Quarterly Report (10-q)

Date : 08/19/2019 @ 9:52PM
Source : Edgar (US Regulatory)
Stock : DPW Holdings Inc (DPW)
Quote : 1.68  0.05 (3.07%) @ 7:15PM

Quarterly Report (10-q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

 

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

 

Commission file number 1-12711

 

DPW HOLDINGS, INC.

( Exact name of registrant as specified in its charter )

 

Delaware 94-1721931

(State or other jurisdiction of incorporation or

organization)

 (I.R.S. Employer Identification Number)

 

201 Shipyard Way, Suite E

Newport Beach, CA 92663

(Address of principal executive offices)

 

(949) 444-5464

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

At August 16, 2019 the registrant had outstanding 1,174,493 shares of common stock.

 

 

 

     
 

 

DPW HOLDINGS, INC.

TABLE OF CONTENTS

      Page
PART I – FINANCIAL INFORMATION  
       
Item 1.   Financial Statements  
       
   

Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and

December 31, 2018 (Audited)

F-1 – F-2
       
    Condensed Consolidated Statements of Operations and Comprehensive Loss for the
three and six months ended June 30, 2019 and 2018 (Unaudited)
F-3
       
    Condensed Consolidated Statements of Changes in Stockholders' Equity for the three
and six months ended June 30, 2019 and 2018 (Unaudited)
F-4 – F-7
       
    Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2019 and 2018 (Unaudited)
F-8 – F-9
       
    Notes to Interim Condensed Consolidated Financial Statements (Unaudited) F-10 – F-38
       
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
Operations
1
       
Item 3.    Quantitative and Qualitative Disclosures about Market Risk 11
       
Item 4.   Controls and Procedures 12
       
PART II – OTHER INFORMATION  
       
Item 1.   Legal Proceedings 13
Item 1A.   Risk Factors 14
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3.   Defaults Upon Senior Securities 14
Item 4.   Mine Safety Disclosures 14
Item 5.   Other Information 14
Item 6.   Exhibits 15

 

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, 2018, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of August 16, 2019. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.

 

     
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
ASSETS            
             
CURRENT ASSETS                
Cash and cash equivalents   $ 867,518     $ 902,329  
Marketable equity securities     410,205       178,597  
Accounts receivable     2,629,957       1,930,971  
Accounts and other receivable, related party     1,238,856       3,887,654  
Accrued revenue     1,284,412       1,353,411  
Inventories, net     2,729,243       3,261,126  
Prepaid expenses and other current assets     803,880       775,981  
TOTAL CURRENT ASSETS     9,964,071       12,290,069  
                 
Intangible assets     4,142,699       4,359,798  
Digital currencies     19,314       1,535  
Goodwill     8,695,079       8,463,070  
Property and equipment, net     7,610,362       9,313,299  
Right-of-use assets     3,669,613        
Investments - related party, net of original issue discount of $1,675,274                
  and $2,336,693, respectively     8,381,004       5,611,621  
Investments in derivative liabilities and common stock - related party     3,476,253       3,043,499  
Equity investments in private companies     897,958       480,000  
Investment in limited partnership     1,969,000       1,969,000  
Loans receivable     2,031,312       2,572,230  
Other investments, related parties     847,500       862,500  
Other assets     719,232       459,259  
TOTAL ASSETS   $ 52,423,397     $ 49,425,880  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
CURRENT LIABILITIES                
Accounts payable and accrued expenses   $ 13,508,162     $ 13,065,838  
Accounts payable and accrued expenses, related party     60,023       57,752  
Operating lease liability, current     786,740        
Advances on future receipts     1,909,203       2,085,807  
Short term advances, related party     386,761       73,761  
Revolving credit facility     84,999       285,605  
Notes payable, net     8,121,751       6,388,787  
Notes payable, related party     162,674       166,925  
Convertible notes payable           6,742,494  
Other current liabilities     1,772,234       1,868,402  
TOTAL CURRENT LIABILITIES     26,792,547       30,735,371  
                 
LONG TERM LIABILITIES                
Operating lease liability, non-current     2,944,162        
Notes payable     451,447       483,659  
Notes payable, related parties     121,643       142,059  
Convertible notes payable     263,795        
                 
TOTAL LIABILITIES     30,573,594       31,361,089  

 

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

 

  F- 1  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

 

    June 30,     December 31,  
    2019     2018  
    (Unaudited)        
             
COMMITMENTS AND CONTINGENCIES            
             
STOCKHOLDERS' EQUITY            
Series A Convertible Preferred Stock, $25.00 stated value per share,     7       1  
   $0.001 par value – 1,000,000 shares authorized; 7,040 and 1,434 shares                
     issued and outstanding at June 30, 2019 and December 31, 2018,                
   respectively (redemption amount and liquidation preference of $176,000                
   and $35,850 as of June 30, 2019 and December 31, 2018, respectively)                
Series B Convertible Preferred Stock, $10 stated value per share,     125       125  
   share, $0.001 par value – 500,000 shares authorized; 125,000 shares issued                
   and outstanding at June 30, 2019 and December 31, 2018 (liquidation                
   preference of $1,250,000 at June 30, 2019 and December 31, 2018                
Class A Common Stock, $0.001 par value – 500,000,000 shares authorized;     1,037       101  
   1,037,128 and 100,910 shares issued and outstanding at June 30, 2019                
   and December 31, 2018, respectively                
Class B Common Stock, $0.001 par value – 25,000,000 shares authorized;            
 nil shares issued and outstanding at June 30, 2019 and December 31, 2018                
Additional paid-in capital     92,377,366       77,647,544  
Accumulated deficit     (66,465,775 )     (55,721,115 )
Accumulated other comprehensive loss     (4,071,199 )     (3,902,523 )
TOTAL DPW HOLDINGS STOCKHOLDERS' EQUITY     21,841,561       18,024,133  
                 
Non-controlling interest     8,242       40,658  
                 
TOTAL STOCKHOLDERS' EQUITY     21,849,803       18,064,791  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 52,423,397     $ 49,425,880  

 

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

 

  F- 2  

 

  

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2019     2018     2019     2018  
                         
Revenue   $ 4,541,198     $ 4,347,958     $ 10,092,849     $ 7,513,417  
Revenue, cryptocurrency mining     256,116       718,757       284,920       956,253  
Revenue, related party           1,765,875             3,558,767  
Revenue, restaurant operations     1,161,132       502,492       2,334,631       502,492  
Revenue, lending activities     189,621       108,752       374,710       108,752  
Total revenue     6,148,067       7,443,834       13,087,110       12,639,681  
Cost of revenue     4,589,202       6,083,925       9,707,515       9,886,634  
Gross profit     1,558,865       1,359,909       3,379,595       2,753,047  
                                 
Operating expenses                                
Engineering and product development     471,268       367,415       926,946       710,438  
Selling and marketing     426,113       774,860       900,456       1,500,331  
General and administrative     4,634,151       4,387,974       10,065,117       7,609,597  
Gain on digital currency     (4,479 )     (71,316 )     (5,982 )      
Total operating expenses     5,527,053       5,458,933       11,886,537       9,820,366  
                                 
Loss from operations     (3,968,188 )     (4,099,024 )     (8,506,942 )     (7,067,319 )
Interest income     911,537       603,519       1,748,464       1,243,623  
Interest expense     (532,255 )     (3,490,310 )     (2,631,796 )     (7,262,530 )
Change in fair value of marketable equity securities     272,689             156,647        
Loss on extinguishment of convertible debt                 (807,784 )      
Loss on issuance of warrants     (1,763,481 )           (1,763,481 )      
Change in fair value of warrant liability     946,825             946,825        
Loss before income taxes     (4,132,873 )     (6,985,815 )     (10,858,067 )     (13,086,226 )
Income tax benefit     73,976       (10,715 )     88,144       (6,257 )
Net loss     (4,058,897 )     (6,996,530 )     (10,769,923 )     (13,092,483 )
Less: Net loss attributable to non-controlling interest           108,649       32,416       144,080  
Net loss attributable to DPW Holdings     (4,058,897 )     (6,887,881 )     (10,737,507 )     (12,948,403 )
Preferred dividends     (5,284 )     (108,049 )     (7,153 )     (108,049 )
Net loss available to common stockholders   $ (4,064,181 )   $ (6,995,930 )   $ (10,744,660 )   $ (13,056,452 )
                                 
Basic and diluted net loss per common share   $ (5.00 )   $ (104.24 )   $ (22.42 )   $ (231.65 )
                                 
Basic and diluted weighted average common shares
outstanding
    812,355       67,115       479,226       56,362  
                                 
Comprehensive Loss                                
Loss available to common stockholders   $ (4,064,181 )   $ (6,995,930 )   $ (10,744,660 )   $ (13,056,452 )
Other comprehensive income (loss)                                
Foreign currency translation adjustment    

162,648

      (158,306 )    

192,505

      (131,849 )
Net unrealized gain (loss) on derivative
securities of related party
    375,499       (704,811 )     (361,181 )     (5,445,925 )
Other comprehensive income (loss)    

538,147

      (863,117 )     (168,676 )     (5,577,774 )
Total Comprehensive loss   $ (3,526,034 )   $ (7,859,047 )   $ (10,913,336 )   $ (18,634,226 )

 

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

 

  F- 3  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended June 30, 2019

 

                                        Accumulated              
                            Additional           Other           Total  
    Preferred Stock     Common Stock     Paid-In     Accumulated     Comprehensive     Non-Controlling     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Interest     Equity  
BALANCES, April 1, 2019     126,504     $ 126       231,478     $ 231     $ 84,903,648     $ (62,401,594 )   $ (4,478,216 )   $ 8,242     $ 18,032,437  
Compensation expense due to stock                                                                        
 option issuances                             248,340                         248,340  
Issuance of common stock for cash                 96,388       97       1,056,112                         1,056,209  
Issuance of common stock in payment of                                                                        
  accrued liabilities                 9,375       9       108,514                         108,523  
Issuance of common stock upon exercise                                                                        
 of warrants                 699,887       700       6,620,325                         6,621,025  
Issuance of Series A preferred stock for cash     5,536       6                   138,394                         138,400  
Beneficial conversion feature in connection                                                                        
 with convertible notes                             188,448                         188,448  
Fair value of warrants issued in connection                                                                        
 with convertible notes                               58,448                         58,448  
Cash for exchange fees and other financing costs                             (944,863 )                       (944,863 )
Comprehensive loss:                                                                        
Net loss                                     (4,058,897 )                 (4,058,897 )
Preferred dividends                                   (5,284 )                 (5,284 )
Net unrealized gain on derivatives                                                                        
  in related party                                         375,499             375,499  
Foreign currency translation adjustments                                         31,518             31,518  
Net loss attributable to non-controlling interest                                                      
                                                                         
BALANCES, June 30, 2019     132,040     $ 132       1,037,128     $ 1,037     $ 92,377,366     $ (66,465,775 )   $ (4,071,199 )   $ 8,242     $ 21,849,803  

   

 

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

 

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

 

  F- 4  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Three Months Ended June 30, 2018

 

                                        Accumulated              
                            Additional           Other           Total  
    Preferred Stock     Common Stock     Paid-In     Accumulated     Comprehensive     Non-Controlling     Stockholders'  
    Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Interest     Equity  
                                                       
BALANCES, April 1, 2018     224,276     $ 225       52,544     $ 53     $ 50,772,786     $ (29,474,673 )   $ (211,611 )   $ 745,306     $ 21,832,086  
Compensation expense due to stock                                                                        
 option issuances                             194,019                         194,019  
Compensation expense due to warrant issuances                             23,477                         23,477  
Issuance of common stock and warrants for cash                 17,420       18       12,308,216                         12,308,234  
Issuance of common stock for services                 1,250       1       724,999                         725,000  
Issuance of common stock for conversion                                                                        
 of short-term advances                 4,540       4       2,819,580                         2,819,584  
Issuance of common stock upon exercise                                                                        
 of warrants                 349       1       (1 )                        
Issuance of Series B preferred stock for                                                                        
 conversion of short-term advances     25,000       25                   249,975                         250,000  
Issuance of common stock for conversion                                                                        
 of Series E preferred stock     (124,276 )     (125 )     311             125                          
Issuance of common stock in connection                                                                        
 with convertible notes                 683             321,548                         321,548  
Repurchase of common stock                 (69 )           (55,000 )                       (55,000 )
Fair value of warrants issued in connection                                                                        
 with convertible notes                             2,003,617                         2,003,617  
Cash for exchange fees and other financing costs                             (979,342 )                       (979,342 )
Non-controlling interest from acquisition of I. AM                                               33,242       33,242  
Comprehensive loss:                                                                        
Net loss                                   (6,887,881 )                 (6,887,881 )
Preferred deemed dividends                             108,049       (108,049 )                 -  
Net unrealized gain on securities                                                                        
 available-for-sale, net of income taxes                                         (704,811 )           (704,811 )
Foreign currency translation adjustments                                   (81,786 )     (158,306 )           (240,092 )
Net loss attributable to non-controlling interest                                               (108,649 )     (108,649 )
                                                                         
BALANCES, June 30, 2018     125,000     $ 125       77,028     $ 77     $ 68,492,048     $ (36,552,389 )   $ (1,074,728 )   $ 669,899     $ 31,535,032  

 

 

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

 

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

 

  F- 5  

 


DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Six Months Ended June 30, 2019

 

                                        Accumulated              
                            Additional           Other           Total  
    Preferred Stock     Common Stock     Paid-In     Accumulated     Comprehensive     Non-Controlling     Stockholders'  
    Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Interest     Equity  
BALANCES, January 1, 2019   126,434     $            126     100,910     $101     $77,647,544     $(55,721,115)     $(3,902,523)     $40,658     $18,064,791  
Compensation expense due to stock                                                                        
 option issuances                             493,954                         493,954  
Issuance of common stock for cash                 191,179       192       5,453,552                         5,453,744  
Issuance of common stock for services                 9,375       9       253,010                         253,019  
Issuance of common stock in payment of                                                                        
  accrued liabilities                 9,375       9       108,514                         108,523  
Issuance of common stock for conversion                                                                        
  of debt                 26,402       26       2,608,431                         2,608,457  
Issuance of common stock upon exercise                                                                        
 of warrants                 699,887       700       6,620,325                         6,621,025  
Issuance of Series A preferred stock for cash     5,606       6                   140,144                         140,150  
Beneficial conversion feature in connection                                                                        
 with convertible notes                             188,448                         188,448  
Fair value of warrants issued in connection                                                                        
 with convertible notes                               58,448                         58,448  
Cash for exchange fees and other financing costs                             (1,195,004 )                       (1,195,004 )
Comprehensive loss:                                                                        
Net loss                                     (10,737,507 )                 (10,737,507 )
Preferred dividends                                   (7,153 )                 (7,153 )
Net unrealized loss on derivatives                                                                        
  in related party                                         (361,181 )           (361,181 )
Foreign currency translation adjustments                                         192,505             192,505  
Net loss attributable to non-controlling interest                                               (32,416 )     (32,416 )
                                                                         
BALANCES, June 30, 2019     132,040     $ 132       1,037,128     $ 1,037     $ 92,377,366     $ (66,465,775 )   $ (4,071,199 )   $ 8,242     $ 21,849,803  

 

 

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

 

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

 

  F- 6  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

Six Months Ended June 30, 2018

                                        Accumulated              
                            Additional           Other           Total  
    Preferred Stock     Common Stock     Paid-In     Accumulated     Comprehensive     Non-Controlling     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Interest     Equity  
                                                       
BALANCES, January 31, 2018     478,776     $ 479       37,778     $ 38     $ 36,918,132     $ (23,414,151 )   $ 4,503,046     $ 780,737     $ 18,788,281  
Compensation expense due to stock option issuances                             426,873                         426,873  
Compensation expense due to warrant issuances                             46,954                         46,954  
Issuance of common stock and warrants for cash                 23,821       24       18,551,565                         18,551,589  
Issuance of common stock for services                 3,354       3       3,758,293                         3,758,296  
Issuance of common stock for conversion of debt                 2,538       3       2,167,841                         2,167,844  
Issuance of common stock for conversion                                                                        
 of short-term advances                 4,540       4       2,819,580                         2,819,584  
Issuance of common stock upon exercise                                                                        
 of stock options                 75             97,800                         97,800  
Issuance of common stock upon exercise of warrants                 2,682       3       867,163                         867,166  
Issuance of Series B preferred stock for                                                                        
 conversion of short-term advances     25,000       25                   249,975                         250,000  
Issuance of common stock for conversion                                                                        
 of Series E preferred stock     (378,776 )     (379 )     947       1       378                          
Issuance of common stock in connection                                                                        
 with convertible notes                 1,362       1       675,220                         675,221  
Repurchase of common stock                 (69 )           (55,000 )                       (55,000 )
Beneficial conversion feature in connection                                                                        
 with convertible notes                             288,573                         288,573  
Fair value of warrants issued in connection                                                                        
 with convertible notes                             3,408,665                         3,408,665  
Cash for exchange fees and other financing costs                             (1,838,013 )                       (1,838,013 )
Non-controlling interest from acquisition of I. AM                                               33,242       33,242  
Comprehensive loss:                                                                        
Net loss                                   (12,948,403 )                 (12,948,403 )
Preferred deemed dividends                             108,049       (108,049 )                 -  
Net unrealized gain on securities                                                                        
 available-for-sale, net of income taxes                                         (5,445,925 )           (5,445,925 )
Foreign currency translation adjustments                                   (81,786 )     (131,849 )           (213,635 )
Net loss attributable to non-controlling interest                                               (144,080 )     (144,080 )
                                                                         
BALANCES, June 30, 2018     125,000     $ 125       77,028     $ 77     $ 68,492,048     $ (36,552,389 )   $ (1,074,728 )   $ 669,899     $ 31,535,032  

 

 

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

 

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

 

  F- 7  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

    For the Six Months Ended June 30,  
    2019     2018  
             
Cash flows from operating activities:            
Net loss   $ (10,769,923 )   $ (13,092,483 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     1,826,721       758,628  
Amortization     299,462       66,716  
Amortization of right-of-use assets     61,289        
Interest expense – debt discount     1,676,609       5,779,108  
Fair value in excess of proceeds upon issuance of warrants     1,763,481        
Change in fair value of warrant liability     (946,825 )      
Accretion of original issue discount on notes receivable – related party     (1,262,422 )     (930,448 )
Accretion of original issue discount on notes receivable     (58,023 )      
Increase in accrued interest on notes receivable – related party     (464,114 )      
Stock-based compensation     992,283       2,811,540  
Realized (gains) losses on sale of digital currencies     (394 )     100,551  
Realized (gains) losses on sale of marketable securities     (86,741 )     157,845  
Unrealized gains on marketable equity securities     (231,608 )      
Unrealized gains on equity securities – related party     (21,288 )      
Unrealized gains on equity securities     (6,316 )      
Changes in operating assets and liabilities:                
Accounts receivable     (591,839 )     770,266  
Accounts receivable, related party     2,648,798       (3,274,267 )
Accrued revenue     68,999        
Digital currencies     (290,902 )     (914,628 )
Inventories     598,281       (627,697 )
Prepaid expenses and other current assets     (242,575 )     430,780  
Other assets     (271,679 )     (157,905 )
Accounts payable and accrued expenses     594,546       2,464,823  
Accounts payable, related parties     2,271        
Other current liabilities     (66,409 )     (7,108 )
                 
Net cash used in operating activities     (4,778,318 )     (5,664,279 )
                 
Cash flows from investing activities:                
Purchase of property and equipment     (93,606 )     (9,004,693 )
Purchase of intangible asset           (42,557 )
Purchase of Enertec           (4,936,562 )
Cash received on acquisitions           235,882  
Investments – related party     (1,027,847 )     (256,780 )
Investments in warrants and common stock - related party     (681,164 )     (1,807,892 )
Investments in marketable equity securities           (855,553 )
Sales of marketable equity securities     571,741       2,132,286  
Proceeds from loans to related parties           16,088  
Investments in debt and equity securities     (383,876 )     (2,401,730 )
                 
Net cash used in investing activities   $ (1,614,752 )   $ (16,921,511 )

 

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

 

  F- 8  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

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

 

 

    For the Six Months Ended June 30,  
    2019     2018  
             
Cash flows from financing activities:            
Gross proceeds from sales of common stock and warrants   $ 11,528,605     $ 18,551,589  
Repurchase of common stock           (55,000 )
Proceeds from issuance of Series A Convertible Preferred Stock     131,741        
Financing cost in connection with sales of equity securities     (1,195,004 )     (1,838,594 )
Proceeds from stock option exercises           97,740  
Proceeds from warrant exercises     127,000       867,166  
Proceeds from convertible notes payable     500,000       8,550,000  
Proceeds from notes payable     4,102,918       9,370,000  
Proceeds from short-term advances – related party     313,000       63,761  
Proceeds from short-term advances           761,000  
Payments on short-term advances           (425,000 )
Payments on notes payable     (1,386,935 )     (10,581,021 )
Payments on convertible notes payable     (7,069,547 )     (1,024,874 )
Proceeds from advances on future receipts     319,729       2,990,277  
Payments on advances on future receipts     (674,229 )     (4,241,018 )
Payments of preferred dividends     (7,153 )      
Payments on revolving credit facilities, net     (217,830 )     (291,843 )
                 
Net cash provided by financing activities     6,472,295       22,794,183  
                 
Effect of exchange rate changes on cash and cash equivalents     (114,036 )     (168,118 )
                 
Net (decrease) increase in cash and cash equivalents     (34,811 )     40,275  
                 
Cash and cash equivalents at beginning of period     902,329       1,478,147  
                 
Cash and cash equivalents at end of period   $ 867,518     $ 1,518,422  
                 
Supplemental disclosures of cash flow information:                
Cash paid during the period for interest   $

1,644,524

    $ 600,373  
                 
Non-cash investing and financing activities:                
Cancellation of convertible note payable into shares of common stock   $ 2,608,458     $ 2,167,844  
Payment of accounts payable with digital currency   $ 273,517     $  
Issuance of common stock for prepaid services   $     $ 1,359,197  
Issuance of common stock in payment of liability   $ 108,523     $  
Cancellation of short-term advances into shares of common stock   $     $ 2,774,584  
Cancellation of short-term advances, related party into shares                
of common stock   $     $ 45,000  
Cancellation of short-term advances, related party into shares                
of Series B Preferred Stock   $     $ 250,000  
Conversion of loans receivable for marketable equity securities   $ 485,000     $  
Conversion of loans receivable for investments in warrants and                
common stock – related party   $

91,483

    $  

 

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

 

  F- 9  

 

 

DPW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited

JUNE 30, 2019

 

 

 

1. DESCRIPTION OF BUSINESS

 

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

 

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

 

2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. As of June 30, 2019, the Company had cash and cash equivalents of $867,518, an accumulated deficit of $66,465,775 and a negative working capital of $16,828,476. The Company has incurred recurring losses and reported losses for the three and six months ended June 30, 2019, totaled $4,058,897 and $10,769,923, respectively. In the past, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During 2019, the Company continued to successfully obtain additional equity and debt financing and in restructuring existing debt.

 

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

 

  F- 10  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Principles of Consolidation

 

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

 

Accounting Estimates

 

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

 

  F- 11  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

    Six Months ended June 30, 2019  
                      Digital              
    DPC 1     DP Limited     Enertec     Farms     I.AM     Total  
                                     
Primary Geographical                                    
Markets                                    
North America   $ 4,449,820     $     $     $ 284,920     $ 2,334,631     $ 7,069,371  
Europe     67,954       961,611                         1,029,565  
Middle East                 4,488,553                   4,488,553  
Other     193,472       120,831       185,318                   499,621  
    $ 4,711,246     $ 1,082,442     $ 4,673,871     $ 284,920     $ 2,334,631     $ 13,087,110  
                                                 
Major Goods                                                
RF/Microwave Filters   $ 989,114     $     $     $     $     $ 989,114  
Detector logarithmic                                                
 video amplifiers     473,150                               473,150  
Power Supply Units     2,874,272                               2,874,272  
Power Supply Systems           1,082,442                         1,082,442  
Healthcare diagnostic systems                 1,260,700                   1,260,700  
Defense systems                 3,413,171                   3,413,171  
Digital Currency Mining                       284,920             284,920  
Restaurant operations                             2,334,631       2,334,631  
Lending activities     374,710                               374,710  
    $ 4,711,246     $ 1,082,442     $ 4,673,871     $ 284,920     $ 2,334,631     $ 13,087,110  
                                                 
Timing of Revenue                                                
Recognition                                                
Goods transferred at a                                                
 a point in time   $ 4,711,246     $ 945,541     $     $ 284,920     $ 2,334,631     $ 8,276,338  
Services transferred over time           136,901       4,673,871                   4,810,772  
    $ 4,711,246     $ 1,082,442     $ 4,673,871     $ 284,920     $ 2,334,631     $ 13,087,110  

 

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

 

Sales of Products

 

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

 

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

 

  F- 12  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

Manufacturing Services

 

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

 

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

 

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

 

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

 

Lending Activities

 

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

 

Blockchain Mining

 

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

  F- 13  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

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

 

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

 

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

 

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

 

Restaurant Operations

 

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

 

Fair value of Financial Instruments

 

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

 

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

 

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

 

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

 

  F- 14  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

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

 

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

 

    Fair Value Measurement at June 30, 2019  
    Total     Level 1     Level 2     Level 3  
Investments in common stock and derivative
instruments of AVLP – a related party
  $ 3,270,003     $ 784,540     $     $ 2,485,463  
Investment in common stock of Alzamend – a
related party
    206,250                   206,250  
Investments in marketable equity securities     410,205       410,205              
Investments in warrants of public companies     40,087                   40,087  
Total Investments   $ 3,926,545     $ 1,194,745     $     $ 2,731,800  

 

 

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

 

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

 

Leases

 

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

 

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

 

  F- 15  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

Net Loss per Share

 

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

 

    June 30,  
    2019     2018  
Stock options     9,006       9,475  
Warrants (1)     51,465       23,410  
Convertible notes     75,000        
Conversion of preferred stock     2,232       2,232  
Total     137,703       35,117  

 

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

 

Reclassifications

 

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

 

Recently Issued Accounting Standards

 

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

 

  F- 16  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

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

 

4. Marketable Equity Securities

 

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

 

    Marketable equity securities at June 30, 2019  
          Gross unrealized   Gross realized      
    Cost     gains (losses)   gains (losses)   Fair value  
Common shares   $ 220,880     $189,325   $—   $ 410,205  

 

 

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

 

  F- 17  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

The following table presents additional information about marketable equity securities:

 

    Marketable Equity
Securities
 
Balance at January 1, 2018   $ 1,834,570  
Purchases of marketable equity securities     858,458  
Sales of marketable equity securities     (2,188,292 )
Realized losses on marketable equity securities     (175,405 )
Unrealized gains on marketable equity securities     (150,734 )
Balance at December 31, 2018   $ 178,597  
Purchases of marketable equity securities on
conversion of debt
    485,000  
Sales of marketable equity securities     (571,741 )
Realized gains on marketable equity securities     86,741  
Unrealized gains on marketable equity securities     231,608  
Balance at June 30, 2019   $ 410,205  

 

At June 30, 2019 and December 31, 2018, the Company had invested in the marketable equity securities of certain publicly traded companies. During the three and six months ended June 30, 2019, unrealized gains of $126,217 and $231,608 were included in net income as a component of change in fair value of equity securities. During the year ended December 31, 2018, the Company recorded an unrealized loss of $42,283. The Company’s investment in marketable equity securities will be revalued on each balance sheet date.  The fair value of the Company’s holdings in marketable equity securities at June 30, 2019 and December 31, 2018 is a Level 1 measurement based on quoted prices in an active market.

 

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

 

5. PROPERTY AND EQUIPMENT, NET

 

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

 

    June 30,     December 31,  
    2019     2018  
Cryptocurrency machines and related equipment   $ 9,198,928     $ 9,168,928  
Computer, software and related equipment     2,479,888       2,495,470  
Restaurant equipment     758,775       752,103  
Office furniture and equipment     364,607       287,583  
Leasehold improvements     1,299,558       1,274,865  
      14,101,756       13,978,949  
Accumulated depreciation and amortization     (6,491,394 )     (4,665,650 )
Property and equipment, net   $ 7,610,362     $ 9,313,299  

 

For the three and six months ended June 30, 2019, depreciation expense amounted to $1,027,698 and $1,826,721, respectively. During the three and six months ended June 30, 2018, depreciation expense amounted to $643,482 and $758,628, respectively.

 

  F- 18  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

6. INTANGIBLE ASSETS, NET

 

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

 

    June 30,     December 31,  
    2019     2018  
Trade name and trademark   $ 1,562,332     $ 1,562,332  
Customer list     2,459,596       2,388,139  
Non-competition agreements     150,000       150,000  
Domain name and other intangible assets     793,011       762,807  
      4,964,939       4,863,278  
Accumulated depreciation and amortization     (822,240 )     (503,480 )
Intangible assets, net   $ 4,142,699     $ 4,359,798  

 

The Company’s trade names and trademarks were determined to have an indefinite life. The remaining definite lived intangible assets are primarily being amortized on a straight-line basis over their estimated useful lives.

Amortization expense was $137,047 and $299,462, respectively, for the three and six months ended June 30, 2019 and $33,358 and $66,716, respectively, for the three and six months ended June 30, 2018.

 

7. INVESTMENTS – RELATED PARTIES

 

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

 

    June 30,     December 31,  
    2019     2018  
Investment in convertible promissory note of AVLP   $ 8,587,847     $ 6,943,997  
Accrued interest in convertible promissory note of AVLP     1,468,431       1,004,317  
Total investment in convertible promissory note of AVLP – Gross     10,056,278       7,948,314  
Less: original issue discount     (1,675,274 )     (2,336,693 )
Total investment in convertible promissory note of AVLP   $ 8,381,004     $ 5,611,621  
                 
Investment in derivative instruments of AVLP     2,485,463       2,230,641  
Investment in common stock of AVLP     784,540       812,858  
Investment in common stock of Alzamend     206,250        
Investment in derivative instruments and common stock of AVLP and
Alzamend
  $ 3,476,253     $ 3,043,499  
                 
Total investment in AVLP and Alzamend – Net   $ 11,857,257     $ 8,655,120  

 

  F- 19  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

 

    Investment in              
    warrants and     Investment in     Total  
    common stock     convertible     investment  
    of AVLP and     promissory     in AVLP and  
    Alzamend     note of AVLP     Alzamend –
Net
 
Balance at January 1, 2019   $ 3,043,499     $ 5,611,621     $ 8,655,120  
Investment in convertible promissory notes of AVLP           1,027,847       1,027,847  
Investment in common stock of AVLP and Alzamend     156,644             156,644  
Fair value of derivative instruments issued by AVLP     616,003             616,003  
Unrealized loss in derivative instruments of AVLP     (361,181 )           (361,181 )
Unrealized loss in common stock of AVLP and
Alzamend
    21,288             21,288  
Accretion of discount           1,277,422       1,277,422  
Accrued Interest           464,114       464,114  
Balance at June 30, 2019   $ 3,476,253     $ 8,381,004     $ 11,857,257  

 

The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, an affiliate of the Company, consist of convertible promissory notes, derivative instruments and shares of common stock of AVLP. At June 30, 2019, the Company has provided loans to AVLP in the principal amount $8,587,847 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 17,175,694 shares of AVLP common stock. The warrants entitle the Company to purchase up to 17,175,694 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The warrants were determined by the issuer to be financial derivative instruments. At June 30, 2019 and December 31, 2018, the Company recorded an unrealized loss on its investment in warrants of AVLP of $2,774,562 and $2,413,381, respectively, representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet. During the three and six months ended June 30, 2019, the Company recognized, in other comprehensive loss, net unrealized gain (loss) on derivative securities of related party of $375,499 and ($361,181), respectively, which compares with a net unrealized loss on derivative securities of related party of $671,653 and $4,944,667, respectively during the three and six months ended June 30, 2018. The Company’s investment in AVLP will be revalued on each balance sheet date. The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate, which ranged between 1.75% and 2.60%, was derived from the U.S. Treasury yield curve, matching the term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 85.0% 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 17,175,694 warrants that the Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company records interest on an accrual basis and recognizes it as earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected. An aggregate of $5,387,307 of original issue discount and discount attributed to the fair value of the warrants is being amortized as interest income through the maturity date. During the three and six months ended June 30, 2019, the Company recorded $657,613 and $1,277,422, respectively, of interest income for the discount accretion compared with $428,417 and $918,448, respectively, during the three and six months ended June 30, 2018. During the three and six months ended June 30, 2019, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $253,923 and $464,114, respectively. During the three and six months ended June 30, 2018, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $157,491 and $301,173, respectively.

 

  F- 20  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 77,500 shares of AVLP common stock for $46,644 and 430,942 shares of AVLP common stock for $417,169, respectively. At June 30, 2019, the closing market price of AVLP’s common stock was $0.80, a decline from $0.90 at December 31, 2018. The Company has determined that its investment in AVLP marketable equity securities are accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures and based upon the closing market price of AVLP common stock at June 30, 2019, the Company’s investment in AVLP common stock had an unrealized gain of $44,368.

 

In aggregate, the Company has 980,675 shares of AVLP common stock which represents 17.3% of AVLP’s outstanding shares of common stock. The Company has determined that AVLP is a variable interest entity (“VIE”) as it does not have sufficient equity at risk. The Company does not consolidate AVLP because the Company is not the primary beneficiary and does not have a controlling financial interest. To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic performance, among other factors. Although the Company has made a significant investment in AVLP, the Company has determined that Philou, which controls AVLP through its equity investment and deemed to be more closely associated with AVLP, is the primary beneficiary. As a result, AVLP’s financial position and results of operations are not consolidated in our financial position and results of operations.

 

8. INVESTMENTS IN REAL ESTATE

 

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

 

9. OTHER INVESTMENTS, RELATED PARTIES

 

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

 

MTIX, Ltd.

 

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

 

  F- 21  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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 June 30, 2019 and December 31, 2018, the Company has valued the note receivable at $600,000, the carrying amount of Note A. The Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.

 

Israeli Property

 

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

 

Under the Tenancy in Common Agreement, Coolisys and its executive officers shall have the exclusive rights to use the Property for the Company and its affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy in Common Agreement, for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right to purchase a portion of the Company’s interest in the Property. Such right shall fully vest at the end of five years of continuous employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal value. The Company will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years. During the three and six months ended June 30, 2019, the Company recognized $7,500 and $15,000, respectively, in amortization expense. If Mr. Kohn is not employed by the Company, the Company shall have the right to demand that Ms. Kohn purchase the Company’s remaining interest in the Property that was not subject to vesting for the fair market value of such unvested Property interest.

 

10. ACQUISITIONS

 

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

 

  F- 22  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

    For the Three     For the Six  
    Months Ended     Months Ended  
    June 30, 2018     June 30, 2018  
Total Revenue   $ 6,402,873     $ 14,177,103  
Net loss   $ (8,976,963 )   $ (15,113,577 )
Less: Net loss attributable                
to non-controlling interest     108,649       144,080  
Net loss attributable to DPW Holdings   $ (8,868,314 )     (14,969,497 )
Preferred dividends     (108,049 )     (108,049 )
Net loss available to common stockholders   $ (8,976,363 )   $ (15,077,546 )
                 
Basic and diluted net loss per common share   $ (133.75 )   $ (267.51 )
                 
Basic and diluted weighted average                
common shares outstanding     67,115       56,362  
                 
Comprehensive Loss                
Loss available to common shareholders   $ (8,976,363 )   $ (15,077,546 )
Other comprehensive income (loss)                
Change in net foreign currency                
translation adjustments     (158,306 )     (131,849 )
Net unrealized loss on derivative                
securities of related party     (704,811 )     (5,445,925 )
Other comprehensive income (loss)     (863,117 )     (5,577,774 )
Total Comprehensive loss   $ (9,839,480 )   $ (20,655,320 )

 

11. STOCK-BASED COMPENSATION

 

Under the Company's 2018 Stock Incentive Plan (the “2018 Plan”), 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive Plan (the “2016 Plan”) and the 2012 Stock Option Plan, as amended (the “2012 Plan”) (collectively, the “Plans”), options may be granted to employees, officers, consultants, service providers and directors of the Company. The Plans, as amended, provide for the issuance of a maximum of 21,716 shares of the Company’s common stock.

 

Options granted under the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally become fully vested after four years. Any options that are forfeited or cancelled before expiration become available for future grants. The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans are subject to a vesting period determined at the date of grant. As of June 30, 2019, an aggregate of 13,014 of the Company's options are still available for future grant.

 

During the six months ended June 30, 2019, the Company did not grant any options. During the six months ended June 30, 2018, the Company granted 1,250 options to its employees from the Plans and also granted 3,622 options outside of the Plans. These options become fully vested after four years. The Company estimated that the grant date fair value of options granted utilizing the Black-Scholes option pricing model during the six months ended June 30, 2018 was $513,510, which is being recognized as stock-based compensation expense over the requisite four-year service period. During the six months ended June 30, 2019 and 2018, the Company also issued 9,375 and 1,979, respectively, shares of common stock to its consultants and service providers. The Company estimated the grant date fair value of these shares of common stock was $253,019 and $2,640,102 respectively, which was determined from the closing price of the Company’s common stock on the date of issuance.

 

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

 

  F- 23  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

  

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

 

    Six Months Ended  
      June 30, 2018  
Weighted average risk-free interest rate     2.41% — 2.80%  
Weighted average life (in years)     4.75  
Volatility     124.7% — 131.7%  
Expected dividend yield     0 %
Weighted average grant-date fair value per share of
options granted
  $ 1,527.94  

 

 

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

 

 

 

Outstanding   Exercisable
        Weighted            
    Average Weighted   Weighted
    Remaining Average   Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$480.00 - $560.00   3,725   7.02   $537.76   2,485   $533.15
$1,056.00 - $1,104.00   213   8.03   $1,098.35   99   $1,091.91
$1,208.00 - $1,352.00   72   3.08   $1,306.78   72   $1,306.78
$480.00 - $1,352.00   4,009   7.01   $581.26   2,656   $574.95

 

                     
Issuances outside of Plans
$640.00 - $1,856.00   4,997   6.90   $1,043.45   1,435   $1,141.96
                     
Total Options
$480.00 - 1,856.00   9,006   6.95   $837.69   4,091   $773.82

 

 

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

 

  F- 24  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

    Three Months Ended     Six Months Ended  
    June 30, 2019     June 30, 2018     June 30, 2019     June 30, 2018  
Cost of revenues   $ -     $ -     $ -     $ 4,874  
Engineering and product development     -       -       -       13,650  
Selling and marketing     -       -       -       11,922  
General and administrative     162,764       843,016       325,090       1,507,181  
Stock-based compensation from Plans   $ 162,764     $ 843,016     $ 325,090     $ 1,537,627  
Stock-based compensation from issuances
outside of Plans
    208,231       530,310       667,193       1,273,913  
Total Stock-based compensation   $ 370,995     $ 1,373,326     $ 992,283     $ 2,811,540  

 

The combination of stock-based compensation of $325,090 from the issuances of equity-based awards pursuant to the Plans and stock-based compensation attributed to stock awards of $253,019 and options of $414,174, which were issued outside of the Plans, resulted in aggregate stock-based compensation of $370,995 and $992,283 during the three and six months ended June 30, 2019.

 

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

 

          Outstanding Options  
                      Weighted        
                Weighted     Average        
    Shares           Average     Remaining     Aggregate  
    Available     Number     Exercise     Contractual     Intrinsic  
    for Grant     of Shares     Price     Life (years)     Value  
January 1, 2019     12,695       4,328     $ 576.40       7.52     $ 0  
Forfeited     319       (319 )   $ 515.61                  
June 30, 2019     13,014       4,009     $ 581.26       7.01     $ 0  

 

As of June 30, 2019, there was $484,062 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.8 years.

 

12. WARRANTS  

 

During the six months ended June 30, 2019, the Company issued a total of 734,443 warrants at an average exercise price of $10.33 per share.

 

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

 

(ii) On May 20, 2019, the Company issued warrants to purchase an aggregate of 12,500 shares of common stock at an exercise price equal to $8.80 per share of common stock in connection with the issuance of a 4% Original Issue Discount Convertible Promissory Note in the aggregate principal amount of $660,000.

 

  F- 25  

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

Outstanding       Exercisable
        Weighted            
    Average Weighted   Weighted
    Remaining Average   Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
$0.00   6,500   4.76   $0.00   6,500   $0.00
$8.00   397   7.35   $8.00   397   $8.00
$12.00   12,500   4.86   $12.00   12,500   $12.00
$19.80   15,555   4.76   $19.80   0   $19.80
$440.00   355   3.36   $440.00   355   $440.00
$480.00   94   3.84   $480.00   94   $480.00
$528.00   186   3.34   $528.00   186   $528.00
$560.00   2,657   3.37   $560.00   2,657   $560.00
$600.00   170   2.88   $600.00   170   $600.00
$640.00   603   1.20   $640.00   603   $640.00
$696.00   2,155   3.87   $696.00   2,155   $696.00
$752.00   9,614   3.88   $752.00   9,614   $752.00
$800.00   350   3.45   $800.00   350   $800.00
$880.00   947   2.18   $880.00   947   $880.00
$920.00   2,126   3.74   $920.00   2,126   $920.00
$1,040.00   1,243   3.79   $1,040.00   1,243   $1,040.00
$1,080.00   1,389   3.87   $1,080.00   1,389   $1,080.00
$1,760.00   781   3.57   $1,760.00   781   $1,760.00
$1,800.00   140   3.57   $1,800.00   140   $1,800.00
$2,000.00   203   3.57   $2,000.00   203   $2,000.00
$8.00 - $2,000.00   57,965   3.81   $334.01   42,410   $449.25

 

 

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 six months ended June 30, 2019 and 2018:

 

    Six Months Ended  
    June 30, 2019     June 30, 2018  
Weighted average risk-free interest rate     2.18% — 2.28%       2.41% — 2.94%  
Weighted average life (in years)     5.0       4.8  
Volatility     87.5 %     124.8% — 138.4%  
Expected dividend yield     0 %     0 %
Weighted average grant-date fair value per
share of warrants granted
  $ 10.48     $ 629.64  

 

  F- 26  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

13. OTHER CURRENT LIABILITIES

 

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

 

    June 30,     December 31,  
    2019     2018  
Accrued payroll and payroll taxes   $ 1,288,503     $ 1,497,470  
Other accrued expenses     483,731       370,932  
    $ 1,772,234     $ 1,868,402  

 

14. LEASES

 

We have operating leases for office space and restaurant locations. Our leases have remaining lease terms of 3 months to 9 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year.

 

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

 

 

    June 30, 2019  
Operating right-of-use assets   $ 3,669,613  
Operating lease liability - current   $ 786,740  
Operating lease liability - non-current   $ 2,944,162  

 

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

 

    Six  
    Months Ended  
    June 30, 2019  
Operating lease cost   $ 534,785  
Short-term lease cost     -  
Variable lease cost   $ 234,327  

 

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

    June 30, 2019  
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows from operating leases   $ 710,024  
Right-of-use assets obtained in exchange for new operating lease liabilities   $ -  
Weighted-average remaining lease term - operating leases      5.75 years  
Weighted-average discount rate - operating leases     10 %

 

  F- 27  

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

Payments due by period      
2019 (Remainder)   $ 581,895  
2020     1,039,687  
2021     779,008  
2022     501,411  
2023     514,895  
Thereafter     1,582,121  
Total lease payments     4,999,017  
Less interest     (1,268,115 )
Present value of lease liabilities   $ 3,730,902  

 

 

Information for our leases for the year ended December 31, 2018, under ASC Topic 840,  Leases , follows for comparative purposes.

 

15. ADVANCES ON FUTURE RECEIPTS

 

During the three months ended March 31, 2019, the Company received funding as a result of entering into three Agreements for the Purchase and Sale of Future Receipts (collectively, the “Agreements on Future Receipts”). The Company sold in the aggregate $568,123 in future receipts of the Company for $395,095. During 2019, the Company had repaid $674,228. The Company recorded a discount in the amount of $173,028 in connection with these three agreements, based upon the difference between the amount of future receipts sold and the actual proceeds received by the Company. During the three and six months ended June 30, 2019, non-cash interest expense of $82,525 and $177,896, respectively, was recorded from the amortization of debt discounts.

 

16. NOTES PAYABLE

 

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

 

    June 30,     December 31,  
    2019     2018  
Dominion   $ 2,900,000     $  
12% short-term promissory note     1,000,000       1,000,000  
15% May short-term promissory note     805,000        
Other short-term notes payable     781,699       1,033,553  
12% September short-term promissory notes     526,316       789,473  
8% short-term promissory notes     636,300       1,272,600  
October short-term promissory note           565,000  
Notes payable to Wells Fargo     291,460       291,988  
Note payable to Dept. of Economic and Community Development     244,984       260,169  
Microphase short-term promissory note           200,000  
Note payable to Power-Plus Member     13,250       13,250  
Note payable to People's United Bank     20,000       18,589  
Short term bank credit     1,661,402       1,586,864  
Total notes payable     8,880,411       7,031,486  
Less:                
Unamortized debt discounts     (237,131 )     (151,499 )
Unamortized financing cost     (70,082 )     (7,541 )
Total notes payable, net of financing cost   $ 8,573,198     $ 6,872,446  
Less: current portion     (8,121,751 )     (6,388,787 )
Notes payable – long-term portion   $ 451,447     $ 483,659  

 

  F- 28  

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

January Exchange Agreement

 

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

 

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

 

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

 

February 2019 Exchange Agreement

 

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

 

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

 

Enertec Short-Term Promissory Note

 

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

 

  F- 29  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

17. NOTES PAYABLE – RELATED PARTIES

 

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

 

    June 30,     December 31,  
    2019     2018  
Notes payable to Microphase former officers and employees   $ 284,317     $ 308,984  
Total notes payable     284,317       308,984  
Less: current portion     (162,674 )     (166,925 )
Notes payable – long-term portion   $ 121,643     $ 142,059  

 

18. CONVERTIBLE NOTES

 

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

 

    June 30,     December 31,  
    2019     2018  
10% Convertible secured notes   $     $ 7,997,126  
4% Convertible promissory note     660,000        
Total convertible notes payable     660,000       7,997,126  
Less:                
Unamortized debt discounts     (396,205 )     (1,189,276 )
Unamortized financing cost           (65,356 )
Total convertible notes payable, net of financing cost   $ 263,795     $ 6,742,494  

 

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

 

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

 

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

 

  F- 30  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

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

 

19. COMMITMENTS AND CONTINGENCIES

 

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

 

The Complaint alleges violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants as, in the view of the plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions. The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves. The Company and the individual defendants moved to dismiss the Complaint and on February 25, 2019, the Court granted the motion to dismiss but granted plaintiffs leave to amend their Complaint.  On March 11, 2019, plaintiffs filed their amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions. On March 25, 2019, the Company and the individual defendants filed a motion to dismiss the amended complaint.  On May 21, 2019, the Court granted in part and denied in part the Motion to Dismiss the Amended Complaint.  Specifically, the May 21, 2019 Order granted so much of Defendants’ Motion to Dismiss the Amended Complaint that sought to dismiss Directors Robert O. Smith, Jeff Bentz, and Mordechai Rosenberg as parties.

 

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

 

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.

 

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

 

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

 

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

 

  F- 31  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

20. STOCKHOLDERS’ EQUITY

 

Amendments to Certificate of Incorporation

 

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

 

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

 

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

 

Preferred Stock

 

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

 

Common Stock

 

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

 

  F- 32  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

2019 Issuances

 

Issuance of Common Stock pursuant to the At the Market Offering

 

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

 

Public Offering

 

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

 

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

 

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

 

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

 

  F- 33  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

The Offering closed on April 2, 2019 and as of June 30, 2019, the Company had issued a total of 699,887 shares of its common stock, inclusive of shares issued pursuant to the exercise of 317,500 Pre-Funded Warrants and 382,387 shares issued pursuant to the cashless exercise of the Common Warrants.

 

Issuance of Common Stock for Services

 

During the six months ended June 30, 2019, the Company issued to its consultants a total 9,375 shares of its common stock with an aggregate value of $253,019, an average of $26.99 per share for services rendered.

 

Issuance of common stock for conversion of debt

 

During the six months ended June 30, 2019, principal and accrued interest of $2,128,878 and $479,579, respectively, on the Company’s debt securities was satisfied through the issuance of 26,402 shares of the Company’s common stock.

 

Issuance of common stock in payment of accrued liability

 

During the six months ended June 30, 2019, the Company issued 9,375 shares of its common stock in satisfaction of an accrued liability of $108,523.

 

21. RELATED PARTY TRANSACTIONS

 

a. The Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”) with an effective date of August 21, 2017, pursuant to which the Company will provide AVLP a non-revolving credit facility of up to $10,000,000 for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit. At June 30, 2019, the Company has provided loans to AVLP in the principal amount $8,587,847 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 17,175,694 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 June 30, 2019, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement of $1,468,431.

 

During the six months ended June 30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 77,500 shares of AVLP common stock for $46,644 and 430,942 shares of AVLP common stock for $417,169, respectively. At June 30, 2019, the Company’s investment in AVLP common stock had an unrealized gain of $44,368.

 

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

 

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

 

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

 

  F- 34  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

22. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION

 

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

 

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

 

 

    Three Months ended June 30, 2019  
    DPC     DP Limited     Enertec     SC Mining     I.AM     Total  
Revenue   $ 1,839,619     $ 525,928     $ 2,175,651     $     $     $ 4,541,198  
Revenue, cryptocurrency                                                
mining                       256,116             256,116  
Revenue, restaurant
operations
                            1,161,132       1,161,132  
Revenue, lending activities     189,621                               189,621  
Total revenues   $ 2,029,240     $ 525,928     $ 2,175,651     $ 256,116     $ 1,161,132     $ 6,148,067  
                                                 
Depreciation and                                                
amortization expense   $ 69,755     $ 19,110     $ 128,434     $ 716,573     $ 230,873     $ 1,164,745  
                                                 
Loss from operations   $ (445,966 )   $ (1,763 )   $ (110,218 )   $ (746,448 )   $ (328,117 )   $ (1,632,512 )
Capital expenditures for                                                
segment assets, as of                                                
June 30, 2019   $ 5,025     $ 69,067     $ 8,162     $     $ 1,746     $ 84,000  
                                                 
Identifiable assets as of                                                
June 30, 2019   $ 31,591,172     $ 1,572,830     $ 11,553,254     $ 5,786,092     $ 1,920,049     $ 52,423,397  

 

 

    Three Months ended June 30, 2018  
    DPC     DP Limited     Enertec     SC Mining     I.AM     Total  
Revenue   $ 2,718,117     $ 411,971     $ 1,217,870     $     $     $ 4,347,958  
Revenue, cryptocurrency                                                
mining                       718,757             718,757  
Revenue, related party     1,765,875                               1,765,875  
Revenue, restaurant
operations
                            502,492       502,492  
Revenue, lending activities     108,752                               108,752  
Total revenues   $ 4,592,744     $ 411,971     $ 1,217,870     $ 718,757     $ 502,492     $ 7,443,834  
                                                 
Depreciation and                                                
amortization expense   $ 9,669     $ 13,643     $ 9,718     $ 577,093     $     $ 610,123  
                                                 
Loss from operations   $ 781,523     $ (198,889 )   $ 146,162     $ (985,695 )   $ (1,009 )   $ (257,908 )
Capital expenditures for                                                
segment assets, as of                                                
June 30, 2018   $ 32,112     $     $ 31,668     $ 1,640,985     $ 22,658     $ 1,727,423  
                                                 

Identifiable assets as of

June 30, 2018

  $ 28,650,534     $ 1,390,132     $ 12,500,975     $ 8,784,920     $ 2,114,739     $ 53,441,300  

 

  F- 35  

 

 

DPW HOLDINGS AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)

JUNE 30, 2019

 

 

 

    Six Months ended June 30, 2019  
    DPC     DP Limited     Enertec     SC Mining     I.AM     Total  
Revenue   $ 4,336,536     $ 1,082,442     $ 4,673,871     $     $     $ 10,092,849  
Revenue, cryptocurrency                                                
mining                       284,920             284,920  

Revenue, restaurant

operations

                          $ 2,334,631       2,334,631  
Revenue, lending activities     374,710                               374,710  
Total revenues   $ 4,711,246     $ 1,082,442     $ 4,673,871     $ 284,920     $ 2,334,631     $ 13,087,110  
                                                 
Depreciation and                                                
amortization expense   $ 139,901     $ 38,907     $ 283,356     $ 1,433,145     $ 230,874     $ 2,126,183  
                                                 
Loss from operations   $ (963,342 )   $ (2,688 )   $ (160,106 )   $ (1,488,871 )   $ (432,470 )   $ (3,047,477 )
Capital expenditures for                                                
segment assets, as of                                                
June 30, 2019   $ 8,818     $ 69,067     $ 8,162     $     $ 7,559     $ 93,606  
                                                 
Identifiable assets as of                                                
June 30, 2019   $ 31,591,172     $ 1,572,830     $ 11,553,254     $ 5,786,092     $ 1,920,049     $ 52,423,397  

 

 

    Six Months ended June 30, 2018  
    DPC     DP Limited     Enertec     SC Mining     I.AM     Eliminations     Total  
Revenue   $ 5,557,813     $ 737,734     $ 1,217,870     $     $     $     $ 7,513,417  
Revenue, cryptocurrency                                                        
mining                       956,253                   956,253  
Revenue, related party     3,558,767                                     3,558,767  

Revenue, restaurant

operations

                            502,492             502,492  
Revenue, lending activities     108,752                                     108,752  
Inter-segment revenues     4,513                               (4,513 )      
Total revenues   $ 9,229,845     $ 737,734     $ 1,217,870     $ 956,253     $ 502,492     $ (4,513 )   $ 12,639,681  
                                                         
Depreciation and                                                        
amortization expense   $ 85,905     $ 31,024     $ 9,718     $ 631,981     $     $     $ 758,628  
                                                         
Loss from operations   $ (1,069,831 )   $ (451,408 )   $ 146,162     $ (1,850,117 )   $ (1,009 )   $     $ (3,226,203 )
Capital expenditures for                                                        
segment assets, as of                                                        
June 30, 2018   $ 343,335     $ 1,319     $ 31,668     $ 8,806,778     $ 22,658     $