the effective conversion price and the fair value of the Company’s
common stock. During the year ended December 31, 2018, non-cash interest expense of $1,356,960 was recorded from the amortization
of debt discounts attributed to the August 31, 2018 amendment of to the 10% Convertible Note and the Second 10% Convertible Note.
Pursuant to the terms of an amendment
dated December 7, 2018, the Company agreed that if the investor elects to convert three monthly payments in the principal amount
of $309,193 into shares of the Company’s common stock at the stated conversion price of $8.00 and the proceeds from the sale
of the shares did not result in net proceeds to the investor of 103% of the principal, interest and penalties due, then the Company
would pay the investor the difference in cash (the “True-Up Payment). During December 2018, the Company issued to the investor
109,724 shares of its common stock at $8.00 per share upon the conversion of $877,793 in principal, accrued interest and penalties.
During December 2018, the investor received $304,608 from the sale of the shares of common stock, which approximated the value
of the shares of common stock on the date of issuance, resulting in a True-Up Payment due to the investor of $599,519.
|
(b)
|
On December 4, 2017, the Company entered into a securities purchase agreement to sell a 5% Convertible
Note (the “5% Convertible Note”) and 7,500 shares of restricted common stock to an institutional investor. The principal
of the 5% Convertible Note and interest thereon was convertible into shares of common stock at $12.00 per share of common stock,
subject to adjustments for lower priced issuances, stock splits, stock dividends, combinations or similar events. The 5% Convertible
Note was in the principal amount of $550,000, included an OID of $50,000 resulting in net proceeds to the Company of $500,000,
accrued interest at 5% simple interest on the principal amount, and was due on August 13, 2018. Interest only payments were due
on a quarterly basis and the principal was due on June 3, 2018.
|
At the time of issuance of the
5% Convertible Note, the closing price of the Company’s common stock was in excess of the conversion price, resulting in
a BCF accounted for under ASC 470. At issuance, the intrinsic value of the BCF totaled $244,260 based on the difference between
the effective conversion price and the fair value of the Company’s common stock at the commitment date of the transaction.
The intrinsic value of the BCF exceeded the proceeds allocated to the relative fair value of the 5% Convertible Note. The BCF was
amortized to interest expense over the term of the 5% Convertible Note using the effective interest method. The valuation of the
BCF was calculated based on the effective conversion price compared with the market price of the Company’s common stock on
the date of issuance of the 5% Convertible Note.
In the aggregate, the Company
recorded debt discount in the amount of $550,000 based on the relative fair values of the 7,500 shares of common stock of $25,740,
BCF of $244,260 and OID of $50,000. The debt discount is being amortized as non-cash interest expense over the term of the debt.
During the year ended December 31, 2017, non-cash interest expense of $380,769 was recorded from the amortization of debt discounts.
In January 2018, the 5% Convertible Note was converted into 46,082 shares of the Company’s common stock based upon the contractual
rights included in the 5% Convertible Note (See Note 24).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(c)
|
On August 3, 2017, the Company entered into a securities purchase agreement to sell a 12% Convertible
Note (the “12% Convertible Note”) and a warrant to purchase 33,333 shares of common stock to an accredited investor.
The principal of the 12% Convertible Note may be converted into shares of common stock at $11.00 per share and under the terms
of the Warrant, up to 33,333 shares of common stock may be purchased at an exercise price of $14.00 per share.
|
The 12% Convertible Note was
in the principal amount of $400,000, included an OID of $40,000 resulting in net proceeds to the Company of $360,000, accrued interest
at 12% simple interest on the principal amount, and was due on August 13, 2018. Interest only payments were due on a quarterly
basis and the principal was due on August 3, 2018. The principal may be converted into shares of the Company’s common stock
at $11.00 per share.
The Company computed the fair
value of the 33,333 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount
in the amount of $167,203 based on the estimated fair value of the 33,333 warrants.
The BCF embedded in the 12%
Convertible Note is accounted for under ASC 470. At issuance, the intrinsic value of the BCF totaled $186,797. The Company, however,
was prohibited from issuing shares of common stock pursuant to the 12% Convertible Note until stockholder approval of such issuance
of securities was obtained as required by applicable NYSE American listing rules. The Company received stockholder approval for
the share issuances on December 28, 2017. The intrinsic value of the BCF was amortized to interest expense over the term of the
12% Convertible Note using the effective interest method. The valuation of the BCF was calculated based on the effective conversion
price compared with the market price of the Company’s common stock on the date of issuance of the 12% Convertible Note.
In aggregate, the Company recorded debt discount in the amount of $394,000 based on the relative fair values of the 33,333 warrants,
BCF and OID of $40,000. During the year ended December 31, 2017, non-cash interest expense of $211,658 was recorded from the amortization
of debt discounts.
On December 28, 2017, principal
and accrued interest of $198,000 and $4,818, respectively, on the 12% Convertible Note was satisfied through the issuance of 18,438
shares of the Company’s common stock and the remaining balance of $202,000 was converted into 18,884 shares of the Company’s
common stock on January 10, 2018 (See Note 24). The fair value of the warrants was estimated using the Black-Scholes option-pricing
method. The risk-free rate of 1.79% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect
at the measurement date. The volatility factor of 107.3% was determined based on the Company’s historical stock prices.
|
(d)
|
On April 16, 2018, the Company entered into securities purchase agreements to sell (i) a 12% convertible
note (the “12% April 2018 Convertible Note”), (ii) a five-year warrant to purchase 49,679 shares of the Company’s
common stock at an exercise price of $26.00 per share; and (iii) 10,046 shares of the Company’s common stock to three institutional
investors. The 12% April 2018 Convertible Note is convertible into common stock at $14.00 per share, but may only be converted
if an event of default thereunder has occurred and not been cured on a timely basis.
|
The 12% April 2018 Convertible
Note is in the principal amount of $1,722,222, included an OID of $172,222 resulting in net proceeds to the Company of $1,550,000
and bears interest at 12% simple interest on the principal amount. The Company is required to make monthly principal and interest
payments until the 12% April 2018 Convertible Note is satisfied in full on October 16, 2018.
The Company computed the fair
value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount
in the amount of $539,360 based on the estimated fair value of the warrants. The Company estimated that the grant date fair value
of the shares of common stock was $128,524, which was determined from the closing price of the Company’s common stock on
the date of issuance.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
In aggregate, the Company recorded
debt discount in the amount of $885,106 based on the relative fair values of the warrants, common stock, OID and debt issuance
costs of $45,000. During the year ended December 31, 2018, non-cash interest expense of $885,106 was recorded from the amortization
of debt discounts. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate
of 2.94% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The
volatility factor of 127.9% was determined based on the Company’s historical stock prices. Beginning on May 16, 2018, the
Company was required to make six monthly cash payments in the aggregate amount of $304,259. On August 31, 2018, the Company made
its final payment and in aggregate paid principal and accrued interest of $1,722,222 and $103,333, respectively, on the 12% April
2018 Convertible Note.
|
(e)
|
On January 23, 2018, we entered into a securities purchase agreement with an institutional investor
to sell, for an aggregate purchase price of $1,000,000, a 10% senior convertible promissory note (the “January 2018 10% Convertible
Note”) with an aggregate principal face amount of $1,250,000, a warrant to purchase an aggregate of 31,250 shares of our
common stock and 27,174 shares of our common stock. The transactions contemplated by the securities purchase agreement closed on
February 8, 2018. The January 2018 10% Convertible Note was convertible into 31,250 shares of the Company’s common
stock, a conversion price of $40.00 per share. The exercise price of the warrant to purchase 31,250 shares of the Company’s
common stock is $44.00 per share. On February 9, 2018, in addition to the 27,174 shares of common stock provided for pursuant to
the securities purchase agreement, the Company issued to the investor an aggregate of 34,597 shares of the Company’s common
stock upon the conversion of the entire outstanding principal and accrued interest on the January 2018 10% Convertible Note of
$1,383,884 (See Note 24).
|
Convertible Notes Converted into Common
Stock during 2017
|
(f)
|
On November 2, 2017, the Company entered into a securities purchase agreement to sell a 5% Convertible
Note (the “November 5% Convertible Note”) and 15,000 shares of restricted common stock to an institutional investor.
The principal of the November 5% Convertible Note and interest thereon was convertible into shares of common stock at $12.00 per
share of common stock, subject to adjustments for lower priced issuances, stock splits, stock dividends, combinations or similar
events. The November 5% Convertible Note was in the principal amount of $1,111,000 and included an original issue discount (“OID”)
of $101,000 and debt issuance costs of $105,800, resulting in net proceeds to the Company of $904,200. The November 5% Convertible
Note provided for 5% simple interest on the principal amount.
|
In connection with the November
5% Convertible Note, the Company paid to Aegis Capital Corp. (“Aegis”), its financial advisor, a cash fee of $80,800
and issued to Aegis a warrant to purchase up to 7,407 shares of common stock with an exercise price of $13.20 per share, subject
to adjustment for stock splits, stock dividends, combinations or similar events. The warrant is exercisable at any time commencing
six months from the date of issuance through five years from the date of issuance and may be exercised for cash or on a “cashless”
basis if there is no effective registration statement registering, or no current prospectus available for the resale of, all of
the shares of common stock underlying the warrant.
The debt conversion features
embedded in the November
5% Convertible Note is accounted
for under ASC No.
470, De
bt. At the time of issuance, the intrinsic value of the debt conversion features utilizing
the Black Scholes option pricing model totaled $423,593. The intrinsic value of the debt conversion feature combined with the
amount of the original issue discount and the relative value of the 15,000 shares of common stock and warrants to purchase 7,407
shares of common stock exceeded the proceeds allocated to the relative fair value of the November 5% Convertible Note and resulted
in aggregate debt discount of $722,868. The respective debt discount of $722,868 was amortized to interest expense over the term
of the November 5% Convertible Note using the effective interest method. In addition, the Company incurred $105,800 of debt issuance
costs which are also being amortized as non-cash interest expense over the term of the debt.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
On December 13, 2017 and December
14, 2017, the entire $1,111,000 of principal on the November 5% Convertible Note was satisfied through the issuance of 92,583 shares
of the Company’s common stock based upon the contractual rights provided for in the November 5% Convertible Note (See Note
14).
During the year ended December
31, 2017, non-cash interest expense of $828,668 was recorded from the amortization of debt discounts and debt financing cost.
|
(g)
|
On August 10, 2017, the Company, entered into securities purchase agreements with five institutional
investors to sell for an aggregate purchase price of $800,000, 10% Senior Convertible Promissory Notes (the “10% Convertible
Notes”) with an aggregate principal face amount of $880,000 and warrants to purchase an aggregate of 73,750 shares of common
stock. The principal of the 10% Convertible Notes and interest earned thereon may be converted into shares of common stock at $12.00
per share and under the terms of the Warrant, up to 73,750 shares of common stock may be purchased at an exercise price of $13.20
per share.
|
The 10% Convertible Notes are
in the aggregate principal amount of $880,000, included an OID of $80,000 resulting in net proceeds to the Company of $800,000,
bear simple interest at 10% on the principal amount, and principal and interest are due on February 10, 2018. Subject to certain
beneficial ownership limitations, each investor may convert the principal amount of the 10% Convertible Notes and accrued interest
earned thereon at any time into shares of common stock at $12.00 per share. The conversion price of the 10% Convertible Notes is
subject to adjustment for customary stock splits, stock dividends, combinations or similar events.
The Company computed the fair
value of the 73,750 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt
discount in the amount of $356,691 based on the estimated intrinsic value of the 73,750 warrants. The intrinsic value of the warrants
was estimated using the Black-Scholes option-pricing method. The risk-free rate of 1.78% was derived from the U.S. Treasury yield
curve, matching the term of the warrant, in effect at the measurement date. The volatility factor of 107.3% was determined based
on the Company’s historical stock prices.
The BCF embedded in the 10%
Convertible Notes is accounted for under ASC No.
470, De
bt. At issuance, the estimated fair value of the BCF totaled
$326,809. The fair value of the BCF was allocated from the net proceeds of the 10% Convertible Notes and was amortized to interest
expense over the term of the 10% Convertible Notes using the effective interest method. The valuation of the BCF was calculated
based on the effective conversion price compared with the market price of the Company’s common stock on the date of issuance
of the 10% Convertible Notes. In aggregate, the Company recorded debt discount in the amount of $763,500 based on the relative
fair values of the 73,750 warrants of $356,961, BCF of $326,809 and OID of $80,000. During the years ended December 31, 2017,
non-cash interest expense of $763,500 was recorded from the amortization of debt discounts.
During December 2017, the entire
principal and accrued interest of $880,000 and $54,450, respectively, on the 10% Convertible Notes was satisfied through the issuance
of 77,871 shares of the Company’s common stock based upon the contractual rights provided for in the 10% Convertible Note
(See Note 14).
Other Convertible Notes Payable
|
(h)
|
On April 17, 2017, the Company entered into two 7% convertible notes (the “7% Convertible
Notes”) each in the aggregate principal amount of $125,000 for a total of $250,000. The 7% Convertible Notes accrued interest
at 7% simple interest on the principal amount and were due on June 2, 2017. The principal was convertible into shares of the Company’s
common stock at $15.00 per share. The noteholder could convert the principal amount of the 7% Convertible Notes at any
time into common stock. The 7% Convertible Notes contained standard and customary events of default including, but not limited
to, failure to make payments when due under the 7% Convertible Note agreements and bankruptcy or insolvency of the Company. The
Company had the right to prepay the 7% Convertible Notes. The 7% Convertible Notes were repaid during July 2017.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
As additional consideration,
the investors received five and a half year warrants to purchase 8,333 shares of common stock at an exercise price of $18.00 per
share (collectively the “7% Convertible Note Warrants”). The 7% Convertible Note Warrants are exercisable commencing
six months after the issuance date. The exercise price of the 7% Convertible Note Warrants is subject to adjustment for customary
stock splits, stock dividends, combinations and other standard anti-dilution events. The 7% Convertible Note Warrants may be exercised
for cash or on a cashless basis. The Company computed the fair value of the 7% Convertible Note Warrants using the Black-Scholes
option pricing model and, as a result of this calculation, recorded debt discount in the amount of $61,304 based on the estimated
fair value of the 7% Convertible Note Warrants.
The BCF embedded in the 7% Convertible
Notes is accounted for under ASC No.
470, De
bt. At issuance, the estimated fair value of the BCF totaled $31,304. The
fair value of the BCF was allocated from the net proceeds of the 7% Convertible Note and was amortized to interest expense over
the term of the 7% Convertible Notes using the effective interest method. The valuation of the BCF was calculated based on the
effective conversion price compared with the market price of the Company’s common stock on the date of issuance of the Convertible
Note. In aggregate, the Company recorded debt discount in the amount of $93,607 based on the relative fair values of the 7% Convertible
Note Warrants of $61,304 and BCF of $31,304. During the three months ended June 30, 2017, the entire non-cash interest expense
of $92,607 was recorded from the amortization of debt discounts.
On July 25, 2017, the Company
repaid one of the 7% Convertible Notes. Due to the event of default, the Company agreed to reduce the exercise price of warrants
to purchase 83,334 shares of common stock from $18.00 per share to $11.00 per share and made a payment of $144,000. As a result
of this transaction, the Company recorded additional interest expense of $17,226 and recorded an additional $2,641 in non-cash
interest expense based upon the change in the fair value of the warrants due to the adjustment to the exercise price.
On July 28, 2017, the Company
entered into an exchange agreement related to the second 7% Convertible Note. Under the terms of the exchange agreement, the Company
exchanged the 7% Convertible Note for three new promissory notes in the principal amounts of $110,000 due August 1, 2017; $35,000
due August 1, 2017; and $34,000 due August 8, 2017 (individually an Exchange Note and collectively the Exchange Notes) and issued
a new warrant to purchase 4,167 shares of common stock at $11.00 per share and cancelled the prior warrant to purchase 4,167 shares
of common stock at $18.00 per share. The Company recorded a $54,583 extinguishment charge as a result of this transaction.
Concurrent with entering into
the exchange agreement, the investor entered into a subscription agreement under which the Company issued and sold in a registered
direct offering 10,000 shares of common stock at $11.00 per share for an aggregate purchase price of $110,000. The 10,000 shares
of common stock were purchased through the cancellation of the Exchange Note in the principal amount of $110,000. In addition,
in a concurrent private placement, the investor entered into a separate securities purchase agreement under which the Company issued
and sold 3,180 shares of common stock at $11.00 per share for an aggregate of purchase price of $35,000. The 3,180 shares of common
stock were purchased through the cancellation of the Exchange Note in the principal amount of $35,000. Further, the Company
issued a warrant to purchase 6,000 shares of common stock at $11.00 per share. The final Exchange Note in the principal amount
of $34,000 was repaid. In aggregate, and including the $54,583 extinguishment charge above, the Company recorded an additional
non-cash interest expense of $110,421 as a result of the extinguishment of the $125,000 7% Convertible Note based on the difference
of the carrying amount of the 7% Convertible Note and the fair value of the consideration transferred, which was determined from
the closing price of the Company’s common stock on the date of extinguishment and based upon (i) the change in the fair value
of the warrants due to the exchange of the warrant with an exercise price of $18.00 per share with a new warrant with an exercise
price of $11.00 per share, (ii) the fair value of the warrant to purchase 6,000 shares of common stock and (iii) the value of the
shares of cash and common stock in excess of the amount owed pursuant to the 7% Convertible Note.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
(i)
|
On April 26, 2017, the Company entered into a 7% convertible note in the aggregate principal amount
of $104,000. On June 28, 2017, the noteholder converted the outstanding balance into 9,455 shares of the Company’s common
stock. The Company did not record any additional interest expense as a result of the extinguishment since the carrying amount of
the convertible notes was equivalent to the fair value of the consideration transferred, which was determined from the closing
price of the Company’s equity securities on the date of extinguishment.
|
As additional consideration,
the investor received a five-year warrant to purchase 8,000 shares of common stock at an exercise price of $16.00 per share. The
warrants are exercisable commencing six months after the issuance date. The exercise price of the warrants is subject to adjustment
for customary stock splits, stock dividends, combinations and other standard anti-dilution events. The warrants may be exercised
for cash or on a cashless basis. The Company computed the fair value of these warrants using the Black-Scholes option pricing model
and, as a result of this calculation, recorded debt discount in the amount of $24,912 based on the estimated fair value of the
warrants.
The BCF embedded in this convertible
note is accounted for under ASC No.
470, De
bt. At issuance, the estimated fair value of the BCF totaled $26,512. The
fair value of the BCF was allocated from the net proceeds of the convertible note and was amortized to interest expense over the
term of the convertible note using the effective interest method. The valuation of the BCF was calculated based on the effective
conversion price compared with the market price of the Company’s common stock on the date of issuance of the convertible
note. In aggregate, the Company recorded debt discount in the amount of $51,424 based on the relative fair values of the warrants
of $24,912 and BCF of $26,512. During 2017, non-cash interest expense of $51,424 was recorded from the amortization of debt discounts.
The intrinsic value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 1.84% was
derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility
factor of 104.7% was determined based on the Company’s historical stock prices.
23. COMMITMENTS AND CONTINGENCIES
On July 31, 2018 a
stockholder derivative complaint was filed in the United States District Court for the Central District of California against the
Company as the nominal defendant, as well as its current directors and a former director styled
Ethan Young and Greg Young,
Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz,
Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and DPW Holdings, Inc.
, as the nominal defendant (Case No. 18-cv-6587)
(the “Complaint”). No hearings have been scheduled as of the date hereof.
The Complaint alleges
violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants
as, in the view of the plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions.
The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves.
The Company and the individual defendants moved to dismiss the Complaint and on February 25, 2019, the Court granted the motion
to dismiss but granted plaintiffs leave to amend their Complaint. On March 11, 2019, plaintiffs filed their amended complaint
asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions. On
March 25, 2019, the Company and the individual defendants filed a motion to dismiss the amended complaint. The motion to
dismiss is returnable before the Court on May 6, 2019.
Based on the Company’s
assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company
cannot estimate the reasonably possible loss or range of loss that may result from this action. However, an unfavorable outcome
may have a material adverse effect on the Company’s business, financial condition and results of operations.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
On November 28, 2018,
Blockchain Mining Supply and Services, Ltd
, a vendor who sold computers to the Company’s subsidiary, filed in the
United States District Court for the Southern District of New York against Super Crypto Mining, Inc. and the Company (Case No.
18-cv-11099). The Complaint asserted claims for breach of contract and promissory estoppel against the Company and its subsidiary
arising from the subsidiary’s failure to satisfy a purchase agreement. The Complaint seeks damages in the amount of
$1,388,495.
On February 4, 2019,
pursuant to the Court’s Rules, the Company requested a pre-motion Conference with the Court. The Company’s time
to file its motion to dismiss is stayed until the Court’ holds the pre-motion Conference, which has not yet been scheduled
by the Court.
Based on the Company’s
assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company
cannot estimate the reasonably possible loss or range of loss that may result from this action. However, the Company has established
a reserve in the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect
on the Company’s business, financial condition and results of operations.
In November 2012,
the Company signed an operating lease agreement for the US headquarters for a period of 7 years with an option to extend for an
additional 5 years. In September 2009, the Company's United Kingdom subsidiary signed an agreement for a lease in respect of the
UK facility for a period of 15 years with an option to cancel the lease after 10 years on September 2019. In June 201, the Company’s
Israeli subsidiary signed an agreement for a lease in respect of the Israel facility for a period of 10 years. In addition, the
Company leases 43,062 square-feet of other space domestically that includes office, engineering, laboratory, restaurant and warehouse
space in both California and Connecticut. The annual base rent under these leases, payable on a monthly basis, is approximately
$1,272,000 during 2019. These leases expire between May 2019 and January 2028.
Future non-cancellable rental
commitments under operating leases are as follows:
|
2019
|
|
|
$
|
1,272,957
|
|
|
2020
|
|
|
|
1,032,302
|
|
|
2021
|
|
|
|
801,305
|
|
|
2022
|
|
|
|
501,411
|
|
|
2023
|
|
|
|
514,895
|
|
|
Thereafter
|
|
|
|
1,582,120
|
|
|
|
|
|
$
|
5,704,990
|
|
Total rent expense
for the years ended December 31, 2018 and 2017 was approximately $1,086,031 and $291,092, respectively.
24. STOCKHOLDERS’ EQUITY
Preferred Stock
The
Company is authorized to issue 25,000,000 shares of Preferred Stock $0.001 par value. The Board of Directors 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”). On February 27, 2019, subsequent to December 31, 2018, the Board
of Directors designated 2,500 shares as Series C Convertible Redeemable Preferred Stock and the Company filed a Certificate of
Designations of Rights and Preferences of Series C Convertible Redeemable Preferred Stock with the Secretary of State of the State
of Delaware.
On
December 21, 2018, the Company filed with the Delaware Secretary of State a Certificate of Elimination eliminating its previous
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock (collectively, the “Preferred Shares”)
and returning them to authorized but undesignated shares of the Company’s preferred stock. None of the Preferred Shares was
outstanding. The rights, preferences, privileges and restrictions on the remaining authorized 23,497,500 shares of Preferred Stock
have not been determined. The Company’s Board of Directors is authorized to create a new series of preferred shares and determine
the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of
preferred shares.
As of December 31, 2018, there were 125,000 shares of Series B Preferred
Stock and no other shares of Preferred Stock issued or outstanding.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Series A Preferred Stock
On
September 13, 2018, the Company filed a Certificate of Designations of Rights and Preferences (the “Certificate of Designations”)
to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to establish the
preferences, limitations and relative rights of the 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series
A Preferred Stock”).
Dividends on the Series A Preferred Stock shall accrue daily and be cumulative from, and including,
the date of original issue and shall be payable monthly on the last day of each calendar month, subject to the terms and conditions
set forth in the Certificate of Designations. Dividends accrue at the annual rate of 10%, which is equivalent to $2.50 per annum
per share, based on the $25.00 liquidation preference from, and including, the date of original issuance to, but not including,
September 30, 2023, or such other date fixed for redemption.
On
and after September 30, 2023, the Company may, at its option, upon not less than thirty (30) days nor more than sixty (60) days’
written notice, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00 per share of Series A Preferred Stock, plus any accumulated and unpaid dividends thereon to, but not including,
the date fixed for redemption. In addition, upon the occurrence of a change of control, subject to certain restrictions, the Company
may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice, redeem
the Series A Preferred Stock, in whole or in part, within one hundred twenty (120) days after the first date on which such change
of control occurred, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon to,
but not including, the date fixed for redemption. There is no mandatory redemption of the Series A Preferred Stock.
Holders of the Series A Preferred Stock generally have no voting rights except as set forth in the Certificate
of Designations or as otherwise required by law. The holders of Series A Preferred Stock, together with the holders of shares of
every other series of Parity Stock upon which like voting rights have been conferred and are exercisable, voting together as a
single class regardless of series, shall be entitled to elect two directors to the Company’s board of directors at any annual
meeting of stockholders or special meeting held in place thereof. When the Series A Preferred Stock is entitled to vote, such shares
are entitled to one vote per share. In any matter in which the Series A Preferred Stock may vote as a single class with any other
series of Preferred Stock (as may be required by law), each share of Series A Preferred Stock shall be entitled to one vote per
$25.00 of stated liquidation preference.
Series B Preferred Stock
On March 9, 2017, the
Company entered into a Preferred Stock Purchase Agreement with Philou, a related party. Pursuant to the terms of the Preferred
Stock Purchase Agreement, Philou may invest up to $5,000,000 in the Company through the purchase of Series B Preferred Stock over
the term of 36 months.
Each share of Series
B Preferred Stock has a stated value of $10.00 per share. Each share of Series B Preferred Stock may be convertible at the holder’s
option into shares of common stock of the Company at a conversion rate of $14.00 per share, upon the earlier to occur of: (i) 60
months from the closing date, or (ii) upon the filing by the Company of one or more periodic reports that, singly or collectively,
evidence that the Company’s gross revenues have reached no less than $10 million in the aggregate, on a consolidated reporting
basis, over four consecutive quarters in accordance with U.S. GAAP. The conversion price will be subject to standard anti-dilution
provisions in connection with any stock split, stock dividend, subdivision or similar reclassification of the common stock.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Each share of Series
B Preferred Stock shall have the right to receive dividends equal to one ten millionth (0.0000001) of earnings before interest,
taxes, depreciation, amortization and stock-based compensation (“EBITDAS”) calculated for a particular calendar year.
Assuming the purchase of the entire $5,000,000 of shares of Preferred Stock, the holders thereof will be entitled to receive dividends
equal to five percent (5%) in the aggregate of EBITDAS. Payment of dividends shall be calculated for a calendar year, payable
on a quarterly basis, with payments to occur no later than 90 days in arrears from each reporting period subject to a year-end
reconciliation. EBITDAS shall mean earnings before interest, taxes, depreciation, amortization, and stock-based compensation.
At such time as (i)
all shares of common stock issuable upon conversion of all outstanding shares of Series B Preferred Stock (the “Conversion
Shares”) shall have been registered for resale pursuant to an effective Registration Statement covering such Conversion Shares,
(ii) but no earlier than the twenty-fifth (25th) anniversary of the effective date, the shares of Series B Preferred Stock shall
be subject to redemption in cash at the option of the Company in an amount per share equal to 120% of the greater of (a) the stated
value plus all accrued and unpaid dividends, if any and (b) the fair market value of such shares of Series B Preferred Stock.
In addition, for each
share of Series B Preferred Stock purchased, Philou will receive warrants to purchase shares of common stock in a number equal
to the stated value of each share of Series B Preferred Stock purchased divided by $0.70, at an exercise price equal to $14.00
per share of common stock. The warrants do not require a net cash-settlement or provide the holder with a choice of net-cash settlement.
The warrants also do not contain a variable settlement provision. Accordingly, any warrants issued to Philou pursuant to the terms
of the Preferred Stock Purchase Agreement shall be classified as equity instruments.
Further, Philou shall
have the right to participate in the Company’s future financings under substantially the same terms and conditions as other
investors in those respective financings in order to maintain its then percentage ownership interest in the Company. Philou’s
right to participate in such financings shall accrue and accumulate provided that it still owns at least 100,000 shares of Series
B Preferred Stock.
Between March 24, 2017
and June 2, 2017, Philou purchased 100,000 shares of Series B Preferred Stock pursuant to the Preferred Stock Purchase Agreement
in consideration of the cancellation of the Company debt due to Philou in the aggregate amount of $500,000 and cash of $500,000.
In addition, Philou received warrants to purchase 102,041 shares of common stock at an exercise price of $14.00 per share of common
stock, which have been classified as equity instruments. The Company determined that the estimated relative fair value of these
warrants, which are classified as equity, was $401,399 using the Black-Scholes option pricing model. Since the warrants were classified
as equity securities, the Company allocated the $1,000,000 purchase price based on the relative fair values of the Series B Preferred
Stock and the warrants following the guidance in ASC No. 470,
Debt
.
On April 24, 2018,
pursuant to the terms of the Preferred Stock Purchase Agreement, Philou purchased an additional 25,000 shares of Series B Preferred
Stock in consideration of the cancellation of short-term advances due to Philou in the aggregate amount of $250,000. In addition,
Philou received warrants to purchase 25,510 shares of common stock at an exercise price of $14.00 per share of common stock. The
Company determined that the estimated relative fair value of these warrants, which are classified as equity, was $141,951 using
the Black-Scholes option pricing model. Since the warrants were classified as equity securities, the Company allocated the $250,000
purchase price based on the relative fair values of the Series B Preferred Stock and the warrants.
The Series B Convertible
Preferred Stock is convertible at any time, in whole or in part, at the option of Philou, into shares of common stock at a fixed
conversion price, which is subject to adjustment for stock splits, stock dividends, combinations or similar events, of $14.00 per
share. As the effective conversion price of the Series B Convertible Preferred Stock on a converted basis was below the market
price of the Company’s common stock on the date of issuance, it was determined that these discounts represent beneficial
conversion features. During the years ended December 31, 2018 and 2017, the Company valued the BCF at $108,049 and 265,054, respectively,
based on the difference between the effective conversion price and the market price of the Company’s common stock on the
date of issuance. These features are analogous to preference dividends and are recorded as a non-cash return to preferred stockholders
through accumulated deficit.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Series C Preferred Stock
Between May 24, 2017
and June 19, 2017, the Company entered into subscription agreements (the “Series C Subscription Agreement”) with approximately
twenty accredited investors (the “Series C Investors”) in connection with the sale of twenty-one Units at a purchase
price of $52,000 per Unit raising in the aggregate $1,092,000 with each Unit consisting of 21,667 shares of Series C Preferred
Stock and Warrants to purchase 4,333 shares of common stock. Divine acted as the Company’s placement agent.
Each share of Series
C Preferred Stock had a stated value of $2.40 per share. Five shares of Series C Preferred Stock were convertible at the holder’s
option into one share of Common Stock of the Company. As the effective conversion price of the Series C Convertible Preferred Stock
on a converted basis was below the market price of the Company’s common stock on the date of issuance, it was determined
that these discounts represent beneficial conversion features, which were valued at $319,128 and recognized as a deemed dividend,
based on the difference between the effective conversion price and the market price of the Company’s common stock on the
date of issuance.
Each share of Series
C Preferred Stock had the right to receive dividends equal $0.24 per share per annum as declared by the Company’s Board of
Directors. The dividends were payable on a quarterly basis on the 20th day following each calendar quarter.
During December 2017,
pursuant to the conversion terms of the Series C Preferred Stock, all of the Series C Investors elected to convert their 455,002
shares of Series C Preferred Stock into 91,000 shares of the Company’s common stock. Additionally, of the 91,000 warrants
that were issued in conjunction with the Series C Subscription Agreements, the Company issued 80,167 shares of its common stock
upon cash-based exercises that resulted in gross proceeds to the Company of $1,603,000 and issued 3,545 shares of its common stock
upon the cashless exercise of a warrant to purchase 4,333 shares of common stock.
Series D Preferred Stock
On June 2, 2017,
pursuant to the terms of the Share Exchange Agreement, the Company acquired 1,603,434 shares of the issued and outstanding common
stock of Microphase Common Stock in exchange for the issuance by the Company of 92,122 shares of the Company’s Common Stock,
378,776 shares of the Company’s Series D Preferred Stock and warrants to purchase an aggregate of 50,000 shares of the Company’s
Common Stock.
In the event the Company
shall liquidate, dissolve or wind up, the holders of Series D Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of the Common Stock, the Company’s Series A Preferred
Stock, or to the holders of any other junior series of preferred stock, by reason of their ownership thereof and subject to the
rights of the Company’s Series B Preferred Stock, Series C Preferred Stock and any other class or series of Company stock
subsequently issued that ranks senior to the Series D Preferred Stock, an amount per share in cash or equivalent value in securities
or other consideration equal to its Stated Value of $0.01 per share.
The holders of Series
D Preferred Stock shall not be entitled to receive dividends and shall have no voting rights except as otherwise required by law.
Upon the stockholders of DPW Common Stock approving the conversion of the Series D Preferred Stock into shares of DPW Common Stock
in connection with the acquisition of MPC Common Stock and for purposes of compliance with Rule 713 of the NYSE American, then
each share of Series D Preferred Stock shall automatically be converted into 37,878 shares of DPW Common Stock.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Series E Preferred Stock
On June 2, 2017, pursuant
to the terms of the Share Exchange Agreement and in consideration of legal services, Microphase issued a $450,000 8% promissory
note with a maturity date of November 25, 2017 to an unsecured creditor, Lucosky Brookman, LLP (the “Lucosky Note”).
In conjunction with the issuance of the Lucosky Note, the Company issued Lucosky Brookman 10,000 shares of Series E Preferred
Stock with a stated value equal to forty-five dollars ($45.00) per share. The Company, at its option, may redeem for cash, in
whole or in part, at any time and from time to time, the shares of Series E Preferred Stock at the time outstanding, upon written
notice to the holder of the shares, at a cash redemption price equal to $45 multiplied by the number of shares being redeemed.
Any such optional redemption by the Company shall be credited against the Lucosky Note.
In the event the Company
shall liquidate, dissolve or wind up, the holders of Series E Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of the DPW Common Stock, the Company’s Series A Preferred
Stock, or to the holders of any other junior series of preferred stock, by reason of their ownership thereof and subject to the
rights of the Company’s Series B Preferred Stock, Series C Preferred Stock and any other class or series of Company stock
subsequently issued that ranks senior to the Series E Preferred Stock an amount per share in cash or equivalent value in securities
or other consideration equal to $0.01 per share. The holders of Series E Preferred Stock shall not be entitled to receive dividends
and shall have no voting rights except as otherwise required by law. Subject to the stockholders of DPW Common Stock of the Company
approving the conversion of the Series E Preferred Stock into shares of Common Stock in connection with the acquisition of MPC
Common Stock and for purposes of compliance with Rule 713 of the NYSE American, then each share of Series E Preferred Stock may
be converted into sixty (60) shares of DPW Common Stock, for an aggregate of 30,000 shares of DPW Common Stock. On December 29,
2017, the Lucosky Note was satisfied through the conversion of the 10,000 shares of Series E Preferred Stock into 30,000 shares
of the Company’s common stock.
Common Stock
Common stock confers
upon the holders the rights to receive notice to participate and vote in the general 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.
2018 Issuances
Issuance of Common Stock pursuant to
the At the Market Offering
On
February 27, 2018, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares
of the Company’s common stock, having an aggregate offering price of up to $50 million from time to time, through an “at
the market offering” program (the “HCW ATM Offering”) under which HCW acts as sales agent. Between February 27,
2018 and December 31, 2018, the Company had received gross proceeds of $19,022,416 through the sale of 1,062,096 shares of the
Company’s common stock through the HCW ATM Offering. The offer and sale of the shares through the HCW ATM Offering were 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 SEC on December 18, 2017, amended on January
8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the HCW ATM Offering, dated
February 27, 2018. The HCW ATM Offering was terminated effective September 23, 2018.
In
connection with the termination of the HCW ATM Offering, HCW released DPW from the right of first refusal provisions set forth
in the sales agreement. In consideration for the release, the Company issued HCW 25,000 shares of its common stock, which have
been recorded in additional paid in capital, and to pay HCW a fee until February 28, 2020 of three percent fee of aggregate gross
proceeds received on future financings by the Company and a one percent fee of aggregate gross proceeds received on future financings
by the Company’s subsidiaries.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
On October 10, 2018,
the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Wilson-Davis &
Co., Inc., as sales agent (the “Agent”) to sell shares of its Common Stock, having an aggregate offering price of
up to $25,000,000 (the “Shares”) from time to time, through an “at the market offering” program (the “WDCO
ATM Offering”). Through December 31, 2018, we had received gross proceeds of $1,637,054 through the sale of 372,109 shares
of our common stock through the WDCO ATM Offering. The offer and sale of the shares through the WDCO ATM Offering were made pursuant
to our then effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained
therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and
declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the WDCO ATM Offering, dated October
15, 2018.
Issuance of Common Stock for Services
During the year ended
December 31, 2018, the Company issued to its consultants a total 184,153 shares of its common stock with an aggregate value of
$3,740,888, an average of $20.31 per share for services rendered.
Issuance of common stock for conversion
of debt
On January 3, 2018,
accrued interest of $23,250 on the 10% Convertible Notes was satisfied through the issuance of 1,938 shares of the Company’s
common stock.
On January 10, 2018,
principal and accrued interest of $202,000 and $5,723, respectively, on the 12% Convertible Note was satisfied through the issuance
of 18,884 shares of the Company’s common stock (See Note 22c).
On January 12, 2018,
principal and accrued interest of $550,000 and $2,987, respectively, on the 5% Convertible Note was satisfied through the issuance
of 46,082 shares of the Company’s common stock (See Note 22b).
On February 9, 2018,
principal and accrued interest of $1,250,000 and $133,884, respectively, on the January 2018 10% Convertible Note was satisfied
through the issuance of 34,597 shares of the Company’s common stock (See Note 22e).
During December 2018,
principal and accrued interest of $18,865 and $259,408, respectively, on the 10% Convertible Note was satisfied through the issuance
of 109,724 shares of the Company’s common stock (See Note 22a).
Issuances of Common Stock upon Exercise
of Stock Options
During January 2018,
the Company issued a total of 3,000 shares of its common stock upon the cash exercise of options. These options were issued pursuant
to the Company’s Plans. The Company received cash of $97,800 as a result of these option exercises.
Issuances of Common Stock upon Exercise
of Warrants
During January 2018,
the Company issued a total of 93,324 shares of its common stock upon the cash and cashless exercise of warrants to purchase an
aggregate of 109,382 shares of its common stock. These warrants were issued between August 2017 and December 2017 in conjunction
with various common stock and debt financings. The Company received cash of $867,166 as a result of these warrant exercises.
On May 8, 2018, the
Company issued 13,958 shares of common stock pursuant a cashless exercise of warrants issued to Divine Capital Markets, LLC, its
Placement Agent (the “Placement Agent”) for the 2017 private placement of the Series C Preferred Stock and warrants.
For its services, the Placement Agent received, a warrant to purchase 9,100 shares of the Company’s common stock at $14.40
per share and a second warrant to purchase 9,100 shares of the Company’s common stock at $20.00 per share.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Issuances of common stock in connection
with convertible notes
On February 9, 2018,
in conjunction with the securities purchase agreement to sell the January 2018 10% Convertible Note in the principal amount of
$1,250,000 the Company issued 27,174 shares of restricted common stock to the institutional investor (See Note 22b).
On April 16, 2018,
in conjunction with the securities purchase agreements to sell the 12% April 2018 Convertible Note in the principal amount of $1,722,222,
the Company issued 10,046 shares of restricted common stock to the institutional investor (See Note 22d).
On May 15, 2018, in
conjunction with the securities purchase agreement to sell the 10% Convertible Note in the principal amount of $6,000,000 the Company
issued 17,241 shares of restricted common stock to the institutional investor (See Note 22a). On August 10, 2018, pursuant to an
amendment to the 10% Convertible Note entered into on July 2, 2018, the Company is required to issue an additional 31,000 shares
of restricted common stock to the holder of the note.
On July 2, 2018, in
conjunction with the securities purchase agreement to sell the Second 10% Convertible Note in the principal amount of $1,000,000
the Company issued 20,000 shares of restricted common stock to the institutional investor (See Note 22a).
On August 16, 2018,
in conjunction with the securities purchase agreements to sell secured promissory notes in the aggregate principal face amount
of $1,272,600, the Company issued 20,000 shares of restricted common stock to the institutional investors (See Note 20h).
During September 2018,
in conjunction with the securities purchase agreements to sell secured promissory notes in the aggregate principal face amount
of $789,473, the Company issued 22,500 shares of restricted common stock to the institutional investors (See Note 20i).
On October 11, 2018,
in conjunction with the securities purchase agreements to secured promissory note in the aggregate principal face amount of $565,000,
the Company issued 20,000 shares of restricted common stock to the institutional investor (See Note 20j).
Issuances of Common Stock upon Conversion
of Series D Preferred Stock
During the year ended
December 31, 2018, pursuant to the conversion terms of the Series D Preferred Stock, 378,776 shares of the Series D Preferred Stock
were converted into 37,878 shares of the Company’s common stock.
Issuances of
Common Stock for cash and cancellation of short-term advances
On October 5, 2017,
Ault & Company purchased 3,750 shares of the Company’s common stock at $12.00 per share and a warrant to purchase up
to 3,750 shares of the Company’s common stock at $12.00 per share for an aggregate purchase price of $45,000. The shares
and warrants were issued by the Company on May 8, 2018. Ault & Company is controlled by Mr. Milton Ault, the Company’s
Chairman and Chief Executive Officer.
On May 15, 2018, the
Company entered into securities purchase agreements with certain investors in which the Company sold an aggregate of 384,589 shares
of its common stock, 206,730 for cash and 177,858 for the cancellation of short-term advances, and five-year warrants to purchase
such number of shares of common stock equal to the shares of common stock purchased by the investors. The Company received aggregate
consideration of $5,999,584, consisting of cash and the cancellation of short-term advances of $3,225,000 and $2,774,584, respectively.
These securities were issued pursuant to our registration statement filed with the Securities and Exchange Commission (File No.
333-222132) which became effective on January 11, 2018.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Treasury Stock
The Company utilizes the cost method of
accounting for treasury stock. The cost of reissued shares is determined under the last-in, first-out method. The Company purchased
2,750 shares for $57,748 during the year ended December 31, 2018.
2017 Issuances
Issuances of Common Stock for Cash or
a Combination of Cash and Cancellation of Debt
On March 15, 2017,
Company entered into a subscription agreement with a related party for the sale of 25,000 shares of common stock at $12.00 per
share for the aggregate purchase price of $300,000.
On July 24, 2017, we
entered into subscription agreements with six investors, and on July 25, 2017 we entered into a securities purchase agreement with an
institutional investor, under which we agreed to issue and sell in the aggregate 42,568 shares of common stock to the investors
at $11.00 per share for an aggregate purchase price of $468,250. Of the aggregate purchase price of $468,250, $445,250 was paid
in cash and $23,000, which represented 2,091 of the total shares of common stock sold, was in consideration for the cancellation
of debt of the Company. The company granted warrants to purchase 5,455 shares of common stock to two of the investors that
entered into the subscription agreements at $15.00 per share. In a concurrent private placement, we sold to the institutional investor
warrants to purchase an aggregate of 8,182 shares of the Company’s common stock at an exercise price equal to $11.00
per share.
On October 18,
2017, the Company entered into subscription agreements with five investors, under which we agreed to issue and sell in the
aggregate 22,612 shares of common stock to the investors at $13.40 per share for an aggregate purchase price of $303,000.
$210,000 of the purchase price was paid in cash and $93,000, which represented 6,940 of the total shares of common stock
sold, was paid through the cancellation of debt incurred by the Company.
On November 7,
2017, the Company entered into subscription agreements with investors under which the Company agreed to issue and sell in the aggregate
36,250 shares of common stock to the investors at $12.00 per share for an aggregate purchase price of $435,000. $280,000 of the
aggregate purchase price was paid in cash and $155,000, which represented 12,917 of the total shares of common stock sold, was
paid through the cancellation of debt incurred by the Company.
On December 5,
2017, the Company entered into subscription agreements with investors for the sale of 32,000 shares of common stock at $25.00 per
share for the aggregate purchase price of $800,000. The direct offering closed December 13, 2017.
In aggregate, the above
transactions resulted in the issuance of 136,482 shares of common stock for cash proceeds, net of $72,769 in financing costs, of
$1,962,481 and the issuance of 21,498 shares of common stock for the cancellation of $271,000 in debt incurred by the Company.
Issuances of Common Stock for Services
On March 8, 2017, the
Company issued an aggregate of 12,547 shares of its common stock as payment for services to a consultant. The shares were valued
at $10, an average of $0.80 per share.
Between May 9, 2017
and June 18, 2017, the Company issued an aggregate of 47,808 shares of its common stock as payment for services to its consultant.
The shares were valued at $498,769, an average of $10.40 per share.
Between August 21,
2017 and September 5, 2017, the Company issued an aggregate of 29,032 shares of its common stock as payment for services to its
consultants. The shares were valued at $363,613, an average of $12.40 per share.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Between October 3, 2017 and December 28, 2017, the Company issued an aggregate of
30,600 shares of its common stock as payment for services to its consultants. The shares were valued at $790,320, an average of
$25.80 per share.
In aggregate, during
the year ended December 31, 2017, the Company issued a total of 108,067 shares of its common stock, with a value of $1,662,702,
to its consultants for services.
Issuance of common stock for conversion
of debt
Between February 16, 2017 and February 23, 2017, the Company issued 33,333 shares of its common stock,
an extinguishment price of $12.00 per share, for the cancellation of $400,000 in demand promissory notes.
On April 5, 2017, the
Company issued 18,000 shares of its common stock, at a price of $15.00 per share, for the cancellation of $270,000 in demand promissory
notes.
On June 28, 2017, the
Company issued 9,455 shares of its common stock, at a price of $11.00 per share, for the cancellation of a 7% convertible promissory
note in the principal amount of $104,000.
On June 28, 2017, the
holders of $55,000 of in short-term loans agreed to cancel their notes for the purchase of 5,000 shares of the Company’s
common stock at a price of $11.00 per share.
On July 28, 2017, an
institutional investor agreed to cancel two promissory notes in the aggregate amount of $145,000 for the issuance of 13,180 shares
of the Company’s common stock at a price of $11.00 per share.
During the period from
November 27, 2017 to December 6, 2017, the entire $530,000 of principal on the Convertible Note was satisfied through the issuance
of 48,182 shares of the Company’s common stock (See Note 20).
On December 13, 2017
and December 14, 2017, the entire $1,111,000 of principal on the November 5% Convertible Note was satisfied through the issuance
of 92,583 shares of the Company’s common stock (See Note 22f).
On December 28, 2017,
principal and accrued interest of $198,000 and $4,818, respectively, on the 12% Convertible Note was satisfied through the issuance
of 18,438 shares of the Company’s common stock (See Note 22c).
During December 2017,
the entire principal and accrued interest of $880,000 and $54,452, respectively, on the 10% Convertible Notes was satisfied through
the issuance of 77,871 shares of the Company’s common stock (See Note 22g).
Issuances of Common Stock upon Exercise
of Stock Options
Between December 4,
2017 and December 22, 2017, the Company issued a total of 361,458 shares of its common stock upon the cash and cashless exercise
of options to purchase an aggregate of 363,500 shares of its common stock. These options were issued pursuant to the Company’s
Plans. The Company received cash of $557,360 as a result of these option exercises.
Issuances of Common Stock upon Exercise
of Warrants
Between November 27,
2017 and December 28, 2017, the Company issued a total of 93,593 shares of its common stock upon the cash and cashless exercise
of warrants to purchase an aggregate of 105,673 shares of its common stock. These warrants were issued between November 2016 and
August 2017 in conjunction with various common stock and debt financings. The Company received cash of $642,603 as a result of
these warrant exercises.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
During December 2017,
in conjunction with the Series C Subscription Agreements, the Company issued 80,167 shares of its common stock upon cash-based
exercises that resulted in gross proceeds to the Company of $1,603,335 and issued 3,545 shares of its common stock upon the cashless
exercise of a warrant to purchase 4,333 shares of common stock.
In aggregate, the Company
received gross proceeds of $2,245,938 from the issuance of 177,305 shares of common stock in connection with warrant exercises.
Issuances of common stock in connection
with convertible notes
On November 2, 2017,
in conjunction with the securities purchase agreement to sell the November 5% Convertible Note in the principal amount of $1,111,000
the Company issued 15,000 shares of restricted common stock to the institutional investor.
On December 4, 2017,
in conjunction with the securities purchase agreement to sell the 5% Convertible Note in the principal amount of $550,000, the
Company issued 7,500 shares of restricted common stock to the institutional investor.
Issuance of common stock for domain
name
On July 7, 2017, the
Company entered into an asset purchase agreement to acquire the intellectual property of Coolisys.com, consisting of the common
law rights associated with the trademarks and name as well as the domain name and content of
www.Coolisys.com
. The aggregate
purchase price of $81,000 was comprised of 2,500 shares of common stock, valued at $31,000
based
on the closing price of the Common Stock on the date of the acquisition, and cash of $50,000.
Issuance of common stock and warrants
in satisfaction of subsidiary debt
On
December 5, 2017, the Company entered into an exchange agreement with several accredited investors for the cancellation of $690,000
in outstanding principal on the 10% Short-Term Notes.
In
December 2016, Microphase issued $705,000 in 10% Short-Term Notes. The 10% Short-Term Notes were due one year from the date of
issuance. The amount due pursuant to the 10% Short-Term Notes is equal to the entire original principal amount multiplied by 125%
(the “Loan Premium”) plus accrued interest. In exchange for the cancellation of $690,000 of outstanding principal
and $250,000 of accrued loan premiums and interest owed to the investors by Microphase Corporation, the Company entered into the
exchange agreement pursuant to which the Company issued an aggregate of 76,193 shares of common stock and warrants to purchase
19,023 shares of common stock with an exercise price of $22.00 per share of common stock, (See Note 20l).
Issuance of common stock for acquisition
of debt due from related party
On December 5, 2017,
the Company entered into an exchange agreement with WT Johnson, pursuant to which the Company issued to WT Johnson convertible
promissory notes in the principal amount of $2,267,766. During December 2017, the Company issued 30,000 shares of its common stock
upon the conversion of the promissory notes.
25. INCOME TAXES
On
December 22, 2017, the United States enacted significant changes to U.S. tax law following the passage and signing of H.R.1, “An
Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”
(the “Tax Act”).
Introduced initially as the Tax Cuts and Jobs Act, the Act to Provide for Reconciliation
Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Act”) was enacted
on December 22, 2017. The Act applies to corporations generally beginning with taxable years starting after December 31, 2017 and
reduces the corporate tax rate from a graduated set of rates with a maximum 35% tax rate to a flat 21% tax rate. Additionally,
the Act introduces other changes that impact corporations, including a net operating loss (“NOL”) deduction annual
limitation, an interest expense deduction annual limitation, elimination of the alternative minimum tax, and immediate expensing
of the full cost of qualified property. The Act also introduces an international tax reform that moves the U.S. toward a territorial
system, in which income earned in other countries will generally not be subject to U.S. taxation. However, the accumulated foreign
earnings of certain foreign corporations will be subject to a one-time transition tax, which can be elected to be paid over an
eight-year tax transition period, using specified percentages, or in one lump sum. NOL and foreign tax credit (“FTC”)
carryforwards can be used to offset the transition tax liability. The Company does not expect that this change will have an impact
on the Company as it has not earned taxable income in the past and it has significant NOL carryforwards.
The
application of this rate reduction to the ending deferred tax assets and deferred tax liabilities impacted our expense for income
taxes in 2017 by $1,138,845 which was fully offset by a corresponding change to our valuation allowance.
We applied
the guidance in SAB 118 when accounting for the enactment-date effects of the Act in 2017 and throughout 2018. At December 31,
2017, we had not completed our accounting for all of the enactment-date income tax effects of the Act under ASC 740, Income Taxes.
At December 31, 2018, we have now completed our accounting for all of the enactment-date income tax effects of the Act. During
2018 we did not need to adjust to the provisional amounts recorded at December 31, 2017.
The
2017 and 2018 impacts of the enactment of the Tax Act are reflected in the tables below.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's deferred tax assets are as follows:
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Foreign
|
|
$
|
134,017
|
|
|
$
|
—
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total Current
|
|
$
|
134,017
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(52,134
|
)
|
|
$
|
—
|
|
Federal
|
|
|
(158,482
|
)
|
|
|
(78,393
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
Total Deferred
|
|
$
|
(210,616
|
)
|
|
$
|
(78,393
|
)
|
Income tax (benefit)
|
|
$
|
(76,599
|
)
|
|
$
|
(78,393
|
)
|
The Company had Federal
and state net operating loss carryforwards of approximately $43,051,999 and $7,960,184 at December 31, 2018 and December 31, 2017
respectively, available to offset future taxable income, expiring at various times starting in 2022 through 2039. The net operating
loss generated in 2018 will carryforward indefinitely. In accordance with Section 382 of the Internal Revenue Code, the future
utilization of the Company’s net operating loss to offset future taxable income may be subject to an annual limitation as
a result of ownership changes that may have occurred previously or that could occur in the future. Management believes that such
an ownership change may have occurred during 2017. The Company has estimated the Section 382 annual limitation due to this ownership
change to be approximately $157,433. This has been used to reduce the amount of the net operating losses that have limited carryforward
periods.
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers
the scheduled reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment.
After consideration of all of the information available and due to the last five years significant losses there is substantial
doubt related to the Company’s ability to utilize its deferred tax assets, the Company recorded a full valuation allowance
of the deferred tax asset. For the year ended December 31, 2018, the valuation allowance has increased by $4,887,148.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The 2015 tax year remains
open to examination by the Internal Revenue Service (
“IRS”
) and the 2014 through 2015 tax years remain open
to examination by the California Franchise Tax Board (
“FTB”
) and the Connecticut Department of Revenue
(“CDR”
).
The IRS, FTB and CDR have the authority to examine those tax years until the applicable statute of limitations expires and the
years with net operating loss carryovers when such carryovers are used. Returns for tax years 2016, 2017 and 2018 have not been
filed.
As of December 31,
2018, the Company’s foreign subsidiaries had accumulated losses for income tax purposes in the amount of approximately $1,808,466. All
of the Company’s international accumulated losses were generated in the United Kingdom and Israel which have statutory tax
rates of 20% and 7.5% respectively. These net operating losses may be carried forward and offset against taxable income
in the future for an indefinite period.
The net income tax benefit consists
of the following:
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Foreign
|
|
$
|
134,017
|
|
|
$
|
—
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total Current
|
|
$
|
134,017
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(52,134
|
)
|
|
$
|
—
|
|
Federal
|
|
|
(158,482
|
)
|
|
|
(78,393
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
Total Deferred
|
|
$
|
(210,616
|
)
|
|
$
|
(78,393
|
)
|
Income tax (benefit)
|
|
$
|
(76,599
|
)
|
|
$
|
(78,393
|
)
|
The Company’s
effective tax rates were (0.3%) and (0.8%) for the years ended December 31, 2018 and 2017, respectively. During the year
ended December 31, 2018, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the
valuation allowance and the effect of changes in tax rates in future periods. The reconciliation of income tax attributable to
operations computed at the 2018 and 2017 U.S. Federal statutory income tax rates of 21% and 34% respectively to income tax expense
is as follows:
|
|
2018
|
|
|
2017
|
|
Tax benefit at U.S. Federal statutory tax rate
|
|
|
(21.0
|
%)
|
|
|
(34.0
|
%)
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
Effect of change in tax rates
|
|
|
1.8
|
%
|
|
|
12.0
|
%
|
Effect of Section 382 limitation
|
|
|
4.9
|
%
|
|
|
0.0
|
%
|
Increase in valuation allowance
|
|
|
15.1
|
%
|
|
|
17.0
|
%
|
Nondeductible meals & entertainment expense and other
|
|
|
0.9
|
%
|
|
|
6.1
|
%
|
State taxes, net of federal benefit
|
|
|
(2.4
|
%)
|
|
|
(4.5
|
%)
|
Foreign rate differential
|
|
|
0.3
|
%
|
|
|
0.7
|
%
|
Stock compensation expense
|
|
|
(0.1
|
%)
|
|
|
1.9
|
%
|
Effective tax rate
|
|
|
(0.3
|
%)
|
|
|
(0.8
|
%)
|
The Company accounts
for uncertain tax positions in accordance with ASC No. 740-10-25. ASC No. 740-10-25 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-25,
the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit to be
recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact
income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities
for potential tax assessments are included in income tax expense. ASC No. 740-10-25 also requires management to evaluate tax positions
taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would
not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken
by the Company and has concluded that as of December 31, 2018 and 2017, there are no uncertain tax positions taken, or expected
to be taken, that would require recognition of a liability that would require disclosure in the financial statements.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
26. RELATED PARTY TRANSACTIONS
|
a.
|
The Company has made a strategic investment in AVLP in expectation of future business generated
by the Company from MTIX Ltd., an advanced materials and processing technology company located in Huddersfield, West Yorkshire,
UK (“MTIX”), a wholly-owned subsidiary of AVLP. The Company’s investments in AVLP consist of convertible promissory
notes, warrants and shares of common stock of AVLP. On September 6, 2017, the Company and AVLP entered into a Loan and Security
Agreement (“AVLP Loan Agreement”) with an effective date of August 21, 2017 pursuant to which the Company
will provide AVLP a non-revolving credit facility of up to $10 million for a period ending on August 21, 2019, subject to the terms
and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit. At December
31, 2018, the Company has provided loans to AVLP in the principal amount $6,943,997 and, in addition to the 12% convertible promissory
notes, AVLP has issued to the Company warrants to purchase 13,887,994 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 December 31, 2018 and 2017, the Company recorded
contractual interest receivable attributed to the AVLP Loan Agreement of $1,004,317 and $324,000, respectively.
|
During the year ended December
31, 2018 and 2017, the
Company also acquired in the
open market 430,942 shares of AVLP common stock for $417,169 and 221,333 shares of AVLP common stock for $191,782 respectively.
At December 31, 2018, the closing market price of AVLP’s common stock was $0.90, a decline from $1.75 at December 31, 2017.
The Company has determined that its investment in AVLP marketable equity securities are accounted for pursuant to the fair value
method and based upon the closing market price of common stock at December 31, 2018, the amount of the Company’s unrealized
gain is $119,329.
Philou is AVLP’s controlling
stockholder. Mr. Ault is Chairman of AVLP’s Board of Directors and the Chairman of the Company’s Board of Directors.
Mr. William B. Horne is the Chief Financial Officer of AVLP and the Chief Financial Officer and a director of the Company.
During the years ended December
31, 2018 and 2017, the Company recognized $3,907,280 and $173,751, respectively, in revenues resulting from its relationship with
MTIX, which was acquired by AVLP on August 22, 2017 and is therefore deemed to be a related party. In March 2017, the Company was
awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement
(“MLSE”) plasma-laser system. Management believes that the MLSE purchase order will be a source of revenue and generate
significant cash flows for the Company. However, at December 31, 2018, $3,887,000 in revenues recognized during the years ended
December 31, 2018 and 2017, had not yet been received and was reflected on the financial statements as accounts receivable, related
party. Subsequent to year end the Company received $2,676,219 for manufacturing services performed on the first MLSE system.
|
b.
|
On April 13, 2018, the Company entered into an amended and restated consulting agreement with Mr. Ault
pursuant to which the parties thereto agreed to amend and restate that certain independent contractor agreement dated September
22, 2016, by and between the Company and Mr. Ault.
In
accordance with the terms set forth in the Agreement, Mr. Ault shall continue to serve as the Company’s Chief Executive Officer
and Chairman of the Board of Directors in consideration of a monthly fee of $33,333, effective November 15, 2017. On June 17, 2018,
the Company entered into a ten-year executive employment agreement with Mr. Ault. For his services, Mr. Ault will be paid
a base salary of $400,000 per annum. For his services, Mr. Ault was paid $400,000 and $207,500, respectively, during the years
ended December 31, 2018 and 2017.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
|
c.
|
On March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou. Pursuant
to the terms of the Preferred Stock Purchase Agreement, Philou may invest up to $5,000,000 in the Company through the purchase
of Series B Preferred Stock over 36 months.
Philou has purchased 125,000 shares of Series
B Preferred Stock pursuant to the terms of the Purchase Agreement, the most recent purchase having occurred on April 24, 2018 for
the purchase of 25,000 shares of Series B Preferred Stock
.
|
|
d.
|
Between July 6, 2017 and September 30, 2018, Milton C. Ault, III, the Company’s Chairman
and Chief Executive Officer, personally guaranteed the repayment of (i) $8,218,000 from the sale of Advances on Future Receipts
(ii) and $4,781,000 from the sale of the promissory notes. These personal guarantees were necessary to facilitate the consummation
of these financing transactions. Mr. Ault’s payment obligations would be triggered if the Company failed to perform under
these financing obligations. Our board of directors has agreed to compensate Mr. Ault for his personal guarantees. The amount of
annual compensation for each of these guarantees, which will be in the form of non-cash compensation, is approximately 1.5% of
the amount of the obligation.
|
|
e.
|
During the year ended December 31, 2017, DP Lending made loans to Alzamend Neuro, Inc. (“Alzamend”),
in the amount of $44,000. AVLP is a party to a management services agreement pursuant to which AVLP provides management, consulting
and financial services to Alzamend. The outstanding principal under these loans was repaid during 2018. As additional consideration,
the Company received a warrant to purchase 22,000 shares of Alzamend’s common stock at an exercise price of $0.30 per share
of common stock.
|
|
f.
|
On
December 5, 2017, the Company entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson
two convertible promissory notes in the principal amount of $600,000 (“Note A”) and $1,667,766 (“Note B”),
in exchange for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.
|
During December 2017, the Company
issued 30,000 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently sold
the 30,000 shares. The proceeds from the sale 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 $2,667,766 from MTIX. At December 31, 2017, 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.
|
g.
|
Between May 5, 2017 and June 30, 2017, the Company received additional short-term loans of $140,000 from
four accredited investors of which $75,000 was from the Company’s corporate counsel, a related party. As additional consideration,
the investors received five-year warrants to purchase 11,219 shares of common stock at a weighted average exercise price of $15.40
per share. On June 28, 2017, $52,000 in short-term loans that was received from the related party was converted into one of
the Series C Units (See Note 24) and on July 24, 2017, the remaining $23,000 in short-term loans was converted in 2,091 shares
of the Company’s common stock
in conjunction with
the subscription agreements that the Company entered into with six investors (See Note 20h).
|
|
h.
|
During the year ended December 31, 2017, our President, Amos Kohn, purchased certain real property
that will serve as a facility for the Company’s business operations in Israel. The Company made $300,000 of payments to the
seller of the property and received a 28% undivided interest in the real property (“Property’). The Company’s
subsidiary, Coolisys, entered into a Trust Agreement and Tenancy In Common Agreement with Roni Kohn, who owns a 72% interest in
the Property, is the daughter of Mr. Kohn and is an Israeli citizen. The Property was purchased to serve as a residence/office
facility for the Company in order to oversee its European operations and to expand its business in the hi-tech industry located
in Israel. Pursuant to the Trust Agreement, Ms. Kohn will hold and manage Coolisys’ undivided 28% interest in the Property.
The trust will be in effect until it is terminated by mutual agreement of the parties. During the term of the trust, the Ms. Kohn
will not sell, lease, sublease, transfer, grant, encumber, change or effect any other disposition with respect to the Property
or the Coolisys’ interest without the Company’s approval.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
27. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has five
reportable segments as of December 31, 2018 and had two reportable segments as of December 3, 2017; 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.
|
|
Year ended December 31, 2018
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Enertec
|
|
|
Digital Farms
|
|
|
I.AM
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
10,499,612
|
|
|
$
|
2,036,530
|
|
|
$
|
5,226,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,762,217
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,675,549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,675,549
|
|
Revenue, related party
|
|
|
3,907,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,907,280
|
|
Revenue, restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,462,140
|
|
|
|
—
|
|
|
|
3,462,140
|
|
Revenue, lending activities
|
|
|
347,033
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
347,033
|
|
Inter-segment revenues
|
|
|
36,833
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,833
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
14,790,758
|
|
|
$
|
2,036,530
|
|
|
$
|
5,226,075
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
(36,833
|
)
|
|
$
|
27,154,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
300,326
|
|
|
$
|
65,046
|
|
|
$
|
389,808
|
|
|
$
|
2,151,505
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,906,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(3,608,828
|
)
|
|
$
|
(586,107
|
)
|
|
$
|
(431,320
|
)
|
|
$
|
(6,369,138
|
)
|
|
$
|
(81,264
|
)
|
|
$
|
—
|
|
|
$
|
(11,076,657
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
44,190
|
|
|
$
|
1,301
|
|
|
$
|
48,826
|
|
|
$
|
8,891,928
|
|
|
$
|
184,377
|
|
|
$
|
—
|
|
|
$
|
9,169,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
28,623,729
|
|
|
$
|
1,458,699
|
|
|
$
|
10,251,816
|
|
|
$
|
7,018,958
|
|
|
$
|
2,072,678
|
|
|
$
|
—
|
|
|
$
|
49,425,880
|
|
|
|
Year ended December 31, 2017
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
Revenues
|
|
$
|
7,889,731
|
|
|
$
|
2,111,018
|
|
|
$
|
—
|
|
|
$
|
10,000,749
|
|
Revenue, related party
|
|
|
173,751
|
|
|
|
—
|
|
|
|
—
|
|
|
|
173,751
|
|
Inter-segment revenues
|
|
|
53,501
|
|
|
|
—
|
|
|
|
(53,501
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
8,116,983
|
|
|
$
|
2,111,018
|
|
|
$
|
(53,501
|
)
|
|
$
|
10,174,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
$
|
183,252
|
|
|
$
|
70,754
|
|
|
$
|
—
|
|
|
$
|
254,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(5,558,272
|
)
|
|
$
|
(424,773
|
)
|
|
$
|
—
|
|
|
$
|
(5,983,045
|
)
|
Capital expenditures for segment assets, as of
December 31, 2017
|
|
$
|
382,250
|
|
|
$
|
20,529
|
|
|
$
|
—
|
|
|
$
|
402,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets as of December 31, 2017
|
|
$
|
28,780,371
|
|
|
$
|
1,728,523
|
|
|
$
|
—
|
|
|
$
|
30,508,894
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Concentration Risk:
The following table
provides the percentage of total revenues attributable to a single customer from which 10% or more of total revenues are derived:
|
|
|
For the Year Ended
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
|
by Major
|
|
|
Percentage of
|
|
|
Customers
|
|
|
Total Company
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
Customer A
|
|
$
|
3,907,280
|
|
|
14
|
%
|
|
|
|
For the Year Ended
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
|
by Major
|
|
|
Percentage of
|
|
|
|
Customers
|
|
|
Total Company
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
Customer B
|
|
$
|
1,340,766
|
|
|
13
|
%
|
Revenue from Customer
A is related party revenue attributable to Coolisys and revenue from Customer B is also attributable to Coolisys. At December 31,
2018, MTIX represented all of the Company’s accounts and other receivable, related party.
For the years ended
December 31, 2018 and 2017, total revenues from external customers divided on the basis of the Company’s product lines are
as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Commercial products
|
|
$
|
10,597,256
|
|
|
$
|
5,488,657
|
|
Defense products
|
|
|
16,556,963
|
|
|
|
4,685,843
|
|
Total revenues
|
|
$
|
27,154,219
|
|
|
$
|
10,174,500
|
|
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 years
ended December 31, 2018 and 2017. Other than as shown, no foreign country or region contributed materially to revenues or long-lived
assets for these periods:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
North America
|
|
$
|
19,113,226
|
|
|
$
|
6,636,954
|
|
Europe
|
|
|
1,765,991
|
|
|
|
2,634,166
|
|
Middle East
|
|
|
5,226,075
|
|
|
|
672,256
|
|
Other
|
|
|
1,048,927
|
|
|
|
231,124
|
|
Total revenues
|
|
$
|
27,154,219
|
|
|
$
|
10,174,500
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
28. SUBSEQUENT EVENTS
In accordance with
FASB ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2018 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.
Amendments
to Certificate of Incorporation
On January 3, 2019,
the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation,
with the Secretary of State of the State of Delaware, to effectuate an increase to the number of authorized shares of common stock
of the Company. Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its Class A
common stock, par value $0.001, 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 its 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 as of December 28, 2018, and approved by a vote of the stockholders of the Company at the December 28, 2018 Annual
Meeting of Stockholders. The Certificate of Amendment became effective upon filing with the State of Delaware on January 3, 2019.
On
February 27, 2019, the Company filed a Certificate of Designations of Rights and Preferences of Series C Convertible Redeemable
Preferred Stock (the “Certificate of Designations”) to its Certificate of Incorporation, as amended on January 2, 2019,
with the Secretary of State of the State of Delaware to establish the preferences, limitations and relative rights of the Series
C Convertible Redeemable Preferred Stock. The Series C Redeemable Preferred Stock issued and outstanding sixty (60) months from
the from their date of issuance (the “Redemption Date”), shall be mandatorily redeemed and repurchased by the Company
at the Stated Value.
On March 14, 2019,
pursuant
to the authorization provided by the Company’s stockholders
at a Special Meeting of Stockholders, the Company’s
Board of Directors approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse
stock split of the Common Stock affecting both the authorized and issued and outstanding number of such shares by a ratio of one-for-twenty
(the “Reverse Stock Split”). The Company filed the COI Amendment to its Certificate of Incorporation with the State
of Delaware effectuating the Reverse Stock Split on March 14, 2019. As a result of the Reverse Stock Split, each twenty (20) shares
of Common Stock issued and outstanding prior to the Reverse Stock Split were converted into one (1) share of Common Stock,
with
no change in authorized shares or par value per share.
Amendments
to 10% Convertible Note
On January 9, 2019,
the Company and the Investor of the 10% Convertible Note entered into an amendment, which revised the amortization schedule of
the 10% Convertible Note such that the monthly amortization payments in the principal amount $309,193, at the request of the holder,
shall be satisfied by the issuance of shares of the Company’s common stock. The shares of common stock shall be issued at
a price equal to the greater of (i) $2.40 per share (the closing price of the Company’s common stock on January 9, 2019)
or (ii) 80% of the lowest daily VWAP in the three days prior to the date of issuance, but not to exceed $8.00 per share. However,
the Company shall have the right to pay the monthly amortization payment in cash within 72 hours by advising the investor via email
within two hours of receipt of any conversion notice. Between January 4, 2019 and February 21, 2019, the Company issued to the
investor 336,486 shares of its common stock at $1.96 per share upon the conversion of $1,053,351 in principal and accrued interest.
The investor received $660,337 from the sale of the shares of common stock, which approximated the value of the shares of common
stock on the date of issuance, resulting in a True-Up Payment due to the investor of $393,014.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Public Offering
On
March 29, 2019, the 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) 2,855,500
shares of its common stock (the “Shares”) together with warrants to purchase 2,855,500 shares of common stock (the
“Common Warrants”) and (b) pre-funded warrants to purchase up to an aggregate of 12,700,000 shares of its
common stock (the “Pre-Funded Warrants”) together with a number of Common Warrants to purchase 12,700,000 shares
of common stock (the “Offering”). The Shares were sold to the purchasers at the public offering price of $0.44 per
share (the “Offering Price”). The Common Warrants were sold at a public offering price of $0.01 per Common Warrant.
The Pre-Funded Warrants were offered to each purchaser whose purchase of the Shares and the Common Warrant in the Offering would
otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99%
(or, at the election of the purchaser, 9.99%) of the Company’s outstanding common stock immediately following the consummation
of the Offering. The purchase price of each Pre-Funded Warrant equaled the Offering Price at which the Shares were sold to the
public in the Offering, minus $0.01, and the exercise price of each Pre-Funded Warrant equaled $0.01 per share.
Pursuant to the Underwriting
Agreement, the Company also granted the Underwriter the option to purchase up to 428,325 additional shares of common stock, and/or
Pre-funded Warrants to purchase up to 1,905,000 additional shares of common stock and/or Common Warrants to purchase up to 2,333,325
additional shares of common stock to cover over-allotments, if any. The option is exercisable 45 days after entry into the Underwriting
Agreement. The Offering was made pursuant to the shelf registration statement on Form S-3 (File No. 333-222132),
as amended, that was filed by the Company with the SEC on January 8, 2019 and declared effective by the SEC on January 11,
2018, and a related prospectus supplement.
The Common Warrants
are exercisable at any time after the date of issuance at an exercise price of $0.45 per share and will expire on the fifth anniversary
of the original issuance date. If at the time of exercise, there is no effective registration statement registering, or no current
prospectus available for, the issuance of the shares of common stock underlying the Common Warrants, then the Common Warrant may
be exercised through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of
common stock determined according to the formula set forth in the Common Warrant. If on any date on or after May 2, 2019, the volume
weighted average price of the Company’s common stock fails to exceed the exercise price of the Common Warrant in effect on
such date, the Common Warrant may be exercised such that the holder will receive one common share for each warrant held.
The Pre-Funded Warrants
are exercisable at any time after the date of issuance and may be exercised at any time until all of the Pre-Funded Warrants are
exercised in full. As an alternative to payment in immediately available funds, the holder may elect to exercise the Pre-Funded
Warrant through a cashless exercise.
In
addition, the Company has also issued the Underwriter a warrant to purchase a maximum of 622,220 additional shares of common stock
(equal to 4% of the Shares sold in the Offering plus the number of shares of common stock underlying the Pre-Funded Warrants) at
an initial exercise price of $0.50 per share, with a term of five years (the “Underwriter’s Warrant”). The Underwriter’s
Warrant contains demand and piggy-back registration rights. If at the time of exercise, there is no effective registration statement
registering, or no current prospectus available for, the issuance of the shares of common stock underlying the Underwriter’s
Warrant, then the Underwriter’s Warrant may be exercised through a cashless exercise.
The
Company received net proceeds from the Offering of approximately $6 million, after deducting underwriting discounts and commissions
and estimated Offering expenses, and assuming no exercise of the Underwriter’s option to purchase additional shares. The
Company used the net proceeds from the Offering for the repayment of debt, working capital and other general corporate purposes.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The
Offering closed on April 2, 2019 and as of April 12, 2019 the Company had issued a total of 12,555,500 shares of its common stock,
inclusive of shares issued pursuant to the exercise of a total of 9,700,000 Pre-Funded Warrants.
WDCO ATM Offering
Between
January 1, 2019 and April 12, 2018, the Company had received net proceeds of $4,469,630 through the sale of 4,791,642 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 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 SEC on December 18, 2017, amended
on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering,
dated October 15, 2018.
Series C Convertible
Redeemable Preferred Stock
On
February 27, 2019, the Company entered into a Securities Purchase Agreement with Ault & Company, Inc., a Delaware corporation
and a stockholder of the Company (“Ault & Company”). Pursuant to the terms of the Agreement, Ault & Company
will invest at its sole and absolute discretion up to $2,500,000 in the Company through the purchase of the Company’s Series
C Convertible Redeemable Preferred Stock (“The Series C Preferred Stock”), during the period commencing on the Closing
Date and ending on December 31, 2019. Each share of Series C Preferred Stock shall be purchased at $1,000 (the “Stated Value”)
for up to a maximum issuance of 2,500 shares of Preferred Stock. Each share of Preferred Stock shall become convertible after the
eighteen months from the date from the date of issuance into such number of fully paid and non-assessable shares of the Company’s
common stock (“Common Stock”) for $2.40 per share, subject to adjustments (the “Conversion Price”). The
Preferred Stock is mandatorily redeemable by the Company after five years from the date of issuance.
January 2019
Exchange Agreement
On
January 23, 2019 the Company entered into an Exchange Agreement (the “January ’19 Exchange Agreement”) with an
institutional investor pursuant to which the Company issued to the investor two new 8% promissory notes in the aggregate principal
amount of $1,043,799 (the “New Notes”) the Secured Promissory Note issued by the Company to the investor on October
10, 2018 (the “October Note”) and that certain Secured Promissory Note issued by the Company to the investor on August
16, 2018, as amended on November 29, 2018 (the “November Note”, and together with the October Note, the “Old
Notes”).
Pursuant
to the January ’19 Exchange Agreement, the investor may elect to receive from the Company shares of Common Stock of the Company
issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132). Any Common Stock issued to the investor
in accordance therewith shall reduce the outstanding sums due under the New Notes by an amount equal to the number of shares of
Common Stock issued multiplied by the applicable issuance price. The number of shares of Common Stock issuable upon delivery of
issuance notices by the investor to the Company shall be determined by dividing the amount of the New Note to be drawn down by
the greater of $2.40 or 80% of the lowest daily VWAP in the three trading days prior to the acquisition of the Common Stock. In
addition, in the event the investor’s proceeds from the sale of all Common Stock received by the investor pursuant to the
terms of the February ’19 Exchange Agreement, do not equal at least 100% of the deemed payment of the outstanding principal
balance of the New Note, the Company shall owe the difference to the investor in cash or through the delivery of free trading shares
of Common Stock.
Subject
to the conditions set forth in the Exchange Agreement, on or after April 15, 2019, unless the New Notes have been paid in full,
the Investor may be issued a secured convertible promissory note (the “Convertible Note”) in exchange for the November
Note.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
The
Convertible Note, if issued, will be issued on or about April 15, 2019, with a maturity date of July 15, 2019, and will bear interest
at 8% per annum payable by the Company to the Investor, in cash, within seven days of the end of each calendar quarter while the
Convertible Note remains outstanding. The number of shares of Common Stock issuable upon conversion of the Convertible Note shall
be determined by dividing the amount to be converted by the greater of $2.40 or 80% of the lowest daily VWAP in the three trading
days prior to the conversion, subject to certain conditions. The Convertible Note contains standard and customary events of default
including, but not limited to, failure to make payments when due under the Convertible Note, failure to comply with certain covenants
contained in the Convertible Note, or bankruptcy or insolvency of the Company.
On
February 11, 2019 and March 22, 2019, pursuant to the January ’19 Exchange Agreement, the Company issued to the investor
436,753 and 102,041 shares, respectively, of the Company’s common stock for an aggregate reduction in the note of $876,324,
resulting in a remaining balance due of $171,883.
February 2019 Exchange Agreement
On
February 20, 2019 the Company entered into an Exchange Agreement (the “February ’19 Exchange Agreement”) with
an institutional investor pursuant to which the Company issued to the investor a new 8% promissory note in the principal amount
of $433,884 (the “New Note”) in exchange for the Secured Promissory Note issued by the Company to the investor on August
16, 2018, as amended on November 29, 2018 (the “Old Note”).
Pursuant
to the February ’19 Exchange Agreement, the investor may elect to receive from the Company shares of Common Stock of the
Company issued under the Company’s Registration Statement on Form S-3 (File No. 333-222132). Any Common Stock issued to the
investor in accordance therewith shall reduce the outstanding sums due under the New Note by an amount equal to the number of shares
of Common Stock issued multiplied by the applicable issuance price. The number of shares of Common Stock issuable upon delivery
of issuance notices by the investor to the Company shall be determined by dividing the amount of the New Note to be drawn down
by the greater of $2.40 or 80% of the lowest daily VWAP in the three trading days prior to the acquisition of the Common Stock.
In addition, in the event the investor’s proceeds from the sale of all Common Stock received by the investor pursuant to
the terms of the February ’19 Exchange Agreement, do not equal at least 100% of the deemed payment of the outstanding principal
balance of the New Note, the Company shall owe the difference to the investor in cash or through the delivery of free trading shares
of Common Stock.
On
March 18, 2019 and April 4, 2019, pursuant to the February ’19 Exchange Agreement, the Company issued to the investor 180,785
and 375,000 shares of the Company’s common stock for an aggregate reduction in the note of $250.062, resulting in a remaining
balance due of $183,822.
Issuances of
Common Stock for Services
Between January 7,
2019 and March 20, 2019, the Company issued an aggregate of 375,000 shares of its common stock as payment for services to its consultant.
The shares were valued at $482,500, an average of $1.29 per share.
Short-term Promissory Notes
On
December 28, 2018, Enertec entered into a $500,000 Secured Promissory Note (the “Enertec Note”), whereby Enertec agreed
to pay interest in an amount of 10% per annum in cash to the investor, beginning on January 15, 2019, on a monthly basis, until
the Enertec Note is paid in full. The maturity date of the Enertec Note shall be the earlier of June 15, 2019 or as otherwise provided
in the terms of the Enertec Note. The proceeds from the Enertec Note were received in January 2019. The Enertec Note was paid from
proceeds received in the Offering.
On
December 28, 2018, Microphase entered into a $200,000 Secured Promissory Note (the “Microphase Note”), whereby Microphase
agreed to pay interest in an amount of 10% per annum in cash to the investor, beginning on January 15, 2019, on a monthly basis,
until the Microphase Note is paid in full. The maturity date of the Microphase Note shall be the earlier of March 31, 2019, or
as otherwise provided in the terms of the Microphase Note. The Microphase Note was paid from proceeds received in the Offering.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
In
connection with the Enertec Note and the Microphase Note, Milton C. Ault III provided a personal guarantee for the benefit of the
investor.
Payment of
related party receivable
During the years ended
December 31, 2018 and 2017, the Company recognized $3,907,280 and $173,751 in revenues from MTIX, a related party, to manufacture
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 on the first MLSE system.
APPENDIX B
DPW HOLDINGS,
INC.
AMENDED AND
RESTATED 2018 STOCK INCENTIVE PLAN
(effective July
2, 2019, subject to stockholder approval)
1.1
Purpose
.
The purposes of DPW’s Amended and Restated 2018 Stock Incentive Plan (the “
Plan
”) is to promote the interests
of DPW Holdings, Inc. (the “
Company
”) and the stockholders of the Company by providing (i) executive officers
and other employees of the Company and its Subsidiaries (as defined below), (ii) certain advisors who perform services for the
Company and its Subsidiaries and (iii) non-employee members of the Board of Directors of the Company (the “
Board
”)
with appropriate incentives and rewards to encourage them to enter into and continue in the employ and service of the Company and
to acquire a proprietary interest in the long-term success of the Company, as well as to reward the performance of these individuals
in fulfilling their personal responsibilities for long-range and annual achievements.
1.2
Effective
Date and Term
. The Plan will become effective upon the date it is approved by the stockholders of the Company (the “
Effective
Date
”). Unless terminated earlier by the Committee, the Plan will expire on the tenth (10
th
) anniversary of
the Effective Date.
1.3
Definitions
.
Capitalized terms in the Plan, unless defined elsewhere in the Plan, shall be defined as set forth below:
1934
Act
. The term “1934 Act” shall mean the Securities Exchange Act of 1934, as amended, including the rules and regulations
promulgated thereunder and any successor thereto.
Affiliated
Company
. The term “Affiliated Company” means any company, partnership, association, organization or other entity
controlled by, controlling or under common control with the Company.
Award
.
The term “Award” means any award or benefit granted under the Plan, including, without limitation, Options, SARs, Restricted
Stock, Restricted Stock Units and Other Stock-Based Awards.
Award
Agreement
. The term “Award Agreement” means a written or electronic Award grant agreement under the Plan.
Change
of Control
. The term “Change of Control” shall be deemed to occur if and when:
|
(i)
|
any person, including a “person” as such term is used in Sections 13(d) and 14(d) of
the 1934 Act (a “
Person
”), is or becomes a beneficial owner (as such term is defined in Rule 13d-3 under the
1934 Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s
then outstanding securities;
|
|
(ii)
|
individuals who, as of the Effective Date, constitute the Board (the “
Incumbent Board
”)
cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director
subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by
a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs
as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board;
|
|
(iii)
|
all or substantially all of the assets of the Company are sold, transferred or distributed, or
the Company is dissolved or liquidated; or
|
|
(iv)
|
a reorganization, merger, consolidation or other corporate transaction involving the Company (a
“
Transaction
”) is consummated, in each case, with respect to which the stockholders of the Company immediately
prior to such Transaction do not, immediately after the Transaction, own more than 50% of the combined voting power of the Company
or other corporation resulting from such Transaction in substantially the same respective proportions as such stockholders’
ownership of the voting power of the Company immediately before such Transaction.
|
Notwithstanding the
foregoing or any other provision of this Plan, the term Change of Control shall not include a sale of assets, merger or other transaction
effected exclusively for the purpose of changing the domicile of the Company. For the avoidance of doubt, solely with respect to
any Award that constitutes “deferred compensation” subject to Section 409A of the Code and that is payable on account
of a Change of Control (including any installments or stream of payments that are accelerated on account of a Change of Control),
a Change of Control shall occur only if such event also constitutes a “change in the ownership,” “change in effective
control,” and/or a “change in the ownership of a substantial portion of assets” of the Company as those terms
are defined under Treasury Regulation §1.409A-3(i)(5), but only to the extent necessary to establish a time or form of payment
that complies with Section 409A of the Code, without altering the definition of Change of Control for purposes of determining whether
a Grantee's rights to such Award become vested or otherwise unconditional upon the Change in Control.
Code
.
The term “Code” means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall
include reference to any successor provision of the Code.
Committee
.
The term “Committee” means the committee of the Board described in Section 2 hereof and any sub-committee established
by such Committee pursuant to Section 2.4 hereof.
Covered
Employee
. The term “Covered Employee” means an Employee who is, or who is anticipated to become, between the time
of grant and payment of the Award, a “covered employee,” as such term is defined in Section 162(m)(3) of the Code
(or any successor section thereof).
Disability
.
The term “Disability” means “Disability” as defined in any Award Agreement to which the Grantee is a party.
Eligible
Grantee
. The term “Eligible Grantee” shall mean any Employee, Non-Employee Director or Key Advisor, as determined
by the Committee in its sole discretion.
Employee
.
The term “Employee” means an active employee of the Company or a Subsidiary, but excluding any person who is classified
by the Company or a Subsidiary as a “contractor” or “consultant,” no matter how characterized by the Internal
Revenue Service, other governmental agency or a court, or any employee who is not actively employed, as determined by the Committee.
Any change of characterization of an individual by the Internal Revenue Service or any court or government agency shall have no
effect upon the classification of an individual as an Employee for purposes of this Plan, unless the Committee determines otherwise.
Fair
Market Value.
For purposes of determining the “Fair Market Value” of a share of Stock as of any date, the
“Fair Market Value” as of that date shall be, unless otherwise determined by the Committee, the closing sale price
during regular trading hours of the Stock on the date on the principal securities market in which shares of Stock is then traded;
or, if there were no trades on that date, the closing sale price during regular trading hours of the Stock on the first trading
day prior to that date. If the Stock is not publicly traded at the time a determination of Fair Market Value is required to be
made hereunder, the determination of such amount shall be made by the Committee in such manner as it deems appropriate.
Grantee
.
The term “Grantee” means an Employee, Non-Employee Director or Key Advisor of the Company or a Subsidiary who has been
granted an Award under the Plan.
ISO
.
The term “ISO” means any Option intended to be and designated as an incentive stock option within the meaning of Section 422
of the Code.
Key
Advisor
. The term “Key Advisor” means a consultant or other key advisor who performs services for the Company or
a Subsidiary.
Non-Employee
Director
. The term “Non-Employee Director” means a member of the Board who is not an Employee.
NQSO
.
The term “NQSO” means any Option that is not designated as an ISO, or which is designated by the Committee as an ISO
but which subsequently fails or ceases to qualify as an ISO.
Option
.
The term “Option” means a right, granted to an Eligible Grantee under Section 4.2(i) hereof, to purchase shares
of Stock. An Option may be either an ISO or an NQSO.
Other
Stock-Based Award
. The term “Other Stock-Based Award” means a right or other interest granted to an Eligible Grantee
under Section 4.2(v) hereof that may be denominated or payable in, valued in whole or in part by reference to, or otherwise
based on, or related to, Stock, including but not limited to (i) unrestricted Stock awarded as a bonus or upon the attainment of
Performance Goals or otherwise as permitted under the Plan, and (ii) a right granted to an Eligible Grantee to acquire Stock from
the Company containing terms and conditions prescribed by the Committee.
Performance
Award
. The term “Performance Award” means a grant made pursuant to Section 4.2(viii) hereof, the amount and settlement
of which is contingent on the achievement of specific Performance Goals during a Performance Period, determined using a specific
Performance Measure, all as specified in the related Award Agreement. Performance Awards may be granted in the form of Stock Options,
SARs, Restricted Stock, Restricted Stock Units, and/or Other Stock-Based Awards.
Performance
Goals
. The term “Performance Goals” means performance goals based on the attainment on an absolute or relative
basis by the Company or any Subsidiary of the Company or any Affiliated Company (or any division or business unit of any such entity),
or any two or more of the foregoing, of performance goals pre-established by the Committee in its sole discretion, based on one
or more of the following criteria (if applicable,
a
ny performance
criteria that are financial metrics, may be determined in accordance with United States Generally Accepted Accounting Principles
(“
GAAP
”) or may be adjusted when established to include or exclude any items otherwise includable or excludable
under GAAP): (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, earnings, income
before taxes and extraordinary items, net income, operating income, earnings before or after deduction for all or any portion of
income tax, earnings before interest, taxes, depreciation and amortization or a combination of any or all of the foregoing; (ii) the
attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation,
that attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified
increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives
with regard to limiting the level of increase in, all or a portion of, the Company’s bank debt or other long-term or short-term
public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances
and/or other offsets and adjustments as may be established by the Committee; (v) earnings per share or the attainment of a
specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment
of certain target levels of, or a specified increase in return on capital employed or return on invested capital; (vii) the
attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders’ equity;
(viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash
flow return on investment formula; (ix) the attainment of certain target levels in, or specified increases in, the fair market
value of the shares of the Company’s common stock; (x) the growth in the value of an investment in the Company’s
common stock; (xi) the attainment of a certain level of, reduction of, or other specified objectives with regard to limiting
the level in or increase in, all or a portion of controllable expenses or costs or other expenses or costs; (xii) gross or
net sales, revenue and growth of sales revenue (either before or after cost of goods, selling and general administrative expenses,
research and development expenses and any other expenses or interest); (xiii) total stockholder return; (xiv) return
on assets or net assets; (xv) return on sales; (xvi) operating profit or net operating profit; (xvii) operating
margin; (xviii) gross or net profit margin; (xix) cost reductions or savings; (xx) productivity; (xxi) operating
efficiency; (xxii) working capital; (xxiii) market share; (xxiv) customer satisfaction; and (xxv) to the extent
that an Award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by the Board.
Any of the above Performance Goals may be compared to the performance of a selected group of comparison companies, or a published
or special index that the Committee, in its sole discretion, deems appropriate, or as compared to various stock market indices.
Subject to the limitations in Section 4.2 hereof, the Committee in its sole discretion may designate additional business criteria
on which the Performance Goals may be based or adjust, or modify or amend the aforementioned business criteria. The relative weights
of the criteria that comprise the Performance Goals shall be determined by the Committee in its sole discretion. In establishing
the Performance Goals for a performance period, the Committee may establish different Performance Goals for individual Grantees
or groups of Grantees. Subject to the limitations in Section 4.2(viii)(d) hereof, the Committee in its sole discretion shall
have the authority to make equitable adjustments to the Performance Goals in recognition of unusual or non-recurring events affecting
the Company or any Subsidiary of the Company or any Affiliated Company or the financial statements of the Company or any Subsidiary
of the Company or any Affiliated Company, in response to changes in applicable laws or regulations, including changes in generally
accepted accounting principles or practices, or to account for items of gain, loss or expense determined to be extraordinary or
unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business, as applicable. Performance
Goals may include a threshold level of performance below which no Award will be earned, a level of performance at which the target
amount of an Award will be earned and a level of performance at which the maximum amount of the Award will be earned.
Performance
Measure
. The term “Performance Measure” means, with respect to a Performance Award, one or more of the criteria
identified at Section 4.2(viii) hereof selected by the Committee for the purpose of establishing, and measuring attainment of,
Performance Goals for a Performance Period in respect of such grant, as provided in the related Award Agreement. For purposes of
clarity, the Committee may establish a Performance Measure on a regional or jurisdictional basis, Subsidiary by Subsidiary basis,
product-line basis, consolidated Company basis, or any other manner that it determines appropriate in its sole discretion.
Performance
Period
. The term “Performance Period” means, with respect to a Performance Award, the one or more periods of time,
which may be of varying and overlapping durations, as the Committee may select during which the attainment of one or more Performance
Goals will be measured.
Restricted
Stock
. The term “Restricted Stock” means an Award of shares of Stock to an Eligible Grantee under Section 4.2(iii)
hereof that may be subject to certain restrictions and to a risk of forfeiture. Stock issued upon the exercise of Options or SARs
is not “Restricted Stock” for purposes of the plan, even if subject to post-issuance transfer restrictions or forfeiture
conditions. When Restricted Stock vests, it ceases to be “Restricted Stock” for purposes of the Plan.
Restricted
Stock Unit
. The term “Restricted Stock Unit” means a right granted to an Eligible Grantee under Section 4.2(iv)
hereof to receive Stock or cash at the end of a specified deferral period, which right may be conditioned on the satisfaction of
specified performance or other criteria.
Retirement
.
The term “Retirement” means any termination of employment or service as an Employee, Non-Employee Director or Key Advisor
as a result of retirement in good standing under the rules of the Company or a Subsidiary, as applicable, then in effect.
Rule 16b-3
.
The term “Rule 16b-3” means Rule 16b-3 under Section 16 of the 1934 Act, as from time to time in effect
promulgated by the Securities and Exchange Commission, including any successor to such Rule.
Section
162(m) Grandfathered Award
. The term “Section 162(m) Grandfathered Award” means an Award that is intended to constitute
“qualified performance-based compensation” within the meaning of Section 162(m) of the Code and that is eligible for
transition relief from the changes to Section 162(m) provided under the Tax Cuts and Jobs Act.
Stock
.
The term “Stock” means shares of Class A common stock, par value $0.001 per share, of the Company.
Stock
Appreciation Right or SAR
. The term “Stock Appreciation Right” or “SAR” means the right, granted to
an Eligible Grantee under Section 4.2(ii) hereof, to be paid an amount measured by the appreciation in the Fair Market Value
of Stock from the date of grant to the date of exercise of the right.
Subsidiary
.
The term “Subsidiary” means any present or future subsidiary corporation of the Company within the meaning of Section 424(f)
of the Code, and any present or future business venture designated by the Committee in which the Company has a significant interest,
including, without limitation, any subsidiary corporation in which the Company has at least a 50% ownership interest, as determined
in the discretion of the Committee.
Substitute
Award
. The term “Substitute Award” means an Award granted or Stock issued by the Company in assumption of, or in
substitution or exchange for, an award previously granted, or the right or obligation to make a future award, in all cases by a
company acquired by the Company or any Subsidiary of the Company or with which the Company or a Subsidiary combines.
2.1
Committee
.
The authority to manage the operation of and administer the Plan shall be vested in a committee (the “
Committee
”)
in accordance with this Section 2. The Committee shall be selected by the Board, and shall consist solely of two or more members
of the Board who are non-employee directors within the meaning of Rule 16b-3 and, to the extent the administration of an Award
relates to a Section 162(m) Grandfathered Award, are outside directors within the meaning of Section 162(m) of the Code. Unless
otherwise determined by the Board, the Company’s Compensation Committee shall be designated as the “Committee”
hereunder.
2.2
Powers
of the Committee
. The Committee’s administration of the Plan shall be subject to the following:
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(i)
|
Subject to the provisions of the Plan, the Committee will have the authority and discretion to
select from among the Eligible Grantees those persons who shall receive Awards, to determine the time or times of receipt, to determine
the types of Awards and the number of shares covered by the Awards, and to establish the terms, conditions, performance criteria,
restrictions, and other provisions of such Awards;
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(ii)
|
The Committee will have the authority and discretion to interpret the Plan, to establish, amend,
and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any Award Agreement made pursuant
to the Plan, and to make all other determinations that may be necessary or advisable for the administration of the Plan;
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|
(iii)
|
Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final
and binding on all persons; and
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(iv)
|
In managing the operation of and administering the Plan, the Committee shall take action in a manner
that conforms to the articles of incorporation and by-laws of the Company, and applicable state corporate law.
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2.3
Prohibition
against Repricing
. Other than pursuant to Section 3.4 hereof, the Committee shall not, without the approval of the Company’s
stockholders, (a) lower the option price per share of an Option or SAR after it is granted, (b) cancel an Option or SAR when the
exercise price per Share exceeds the Fair Market Value of one share in exchange for cash or another Award (other than in connection
with a Change in Control), or (c) take any other action with respect to an Option or SAR that would be treated as a repricing under
the rules and regulations of the principal U.S. national securities exchange on which the Company’s shares are then listed.
2.4
Delegation
of Authority
. To the extent not inconsistent with applicable law, the rules of any national securities exchange that may in
the future apply to the Company, or other provisions of the Plan, the Committee may, at any time, allocate all or any portion of
its responsibilities and powers to any one or more of its members or, with respect to Awards made to Employees other than executive
officers, the Chief Executive Officer, including without limitation, the power to designate Grantees hereunder and determine the
amount, timing and terms of Awards hereunder. Any such allocation or delegation may be revoked by the Committee at any time.
2.5
Indemnification
.
Each person who is or shall have been a member of the Committee, or the Board, shall be indemnified and held harmless by the Company
against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with
or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved
by reason of any action taken in good faith or failure to act in good faith under the Plan and against and from any and all amounts
paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment
in any such action, suit or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing
right of indemnification shall be in addition to any other rights of indemnification or elimination of liability to which such
persons may be entitled under the Company’s articles of incorporation or by-laws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.
2.6
Minimum
Vesting Requirement for Full-Value Awards.
Notwithstanding anything to the contrary, Grantees of full-value Awards (i.e., Awards
other than Options and SARs), will be required to continue to provide services to the Company (or an Affiliated Company) for not
less than one-year following the date of grant in order for any such full-value Awards to fully or partially vest (other than in
case of death, Disability or a Change of Control). Notwithstanding the foregoing, up to five percent (5%) of the available shares
of Stock authorized for issuance under the Plan pursuant to Section 3.1 hereof may provide for vesting of full-value Awards, partially
or in full, in less than one-year.
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3
|
Available Shares of Stock under the Plan
|
3.1
Shares
Available for Awards
. Subject to the adjustments described in Section 3 herein, the maximum number of shares of Stock reserved
for the grant of Awards under the Plan shall be 7,000,000. Any shares of Stock that are subject to Options or SARs shall be counted
against this limit as one (1) share for every one (1) share granted, and any shares of Stock that are subject to Awards other than
Options or SARs shall be counted against this limit as 1.25 shares for every one (1) share granted.
3.2
Forfeited,
Cancelled and Expired Awards
. Awards granted under the Plan that are forfeited, expire or are canceled or settled without issuance
of Stock shall not count against the maximum number of shares that may be issued under the Plan as set forth in Section 3.1 hereof
and shall be available for future Awards under the Plan. Any Stock that again becomes available for Awards under the Plan pursuant
to this Section 3.2 shall be added as (i) one (1) share for every one (1) share subject to Options or SARs granted under the Plan
or options, and (ii) as 1.25 shares for every one (1) share subject to Awards other than Options or Stock Appreciation Rights granted
under the Plan.
3.3
Prohibition
on Share Recycling.
Notwithstanding anything to the contrary, any and all Stock that is (i) withheld or tendered in payment
of an Option exercise price; (ii) withheld by the Company or tendered by the Grantee to satisfy any tax withholding obligation
with respect to any Award; (iii) covered by a SAR (to the extent that it is settled in Stock, without regard to the number of shares
of Stock that are actually issued to the Grantee upon exercise); (iv) reacquired by the Company on the open market or otherwise
using cash proceeds from the exercise of Options, shall not be added to the maximum number of shares of Stock that may be issued
under the Plan as set forth in Section 3.1 hereof.
3.4
Adjustments
.
In the event of any change in the Company’s capital structure, including but not limited to a change in the number of shares
of Stock outstanding, on account of (i) any stock dividend, stock split, reverse stock split or any similar equity restructuring,
or (ii) any combination or exchange of equity securities, merger, consolidation, recapitalization, reorganization, or divesture
or any other similar event affecting the Company’s capital structure, to reflect such change in the Company’s capital
structure, the Committee shall make appropriate equitable adjustments to (a) the maximum number of shares of Stock that may be
issued under the Plan as set forth in Section 3.1 hereof, (b) the number of shares of Stock issuable upon outstanding Awards, and
(c) any individual Award limitations or restrictions, as applicable. In the event of any extraordinary dividend, divestiture or
other distribution (other than ordinary cash dividends) of assets to stockholders, or any transaction or event described above,
to the extent necessary to prevent the enlargement or diminution of the rights of Grantees, the Committee shall make appropriate
equitable adjustments to the number or kind of shares subject to an outstanding Award, the exercise price applicable to an outstanding
Award, and/or a Performance Goals. Any adjustments under this Section 3.4 shall be consistent with Section 409A or Section
424 of the Code, to the extent applicable, and made in a manner that does not adversely affect the exemption provided pursuant
to Rule 16b-3 or qualification under Section 162(m) of the Code, to the extent each may be applicable. The Company shall give each
Grantee notice of an adjustment to an Award hereunder and, upon notice, such adjustment shall be final, binding and conclusive
for all purposes. Notwithstanding the foregoing, the Committee shall decline to adjust any Award made to a Grantee if such adjustment
would violate applicable law.
3.5
Fractional
Shares
. The Company shall not be obligated to issue any fractional shares of Stock in settlement of Awards granted under the
Plan. Except as otherwise provided in an Award Agreement or determined by the Committee, (i) the total number of shares issuable
pursuant to the exercise, vesting or earning of an Award shall be rounded down to the nearest whole share, and (ii) no fractional
shares shall be issued. The Committee may, in its discretion, determine that a fractional share shall be settled in cash.
3.6
Substitute
Awards; Plans of Acquired Companies
. Substitute Awards shall not count against the maximum number of shares that may be issued
under the Plan as set forth in Section 3.1 hereof. In addition, shares of Stock issued in connection with awards that are assumed,
converted or substituted as a result of the acquisition of another company by the Company or any Subsidiary of the Company (including
by way of merger, combination or similar transaction) will not count against the number of shares of Stock that may be issued under
the Plan. Available shares under a stockholder-approved plan of an acquired company (as appropriately adjusted to reflect the transaction)
may be used for Awards under the Plan and do not reduce the maximum number of shares available for grant under the Plan, subject
to applicable stock exchange requirements.
4.1
General
.
The term of each Award shall be for such period as may be determined by the Committee, subject to the limitations set forth below.
Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by the Company or any Subsidiary of the
Company upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date
of grant or thereafter, including, without limitation, cash, Stock, or other property. In addition to the foregoing, the Committee
may impose on any Award or the exercise thereof, at the date of grant, such additional terms and conditions not inconsistent with
the provisions of the Plan, including, but not limited to forfeiture and clawback provisions, as the Committee shall determine;
provided, however, that any such terms and conditions shall not be inconsistent with Section 409A of the Code.
4.2
Types
of Awards
. The Committee is authorized to grant the Awards described in this Section 4.2, under such terms and conditions
as deemed by the Committee to be consistent with the purposes of the Plan. Such Awards may be granted with value and payment contingent
upon Performance Goals. Each Award shall be evidenced by an Award Agreement containing such terms and conditions applicable to
such Award as the Committee shall determine.
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(i)
|
Options
. The Committee is authorized to grant Options to Grantees on the following terms
and conditions:
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|
a.
|
Type of Award
. The Award Agreement evidencing an Option shall designate the Option as either
an ISO or an NQSO, as determined in the discretion of the Committee. At the time of the grant of Options, the Committee may place
restrictions on the exercisability or vesting of Options that shall lapse, in whole or in part, upon the attainment of Performance
Goals; provided that such Performance Goals shall relate to periods of performance of at least one fiscal year.
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|
b.
|
Exercise Price
. The exercise price of each Option granted under this Section 4.2 shall
be established by the Committee or shall be determined by a method established by the Committee at the time the Option is granted;
provided, however, that the exercise price shall not be less than 100% of the Fair Market Value of a share of Stock on the date
of grant of the Award. Notwithstanding the foregoing, the exercise price of any Substitute Awards may be issued at any such price
as the Committee determines necessary in order to preserve for such newly Eligible Grantee the economic value of all or a portion
of such acquired entity award. No dividends or dividend equivalents will be paid on shares of Stock subject to an Option.
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c.
|
Exercise
. Upon satisfaction of the applicable conditions relating to vesting and exercisability,
as determined by the Committee and set forth in the Award Agreement, and upon provision for the payment in full of the exercise
price and applicable taxes due, the Grantee shall be entitled to exercise the Option and receive the number of shares of Stock
issuable in connection with the Option exercise provided, however, that no Option may be exercised more than ten years after its
grant date. Except as set forth in Section 4.3 hereof, no NQSO granted hereunder may be exercised after the earlier of (A)
the expiration of the NQSO or (B) unless otherwise provided by the Committee in an Award Agreement, ninety days after the severance
of an NQSO holder’s employment or service with the Company or any Subsidiary. The shares issued in connection with the Option
exercise may be subject to such conditions and restrictions as the Committee may determine, from time to time. An Option may be
exercised by any method as may be permitted by the Committee from time to time, including but not limited to any “net exercise”
or other “cashless” exercise method.
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d.
|
Restrictions Relating to ISOs
. In addition to being subject to the terms and conditions
of this Section 4.2(i), ISOs shall comply with all other requirements under Section 422 of the Code. Accordingly, ISOs may
be granted only to Eligible Grantees who are employees (as described in Treasury Regulation Section 1.421-7(h)) of the Company
or of any “Parent Corporation” (as defined in Section 424(e) of the Code) or of any “Subsidiary Corporation”
(as defined in Section 424(f) of the Code) on the date of grant. The aggregate Fair Market Value (determined as of the time the
ISO is granted) of the Stock with respect to which ISOs (under all option plans of the Company and of any Parent Corporation and
of any Subsidiary Corporation) are exercisable for the first time by an Eligible Grantee during any calendar year shall not exceed
$100,000. ISOs shall not be transferable by the Eligible Grantee otherwise than by will or the laws of descent and distribution
and shall be exercisable, during the Eligible Grantee's lifetime, only by such Eligible Grantee. The Committee shall not grant
ISOs to any Employee who, at the time the ISO is granted, owns stock possessing (after the application of the attribution rules
of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting stock of the Company or of any Parent Corporation
or of any Subsidiary Corporation, unless the exercise price of the ISO is fixed at not less than one hundred and ten percent (110%)
of the Fair Market Value of a share of Common Stock on the date of grant and the exercise of such ISO is prohibited by its terms
after the fifth (5th) anniversary of the ISO's date of grant. In addition, no ISO shall be issued to an Eligible Grantee in tandem
with a NQSO issued to such Eligible Grantee in accordance with Treasury Regulation Section 14a.422A-1, Q/A-39.
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(ii)
|
SARs
. The Committee is authorized to grant SARs to Grantees on the following terms and conditions:
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|
a.
|
In General
. SARs may be granted independently or in tandem with an Option at the time of
grant of the related Option. An SAR granted in tandem with an Option shall be exercisable only to the extent the underlying Option
is exercisable. Payment of an SAR may be made in cash, Stock, or a combination of the foregoing, as specified in the Award Agreement
or determined in the sole discretion of the Committee. At the time of the grant of SARs, the Committee may place restrictions on
the exercisability or vesting of SARs that shall lapse, in whole or in part, upon the attainment of Performance Goals; provided
that such Performance Goals shall relate to periods of performance of at least one fiscal year.
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b.
|
Term and Exercisability of SARs
. SARs shall be exercisable over the exercise period at such
times and upon such conditions as the Committee may determine, as reflected in the Award Agreement; provided, however, that no
SAR may be exercised more than ten years after its grant date. Except as set forth in Section 4.3 hereof, no SAR granted hereunder
may be exercised after the earlier of (A) the expiration of the SAR or (B) unless otherwise provided by the Committee in an Award
Agreement, ninety days after the severance of an SAR holder’s employment or service with the Company or any Subsidiary.
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c.
|
Payment
. An SAR shall confer on the Grantee a right to receive an amount with respect to
each share of Stock subject thereto, upon exercise thereof, equal to the excess of (A) the Fair Market Value of one share of Stock
on the date of exercise over (B) the grant price of the SAR (which in the case of an SAR granted in tandem with an Option shall
be equal to the exercise price of the underlying Option, and which in the case of any other SAR shall be such price as the Committee
may determine but in no event shall be less than the Fair Market Value of a share of Stock on the date of grant of such SAR). An
SAR may be exercised by giving written notice of such exercise to the Committee or its designated agent. No dividends or dividend
equivalents will be paid on shares of Stock subject to an SAR.
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(iii)
|
Restricted Stock
. The Committee is authorized to grant Restricted Stock to Grantees on the
following terms and conditions:
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|
a.
|
Issuance and Restrictions
. Restricted Stock shall be subject to such restrictions on transferability
and other restrictions, if any, as the Committee may impose at the date of grant, which restrictions may lapse separately or in
combination at such times, under such circumstances, in such installments, or otherwise, as the Committee may determine. The Committee
may place restrictions on Restricted Stock that shall lapse, in whole or in part, upon the attainment of Performance Goals; provided
that such Performance Goals shall relate to periods of performance of at least one fiscal year. Except to the extent restricted
under the Award Agreement relating to the Restricted Stock, a Grantee granted Restricted Stock shall have all of the rights of
a stockholder including, without limitation, the right to vote Restricted Stock and the right to receive dividends thereon.
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b.
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Certificates for Stock
. Restricted Stock granted under the Plan may be evidenced in such
manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Grantee,
such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted
Stock, and the Company may retain physical possession of the certificate.
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c.
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Dividends
. Except to the extent restricted under the applicable Award Agreement, cash dividends
paid on Restricted Stock shall be paid at the dividend payment date subject to no restriction. Unless otherwise determined by the
Committee, Stock distributed in connection with a stock split or stock dividend shall be subject to the transfer restrictions,
forfeiture risks and vesting conditions to the same extent as the Restricted Stock with respect to which such Stock or other property
has been distributed. Notwithstanding the foregoing, the Committee may not provide for the current payment of dividends for Restricted
Stock subject to Performance Goals; for such Awards, dividends may accrue but shall not be payable unless and until the Award vests
upon satisfaction of the applicable Performance Goals and all other applicable conditions to vesting.
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(iv)
|
Restricted Stock Units
. The Committee is authorized to grant Restricted Stock Units to Grantees,
subject to the following terms and conditions:
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|
a.
|
Conditions to Vesting
. At the time of the grant of Restricted Stock Units, the Committee
may place restrictions on Restricted Stock Units that shall lapse, in whole or in part, upon the attainment of Performance Goals;
provided that such Performance Goals shall relate to periods of performance of at least one fiscal year.
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b.
|
Benefit upon Vesting
. Unless otherwise provided in an Award Agreement, upon the vesting
of a Restricted Stock Unit, there shall be delivered to the Grantee, within 30 days of the date on which such Award (or any portion
thereof) vests, the number of shares of Stock equal to the number of Restricted Stock Units becoming so vested.
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c.
|
Dividend Equivalents
. To the extent provided in an Award Agreement, subject to the requirements
of Section 409A of the Code, an Award of Restricted Stock Units may provide the Grantee with the right to receive dividend
equivalent payments with respect to Stock subject to the Award (both before and after the Stock subject to the Award is earned,
vested, or acquired), which payments may be either made currently or credited to an account for the Grantee, and may be settled
in cash or Stock, as determined by the Committee. Any such settlements and any such crediting of dividend equivalents may, at the
time of grant of the Restricted Stock Unit, be made subject to the transfer restrictions, forfeiture risks, vesting and conditions
of the Restricted Stock Units and subject to such other conditions, restrictions and contingencies as the Committee shall establish
at the time of grant of the Restricted Stock Unit, including the reinvestment of such credited amounts in Stock equivalents, provided
that all such conditions, restrictions and contingencies shall comply with the requirements of Section 409A of the Code. Notwithstanding
the foregoing in this Section 4.2(iv)(c), dividend equivalents may accrue on unearned Restricted Stock Units subject to Performance
Goals but shall not be payable unless and until the applicable Performance Goals are met and certified.
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(v)
|
Other Stock-Based Awards
. The Committee is authorized to grant Awards to Grantees in the
form of Other Stock-Based Awards, as deemed by the Committee to be consistent with the purposes of the Plan. At the time of the
grant of Other Stock-Based Awards, the Committee may place restrictions on the payout or vesting of Other Stock-Based Awards that
shall lapse, in whole or in part, upon the attainment of Performance Goals; provided that such Performance Goals shall relate to
periods of performance of at least one fiscal year. The Committee shall determine the terms and conditions of such Awards at the
date of grant. Other Stock-Based Awards may not be granted with the right to receive dividend equivalent payments.
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(vi)
|
Settlement of Options and SARs
. Shares of Stock delivered pursuant to the exercise of an
Option or SAR shall be subject to such conditions, restrictions and contingencies as the Committee may establish in the applicable
Award Agreement. Settlement of SARs may be made in shares of Stock (valued at their Fair Market Value at the time of exercise),
in cash, or in a combination thereof, as determined in the discretion of the Committee and set forth in the Award Agreement. The
Committee, in its discretion, may impose such conditions, restrictions and contingencies with respect to shares of Stock acquired
pursuant to the exercise of an Option or an SAR as the Committee determines to be desirable.
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|
(vii)
|
Vesting; Additional Terms
. Subject to Section 2.6, and except as provided in Section 4.3,
hereof, other than Options, SARs, Restricted Stock, Restricted Stock Units or Other Stock-Based Awards conditioned upon the attainment
of Performance Goals that relate to performance periods of at least one fiscal year, Options, SARs, Restricted Stock, Restricted
Stock Units or Other Stock-Based Awards granted hereunder shall vest as determined by the Committee and set forth in the Award
Agreement. The term of any Award granted under the Plan will not exceed ten years from the date of grant.
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(viii)
|
Qualified Performance-Based Compensation
.
|
|
a.
|
The Committee may determine that Restricted Stock, Restricted Stock Units or Other Stock-Based
Awards granted to a Covered Employee shall be considered “performance-based compensation,” or Performance Awards, in
which case the provisions of this Section 4.2(viii) shall apply. To the extent required pursuant to Section 162(m) of the
Code and the regulations promulgated thereunder, the Committee’s authority to grant new awards that are intended to qualify
as performance-based compensation within the meaning of Section 162(m) of the Code (other than qualifying Options and qualifying
SARs) shall terminate upon the first meeting of the Company’s stockholders that occurs in the fifth year following the year
in which the Company’s stockholders first approve this Plan.
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b.
|
When Performance Awards are made under this Section 4.2(viii), the Committee shall establish in
writing (i) the objective Performance Goals that must be met, (ii) the period during which performance will be measured, (iii)
the maximum amounts that may be paid if the Performance Goals are met, and (iv) any other conditions that the Committee deems appropriate
and consistent with the requirements of Section 162(m) of the Code. The Performance Goals shall satisfy the Committee’s
requirements for “performance-based compensation,” including the requirement that the achievement of the goals be substantially
uncertain at the time they are established and that the Performance Goals be established in such a way that a third party with
knowledge of the relevant facts could determine whether and to what extent the Performance Goals have been met. The Committee shall
not have discretion to increase the amount of compensation that is payable, but may reduce the amount of compensation that is payable,
pursuant to Performance Awards identified by the Committee as “performance-based compensation.”
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c.
|
At the time each a Performance Award is granted, the Committee shall establish in writing the Performance
Period, the Performance Measure and the Performance Goals in respect of such Performance Awards.
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|
d.
|
The Committee in its sole discretion shall have the authority to make equitable adjustments to
the Performance Goals in recognition of unusual or non-recurring events affecting the Company or any Subsidiary of the Company
or any Affiliated Company or the financial statements of the Company or any Subsidiary of the Company or any Affiliated Company,
for the following items: (1) asset write-downs; (2) litigation or claim judgments or settlements; (3) the effect of changes in
tax laws, accounting principles, regulations, or other laws or regulations affecting reported results; (4) any reorganization and
restructuring programs, including discontinued operations; (5) acquisitions or divestitures; (6) unusual nonrecurring or extraordinary
items identified in the Company’s audited financial statements, including footnotes; (7) any reorganization or change in
the corporate or capital structures of the Company; (8) foreign exchange gains and losses; (9) business interruption events; (10)
annual incentive payments or other bonuses; or (11) capital charges, provided such adjustment is appropriate and consistent with
the requirements established by the Committee to which the Performance Goal relates. In addition, the Committee may specify that
certain equitable adjustments to the Performance Goals will be made during the applicable Performance Period, provided such specification
is appropriate and consistent with the requirements established by the Committee pursuant to Section 4.2(viii)(c) hereof.
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|
e.
|
The Committee shall certify the performance results for the performance period specified in the
Award Agreement after the Performance Period ends. The Committee shall determine the amount, if any, to be paid pursuant to each
Award based on the achievement of the Performance Goals and the satisfaction of all other terms of the Award Agreement. Subject
to adjustment as provided in Section 3.4 hereof, the following limits will apply to Awards of the specified type granted to any
one Grantee in any single fiscal year:
|
|
(i)
|
Appreciation Awards – Options and SARs: 2,625,000 shares; and
|
|
(ii)
|
Full Value Awards – Awards (other than Options and SARs) that are denominated in Shares:
1,750,000 shares.
|
In applying the foregoing limits,
(a) all Awards of the specified type granted to the same Grantee in the same fiscal year will be aggregated and made subject to
one limit; (b) the limits applicable to Options and SARs refer to the number of shares of Stock subject to those Awards; (c) the
share limit under clause (ii) refers to the maximum number of shares of Stock that may be delivered under an Award or Awards of
the type specified in clause (ii) assuming a maximum payout; and (d) each of the specified limits in clauses (i) and (ii) is multiplied
by two (2) for Awards granted to a Grantee in the year employment commences.
|
f.
|
The Committee may provide in the Award Agreement that Awards under this Section 4.2(viii)
shall be payable, in whole or in part, in the event of the Grantee’s death or Disability, or under other circumstances consistent
with the Treasury regulations and rulings under Section 162(m) of the Code.
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|
(ix)
|
Automatic Extended Exercisability in Certain Cases
. Notwithstanding the foregoing provisions
of this Section, if the date an Award would otherwise terminate is a date that the Grantee is prohibited from exercising the Award
under the Company’s insider trading policy or such other conditions under applicable securities laws as the Committee shall
specify, the term of the Award shall be extended to the second business day after the Grantee is no longer so prohibited from exercising
the Award, but in no event shall the Award be extended beyond the original stated term of the Award.
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4.3
Change
of Control of the Company.
|
(i)
|
The Committee may, at the time an Award is made or at any time prior to, coincident with or after
the time of a Change of Control:
|
|
a.
|
provide for the cancellation of any Awards then outstanding if the surviving entity or acquiring
entity (or the surviving or acquiring entity’s parent company) in the Change of Control replaces the Awards with new rights
of substantially equivalent value, as determined by the Committee. For an Award to be validly assumed by a successor for purpose
of this Section 4.3(i)(a), it must (x) provide such Grantee with rights and entitlements substantially equivalent to or better
than the rights, terms and conditions applicable under such Award, including, but not limited to, an identical or better exercise
or vesting schedules; (y) have substantially equivalent value to such Award (determined at the time of the Change in Control);
and (z) be based on stock that is traded on an established U.S. securities market or an established securities market outside the
United Stated upon which the Grantees could readily trade the stock without administrative burdens or complexities. In the event
of any ambiguity or discrepancy, the determination of the Committee shall be final and binding;
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b.
|
provide that upon an involuntary termination of a Grantee’s employment as a result of a Change
of Control, any time periods shall accelerate, and any other conditions relating to the vesting, exercise, payment or distribution
of an Award shall be waived; or
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|
c.
|
provide that Awards shall be purchased for an amount of cash equal to the amount that could have
been obtained for the shares covered by a Restricted Stock Award if it had been vested and or by an Option or SAR if it had been
exercised at the time of the Change of Control, provided however that Awards outstanding as of the date of the Change in Control
may be cancelled and terminated without payment if the consideration payable with respect to one share of Stock in connection with
the Change in Control is less than the exercise price or grant price applicable to such Award, as applicable.
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(ii)
|
Notwithstanding any other provisions of the Plan or an Award Agreement to the contrary, the vesting,
payment, purchase or distribution of an Award may not be accelerated by reason of a Change of Control for any Grantee unless the
Grantee’s employment is involuntarily terminated as a result of the Change of Control
as
provided in the Award Agreement or in any other written agreement, including an employment agreement, between us and the Grantee
.
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4.4
Limitation
on Award Grants to Non-Employee Directors
. The maximum number of shares of Stock subject to Awards granted during a single
fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during the fiscal
year, shall not exceed $350,000 in total value (calculating the value of any such Awards based on the grant date fair value of
such Awards for financial reporting purposes);
provided
, that the Board may make exceptions to this limit for individual
non-employee directors in extraordinary circumstances as the Board may determine in its sole discretion, so long as (x) the aggregate
limit does not exceed $500,000 in total value during a fiscal year and (y) the non-employee director receiving such additional
compensation does not participate in the decision to award such compensation or in other contemporaneous compensation decisions
involving non-employee directors.
5.1
Duration
.
Grants may be made under the Plan through September 6, 2028. In the event of Plan termination while Awards remain outstanding,
the Plan shall remain in effect as long as any Awards under it are outstanding, although no further grants may be made following
Plan termination.
5.2
Uncertificated
Stock
. Nothing contained in the Plan shall prohibit the issuance of Stock on an uncertificated basis, to the extent allowed
by the Company’s Articles of Incorporation and Bylaws, by applicable law and by the applicable rules of any stock exchange.
5.3
Tax
Withholding
. All distributions under the Plan are subject to withholding of all applicable taxes, and the Committee may condition
the delivery of any shares or other benefits under the Plan on satisfaction of the applicable withholding obligations. The Committee,
in its discretion, and subject to such requirements as the Committee may impose prior to the occurrence of such withholding, may
permit such withholding obligations to be satisfied through cash payment by the Grantee, through the surrender of shares of Stock
which the Grantee already owns, through withholding from other compensation payable to the Grantee or through the surrender of
unrestricted shares of Stock to which the Grantee is otherwise entitled under the Plan, but only to the extent of the minimum amount
required to be withheld under applicable law (or, if permitted by the Company, such other withholding rate as will not cause adverse
accounting consequences and is permitted under applicable IRS withholding rules).
5.4
Use
of Shares.
Subject to the limitations on the number of shares of Stock that may be delivered under the Plan, the Committee
may use available shares of Stock as the form of payment for compensation, grants or rights earned or due under any other compensation
plans or arrangements of the Company or a Subsidiary, including the plans and arrangements of the Company or a Subsidiary assumed
in business combinations.
5.5
Non-transferability
.
Awards granted under the Plan, and during any period of restriction on transferability, shares of Common Stock issued in connection
with the exercise of an Option or a SAR, or vesting of a Restricted Stock Award may not be sold, pledged, hypothecated, assigned,
margined or otherwise transferred by a Grantee in any manner other than by will or the laws of descent and distribution, unless
and until the shares underlying such Award have been issued, and all restrictions applicable to such shares have lapsed or have
been waived by the Committee. No Award or interest or right therein shall be subject to the debts, contracts or engagements of
a Grantee or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law, by judgment,
lien, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy and divorce), and any attempted
disposition thereof shall be null and void, of no effect, and not binding on the Company in any way. Notwithstanding the foregoing,
the Committee may permit Options and/or shares issued in connection with an Option or a SAR exercise that are subject to restrictions
on transferability, to be transferred one time and without payment or consideration to a member of a Grantee’s immediate
family or to a trust or similar vehicle for the benefit of a Grantee’s immediate family members. During the lifetime of a
Grantee, all rights with respect to Awards shall be exercisable only by such Grantee or, if applicable pursuant to the preceding
sentence, a permitted transferee.
5.6
Form
and Time of Elections
. Unless otherwise specified herein, each election required or permitted to be made by any Grantee
or other person entitled to benefits under the Plan, and any permitted modification, or revocation thereof, shall be in writing
filed with the Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with
the terms of the Plan, as the Committee shall require.
5.7
Agreement
with Company
. An Award under the Plan shall be subject to such terms and conditions, not inconsistent with the Plan, as the
Committee shall, in its sole discretion, prescribe. The terms and conditions of any Award to any Grantee shall be reflected in
such form of written document as is determined by the Committee. A copy of such document shall be provided to the Grantee, and
the Committee may, but need not, require that the Grantee shall sign a copy of such document. Such document is referred to in the
Plan as an “Award Agreement” regardless of whether any Grantee signature is required.
5.8
Gender
and Number
. Where the context admits, words in any gender shall include any other gender, words in the singular shall include
the plural and the plural shall include the singular.
5.9
Limitation
of Implied Rights.
|
(i)
|
The Plan shall at all times be unfunded and neither a Grantee nor any other person shall, by reason
of participation in the Plan, acquire any right in or title to any assets, funds or property of the Company or any Subsidiary whatsoever,
including, without limitation, any specific funds, assets, or other property which the Company or any Subsidiary, in its sole discretion,
may set aside in anticipation of a liability under the Plan. Nothing contained in the Plan and no action taken pursuant hereto
shall create or be construed to create a fiduciary relationship between the Company and any Grantee or any other person. A Grantee
shall have only a contractual right to the Stock or amounts, if any, payable under the Plan, unsecured by any assets of the Company
or any Subsidiary, and nothing contained in the Plan shall constitute a guarantee that the assets of the Company or any Subsidiary
shall be sufficient to pay any benefits to any person.
|
|
(ii)
|
The Plan does not constitute a contract of employment or service, and selection as a Grantee
will not give any participating Employee, Non-Employee Director or Key Advisor the right to be retained in the employ or service
of the Company or any Subsidiary, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically
accrued under the terms of the Plan. Except as otherwise provided in the Plan or the Award Agreement, no Award under the Plan shall
confer upon the holder thereof any rights as a stockholder of the Company prior to the date on which the individual fulfills all
conditions for receipt of such rights.
|
5.10
Section 409A
.
It is intended that all Options and SARs granted under the Plan shall be exempt from the provisions of Section 409A of the
Code and that all other Awards under the Plan, to the extent that they constitute “non-qualified deferred compensation”
within the meaning of Section 409A of the Code, will comply with Section 409A of the Code (and any regulations and guidelines
issued thereunder). The Plan and any Award Agreements issued hereunder may be amended in any respect deemed by the Board or the
Committee to be necessary in order to preserve compliance with Section 409A of the Code. Notwithstanding anything in this
Plan to the contrary, if required by Section 409A of the Code, if a Grantee is considered a “specified employee”
for purposes of Section 409A of the Code and if payment of any Award under this Plan is required to be delayed for a period
of six months after “separation from service” within the meaning of Section 409A of the Code, payment of such
Award shall be delayed as required by Section 409A of the Code, and the accumulated amounts with respect to such Award shall
be paid in a lump sum payment within ten days after the end of the six month period. If the Grantee dies during the postponement
period prior to the payment of benefits, the amounts withheld on account of Section 409A of the Code shall be paid to the
Grantee’s beneficiary within sixty (60) days after the date of the Grantee’s death. For purposes of Section 409A
of the Code, each payment under the Plan shall be treated as a separate payment. In no event shall a Grantee, directly or indirectly,
designate the calendar year of payment. To the extent that any provision of the Plan would cause a conflict with the requirements
of section 409A of the Code, or would cause the administration of the Plan to fail to satisfy the requirements of Section 409A
of the Code, such provision shall be deemed null and void to the extent permitted by applicable law. Notwithstanding anything in
the Plan or any Award Agreement to the contrary, each Grantee shall be solely responsible for the tax consequences of Awards under
the Plan, and in no event shall the Company have any responsibility or liability if an Award does not meet any applicable requirements
of Section 409A of the Code. Although the Company intends to administer the Plan to prevent taxation under Section 409A
of the Code, the Company does not represent or warrant that the Plan or any Award complies with any provision of federal, state,
local or other tax law.
5.11
Regulations
and Other Approvals
.
|
(i)
|
The obligation of the Company to sell or deliver Stock with respect to any Award granted under
the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities
laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
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|
(ii)
|
Each Award is subject to the requirement that, if at any time the Committee determines, in its
absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Stock, no such Award shall
be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval
has been effected or obtained free of any conditions not acceptable to the Committee.
|
|
(iii)
|
In the event that the disposition of Stock acquired pursuant to the Plan is not covered by a then
current registration statement under the Securities Act and is not otherwise exempt from such registration, such Stock shall be
restricted against transfer to the extent required by the Securities Act of 1933, as amended, or regulations thereunder, and applicable
state securities laws, and the Committee may require a Grantee receiving Stock pursuant to the Plan, as a condition precedent to
receipt of such Stock, to represent to the Company in writing that the Stock acquired by such Grantee is acquired for investment
only and not with a view to distribution.
|
|
(iv)
|
With respect to persons subject to Section 16 of the 1934 Act, it is the intent of the Company
that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3.
|
|
(v)
|
All Awards under the Plan will be subject to any compensation, clawback and recoupment policies
that may be applicable to the employees of the Company, as in effect from time to time and as approved by the Board or Committee,
whether or not approved before or after the Effective Date. Subject to the requirements of applicable law, any such compensation,
clawback and recoupment policies shall apply to Awards made after the effective date of the policy.
|
5.12
Non-Employee
Director Award Deferrals
. The Committee may permit a Non-Employee Director to defer receipt of the payment of cash or the delivery
of shares that would otherwise be due to such Non-Employee Director in connection with any Restricted Stock, Restricted Stock
Units or Other Stock-Based Awards. If any such deferral election is permitted, the Committee shall establish rules and procedures
for such deferrals and may provide for interest or other earnings to be paid on such deferrals, which rules and procedures shall
be consistent with applicable requirements of Section 409A of the Code. Unless otherwise specified in a Non-Employee Director’s
valid election, any deferred amount will be deferred until the earliest to occur of the Non-Employee Director’s death, separation
from service, or Change of Control; provided that any such deferral election is made by the Non-Employee Director on or prior
to December 31 of the calendar year preceding the calendar year in which any such amounts are earned, or, if such Non-Employee
Director is newly eligible for purposes of Section 409A of the Code, then within 30 days following the date he or she is first
eligible, and then only with respect to amounts earned after the date of the election.
|
6
|
Amendment and Termination
|
The
Plan may be terminated or amended by the Board at any time, except that the following actions may not be taken without stockholder
approval:
|
(i)
|
any increase in the number of shares that may be issued under the Plan (except by certain adjustments
provided for under the Plan);
|
|
(ii)
|
any change in the class of persons eligible to receive ISOs under the Plan;
|
|
(iii)
|
any change in the requirements of Sections 4.2(i)(b) and 4.2(ii)(c) hereof regarding the exercise
price of Options and the grant price of SARs;
|
|
(iv)
|
any repricing or cancellation and regrant of any Option or, if applicable, other Award at a lower
exercise, base or purchase price, as set forth in Section 2.3 hereof; or
|
|
(v)
|
any other amendment to the Plan that would require approval of the Company’s stockholders
under applicable law, regulation or rule or stock exchange listing requirement.
|
Notwithstanding
any of the foregoing, adjustments pursuant to Section 3 hereof shall not be subject to the foregoing limitations of this Section 6.
The
Plan and all Award Agreements entered into under the Plan shall be construed in accordance with and governed by the laws of the
State of New York, except that any principles or provisions of New York law that would apply the law of another jurisdiction (other
than applicable provisions of U.S. Federal law) shall be disregarded. Notwithstanding the foregoing, matters with respect to indemnification,
delegation of authority under the Plan, and the legality of shares of Stock issued under the Plan, shall be governed by the Delaware
General Corporation Law.
If
any of the provision of this Plan is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision
shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability and the remaining
provisions shall not be affected thereby; provided that, if any such provision is finally held to be invalid, illegal or unenforceable
because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision shall
be deemed modified to the minimum extent necessary in order to make such provision enforceable.
|
9
|
Clawback and Non-compete
|
Notwithstanding
any other provisions of this Plan, any Award which is subject to recovery under any law, government regulation, stock exchange
listing requirement, or Company policy, will be subject to such deductions and clawback as may be required to be made pursuant
to such law, government regulation or stock exchange listing requirement, or any policy adopted by the Company whether pursuant
to any such law, government regulation or stock exchange listing requirement or otherwise. In addition and notwithstanding any
other provisions of this Plan, any Award shall be subject to such noncompete provisions under the terms of the Agreement or any
other agreement or policy adopted by the Company, including, without limitation, any such terms providing for immediate termination
and forfeiture of an Award if and when a Participant becomes an employee, agent or principal of a competitor without the express
written consent of the Company.
* * * * *
4. To approve approve
a frequency of “Three Years” for future advisory votes on executive compensation. 2 Years 3 Years Abstain 1 Year 01
________ Milton “Todd” Ault, III* 04 ________ Moti Rosenberg* 02 ________ Amos Kohn* 05 ________ Jeffrey Bentz* 03
________ Robert Smith* 06 ________ William Horne* For Withhold For Withhold For Withhold 1 U P X Using a black ink pen, mark your
votes with an X as shown in this example. Please do not write outside the designated areas. 032QLD + + Proposals — The Board
of Directors recommends a vote FOR all the nominees listed, FOR Proposals 2, 3, 5, 6, and 7, and for 3 YEARS for A Proposal 4.
2. To ratify the appointment of Marcum, LLP, as the Company's independent registered public accounting firm for the fiscal year
ending December 31, 2019. 3. To approve on a non-binding advisory basis, the compensation of our named executive officers. 1.
Election of Directors: For Against Abstain Please sign exactly as name(s) appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, corporate officer, trustee, guardian, or custodian, please give full title. Date
(mm/dd/yyyy) — Please print date below. Signature 1 — Please keep signature within the box. Signature 2 — Please
keep signature within the box. B Authorized Signatures — This section must be completed for your vote to be counted. —
Date and Sign Below 5. To approve an amendment to our Certificate of Incorporation to effect a reverse stock split of our Class
A Common Stock by a ratio of not less than one-for-5 and not more than one-for-40 at any time prior to July 1, 2020, with the
exact ratio to be set at a whole number within this range as determined by the Board of Directors in its sole discretion. qIF
VOTING BY MAIL, SIGN, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.q Annual Meeting Proxy Card For Against Abstain
To cumulate votes as to a particular nominee or nominees as explained in the Proxy Statement, check the box to the right and then
indicate the number of votes to be given to such nominee(s) next to his or her name. NOTE: If you wish to use cumulative voting,
you MUST vote your proxy by mail. * To be elected as directors to serve until the next annual meeting and until their respective
successors are elected and qualified. You may vote online or by phone instead of mailing this card. Online Go to www.envisionreports.com/DPW
or scan the QR code — login details are located in the shaded bar below. Save paper, time and money! Sign up for electronic
delivery at www.envisionreports.com/DPW Phone Call toll free 1-800-652-VOTE (8683) within the USA, US territories and Canada Votes
submitted electronically must be received by 11:59 p.m, Eastern Time, on July 1, 2019. Your vote matters – here’s
how to vote! Small steps make an impact. Help the environment by consenting to receive electronic delivery, sign up at www.envisionreports.com/DPW
201 Shipyard Way Newport Beach, CA 92663 (949) 444-5464 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned
hereby appoints Milton “Todd” Ault, III and William B. Horne, or any one of them, as proxy, with full power to appoint
substitutes, and hereby authorizes Messrs. Ault and Horne, or any one of them, to represent and to vote as designated below, all
the shares of common stock of DPW Holdings, Inc., held of record by the undersigned as of May 23, 2019, at the 2019 Annual Meeting
of Stockholders to be held at the Hyatt Regency, Newport Beach, located at 1107 Jamboree Road, Newport Beach, CA 92660, at 9 a.m.
Pacific Time, on July 2, 2019, and any adjournments or postponements thereof, and hereby ratifies all that said proxies may do
by virtue hereof. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES LISTED (AND THE PROXYHOLDER WILL HAVE DISCRETIONARY
AUTHORITY TO CUMULATE VOTES AMONG NOMINEES) IN PROPOSAL ONE AND FOR THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
IN PROPOSAL FIVE. THE PROXY HOLDER WILL HAVE DISCRETIONARY AUTHORITY TO VOTE WITH RESPECT TO OTHER BUSINESS WHICH PROPERLY MAY
COME BEFORE THE MEETING, OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF. PLEASE READ, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED ENVELOPE. (IF YOU VOTE BY INTERNET, PLEASE DO NOT MAILBACK THIS PROXY CARD). THE UNDERSIGNED HEREBY ACKNOWLEDGES
RECEIPT OF THE NOTICE OF ANNUAL MEETING AND PROXY STATEMENT FURNISHED IN CONNECTION THEREWITH. Proxy — DPW HOLDINGS, INC.
qIF VOTING BY MAIL, SIGN, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.q C Non-Voting Items + + Change of Address
— Please print new address below. 6. To approve (i) the grant of 250,000 shares of Common Stock, which shares shall vest
fifty percent upon the effective date of the agreement, with the remainder vesting ratably over 48 months beginning on June 1,
2019, and (ii) the grant of options to purchase 750,000 shares of Common Stock at an exercise price equal to $0.22, which option
will vest ratably over 48 months, and the underlying shares of Common Stock issuable thereunder, pursuant to the terms of the
Nisser Employment Agreement dated April 12, 2019, as subsequently amended, in order to comply with listing Rule 711 of the NYSE
American. 7. To approve approve an amendment to the DPW Holdings, Inc. 2018 Stock Incentive Plan (the “2018 Plan”),
which, if adopted by our stockholders, would, among other things: • Increase the number of shares of our common stock that
may be issued pursuant to stock-based awards made under the 2018 Plan by 6,500,000 shares for a total of 7,000,000 shares; and
• Enable the 2018 Plan to continue to satisfy the requirements set forth in Section 162(m) of the Internal Revenue Code of
1986, as amended, and the related regulations with respect to “qualified performancebased compensation.” For Against
Abstain For Against Abstain