2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying condensed
consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. As of September
30, 2019, the Company had cash and cash equivalents of $756,652, an accumulated deficit of $76,811,910 and a negative working
capital of $16,085,485. The Company has incurred recurring losses and reported losses for the three and nine months ended September
30, 2019, totaled $10,340,851 and $21,110,774, respectively. In the past, the Company has financed its operations principally
through issuances of convertible debt, promissory notes and equity securities. During 2019, the Company continued to successfully
obtain additional equity and debt financing and in restructuring existing debt.
The Company expects to continue to
incur losses for the foreseeable future and needs to raise additional capital to continue its business development initiatives
and to support its working capital requirements. On April 2, 2019, the Company received gross proceeds of approximately $7 million
in a public offering of its securities (see Note 20). Management believes that the Company has access to capital resources through
potential public or private issuances of debt or equity securities. However, if the Company is unable to raise additional capital,
it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce, eliminating
outside consultants and reducing legal fees to conserve its cash in amounts sufficient to sustain operations and meet its obligations.
These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do
not include all the information and disclosures required by generally accepted accounting principles in the United States of America
(“GAAP”). The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated
financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our estimates.
The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management,
necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2018, filed with the Securities and Exchange Commission on April 16, 2019. The condensed consolidated
balance sheet as of December 31, 2018 was derived from the Company’s audited 2018 financial statements contained in the above
referenced Form 10-K. Results of the three and nine months ended September 30, 2019, are not necessarily indicative of the results
to be expected for the full year ending December 31, 2019.
Principles of Consolidation
The consolidated financial
statements include the accounts of DPW and its wholly-owned subsidiaries, Coolisys, DP Limited, Power-Plus, Enertec, DP Lending,
Digital Power Corporation, Power-Plus Technical Distributors and Digital Farms and its majority-owned subsidiaries, Microphase
and I.AM. All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of
financial statements, in conformity with U.S. GAAP, requires management to make estimates, judgments and assumptions. The Company's
management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time
they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates. Key estimates include acquisition accounting, fair
value of certain financial instruments, reserve for trade receivables and inventories, carrying amounts of investments, carrying
amounts of digital currencies, accruals of certain liabilities including product warranties, useful lives and the recoverability
of long-lived assets, impairment analysis of intangibles and goodwill, and deferred income taxes and related valuation allowance.
Impairment of long-lived assets:
Management reviews
long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted expected future cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by comparing the amount by which the carrying amount of the assets to their fair value. Based
on its reviews, management determined that its digital currency miners were impaired by a total of $4,315,856 based upon an assessment
as of September 30, 2019, including consideration of the decline in bitcoin values which occurred throughout 2019.
Revenue Recognition
The Company recognizes
revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a
company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps
are applied to achieve that core principle:
|
·
|
Step 1: Identify the contract with the customer,
|
|
·
|
Step 2: Identify the performance obligations in the
contract,
|
|
·
|
Step 3: Determine the transaction price,
|
|
·
|
Step 4: Allocate the transaction price to the performance
obligations in the contract, and
|
|
·
|
Step 5: Recognize revenue when the company satisfies
a performance obligation.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The Company’s disaggregated revenues consist of
the following for the nine months ended September 30, 2019:
|
|
Nine Months ended September 30, 2019
|
|
|
|
|
|
|
|
|
Digital
|
|
|
|
|
|
|
DPC 1
|
|
DP Limited
|
|
Enertec
|
|
Farms
|
|
I.AM
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
7,146,478
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
592,092
|
|
|
$
|
3,371,465
|
|
|
$
|
11,110,035
|
|
Europe
|
|
|
90,154
|
|
|
|
1,193,158
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,283,312
|
|
Middle East
|
|
|
21,348
|
|
|
|
—
|
|
|
|
6,336,852
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,358,200
|
|
Other
|
|
|
296,190
|
|
|
|
230,813
|
|
|
|
190,223
|
|
|
|
—
|
|
|
|
—
|
|
|
|
717,226
|
|
|
|
$
|
7,554
170
|
|
|
$
|
1,423,971
|
|
|
$
|
6,527,075
|
|
|
$
|
592,092
|
|
|
$
|
3,371,465
|
|
|
$
|
19,468,773
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave Filters
|
|
$
|
2,245,748
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,245,748
|
|
Detector logarithmic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
video amplifiers
|
|
|
558,155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
558,155
|
|
Power Supply Units
|
|
|
4,306,340
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,306,340
|
|
Power Supply Systems
|
|
|
—
|
|
|
|
1,423,971
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,423,971
|
|
Healthcare diagnostic systems
|
|
|
—
|
|
|
|
—
|
|
|
|
1,503,306
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,503,306
|
|
Defense systems
|
|
|
—
|
|
|
|
—
|
|
|
|
5,023,769
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,023,769
|
|
Digital Currency Mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
592,092
|
|
|
|
—
|
|
|
|
592,092
|
|
Restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,371,465
|
|
|
|
3,371,465
|
|
Lending activities
|
|
|
443,927
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
443,927
|
|
|
|
$
|
7,554,170
|
|
|
$
|
1,423,971
|
|
|
$
|
6,527,075
|
|
|
$
|
592,092
|
|
|
$
|
3,371,465
|
|
|
$
|
19,468,773
|
|
Timing of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a point in time
|
|
$
|
7,554,170
|
|
|
$
|
1,287,070
|
|
|
$
|
—
|
|
|
$
|
592,092
|
|
|
$
|
3,371,465
|
|
|
$
|
12,804,797
|
|
Services transferred over time
|
|
|
—
|
|
|
|
136,901
|
|
|
|
6,527,075
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,663,976
|
|
|
|
$
|
7,554,170
|
|
|
$
|
1,423,971
|
|
|
$
|
6,527,075
|
|
|
$
|
592,092
|
|
|
$
|
3,371,465
|
|
|
$
|
19,468,773
|
|
1 Consists of Microphase, Coolisys, Power-Plus
and DP Lending
Sales of Products
The Company generates revenues from
the sale of its products through a direct and indirect sales force. The Company’s performance obligations to deliver
products are satisfied at the point in time when products are received by the customer, which is when the customer obtains control
over the goods. The Company provides standard assurance warranties, which are not separately priced, that the products function
as intended. The Company primarily receives fixed consideration for sales of product. Some of the Company’s contracts with
distributors include stock rotation rights after six months for slow moving inventory, which represents variable consideration.
The Company uses an expected value method to estimate variable consideration and constrains revenue for estimated stock rotations
until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. To date, returns
have been insignificant. The Company’s customers generally pay within 30 days from the receipt of a valid invoice.
Because the Company’s product
sales agreements have an expected duration of one year or less, the Company has elected to adopt the practical expedient in ASC
606-10-50-14(a) of not disclosing information about its remaining performance obligations.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Manufacturing Services
The Company provides manufacturing
services in exchange primarily for fixed fees; however, the initial two MLSE units are subject to variable pricing under the $50
million purchase order from MTIX. Under the terms of the MLSE purchase order, the Company shall be entitled to cost plus $100,000
for the manufacture of the first two MLSE units. The Company has determined that the costs of manufacturing the MLSE units will
decline over time because of a learning curve which will result in a greater amount of revenue being recognized for these initial
two MLSE units.
For manufacturing services, which
include revenues generated by Enertec and in certain instances revenues generated by DPL, the Company’s performance obligation
for manufacturing services is satisfied over time as the Company creates or enhances an asset based on criteria that are unique
to the customer and that the customer controls as the asset is created or enhanced. Generally, the Company recognizes revenue based
upon proportional performance over time using a cost to cost method which measures progress based on the costs incurred to total
expected costs in satisfying its performance obligation. This method provides a depiction of the progress in providing the manufacturing
service because there is a direct relationship between the costs incurred by the Company and the transfer of the manufacturing
service to the customer. Manufacturing services that are recognized based upon the proportional performance method are included
in the above table as services transferred over time and to the extent the customer has not been invoiced for these revenues, as
accrued revenue in the accompanying consolidated balance sheets. Revisions to the Company’s estimates may result in increases
or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are
first identified.
The Company has elected the practical
expedient to not adjust the promised amount of consideration for the effects of a significant financing component to the extent
that the period between when the Company transfers its promised good or service to the customer and when the customer pays is one
year or less.
The aggregate amount of the transaction
price allocated to the performance obligation that is partially unsatisfied as of September 30, 2019, for the MLSE units was approximately
$48 million, representing 24 MLSE units. Based on our expectations regarding funding of the production process and our experience
building the first machines, the Company expects to recognize the remaining revenue related to the partially unsatisfied performance
obligation over the next two and a half years. The Company will be paid in installments for this performance obligation over the
next two and a half years.
Lending Activities
DP Lending generates revenue from
lending activities primarily through interest, origination fees and late/other fees. Interest income on these products is calculated
based on the contractual interest rate and recorded as interest income as earned. The origination fees or original issue discounts
are recognized over the life of the loan using the effective interest method.
Blockchain Mining
The Company has entered into digital
asset mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool. The contracts
are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company
provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional
share of the fixed digital currency award the mining pool operator receives (less digital asset transaction fees to the mining
pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The Company’s
factional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total
computing power contributed by all mining pool participants in solving the current algorithm.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Providing computing power in digital
asset transaction verification services is an output of the Company’s ordinary activities. The provision of providing such
computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction
consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received,
which is not materially different than the fair value at contract inception or the time the Company has earned the award from the
pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not
occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve
an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized.
There is no significant financing component in these transactions.
Fair value of the digital currency
award received is determined using the market rate of the related digital currency at the time of receipt.
There is currently no specific definitive
guidance under GAAP or alternative accounting framework for the accounting for digital currencies recognized as revenue or held,
and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative
guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s
consolidated financial position and results from operations.
Expenses associated with running
the cryptocurrency mining business, such as equipment deprecation and electricity cost are recorded as a component of cost of revenues.
We intend to use the digital assets
primarily for operating expenses of Digital Farms. During 2018, we used digital assets for debt reduction, capital purchases, consulting
fees, data center costs and other operating expenses.
Restaurant Operations
The Company records revenue from
restaurant sales at the time of sale, net of discounts, coupons, employee meals and complimentary meals and gift cards. Restaurant
cost of sales primarily includes the cost of goods, beverages, and merchandise and disposable paper and plastic goods used in preparing
and selling the Company’s menu items and exclude depreciation and amortization. Vendor allowances received in connection
with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned.
Fair value of Financial Instruments
In accordance with ASC No. 820, Fair
Value Measurements and Disclosures, fair value is defined as the exit price, or the amount that would be received for the sale
of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.
The guidance also establishes a hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that the most observable inputs be used when available. Observable inputs include those that market participants would
use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use
in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Level 2: Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or model-derived valuations. All significant inputs used in our valuations are observable or can be derived principally from or
corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include
quoted prices that were adjusted for security-specific restrictions which are compared to output from internally developed models
such as a discounted cash flow model.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Level 3: Unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of financial
instruments carried at cost, including cash and cash equivalents, accounts receivables and accounts and other receivable –
related party, investments, notes receivable, trade payables and trade payables – related party approximate their fair value
due to the short-term maturities of such instruments.
The categorization of a financial
instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table sets forth the Company’s financial instruments (see Note 4 and Note 7) that were measured at fair value
on a recurring basis by level within the fair value hierarchy:
|
|
Fair Value Measurement at September 30, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in common stock and derivative
instruments of AVLP – a related party
|
|
$
|
2,145,720
|
|
|
$
|
397,670
|
|
|
$
|
—
|
|
|
$
|
1,748,050
|
|
Investment in common stock of Alzamend – a
related party
|
|
|
206,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
206,250
|
|
Investments in marketable equity securities
|
|
|
473,314
|
|
|
|
473,314
|
|
|
|
—
|
|
|
|
—
|
|
Investments in warrants of public companies
|
|
|
9,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,174
|
|
Total Investments
|
|
$
|
2,834,458
|
|
|
$
|
870,984
|
|
|
$
|
—
|
|
|
$
|
1,963,474
|
|
|
|
Fair Value Measurement at December 31, 2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in common stock and derivative
instruments of AVLP – a related party
|
|
$
|
3,043,499
|
|
|
$
|
812,858
|
|
|
$
|
—
|
|
|
$
|
2,230,641
|
|
Investments in marketable equity securities
|
|
|
178,597
|
|
|
|
178,597
|
|
|
|
—
|
|
|
|
—
|
|
Investments in warrants of public companies
|
|
|
34,372
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,372
|
|
Total Investments
|
|
$
|
3,256,468
|
|
|
$
|
991,455
|
|
|
$
|
—
|
|
|
$
|
2,265,013
|
|
We assess the inputs used to measure fair value using
the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market.
Leases
Effective January 1, 2019, the Company
accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified
as operating or financing leases. As of January 1, 2019, we only had operating leases. Operating leases are recognized as Operating
lease right-of-use (“ROU”) assets, Operating lease liabilities, current, and Operating lease liabilities, non-current
on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement date in determining the present value of future payments. In
certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis
over the lease term without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required
payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise
that option. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the
life of the lease, without assuming renewal features, if any, are exercised. We do not separate lease and non-lease components
for our leases.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The Company continues to account
for leases in the prior period financial statements under ASC Topic 840.
Net Loss per Share
Net loss per share is computed by
dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation of the
basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents
is anti-dilutive due to the Company’s net loss position for all periods presented. The Company has included 6,500 warrants,
which are exercisable for shares of the Company’s common stock on a one-for-one basis, in its earnings per share calculation
for the three and nine months ended September 30, 2019. Anti-dilutive securities, which are convertible into or exercisable for
the Company’s Class A common stock, consist of the following at September 30, 2019 and 2018:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
2,906
|
|
|
|
9,463
|
|
Warrants(1)
|
|
|
72,921
|
|
|
|
23,410
|
|
Convertible notes
|
|
|
349,486
|
|
|
|
25,097
|
|
Conversion of preferred stock
|
|
|
2,232
|
|
|
|
2,232
|
|
Total
|
|
|
427,545
|
|
|
|
60,202
|
|
|
(1)
|
The Company has excluded 6,500 warrants issued in April 2019, which may be exercised by means of
a cashless exercise into 6,500 shares of the Company’s common stock, in its anti-dilutive securities but included the warrants
in its weighted average shares outstanding.
|
Reclassifications
Certain prior year amounts have been
reclassified for comparative purposes to conform to the current-year financial statement presentation. These reclassifications
had no effect on previously reported results of operations. In addition, certain prior year amounts from the restated amounts have
been reclassified for consistency with the current period presentation.
Recently Issued Accounting Standards
In February 2016,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842), in order to increase transparency and comparability among organizations by, among other provisions, recognizing
lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP.
For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within
those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect
a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless
the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination
of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under
previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides
entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest
period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance
as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described
above. Upon adoption the Company recognized cumulative operating lease liabilities and operating right-of-use assets of approximately $4.2
million.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
In July 2017, the FASB issued ASU
No. 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging
(Topic 815) (“ASU 2017-11”). ASU 2017-11 consists of two parts. The amendments in Part I of this update change
the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature
no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The
amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked
financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as
a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require
entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round
feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common stockholders
in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized
guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options),
including related EPS guidance (in Topic 260). The amendments in Part II of this update re-characterize the indefinite deferral
of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments
do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this update
do not require any transition guidance because those amendments do not have an accounting effect. The Company adopted this standard
on January 1, 2019, and the adoption did not have any impact on its consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU
No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, (“ASU 2018-07”). ASU 2018-07 simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, most of the guidance
on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes
take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal
year. The Company adopted this standard on January 1, 2019, and the adoption did not have any impact on its consolidated financial
statements and related disclosures.
4. Marketable Equity Securities
Marketable securities in equity securities
with readily determinable market prices consisted of the following as of September 30, 2019 and December 31, 2018:
|
|
Marketable equity securities at September 30, 2019
|
|
|
|
|
|
|
Gross unrealized
|
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains (losses)
|
|
|
gains (losses)
|
|
|
Fair value
|
|
Common shares
|
|
$
|
220,880
|
|
|
$
|
252,434
|
|
|
$
|
—
|
|
|
$
|
473,314
|
|
|
|
Marketable equity securities at December 31, 2018
|
|
|
|
|
|
|
|
|
Gross unrealized
|
|
|
|
Gross realized
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
gains (losses)
|
|
|
|
gains (losses)
|
|
|
|
Fair value
|
|
Common shares
|
|
$
|
220,880
|
|
|
$
|
(42,283
|
)
|
|
$
|
—
|
|
|
$
|
178,597
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The following table presents additional information about marketable equity
securities:
|
|
Marketable Equity
Securities
|
|
Balance at January 1, 2018
|
|
$
|
1,834,570
|
|
Purchases of marketable equity securities
|
|
|
858,458
|
|
Sales of marketable equity securities
|
|
|
(2,188,292
|
)
|
Realized losses on marketable equity securities
|
|
|
(175,405
|
)
|
Unrealized gains on marketable equity securities
|
|
|
(150,734
|
)
|
Balance at December 31, 2018
|
|
$
|
178,597
|
|
Purchases of marketable equity securities on
conversion of debt
|
|
|
485,000
|
|
Sales of marketable equity securities
|
|
|
(571,741
|
)
|
Realized gains on marketable equity securities
|
|
|
86,741
|
|
Unrealized gains on marketable equity securities
|
|
|
294,717
|
|
Balance at September 30, 2019
|
|
$
|
473,314
|
|
At September 30, 2019 and December
31, 2018, the Company had invested in the marketable equity securities of certain publicly traded companies. During the three and
nine months ended September 30, 2019, unrealized gains of $63,109 and $294,717 were included in net income as a component of change
in fair value of equity securities. During the year ended December 31, 2018, the Company recorded an unrealized loss of $42,283.
The Company’s investment in marketable equity securities will be revalued on each balance sheet date. The fair
value of the Company’s holdings in marketable equity securities at September 30, 2019 and December 31, 2018 is a Level 1
measurement based on quoted prices in an active market.
At September 30, 2019 and December
31, 2018, the Company also held equity investments in private companies and an investment in a limited partnership. These investments
do not have readily determinable fair values and have been measured at cost less impairment, if any, and adjusted for observable
price changes for identical or similar investments of the issuer.
5. PROPERTY AND EQUIPMENT, NET
At September 30, 2019 and December 31, 2018
property and equipment consist of:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Cryptocurrency machines and related equipment
|
|
$
|
4,883,072
|
|
|
$
|
9,168,928
|
|
Computer, software and related equipment
|
|
|
2,512,515
|
|
|
|
2,495,470
|
|
Restaurant equipment
|
|
|
763,275
|
|
|
|
752,103
|
|
Office furniture and equipment
|
|
|
366,292
|
|
|
|
287,583
|
|
Leasehold improvements
|
|
|
1,289,308
|
|
|
|
1,274,865
|
|
|
|
|
9,814,462
|
|
|
|
13,978,949
|
|
Accumulated depreciation and amortization
|
|
|
(7,304,568
|
)
|
|
|
(4,665,650
|
)
|
Property and equipment, net
|
|
$
|
2,509,894
|
|
|
$
|
9,313,299
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Under the guidance
of ASC 360, Impairment or Disposal of Long-lived Assets, a long-lived asset or asset group (including intangibles) will be tested
for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Based
upon the significant decline in the price of bitcoin during the nine months ended September 30, 2019 and the decline in projected
cash flows over the life of the cryptocurrency machines, the Company performed an undiscounted cash flow test to determine if
the cryptocurrency machines were impaired. The undiscounted cash flows were less than the carrying amount of the Company’s
cryptocurrency machines and therefore, the carrying amount of the assets were compared to the fair value of the cryptocurrency
machines, and the Company determined that there were impairment charges to be recorded on the cryptocurrency machines. Impairment
charges for the nine months ended September 30, 2019 totaled approximately $4,315,856.
For the three and nine months ended
September 30, 2019, depreciation expense amounted to $846,631 and $2,673,352, respectively. During the three and nine months ended
September 30, 2018, depreciation expense amounted to $883,793 and $1,642,422, respectively.
6. INTANGIBLE ASSETS, NET
At September 30, 2019 and December 31, 2018
intangible assets consist of:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Trade name and trademark
|
|
$
|
1,562,332
|
|
|
$
|
1,562,332
|
|
Customer list
|
|
|
2,495,097
|
|
|
|
2,388,139
|
|
Non-competition agreements
|
|
|
150,000
|
|
|
|
150,000
|
|
Domain name and other intangible assets
|
|
|
808,016
|
|
|
|
762,807
|
|
|
|
|
5,015,445
|
|
|
|
4,863,278
|
|
Accumulated depreciation and amortization
|
|
|
(937,002
|
)
|
|
|
(503,480
|
)
|
Intangible assets, net
|
|
$
|
4,078,443
|
|
|
$
|
4,359,798
|
|
The Company’s trade
names and trademarks were determined to have an indefinite life. The remaining definite lived intangible assets are primarily
being amortized on a straight-line basis over their estimated useful lives. Amortization expense was $101,199 and $400,661,
respectively, for the three and nine months ended September 30, 2019 and $33,358 and $100,074, respectively, for the three
and nine months ended September 30, 2018.
7. INVESTMENTS – RELATED PARTIES
Investments in Avalanche International
Corp. (“AVLP”) and Alzamend Neuro, Inc. (“Alzamend”) at September 30, 2019 and December 31, 2018, are comprised
of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Investment in convertible promissory note of AVLP
|
|
$
|
9,476,979
|
|
|
$
|
6,943,997
|
|
Accrued interest in convertible promissory note of AVLP
|
|
|
1,736,859
|
|
|
|
1,004,317
|
|
Total investment in convertible promissory note of AVLP – Gross
|
|
|
11,213,838
|
|
|
|
7,948,314
|
|
Less: original issue discount
|
|
|
(1,475,485
|
)
|
|
|
(2,336,693
|
)
|
Total investment in convertible promissory note of AVLP
|
|
$
|
9,738,353
|
|
|
$
|
5,611,621
|
|
|
|
|
|
|
|
|
|
|
Investment in derivative instruments of AVLP
|
|
|
1,748,050
|
|
|
|
2,230,641
|
|
Investment in common stock of AVLP
|
|
|
397,670
|
|
|
|
812,858
|
|
Investment in common stock of Alzamend
|
|
|
206,250
|
|
|
|
—
|
|
Investment in derivative instruments and common stock of AVLP and
Alzamend
|
|
$
|
2,351,970
|
|
|
$
|
3,043,499
|
|
|
|
|
|
|
|
|
|
|
Total investment in AVLP and Alzamend – Net
|
|
$
|
12,090,323
|
|
|
$
|
8,655,120
|
|
|
|
|
|
|
|
|
|
|
Investment in warrants and common stock of AVLP and Alzamend
|
|
$
|
2,351,970
|
|
|
$
|
3,043,499
|
|
Investment in convertible promissory note of AVLP
|
|
|
9,738,353
|
|
|
|
5,611,621
|
|
Total investment in AVLP and Alzamend – Net
|
|
$
|
12,090,323
|
|
|
$
|
8,655,120
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The following table summarizes the
changes in our investments in AVLP and Alzamend during the nine months ended September 30, 2019:
|
|
Investment in
|
|
|
|
|
|
|
|
|
|
warrants and
|
|
|
Investment in
|
|
|
Total
|
|
|
|
common stock
|
|
|
convertible
|
|
|
investment
|
|
|
|
of AVLP and
|
|
|
promissory
|
|
|
in AVLP and
|
|
|
|
Alzamend
|
|
|
note of AVLP
|
|
|
Alzamend – Net
|
|
Balance at January 1, 2019
|
|
$
|
3,043,499
|
|
|
$
|
5,611,621
|
|
|
$
|
8,655,120
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
1,501,912
|
|
|
|
1,501,912
|
|
Investment in common stock of AVLP and Alzamend
|
|
|
163,032
|
|
|
|
—
|
|
|
|
163,032
|
|
Fair value of derivative instruments issued by AVLP
|
|
|
1,031,070
|
|
|
|
—
|
|
|
|
1,031,070
|
|
Unrealized loss in derivative instruments of AVLP
|
|
|
(1,513,661
|
)
|
|
|
—
|
|
|
|
(1,513,661
|
)
|
Unrealized gain in common stock of AVLP and
Alzamend
|
|
|
(371,970
|
)
|
|
|
—
|
|
|
|
(371,970
|
)
|
Accretion of discount
|
|
|
—
|
|
|
|
1,892,278
|
|
|
|
1,892,278
|
|
Accrued Interest
|
|
|
—
|
|
|
|
732,542
|
|
|
|
732,542
|
|
Balance at September 30, 2019
|
|
$
|
2,351,970
|
|
|
$
|
9,738,353
|
|
|
$
|
12,090,323
|
|
The Company’s investments in
AVLP, a related party controlled by Philou Ventures, LLC, or Philou, an affiliate of the Company, consist of convertible promissory
notes, derivative instruments and shares of common stock of AVLP. At September 30, 2019, the Company has provided loans to AVLP
in the principal amount $9,476,979 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants
to purchase 18,953,958 shares of AVLP common stock. The warrants entitle the Company to purchase up to 18,953,958 shares of AVLP
common stock at an exercise price of $0.50 per share for a period of five years. The warrants were determined by the issuer to
be financial derivative instruments. At September 30, 2019 and December 31, 2018, the Company recorded an unrealized loss on its
investment in warrants of AVLP of $3,927,042 and $2,413,381, respectively, representing the difference between the cost basis and
the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder's equity
section of the Company’s consolidated balance sheet. During the three and nine months ended September 30, 2019, the Company
recognized, in other comprehensive loss, net unrealized loss on derivative securities of related party of $1,152,480 and $1,513,661,
respectively, which compares with a net unrealized loss on derivative securities of related party of $1,456,232 and $6,400,899,
respectively during the three and nine months ended September 30, 2018. The Company’s investment in AVLP will be revalued
on each balance sheet date. The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes
option-pricing method. The risk-free rate, which ranged between 1.50% and 2.60%, was derived from the U.S. Treasury yield curve,
matching the term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 89.4%
was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million.
The warrant valuation is a Level 3 measurement.
In accordance with ASC No. 310, Receivables (“ASC
310”), the Company accounts for its convertible promissory notes in AVLP at amortized cost, which represents the amount at
which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of original issue discount and
discount attributed to the fair value of the 18,953,958 warrants that the Company received in conjunction with its investment.
Interest is accreted using the effective interest method. The Company records interest on an accrual basis and recognizes it as
earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected
to be collected. An aggregate of $5,802,374 of original issue discount and discount attributed to the fair value of the warrants
is being amortized as interest income through the maturity date. During the three and nine months ended September 30, 2019, the
Company recorded $614,856 and $1,892,278, respectively, of interest income for the discount accretion compared with $535,264 and
$1,453,712, respectively, during the three and nine months ended September 30, 2018. During the three and nine months ended September
30, 2019, the Company recorded contractual interest attributed to the AVLP Notes and AVLP Loan Agreement of $268,428 and $732,542,
respectively. During the three and nine months ended September 30, 2018, the Company recorded contractual interest attributed to
the AVLP Notes and AVLP Loan Agreement of $176,946 and $478,119, respectively.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The Company evaluated the collectability
of both interest and principal for the convertible promissory notes in AVLP to determine whether there was an impairment. Based
on current information and events, the Company determined that it is probable that it will be able to collect amounts due according
to the existing contractual terms. Impairment assessments require significant judgments and are based on significant assumptions
related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.
During the nine months ended September
30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 91,000 shares of AVLP common stock
for $53,032 and 430,942 shares of AVLP common stock for $417,169, respectively. At September 30, 2019, the closing market price
of AVLP’s common stock was $0.40, a decline from $0.90 at December 31, 2018. The Company has determined that its investment
in AVLP marketable equity securities are accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures
and based upon the closing market price of AVLP common stock at September 30, 2019, the Company’s investment in AVLP common
stock had an unrealized loss of $348,891.
In aggregate, the Company has 994,175
shares of AVLP common stock which represents 18.0% of AVLP’s outstanding shares of common stock. The Company has determined
that AVLP is a variable interest entity (“VIE”) as it does not have sufficient equity at risk. The Company does not
consolidate AVLP because the Company is not the primary beneficiary and does not have a controlling financial interest. To be a
primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE's economic
performance, among other factors. Although the Company has made a significant investment in AVLP, the Company has determined that
Philou, which controls AVLP through its equity investment and deemed to be more closely associated with AVLP, is the primary beneficiary.
As a result, AVLP’s financial position and results of operations are not consolidated in our financial position and results
of operations.
8. INVESTMENTS IN REAL ESTATE
On June 8, 2018, the Company entered
into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the “NY Partnership”).
The NY Partnership is a limited partner in the partnership that is responsible for the construction and related activities of a
hotel in New York City. In connection with this transaction, the Company has agreed to finance a portion of the capital required
by the NY Partnership. As of September 30, 2019, the Company had invested an aggregate of $1,869,000 in the NY Partnership and
$100,000 in another real estate investment. The Company was initially required to make monthly capital contributions of $500,000
every thirty days until the Company’s commitment of $10 million was funded in full. The Company had received a waiver for
its obligation to make monthly capital contributions through September 30, 2019 and on June 12, 2019, the agreement was restructured
whereby DPW no longer has any further funding obligations until the hotel is open for business to the public.
9. OTHER INVESTMENTS, RELATED PARTIES
The Company’s other related
party investments primarily consist of two investments.
MTIX, Ltd.
On December 5, 2017, the Company
entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson two convertible promissory
notes in the principal amount of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange for cancellation
of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
During December 2017, the Company
issued 750 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently sold the
750 shares. The proceeds from the sale of shares of common stock received upon the conversion of Note A were sufficient to satisfy
the entire $2,267,766 obligation as well as an additional $400,500 of value added tax due to WT Johnson. Concurrent with entering
into the exchange agreement, the Company received a promissory note in the amount of $2,668,266 from MTIX and cancelled Note B.
At September 30, 2019 and December 31, 2018, the Company has valued the note receivable at $600,000, the carrying amount of Note
A. The Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.
Israeli Property
During the year ended December 31,
2017, our President, Amos Kohn, purchased certain real property that serves as a facility for the Company’s business operations
in Israel. The Company made $300,000 of payments to the seller of the property and received a 28% undivided interest in the real
property (the “Property”). The Company’s subsidiary, Coolisys, entered into a Trust Agreement and Tenancy in
Common Agreement with Roni Kohn, who owns a 72% interest in the Property, the daughter of Mr. Kohn and an Israeli citizen. The
Property was purchased to serve as a residence/office facility for the Company in order to oversee its Israeli operations and to
expand its business in the high-tech industry located in Israel. Pursuant to the Trust Agreement, Ms. Kohn will hold and manage
Coolisys’ undivided 28% interest in the Property. The trust will be in effect until it is terminated by mutual agreement
of the parties. During the term of the trust, Ms. Kohn will not sell, lease, sublease, transfer, grant, encumber, change or effect
any other disposition with respect to the Property or Coolisys’ interest without the Company’s approval.
Under the Tenancy
in Common Agreement, Coolisys and its executive officers shall have the exclusive rights to use the Property for the Company and
its affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy in Common
Agreement, for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right to purchase
a portion of the Company’s interest in the Property. Such right shall fully vest at the end of five years of continuous
employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal value.
The Company will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years. During the three
and nine months ended September 30, 2019, the Company recognized $7,500 and $22,500, respectively, in amortization expense. At
September 30, 2019 and December 31, 2018, the unamortized balance of the Israeli Property was $240,000 and $262,500, respectively.
If Mr. Kohn is not employed by the Company, the Company shall have the right to demand that Ms. Kohn purchase the Company’s
remaining interest in the Property that was not subject to vesting for the fair market value of such unvested Property interest.
10. ACQUISITIONS
The following
pro forma data for the nine months ended September 30, 2018, summarizes the results of operations for the period indicated as if
the Enertec acquisition, which closed on May 23, 2018, had been completed as of the beginning of the period presented. The pro
forma data gives effect to actual operating results prior to the acquisition. These pro forma amounts do not purport to be indicative
of the results that would have been obtained if the acquisition occurred as of the beginning of the period presented or that may
be obtained in future periods:
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
|
September 30, 2018
|
|
Total Revenue
|
|
$
|
22,521,427
|
|
Net loss
|
|
$
|
(22,921,424
|
)
|
Less: Net loss attributable
|
|
|
|
|
to non-controlling interest
|
|
|
218,494
|
|
Net loss attributable to DPW Holdings
|
|
|
(22,702,930
|
)
|
Preferred dividends
|
|
|
(108,049
|
)
|
Net loss available to common stockholders
|
|
$
|
(22,810,979
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(346.54
|
)
|
Basic and diluted weighted average
|
|
|
|
|
common shares outstanding
|
|
|
65,824
|
|
Comprehensive Loss
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(22,810,979
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
Change in net foreign currency
|
|
|
|
|
translation adjustments
|
|
|
(209,535
|
)
|
Net unrealized loss on derivative
|
|
|
|
|
securities of related party
|
|
|
(6,787,902
|
)
|
Other comprehensive income (loss)
|
|
|
(6,997,437
|
)
|
Total Comprehensive loss
|
|
$
|
(29,808,416
|
)
|
11. STOCK-BASED COMPENSATION
Under the Company's 2018 Stock Incentive
Plan (the “2018 Plan”), 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive Plan (the “2016
Plan”) and the 2012 Stock Option Plan, as amended (the “2012 Plan”) (collectively, the “Plans”),
options may be granted to employees, officers, consultants, service providers and directors of the Company. On July 19, 2019, the
Company’s stockholders approved an amendment to the 2018 Plan which increased the number of shares of the Company’s
common stock that may be issued thereunder to a total of 175,000 shares. The Plans, as amended, provide for the issuance of a maximum
of 184,216 shares of the Company’s common stock.
Options granted under the Plans
have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become
exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally become fully
vested after four years. Any options that are forfeited or cancelled before expiration become available for future grants. The
options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans are subject
to a vesting period determined at the date of grant. As of September 30, 2019, an aggregate of 152,961 of the Company's options
are still available for future grant.
During the nine months
ended September 30, 2019, the Company did not grant any options. During the nine months ended September 30, 2018, the Company
granted 1,250 options to its employees from the Plans and also granted 3,622 options outside of the Plans. These options become
fully vested after four years. The Company estimated that the grant date fair value of options granted utilizing the Black-Scholes
option pricing model during the nine months ended September 30, 2018 was $513,510, which is being recognized as stock-based compensation
expense over the requisite four-year service period. During the nine months ended September 30, 2019 and 2018, the Company also
issued 29,375 and 1,979, respectively, shares of common stock to its consultants and service providers. The Company estimated
the grant date fair value of these shares of common stock was $305,019 and $2,640,102 respectively, which was determined from
the closing price of the Company’s common stock on the date of issuance.
The Company has valued the options
at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables such as
the options’ term, exercise price, current stock price, risk-free interest rate estimated over the expected term and estimated
volatility of our stock over the expected term of the options. The risk-free interest rate used in the calculations is based on
the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options as calculated
using the simplified method. The estimated volatility was determined based on the historical volatility of our common stock.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
During the nine months ended September
30, 2018, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with the following
weighted average assumptions:
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
Weighted average risk-free interest rate
|
|
|
2.41% — 2.80%
|
|
Weighted average life (in years)
|
|
|
4.75
|
|
Volatility
|
|
|
124.7% — 131.7%
|
|
Expected dividend yield
|
|
|
0%
|
|
Weighted average grant-date fair value per share of
options granted
|
|
|
$624.33
|
|
The options outstanding as of September 30, 2019, have been classified by
exercise price, as follows:
Outstanding
|
|
Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
Price
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
$480.00 - $560.00
|
|
1,306
|
|
6.32
|
|
$544.50
|
|
631
|
|
$543.76
|
$1,056.00 - $1,104.00
|
|
188
|
|
8.17
|
|
$1,104.00
|
|
86
|
|
$1,104.00
|
$1,208.00 - $1,352.00
|
|
38
|
|
3.99
|
|
$1,338.67
|
|
38
|
|
$1,338.67
|
$480.00 - $1,352.00
|
|
1,531
|
|
6.49
|
|
$632.46
|
|
755
|
|
$647.06
|
Issuances outside of Plans
|
$640.00 - $1,856.00
|
|
1,375
|
|
5.03
|
|
$827.64
|
|
281
|
|
$935.11
|
Total Options
|
$480.00 - 1,856.00
|
|
2,906
|
|
5.80
|
|
$724.80
|
|
1,036
|
|
$725.26
|
The total stock-based compensation
expense related to stock options and stock awards issued pursuant to the Plans to the Company’s employees, consultants and
directors, included in reported net loss for the three and nine months ended September 30, 2019 and 2018, is comprised as follows:
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Sept. 30, 2019
|
|
|
Sept. 30, 2018
|
|
|
Sept. 30, 2019
|
|
|
Sept. 30, 2018
|
|
Cost of revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,874
|
|
Engineering and product development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,650
|
|
Selling and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,922
|
|
General and administrative
|
|
|
206,289
|
|
|
|
697,252
|
|
|
|
531,379
|
|
|
|
2,204,433
|
|
Stock-based compensation from Plans
|
|
$
|
206,289
|
|
|
$
|
697,252
|
|
|
$
|
531,379
|
|
|
$
|
2,234,879
|
|
Stock-based compensation from issuances
outside of Plans
|
|
|
155,490
|
|
|
|
655,388
|
|
|
|
822,683
|
|
|
|
1,929,301
|
|
Total Stock-based compensation
|
|
$
|
361,779
|
|
|
$
|
1,352,640
|
|
|
$
|
1,354,062
|
|
|
$
|
4,164,180
|
|
The combination of stock-based compensation
of $531,379 from the issuances of equity-based awards pursuant to the Plans and stock-based compensation attributed to stock awards
of $253,019 and options of $569,664, which were issued outside of the Plans, resulted in aggregate stock-based compensation of
$361,779 and $1,354,062 during the three and nine months ended September 30, 2019.
A summary of option activity under
the Company's stock option plans as of September 30, 2019, and changes during the nine months ended are as follows:
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Available
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
for Grant
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Value
|
|
January 1, 2019
|
|
|
12,695
|
|
|
|
4,328
|
|
|
$576.40
|
|
|
7.52
|
|
|
$0
|
|
Amendment to 2018 SIP
|
|
|
162,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
(25,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
2,766
|
|
|
|
(2,797
|
)
|
|
$377.70
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
152,961
|
|
|
|
1,531
|
|
|
$632.46
|
|
|
6.49
|
|
|
$0
|
|
As of September 30, 2019, there was
$452,427 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plans.
That cost is expected to be recognized over a weighted average period of 2.6 years.
12. WARRANTS
During the nine months
ended September 30, 2019, the Company issued a total of 759,443 warrants at an average exercise price of $10.28 per share.
|
(i)
|
On April 2, 2019, the Company issued warrants to purchase an aggregate of 388,888 shares of
Common Stock at an initial exercise price of $18.00 per share and (the “Common Warrants”) and (b) pre-funded warrants
to purchase up to 317,500 shares of our Common Stock at an initial exercise price of $0.40 per share (the “Pre-Funded Warrants”)
in connection with an underwriting agreement with A.G.P./Alliance Global Partners (the “Underwriter”). In addition,
the Company has also issued the Underwriter a warrant to purchase a maximum of 15,555 additional shares of common stock at an initial
exercise price of $19.80 per share (See Note 20).
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
|
(ii)
|
On May 20, 2019, the Company issued warrants to purchase an aggregate of 12,500 shares of
common stock at an exercise price equal to $12.00 per share of common stock in connection with the issuance of a 4% Original Issue
Discount Convertible Promissory Note in the aggregate principal amount of $660,000.
|
|
(iii)
|
On July 3, 2019, the Company issued warrants to purchase an aggregate of 25,000 shares of
common stock at an exercise price equal to $8.80 per share of common stock in connection with the issuance of a 12% Convertible
Promissory Note in the aggregate principal amount of $1,492,000.
|
The following table summarizes information
about common stock warrants outstanding at September 30, 2019:
Outstanding
|
|
Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
Price
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
$0.00
|
|
6,500
|
|
4.50
|
|
$0.00
|
|
6,500
|
|
$0.00
|
$8.00
|
|
397
|
|
7.09
|
|
$8.00
|
|
397
|
|
$8.00
|
$8.80
|
|
25,000
|
|
4.76
|
|
$8.80
|
|
25,000
|
|
$8.80
|
$12.00
|
|
12,500
|
|
4.61
|
|
$12.00
|
|
12,500
|
|
$12.00
|
$19.80
|
|
15,555
|
|
4.50
|
|
$19.80
|
|
15,555
|
|
$19.80
|
$440.00
|
|
355
|
|
3.11
|
|
$440.00
|
|
355
|
|
$440.00
|
$480.00
|
|
94
|
|
3.59
|
|
$480.00
|
|
94
|
|
$480.00
|
$528.00
|
|
186
|
|
3.09
|
|
$528.00
|
|
186
|
|
$528.00
|
$560.00
|
|
2,657
|
|
3.12
|
|
$560.00
|
|
2,657
|
|
$560.00
|
$600.00
|
|
170
|
|
2.62
|
|
$600.00
|
|
170
|
|
$600.00
|
$640.00
|
|
603
|
|
0.94
|
|
$640.00
|
|
603
|
|
$640.00
|
$752.00
|
|
9,614
|
|
3.63
|
|
$752.00
|
|
9,614
|
|
$752.00
|
$800.00
|
|
350
|
|
3.19
|
|
$800.00
|
|
350
|
|
$800.00
|
$880.00
|
|
947
|
|
1.92
|
|
$880.00
|
|
947
|
|
$880.00
|
$920.00
|
|
2,126
|
|
3.49
|
|
$920.00
|
|
2,126
|
|
$920.00
|
$1,040.00
|
|
1,243
|
|
3.54
|
|
$1,040.00
|
|
1,243
|
|
$1,040.00
|
$1,760.00
|
|
781
|
|
3.32
|
|
$1,760.00
|
|
781
|
|
$1,760.00
|
$1,800.00
|
|
140
|
|
3.32
|
|
$1,800.00
|
|
140
|
|
$1,800.00
|
$2,000.00
|
|
203
|
|
3.32
|
|
$2,000.00
|
|
203
|
|
$2,000.00
|
$8.00 - $2,000.00
|
|
79,421
|
|
3.95
|
|
$208.77
|
|
79,421
|
|
$208.77
|
The Company has valued the warrants
at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables such as
the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our stock over
the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield available
on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The Company utilized the Black-Scholes
option pricing model and the assumptions used during the nine months ended September 30, 2019 and 2018:
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Weighted average risk-free interest rate
|
|
1.75% — 2.28%
|
|
|
2.41% — 2.94%
|
|
Weighted average life (in years)
|
|
|
5.0
|
|
|
|
4.8
|
|
Volatility
|
|
|
85.5% — 87.5%
|
|
|
|
124.8% — 138.4%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average grant-date fair value per
share of warrants granted
|
|
|
$10.34
|
|
|
|
$629.64
|
|
13. OTHER CURRENT LIABILITIES
At September 30, 2019 and December 31, 2018
other current liabilities consist of:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued payroll and payroll taxes
|
|
$
|
1,561,671
|
|
|
$
|
1,497,470
|
|
Other accrued expenses
|
|
|
297,370
|
|
|
|
370,932
|
|
|
|
$
|
1,859,041
|
|
|
$
|
1,868,402
|
|
14. LEASES
We have operating leases for office
space and restaurant locations. Our leases have remaining lease terms of 7 months to 8 years, some of which may
include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year.
The following table provides a summary
of leases by balance sheet location as of September 30, 2019:
|
|
September 30, 2019
|
|
Operating right-of-use assets
|
|
$
|
3,433,794
|
|
Operating lease liability - current
|
|
$
|
741,433
|
|
Operating lease liability - non-current
|
|
$
|
2,781,345
|
|
The components of lease expenses
for the nine months ended September 30, 2019, were as follows:
|
|
Nine
|
|
|
|
Months Ended
|
|
|
|
September 30, 2019
|
|
Operating lease cost
|
|
$
|
754,692
|
|
Short-term lease cost
|
|
|
-
|
|
Variable lease cost
|
|
$
|
351,491
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
The following tables provides a summary
of other information related to leases for the nine months ended September 30, 2019:
|
|
September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,020,499
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
-
|
|
Weighted-average remaining lease term - operating leases
|
|
|
5.7 years
|
|
Weighted-average discount rate - operating leases
|
|
|
10%
|
|
Maturity of lease liabilities under
our non-cancellable operating leases as of September 30, 2019, are as follows:
Payments due by period
|
|
|
|
2019 (Remainder)
|
|
$
|
271,420
|
|
2020
|
|
|
1,039,687
|
|
2021
|
|
|
779,008
|
|
2022
|
|
|
501,411
|
|
2023
|
|
|
514,895
|
|
Thereafter
|
|
|
1,582,121
|
|
Total lease payments
|
|
|
4,688,542
|
|
Less interest
|
|
|
(1,165,764
|
)
|
Present value of lease liabilities
|
|
$
|
3,522,778
|
|
15. ADVANCES ON FUTURE RECEIPTS
During the nine months
ended September 30, 2019, the Company received funding as a result of entering into six Agreements for the Purchase
and Sale of Future Receipts (collectively, the “Agreements on Future Receipts”). The Company sold in the aggregate
$1,517,847 in future receipts of the Company for $1,017,170. During 2019, the Company had repaid $1,365,435. The Company recorded
a discount in the amount of $500,677 in connection with these six agreements, based upon the difference between the amount of
future receipts sold and the actual proceeds received by the Company. The Company is currently in default on its payment obligations
on certain of the Agreements on Future Receipts with an aggregate outstanding balance of $1,650,862 at September 30, 2019. During
the three and nine months ended September 30, 2019, non-cash interest expense of $115,706 and $293,602, respectively, was recorded
from the amortization of debt discounts.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
16. NOTES PAYABLE
Notes Payable at September 30, 2019
and December 31, 2018, are comprised of the following.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
June 2019 short-term promissory note
|
|
$
|
2,510,173
|
|
|
$
|
—
|
|
12% short-term promissory note
|
|
|
—
|
|
|
|
1,000,000
|
|
15% May short-term promissory note
|
|
|
780,000
|
|
|
|
—
|
|
Other short-term notes payable
|
|
|
805,554
|
|
|
|
1,033,553
|
|
12% September short-term promissory notes
|
|
|
—
|
|
|
|
789,473
|
|
8% short-term promissory notes
|
|
|
318,150
|
|
|
|
1,272,600
|
|
October short-term promissory note
|
|
|
—
|
|
|
|
565,000
|
|
Notes payable to Wells Fargo
|
|
|
289,885
|
|
|
|
291,988
|
|
Note payable to Dept. of Economic and Community Development
|
|
|
237,069
|
|
|
|
260,169
|
|
Microphase short-term promissory note
|
|
|
—
|
|
|
|
200,000
|
|
Note payable to Power-Plus Member
|
|
|
13,250
|
|
|
|
13,250
|
|
Note payable to People's United Bank
|
|
|
18,379
|
|
|
|
18,589
|
|
Short term bank credit
|
|
|
1,677,196
|
|
|
|
1,586,864
|
|
Total notes payable
|
|
|
6,649,656
|
|
|
|
7,031,486
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(74,750
|
)
|
|
|
(151,499
|
)
|
Unamortized financing cost
|
|
|
(32,377
|
)
|
|
|
(7,541
|
)
|
Total notes payable, net of financing cost
|
|
$
|
6,542,529
|
|
|
$
|
6,872,446
|
|
Less: current portion
|
|
|
(6,077,720
|
)
|
|
|
(6,388,787
|
)
|
Notes payable – long-term portion
|
|
$
|
464,809
|
|
|
$
|
483,659
|
|
January 2019 Exchange
Agreement
On August
16, 2018, as amended on November 29, 2018, the Company entered into a securities purchase agreement with four institutional investors
providing for the issuance of 8% promissory notes, each in the principal amount of $318,150, for an aggregate principal face amount
of $1,272,600, due February 15, 2019 (individually the “8% Short-Term Promissory Note” and collectively the “8%
Short-Term Promissory Notes”).
On January
23, 2019, the Company entered into an Exchange Agreement (the “January Exchange Agreement”) with one of the institutional
investors pursuant to which the Company issued to the investor two new 8% promissory notes in the aggregate principal amount of
$1,043,799 (the “New Notes”) in exchange for one of the 8% Short-Term Promissory Notes in the aggregate principal amount
of $318,150, the October short-term promissory note in the aggregate principal amount of $565,000 and accrued interest of $160,649.
Pursuant
to the January Exchange Agreement, the investor received 10,918 shares of common stock of the Company issued under the Company’s
Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Notes. Further, since the investor’s
proceeds from the sale of all 10,918 shares of common stock received were not equal to the outstanding principal balance of the
New Notes, the Company was required to pay to the investor the difference, which amounted to $244,898, in cash or through the delivery
of free trading shares of common stock. The Company recognized additional interest expense for the difference of $244,898. On March
19, 2019, the Company issued to the investor an additional 2,551 shares of the Company’s common stock, with a value of $73,016,
in partial satisfaction of the liability, resulting in a remaining balance due of $171,882 which was paid during June 2019.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
February 2019 Exchange Agreement
On February 20, 2019,
the Company entered into an Exchange Agreement (the “February Exchange Agreement”) with another one of the institutional
investors pursuant to which the Company issued to the investor a new 8% promissory note in the principal amount of $433,884 (the
“New Note”) in exchange for principal and accrued interest on the 8% Short-Term Promissory Note (the “Old Note”).
Pursuant to the February
Exchange Agreement, the investor received 4,520 shares of common stock of the Company issued under the Company’s Registration
Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Note. Further, since the investor’s proceeds from
the sale of all 4,520 shares of common stock received were not equal to the outstanding principal balance of the New Note, the
Company is required to pay the difference, which amounted to $289,954, to the investor in cash or through the delivery of free
trading shares of common stock. The Company recognized additional interest expense for the difference of $289,954. On April 4,
2019, the Company issued to the investor an additional 9,375 shares of the Company’s common stock, with a value of $108,523,
in partial satisfaction of the liability, resulting in a remaining balance due of $183,822 which was paid during June 2019.
Enertec Short-Term Promissory Note
On December 28, 2018,
Enertec entered into a $500,000 secured promissory note (the “Enertec Short-Term Promissory Note”) whereby Enertec
agreed to pay interest in an amount of 10% per annum in cash to the investor, until the Enertec Short-Term Promissory Note is paid
in full. The proceeds from the Enertec Short-Term Promissory Note were received in January 2019 and repaid on April 2, 2019. In
connection with the Enertec Short-Term Promissory Note, Milton C. Ault III provided a personal guarantee for the benefit of the
investor.
Dominion June 2019 Short-Term Promissory
Note
On June 18, 2019, the
Company entered into a securities purchase agreement with the Investor to sell a 10% senior secured promissory note with a principal
face amount of $2,800,000, plus an original issue discount in the amount of $100,000 and issue 12,500 shares of the Company’s
common stock subject to the approval thereof by the NYSE American. In addition, Ault & Company has guaranteed to the Investor
the prompt and complete payment and performance when of the obligations of the Company pursuant to this.
The June 2019 short-term
promissory note has a principal face amount of $2,900,000 with a purchase price of $2,800,000, and bears interest at 10% per annum.
Pursuant to the terms of the note, the Company was required to make six monthly amortization payments beginning on July 18, 2019.
The Company has not made these payments and this note is currently in default. We are in negotiations with the investors to amend
the payment terms on this Note.
17. NOTES PAYABLE – RELATED PARTIES
Notes Payable – Related parties
at September 30, 2019 and December 31, 2018, are comprised of the following.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Notes payable to Microphase former officers and employees
|
|
$
|
284,317
|
|
|
$
|
308,984
|
|
Total notes payable
|
|
|
284,317
|
|
|
|
308,984
|
|
Less: current portion
|
|
|
(168,589
|
)
|
|
|
(166,925
|
)
|
Notes payable – long-term portion
|
|
$
|
115,728
|
|
|
$
|
142,059
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
18. CONVERTIBLE NOTES
Convertible Notes Payable at September
30, 2019 and December 31, 2018 are comprised of the following.
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
10% Convertible secured notes
|
|
$
|
—
|
|
|
$
|
7,997,126
|
|
4% Convertible promissory note
|
|
|
660,000
|
|
|
|
—
|
|
12% Convertible promissory note
|
|
|
622,000
|
|
|
|
—
|
|
8% Convertible promissory note
|
|
|
815,218
|
|
|
|
—
|
|
Total convertible notes payable
|
|
|
2,097,218
|
|
|
|
7,997,126
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(666,793
|
)
|
|
|
(1,189,276
|
)
|
Unamortized financing cost
|
|
|
—
|
|
|
|
(65,356
|
)
|
Total convertible notes payable, net of financing cost
|
|
$
|
1,430,425
|
|
|
$
|
6,742,494
|
|
Less: current portion
|
|
|
(1,146,141
|
)
|
|
|
(6,742,494
|
)
|
Convertible notes payable, net of financing cost – long-term portion
|
|
$
|
284,284
|
|
|
$
|
—
|
|
On May 15, 2018, the Company entered
into a securities purchase agreement to sell a 10% convertible note (the “10% Convertible Note”) in the principal amount
of $6,000,000. On July 2, 2018 and August 31, 2018, the Company entered into securities purchase agreements with the institutional
investor providing for the issuance of a second 10% convertible note with a principal face amount of $1,000,000 (the “Second
10% Convertible Note”) and a third 10% convertible note with a principal face amount of $2,000,000 (the “Third 10%
Convertible Note” and with the Second 10% Convertible Note, the “Additional 10% Convertible Notes”), respectively.
On January 9, 2019, the 10% Convertible
Note was amended to revise the amortization schedule such that the conversion price on eleven monthly amortization payments in
the principal amount $309,193 each, at the request of the holder, shall be satisfied by the issuance of shares of the Company’s
common stock. The conversion price on these monthly amortization payments was reduced from $8.00 per share of common stock to a
price equal to the greater of (i) $2.40 per share (the closing price of the Company’s common stock on January 9, 2019) or
(ii) 80% of the lowest daily VWAP in the three days prior to the date of issuance, but not to exceed $8.00 per share. Further,
the Company shall have the right to pay the monthly amortization payment in cash within 72 hours by advising the investor within
two hours of receipt of any conversion notice. The amendment to the embedded conversion option of the 10% Convertible Note caused
a material change in the fair value of the embedded conversion options and resulted in a loss on extinguishment of $807,784.
Between January 4, 2019 and February
21, 2019, the Company issued to the investor 8,412 shares of its common stock upon the conversion of $1,053,351 in principal and
accrued interest. The investor received $660,337 from the sale of these shares of common stock. In accordance with the January
9, 2019 amendment, the Company is required to pay the difference between the conversion amount and the proceeds received from the
subsequent sale of the shares by the investor, which amounted to $393,014. The Company recognized additional interest expense in
the amount of $393,014.
On April 2, 2019, the Company repaid
principal of $3,000,000 and accrued interest of $1,125,000 on the Additional 10% Convertible Notes and between April 2, 2019 and
June 18, 2019 repaid the balance due on the 10% Convertible Note.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Exchange Agreements
On July 2, 2019, we entered into
an exchange agreement with an institutional investor pursuant to which, in exchange for a term promissory note issued by us to
the investor on September 21, 2018, in the principal face amount of $526,316, we sold to the investor a new convertible promissory
note in the principal amount of $783,031 with an interest rate of 12% per annum and a maturity date of December 31, 2019. Subject
to the approval by the NYSE American, this note shall be convertible into shares of common stock, commencing on July 15, 2019,
at conversion price equal to the greater of (A) $8.80 or (B) 80% of the lowest daily VWAP in the three trading days prior to the
date of conversion.
On July
2, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for (i) a term promissory
note issued by DP Lending to the investor on August 10, 2018 in the principal face amount of $550,000 and (ii) a term promissory
note issued by us on August 16, 2018, as amended on November 29, 2018, in the principal face amount of $318,150, we sold to the
investor a new convertible promissory note in the principal amount of $1,250,000 (subject to adjustments) with an interest rate
of 8% per annum and a maturity date of December 31, 2019. Subject to the approval by the NYSE American, this note shall be convertible
into shares of our common stock at conversion price of $8.80.
On July
3, 2019, we entered into an exchange agreement with an institutional investor pursuant to which, in exchange for a term promissory
note issued by us to the investor on March 23, 2018 in the principal face amount of $1,000,000, we sold a convertible promissory
note in the principal face amount of $1,292,000 plus a default premium of $200,000, and (ii) a five-year warrant to purchase of
25,000 shares of our common stock at an exercise price of $8.80 per share, subject to the approval thereof by the NYSE American.
This convertible
promissory note is in the aggregate principal amount of $1,492,000 and bears interest at 12% per annum, which principal and all
accrued and unpaid interest are due on January 22, 2020, and which interest shall be payable in cash, in arrears, on the first
business day of each month, with the first payment of interest due on August 1, 2019. Commencing on July 15, 2019, subject to certain
beneficial ownership limitations, the investor may convert the principal amount of this note and accrued interest earned thereon
at any time into shares of our common stock at $8.80 per share.
19. COMMITMENTS AND CONTINGENCIES
On July 31, 2018, a stockholder derivative
complaint was filed in the United States District Court for the Central District of California against the Company as the nominal
defendant, as well as its current directors and a former director styled Ethan Young and Greg Young, Derivatively on Behalf
of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz, Mordechai Rosenberg,
Robert O. Smith, and Kristine Ault and DPW Holdings, Inc., as the nominal defendant (Case No. 18-cv-6587) (the “Complaint”).
The Complaint alleges violations
of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants as, in the
view of the plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions. The Company
and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves. The Company
and the individual defendants moved to dismiss the Complaint and on February 25, 2019, the Court granted the motion to dismiss
but granted plaintiffs leave to amend their Complaint. On March 11, 2019, plaintiffs filed their amended complaint asserting
violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions. On March 25,
2019, the Company and the individual defendants filed a motion to dismiss the amended complaint. On May 21, 2019, the Court
granted in part and denied in part the Motion to Dismiss the Amended Complaint. Specifically, the May 21, 2019 Order granted
so much of Defendants’ Motion to Dismiss the Amended Complaint that sought to dismiss Directors Robert O. Smith, Jeff Bentz,
and Mordechai Rosenberg as parties. Plaintiffs did not further amend the complaint and proceeded with the operative complaint and
forewent any claims against Messrs. Smith, Bentz, and Rosenberg.
On July 8, 2019, the Court held a
scheduling conference wherein the Court set a trial date of August 25, 2020.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
On October 21, 2019, the parties
mediated the matter before JAMS in Manhattan, New York. At that mediation, the matter was tentatively settled with respect to all
claim against the Company and the remaining defendants, Milton C. Ault III, Amos Kohn, and William Horne. The tentative settlement
included certain changes to the policies of the Company. The tentative settlement agreement did not have a monetary component.
Furthermore, the parties settled any dispute over the attorneys’ fees, which will be paid by AIG, the Company’s insurance
carrier. The parties are currently working on finalizing the settlement agreement, and expect to have a finalized settlement agreement
prior to end of the calendar year. Upon execution of the finalized settlement agreement, Plaintiff will file a notice of dismissal
with prejudice with the Court.
On November 28, 2018, Blockchain
Mining Supply and Services, Ltd, a vendor who sold computers to the Company’s subsidiary, filed in the United States
District Court for the Southern District of New York against Super Crypto Mining, Inc. and the Company (Case No. 18-cv-11099).
The Complaint asserted claims for breach of contract and promissory estoppel against the Company and its subsidiary arising from
the subsidiary’s failure to satisfy a purchase agreement. The Complaint seeks damages in the amount of $1,388,495,
which approximates the amount of the reserve established.
On February 4, 2019, pursuant to
the Court’s Rules, the Company requested a pre-motion Conference with the Court. On April 16, 2019, the Court held
a pre-motion Conference in connection with the Company’s anticipated motion to dismiss. To date, however, the Court
has not set a briefing schedule in connection with the Company’s anticipated motion to dismiss.
Based on the Company’s assessment
of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot estimate
the reasonably possible loss or range of loss that may result from this action. However, the Company has established a reserve
in the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect on the
Company’s business, financial condition and results of operations.
The Company received a subpoena from
the Commission for the voluntary production of documents. The Company is fully cooperating with this non-public, fact-finding inquiry
and believe that the Company has operated our business in compliance with all applicable laws. The subpoena expressly provides
that the inquiry is not to be construed as an indication by the Commission or its staff that any violations of the federal securities
laws have occurred, nor should it be considered a reflection upon any person, entity or security. However, there can be no assurance
as to the outcome of this matter.
20. STOCKHOLDERS’ EQUITY
Amendments to Certificate
of Incorporation
On January 3, 2019, the Company filed
a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation, with the Secretary
of State of the State of Delaware, to effectuate an increase to the number of authorized shares of common stock of the Company.
Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its Class A common stock to
500,000,000 from 200,000,000 (the “Authorized Increase”). The number of authorized shares of the Company’s Class
B common stock remains at 25,000,000 and the number of authorized shares of the Company’s preferred stock remains at 25,000,000.
As a result of the increase of authorized shares of the Company’s Class A common stock, the aggregate number of the Company’s
authorized shares is 550,000,000. The Authorized Increase was approved by the Company’s Board of Directors (the “Board”)
as of December 28, 2018, and approved by a vote of the stockholders of the Company at the December 28, 2018 Annual Meeting of Stockholders.
The Certificate of Amendment became effective upon filing with the State of Delaware on January 3, 2019.
On March 14, 2019, pursuant
to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s
Board approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split
of the common stock of the Company’s issued and outstanding number of such shares by a ratio of one-for-twenty (the “Reverse
Stock Split”). The Company filed the COI Amendment to its Certificate of Incorporation
with the State of Delaware effectuating the Reverse Stock Split on March 14, 2019. As a result of the Reverse Stock Split, each
twenty (20) shares of common stock issued and outstanding prior to the Reverse Stock Split were converted into one (1) share of
common stock, with no change in authorized shares or par value per share.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
At the Company’s reconvened
2019 Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate a
second reverse stock split (the “Second Reverse Stock Split”) of the Company’s issued and outstanding common
stock. Thereafter, on July 23, 2019, the Board approved the Second Reverse Stock Split with a ratio of one-for-forty. As a result
of the Second Reverse Stock Split, each forty (40) shares of common stock issued and outstanding prior to the Second Reverse Stock
Split were converted into one (1) share of common stock, with no change in authorized
shares or par value per share. The Second Reverse Stock Split became effective in the State of Delaware on August 5, 2019.
Preferred Stock
The Company
is authorized to issue 25,000,000 shares of Preferred Stock $0.001 par value. The Board has designated 1,000,000 shares as Series
A Convertible Preferred Stock (the “Series A Preferred Stock”), 500,000 shares as Series B Convertible Preferred Stock
(the “Series B Preferred Stock”) and 2,500 shares as Series C Convertible Redeemable Preferred Stock (the “Series
C Preferred Stock”). The rights, preferences, privileges and restrictions on the remaining authorized 23,497,500 shares of
Preferred Stock have not been determined. The Board is authorized to designate a new series of preferred shares and determine the
number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred
shares. As of September 30, 2019, there were 7,040 shares of Series A Preferred Stock, 125,000
shares of Series B Preferred Stock and no other shares of Preferred Stock issued or outstanding.
Common Stock
Common stock confers upon the holders
the rights to receive notice to participate and vote at any meeting of stockholders of the Company, to receive dividends, if and
when declared, and to participate in a distribution of surplus of assets upon liquidation of the Company. The Class B common stock
carries the voting power of 10 shares of Class A common stock.
2019 Issuances
Issuance of Common Stock pursuant to the At the Market
Offering
On October 10, 2018, the Company
entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Wilson-Davis & Co., Inc., as
sales agent (the “Agent”) to sell shares of its common stock, having an aggregate offering price of up to $25,000,000
(the “Shares”) from time to time, through an “at the market offering” program (the “WDCO ATM Offering”).
During the nine months ended September 30, 2019, the Company had received gross proceeds of $4,656,051 through the sale of 119,791
shares of the Company’s common stock through the WDCO ATM Offering. The offer and sale of the shares through the WDCO ATM
Offering were made pursuant to our then effective “shelf” registration statement on Form S-3 and an accompanying
base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended
on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the WDCO ATM
Offering, dated October 15, 2018.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Public Offering
On March
29, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global
Partners (the “Underwriter”), pursuant to which the Company agreed to issue and sell an aggregate of (a) 71,388 shares
of its common stock (the “Shares”) together with warrants to purchase 71,388 shares of common stock (the “Common
Warrants”) and (b) pre-funded warrants to purchase up to 317,500 shares of its common stock (the “Pre-Funded Warrants”)
together with a number of Common Warrants to purchase 317,500 shares of common stock (the “Offering”). The Shares were
sold to the purchasers at the public offering price of $17.60 per share (the “Offering Price”). The Common Warrants
were sold at a public offering price of $0.40 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser
whose purchase of the Shares and the Common Warrant in the Offering would otherwise result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of the
Company’s outstanding common stock immediately following the consummation of the Offering. The purchase price of each Pre-Funded
Warrant equaled the Offering Price at which the Shares were sold to the public in the Offering, minus $0.40, and the exercise price
of each Pre-Funded Warrant equaled $0.40 per share. In addition, the Company has also issued
the Underwriter a warrant to purchase a maximum of 15,550 additional shares of common stock at an initial exercise price of $19.80
per share, with a term of five years (the “Underwriter Warrants”).
The Common Warrants
are exercisable at any time after the date of issuance at an exercise price of $0.45 per share. However, since the volume weighted
average price of the Company’s common stock on or after May 2, 2019, was less than $0.45 per share, the Common Warrant is
exercisable by means of a cashless exercise such that the holder of the Common Warrant shall receive one common share for each
warrant held.
Upon issuance,
the Common Warrants, Pre-Funded Warrants and Underwriter Warrants (the “Offering Warrants”) were recorded at fair value
and classified as a liability. Since the fair value of the Offering Warrants exceeded the proceeds from the Offering the Company
recognized a loss on issuance of warrants of $1,763,481. The fair value of the Offering Warrants was re-measured at each financial
reporting period and immediately before exercise, with any changes in fair value recorded as change in fair value of warrant liability
in the Condensed Consolidated Statements of Operations and Comprehensive Loss. The fair value at issuance was calculated using
a Black-Scholes option pricing model using a risk-free interest rate of 2.28%, an expected life of 5 years, expected dividends
of zero and expected volatility of 87.51%.
The Company
received net proceeds from the Offering of $6,204,717, after deducting underwriting discounts and commissions and offering expenses.
The Company used the net proceeds from the Offering primarily for the repayment of debt.
The
Offering closed on April 2, 2019 and as of September 30, 2019, the Company had issued a total of 771,275 shares of its common stock,
inclusive of shares issued pursuant to the exercise of 317,500 Pre-Funded Warrants and 382,387 shares issued pursuant to the cashless
exercise of the Common Warrants.
Ascendiant ATM Offering
On August 6, 2019,
the Company entered into an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent to sell
shares of the Company’s common stock having an aggregate offering price of up to $5,500,000 (the “ATM Offering”).
The offer and sale of the Company’s common stock will be made pursuant to the Company’s effective “shelf”
registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132)
filed with the Securities and Exchange Commission (the “Commission”) on December 18, 2017, amended on January 8, 2018,
and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated August 6,
2019. Through September 30, 2019, the Company had received gross proceeds of $4,416,765 through the sale of 1,140,330 shares of
the Company’s common stock from the ATM Offering.
Issuance of Common Stock for Services
During the nine months
ended September 30, 2019, the Company issued to its consultants a total 29,375 shares of its common stock with an aggregate value
of $305,019, an average of $10.38 per share for services rendered.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
Issuance of common stock for conversion
of debt
During the nine months
ended September 30, 2019, principal and accrued interest of $4,238,878 and $497,417, respectively, on the Company’s debt
securities was satisfied through the issuance of 370,473 shares of the Company’s common stock.
Issuance of common stock in payment
of accrued liability
During the nine months
ended September 30, 2019, the Company issued 9,375 shares of its common stock in satisfaction of an accrued liability of $108,521.
21. RELATED PARTY TRANSACTIONS
|
a.
|
The Company and AVLP entered into a Loan and Security Agreement (“AVLP
Loan Agreement”) with an effective date of August 21, 2017, pursuant to which the Company will provide AVLP a non-revolving
credit facility of up to $10,000,000 for a period ending on August 21, 2019, subject to the terms and conditions stated in the
Loan Agreement, including that the Company having available funds to grant such credit. At September 30, 2019, the Company has
provided loans to AVLP in the principal amount $9,476,979 and, in addition to the 12% convertible promissory notes, AVLP has issued
to the Company warrants to purchase 18,953,958 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes
issued by AVLP are secured by the assets of AVLP. As of September 30, 2019, the Company recorded contractual interest receivable
attributed to the AVLP Loan Agreement of $1,736,859.
|
During the nine months ended
September 30, 2019 and the year ended December 31, 2018, the Company also acquired in the open market 91,000 shares of AVLP common
stock for $53,032 and 430,942 shares of AVLP common stock for $417,169, respectively. At September 30, 2019, the Company’s
investment in AVLP common stock had an unrealized loss of $348,891.
Philou is AVLP’s controlling
shareholder. Mr. Ault is Chairman of AVLP’s Board of Directors and the Chairman of the Board. Mr. William B. Horne is the
Chief Financial Officer and a director of AVLP and the Company.
In March 2017, the Company was
awarded a $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”)
plasma-laser system. At June 30, 2019, the Company had recorded a receivable from MTIX of $1,238,856 and during the six months
ended June 30, 2019, the Company had received payments from MTIX of $2,676,219. The receivable was primarily the result of revenues
recognized during the year ended December 31, 2018, and reflected on the financial statements as accounts receivable, related party.
|
b.
|
During the nine months ended September 30, 2019, the Company acquired
137,500 shares of common stock of Alzamend from a third party for $110,000 consisting of the cancellation of principal and interest
due the Company of $91,483 and cash of $18,517. AVLP provides management, consulting and financial services to Alzamend.
|
|
c.
|
During the nine months ended September 30, 2019, Ault & Company,
Inc. (“Ault & Company”) has provided $625,500 in short-term advances. Ault and Company is the Manager of Philou
which presently owns 125,000 shares of the Company’s Series B Preferred Stock. Mr. Ault and Mr. Horne serve as the Chief
Executive Officer and Chief Financial Officer, respectively, of Ault & Company.
|
|
d.
|
Ault & Company guaranteed the prompt and complete payment and performance of the June 2019
short-term promissory note with a principal face amount of $2,900,000.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
22. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has five
reportable segments as of September 30, 2019, and had two reportable segments as of September 30, 2018; see Note 1 for a brief
description of the Company’s business.
The following data
presents the revenues, expenditures and other operating data of the Company’s geographic operating segments and presented
in accordance with ASC No. 280.
|
|
Three Months ended September 30, 2019
|
|
|
DPC
|
|
DPL
|
|
Enertec
|
|
SC Mining
|
|
I.AM
|
|
Total
|
Revenue
|
|
$
|
2,773,707
|
|
|
$
|
341,529
|
|
|
$
|
1,853,204
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,968,440
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
307,172
|
|
|
|
—
|
|
|
|
307,172
|
|
Revenue, restaurant
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,036,834
|
|
|
|
1,036,834
|
|
Revenue, lending activities
|
|
|
69,217
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69,217
|
|
Total revenues
|
|
$
|
2,842,924
|
|
|
$
|
341,529
|
|
|
$
|
1,853,204
|
|
|
$
|
307,172
|
|
|
$
|
1,036,834
|
|
|
$
|
6,381,663
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
140,278
|
|
|
$
|
36,403
|
|
|
$
|
222,337
|
|
|
$
|
1,433,145
|
|
|
$
|
280,412
|
|
|
$
|
2,112,575
|
|
Loss from operations
|
|
$
|
(206,509
|
)
|
|
$
|
(84,780
|
)
|
|
$
|
(212,585
|
)
|
|
$
|
(5,049,622
|
)
|
|
$
|
(284,167
|
)
|
|
$
|
(5,837,663
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
$
|
26,081
|
|
|
$
|
12,252
|
|
|
$
|
12,883
|
|
|
$
|
—
|
|
|
$
|
4,501
|
|
|
$
|
55,717
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
$
|
32,186,830
|
|
|
$
|
1,301,273
|
|
|
$
|
11,184,088
|
|
|
$
|
850,984
|
|
|
$
|
1,902,803
|
|
|
$
|
47,425,978
|
|
|
|
Three
Months ended September 30, 2018
|
|
|
DPC
|
|
DPL
|
|
Enertec
|
|
SC
Mining
|
|
I.AM
|
|
Eliminations
|
|
Total
|
Revenue
|
|
$
|
2,974,216
|
|
|
$
|
601,679
|
|
|
$
|
2,156,107
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,732,002
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
590,165
|
|
|
|
—
|
|
|
|
—
|
|
|
|
590,165
|
|
Revenue, related party
|
|
|
352,496
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
352,496
|
|
Revenue, restaurant
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,584,891
|
|
|
|
—
|
|
|
|
1,584,891
|
|
Revenue, lending activities
|
|
|
85,368
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
85,368
|
|
Inter-segment revenues
|
|
|
25,168
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,168
|
)
|
|
|
-
|
|
Total revenues
|
|
$
|
3,437,248
|
|
|
$
|
601,679
|
|
|
$
|
2,156,107
|
|
|
$
|
590,165
|
|
|
$
|
1,584,891
|
|
|
$
|
(25,168
|
)
|
|
$
|
8,344,922
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
74,018
|
|
|
$
|
12,643
|
|
|
$
|
27,538
|
|
|
$
|
802,952
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
917,151
|
|
Loss from operations
|
|
$
|
(792,092
|
)
|
|
$
|
(47,128
|
)
|
|
$
|
(99,201
|
)
|
|
$
|
(1,169,739
|
)
|
|
$
|
(3,829
|
)
|
|
$
|
—
|
|
|
$
|
(2,111,989
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
$
|
5,838
|
|
|
$
|
—
|
|
|
$
|
6,791
|
|
|
$
|
241,725
|
|
|
$
|
106,074
|
|
|
$
|
—
|
|
|
$
|
360,428
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
$
|
30,113,607
|
|
|
$
|
1,516,710
|
|
|
$
|
11,024,505
|
|
|
$
|
8,245,136
|
|
|
$
|
2,204,303
|
|
|
$
|
—
|
|
|
$
|
53,104,261
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
|
|
Nine Months ended September 30, 2019
|
|
|
DPC
|
|
DPL
|
|
Enertec
|
|
SC Mining
|
|
I.AM
|
|
Total
|
Revenue
|
|
$
|
7,110,243
|
|
|
$
|
1,423,971
|
|
|
$
|
6,527,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,061,289
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
592,092
|
|
|
|
—
|
|
|
|
592,092
|
|
Revenue, restaurant
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3,371,465
|
|
|
|
3,371,465
|
|
Revenue, lending activities
|
|
|
443,927
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
443,927
|
|
Total revenues
|
|
$
|
7,554,170
|
|
|
$
|
1,423,971
|
|
|
$
|
6,527,075
|
|
|
$
|
592,092
|
|
|
$
|
3,371,465
|
|
|
$
|
19,468,773
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
210,424
|
|
|
$
|
56,200
|
|
|
$
|
377,259
|
|
|
$
|
2,149,717
|
|
|
$
|
280,413
|
|
|
$
|
3,074,013
|
|
Loss from operations
|
|
$
|
(1,169,851
|
)
|
|
$
|
(87,468
|
)
|
|
$
|
(372,691
|
)
|
|
$
|
(6,538,493
|
)
|
|
$
|
(716,637
|
)
|
|
$
|
(8,885,140
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
$
|
34,899
|
|
|
$
|
81,319
|
|
|
$
|
21,045
|
|
|
$
|
—
|
|
|
$
|
12,060
|
|
|
$
|
149,323
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
$
|
32,186,830
|
|
|
$
|
1,301,273
|
|
|
$
|
11,184,088
|
|
|
$
|
850,984
|
|
|
$
|
1,902,803
|
|
|
$
|
47,425,978
|
|
|
|
Nine
Months ended September 30, 2018
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Enertec
|
|
|
SC
Mining
|
|
|
I.AM
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
8,532,029
|
|
|
$
|
1,339,413
|
|
|
$
|
3,373,977
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,245,419
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,546,418
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,546,418
|
|
Revenue, related party
|
|
|
3,911,263
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,911,263
|
|
Revenue, restaurant
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,087,383
|
|
|
|
—
|
|
|
|
2,087,383
|
|
Revenue, lending activities
|
|
|
194,120
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
194,120
|
|
Inter-segment revenues
|
|
|
29,681
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29,681
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
12,667,093
|
|
|
$
|
1,339,413
|
|
|
$
|
3,373,977
|
|
|
$
|
1,546,418
|
|
|
$
|
2,087,383
|
|
|
$
|
(29,681
|
)
|
|
$
|
20,984,603
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
226,639
|
|
|
$
|
43,667
|
|
|
$
|
37,257
|
|
|
$
|
1,434,932
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,742,495
|
|
Loss from operations
|
|
$
|
(1,861,923
|
)
|
|
$
|
(498,536
|
)
|
|
$
|
46,961
|
|
|
$
|
(3,019,856
|
)
|
|
$
|
(4,838
|
)
|
|
$
|
—
|
|
|
$
|
(5,338,192
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
$
|
349,190
|
|
|
$
|
1,301
|
|
|
$
|
38,460
|
|
|
$
|
9,048,503
|
|
|
$
|
128,732
|
|
|
$
|
—
|
|
|
$
|
9,566,186
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
$
|
30,113,607
|
|
|
$
|
1,516,710
|
|
|
$
|
11,024,505
|
|
|
$
|
8,245,136
|
|
|
$
|
2,204,303
|
|
|
$
|
—
|
|
|
$
|
53,104,261
|
|
Concentration Risk:
The following tables provide the
percentage of total revenues for the three and nine months ended September 30, 2019 and 2018 attributable to a single customer
from which 10% or more of total revenues are derived.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
|
by Major
|
|
|
Total Company
|
|
|
by Major
|
|
|
Total Company
|
|
|
|
Customers
|
|
|
Revenues
|
|
|
Customers
|
|
|
Revenues
|
|
Customer A
|
|
$
|
1,424,982
|
|
|
|
22
|
%
|
|
$
|
4,270,523
|
|
|
|
22
|
%
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
|
by Major
|
|
|
Total Company
|
|
|
by Major
|
|
|
Total Company
|
|
|
|
Customers
|
|
|
Revenues
|
|
|
Customers
|
|
|
Revenues
|
|
Customer B
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3,911,263
|
|
|
|
19
|
%
|
Revenue from Customer A is attributable
to Enertec. Revenue from Customer B relates to MTIX, a related party, and is attributable to Coolisys. Further, at September 30,
2019, MTIX represented all the Company’s accounts and other receivable, related party.
For the three and nine months
ended September 30, 2019 and 2018, total revenues from external customers divided on the basis of the Company’s product
lines are as follows:
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
|
Commercial products
|
|
$
|
3,326,936
|
|
|
$
|
5,073,698
|
|
|
$
|
10,221,209
|
|
|
$
|
13,874,921
|
|
Defense products
|
|
|
3,054,727
|
|
|
|
3,271,224
|
|
|
|
9,247,564
|
|
|
|
7,109,682
|
|
Total revenues
|
|
$
|
6,381,663
|
|
|
$
|
8,344,922
|
|
|
$
|
19,468,773
|
|
|
$
|
20,984,603
|
|
Financial data relating
to geographic areas:
The Company’s
total revenues are attributed to geographic areas based on the location. The following table presents total revenues for the three
and nine months ended September 30, 2019 and 2018. Other than as shown, no foreign country or region contributed materially to
revenues or long-lived assets for these periods:
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,040,664
|
|
|
$
|
5,166,899
|
|
|
$
|
11,110,035
|
|
|
$
|
15,599,219
|
|
Middle East
|
|
|
1,869,647
|
|
|
|
2,156,106
|
|
|
|
6,358,200
|
|
|
|
3,373,976
|
|
Europe
|
|
|
253,747
|
|
|
|
693,725
|
|
|
|
1,283,312
|
|
|
|
1,338,313
|
|
Other
|
|
|
217,605
|
|
|
|
328,192
|
|
|
|
717,226
|
|
|
|
673,095
|
|
Total revenues
|
|
$
|
6,381,663
|
|
|
$
|
8,344,922
|
|
|
$
|
19,468,773
|
|
|
$
|
20,984,603
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
– Unaudited (Continued)
SEPTEMBER 30, 2019
23. SUBSEQUENT EVENTS
In accordance with
FASB ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2019, and thru the date of this report being
issued and has determined that it does not have any material subsequent events to disclose in these financial statements except
for the following.
Ascendiant ATM Offering
During October 2019
the Company received gross proceeds of $1,083,234 through the sale of 679,496 shares of the Company’s common stock through
the ATM Offering.
Issuance of common stock in payment
of accrued liability
On November 1, 2019,
the Company issued 25,602 shares of its common stock in satisfaction of an accrued liability of $30,722.
Exchange Agreements
On November 4, 2019,
the Company entered into an exchange agreement with a certain investor (the “Investor”) pursuant to which, in
exchange for an original issue discount promissory note issued by the Company for the benefit of the Investor on July 25, 2019,
as amended, the Company sold to the Investor a new convertible promissory note in the principal amount of $350,000 with an interest
rate of 12% per annum. Subject to the approval by the NYSE American, this note shall be convertible into shares of the Company’s
common stock at conversion price of $1.20 per share, subject to adjustments.
On November 15, 2019,
the Company entered into an exchange agreement with a lender (the “Lender”) pursuant to which the Company issued
to the Lender a convertible promissory note in the principal amount of $935,772 with an interest rate of 8% per annum, in exchange
for those certain promissory notes (i) in the original principal amount of $575,000 issued on May 10, 2019, and (ii) in the original
principal amount of $230,000 issued on May 21, 2019 held by the Lender. Subject to the approval by the NYSE American, this note
shall be convertible into shares of the Company’s common stock at conversion price of $1.80.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this quarterly report, the “Company,”
“DPW Holdings,” “we,” “us” and “our” refer to DPW Holdings, Inc., a Delaware corporation,
our wholly-owned subsidiaries, Coolisys Technologies, Inc., Power-Plus Technical Distributors, LLC, Digital Power Lending, LLC,
Digital Farms, Inc., Digital Power Limited, Enertec Systems 2001 Ltd. and our majority owned subsidiaries, Microphase Corporation
and I.AM, LLC.
Recent Developments
On May 13,
2019, we filed an Offering Statement on Form 1-A pursuant to Regulation A promulgated by the Securities and Exchange Commission
(the “Commission”), pursuant to which up to $50 million of 3-year, non-convertibles promissory notes (“Promissory
Notes”) will be offered and sold once the Commission has qualified the Offering Statement. The Promissory Notes will accrue
annualized interest of 12% that will be paid rata monthly and will be offered on a continuous basis, in each case as determined
by us in our sole discretion. The Company cannot provide any assurance that any Promissory Notes will be sold pursuant this Offering
Statement.
At our reconvened 2019 Annual Meeting
of Stockholders, our stockholders approved a proposal permitting our Board of Directors (the “Board”) to effectuate
a second reverse stock split (the “Second Reverse Stock Split”) of our 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.
On August 6, 2019, we entered into
an At-The-Market Issuance Sales Agreement with Ascendiant Capital Markets, LLC, as sales agent in which we sold shares of our common
stock having an aggregate offering price of $5,500,000 (the “ATM Offering”). The offer and sale of our common stock
was made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus
contained therein (Registration Statement No. 333-222132) filed with the Securities and Exchange Commission (the “Commission”)
on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement
related to the ATM Offering, dated August 6, 2019.
GENERAL
We are a growth company seeking to
increase our revenues through acquisitions. We continually assess acquisition opportunities and are exploring acquisitions in the
financial sector.
Over the recent past we have provided
capital and relevant expertise to fuel the growth of businesses in defense/aerospace, industrial, telecommunications, medical,
crypto-mining, textiles and a select portfolio of commercial hospitality properties. We have provided capital to subsidiaries as
well as partner companies in which we have an equity interest or may be actively involved, influencing development through board
representation and management support.
Through our lending subsidiary, DP
Lending, we have launched an online fintech portal, MonthlyInterest.com, that facilitates investments that pay monthly interest.
As a holding company, we have been developing DP Lending to enable the capacity to fund entrepreneurs, our subsidiaries and partner
companies. We believe MonthlyInterest.com will provide investors the opportunity to invest directly into companies and technology
that will have a global impact, bypassing traditional banking and lending institutions.
Realizing Value
As a holding company, our business
strategy is designed to increase shareholder value. Under this strategy, we are focused on managing and financially supporting
our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value
returned to shareholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual
partner companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof,
as well as other opportunities to maximize shareholder value. We anticipate returning value to shareholders after satisfying our
debt obligations and working capital needs.
From time to time, we engage in discussions
with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process
we initiate. To the extent we believe that a subsidiary partner company’s further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to
sell some or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales
of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in
the case of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries
or partner companies public through rights offerings and directed share subscription programs. We will continue to consider these
(or similar) programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize
value for our shareholders.
We are a Delaware corporation with
our corporate office located at 201 Shipyard Way, Suite E, Newport Beach, California 92663. Our phone number is 949-444-5464 and
our website address is www.dpwholdings.com.
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND
2018
The following table summarizes the results of our operations
for the three months ended September 30, 2019 and 2018.
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,968,440
|
|
|
$
|
5,732,002
|
|
Revenue, cryptocurrency mining
|
|
|
307,172
|
|
|
|
590,165
|
|
Revenue, related party
|
|
|
—
|
|
|
|
352,496
|
|
Revenue, restaurant operations
|
|
|
1,036,834
|
|
|
|
1,584,891
|
|
Revenue, lending activities
|
|
|
69,217
|
|
|
|
85,368
|
|
Total revenue
|
|
|
6,381,663
|
|
|
|
8,344,922
|
|
Cost of revenue
|
|
|
4,642,526
|
|
|
|
6,317,754
|
|
Gross profit
|
|
|
1,739,137
|
|
|
|
2,027,168
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
481,902
|
|
|
|
333,555
|
|
Selling and marketing
|
|
|
392,725
|
|
|
|
790,603
|
|
General and administrative
|
|
|
4,519,641
|
|
|
|
5,088,312
|
|
Impairment of property and equipment
|
|
|
4,315,856
|
|
|
|
—
|
|
(Gain) loss on digital currency
|
|
|
(951
|
)
|
|
|
2,543
|
|
Total operating expenses
|
|
|
9,709,173
|
|
|
|
6,215,013
|
|
Loss from operations
|
|
|
(7,970,036
|
)
|
|
|
(4,187,845
|
)
|
Interest income
|
|
|
898,646
|
|
|
|
712,262
|
|
Interest expense
|
|
|
(2,954,843
|
)
|
|
|
(4,072,539
|
)
|
Change in fair value of marketable equity securities
|
|
|
(330,150
|
)
|
|
|
—
|
|
Loss on extinguishment of convertible debt
|
|
|
(155,448
|
)
|
|
|
—
|
|
Loss on issuance of warrants
|
|
|
—
|
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
165,840
|
|
|
|
—
|
|
Loss before income taxes
|
|
|
(10,345,991
|
)
|
|
|
(7,548,122
|
)
|
Income tax benefit
|
|
|
5,140
|
|
|
|
23,737
|
|
Net loss
|
|
|
(10,340,851
|
)
|
|
|
(7,524,385
|
)
|
Less: Net loss attributable to non-controlling interest
|
|
|
—
|
|
|
|
74,414
|
|
Net loss attributable to DPW Holdings
|
|
$
|
(10,340,851
|
)
|
|
$
|
(7,449,971
|
)
|
Preferred dividends
|
|
|
(5,284
|
)
|
|
|
—
|
|
Net loss available to common stockholders
|
|
$
|
(10,346,135
|
)
|
|
$
|
(7,449,971
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(6.47
|
)
|
|
$
|
(88.23
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,599,306
|
|
|
|
84,441
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(10,346,135
|
)
|
|
$
|
(7,449,971
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
67,166
|
|
|
|
(77,686
|
)
|
Net unrealized loss on derivative securities of related party
|
|
|
(1,152,480
|
)
|
|
|
(1,341,977
|
)
|
Other comprehensive income (loss)
|
|
|
(1,085,314
|
)
|
|
|
(1,419,663
|
)
|
Total Comprehensive loss
|
|
$
|
(11,431,449
|
)
|
|
$
|
(8,869,634
|
)
|
Revenues
Our revenues decreased by $1,963,259,
or 23.5%, to $6,381,663 for the three months ended September 30, 2019, from $8,344,922 for the three months ended September 30,
2018. As discussed below the decrease from the three months ended September 30, 2018, was due to a decrease in revenue from our
restaurant operations, the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system and
from our cryptocurrency mining operations and, to a lesser extent, a decrease in revenue from customized solutions for the military
markets caused by temporary shortages in components required for the manufacture of these solutions.
Revenues, cryptocurrency mining
In January 2018, we formed Digital
Farms, Inc. (“Digital Farms”), a wholly-owned subsidiary formerly known as Super Crypt Mining, Inc. Digital Farms was
established to operate our cryptocurrency business, which is pursuing a variety of digital currencies. We are mining the top three
cryptocurrencies for our own account, consisting of Bitcoin, Litecoin and Ethereum. Although the market prices of digital currencies
were significantly higher during the three months ended September 30, 2019 compared to the prior-year period, due to power cost
considerations, we reduced the number of active miners from 1,512 in the prior year period to 978 during the current quarter. These
factors, coupled with a significant increase in the difficulty factor, which increases when market prices of digital currencies
are increasing as more computational power is added to the network, resulted in a decrease in revenues of $282,993.
Revenues, related party
During the three months ended September
30, 2018, we recognized $352,496 in revenues from our purchase order with MTIX Limited, a company formed under the laws of England
and Wales (“MTIX”). Due to working capital constraints discussed below, we did not recognize any revenues from MTIX
during the three months ended September 30, 2019. MTIX was acquired by AVLP on August 22, 2017, and is therefore a related party.
In March 2017, the Company was awarded a purchase order by MTIX to manufacture, install and service MLSE plasma-laser system. Over
the next several years, management believes that the MLSE purchase order will be a source of revenue and generate significant cash
flows. The lack of revenue during the three months ended September 30, 2019, was due to an emphasis on reducing the debt obligations
incurred in May 2018 to acquire Enertec. Payments, and the related manufacturing services, that otherwise would have gone to subcontractors
of the MLSE plasma-laser system have been delayed in order to enable us to restructure and reduce our overall debt obligations.
Revenues, restaurant operations
During the three months ended September
30, 2019, we recognized a decrease in revenues from our restaurant operations of $548,057 compared to the prior-year period. The
decrease was primarily due to significant construction projects that hampered access to our restaurant locations and, to a lesser
extent, competition from restaurants recently opened near two of our locations.
Gross Margins
Gross margins increased to 27.3%
for the three months ended September 30, 2019 compared to 24.3% for the three months ended September 30, 2018. The Company’s
gross margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our revenue.
Our gross margins during the three months ended September 30, 2018, of 24.3%, were affected by the negative margins on revenues
of $307,172 at Digital Farms. The negative gross margins at Digital Farms resulted from monthly recurring fixed costs at our colocation
facilities which temporarily exceed the revenues from our mining operations. Excluding the effects of Digital Farms, then our adjusted
gross margins for the three months ended September 30, 2018, would have been 38.9%, slightly higher than our historical range.
The increase is mainly attributable to higher gross margins related to our restaurant operations.
Our gross margin of 27.3% recognized
during the three months ended September 30, 2019, was also impacted by the negative margins at Digital Farms. Excluding the effects
of Digital Farms, our adjusted gross margin for the three months ended September 30, 2019, would have been 39.7%. which is consistent
with our historical average.
Engineering and Product Development
Engineering and product development
expenses increased by $148,347 to $481,902 for the three months ended September 30, 2019, from $333,555 for the three months ended
September 30, 2018. The increase in engineering and product development expenses is attributed to an increase in spending at Enertec
as it pursues additional contracts in the defense industry.
Selling and Marketing
Selling and marketing expenses were
$392,725 for the three months ended September 30, 2019, compared to $790,603 for the three months ended September 30, 2018, a decrease
of $397,878. This increase was the result of decreases in personnel costs directly attributed to a reduction in sales and marketing
personnel throughout our operations.
General and Administrative
General and administrative expenses
were $4,519,641 for the three months ended September 30, 2019, compared to $5,088,312 for the three months ended September 30,
2018, a decrease of $568,671. General and administrative expenses decreased from the comparative prior period, mainly due to lower
stock compensation expense and legal fees partially offset by an increase in cost attributed to the hiring of a Chief Accounting
Officer and Senior Vice President of Finance. The remaining increase in general and administrative expenses is due to various costs,
none of which are significant individually.
Asset Impairment Charges
Asset impairment charges of $4,315,856 were recognized
during the three months ended September 30, 2019. The impairment charges related to impairments of our cryptocurrency equipment.
Operating Loss
The Company recorded
an operating loss of $7,970,036 for the three months ended September 30, 2019, compared to an operating loss of $4,187,845 for
the three months ended September 30, 2018. The increase in operating loss is mostly attributable to the impairment of property
and equipment coupled with a higher gross profit and lower selling and marketing expenses, partially offset by an increase in general
and administrative expenses.
Interest Income
Interest income was $898,646 for the
three months ended September 30, 2019 compared to $712,262 for the three months ended September 30, 2018. The increase in interest
income for the three months ended September 30, 2019 is related to an increase in interest income pursuant to the Loan and Security
Agreement entered into on September 6, 2017, with AVLP, a related party.
Interest Expense
Interest expense was $2,954,843 for
the three months ended September 30, 2019 compared to $4,072,539 for the three months ended September 30, 2018. The decrease in
interest expense for the three months ended September 30, 2019 is primarily related to a reduction of amortization of debt discount
resulting from original issue discount from the issuance of warrants in conjunction with the sale of debt instruments. During the
three months ended September 30, 2019 and 2018, as a result of these issuances, non-cash interest expense of $1,357,845 and $3,033,864,
respectively, was recorded from the amortization of debt discount and debt financing costs.
Change in fair value of warrant liability
During the three months ended September
30, 2019, the fair value of the warrants that were issued in our Offering decreased by $165,840. The fair value of these warrants
is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change
in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Net Loss
For the foregoing reasons, our net
loss for the three months ended September 30, 2019, was $10,340,851 compared to a net loss of $7,524,385 for the three months ended
September 30, 2018. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders
of Microphase during the three months ended September 30, 2019 and 2018, of nil and $74,414, respectively, and preferred dividends
of $5,284 and nil, respectively, the net loss available to common shareholders during the three months ended September 30, 2019
and 2018, was $10,346,135 and $7,449,971, respectively.
During the three months
ended September 30, 2019 and 2018, our reported net loss included non-cash charges of $6,390,242 and $4,709,663, respectively.
A summary of these non-cash charges is as follows:
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Interest expense – debt discount
|
|
$
|
1,357,845
|
|
|
$
|
3,033,864
|
|
Stock-based compensation
|
|
|
361,779
|
|
|
|
1,352,640
|
|
Depreciation and amortization
|
|
|
947,830
|
|
|
|
917,152
|
|
Impairment of property and equipment
|
|
|
4,315,856
|
|
|
|
—
|
|
Amortization of right-of-use assets
|
|
|
199,260
|
|
|
|
—
|
|
Accretion of original issue discount on notes receivable – related party
|
|
|
(607,356
|
)
|
|
|
(593,993
|
)
|
Accretion of original issue discount on notes receivable
|
|
|
(19,132
|
)
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
(165,840
|
)
|
|
|
—
|
|
Non-cash items included in net loss
|
|
$
|
6,390,242
|
|
|
$
|
4,709,663
|
|
Other comprehensive income (loss)
Other comprehensive loss was $11,431,449
and 8,869,634, respectively, for the three months ended September 30, 2019 and 2018. Other comprehensive loss for the three months
ended September 30, 2019, which decreased our equity, was primarily due to unrealized loss in the warrant derivative securities
that we received as a result of our investment in Avalanche International, Corp., or AVLP, a related party. During the three months
ended September 30, 2018, unrealized losses in the warrant derivative securities of AVLP was the primary component of other comprehensive
loss.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2019 AND 2018
The following table summarizes the
results of our operations for the nine months ended September 30, 2019 and 2018.
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,061,289
|
|
|
$
|
13,245,419
|
|
Revenue, cryptocurrency mining
|
|
|
592,092
|
|
|
|
1,546,418
|
|
Revenue, related party
|
|
|
—
|
|
|
|
3,911,263
|
|
Revenue, restaurant operations
|
|
|
3,371,465
|
|
|
|
2,087,383
|
|
Revenue, lending activities
|
|
|
443,927
|
|
|
|
194,120
|
|
Total revenue
|
|
|
19,468,773
|
|
|
|
20,984,603
|
|
Cost of revenue
|
|
|
14,350,041
|
|
|
|
16,204,388
|
|
Gross profit
|
|
|
5,118,732
|
|
|
|
4,780,215
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
1,408,848
|
|
|
|
1,043,993
|
|
Selling and marketing
|
|
|
1,293,181
|
|
|
|
2,290,934
|
|
General and administrative
|
|
|
14,584,758
|
|
|
|
12,697,909
|
|
Impairment of property and equipment
|
|
|
4,315,856
|
|
|
|
—
|
|
(Gain) loss on digital currency
|
|
|
(6,933
|
)
|
|
|
2,543
|
|
Total operating expenses
|
|
|
21,595,710
|
|
|
|
16,035,379
|
|
Loss from operations
|
|
|
(16,476,978
|
)
|
|
|
(11,255,164
|
)
|
Interest income
|
|
|
2,647,110
|
|
|
|
1,955,885
|
|
Interest expense
|
|
|
(5,586,639
|
)
|
|
|
(11,335,069
|
)
|
Change in fair value of marketable equity securities
|
|
|
(173,503
|
)
|
|
|
—
|
|
Loss on extinguishment of convertible debt
|
|
|
(963,232
|
)
|
|
|
—
|
|
Loss on issuance of warrants
|
|
|
(1,763,481
|
)
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
1,112,665
|
|
|
|
—
|
|
Loss before income taxes
|
|
|
(21,204,058
|
)
|
|
|
(20,634,348
|
)
|
Income tax benefit
|
|
|
93,284
|
|
|
|
17,480
|
|
Net loss
|
|
|
(21,110,774
|
)
|
|
|
(20,616,868
|
)
|
Less: Net loss attributable to non-controlling interest
|
|
|
32,416
|
|
|
|
218,494
|
|
Net loss attributable to DPW Holdings
|
|
$
|
(21,078,358
|
)
|
|
$
|
(20,398,374
|
)
|
Preferred dividends
|
|
|
(12,437
|
)
|
|
|
(108,049
|
)
|
Net loss available to common stockholders
|
|
$
|
(21,090,795
|
)
|
|
$
|
(20,506,423
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(24.62
|
)
|
|
$
|
(311.53
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
856,689
|
|
|
|
65,824
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(21,090,795
|
)
|
|
$
|
(20,506,423
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
259,671
|
|
|
|
(209,535
|
)
|
Net unrealized loss on derivative securities of related party
|
|
|
(1,513,661
|
)
|
|
|
(6,787,902
|
)
|
Other comprehensive income (loss)
|
|
|
(1,253,990
|
)
|
|
|
(6,997,437
|
)
|
Total Comprehensive loss
|
|
$
|
(22,344,785
|
)
|
|
$
|
(27,503,860
|
)
|
Revenues
Our revenues decreased by $1,515,830,
or 7.2%, to $19,468,773 for the nine months ended September 30, 2019, from $20,984,603 for the nine months ended September 30,
2018. During the nine months ended September 30, 2019 and 2018, our acquisitions of Enertec and I.AM represented $9,898,540 and
$5,461,360, respectively, of our revenues. Excluding revenues from these acquisitions, we would have recognized revenues of $9,570,233
and $15,523,243, respectively, during the nine months ended September 30, 2019 and 2018, a decrease of $5,953,010. As discussed
below, the decrease of $5,953,010 from the nine months ended September 30, 2018, was primarily due to a decrease in revenue from
our restaurant operations, from the manufacture of the MLSE plasma-laser system and from our cryptocurrency mining operations.
The following table shows revenue for the nine months ended September 30, 2019 and 2018, generated from acquisitions completed
during the year ended December 31, 2018.
|
|
|
|
For the Nine Months Ended September 30,
|
|
Company acquired
|
|
Date of Acquisition
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Enertec Systems 2001 Ltd.
|
|
May 22, 2018
|
|
$
|
6,527,075
|
|
|
$
|
3,373,977
|
|
I.AM, Inc.
|
|
May 23, 2018
|
|
|
3,371,465
|
|
|
|
2,087,383
|
|
|
|
|
|
$
|
9,898,540
|
|
|
$
|
5,461,360
|
|
Revenues, cryptocurrency mining
In January 2018, we formed Digital
Farms, a wholly-owned subsidiary. Digital Farms was established to operate our cryptocurrency business, which is pursuing a variety
of digital currencies. We are mining the top three cryptocurrencies for our own account, consisting of Bitcoin, Litecoin and Ethereum.
The market prices of digital currencies were slightly lower during the nine months ended September 30, 2019 compared to the prior-year
period. Further, due to power cost considerations, we reduced the number of active miners from 1,512 in the prior year period to
978 during the current quarter. These factors, coupled with a significant increase in the difficulty factor during the current
quarter resulted in a decrease in revenues $954,326.
Revenues, related party
During the nine months ended September
30, 2018, we recognized $3,911,263 in revenues resulting from our purchase order with MTIX. Conversely, we did not recognize any
revenues from MTIX during the nine months ended September 30, 2019. MTIX was acquired by AVLP on August 22, 2017, and is therefore
a related party. The lack of revenue during the nine months ended September 30, 2019, was due to an emphasis on reducing the debt
obligations incurred in May 2018 to acquire Enertec. Payments, and the related manufacturing services, that otherwise would have
gone to subcontractors of the MLSE plasma-laser system have been delayed in order to enable us to restructure and reduce our overall
debt obligations.
Gross Margins
Gross margins increased to 26.3%
for the nine months ended September 30, 2019, compared to 22.8% for the nine months ended September 30, 2018. Our gross margins
during the nine months ended September 30, 2018, of 22.8%, were affected by the lower margin related party revenue of $3,911,263
from MTIX combined with negative margins on revenues of $1,546,418 at Digital Farms. Excluding the effects of Digital Farms and
our contract with MTIX, then our adjusted gross margins for the nine months ended September 30, 2018, would have been 38.6%.
Our gross margin of 26.3% recognized
during the nine months ended September 30, 2019, was also impacted by the negative margins at Digital Farms. Excluding the effects
of Digital Farms, our adjusted gross margin for the nine months ended September 30, 2019 would have been 37.9%. which is consist
with our historical average which has typically ranged between 33% and 37%, with slight variations depending on the overall composition
of our revenue.
Engineering and Product Development
Engineering and product development
expenses increased by $364,855 to $1,408,848 for the nine months ended September 30, 2019, from $1,043,993 for the nine months
ended September 30, 2018. The increase in engineering and product development expenses is attributed to our acquisition of Enertec,
which due to the timing of the acquisition was partially excluded from the prior period amount.
Selling and Marketing
Selling and marketing expenses were
$1,293,181 for the nine months ended September 30, 2019, compared to $2,290,934 for the nine months ended September 30, 2018, a
decrease of $997,753. Our acquisition of Enertec and I.AM resulted in an increase of $196,962. This increase was offset by decreases
in personnel costs directly attributed to a reduction in sales and marketing personnel throughout our operations.
General and Administrative
General and administrative expenses
were $14,584,758 for the nine months ended September 30, 2019 compared to $12,697,909 for the nine months ended September 30, 2018,
an increase of $1,886,849. Our acquisitions of Enertec and I.AM accounted for $2,119,118 of the increase in general and administrative
expenses. The adjusted decrease of $232,269 from the comparative prior period was mainly due to the lower stock compensation expense
and legal fees partially offset by an increase in cost attributed to the hiring of a Chief Accounting Officer and Senior Vice President
of Finance.
Asset Impairment Charges
Asset impairment charges of $4,315,856 were recognized
during the nine months ended September 30, 2019. The impairment charges related to impairments of our cryptocurrency equipment.
Operating Loss
The Company recorded
an operating loss of $16,476,978 for the nine months ended September 30, 2019, compared to an operating loss of $11,255,164 for
the nine months ended September 30, 2018. The increase in operating loss is mostly attributable to the impairment of property and
equipment coupled with an increase of general and administrative expenses, partially offset by higher gross profit and lower selling
and marketing expenses.
Interest Income
Interest income was $2,647,110 for
the nine months ended September 30, 2019 compared to $1,955,885 for the three months ended September 30, 2018. The increase in
interest income for the nine months ended September 30, 2019 is primarily related to an increase in interest income pursuant to
the Loan and Security Agreement entered into on September 6, 2017, with AVLP, a related party.
Interest expense
Interest expense was $5,586,639 for
the nine months ended September 30, 2019, compared to $11,335,069 for the nine months ended September 30, 2018. The decrease in
interest expense for the nine months ended September 30, 2019 is primarily related to a reduction of amortization of debt discount
resulting from original issue discount from the issuance of warrants in conjunction with the sale of debt instruments. During the
nine months ended September 30, 2019 and 2018, as a result of these issuances, non-cash interest expense of $3,034,454 and $8,812,972,
respectively, was recorded from the amortization of debt discount and debt financing costs.
Loss on issuance of warrants
We recognized a loss on issuance of
warrants of $1,763,481 for the nine months ended September 30, 2019, based upon the fair value of the warrants issued in our Offering
in excess of the proceeds received from the Offering.
Change in fair value of warrant liability
During the nine months ended September
30, 2019, the fair value of the warrants that were issued in our Offering decreased by $1,112,665. The fair value of these warrants
is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value recorded as change
in fair value of warrant liability in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Net Loss
For the foregoing reasons, our net
loss for the nine months ended September 30, 2019, was $21,110,774 compared to a net loss of $20,616,868 for the nine months ended
September 30, 2018. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders
of Microphase during the nine months ended September 30, 2019 and 2018, of $32,416 and $218,494, respectively, and preferred dividends
of $12,437 and $108,049, respectively, the net loss available to common shareholders during the nine months ended September 30,
2019 and 2018, was $21,090,795 and $20,506,423, respectively.
As reflected in our
consolidated statement of cash flows for the nine months ended September 30, 2019 and 2018, our reported net loss is comprised
of non-cash charges of $10,742,817 and $13,195,207, respectively. A summary of these non-cash charges is as follows:
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Interest expense – debt discount
|
|
$
|
3,034,454
|
|
|
$
|
8,812,972
|
|
Stock-based compensation
|
|
|
1,354,062
|
|
|
|
4,164,180
|
|
Depreciation and amortization
|
|
|
3,074,013
|
|
|
|
1,742,496
|
|
Impairment of property and equipment
|
|
|
4,315,856
|
|
|
|
—
|
|
Amortization of right-of-use assets
|
|
|
260,549
|
|
|
|
—
|
|
Accretion of original issue discount on notes receivable – related party
|
|
|
(1,869,778
|
)
|
|
|
(1,524,441
|
)
|
Accretion of original issue discount on notes receivable
|
|
|
(77,155
|
)
|
|
|
—
|
|
Fair value in excess of proceeds upon issuance of warrants
|
|
|
1,763,481
|
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
(1,112,665
|
)
|
|
|
—
|
|
Non-cash items included in net loss
|
|
$
|
10,742,817
|
|
|
$
|
13,195,207
|
|
Other comprehensive loss
Other comprehensive loss was $22,344,785
and $27,503,860, respectively, for the nine months ended September 30, 2019 and 2018. Other comprehensive loss for the nine months
ended September 30, 2019, which decreased our equity, was primarily due to unrealized losses in the warrant derivative securities
that we received as a result of our investment in AVLP, a related party. During the nine months ended September 30, 2018, unrealized
losses in the warrant derivative securities of AVLP was also the primary component of other comprehensive loss.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2019, we had cash
and cash equivalents of $756,652. This compares with cash and cash equivalents of $902,329 at December 31, 2018. The decrease in
cash and cash equivalents was primarily due to cash provided by financing activities being slightly in excess of the amount of
cash used in operating and investing activities with the remaining variance attributed to the effect of exchange rates caused by
a decrease in exchange rates between the U.S. dollar and the Israeli Shekel.
Net cash used in operating activities
totaled $8,377,278 for the nine months ended September 30, 2019, compared to $9,430,055 for the nine months ended September 30,
2018. During the nine months ended September 30, 2019, the decrease in net cash used in operating activities compared to the nine
months ended September 30, 2018, was mainly due to a reduction in our net loss for the nine months ended September 30, 2019 compared
to the nine months ended September 30, 2018. The net loss was partially offset by several non-cash charges, a decrease in amortization
of debt discount of $5,778,518 and stock-based compensation of $2,810,118, an increase in depreciation and amortization of $1,331,517and
a decrease in accounts receivable, related party due to a payment of $2,676,219 in April 2019.
Net cash used in investing activities
was $2,686,506 for the nine months ended September 30, 2019, compared to $19,915,693 for the nine months ended September 30, 2018.
The decrease of the net usage of cash from investing activities was primarily attributed to the purchase of property and equipment
at Digital Farms and our acquisition of Enertec during the nine months ended September 30, 2018.
Net cash provided by financing activities
was $11,083,232 and $28,791,362 for the nine months ended September 30, 2019 and 2018, respectively. Financing activities during
the nine months ended September 30, 2019, primarily related to the sale of shares of our common stock through an “at the
market offering” program and through an underwriting agreement with A.G.P./Alliance Global Partners. The proceeds that we
received from the sale of our shares of common stock was partially offset by net cash outflows of $3,706,679 associated with our
debt arrangements.
Historically, we have financed our
operations principally through issuances of convertible debt, promissory notes and equity securities. During 2019, as reflected
below, we continued to successfully obtain additional equity and debt financing and in restructuring existing debt.
|
·
|
On October 15, 2018, we entered into an At-The-Market Issuance Sales Agreement with WDCO (the “WDCO
ATM Offering”) to sell shares of our common stock. Between January 1, 2019 and April 1, 2019, the date the WDCO ATM Offering
was terminated, the Company received gross proceeds of $4,656,050 through the sale of 119,791 shares of our common stock through
the WDCO ATM Offering.
|
|
·
|
On March 29, 2019, we entered into an underwriting agreement pursuant to which we sold 71,388 shares
of our common stock, warrants to purchase 388,888 shares of our common stock and pre-funded warrants to purchase 317,500 shares
of our common stock on April 2, 2019. We received gross proceeds from this offering of $6,999,555 and used approximately $6,000,000
of the proceeds from this offering for the repayment of debt.
|
|
·
|
On May 13, 2019, we filed an Offering Statement on Form 1-A pursuant to Regulation A promulgated
by the Commission, pursuant to which up to $50 million of 3-year, non-convertibles promissory notes (“Promissory Notes”)
will be offered and sold once the Commission has qualified the Offering Statement. We anticipate that the Promissory Notes will
accrue annualized interest of between 5% and 15% that will be paid rata monthly and will be offered on a continuous basis, in each
case as determined by us in our sole discretion. The Company cannot provide any assurance that any Promissory Notes will be sold
pursuant this Offering Statement.
|
|
·
|
On August 6, 2019, we entered into an At-The-Market Issuance Sales Agreement with Ascendiant Capital
Markets, LLC, as sales agent in which we sold shares of our common stock having an aggregate offering price of $5,500,000 (the
“ATM Offering”). The offer and sale of our common stock was made pursuant to our effective “shelf” registration
statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed
with the Commission on December 18, 2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and
a prospectus supplement related to the ATM Offering, dated August 6, 2019.
|
We expect to continue to incur losses
for the foreseeable future and will be required to raise additional capital to continue to support our working capital requirements.
We have been successful over the last 12 months in raising capital to support our working capital requirements. We anticipate that
we will continue to raise capital through public and private equity offerings, debt financings, or other means. If we are unable
to secure additional capital, we may be required to curtail our current operations and take additional measures to reduce costs
expenses, including reducing our workforce, eliminating outside consultants, ceasing or reducing our due diligence of potential
future acquisitions, including the associated legal fees, in order to conserve cash in order to sustain operations and meet our
obligations.
Based on the above, these matters
raise substantial doubt about our ability to continue as a going concern and amounts reported in our financial statements do not
reflect the effects of any adjustments to the carrying amounts of our assets and liabilities should we be unable to continue as
a going concern.
CRITICAL ACCOUNTING POLICIES
In our Annual Report on Form 10-K
for the year ended December 31, 2018, we identified the critical accounting policies which affect our more significant estimates
and assumptions used in preparing our consolidated financial statements. The basis for developing the estimates and assumptions
within our critical accounting policies is based on historical information and known current trends and factors. The estimates
and assumptions are evaluated on an ongoing basis and actual results have been within our expectations. We have not changed
these policies from those previously disclosed in our Annual Report.