The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The above Consolidated Statements of Stockholders’
Equity reflects a 1 for 40 reverse stock split effective August 5, 2019, see Note 1 for further information.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
1. DESCRIPTION OF BUSINESS
DPW Holdings, Inc.,
a Delaware corporation (“DPW” or the “Company”), formerly known as Digital Power Corporation, was incorporated
in September 2017. The Company is a diversified holding company owning subsidiaries engaged in the
following operating businesses: commercial and defense solutions, commercial lending, cryptocurrency blockchain mining, advanced
textile technology and restaurant operations. The Company’s wholly-owned subsidiaries are Gresham Worldwide, Inc.
(“GWW”), Coolisys Technologies, Inc. (“Coolisys”), Gresham Power Electronics Ltd. (f/k/a Digital Power
Limited) (“Gresham Power”), Enertec Systems 2001 Ltd (“Enertec”),
Digital Power Lending, LLC (“DP Lending”) and Digital Farms, Inc. (“Digital Farms”). The Company also has
controlling interests in Microphase Corporation (“Microphase”) and I. AM, Inc.
(“I.AM”). The Company has five reportable segments – defense solution through GWW with operations conducted
by Microphase, Enertec and Gresham Power, commercial solution through Coolisys, commercial lending through DP Lending, digital
currency blockchain mining through Digital Farms and restaurant operations through I.AM.
On March 14, 2019, pursuant
to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s
Board of Directors (the “Board”) approved the Certificate of Incorporation Amendment (the “COI Amendment”)
to effectuate a reverse stock split of the Common Stock of the Company’s issued and outstanding number of such shares by
a ratio of one-for-twenty (the “First Stock Split”). At the Company’s
2019 reconvened Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate
a second reverse stock split (the “Second Stock Split”) of the Company’s issued and outstanding Common Stock.
Thereafter, on July 23, 2019, the Board approved the Second Stock Split with a ratio of one-for-forty. The Second Stock Split did
not affect the number of authorized shares of Common Stock or their par value per share. As a result of the Second Stock Split,
each forty shares of common stock issued and outstanding prior to the Second Stock Split were converted into one share of common
stock. The Second Stock Split became effective in the State of Delaware on August 5, 2019. All share amounts in these financial
statements have been updated to reflect these reverse stock splits.
2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying consolidated
financial statements have been prepared on the basis that the Company will continue as a going concern. As of December 31, 2019,
the Company had cash and cash equivalents of $488,553, an accumulated deficit of $88,650,465 and a negative working capital of
$19,150,075. The Company has incurred recurring losses and reported losses for the years ended December 31, 2019 and 2018, totaled
$32,913,412 and $32,233,881, 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 22). Subsequent to December 31, 2019, the Company entered into a Master
Exchange Agreement with an entity that, subject to shareholder approval, has agreed to purchase up to approximately $7.7 million
in certain promissory notes previously issued by the Company. Further, as a result of temporary restaurant closures in San Diego,
California, and the deteriorating business conditions at the Company’s cryptocurrency mining operations, the Company concluded
that discontinuing these operations was ultimately in its best interest (see Note 26). Management believes that the Company has
access to capital resources through potential public or private issuances of debt or equity securities. However, if the Company
is unable to raise additional capital, which could be adversely affected by the recent outbreak of COVID-19, 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 CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“U.S. GAAP”).
Principles of Consolidation
The consolidated financial
statements include the accounts of DPW and its wholly-owned subsidiaries, Digital Power Corporation, Gresham Power, Enertec, DP
Lending and Digital Farms and its majority-owned subsidiaries, Microphase and I.AM. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Accounting Estimates
The preparation of
financial statements, in conformity with U.S. GAAP, requires management to make estimates, judgments and assumptions. The Company's
management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time
they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates. Key estimates include acquisition accounting, fair
value of certain financial instruments, reserves 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 CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The Company’s disaggregated revenues
consist of the following for the year ended December 31, 2019:
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWW
|
|
|
|
Coolisys
|
|
|
|
DP Lending
|
|
|
|
Digital Farms
|
|
|
|
I.AM
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,342,565
|
|
|
$
|
5,276,096
|
|
|
$
|
662,740
|
|
|
$
|
641,745
|
|
|
$
|
4,149,646
|
|
|
$
|
15,072,792
|
|
Europe
|
|
|
1,672,489
|
|
|
|
5,767
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,678,256
|
|
Middle East
|
|
|
8,659,675
|
|
|
|
21,348
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,681,023
|
|
Other
|
|
|
557,114
|
|
|
|
522,455
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,079,569
|
|
|
|
$
|
15,231,843
|
|
|
$
|
5,825,666
|
|
|
$
|
662,740
|
|
|
$
|
641,745
|
|
|
$
|
4,149,646
|
|
|
$
|
26,511,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave Filters
|
|
$
|
2,245,748
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,245,748
|
|
Detector logarithmic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
video amplifiers
|
|
|
558,155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
558,155
|
|
Power Supply Units
|
|
|
1,656,162
|
|
|
|
5,825,666
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,481,828
|
|
Power Supply Systems
|
|
|
1,920,594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,920,594
|
|
Healthcare diagnostic systems
|
|
|
1,711,050
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,711,050
|
|
Defense systems
|
|
|
7,140,134
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,140,134
|
|
Digital Currency Mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
641,745
|
|
|
|
—
|
|
|
|
641,745
|
|
Restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,149,646
|
|
|
|
4,149,646
|
|
Lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
662,740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
662,740
|
|
|
|
$
|
15,231,843
|
|
|
$
|
5,825,666
|
|
|
$
|
662,740
|
|
|
$
|
641,745
|
|
|
$
|
4,149,646
|
|
|
$
|
26,511,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a point in time
|
|
$
|
6,243,758
|
|
|
$
|
5,825,666
|
|
|
$
|
662,740
|
|
|
$
|
641,745
|
|
|
$
|
4,149,646
|
|
|
$
|
17,523,555
|
|
Services transferred over time
|
|
|
8,988,085
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,988,085
|
|
|
|
$
|
15,231,843
|
|
|
$
|
5,825,666
|
|
|
$
|
662,740
|
|
|
$
|
641,745
|
|
|
$
|
4,149,646
|
|
|
$
|
26,511,640
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The Company’s disaggregated revenues
consist of the following for the year ended December 31, 2018:
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWW
|
|
|
|
Coolisys
|
|
|
|
DP
Lending
|
|
|
|
Digital Farms
|
|
|
|
I.AM
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,421,081
|
|
|
$
|
9,207,423
|
|
|
$
|
347,033
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
19,113,226
|
|
Europe
|
|
|
1,763,366
|
|
|
|
2,625
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,765,991
|
|
Middle East
|
|
|
5,226,075
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,226,075
|
|
Other
|
|
|
522,570
|
|
|
|
526,357
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,048,927
|
|
|
|
$
|
11,933,092
|
|
|
$
|
9,736,405
|
|
|
$
|
347,033
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
27,154,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave Filters
|
|
$
|
3,331,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,331,575
|
|
Detector logarithmic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
video amplifiers
|
|
|
1,338,912
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,338,912
|
|
Power Supply Units
|
|
|
—
|
|
|
|
5,829,125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,829,125
|
|
Power Supply Systems
|
|
|
2,036,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,036,530
|
|
Healthcare diagnostic systems
|
|
|
1,715,512
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,715,512
|
|
Defense systems
|
|
|
3,510,563
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,510,563
|
|
Digital Currency Mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,675,549
|
|
|
|
—
|
|
|
|
1,675,549
|
|
Restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,462,140
|
|
|
|
3,462,140
|
|
Lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
347,033
|
|
|
|
—
|
|
|
|
—
|
|
|
|
347,033
|
|
MLSE Systems
|
|
|
—
|
|
|
|
3,907,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,907,280
|
|
|
|
$
|
11,933,092
|
|
|
$
|
9,736,405
|
|
|
$
|
347,033
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
27,154,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a point in time
|
|
$
|
6,082,285
|
|
|
$
|
5,829,125
|
|
|
$
|
347,033
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
17,396,132
|
|
Services transferred over time
|
|
|
5,850,807
|
|
|
|
3,907,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,758,087
|
|
|
|
$
|
11,933,092
|
|
|
$
|
9,736,405
|
|
|
$
|
347,033
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
27,154,219
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 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 Gresham Power, the Company’s performance
obligation for manufacturing services is satisfied over time as the Company creates or enhances an asset based on criteria that
are unique to the customer and that the customer controls as the asset is created or enhanced. Generally, the Company recognizes
revenue based upon proportional performance over time using a cost to cost method which measures progress based on the costs incurred
to total expected costs in satisfying its performance obligation. This method provides a depiction of the progress in providing
the manufacturing service because there is a direct relationship between the costs incurred by the Company and the transfer of
the manufacturing service to the customer. Manufacturing services that are recognized based upon the proportional performance method
are included in the above table as services transferred over time and to the extent the customer has not been invoiced for these
revenues, as accrued revenue in the accompanying consolidated balance sheets. Revisions to the Company’s estimates may result
in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which
they are first identified.
The Company has elected
the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component
to the extent that the period between when the Company transfers its promised good or service to the customer and when the customer
pays in one year or less.
The aggregate amount
of the transaction price allocated to the performance obligation that is partially unsatisfied as of December 31, 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 three years. The Company will be paid in installments for this performance obligation
over the next three 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.
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.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
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. Historically, the Company used digital assets for debt reduction,
capital purchases, consulting fees, data center costs and other operating expenses. Digital
Farms’ operations were discontinued in the first quarter of 2020 (see note 26).
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. The restaurant operations were discontinued in the first quarter of 2020 (see
note 26).
Foreign Currency Translation
A substantial portion
of the Company’s revenues are generated in U.S. dollars (“U.S. dollar”). In addition, a substantial portion
of the Company’s costs are incurred in U.S. dollars. Company management has determined that the U.S. dollar is the functional
currency of the primary economic environment in which it operates.
Accordingly, monetary
accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) No. 830, Foreign Currency
Matters (“ASC No. 830”). All transaction gains and losses from the re-measurement of monetary balance sheet items
are reflected in the statements of operations as financial income or expenses as appropriate.
The financial statements
of Gresham Power and Enertec, whose functional currencies have been determined to be their local currencies, the British Pound
(“GBP”) and the Israeli Shekel (“ILS”), have been translated into U.S. dollars in accordance with ASC No.
830. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement
of operations amounts have been translated using the average exchange rate in effect for the reporting period. The resulting translation
adjustments are reported as other comprehensive income (loss) in the consolidated statement of comprehensive income (loss) and
accumulated comprehensive income (loss) in statement of changes in stockholders' equity (deficit).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Cash and Cash Equivalents
The Company considers
all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Financial
instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s
cash is maintained in checking accounts, money market funds and certificates of deposits with reputable financial institutions.
These balances may, at times, exceed the U.S. Federal Deposit Insurance Corporation insurance limits. The Company has cash and
cash equivalents of $288,428 and $409,945 at December 31, 2019 and 2018, respectively, in the United Kingdom (“U.K”)
and $47,062 and $60,040, respectively, in Israel. The Company has not experienced any losses on deposits of cash and cash equivalents.
Accounts Receivable and Allowance
for Doubtful Accounts
The Company’s
receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying amount
of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.
The Company individually reviews all accounts receivable balances and based upon an assessment of current creditworthiness, estimates
the portion, if any, of the balance that will not be collected. The Company estimates the allowance for doubtful accounts based
on historical collection trends, age of outstanding receivables and existing economic conditions. If events or changes in circumstances
indicate that a specific receivable balance may be impaired, further consideration is given to the collectability of those balances
and the allowance is adjusted accordingly. A customer’s receivable balance is considered past-due based on its contractual
terms. Past-due receivable balances are written-off when the Company’s internal collection efforts have been unsuccessful
in collecting the amount due. Based on an assessment as of December 31, 2019 and 2018, of the collectability of invoices, accounts
receivable are presented net of an allowance for doubtful accounts of $5,000 and $5,000, respectively.
Inventories
Inventories are stated
at the lower of cost or net realizable value. Inventory write-offs are provided to cover risks arising from slow-moving items or
technological obsolescence.
Cost of inventories is determined
as follows:
Raw materials,
parts and supplies - using the “first-in, first-out” method.
Work-in-progress and finished products
- on the basis of direct manufacturing costs with the addition of indirect manufacturing costs.
The Company periodically
assesses its inventories valuation in respect of obsolete and slow-moving items by reviewing revenue forecasts and technological
obsolescence. When inventories on hand exceed the foreseeable demand or become obsolete, the value of excess inventory, which at
the time of the review was not expected to be sold, is written off.
During the years ended
December 31, 2019 and 2018, the Company did not record inventory write-offs within the cost of revenue.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Property and Equipment, Net
Property and equipment
are stated at cost, net of accumulated depreciation. Repairs and maintenance costs are expensed as incurred. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets, at the following annual rates:
|
|
Useful lives (in years)
|
|
|
|
Computer, software and related equipment
|
|
3 - 5
|
Office furniture and equipment
|
|
5 - 10
|
Leasehold improvements
|
|
Over the term of the lease or the life of the asset, whichever is shorter.
|
Goodwill
The Company evaluates
its goodwill for impairment in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill is recorded
when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible
assets acquired.
The Company tests the
recorded amount of goodwill for impairment on an annual basis on December 31 of each fiscal year or more frequently if there are
indicators that the carrying amount of the goodwill exceeds its carried value. At December 31, 2019, the Company had five reporting
units. The Company performed a qualitative assessment and concluded that goodwill at the Company’s Coolisys and I.AM subsidiaries
was impaired by a total of $746,205 based upon an assessment as of December 31, 2019. As a result of this assessment, the Company
recorded an impairment of $746,205
Intangible Assets
The Company acquired
amortizable intangibles assets as part of three asset purchase agreements consisting of customer lists and non-compete agreements.
The Company also has the trade names and trademarks associated with the acquisition of Microphase which were determined to have
an indefinite life. The Company’s intangible assets, net also include definite lived intangible assets, which are being amortized
on a straight-line basis over their estimated useful lives as follows:
|
|
Useful lives (in years)
|
Customer list
|
|
5 - 14
|
Non-competition agreements
|
|
3
|
Domain name and other intangible assets
|
|
3
|
The Company reviews
intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the
assets might not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant
underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant
changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability,
the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived
asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result
from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value
of the impaired asset over its fair value, determined based on discounted cash flows. During the years ended December 31, 2019
and 2018, the Company recorded an impairment loss of $780,692 and 700,000, respectively, as impairment indicators were noted for
the periods presented in these consolidated financial statements.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Long-Lived Assets
The long-lived assets
of the Company are reviewed for impairment in accordance with ASC No. 360, Property, Plant, and Equipment, whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2019 and 2018, no impairment
charges were necessary.
Warranty
The Company offers
a warranty period for all its manufactured products. Warranty periods range from one to two years depending on the product. The
Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the
time product revenue is recognized. Factors that affect the Company's warranty liability include the number of units sold, historical
rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability
and adjusts the amount, as necessary. As of December 31, 2019 and 2018, the Company’s accrued warranty liability was $80,412
and $86,495, respectively.
Income Taxes
The Company determines
its income taxes under the asset and liability method in accordance with FASB ASC No. 740, Income Taxes, which requires
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between
the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which
the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes
it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income
and Comprehensive Income in the period that includes the enactment date.
The Company accounts
for uncertain tax positions in accordance with ASC No. 740-10-25. ASC No. 740-10-25 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC
No. 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax benefit to be recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded,
such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related
to accrued liabilities for potential tax assessments are included in income tax expense. ASC No. 740-10-25 also requires management
to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that
more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated
tax positions taken by the Company and has concluded that as of December 31, 2019 and 2018, there are no uncertain tax positions
taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.
The Company has not yet filed its 2018 or 2019 tax returns.
Common Stock Purchase Warrants and
Other Derivative Financial Instruments
The Company classifies
common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require
physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its
own shares (physical settlement or net-share settlement). The Company classifies any contracts that (i) require net-cash settlement
(including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company),
(ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement),
or (iii) contain reset provisions as either an asset or a liability. The Company assesses classification of its freestanding
derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
The Company determined that certain freestanding derivatives, which principally consist of issuance of warrants to purchase shares
of common stock in connection with convertible notes and to employees of the Company, satisfy the criteria for classification as
equity instruments as these warrants do not contain cash settlement features or variable settlement provision that cause them to
not be indexed to the Company’s own stock.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Stock-Based Compensation
The Company accounts
for stock-based compensation in accordance with ASC No. 718, Compensation – Stock Compensation (“ASC No.
718”). Under ASC No. 718, compensation expense related to stock-based payments is recorded over the requisite service
period based on the grant date fair value of the awards. Compensation previously recorded for unvested stock options that are forfeited
is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for
stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards,
including the option’s expected term and the price volatility of the underlying stock.
The Company’s
accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions
of ASC No. 505-50, Equity Based Payments to Non-Employees. Accordingly, the measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor
is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments
issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Convertible Instruments
The Company accounts
for hybrid contracts that feature conversion options in accordance with ASC No. 815, Derivatives and Hedging Activities
(“ASC No. 815”). ASC No. 815 requires companies to bifurcate conversion options from their host instruments
and account for them as freestanding derivative financial instruments according to certain criteria. The criteria includes circumstances
in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair
value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument
would be considered a derivative instrument.
Conversion options
that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity
or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their
bifurcation from the host instrument.
The Company accounts
for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from
their host instruments, in accordance with ASC No. 470-20, Debt with Conversion and Other Options (“ASC No.
470-20”). Under ASC No. 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts
for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their
host instruments) in accordance with ASC No. 815.
Concentration of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade
receivables.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Cash and cash equivalents
are invested in banks in the U.S., UK and Israel. Such deposits in the United States may be in excess of insured limits and are
not insured in other jurisdictions.
Trade receivables of
the Company and its subsidiaries are mainly derived from sales to customers located primarily in the U.S., Europe and Israel. The
Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance
for doubtful accounts is determined with respect to those amounts that the Company and its subsidiaries have determined to be doubtful
of collection.
Comprehensive Income (Loss)
The Company reports
comprehensive loss in accordance with ASC No. 220, Comprehensive Income. This statement establishes standards for the reporting
and presentation of comprehensive loss and its components in a full set of general purpose financial statements. Comprehensive
loss generally represents all changes in equity during the period except those resulting from investments by, or distributions
to, stockholders. The Company determined that its items of other comprehensive loss relate to changes in foreign currency translation
adjustments and unrealized gains and losses in its warrants in Avalanche International Corp. (“AVLP”), a related party.
Fair value of Financial Instruments
In accordance with
ASC No. 820, Fair Value Measurements and Disclosures, fair value is defined as the exit price, or the amount that would
be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of
the measurement date.
The guidance also establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Observable inputs include those that market participants
would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use
in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1: Quoted market prices in active
markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 that
are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or model-derived valuations. All significant inputs used in our valuations are observable or can be derived
principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level
2 inputs also include quoted prices that were adjusted for security-specific restrictions which are compared to output from internally
developed models such as a discounted cash flow model.
Level 3: Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts
of financial instruments carried at cost, including cash and cash equivalents, accounts receivables and accounts and other receivable
– related party, investments, notes receivable, trade payables and trade payables – related party approximate their
fair value due to the short-term maturities of such instruments.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
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 December 31, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in convertible promissory note of
AVLP – a related party
|
|
$
|
6,540,720
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,540,720
|
|
Investments in common stock and derivative
instruments of AVLP – a related party
|
|
|
1,569,286
|
|
|
|
238,602
|
|
|
$
|
—
|
|
|
|
1,330,684
|
|
Investment in common stock of Alzamend – a
related party
|
|
|
558,938
|
|
|
|
—
|
|
|
|
—
|
|
|
|
558,938
|
|
Investments in marketable equity securities
|
|
|
639,647
|
|
|
|
639,647
|
|
|
|
—
|
|
|
|
—
|
|
Investments in warrants of public companies
|
|
|
9,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,174
|
|
Total Investments
|
|
$
|
9,317,765
|
|
|
$
|
878,249
|
|
|
$
|
—
|
|
|
$
|
8,439,516
|
|
|
|
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.
Debt Discounts
The Company accounts
for debt discount according to ASC No. 470-20, Debt with Conversion and Other Options. Debt discounts are amortized through
periodic charges to interest expense over the term of the related financial instrument using the effective interest method. During
the years ended December 31, 2019 and 2018, the Company recorded amortization of debt discounts of $3,709,993 and $11,191,055,
respectively.
Leases
Effective January 1,
2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition
of a lease are classified as operating or financing leases. As of January 1, 2019, we only had operating leases. Operating leases
are recognized as Operating lease right-of-use (“ROU”) assets, Operating lease liabilities, current, and Operating
lease liabilities, non-current on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present
value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit
rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present
value of future payments. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease
costs on a straight-line basis over the lease term without regard to deferred payment terms, such as rent holidays, that defer
the commencement date of required payments. Our lease terms may include options to extend or terminate the lease when it is reasonably
certain that we will exercise that option. Leasehold improvements are capitalized at cost and amortized over the lesser of their
expected useful life or the life of the lease, without assuming renewal features, if any, are exercised. We do not separate lease
and non-lease components for our leases.
The Company continues
to account for leases in the prior period financial statements under ASC Topic 840.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Net Loss per Share
Net loss per share
is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation
of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock
equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. The Company has included 6,500
warrants, which are exercisable for shares of the Company’s common stock on a one-for-one basis, in its earnings per share
calculation for the year ended December 31, 2019. Anti-dilutive securities, which are convertible into or exercisable for the Company’s
common stock, consist of the following at December 31, 2019 and 2018:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
2,763
|
|
|
|
9,325
|
|
Warrants (1)
|
|
|
72,518
|
|
|
|
23,410
|
|
Convertible notes
|
|
|
1,252,163
|
|
|
|
24,991
|
|
Conversion of preferred stock
|
|
|
2,232
|
|
|
|
2,232
|
|
Total
|
|
|
1,329,676
|
|
|
|
59,958
|
|
|
(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 and Adopted 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. The adoption did not have any impact on retained earnings.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 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 took 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.
In August 2018,
the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement” (“ASU 2018-13”), which makes a number of changes meant to add,
modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level
2 and Level 3 fair value measurements. This guidance is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of
the update. The Company adopted ASU 2018-13 on January 1, 2020 and
its adoption did not have any impact on the Company’s consolidated financial statements and related disclosures.
In December 2019, the
FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”),
which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions
to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with
early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements
and related disclosures.
4. Marketable Securities
Marketable securities
in equity securities with readily determinable market prices consisted of the following as of December 31, 2019 and 2018:
|
|
Marketable equity securities at December 31, 2019
|
|
|
|
|
|
|
|
|
Gross unrealized
|
|
|
|
Gross realized
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
gains (losses)
|
|
|
|
gains (losses)
|
|
|
|
Fair value
|
|
Common shares
|
|
$
|
423,025
|
|
|
$
|
216,622
|
|
|
$
|
—
|
|
|
$
|
639,647
|
|
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 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 losses on marketable equity securities
|
|
|
(150,734
|
)
|
Balance at December 31, 2018
|
|
$
|
178,597
|
|
Purchases of marketable equity securities
|
|
|
485,000
|
|
Marketable equity securities received upon warrant exercise
|
|
|
381
|
|
Marketable equity securities received upon conversion of preferred stock
|
|
|
202,145
|
|
Sales of marketable equity securities
|
|
|
(580,721
|
)
|
Realized gains on marketable equity securities
|
|
|
95,340
|
|
Unrealized gains on marketable equity securities
|
|
|
258,905
|
|
Balance at December 31, 2019
|
|
$
|
639,647
|
|
At December 31, 2019
and 2018, the Company had invested in the marketable equity securities of certain publicly traded companies. During the year ended
December 31, 2019, unrealized gains of $258,905 were included in net income as a component of change in fair value of equity securities.
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 December 31, 2019 and 2018 is a Level 1 measurement based
on quoted prices in an active market.
At December 31, 2019
and 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. INVENTORIES
At December 31, 2019 and 2018,
inventories consist of:
|
|
2019
|
|
|
2018
|
|
Raw materials, parts and supplies
|
|
$
|
1,582,423
|
|
|
$
|
2,026,839
|
|
Work-in-progress
|
|
|
534,937
|
|
|
|
483,706
|
|
Finished products
|
|
|
424,492
|
|
|
|
750,581
|
|
Total inventories
|
|
$
|
2,541,852
|
|
|
$
|
3,261,126
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
6. PROPERTY AND EQUIPMENT, NET
At December 31, 2019 and 2018,
property and equipment consist of:
|
|
2019
|
|
|
2018
|
|
Cryptocurrency machines and related equipment
|
|
$
|
567,216
|
|
|
$
|
9,168,928
|
|
Computer, software and related equipment
|
|
|
2,542,399
|
|
|
|
2,495,470
|
|
Restaurant equipment
|
|
|
763,275
|
|
|
|
752,103
|
|
Office furniture and equipment
|
|
|
441,613
|
|
|
|
287,583
|
|
Leasehold improvements
|
|
|
1,339,646
|
|
|
|
1,274,865
|
|
|
|
|
5,654,149
|
|
|
|
13,978,949
|
|
Accumulated depreciation and amortization
|
|
|
(3,361,954
|
)
|
|
|
(4,665,650
|
)
|
Property and equipment, net
|
|
$
|
2,292,195
|
|
|
$
|
9,313,299
|
|
For the years ended
December 31, 2019 and 2018, depreciation expense amounted to $2,962,435 and $2,447,249, respectively.
7. INTANGIBLE ASSETS, NET
At December 31, 2019 and 2018
intangible assets consist of:
|
|
2019
|
|
|
2018
|
|
Trade name and trademark
|
|
$
|
1,039,307
|
|
|
$
|
1,562,332
|
|
Customer list
|
|
|
2,406,434
|
|
|
|
2,388,139
|
|
Non-competition agreements
|
|
|
—
|
|
|
|
150,000
|
|
Domain name and other intangible assets
|
|
|
641,809
|
|
|
|
762,807
|
|
|
|
|
4,087,550
|
|
|
|
4,863,278
|
|
Accumulated depreciation and amortization
|
|
|
(880,562
|
)
|
|
|
(503,480
|
)
|
Intangible assets, net
|
|
$
|
3,206,988
|
|
|
$
|
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 $502,656 and $459,656, respectively, for the years ended December 31, 2019 and 2018.
The customer
lists are subject to amortization over their estimated useful lives, which range between 3 and 14 years. The following
table presents estimated amortization expense for each of the succeeding five calendar years and thereafter.
2020
|
|
$
|
315,885
|
|
2021
|
|
|
260,717
|
|
2022
|
|
|
203,442
|
|
2023
|
|
|
203,442
|
|
2024
|
|
|
203,442
|
|
Thereafter
|
|
|
980,753
|
|
|
|
$
|
2,167,681
|
|
8. GOODWILL
The Company’s
goodwill relates to the acquisition of a controlling interest in Microphase on June 2, 2017 and the acquisition of Enertec Systems
2001 Ltd. (“Enertec”) on May 22, 2018. The following table summarizes the changes in our goodwill during the
years ended December 31, 2019 and 2018:
|
|
Goodwill
|
|
Balance as of January 1, 2018
|
|
$
|
3,651,982
|
|
Acquisition of Enertec
|
|
|
4,780,526
|
|
Acquisition of I.AM
|
|
|
265,252
|
|
Effect of exchange rate changes
|
|
|
(234,690
|
)
|
Balance as of December 31, 2018
|
|
$
|
8,463,070
|
|
Impairment
|
|
|
(746,205
|
)
|
Effect of exchange rate changes
|
|
|
384,082
|
|
Balance as of December 31, 2019
|
|
$
|
8,100,947
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
9. INVESTMENTS – RELATED PARTIES
Investments in AVLP
and Alzamend Neuro, Inc. (“Alzamend”) at December 31, 2019 and 2018, are comprised of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Investment in convertible promissory note of AVLP
|
|
$
|
9,595,079
|
|
|
$
|
6,943,997
|
|
Accrued interest in convertible promissory note of AVLP
|
|
|
2,025,475
|
|
|
|
1,004,317
|
|
Total investment in convertible promissory note of AVLP – Gross
|
|
|
11,620,554
|
|
|
|
7,948,314
|
|
Less: provision for loan losses
|
|
|
(5,079,834
|
)
|
|
|
—
|
|
Less: original issue discount
|
|
|
—
|
|
|
|
(2,336,693
|
)
|
Total investment in convertible promissory note of AVLP
|
|
$
|
6,540,720
|
|
|
$
|
5,611,621
|
|
|
|
|
|
|
|
|
|
|
Investment in derivative instruments of AVLP
|
|
|
1,330,684
|
|
|
|
2,230,641
|
|
Investment in common stock of AVLP
|
|
|
238,602
|
|
|
|
812,858
|
|
Investment in common stock of Alzamend
|
|
|
558,938
|
|
|
|
—
|
|
Investment in derivative instruments and common stock of AVLP and
Alzamend
|
|
$
|
2,128,224
|
|
|
$
|
3,043,499
|
|
|
|
|
|
|
|
|
|
|
Total investment in AVLP and Alzamend – Net
|
|
$
|
8,668,944
|
|
|
$
|
8,655,120
|
|
|
|
|
|
|
|
|
|
|
Investment in warrants and common stock of AVLP and Alzamend
|
|
$
|
2,128,224
|
|
|
$
|
3,043,499
|
|
Investment in convertible promissory note of AVLP
|
|
|
6,540,720
|
|
|
|
5,611,621
|
|
Total investment in AVLP and Alzamend – Net
|
|
$
|
8,668,944
|
|
|
$
|
8,655,120
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The following table
summarizes the changes in our investments in AVLP and Alzamend during the years ended December 31, 2019 and 2018:
|
|
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, 2018
|
|
$
|
7,728,001
|
|
|
$
|
2,332,910
|
|
|
$
|
10,060,911
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
1,671,936
|
|
|
|
1,671,936
|
|
Payment of convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
(1,107,500
|
)
|
|
|
(1,107,500
|
)
|
Investment in common stock of AVLP
|
|
|
417,169
|
|
|
|
—
|
|
|
|
417,169
|
|
Fair value of warrants issued by AVLP
|
|
|
2,255,341
|
|
|
|
—
|
|
|
|
2,255,341
|
|
Unrealized loss in warrants of AVLP
|
|
|
(6,926,293
|
)
|
|
|
—
|
|
|
|
(6,926,293
|
)
|
Unrealized loss in common stock of AVLP
|
|
|
(430,719
|
)
|
|
|
—
|
|
|
|
(430,719
|
)
|
Accretion of discount
|
|
|
—
|
|
|
|
2,034,358
|
|
|
|
2,034,358
|
|
Accrued Interest
|
|
|
—
|
|
|
|
679,917
|
|
|
|
679,917
|
|
Balance at December 31, 2018
|
|
$
|
3,043,499
|
|
|
$
|
5,611,621
|
|
|
$
|
8,655,120
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
1,600,164
|
|
|
|
1,600,164
|
|
Investment in common stock of AVLP and Alzamend
|
|
|
261,132
|
|
|
|
—
|
|
|
|
261,132
|
|
Fair value of derivative instruments issued by AVLP
|
|
|
1,050,918
|
|
|
|
—
|
|
|
|
1,050,918
|
|
Unrealized loss in derivative instruments of AVLP
|
|
|
(1,950,875
|
)
|
|
|
—
|
|
|
|
(1,950,875
|
)
|
Unrealized loss in common stock of AVLP and Alzamend
|
|
|
(276,450
|
)
|
|
|
—
|
|
|
|
(276,450
|
)
|
Provision for loan losses
|
|
|
—
|
|
|
|
(4,000,000
|
)
|
|
|
(4,000,000
|
)
|
Accretion of discount
|
|
|
—
|
|
|
|
2,307,777
|
|
|
|
2,307,777
|
|
Accrued Interest
|
|
|
—
|
|
|
|
1,021,158
|
|
|
|
1,021,158
|
|
Balance at December 31, 2019
|
|
$
|
2,128,224
|
|
|
$
|
6,540,720
|
|
|
$
|
8,668,944
|
|
The Company’s
investments in AVLP, a related party controlled by Philou Ventures, LLC, or Philou, an affiliate of the Company, consist of convertible
promissory notes, derivative instruments and shares of AVLP common stock. At December 31, 2019, the Company has provided loans
to AVLP in the principal amount $9,595,079 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company
warrants to purchase 19,190,158 shares of AVLP common stock. The warrants entitle the Company to purchase up to 19,190,158 shares
of AVLP common stock at an exercise price of $0.50 per share for a period of five years. The warrants were determined by the issuer
to be derivative financial instruments. At December 31, 2019 and 2018, the Company recorded a cumulative unrealized loss on its
investment in warrants of AVLP of $4,364,256 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 years ended December 31, 2019 and 2018, the Company recognized,
in other comprehensive loss, net unrealized loss on derivative securities of related party of $1,950,875 and $6,926,293, respectively.
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 1.42%
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.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
In accordance with
ASC No. 310, Receivables (“ASC 310”), the Company had accounted for its convertible promissory notes
in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued
interest and accretion of original issue discount and discount attributed to the fair value of the 19,190,158 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 $5,822,222 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
years ended December 31, 2019 and 2018, the Company recorded $2,307,777 and $2,034,358, respectively, of interest income for the
discount accretion. During the years ended December 31, 2019 and 2018, the Company recorded contractual interest attributed to
the AVLP Notes and AVLP Loan Agreement of $1,021,158 and $679,917, respectively.
The Company evaluated
the collectability of both interest and principal for the convertible promissory notes in AVLP to determine whether there was
an impairment. Based on current information and events, primarily the value of the underlying
conversion feature and current economic events, the Company concluded that an impairment existed at December 31, 2019 and
determined that the fair value of the convertible promissory notes in AVLP was approximately $6,540,720. The Company’s determination
of fair value was based upon the present value of a future liquidity event combined with the closing price of AVLP’s common
stock at December 31, 2019. Based upon decreases in the closing price of the AVLP’s common stock during the quarter ended
March 31, 2020, the Company expects to recognize an additional impairment charge during the first quarter of 2020. Accordingly,
the Company recorded a $4,000,000 provision for credit losses. Impairment assessments require significant judgments and are based
on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and estimated fair
value of the collateral.
During the years ended
December 31, 2019 and 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 December 31, 2019, the closing market price of AVLP’s common stock
was $0.24, 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 December 31, 2019, the Company’s investment in AVLP common stock had an unrealized
loss of $507,959.
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 the voting power conferred by its equity investment and which is deemed to
be more closely associated with AVLP, is the primary beneficiary. As a result, AVLP’s financial position and results of operations
are not consolidated in our financial position and results of operations.
10. INVESTMENTS IN LIMITED PARTNERSHIP
On June 8, 2018, the
Company entered into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the “NY
Partnership”). The NY Partnership is a limited partner in the partnership that is responsible for the construction and related
activities of a hotel in New York City. In connection with this transaction, the Company has agreed to finance a portion of the
capital required by the NY Partnership. As of December 31, 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.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
11. OTHER INVESTMENTS, RELATED PARTIES
The Company’s
other related party investments primarily consist of two investments.
MTIX, Ltd.
On December 5, 2017,
the Company entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson two convertible
promissory notes in the principal amounts of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange
for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.
During December 2017,
the Company issued 750 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently
sold the 750 shares. The proceeds from the sale of shares of common stock received upon the conversion of Note A were sufficient
to satisfy the entire $2,267,766 obligation as well as an additional $400,500 of value added tax due to WT Johnson. Concurrent
with entering into the exchange agreement, the Company received a promissory note in the amount of $2,668,266 from MTIX and cancelled
Note B. At December 31, 2019 and 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 price.
The Company will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years. During the years
ended December 31, 2019 and 2018, the Company recognized $30,000 in amortization expense. At December 31, 2019 and 2018, the unamortized
balance of the Israeli Property was $232,500 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.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
12. ACQUISITIONS
Business
combinations are accounted for under the acquisition method of accounting in accordance with ASC No. 805, Business Combinations.
Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values. Goodwill is
recorded to the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired
less liabilities assumed at the date of acquisition. Two acquisitions were completed during 2018: Enertec and I.AM.
Acquisitions during 2018
Enertec Systems
2001 Ltd.
On
December 31, 2017, Coolisys entered into a share purchase agreement with Micronet Enertec Technologies, Inc. (“MICT”),
a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary of MICT (“EML”
and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”), an Israeli corporation,
pursuant to which Coolisys acquired Enertec (the “Acquisition”). Enertec is a manufacturer of specialized electronic
systems for the military market. On May 23, 2018, Coolisys acquired Enertec for an aggregate cash purchase price of $4,850,099.
I.AM, Inc.
On
May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I.AM, David J. Krause and Deborah J. Krause.
Pursuant to the securities purchase agreement, I.AM sold to DPL, 981 shares of common stock for a purchase price of $981, representing,
upon the closing, 98.1% of I.AM’s outstanding common stock.
I.AM
owns and operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715,330 in outstanding
principal, pursuant to a loan and security agreement, between I.AM and DP Lending, which I.AM used to acquire the restaurants.
The purchase agreement provides that, as I.AM repays the outstanding loan to DP Lending in accordance with the loan agreement,
DP Lending will on a pro rata basis transfer shares of common stock of I.AM to David J. Krause, up to an aggregate of 471
shares.
Components of the purchase price for acquisitions
completed during the year ended December 31, 2018:
|
|
Enertec
|
|
|
I. AM
|
|
Accounts receivable
|
|
$
|
3,184,227
|
|
|
$
|
29,319
|
|
Inventories
|
|
|
1,343,053
|
|
|
|
40,581
|
|
Property and equipment
|
|
|
648,649
|
|
|
|
700,291
|
|
Trade name and trademark
|
|
|
2,094,741
|
|
|
|
520,000
|
|
Domain name and other intangible assets
|
|
|
—
|
|
|
|
90,000
|
|
Other assets
|
|
|
29,056
|
|
|
|
1,492
|
|
Accounts payable and accrued expenses
|
|
|
(2,702,306
|
)
|
|
|
(103,961
|
)
|
Deferred tax liability
|
|
|
(160,311
|
)
|
|
|
—
|
|
Notes payable
|
|
|
(4,235,725
|
)
|
|
|
—
|
|
Accrued severance pay
|
|
|
(131,811
|
)
|
|
|
—
|
|
Net liabilities assumed
|
|
|
69,573
|
|
|
|
1,277,722
|
|
Goodwill
|
|
|
4,780,526
|
|
|
|
265,252
|
|
Non-controlling interest
|
|
|
—
|
|
|
|
(33,242
|
)
|
Purchase price
|
|
$
|
4,850,099
|
|
|
$
|
1,509,732
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The
following pro forma data for the year ended December 31, 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:
|
|
For the Year Ended
|
|
|
|
December 31, 2018
|
|
Total Revenue
|
|
$
|
28,691,641
|
|
Net loss
|
|
$
|
(35,627,242
|
)
|
Less: Net loss attributable
|
|
|
|
|
to non-controlling interest
|
|
|
748,320
|
|
Net loss attributable to DPW Holdings
|
|
|
(34,878,922
|
)
|
Preferred deemed dividends on Series B
|
|
|
|
|
Preferred Stock
|
|
|
(108,049
|
)
|
Net loss available to common stockholders
|
|
$
|
(34,986,971
|
)
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(482.60
|
)
|
|
|
|
|
|
Basic and diluted weighted average
|
|
|
|
|
common shares outstanding
|
|
|
72,498
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(34,986,971
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
Change in net foreign currency
|
|
|
|
|
translation adjustments
|
|
|
(377,823
|
)
|
Net unrealized loss on derivative
|
|
|
|
|
securities of related party
|
|
|
(8,027,746
|
)
|
Other comprehensive income (loss)
|
|
|
(8,405,569
|
)
|
Total Comprehensive loss
|
|
$
|
(43,392,540
|
)
|
13. 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 December 31, 2019, an aggregate of 103,105 of the Company's options
are still available for future grant.
During the year ended
December 31, 2019, the Company did not grant any options under the Plans and during the year ended December 31, 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 year ended December 31, 2018 was $513,510, which is being recognized as stock-based compensation
expense over the requisite four-year service period. During the years ended December 31, 2019 and 2018, the Company also issued
69,375 and 1,979, respectively, shares of common stock to its consultants and service providers. The grant date fair value of these
shares amounted to $338,619 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 CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
During the year ended
December 31, 2018, the Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with
the following weighted average assumptions:
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
Weighted average risk-free interest rate
|
|
|
2.41% — 2.80%
|
|
Weighted average life (in years)
|
|
|
4.7
|
|
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 December 31, 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
|
|
1,169
|
|
6.14
|
|
$542.67
|
|
630
|
|
$543.72
|
$1,056.00 - $1,104.00
|
|
188
|
|
7.92
|
|
$1,104.00
|
|
98
|
|
$1,104.00
|
$1,208.00 - $1,352.00
|
|
31
|
|
3.63
|
|
$1,339.20
|
|
31
|
|
$1,339.20
|
$480.00 - $1,352.00
|
|
1,388
|
|
6.33
|
|
$636.47
|
|
759
|
|
$648.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances outside of Plans
|
$640.00 - $1,856.00
|
|
1,375
|
|
4.78
|
|
$827.64
|
|
313
|
|
$921.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
$480.00 - 1,856.00
|
|
2,763
|
|
5.56
|
|
$731.62
|
|
1,072
|
|
$728.26
|
On
December 31, 2019 and 2018, there was no aggregate intrinsic value of stock options that were outstanding and exercisable.
The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of
such awards as of the period-end date
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The total stock-based
compensation expense related to stock options and stock awards issued pursuant to the Plans to the Company’s employees, consultants
and directors, included in reported net loss for the years ended December 31, 2019 and 2018, is comprised as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenues
|
|
$
|
-
|
|
|
$
|
4,874
|
|
Engineering and product development
|
|
|
-
|
|
|
|
13,650
|
|
Selling and marketing
|
|
|
-
|
|
|
|
11,922
|
|
General and administrative
|
|
|
715,877
|
|
|
|
2,921,532
|
|
Stock-based compensation from Plans
|
|
$
|
715,877
|
|
|
$
|
2,951,978
|
|
Stock-based compensation from issuances
|
|
|
|
|
|
|
|
|
outside of Plans
|
|
|
868,114
|
|
|
|
1,767,287
|
|
Total Stock-based compensation
|
|
$
|
1,583,991
|
|
|
$
|
4,719,265
|
|
The combination of
stock-based compensation of $715,877 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 $615,095, which were issued outside of the Plans, resulted in aggregate stock-based
compensation of $1,583,991 during the year ended December 31, 2019.
A summary of option
activity under the Company's stock option plans as of December 31, 2019 and 2018, and changes during the years ended are as follows:
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Value
|
|
January 1, 2018
|
|
|
3,174
|
|
|
|
3,428
|
|
|
$
|
617.20
|
|
|
|
8.80
|
|
|
$
|
6,688
|
|
Adoption of 2018 SIP
|
|
|
12,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
(1,979
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,250
|
)
|
|
|
1,250
|
|
|
$
|
560.00
|
|
|
|
|
|
|
|
|
|
Forfeited 1
|
|
|
250
|
|
|
|
(275
|
)
|
|
$
|
810.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(75
|
)
|
|
$
|
1,304.00
|
|
|
|
|
|
|
|
|
|
January 1, 2019
|
|
|
12,695
|
|
|
|
4,328
|
|
|
$
|
576.40
|
|
|
|
7.52
|
|
|
$
|
0
|
|
Amendment to 2018 SIP
|
|
|
162,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
(75,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited 1
|
|
|
2,910
|
|
|
|
(2,940
|
)
|
|
$
|
853.47
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
103,105
|
|
|
|
1,388
|
|
|
$
|
636.47
|
|
|
|
6.33
|
|
|
$
|
0
|
|
1 Includes options that were issued pursuant
to the Company’s 2002 Plan and are not available for future issuance.
As of December 31,
2019, there was $281,288 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 2.35 years.
14. WARRANTS
During the years ended
December 31, 2019 and 2018, the Company issued a total of 777,822 warrants at an average exercise price of $30.55 per share.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Warrant issuances during 2018
During the year ended
December 31, 2018, the Company issued a total of 18,379 warrants at an average exercise price of $868 per share.
|
(i)
|
On January 23, 2018, the Company issued warrants to purchase an aggregate of 781 shares of
common stock at an exercise price equal to $1,760 per share of common stock in connection with the issuance of a 10% senior convertible
promissory note in the aggregate principal amount of $1,250,000 (see Note 20).
|
|
(ii)
|
On January 25, 2018, the Company entered into three agreements for the Purchase and Sale of Future
Receipt, pursuant to which the Company sold up to (i) $562,125 of the Company’s future receipts for a purchase price of $375,000,
(ii) $337,275 in future receipts for a purchase price of $225,000 and (iii) $118,000 in future receipts for a purchase price of
$100,000. Under the terms of these agreements, the Company issued warrants to purchase an aggregate of 140 shares of common stock
at an exercise price of $1,800 per share of common stock and warrants to purchase 203 shares of common stock at an exercise price
of $2,000 per share of common stock (see Note 18).
|
|
(iii)
|
On March 22, 2018, the Company issued warrants to purchase an aggregate of 1,563 shares of
common stock at an exercise price equal to $920 per share of common stock in connection with the issuance of a promissory
note in the principal amount of $2,100,000 with a term of two months, subject to the Company’s ability to prepay within one
month (see Note 18).
|
|
(iv)
|
On March 23, 2018, the Company entered into a securities purchase agreement to sell and issue a
12% promissory note in the principal amount of $1,000,000 and a warrant to purchase 375 shares of common stock to an accredited
investor. Since the promissory note was not paid in full on or before May 23, 2018, the
Company issued an additional warrant to purchase 188 shares of common stock, at an exercise price of $920 per share of common stock
for a total of 563 warrants (see Note 18).
|
|
(v)
|
On April 16, 2018, the Company issued warrants to purchase an aggregate of 1,243 shares of
common stock at an exercise price equal to $1,040 per share of common stock in connection with the issuance of 12% secured convertible
promissory notes in the aggregate principal amount of $1,722,222 (see Note 20).
|
|
(vi)
|
On April 24, 2018, the Company issued warrants to purchase 446 shares of common stock, at an exercise
price of $560 per share of common stock, in connection with the Preferred Stock Purchase Agreement to purchase 25,000 shares of
Series B Preferred Stock by Philou (see Note 22).
|
|
(vii)
|
On October 5, 2017, Ault & Company purchased 94 shares of the Company’s common stock
at $480 per share and a warrant to purchase up to 94 shares of the Company’s common stock at $480 per share for an aggregate
purchase price of $45,000. The shares and warrants were issued by the Company on May 8, 2018, the date all necessary approvals
to issue the shares were received. Ault & Company is controlled by Mr. Milton Ault, the Company’s Chairman and
Chief Executive Officer (see Note 22).
|
|
(viii)
|
On May 15, 2018, the Company entered into securities purchase agreements with certain investors
in which it sold an aggregate of 9,614 shares of its common stock for aggregate consideration of $6,000,000. In connection with
this financing, the Company issued (i) five-year warrants to purchase 2,404 shares of the Company’s Class A common stock
and (ii) five-year warrants to purchase 7,211 shares of the Company’s Class A common stock. The warrants were issued at an
exercise price of $752 per share of common stock (see Note 22).
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
|
(ix)
|
On May 15, 2018, the Company entered into a securities purchase agreement with an institutional
investor to sell and issue a senior secured convertible promissory note with a principal face amount of $6,000,000 and (i) a five-year
warrant to purchase 1,389 shares of the Company’s Class A common stock at an exercise price of $1,080 per share of Class
A common stock (the “Series A Warrant”) and (ii) a five-year warrant to purchase 2,155 shares of the Company’s
Class B common stock at an exercise price of $696 per share of Class A common stock (see Note 20). In connection with the financing,
the Company issued the placement agent a warrant to purchase 188 shares of common stock with an exercise price of $800.
|
Warrant issuances during 2019
During the year ended
December 31, 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 22).
|
|
(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 (see Note 20).
|
|
(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 (see Note 20).
|
The following table
summarizes information about common stock warrants outstanding at December 31, 2019:
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$
|
—
|
|
|
|
6,500
|
|
|
|
4.25
|
|
|
$
|
—
|
|
|
|
6,500
|
|
|
$
|
—
|
|
$
|
8.00
|
|
|
|
397
|
|
|
|
6.84
|
|
|
$
|
8.00
|
|
|
|
397
|
|
|
$
|
8.00
|
|
$
|
8.80
|
|
|
|
25,000
|
|
|
|
4.50
|
|
|
$
|
8.80
|
|
|
|
25,000
|
|
|
$
|
8.80
|
|
$
|
12.00
|
|
|
|
12,500
|
|
|
|
4.36
|
|
|
$
|
12.00
|
|
|
|
12,500
|
|
|
$
|
12.00
|
|
$
|
19.80
|
|
|
|
15,555
|
|
|
|
4.25
|
|
|
$
|
19.80
|
|
|
|
15,555
|
|
|
$
|
19.80
|
|
$
|
440.00
|
|
|
|
355
|
|
|
|
2.86
|
|
|
$
|
440.00
|
|
|
|
355
|
|
|
$
|
440.00
|
|
$
|
480.00
|
|
|
|
94
|
|
|
|
3.33
|
|
|
$
|
480.00
|
|
|
|
94
|
|
|
$
|
480.00
|
|
$
|
528.00
|
|
|
|
186
|
|
|
|
2.84
|
|
|
$
|
528.00
|
|
|
|
186
|
|
|
$
|
528.00
|
|
$
|
560.00
|
|
|
|
2,657
|
|
|
|
2.87
|
|
|
$
|
560.00
|
|
|
|
2,657
|
|
|
$
|
560.00
|
|
$
|
600.00
|
|
|
|
170
|
|
|
|
2.37
|
|
|
$
|
600.00
|
|
|
|
170
|
|
|
$
|
600.00
|
|
$
|
640.00
|
|
|
|
200
|
|
|
|
2.32
|
|
|
$
|
640.00
|
|
|
|
200
|
|
|
$
|
640.00
|
|
$
|
752.00
|
|
|
|
9,614
|
|
|
|
3.38
|
|
|
$
|
752.00
|
|
|
|
9,614
|
|
|
$
|
752.00
|
|
$
|
800.00
|
|
|
|
350
|
|
|
|
2.94
|
|
|
$
|
800.00
|
|
|
|
350
|
|
|
$
|
800.00
|
|
$
|
880.00
|
|
|
|
947
|
|
|
|
1.67
|
|
|
$
|
880.00
|
|
|
|
947
|
|
|
$
|
880.00
|
|
$
|
920.00
|
|
|
|
2,126
|
|
|
|
3.24
|
|
|
$
|
920.00
|
|
|
|
2,126
|
|
|
$
|
920.00
|
|
$
|
1,040.00
|
|
|
|
1,243
|
|
|
|
3.29
|
|
|
$
|
1,040.00
|
|
|
|
1,243
|
|
|
$
|
1,040.00
|
|
$
|
1,760.00
|
|
|
|
781
|
|
|
|
3.06
|
|
|
$
|
1,760.00
|
|
|
|
781
|
|
|
$
|
1,760.00
|
|
$
|
1,800.00
|
|
|
|
140
|
|
|
|
3.07
|
|
|
$
|
1,800.00
|
|
|
|
140
|
|
|
$
|
1,800.00
|
|
$
|
2,000.00
|
|
|
|
203
|
|
|
|
3.07
|
|
|
$
|
2,000.00
|
|
|
|
203
|
|
|
$
|
2,000.00
|
|
|
$8.00 - $2,000.00
|
|
|
|
79,018
|
|
|
|
3.74
|
|
|
$
|
206.57
|
|
|
|
79,018
|
|
|
$
|
206.57
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The Company has valued
the warrants at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables
such as the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our
stock over the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield
available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.
The Company utilized
the Black-Scholes option pricing model and the assumptions used during the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
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
|
|
15. OTHER CURRENT LIABILITIES
Other current liabilities at
December 31, 2019 and 2018 consist of:
|
|
2019
|
|
|
2018
|
|
Accrued payroll and payroll taxes
|
|
$
|
1,719,429
|
|
|
$
|
1,497,470
|
|
Warranty liability
|
|
|
80,412
|
|
|
|
86,495
|
|
Other accrued expenses
|
|
|
227,744
|
|
|
|
284,437
|
|
|
|
$
|
2,027,585
|
|
|
$
|
1,868,402
|
|
16. LEASES
We have operating leases
for office space and restaurant locations. Our leases have remaining lease terms of 4 months to 11 years, some of
which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within
1 year.
The following table
provides a summary of leases by balance sheet category as of December 31, 2019:
|
|
December 31, 2019
|
|
Operating right-of-use assets
|
|
$
|
5,276,056
|
|
Operating lease liability - current
|
|
|
714,393
|
|
Operating lease liability - non-current
|
|
|
4,677,565
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The components of lease
expenses for the year ended December 31, 2019, were as follows:
|
|
Year Ended
|
|
|
|
December 31, 2019
|
|
Operating lease cost
|
|
$
|
934,766
|
|
Short-term lease cost
|
|
|
-
|
|
Variable lease cost
|
|
|
468,655
|
|
The following tables
provides a summary of other information related to leases for the year ended December 31, 2019:
|
|
December 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,291,919
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
-
|
|
Weighted-average remaining lease term - operating leases
|
|
|
7.8 years
|
|
Weighted-average discount rate - operating leases
|
|
|
10
|
%
|
The Company determined
that using a discount rate of 10% is reasonable, as this is consistent with the mortgage rates for commercial properties for the
time period commensurate with the terms of the leases.
Maturity of lease liabilities
under our non-cancellable operating leases as of December 31, 2019, are as follows:
Payments due by period
|
|
|
|
2020
|
|
$
|
1,220,437
|
|
2021
|
|
|
1,094,515
|
|
2022
|
|
|
929,674
|
|
2023
|
|
|
943,159
|
|
2024
|
|
|
914,942
|
|
Thereafter
|
|
|
2,746,189
|
|
Total lease payments
|
|
|
7,848,916
|
|
Less interest
|
|
|
(2,456,959
|
)
|
Present value of lease liabilities
|
|
$
|
5,391,957
|
|
17. ADVANCES ON FUTURE RECEIPTS
During
2018, the Company received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future
Receipts (the “Agreements on Future Receipts”) pursuant to which the Company sold in the aggregate $5,632,400 in future
receipts for a purchase price of $4,100,000. During 2019, the Company entered into six additional Agreements on Future Receipts
and sold in the aggregate $1,517,847 in future receipts of the Company for $1,017,170. Future receipts include cash, check, ACH,
credit card, debit card, bank card, charge card or other form of monetary payment. The Agreements on Future Receipts have been
personally guaranteed by the Company’s Chief Executive Officer and in one instance has also been guaranteed by Philou.
During
the years ended December 31, 2019 and 2018, based upon the difference between the amount of future receipts sold and the actual
proceeds received, the Company recorded a discount in the amount of $500,677 and $1,651,193, respectively, in connection with these
agreements. Under the terms of the agreements entered into during the year ended December 31, 2018, the Company also issued warrants
to purchase an aggregate of 140 shares of common stock at an exercise price of $1,800 per share of common stock and warrants to
purchase 203 shares of common stock at an exercise price of $2,000 per share of common stock. The Company recorded an additional
discount of $258,370 based on the estimated fair value of these warrants. The Company computed the fair value of these warrants
using the Black-Scholes option pricing model. These discounts were reflected as a reduction on the outstanding liability and were
amortized as non-cash interest expense over the term of the agreement. During the years ended December 31, 2019 and 2018, non-cash
interest expense of $495,361 and $2,489,403, respectively, was recorded from the amortization of debt discounts.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The
Company has defaulted on certain prior repayment obligations on these Agreements on Future Receipts but has received a forbearance
on the repayment of the outstanding amount until May 5, 2020.
18. NOTES PAYABLE
Notes Payable at December
31, 2019 and 2018, are comprised of the following.
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Dominion June 2019 short-term promissory note
|
|
$
|
2,510,173
|
|
|
$
|
—
|
|
12% short-term promissory note
|
|
|
—
|
|
|
|
1,000,000
|
|
Other short-term notes payable
|
|
|
1,020,199
|
|
|
|
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
|
|
|
290,560
|
|
|
|
291,988
|
|
Note payable to Dept. of Economic and Community Development
|
|
|
229,096
|
|
|
|
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
|
|
|
16,890
|
|
|
|
18,589
|
|
Enertec Short term bank credit
|
|
|
1,622,337
|
|
|
|
1,586,864
|
|
Total notes payable
|
|
|
6,020,655
|
|
|
|
7,031,486
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(29,348
|
)
|
|
|
(151,499
|
)
|
Unamortized financing cost
|
|
|
(3,668
|
)
|
|
|
(7,541
|
)
|
Total notes payable, net of financing cost
|
|
$
|
5,987,639
|
|
|
$
|
6,872,446
|
|
Less: current portion
|
|
|
(5,505,015
|
)
|
|
|
(6,388,787
|
)
|
Notes payable – long-term portion
|
|
$
|
482,624
|
|
|
$
|
483,659
|
|
Dominion Short-Term Promissory Note
On
June 18, 2019, the Company entered into a securities purchase agreement with Dominion Capital, LLC, a Connecticut limited liability
company (“Dominion”), to sell a 10% senior secured promissory note with a principal face amount of $2,900,000 and issue
12,500 shares of the Company’s common stock. In addition, Ault & Company has guaranteed the prompt and complete payment
and performance of the obligations of the Company pursuant to this senior secured promissory note. The Dominion 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
did not make these payments and this note was in default at December 31, 2019. On February 10, 2020, the Dominion Short-Term Promissory
Note was acquired pursuant to the terms of a Master Exchange Agreement (see note 26).
12% Short-Term
Promissory Note
On
March 23, 2018, the Company entered into a securities purchase agreement pursuant to which it issued a 12% promissory note and
warrants to purchase 563 shares of common stock to an accredited investor. The promissory
note was issued with a 10% OID. The promissory note was in the principal amount of $1,000,000, was sold for $900,000, accrued simple
interest at 12% and was due on June 22, 2018. The exercise price of the warrant is $920.00 per share. The Company recorded debt
discount in the amount of $271,565 based on the estimated fair value of these warrants. The Company computed the fair value of
these warrants using the Black-Scholes option pricing model. The debt discount was amortized as non-cash interest expense over
the term of the debt. The 12% promissory note was unsecured by any of the Company’s assets but was guaranteed by our Chief
Executive Officer. On July 3, 2019, the Company entered into an exchange agreement with the institutional investor pursuant to
which the Company issued the 12% July 2019 convertible promissory note (see note 20).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Other Short-Term Notes Payable
During
the years ended December 31, 2019 and 2018, the Company entered into the following short-term promissory notes:
|
(i)
|
On June 8, 2018, the Company issued a promissory note in
the aggregate principal face amount of $511,750 to an accredited investor. The promissory note included an OID of $66,750
resulting in net proceeds to the Company of $445,000 and was due and payable on July 9, 2018.
At December 31, 2018, the outstanding principal balance on this note was $54,750 and since payment was not made on the specified
maturity date this unsecured promissory note was in default. During the year ended December
31, 2019, the Company paid the remaining outstanding balance of $54,750.
|
|
(ii)
|
On July 13, 2018, the Company issued a 15% promissory note in the principal amount of $176,000
to an accredited investor. This promissory note included an OID of $16,000 and debt issuance costs of $5,000, resulting in net
proceeds of $155,000. At December 31, 2018, the outstanding balance on this note was $124,303.
The principal and accrued interest on this note was due and payable on October 11, 2018 and was in default at December 31,
2018. Mr. Ault personally guaranteed the repayment of this note. During the year ended December
31, 2019, the Company paid the remaining outstanding balance of $124,303.
|
|
(iii)
|
On August 10, 2018, DP Lending issued a 12% promissory note in the principal amount of $550,000
to an accredited investor. This promissory note included an OID of $50,000 resulting in net proceeds of $500,000. The principal
and accrued interest on this note was due and payable on August 10, 2019. The principal and accrued interest on this 12% promissory
note was exchanged pursuant to the terms of the July 2019 Exchange Agreement discussed below.
|
|
(iv)
|
On August 16, 2018, the Company issued an 8% promissory note in the principal amount of $225,000
to an accredited investor. This promissory note included an OID of $25,000 resulting in net proceeds of $200,000. At
December 31, 2018, the outstanding balance on this note was $159,500. This note was due and payable on October 5, 2018 and
was in default at December 31, 2018. Mr. Ault personally guaranteed the repayment of this note. During
the year ended December 31, 2019, the Company paid the remaining outstanding balance of $159,500.
|
|
(v)
|
On August 23, 2018, DP Lending issued a promissory note in the principal amount of $85,000 to an
accredited investor. This promissory note included an OID of $10,000 resulting in net proceeds of $75,000. At
December 31, 2018, the outstanding balance on this note was $85,000. This note was due and payable on September 24, 2018,
subject to a 28-day extension available to DP Lending. However, since payment was not made on the specified maturity date this
unsecured promissory note is currently in default. During the year ended December 31, 2019,
the Company made principal payments of $46,500 leaving a remaining outstanding balance of $38,500.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
|
(vi)
|
On October 9, 2018, DP Lending issued a promissory note in the principal amount of $60,000 to an
accredited investor. This promissory note included an OID of $10,000 resulting in net proceeds of $50,000. At
December 31, 2018, the outstanding balance on this note was $60,000. This note was due and payable on October 23, 2018.
However, since payment was not made on the specified maturity date this unsecured promissory note is currently in default. During
the year ended December 31, 2019, the Company made principal payments of $33,301 leaving a remaining outstanding balance of $26,699.
|
|
(vii)
|
On July 11, 2019, the Company entered into a non-binding term sheet with Ding Gu to sell, for a
purchase price of $400,000, a 12% original issue discount promissory note with an aggregate principal face amount of $440,000.
Definitive documents have not been executed and a dispute has arisen over transaction. On January 17, 2020, Mr. Gu. filed a complaint
in the Supreme Court of the State of New York (see note 21 ) regarding the terms of this non-binding term sheet and those of a
4% convertible promissory note (see note 20).
|
|
(viii)
|
Between September 2019 and December 2019, DP Lending entered into a series of 12% three year term
promissory notes in the aggregate amount of $155,000.
|
|
(ix)
|
During November 2019, we entered into a short term promissory note in the aggregate principal amount
of $360,000. The promissory note contained an original issue discount of $60,000 resulting in net proceeds of $300,000. The interest
rate on the promissory note is 12% per annum and is payable on the maturity date, February 14, 2020.
|
12% September
short-term promissory notes
During September 2018,
the Company issued to institutional investors 12% term promissory notes in the principal face amount of $789,473, with an interest
rate of 12% for a purchase price of $750,000. The outstanding principal face amount, plus any accrued and unpaid interest, was
due by December 31, 2018. During October 2018, in accordance with the notes, the Company issued 563 shares of its common stock
to the investors. The Company estimated that the grant date fair value of the shares of common stock was $151,994, which was determined
from the closing price of the Company’s common stock on the dates of issuance. Since payment was not made on the specified
maturity date these 12% term promissory notes were in default at December 31, 2018. During the first half of 2019, the Company
made principal payments in the aggregate amount of $263,157 and on July 2, 2019, the remaining balance of the $526,316 was exchanged
for a 12% convertible promissory note pursuant to the terms of an exchange agreement (see note 20).
8% short-term
promissory notes
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”). The 8% Short-Term Promissory Notes contained an OID of $262,600 resulting in
net proceeds to the Company of $1,010,000. In conjunction with these notes, the Company issued an aggregate of 500 shares of common
stock to the investors. The Company estimated that the grant date fair value of the shares of common stock was $137,544, which
was determined from the closing price of the Company’s common stock on the dates of issuance. During the year ended December
31, 2019, the Company entered into a series of exchange agreements, referred to below as the January 2019 Exchange Agreement, February
2019 Exchange Agreement and the July 2019 Exchange Agreement in which the Company exchanged the principal balance of the $954,450
for a series of 8% convertible promissory notes. Further, on February 10, 2020, the final 8% short-term promissory note in the
principal amount of $318,150 was acquired pursuant to the terms of a Master Exchange Agreement (see note 26).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
October short-term
promissory note
On
October 11, 2018, the Company entered into a securities purchase agreement with an institutional investor providing for the issuance
of (i) a secured promissory note in the aggregate principal face amount of $565,000 due December 8, 2018, for which the Company
received an aggregate of $510,000, and (ii) issued an aggregate of 500 shares of common stock to the investor. Upon maturity, the
Company was required to pay $27,500 of interest. The note was not paid on the maturity date and was in default at December 31,
2018. The Company estimated that the grant date fair value of the shares of common stock was $104,430, which was determined from
the closing price of the Company’s common stock on the dates of issuance. The October short-term promissory note was exchanged
pursuant to the terms of the January 2019 Exchange Agreement.
Notes payable
to Wells Fargo
At
December 31, 2019 and 2018, Microphase had guaranteed the repayment of two equity lines of credit in the aggregate amount of $290,560
and $291,988, respectively, with Wells Fargo Bank, NA (“Wells Fargo”) (collectively, the “Wells Fargo Notes”).
These loans originated prior to the Company’s acquisition of Microphase and Microphase was the recipient of the actual proceeds
from the loans. Microphase had previously guaranteed the payment under the first Wells Fargo equity line during 2008, the proceeds
of which Microphase had received from a concurrent loan from Edson Realty Inc., a related party owned real estate holding company.
As of December 31, 2019, the first line of credit, which is secured by residential real estate owned by a former officer, had an
outstanding balance of $210,512, with an annual interest rate of 4.00%. Microphase had guaranteed the payment under the second
Wells Fargo equity line in 2014. Microphase had received working capital loans from the former CEO from funds that were drawn against
the second Wells Fargo equity line. As of December 31, 2019, the second line of credit, secured by the former CEO’s principal
residence, had an outstanding balance of $80,048, with an annual interest rate of 3.00%.
Note payable
to Dept. of Economic and Community Development
In
August 2016, Microphase received a $300,000 loan, of which $70,904 has been repaid, pursuant to the State of Connecticut Small
Business Express Job Creation Incentive Program which is administered through the Department of Economic and Community Development
(“DECD”) (the “DECD Note”). The DECD Note accrues interest at a rate of 3% per annum and is due in August
2026. Payment of principal and interest commenced in September 2017, payable in equal monthly installments over the remaining term.
Microphase short-term promissory note
On
December 28, 2018, Microphase entered into a $200,000 Secured Promissory Note (the “Microphase Note”), whereby Microphase
agreed to pay interest in an amount of 10% per annum in cash to the investor, beginning on January 15, 2019, on a monthly basis,
until the Microphase Note is paid in full. The maturity date of the Microphase Note shall be the earlier of March 31, 2019, or
as otherwise provided in the terms of the Microphase Note. The Microphase Note was paid from proceeds received in the April 2,
2019 public offering (see note 22). In connection with the Microphase Note, Milton C. Ault III provided a personal guarantee for
the benefit of the investor.
Note payable
to Power-Plus Member
Pursuant
to the terms of the Purchase Agreement with Power-Plus, the Company entered into a two-year promissory note in the amount of $255,000
payable to the former owner as part of the purchase consideration. On October 18, 2017, for cancellation of debt, the Company
entered into a subscription agreement with the former owner under which the Company sold 173 shares of common stock at $537.57 per
share for an aggregate purchase price of $93,000. At December 31, 2019 and 2019, the outstanding balance on this note was $13,250.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Note Payable to People's United Bank
Microphase utilizes
a $20,000 overdraft credit line at People’s United Bank with an annual interest rate of 15%. At December 31, 2019 and 2018,
the balance of that overdraft credit line was $16,890 and $18,589, respectively.
Enertec Short Term Bank Credit and Secured Promissory Note
At
December 31, 2019 and 2019, Enertec had short term bank credit of $1,622,337 and $1,586,864, respectively, that bears interest
at prime plus 0.7% through 3.85% paid either on a monthly or weekly basis. Further, the Company has undertaken to comply with certain
covenants under its bank loan.
On
December 28, 2018, Enertec entered into a $500,000 secured promissory note (the “Enertec Note”), whereby Enertec agreed
to pay interest in an amount of 10% per annum in cash to the investor, beginning on January 15, 2019, on a monthly basis, until
the Enertec Note was paid in full. The proceeds from the Enertec Note were received in January 2019. The Enertec Note was paid
from proceeds received in the April 2, 2019 public offering (see note 22). In connection with the Enertec Note, Milton C. Ault
III provided a personal guarantee for the benefit of the investor.
Exchange Agreements
January 2019
Exchange Agreement
On
January 23, 2019, the Company entered into an exchange agreement (the “January Exchange Agreement”) with an institutional
investor pursuant to which the Company issued to the investor two new 8% promissory notes in the aggregate principal amount of
$1,043,799 (the “New Notes”) in exchange for one of the 8% Short-Term Promissory Notes in the aggregate principal amount
of $318,150, the October short-term promissory note in the aggregate principal amount of $565,000 and accrued interest of $160,649.
Pursuant
to the January Exchange Agreement, the investor received 10,918 shares of common stock of the Company issued under the Company’s
Registration Statement on Form S-3 (File No. 333-222132) in satisfaction of the New Notes. Further, since the investor’s
proceeds from the sale of all 10,918 shares of common stock received were not equal to the outstanding principal balance of the
New Notes, the Company was required to pay to the investor the difference, which amounted to $244,898, in cash or through the delivery
of free trading shares of common stock. The Company recognized additional interest expense for the difference of $244,898. On March
19, 2019, the Company issued to the investor an additional 2,551 shares of the Company’s common stock, with a value of $73,016,
in partial satisfaction of the liability, resulting in a remaining balance due of $171,882 which was paid during June 2019.
February 2019 Exchange Agreement
On
February 20, 2019, the Company entered into an exchange agreement (the “February Exchange Agreement”) with an institutional
investor pursuant to which the Company issued to the investor a new 8% promissory note in the principal amount of $433,884 (the
“New Note”) in exchange for one of the 8% Short-Term Promissory Notes in the aggregate principal amount of $318,150
and accrued interest of $115,734 (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 was 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.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
July 2019 Exchange Agreement
On July 2, 2019, the
Company 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) one of the 8% Short-Term
Promissory Notes in the aggregate principal amount of $318,150, the Company sold to the investor a new convertible promissory note
in the principal amount of $1,250,000 with an interest rate of 8% per annum and a maturity date of December 31, 2019. This note
shall be convertible into shares of the Company’s common stock at conversion price of $8.80. Since the exchange provided
the institutional investor with a substantive conversion feature, the debt instruments were determined to be substantially different
and a loss on extinguishment of $54,465 was recognized.
Other Notes Payable
|
(a)
|
On January 25, 2018, the Company issued two 5% promissory notes, each in the principal face amount
of $2,500,000 for an aggregate debt of $5,000,000 to two institutional investors. The entire unpaid balance of the principal
and accrued interest on each of the 5% promissory notes was due and payable on February 23, 2018, subject to a 30-day extension
available to the Company. The proceeds from these two 5% promissory notes were used
to purchase 1,000 Antminer S9s manufactured by Bitmain Technologies, Inc. in connection with
our crypto mining operations. The Company repaid the entire outstanding principal and accrued interest on the 5% promissory
notes of $5,101,127 during 2018.
|
|
(b)
|
On February 20, 2018, the Company issued a promissory note
in the principal face amount of $900,000 to an accredited investor. This promissory note included an original issue discount
(“OID”) of $150,000 resulting in net proceeds of $750,000. The principal and
OID on this note was due and payable on March 22, 2018. On March 23, 2018, the Company entered into a new promissory note in the
principal amount of $2,100,000 for a term of two months, subject to the Company’ ability to prepay within one month. The
new promissory note included an OID of $350,000, resulting in net proceeds of $1,750,000. The
Company also issued to the lender a warrant to purchase 1,563 shares of the Company’s common stock at an exercise price of
$920 per share. The principal amount of the new promissory note consisted of cash of $1,000,000 and the cancellation of
principal of $750,000 from the February 20, 2018 promissory note. The interest on the February 20, 2018 note in the amount of $150,000
was paid to the lender prior to entering into the new promissory note. The warrants are exercisable commencing on the issuance
date for a term of three years. The exercise price of these warrants is subject to adjustment for customary stock splits, stock
dividends, combinations and other standard anti-dilution events. The warrants may be exercised for cash or on a cashless basis.
The Company recorded debt discount in the amount of $604,227 based on the estimated fair value of these warrants. The Company computed
the fair value of these warrants using the Black-Scholes option pricing model. The debt discount was amortized as non-cash interest
expense over the term of the debt. On April 23, 2018, the Company paid the entire outstanding
principal on the new promissory note of $2,100,000. The new promissory note had been guaranteed by our Chief Executive Officer
and had also been guaranteed by Philou.
|
19. NOTES PAYABLE – RELATED PARTIES
Notes Payable –
Related parties at December 31, 2019 and 2018, are comprised of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Notes payable, related parties
|
|
$
|
284,317
|
|
|
$
|
308,984
|
|
Less: current portion
|
|
|
(169,153
|
)
|
|
|
(166,925
|
)
|
Notes payable, related parties – long-term portion
|
|
$
|
115,164
|
|
|
$
|
142,059
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Microphase is a party
to several notes payable agreements with seven of its past officers, employees and their family members. As of December 31, 2019,
the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $64,604 of accrued interest, was $348,921,
with annual interest rates ranging between 3.00% and 6.00%. During the year ended December 31, 2019, Microphase incurred $6,852
of interest on these notes.
20. CONVERTIBLE NOTES
Convertible Notes Payable
at December 31, 2019 and 2018, are comprised of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
10% Convertible secured notes
|
|
$
|
—
|
|
|
$
|
7,997,126
|
|
8% Convertible promissory note
|
|
|
935,772
|
|
|
|
—
|
|
12% Convertible promissory note
|
|
|
815,218
|
|
|
|
—
|
|
4% Convertible promissory note
|
|
|
660,000
|
|
|
|
—
|
|
12% July 2019 convertible promissory note
|
|
|
632,000
|
|
|
|
—
|
|
12% November 2019 convertible promissory note
|
|
|
350,000
|
|
|
|
—
|
|
Total convertible notes payable
|
|
|
3,392,990
|
|
|
|
7,997,126
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(355,227
|
)
|
|
|
(1,189,276
|
)
|
Unamortized financing cost
|
|
|
—
|
|
|
|
(65,356
|
)
|
Total convertible notes payable, net of financing cost
|
|
$
|
3,037,763
|
|
|
$
|
6,742,494
|
|
Less: current portion
|
|
|
(2,732,990
|
)
|
|
|
(6,742,494
|
)
|
Convertible notes payable, net of financing cost – long-term portion
|
|
$
|
304,773
|
|
|
$
|
—
|
|
10% Convertible Secured Notes
On May 15, 2018, the
Company entered into a securities purchase agreement with an institutional investor 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 sale 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 10% Convertible Note and the Second 10% Convertible Note,
the “10% Convertible Secured Notes”).
In conjunction with
the sale of the 10% convertible note, the Company issued (i) a five-year warrant to purchase 1,389 shares of the Company’s
common stock at an exercise price of $1,080 per share; (ii) a five-year warrant to purchase 2,155 shares of the Company’s
common stock at an exercise price of $696 per share; and (iii) 431 shares of the Company’s common stock to the institutional
investor. Upon an event of default, the 10% Convertible Note was convertible into the Company’s common stock at $600 per
share. Further, the Company paid the placement agent a cash fee of $300,000 and issued a warrant to purchase 188 shares of the
Company’s common stock with an exercise price of $800 per share.
The Company computed
the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt
discount in the amount of $1,397,389 based on the estimated fair value of the warrants. The Company estimated that the grant date
fair value of the shares of common stock was $405,024, which was determined from the closing price of the Company’s common
stock on the dates of issuance. In aggregate, the Company recorded debt discount in the amount of $2,169,613 based on the relative
fair values of the warrants, common stock and debt issuance costs of $367,200. The fair value of the warrants was estimated using
the Black-Scholes option-pricing method. The risk-free rate of 2.94% was derived from the U.S. Treasury yield curve, matching the
term of the warrant, in effect at the measurement date. The volatility factor of 127.9% was determined based on the Company’s
historical stock prices.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The Second 10% Convertible
Note was convertible into the Company’s common stock at $600 per share and resulted in the issuances of an additional 500
shares of the Company’s common stock. The Third 10% Convertible Note was convertible into 6,250 shares of the Company’s
common stock at $320 per share. At the time of issuance of the Third 10% Convertible Note, the closing price of the Company’s
common stock was in excess of the conversion price, resulting in a beneficial conversion feature (“BCF”). The BCF embedded
in the Third 10% Convertible Note is accounted for under ASC No. 470, Debt (“ASC 470”). At issuance, the
intrinsic value of the BCF totaled $910,419, based on the difference between the effective conversion price and the fair value
of the Company’s common stock at the commitment date of the transaction. The Company recorded debt issuance costs of $200,500
from the Third 10% Convertible Note. The debt issuance costs are being amortized as non-cash interest expense over the term of
the debt.
Pursuant to an amendment
dated as of August 31, 2018 to the 10% Convertible Note and the Second 10% Convertible Note, the Company reduced the conversion
price from $600 to $320 per share. The amendment to the embedded conversion options of the 10% Convertible Note and the Second
10% Convertible Note caused a material change in the fair value of the embedded conversion options on these two notes and resulted
in a loss on extinguishment of $665,346. At the time of the amendment, the closing price of the Company’s common stock was
in excess of the conversion price, resulting in a BCF. The intrinsic value of the BCF was $1,131,960 on the 10% Convertible Note
and $225,000 on the Second 10% Convertible Note based on the difference between the effective conversion price and the fair value
of the Company’s common stock on the date of the amendment.
Pursuant to the terms
of an amendment dated December 7, 2018, the Company agreed that if the institutional investor elected to convert three monthly
payments in the principal amount of $309,193 into shares of the Company’s common stock at the stated conversion price of
$320 and the proceeds from the sale of the shares did not result in net proceeds to the investor of at least 103% of the principal,
interest and penalties due, then the Company would pay the investor the difference in cash (the “True-Up Payment”).
During December 2018, the Company issued to the investor 2,743 shares of its common stock at $320 per share upon the conversion
of $877,793 in principal, accrued interest and penalties. During December 2018, the investor received $304,608 from the sale of
the shares of common stock, which approximated the value of the shares of common stock on the date of issuance, resulting in a
True-Up Payment due to the investor of $599,519.
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 of $309,193 each, at the request of the holder, would be satisfied by the issuance of shares of
the Company’s common stock (“Common Stock”). The conversion price on these monthly amortization payments was
reduced from $320 per share of Common Stock to a price equal to the greater of (i) $96 per share (the closing price of the Common
Stock on January 9, 2019) or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) in the three days
prior to the date of issuance, but not to exceed $320 per share. 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.
During 2019, the Company
repaid the 10% Convertible Secured Notes, a portion of which was repaid through the issuance of 8,413 shares of Common Stock upon
the conversion of $1,053,351 in principal and accrued interest. The institutional investor received $660,337 from the sale of these
shares of Common Stock. In accordance with the January 9, 2019 amendment, the Company was 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.
8% Convertible Promissory Note
On
November 15, 2019, the Company entered into an exchange agreement with a lender pursuant to which the Company issued to the lender
a convertible promissory note in the principal amount of $935,772 with an interest rate of 8% per annum, in exchange for two 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. The 8% convertible promissory note is convertible into shares of the Company’s
common stock at conversion price of $1.80. Since the exchange provided the lender with a substantive conversion feature, the debt
instruments were determined to be substantially different and a loss on extinguishment of $27,151 was recognized.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
12% Convertible Promissory Note
On July 2, 2019, the
Company entered into an exchange agreement with an institutional investor pursuant to which, in exchange for a term promissory
note issued by the Company to the investor on September 21, 2018, in the principal face amount of $526,316, the Company 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. This note was convertible into shares of Common Stock at a 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. Since the exchange
provided the institutional investor with a substantive conversion feature, the debt instruments were determined to be substantially
different and a loss on extinguishment of $36,999 was recognized.
Further,
at the time of issuance of the 12% Convertible Note, the closing price of the Company’s common stock was in excess of the
conversion price, resulting in a BCF. At issuance, the intrinsic value of the BCF totaled $71,185, based on the difference between
the effective conversion price and the fair value of the Company’s common stock at the commitment date of the transaction.
During the year ended December 31, 2019, non-cash interest expense of $71,185 was recorded from the amortization of debt discounts
attributed to the 12% Convertible Note.
On September 26, 2019,
principal and interest on the 12% Convertible Note was exchanged for a convertible promissory note in the principal amount of $815,218
with an interest rate of 12% per annum and a maturity date of December 31, 2019. This note is convertible into shares of Common
Stock at a conversion price of $4.00. The Company recognized an additional loss on extinguishment of $11,647.
4% Convertible Promissory Note
On May 20, 2019, the
Company entered into a Securities Purchase Agreement with an investor to sell, for a purchase price of $500,000, a 4% Original
Issue Discount (“OID”) Convertible Promissory Note with an aggregate principal face amount of $660,000 and a five-year
warrant to purchase an aggregate of 12,500 shares of the Company’s common stock. The Company is required to make quarterly
interest payments and the principal amount of the note is due on May 20, 2024. The Note is convertible into shares of the Company’s
common stock at $4.00 per share. The exercise price of the Warrant is $12.00 per share. In addition, the Chief Executive Officer
of the Company agreed to guarantee and act as surety for the Company’s obligation to repay the Note pursuant to a Personal
Guarantee (the “Guarantee”).
The Company computed
the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt
discount in the amount of $58,448 based on the estimated fair value of the warrants. At the time of issuance of the note, the closing
price of the Company’s common stock was in excess of the effective conversion price, resulting in a BCF of $188,448, based
on the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment
date of the transaction
In aggregate, the Company
recorded a debt discount in the amount of $406,896 based on the relative fair values of the warrants, BCF and OID. During the year
ended December 31, 2019, non-cash interest expense of $51,669 was recorded from the amortization of debt discounts. The fair value
of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 2.18% was derived from the U.S.
Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility factor of 87.51% was
determined based on historical stock prices of similar technology companies.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
12% July 2019
Convertible Promissory Note
On
July 3, 2019, the Company 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.
This
convertible promissory note is in the aggregate principal amount of $1,492,000 and bears interest at 12% per annum. The principal
and all accrued and unpaid interest are due on January 22, 2020. Interest is 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.
The Company computed
the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt
discount in the amount of $142,070 based on the estimated fair value of the warrants. At the time of issuance of the note, the
closing price of the Company’s common stock was in excess of the effective conversion price, resulting in a BCF of $209,888,
based on the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment
date of the transaction
In aggregate, the Company
recorded debt discount in the amount of $351,958 based on the relative fair values of the warrants and BCF. During the year ended
December 31, 2019, non-cash interest expense of $351,958 was recorded from the amortization of debt discounts. The fair value of
the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 1.75% was derived from the U.S.
Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility factor of 85.47% was
determined based on historical stock prices of similar technology companies.
12% November
2019 Convertible Promissory Note
On
November 4, 2019, the Company entered into an exchange agreement with a certain 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. The note is convertible into shares of the Company’s common stock at conversion price of $1.20 per share, subject
to adjustments. Principal and interest on this note is due on July 4, 2020. Since the exchange provided the institutional investor
with a substantive conversion feature, the debt instruments were determined to be substantially different and a loss on extinguishment
of $30,053 was recognized.
12% April 2018 Convertible Promissory
Note
On April 16, 2018,
the Company entered into securities purchase agreements to sell (i) a 12% convertible note (the “12% April 2018 Convertible
Promissory Note”), (ii) a five-year warrant to purchase 1,242 shares of the Company’s common stock at an exercise price
of $1,040 per share; and (iii) 251 shares of the Company’s common stock to three institutional investors. Upon an event of
default, the 12% April 2018 Convertible Promissory Note was convertible into common stock at $560 per share. The 12% April 2018
Convertible Promissory Note was in the principal amount of $1,722,222 and included an OID of $172,222, resulting in net proceeds
to the Company of $1,550,000.
The Company computed
the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt
discount in the amount of $539,360 based on the estimated fair value of the warrants. The Company estimated that the grant date
fair value of the shares of common stock was $128,524, which was determined from the closing price of the Company’s common
stock on the date of issuance.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
In aggregate, the Company
recorded debt discount in the amount of $885,106 based on the relative fair values of the warrants, common stock, OID and debt
issuance costs of $45,000. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free
rate of 2.94% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date.
The volatility factor of 127.9% was determined based on the Company’s historical stock prices. Beginning on May 16, 2018,
the Company was required to make six monthly cash payments in the aggregate amount of $304,259. On August 31, 2018, the Company
made its final payment and in aggregate paid principal and accrued interest of $1,722,222 and $103,333, respectively, on the 12%
April 2018 Convertible Promissory Note.
January 2018 10% Convertible Promissory
Note
On January 23, 2018,
we entered into a securities purchase agreement with an institutional investor to sell, for an aggregate purchase price of $1,000,000,
a 10% senior convertible promissory note (the “January 2018 10% Convertible Promissory Note”) with an aggregate principal
face amount of $1,250,000, a warrant to purchase an aggregate of 781 shares of our common stock and 680 shares of our common stock.
The transactions contemplated by the securities purchase agreement closed on February 8, 2018. The January 2018 10% Convertible
Promissory Note was convertible into 781 shares of the Company’s common stock, a conversion price of $1,600 per share. The
exercise price of the warrant to purchase 781 shares of the Company’s common stock is $1,760 per share. On February 9, 2018,
in addition to the 680 shares of common stock provided for pursuant to the securities purchase agreement, the Company issued to
the investor an aggregate of 865 shares of the Company’s common stock upon the conversion of the entire outstanding principal
and accrued interest on the January 2018 10% Convertible Promissory Note of $1,383,884 (See Note 22).
21. COMMITMENTS AND CONTINGENCIES
Derivative Action
On July 31, 2018, Ethan
Young and Greg Young (collectively, “Plaintiffs”) filed a stockholder derivative complaint (the “Complaint”)
in the United States District Court for the Central District of California (the “Court”) against the Company as the
nominal defendant, as well as its current directors and a former director, in action captioned, Ethan Young and Greg Young,
Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz,
Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and DPW Holdings, Inc., as the nominal defendant, Case No. 18-cv-6587
(the “Derivative Action”).
The Complaint alleged
violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants,
in connection with various transactions entered into by us.
We moved to dismiss
the Complaint, and on February 25, 2019, the Court granted our motion to dismiss, in its entirety, without prejudice, and also
granted Plaintiffs leave to amend their Complaint.
On March 11, 2019,
plaintiffs filed an amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on
the previously pled transactions (the “Amended Complaint”).
On March 25, 2019,
we filed a motion to dismiss the Amended Complaint. On May 21, 2019, the Court granted in part, and denied part, our motion to
dismiss the Amended Complaint. As previously announced, on February 24, 2020, the Company entered into a definitive settlement
agreement (the “Settlement Agreement”) with Plaintiffs to settle the claims asserted in the Amended Complaint.
On April 15, 2020,
the Court issued an Order (the “Order”) approving a Motion for Preliminary Approval of Settlement in the Derivative
Action. Pursuant to the terms of the Order, the Board shall adopt and/or maintain certain resolutions and amendments to the Company’s
committee charters and/or bylaws, to ensure adherence to certain corporate governance policies (collectively, the “Reforms”).
The Order further provides that such Reforms shall remain in effect for a period of no less than five (5) years and shall be subject
to any of the following: (a) a determination by a majority of the independent directors that the Reform is no longer in the best
interest of the Company, including, but not limited to, due to circumstances making the Reforms no longer applicable, feasible,
or available on commercially reasonable terms, or (b) modifications which the Company reasonably believes are required by applicable
law or regulation.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
In connection with
the Settlement Agreement, the parties have agreed upon a payment of attorneys’ fees in the amount of $600,000, which sum
shall be payable by our Director & Officer liability insurance. The Settlement Agreement contains no admission of wrongdoing.
We have always maintained
and continue to believe that neither us nor our current or former directors engaged in any wrongdoing or otherwise committed any
violation of federal or state securities laws or any other laws or regulations.
Although the Settlement
Agreement has been approved by the Court, there can be no assurance that the settlement will be finalized and approved by the Court
or that the Settlement Agreement will be properly objected to by any of our shareholders and, even if approved, whether the conditions
to closing will be satisfied, and the actual outcome of this matter may differ materially from the terms of the settlement described
herein.
Blockchain Mining Supply and Services,
Ltd.
On November 28, 2018,
Blockchain Mining Supply and Services, Ltd. (“Blockchain Mining”) a vendor who sold computers to our subsidiary, filed
a Complaint (the “Complaint”) in the United States District Court for the Southern District of New York against us
and our subsidiary, Super Crypto Mining, Inc., in an action captioned Blockchain Mining Supply and Services, Ltd. v. Super Crypto
Mining, Inc. and DPW Holdings, Inc., Case No. 18-cv-11099.
The Complaint asserts
claims for breach of contract and promissory estoppel against the us and our subsidiary arising from the subsidiary’s alleged
failure to honor its obligations under the purchase agreement. The Complaint seeks monetary damages in excess of $1,388,495, plus
attorneys’ fees and costs.
We believe that these
claims are without merit and intend to vigorously defend them.
On April 13, 2020,
we and our subsidiary, jointly filed a motion to dismiss the Complaint in its entirety as against us, and the promissory estoppel
claim as against our subsidiary. On the same day, our subsidiary also filed a partial Answer to the Complaint in connection with
the breach of contract claim.
On April 29, 2020,
Blockchain Mining filed an amended complaint (the “Amended Complaint”). The Amended Complaint asserts the same causes
of action and seeks the same damages as the initial Complaint.
On May 13, 2020, we
and our subsidiary, jointly filed a motion to dismiss the Amended Complaint in its entirety as against us, and the promissory estoppel
claim as against of our subsidiary. On the same day, our subsidiary also filed a partial Answer to the Amended Complaint in connection
with the breach of contract claim.
Based on our assessment
of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably
estimate the potential loss or range of loss that may result from this action. Notwithstanding, we have established a reserve in
the amount of the unpaid portion of the purchase agreement. An unfavorable outcome may have a material adverse effect on our business,
financial condition and results of operations.
Ding Gu (a/k/a Frank Gu) and Xiaodan
Wang Litigation
On January 17, 2020,
Ding Gu (a/k/a Frank Gu) (“Gu”) and Xiaodan Wang (“Wang” and with “Gu” collectively, “Plaintiffs”),
filed a Complaint (the “Complaint”) in the Supreme Court of the State of New York, County of New York against us and
our Chief Executive Officer, Milton C. Ault, III, in an action captioned Ding Gu (a/k/a Frank Gu) and Xiaodan Wang v. DPW Holdings,
Inc. and Milton C. Ault III (a/k/a Milton Todd Ault III a/k/a Todd Ault), Index No. 650438/2020.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The Complaint asserts
causes of action for declaratory judgment, specific performance, breach of contract, conversion, attorneys’ fees, permanent
injunction, enforcement of Guaranty, unjust enrichment, money had and received, and fraud arising from: (i) a series of transactions
entered into between Gu and us, as well as Gu and Ault, in or about May 2019; and (ii) a term sheet entered into between Plaintiffs
and DPW, in or about July 2019. The Complaint seeks, among other things, monetary damages in excess of $1,100,000, plus a decree
of specific performance directing DPW to deliver unrestricted shares of DPW’s common stock to Gu, plus attorneys’ fees
and costs.
We believe that these
claims are without merit and intend to vigorously defend them.
On May 4, 2020, we
and Ault, jointly filed a motion to dismiss the Complaint in its entirety, with prejudice.
The motion to dismiss
is returnable before the Court on June 26, 2020.
Based on our assessment
of the facts underlying the above claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably
estimate the potential loss or range of loss that may result from this action. An unfavorable outcome may have a material adverse
effect on our business, financial condition and results of operations.
The Company is involved
in litigation arising from other matters in the ordinary course of business. We are regularly subject to claims, suits, regulatory
and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such
claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other
adverse consequences.
Certain of these outstanding
matters include speculative, substantial or indeterminate monetary amounts. We record a liability when we believe that it is probable
that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and
the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters
that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses
disclosed, and make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and
the estimated amount of a loss related to such matters.
With respect to our
other outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will
not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results
of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.
Subpoena
The Company received
a subpoena from the SEC for the voluntary production of documents. The Company is fully cooperating with this non-public, fact-finding
inquiry and Management believe that the Company has operated our business in compliance with all applicable laws. The subpoena
expressly provides that the inquiry is not to be construed as an indication by the Commission or its staff that any violations
of the federal securities laws have occurred, nor should it be considered a reflection upon any person, entity or security. However,
there can be no assurance as to the outcome of this matter.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Other Litigation Matters
During the year ended
December 31, 2019, several non-trade creditors of the Company commenced litigation against the Company for payment of approximately
$4.0 million of debt obligations not paid according to contractual terms. The Company has since repaid approximately $3.6 million
of such debt obligations and entered into settlement agreements for the remaining amount of approximately $400,000 which are included
within future receipts obligations in the accompanying consolidated balance sheet at December 31, 2019. The Company also recorded
an aggregate of approximately $450,000 of trade liabilities for judgments settled in favor of two trade creditors during the year
ended December 31, 2019 and is currently a defendant in several other claims made by trade creditors in which the maximum loss
exposure is currently estimated to be approximately $350,000. The outcome of any matters relating to unresolved trade credit
obligations cannot be predicted at this time.
Operating Leases
In November 2012, the
Company signed an operating lease agreement for the US headquarters for a period of 7 years with an option to extend for an additional
5 years. In September 2009, the Company's United Kingdom subsidiary signed an agreement for a lease in respect of the UK facility
for a period of 15 years with an option to cancel the lease after 10 years in September 2019. In June 2010, the Company’s
Israeli subsidiary signed an agreement for a lease in respect of the Israel facility for a period of 10 years. In addition, the
Company leases 43,062 square-feet of other space domestically that includes office, engineering, laboratory, restaurant and warehouse
space in both California and Connecticut. The annual base rent under these leases, payable on a monthly basis, is approximately
$1,272,000 during 2019. These leases expire between May 2019 and January 2028 (see note 16).
22. STOCKHOLDERS’ EQUITY
Amendments
to Certificate of Incorporation
On January 3, 2019,
the Company filed a certificate of amendment (the “Certificate of Amendment”) to its Certificate of Incorporation,
with the Secretary of State of the State of Delaware, to effectuate an increase to the number of authorized shares of common stock
of the Company. Pursuant to the Certificate of Amendment, the Company increased the number of authorized shares of its Class A
common stock to 500,000,000 from 200,000,000 (the “Authorized Increase”). The number of authorized shares of the Company’s
Class B common stock remains at 25,000,000 and the number of authorized shares of the Company’s preferred stock remains at
25,000,000. As a result of the increase of authorized shares of the Company’s Class A common stock, the aggregate number
of the Company’s authorized shares is 550,000,000. The Authorized Increase was approved by the Company’s Board of Directors
(the “Board”) as of December 28, 2018, and approved by a vote of the stockholders of the Company at the December 28,
2018 Annual Meeting of Stockholders. The Certificate of Amendment became effective upon filing with the State of Delaware on January
3, 2019.
On March 14, 2019, pursuant
to the authorization provided by the Company’s stockholders at a Special Meeting of Stockholders, the Company’s
Board approved the Certificate of Incorporation Amendment (the “COI Amendment”) to effectuate a reverse stock split
of the common stock of the Company’s issued and outstanding number of such shares by a ratio of one-for-twenty (the “Reverse
Stock Split”). The Company filed the COI Amendment to its Certificate of Incorporation
with the State of Delaware effectuating the Reverse Stock Split on March 14, 2019. As a result of the Reverse Stock Split, each
twenty (20) shares of common stock issued and outstanding prior to the Reverse Stock Split were converted into one (1) share of
common stock, with no change in authorized shares or par value per share.
At the Company’s
reconvened 2019 Annual Meeting of Stockholders, the Company’s stockholders approved a proposal permitting the Board to effectuate
a second reverse stock split (the “Second Reverse Stock Split”) of the Company’s issued and outstanding common
stock. Thereafter, on July 23, 2019, the Board approved the Second Reverse Stock Split with a ratio of one-for-forty. As a result
of the Second Reverse Stock Split, each forty (40) shares of common stock issued and outstanding prior to the Second Reverse Stock
Split were converted into one (1) share of common stock, with no change in authorized
shares or par value per share. The Second Reverse Stock Split became effective in the State of Delaware on August 5, 2019.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 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 December 31, 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.
On December 21, 2018,
the Company filed with the Delaware Secretary of State a Certificate of Elimination eliminating its previous Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock (collectively, the “Preferred Shares”) and returning them
to authorized but undesignated shares of the Company’s preferred stock. None of the Preferred Shares were outstanding.
Series A Preferred Stock
On
September 13, 2018, the Company filed a Certificate of Designations of Rights and Preferences (the “Certificate of Designations”)
to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to establish the
preferences, limitations and relative rights of the 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series
A Preferred Stock”).
Dividends
on the Series A Preferred Stock shall accrue daily and be cumulative from, and including, the date of original issue and shall
be payable monthly on the last day of each calendar month, subject to the terms and conditions set forth in the Certificate of
Designations. Dividends accrue at the annual rate of 10%, which is equivalent to $2.50 per annum per share, based on the $25.00
liquidation preference from, and including, the date of original issuance to, but not including, September 30, 2023, or such other
date fixed for redemption.
On
and after September 30, 2023, the Company may, at its option, upon not less than thirty (30) days nor more than sixty (60) days’
written notice, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption
price of $25.00 per share of Series A Preferred Stock, plus any accumulated and unpaid dividends thereon to, but not including,
the date fixed for redemption. In addition, upon the occurrence of a change of control, subject to certain restrictions, the Company
may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice, redeem
the Series A Preferred Stock, in whole or in part, within one hundred twenty (120) days after the first date on which such change
of control occurred, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon to,
but not including, the date fixed for redemption. There is no mandatory redemption of the Series A Preferred Stock.
Holders
of the Series A Preferred Stock generally have no voting rights except as set forth in the Certificate of Designations or as otherwise
required by law. The holders of Series A Preferred Stock, together with the holders of shares of every other series of Parity Stock
upon which like voting rights have been conferred and are exercisable, voting together as a single class regardless of series,
shall be entitled to elect two directors to the Company’s board of directors at any annual meeting of stockholders or special
meeting held in place thereof. When the Series A Preferred Stock is entitled to vote, such shares are entitled to one vote per
share. In any matter in which the Series A Preferred Stock may vote as a single class with any other series of Preferred Stock
(as may be required by law), each share of Series A Preferred Stock shall be entitled to one vote per $25.00 of stated liquidation
preference.
During the years ended
December 31, 2019 and 2018, the Company issued 5,606 and 1,434 shares of Series A Preferred Stock for $131,741 and $33,699, respectively.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Series B Preferred Stock
On March 9, 2017, the
Company entered into a Preferred Stock Purchase Agreement with Philou, a related party. Pursuant to the terms of the Preferred
Stock Purchase Agreement, Philou invested $1,250,000 in the Company through the purchase of 125,000 shares of Series B Preferred
Stock.
Each share of Series
B Preferred Stock has a stated value of $10.00 per share and may be convertible at the holder’s option into shares of common
stock of the Company at a conversion rate of $560 per share, subject to standard anti-dilution provisions in connection with any
stock split, stock dividend, subdivision or similar reclassification of the common stock. Each share of Series B Preferred Stock
shall have the right to receive dividends equal to one ten millionth (0.0000001) of earnings before interest, taxes, depreciation,
amortization and stock-based compensation (“EBITDAS”) calculated for a particular calendar year. Thus, the holders
of the 125,000 shares of Series B Preferred Stock will be entitled to receive dividends equal to one and a quarter percent (1.25%)
in the aggregate of EBITDAS.
At such time as (i)
all shares of common stock issuable upon conversion of all outstanding shares of Series B Preferred Stock (the “Conversion
Shares”) shall have been registered for resale pursuant to an effective Registration Statement covering such Conversion Shares,
(ii) but no earlier than the twenty-fifth (25th) anniversary of the effective date, the shares of Series B Preferred Stock shall
be subject to redemption in cash at the option of the Company in an amount per share equal to 120% of the greater of (a) the stated
value plus all accrued and unpaid dividends, if any and (b) the fair market value of such shares of Series B Preferred Stock.
On April 24, 2018,
Philou purchased 25,000 shares of Series B Preferred Stock in consideration of the cancellation of short-term advances due to Philou
in the aggregate amount of $250,000. In addition, Philou received warrants to purchase 446 shares of common stock at an exercise
price of $560 per share of common stock. The Company determined that the estimated relative fair value of these warrants, which
are classified as equity, was $141,951 using the Black-Scholes option pricing model. Since the warrants were classified as equity
securities, the Company allocated the $250,000 purchase price based on the relative fair values of the Series B Preferred Stock
and the warrants following the guidance in ASC No. 470, Debt.
As the effective conversion
price of the Series B Convertible Preferred Stock on a converted basis was below the market price of the Company’s common
stock on the date of issuance, it was determined that these discounts represent beneficial conversion features. During the years
ended December 31, 2018, the Company valued the BCF at $108,049, based on the difference between the effective conversion price
and the market price of the Company’s common stock on the date of issuance. These features are analogous to preference dividends
and are recorded as a non-cash return to preferred stockholders through accumulated deficit.
Series C Preferred Stock
The
Series C Preferred Stock, par value $0.001, has a stated value of $1,000 per share for up to a maximum issuance of 2,500 shares
of Series C Preferred Stock. Each share of Preferred Stock shall become convertible after eighteen (18) months from the date of
issuance into such number of fully paid and non-assessable shares of the Company’s common stock for $96 per share, subject
to adjustments. The Series C Preferred Stock is mandatorily redeemable by the Company after five years from the date of issuance.
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.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
2018 Issuances
Issuance of Common Stock pursuant to
the At the Market Offering
On
February 27, 2018, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares
of the Company’s common stock, having an aggregate offering price of up to $50 million from time to time, through an “at
the market offering” program (the “HCW ATM Offering”) under which HCW acted as sales agent. Between February
27, 2018 and December 31, 2018, the Company had received gross proceeds of $19,022,416 through the sale of 26,552 shares of the
Company’s common stock through the HCW ATM Offering. The offer and sale of the shares through the HCW ATM Offering were made
pursuant to the Company’s effective “shelf” registration statement on Form S-3 and an accompanying base
prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January
8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the HCW ATM Offering, dated
February 27, 2018. The HCW ATM Offering was terminated effective September 23, 2018.
In
connection with the termination of the HCW ATM Offering, HCW released DPW from the right of first refusal provisions set forth
in the sales agreement. In consideration for the release, the Company issued HCW 625 shares of its common stock, which have been
recorded in additional paid in capital, and agreed to pay HCW a fee until February 28, 2020 of three percent of the aggregate gross
proceeds received on future financings by the Company and a one percent fee of aggregate gross proceeds received on future financings
by the Company’s subsidiaries.
On October 10, 2018,
the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Wilson-Davis &
Co., Inc., as sales agent (the “Agent”) to sell shares of its Common Stock, having an aggregate offering price of up
to $25,000,000 (the “Shares”) from time to time, through an at the market offering program (the “WDCO ATM Offering”).
Through December 31, 2018, we had received gross proceeds of $1,637,054 through the sale of 9,303 shares of our common stock through
the WDCO ATM Offering. The offer and sale of the shares through the WDCO ATM Offering were made pursuant to our then effective
“shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration
Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the
SEC on January 11, 2018, and a prospectus supplement related to the WDCO ATM Offering, dated October 15, 2018.
Issuance of Common Stock for Services
During the year ended
December 31, 2018, the Company issued to its consultants a total 4,604 shares of its common stock with an aggregate value of $3,740,888,
an average of $812.53 per share for services rendered.
Issuance of Common Stock for Conversion
of Debt
On January 3, 2018,
accrued interest of $23,250 on the 10% Convertible Notes was satisfied through the issuance of 49 shares of the Company’s
common stock.
On January 10, 2018,
principal and accrued interest of $202,000 and $5,723, respectively, on the 12% Convertible Note was satisfied through the issuance
of 472 shares of the Company’s common stock (see Note 20).
On January 12, 2018,
principal and accrued interest of $550,000 and $2,987, respectively, on the 5% Convertible Note was satisfied through the issuance
of 1,152 shares of the Company’s common stock (see Note 20).
On February 9, 2018,
principal and accrued interest of $1,250,000 and $133,884, respectively, on the January 2018 10% Convertible Note was satisfied
through the issuance of 865 shares of the Company’s common stock (see Note 20).
During December 2018,
principal and accrued interest of $18,865 and $259,408, respectively, on the 10% Convertible Note was satisfied through the issuance
of 2,743 shares of the Company’s common stock (see Note 20).
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Issuances of Common Stock upon Exercise
of Stock Options
During January 2018,
the Company issued a total of 75 shares of its common stock upon the cash exercise of options. These options were issued pursuant
to the Company’s Plans. The Company received cash of $97,800 as a result of these option exercises.
Issuances of Common Stock upon Exercise
of Warrants
During January 2018,
the Company issued a total of 2,333 shares of its common stock upon the cash and cashless exercise of warrants to purchase an aggregate
of 2,735 shares of its common stock. These warrants were issued between August 2017 and December 2017 in conjunction with various
common stock and debt financings. The Company received cash of $867,166 as a result of these warrant exercises.
On May 8, 2018, the
Company issued 349 shares of common stock pursuant a cashless exercise of warrants issued to Divine Capital Markets, LLC, its Placement
Agent (the “Placement Agent”) for the 2017 private placement of the Series C Preferred Stock and warrants. For its
services, the Placement Agent received, a warrant to purchase 228 shares of the Company’s common stock at $576 per share
and a second warrant to purchase 228 shares of the Company’s common stock at $800 per share.
Issuances of Common Stock in connection
with Convertible Notes
On February 9, 2018,
in conjunction with the securities purchase agreement to sell the January 2018 10% Convertible Note in the principal amount of
$1,250,000 the Company issued 680 shares of restricted common stock to the institutional investor (see Note 20).
On April 16, 2018,
in conjunction with the securities purchase agreements to sell the 12% April 2018 Convertible Note in the principal amount of $1,722,222,
the Company issued 251 shares of restricted common stock to the institutional investor (see Note 20).
On May 15, 2018, in
conjunction with the securities purchase agreement to sell the 10% Convertible Note in the principal amount of $6,000,000 the Company
issued 431 shares of restricted common stock to the institutional investor (see Note 20).
On July 2, 2018, in
conjunction with the securities purchase agreement to sell the Second 10% Convertible Note in the principal amount of $1,000,000
the Company issued 500 shares of restricted common stock to the institutional investor (see Note 20).
On August 16, 2018,
in conjunction with the securities purchase agreements to sell secured promissory notes in the aggregate principal face amount
of $1,272,600, the Company issued 500 shares of restricted common stock to the institutional investors (see Note 18).
During September 2018,
in conjunction with the securities purchase agreements to sell secured promissory notes in the aggregate principal face amount
of $789,473, the Company issued 563 shares of restricted common stock to the institutional investors (see Note 18).
On October 11, 2018,
in conjunction with the securities purchase agreements to sell a secured promissory note in the aggregate principal face amount
of $565,000, the Company issued 500 shares of restricted common stock to the institutional investor (see Note 18).
Issuances of Common Stock upon Conversion
of Series D Preferred Stock
During the year ended
December 31, 2018, pursuant to the conversion terms of the Series D Preferred Stock, 378,776 shares of the Series D Preferred Stock
were converted into 947 shares of the Company’s common stock.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Issuances of
Common Stock for cash and cancellation of short-term advances
On October 5, 2017,
Ault & Company purchased 94 shares of the Company’s common stock at $480 per share and a warrant to purchase up to 94
shares of the Company’s common stock at $480 per share for an aggregate purchase price of $45,000. The shares and warrants
were issued by the Company on May 8, 2018. Ault & Company is controlled by Mr. Milton Ault, the Company’s Chairman
and Chief Executive Officer.
On May 15, 2018, the
Company entered into securities purchase agreements with certain investors in which the Company sold an aggregate of 9,614 shares
of its common stock, 5,168 for cash and 4,446 for the cancellation of short-term advances, and five-year warrants to purchase such
number of shares of common stock equal to the shares of common stock purchased by the investors. The Company received aggregate
consideration of $5,999,584, consisting of cash and the cancellation of short-term advances of $3,225,000 and $2,774,584, respectively.
These securities were issued pursuant to our registration statement filed with the Securities and Exchange Commission (File No.
333-222132) which became effective on January 11, 2018.
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 year ended December 31, 2019, the Company had received gross proceeds of $4,656,051 through the
sale of 119,791 shares of the Company’s common stock through the WDCO ATM Offering. The offer and sale of the shares through
the WDCO ATM Offering were made pursuant to our then effective “shelf” registration statement on Form S-3 and
an accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18,
2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to
the WDCO ATM Offering, dated October 15, 2018.
Public Offering
On
March 29, 2019, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with A.G.P./Alliance
Global Partners (the “Underwriter”), pursuant to which the Company agreed to issue and sell an aggregate of (a) 71,388
shares of its common stock (the “Shares”) together with warrants to purchase 71,388 shares of common stock (the “Common
Warrants”) and (b) pre-funded warrants to purchase up to 317,500 shares of its common stock (the “Pre-Funded Warrants”)
together with a number of Common Warrants to purchase 317,500 shares of common stock (the “Offering”). The Shares were
sold to the purchasers at the public offering price of $17.60 per share (the “Offering Price”). The Common Warrants
were sold at a public offering price of $0.40 per Common Warrant. The Pre-Funded Warrants were offered to each purchaser
whose purchase of the Shares and the Common Warrant in the Offering would otherwise result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of the
Company’s outstanding common stock immediately following the consummation of the Offering. The purchase price of each Pre-Funded
Warrant equaled the Offering Price at which the Shares were sold to the public in the Offering, minus $0.40, and the exercise price
of each Pre-Funded Warrant equaled $0.40 per share. In addition, the Company has also issued
the Underwriter a warrant to purchase a maximum of 15,550 additional shares of common stock at an initial exercise price of $19.80
per share, with a term of five years (the “Underwriter Warrants”).
The Common Warrants
are exercisable at any time after the date of issuance at an exercise price of $0.45 per share. However, since the volume weighted
average price of the Company’s common stock on or after May 2, 2019, was less than $0.45 per share, the Common Warrant is
exercisable by means of a cashless exercise such that the holder of the Common Warrant shall receive one common share for each
warrant held.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Upon
issuance, the Common Warrants, Pre-Funded Warrants and Underwriter Warrants (the “Offering Warrants”) were recorded
at fair value and classified as a liability due to the attributes of the warrants, which included both cash settlement features
and registration obligations. 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 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 December 31, 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 December 31, 2019, the Company had received gross proceeds of $5,499,999 through the sale of 1,819,826 shares of
the Company’s common stock from the ATM Offering.
Issuance of Common Stock for Services
During the year ended
December 31, 2019, the Company issued to its consultants a total 69,375 shares of its common stock with an aggregate value of $338,619,
an average of $4.88 per share for services rendered.
Issuance of common stock for conversion
of debt
During the year ended
December 31, 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 year ended
December 31, 2019, the Company issued 66,740 shares of its common stock in satisfaction of accrued liabilities of $175,377.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Treasury Stock
The Company utilizes the cost method of
accounting for treasury stock. The cost of reissued shares is determined under the last-in, first-out method. The Company purchased
2,750 shares for $57,748 during the year ended December 31, 2018.
23. INCOME TAXES
Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. Significant components of the Company's deferred tax assets are as follows:
|
|
2019
|
|
|
2018
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accts
|
|
$
|
163,123
|
|
|
$
|
1,318
|
|
UNICAP
|
|
|
16,314
|
|
|
|
22,558
|
|
Obsolete Inventory
|
|
|
41,131
|
|
|
|
41,046
|
|
Reserves
|
|
|
1,641,874
|
|
|
|
1,577,415
|
|
Warrant Liability
|
|
|
2,330
|
|
|
|
3,351
|
|
Accrued Compensation
|
|
|
89,089
|
|
|
|
43,111
|
|
Deferred rent liability
|
|
|
—
|
|
|
|
4,759
|
|
Credit carryforwards
|
|
|
142,484
|
|
|
|
142,484
|
|
Stock Compensation
|
|
|
430,274
|
|
|
|
425,603
|
|
Fixed Assets, net
|
|
|
1,278,863
|
|
|
|
300,240
|
|
Contribution, Carryforward
|
|
|
62
|
|
|
|
66
|
|
Accrued interest expense
|
|
|
22,414
|
|
|
|
30,822
|
|
Net operating loss carryforwards
|
|
|
11,602,532
|
|
|
|
6,924,325
|
|
Lease Liability
|
|
|
899,722
|
|
|
|
—
|
|
Credit Loss
|
|
|
995,184
|
|
|
|
—
|
|
Total deferred tax asset
|
|
|
17,325,396
|
|
|
|
9,517,098
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
ROU assets
|
|
|
(870,886
|
)
|
|
|
—
|
|
Intangible Assets, net
|
|
|
(209,044
|
)
|
|
|
(567,923
|
)
|
Total deferred income tax liabilities
|
|
|
(1,079,930
|
)
|
|
|
(567,923
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
16,245,466
|
|
|
|
8,949,175
|
|
Valuation allowance
|
|
|
(16,308,197
|
)
|
|
|
(9,054,147
|
)
|
Deferred tax asset (liability), net
|
|
$
|
(62,731
|
)
|
|
$
|
(104,972
|
)
|
At December 31, 2019,
the Company had Federal net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $52,884,756.
Approximately $12,302,381 of NOLs generated prior to 2018 will begin to expire in 2020. The Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”) signed in to law on March 27, 2020, provided that NOLs generated in a taxable year beginning
in 2018, 2019, or 2020, may now be carried back five years and forward indefinitely. In addition, the 80% taxable income limitation
is temporarily removed, allowing NOLs to fully offset net taxable income. In accordance with Section 382 of the Internal Revenue
Code, the future utilization of the Company’s net operating loss to offset future taxable income may be subject to an annual
limitation as a result of ownership changes that may have occurred previously or that could occur in the future. Management believes
that such an ownership change may have occurred during 2017. The Company has estimated the Section 382 annual limitation due to
this ownership change to be approximately $157,433. This has been used to reduce the amount of the net operating losses that have
limited carryforward periods.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
At December 31, 2019,
Microphase, an entity not consolidated for income tax purposes, had NOLs of approximately $12,064,563. Approximately $11,684,781
of NOLs generated prior to 2018 will begin to expire in 2020. NOLs generated in a taxable year beginning in 2018, 2019, or 2020,
may be carried back five years and forward indefinitely. In accordance with Section 382 of the Internal Revenue Code, the future
utilization of the Company’s net operating loss to offset future taxable income may be subject to an annual limitation as
a result of ownership changes that may have occurred previously or that could occur in the future.
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers
the scheduled reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment.
After consideration of all of the information available and due to the last five years significant losses there is substantial
doubt related to the Company’s ability to utilize its deferred tax assets, the Company recorded a full valuation allowance
of the deferred tax asset. For the year ended December 31, 2019, the valuation allowance has increased by $7,254,050.
The 2016 and 2017 tax
year remains open to examination by the Internal Revenue Service (“IRS”) and the 2016 through 2017 tax years remain
open to examination by the California Franchise Tax Board (“FTB”) and the Connecticut Department of Revenue (“CDR”).
The IRS, FTB and CDR have the authority to examine those tax years until the applicable statute of limitations expires and the
years with net operating loss carryovers when such carryovers are used. Returns for tax year 2018 have not been filed.
As of December 31,
2019, the Company’s foreign subsidiaries had accumulated losses for income tax purposes in the amount of approximately $2,220,361. All
of the Company’s international accumulated losses were generated in the United Kingdom and Israel which have statutory tax
rates of 19% and 7.5% respectively. These net operating losses may be carried forward and offset against taxable income
in the future for an indefinite period.
The net income tax benefit consists
of the following:
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
|
|
US Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
US State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
134,017
|
|
Total current provision
|
|
|
—
|
|
|
|
134,017
|
|
Deferred
|
|
|
|
|
|
|
|
|
US Federal
|
|
|
—
|
|
|
|
(158,482
|
)
|
US State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
(108,293
|
)
|
|
|
(52,134
|
)
|
Total deferred benefit
|
|
|
(108,293
|
)
|
|
|
(210,616
|
)
|
Total provision for income taxes
|
|
$
|
(108,293
|
)
|
|
$
|
(76,599
|
)
|
The Company’s
effective tax rates were 0.4% and 0.3% for the years ended December 31, 2019 and 2018, respectively. During the year ended
December 31, 2019, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the valuation
allowance and the effect of changes in tax rates in future periods. The reconciliation of income tax attributable to operations
computed at U.S. Federal statutory income tax rates of 21% to income tax expense is as follows:
|
|
2019
|
|
|
2018
|
|
Expected federal income tax benefit
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Beneficial conversion feature
|
|
|
(0.6
|
%)
|
|
|
(1.1
|
%)
|
State taxes net of federal benefit
|
|
|
3.5
|
%
|
|
|
2.4
|
%
|
Foreign rate differential
|
|
|
(0.2
|
%)
|
|
|
(0.3
|
%)
|
Section 382 limitation
|
|
|
—
|
|
|
|
(4.9
|
%)
|
Effect of change in tax rates
|
|
|
—
|
|
|
|
(1.8
|
%)
|
Effect of change in valuation allowance
|
|
|
(21.9
|
%)
|
|
|
(15.1
|
%)
|
Other
|
|
|
(1.4
|
%)
|
|
|
0.1
|
%
|
Income taxes provision (benefit)
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The Company accounts
for uncertain tax positions in accordance with ASC No. 740-10-25. ASC No. 740-10-25 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-25,
the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit to be
recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact
income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities
for potential tax assessments are included in income tax expense. ASC No. 740-10-25 also requires management to evaluate tax positions
taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would
not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken
by the Company and has concluded that as of December 31, 2019 and 2018, there are no uncertain tax positions taken, or expected
to be taken, that would require recognition of a liability that would require disclosure in the financial statements.
24. RELATED PARTY TRANSACTIONS
|
a.
|
The Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”)
with an effective date of August 21, 2017, pursuant to which the Company will provide AVLP a non-revolving credit facility
of up to $10,000,000 for a period ending on August 21, 2021, subject to the terms and conditions stated in the Loan Agreement,
including that the Company having available funds to grant such credit. At December 31, 2019, the Company has provided loans to
AVLP in the principal amount $9,595,079 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company
warrants to purchase 19,190,158 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP
are secured by the assets of AVLP. As of December 31, 2019, the Company recorded contractual interest receivable attributed to
the AVLP Loan Agreement of $2,025,475.
|
During the years ended December
31, 2019 and 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 December 31, 2019, the Company’s investment in AVLP common stock had
an unrealized loss of $507,959.
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. During the years ended December 31, 2019 and 2018, the Company recognized nil and $3,907,280, respectively,
in revenues from MTIX to manufacture the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser systems. On April
12, 2019, the Company received payment of $2,676,219 for manufacturing services performed on the first MLSE system. At December
31, 2019, the Company had recorded a receivable from MTIX of $1,238,856.
|
b.
|
During the year ended December 31, 2019, the Company acquired 372,625 shares of common stock of
Alzamend from a third party for $208,100 consisting of the cancellation of principal and interest due the Company of $181,483 and
cash of $26,617. During the year ended December 31, 2019, the Company recognized an unrealized gain of $350,838 resulting from
its investment in Alzamend common stock.
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
|
c.
|
During the year ended December 31, 2019, Ault & Company, Inc. (“Ault & Company”)
has provided $1,335,570 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.
|
On December 22, 2019, the Company entered into a securities
purchase agreement with Ault & Company. Pursuant to the terms of the agreement, Ault & Company shall purchase an aggregate
of 660,667 shares of the Company’s common stock for a total purchase price of $739,948, at a purchase price per share of
$1.12, subject to the approval of the NYSE American. The NYSE American approved the purchase on January 15, 2020 (see Note 26).
|
|
e.
|
Ault & Company guaranteed the prompt and complete payment and performance of the Dominion short-term
promissory note with a principal face amount of $2,900,000.
|
|
f.
|
On March 9, 2017, the Company entered into a preferred stock purchase agreement with Philou. Pursuant
to the terms of the preferred stock purchase agreement, Philou may invest up to $5,000,000 in the Company through the purchase
of Series B Preferred Stock over 36 months. Philou has purchased 125,000 shares of Series
B Preferred Stock pursuant to the terms of the purchase agreement, the most recent purchase having occurred on April 24, 2018 for
the purchase of 25,000 shares of Series B Preferred Stock.
|
|
g.
|
Between July 6, 2017 and September 30, 2018, Milton C. Ault, III, the Company’s Chairman
and Chief Executive Officer, personally guaranteed the repayment of (i) $8,218,000 from the sale of Advances on Future Receipts
(ii) and $4,781,000 from the sale of the promissory notes. These personal guarantees were necessary to facilitate the consummation
of these financing transactions. Mr. Ault’s payment obligations would be triggered if the Company failed to perform under
these financing obligations. Our board of directors has agreed to compensate Mr. Ault for his personal guarantees. The amount of
annual compensation for each of these guarantees, which will be in the form of non-cash compensation, is approximately 1.5% of
the amount of the obligation.
|
25. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has five
reportable segments as of December 31, 2019 and 2018; see Note 1 for a brief description of the Company’s business.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The following data presents the revenues,
expenditures and other operating data of the Company’s geographic operating segments and presented in accordance with ASC
No. 280.
|
|
Year ended December 31, 2019
|
|
|
|
GWW
|
|
|
Coolisys
|
|
|
DP Lending
|
|
|
Digital Farms
|
|
|
I.AM
|
|
|
Total
|
|
Revenue
|
|
$
|
15,231,843
|
|
|
$
|
5,825,666
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,057,509
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
641,745
|
|
|
|
—
|
|
|
|
641,745
|
|
Revenue, restaurant
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,149,646
|
|
|
|
4,149,646
|
|
Revenue, lending activities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
662,740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
662,740
|
|
Total revenues
|
|
$
|
15,231,843
|
|
|
$
|
5,825,666
|
|
|
$
|
662,740
|
|
|
$
|
641,745
|
|
|
$
|
4,149,646
|
|
|
$
|
26,511,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
705,873
|
|
|
$
|
121,618
|
|
|
$
|
—
|
|
|
$
|
2,245,676
|
|
|
$
|
391,924
|
|
|
$
|
3,465,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(828,424
|
)
|
|
$
|
(1,327,259
|
)
|
|
$
|
(1,673,065
|
)
|
|
$
|
(6,939,212
|
)
|
|
$
|
(2,243,879
|
)
|
|
$
|
(13,011,839
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
34,899
|
|
|
$
|
133,198
|
|
|
$
|
21,203
|
|
|
$
|
—
|
|
|
$
|
12,060
|
|
|
$
|
201,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
20,847,352
|
|
|
$
|
18,901,630
|
|
|
$
|
1,727,275
|
|
|
$
|
487,997
|
|
|
$
|
786,154
|
|
|
$
|
42,750,408
|
|
|
|
Year ended December 31, 2018
|
|
|
|
GWW
|
|
|
Coolisys
|
|
|
DP Lending
|
|
|
Digital Farms
|
|
|
I.AM
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
11,933,092
|
|
|
$
|
5,829,125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,762,217
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,675,549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,675,549
|
|
Revenue, related party
|
|
|
—
|
|
|
|
3,907,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,907,280
|
|
Revenue, restaurant
operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,462,140
|
|
|
|
—
|
|
|
|
3,462,140
|
|
Revenue, lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
347,033
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
347,033
|
|
Inter-segment revenues
|
|
|
—
|
|
|
|
36,833
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,833
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
11,933,092
|
|
|
$
|
9,773,238
|
|
|
$
|
347,033
|
|
|
$
|
1,675,549
|
|
|
$
|
3,462,140
|
|
|
$
|
(36,833
|
)
|
|
$
|
27,154,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
615,503
|
|
|
$
|
139,897
|
|
|
$
|
—
|
|
|
$
|
2,151,505
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,906,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,251,686
|
)
|
|
$
|
(2,194,809
|
)
|
|
$
|
(179,760
|
)
|
|
$
|
(6,369,138
|
)
|
|
$
|
(81,264
|
)
|
|
$
|
—
|
|
|
$
|
(11,076,657
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
52,319
|
|
|
$
|
41,998
|
|
|
$
|
—
|
|
|
$
|
8,891,928
|
|
|
$
|
183,747
|
|
|
$
|
—
|
|
|
$
|
9,169,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
18,400,343
|
|
|
$
|
19,173,587
|
|
|
$
|
2,760,314
|
|
|
$
|
7,018,958
|
|
|
$
|
2,072,678
|
|
|
$
|
—
|
|
|
$
|
49,425,880
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Concentration Risk:
The following table
provides the percentage of total revenues attributable to a single customer from which 10% or more of total revenues are derived:
|
|
For the Years Ended
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
|
by Major
|
|
|
Total Company
|
|
|
|
Customers
|
|
|
Revenues
|
|
Customer A
|
|
$
|
6,319,221
|
|
|
|
24
|
%
|
|
|
For the Years Ended
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
|
by Major
|
|
|
Total Company
|
|
|
|
Customers
|
|
|
Revenues
|
|
Customer B
|
|
$
|
3,907,280
|
|
|
|
14
|
%
|
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 December 31, 2019, MTIX represented all the Company’s accounts and other receivable, related party.
For the years ended
December 31, 2019 and 2018, total revenues from external customers divided on the basis of the Company’s product lines are
as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
Commercial products
|
|
$
|
13,103,036
|
|
|
$
|
10,597,256
|
|
Defense products
|
|
|
13,408,604
|
|
|
|
16,556,963
|
|
Total revenues
|
|
$
|
26,511,640
|
|
|
$
|
27,154,219
|
|
Financial data relating to geographic
areas:
The Company’s
total revenues are attributed to geographic areas based on the location. The following table presents total revenues for the years
ended December 31, 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 Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
North America
|
|
$
|
15,072,792
|
|
|
$
|
19,113,226
|
|
Middle East
|
|
|
8,681,023
|
|
|
|
5,226,075
|
|
Europe
|
|
|
1,678,256
|
|
|
|
1,765,991
|
|
Other
|
|
|
1,079,569
|
|
|
|
1,048,927
|
|
Total revenues
|
|
$
|
26,511,640
|
|
|
$
|
27,154,219
|
|
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
26. SUBSEQUENT EVENTS
In accordance with
FASB ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2018 and thru the date of this report being
issued and has determined that it does not have any material subsequent events to disclose in these financial statements except
for the following.
Sale of Common
Stock, Related Party
On
December 23, 2019, the Company entered into a securities purchase agreement with Ault & Company. Pursuant to the terms of this
agreement, Ault & Company agreed to purchase an aggregate of 660,667 shares of the Company’s common stock for a total
purchase price of $739,948 at a purchase price per share of $1.12, subject to the approval of the NYSE American.
The
sale was authorized by the NYSE American on January 15, 2020. As a result, at the closing on January 15, 2020, Ault & Company
became the beneficial owner of 666,945 shares of Common Stock, or up to 19.99% of the Common Stock then outstanding.
Convertible
Note, Related Party
On
February 5, 2020, (the “Closing Date”), the Company sold
and issued an 8% convertible promissory note in the principal amount of $1,000,000 to Ault & Company. The principal amount
of this note, plus any accrued and unpaid interest at a rate of 8% per annum, shall be due and payable on August 5, 2020. The Note
shall be convertible into shares of the Company’s common stock at a conversion price of $1.45 per share, subject to the approval
of the Company’s stockholders at a special meeting thereof, as required by Rule 713(a)(ii) of the NYSE Company Guide, and
subsequently, authorization from the NYSE American.
Master Exchange
Agreement
On February 10, 2020,
the Company entered into a master exchange agreement (the “Master Exchange Agreement”) with Esousa Holdings,
LLC (the “Creditor”) which acquired approximately $4.2 million dollars in principal amount, plus accrued but unpaid
interest, of certain promissory notes that had been previously issued by us to Dominion (the “Dominion Short-Term Promissory
Note”) and the Canadian Special Opportunity Fund, LP (the “CSOF Note” and with the Dominion Short-Term Promissory
Note, the “Purchased Notes”) in separate transactions. The Creditor also agreed to purchase additional notes up to
an additional principal amount, plus accrued but unpaid interest, of $3.5 million (the “Additional Notes” and collectively,
with the Purchased Notes, the “Notes”). Pursuant to the Master Exchange Agreement, the Creditor has the unilateral
right to acquire, among other things set forth therein, shares of the Company’s common stock (the “Exchange Shares”)
in exchange for the Notes, which Notes evidence an aggregate of up to approximately $7.7 million of indebtedness of the Company.
The first exchange
occurred on the date of the Master Exchange Agreement upon which the Creditor may exchange, in whole or in part, the Dominion Note
for the Exchange Shares (the “Initial Exchange”) and the second exchange (the “Second Exchange” and together
with the Initial Exchange, the “Exchange”) shall occur if, within sixty days after the Initial Exchange, the Company
receives stockholder approval at a special meeting thereof for the Exchange of the Additional Notes for the Company’s common
stock, as required by Rule 713(a)(ii) of the NYSE Company Guide, and subsequently, authorization from the NYSE American (together,
the “Required Approvals”).
The Exchange Agreement
provides for two pricing periods, the first of which shall commence after the date on which the Creditor receives the Exchange
Shares pursuant to the Initial Exchange and ending on the date that is 90 days after such receipt thereof, subject to extension
as provided for in the Exchange Agreement, and the second of which shall commence on the date on which the Creditor receives the
Exchange Shares pursuant to the Second Exchange and ending on the date that is 90 days after such receipt thereof, in either case,
unless earlier terminated by the Creditor by written notice.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
The number of shares
to be issued upon each Exchange will be equal to (x) the principal and accrued but unpaid interest due on the Notes being exchanged
multiplied by 1.35, divided by (y) the closing bid price effective on each date of an exchange notice, provided, however, that
the Company shall theretofore have obtained the Required Approvals (the “Exchange Price”). The total number of shares
of the Company’s common stock to be issued to Creditor in connection with the applicable Exchange shall be adjusted on the
Business Day immediately following the Pricing Period based upon the volume weighted average price (“VWAP”) of the
Company’s common stock over the applicable Pricing Period (the “VWAP Shares”). VWAP Shares means the number of
shares determined by dividing (x) the Exchange Amount of the applicable Exchange, multiplied by 1.1, by (y) the greater of (I)
seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable Pricing Period, or (II) $0.30
per share.
Pursuant to the Master
Exchange Agreement, the Company has agreed to issue to the Creditor warrants to purchase shares of the Company’s common stock
equal to (i) the amount of the Additional Notes, multiplied by 0.83, and divided by (ii) the Closing Bid Price of the Company’s
common stock as of the date immediately prior to the Initial Exchange (the “Purchase Warrant”), or $1.30. The Purchase
Warrant shall be exercisable, commencing on the date upon which the Company receives the Required Approvals thereof, for the exercise
price of one hundred ten percent (110%) of the Closing Bid Price of the Company’s common stock as of the date immediately
prior to the Initial Exchange, or $1.43. In connection therewith, the Company has agreed to file a registration statement to register
the sale of the shares of common stock underlying the exercise of the Purchase Warrant by the Creditor pursuant to the Master Exchange
Agreement. In the event that the Creditor does not purchase all of the Additional Notes, the Company shall have the option to acquire
a portion of the Purchase Warrants from the Creditor for an aggregate price of $1.00.
Between
February 20 and April 2020, the Company issued to the investor an aggregate of 861,580 shares of the Company’s common stock
upon the exchange of principal in the amount of $836,845.
Settlement of Derivative Litigation
On February 24, 2020,
the Company, entered into a definitive settlement agreement (the “Settlement Agreement”) that is intended to settle
the previously disclosed derivative litigation captioned Ethan Young and Greg Young, Derivatively on Behalf of Nominal Defendant,
DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz, Mordechai Rosenberg, Robert O. Smith, and Kristine
Ault and DPW Holdings, Inc., as the nominal defendant (Case No. 18-cv-6587) (as amended on March 11, 2019, the “Amended
Complaint”) against the Company and certain of its officers and directors pending in the United States District Court for
the Central District of California (the “Court”). As previously disclosed, the Amended Complaint alleges violations
including breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions.
Under the terms of
the settlement agreement, the Company’s Board of Directors (the “Board”) shall adopt and/or maintain resolutions
and amendments to committee charters and/or the Company’s bylaws within thirty (30) days of issuance of an Order and Final
Judgment entered by the Court approving the settlement (the “Order”) to ensure adherence to certain corporate
governance policies (collectively, the “Reform(s)”), which shall remain in effect for no less than five (5)
years, subject to any of the following: (a) a determination by a majority of the independent directors that the Reform is no longer
in the best interest of the Company, including, but not limited to, due to circumstances making the Reform no longer applicable,
feasible, or available on commercially reasonable terms, or (b) modifications which the Company reasonably believes are required
by applicable law or regulation.
In connection with
the settlement agreement, the parties have agreed upon a payment of attorneys’ fees in the amount of $600,000 payable by
the Company’s Director & Officer liability insurance.
The settlement agreement
contains no admission of wrongdoing. The Company has always maintained and continues to believe that it did not engage in any wrongdoing
or otherwise commit any violation of federal or state securities laws or other laws.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
Pursuant to the settlement
agreement, the Company and certain of its officers and directors will be released from the claims that were asserted or could have
been asserted in the Amended Complaint by the plaintiffs therein. The settlement is subject to the implementation of certain Reforms,
including, among others, (i) the resignation of a current director and the appointment of two (2) new independent directors to
the Board and the Company’s three-member Nomination and Governance Committee (the “Governance Committee”), one
of whom shall also be appointed to the Company’s three-member Audit Committee as an audit committee financial expert (the
“Expert”) as such term is defined by the SEC, (ii) certain amendments to the Company’s bylaws setting forth the
composition of its directors and requirements of an independent director, (iii) the creation of a policy for related party transactions
to be administered by the Company’s Governance Committee, (iv) certain amendments to the Audit Committee Charter, (v) the
adoption of a written policy protecting whistleblowers, and (vi) within six (6) months of the Order, a resolution by the Board
adopting a clawback policy for accounting restatements to financial statements included in a quarterly or annual report filed with
the Commission. In addition, the settlement is subject to the preliminary and final Court approval, funding of the $600,000 in
cash by the Company’s insurance carrier, and other customary closing conditions. There can be no assurance that the settlement
will be finalized and approved by the Court and, even if approved, whether the conditions to closing will be satisfied, and the
actual outcome of this matter may differ materially from the terms of the settlement described herein.
Coronavirus
disease 2019 pandemic
In March 2020, the
World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to
spread throughout the United States and the World. The Company is monitoring the outbreak of COVID-19 and the related business
and travel restrictions and changes to behavior intended to reduce its spread, and its impact on operations, financial position,
cash flows, inventory, supply chains, customer purchasing trends, customer payments, and the industry in general, in addition to
the impact on its employees. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic
and its impact on the Company's operations and liquidity is uncertain as of the date of this report.
However, the Company’s
business has been disrupted and materially adversely affected by the recent outbreak of COVID-19. Consequently, the Company is
relying on the order issued by the SEC on March 25, 2020, providing an additional 45 days from the original due date to file this
Form 10-K. We are still assessing our business operations and system supports and the impact COVID-19 may have on our results and
financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the
spread of COVID-19 or its consequences, including downturns in business sentiment generally or in our sectors in particular.
Our
operations are located in Alameda County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom, Israel and members of
our senior management work in Seattle, WA and New York, NY, which is also the location of the offices of the Company’s
independent auditor. The Company has been following the recommendations of local health authorities
to minimize exposure risk for its employees, including the temporary closures of its offices and having employees work remotely
to the extent possible, which has to an extent adversely affected their efficiency.
Updates by business
unit are as follows:
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·
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DPW Holdings’ corporate headquarters, located in Newport Beach, CA, has begun working remotely,
based on the occupancy and social distancing order from the Orange County Health Officer (http://www.ochealthinfo.com/phs/about/epidasmt/epi/dip/prevention/novel_coronavirus).
The headquarters staff has tested the secure remote access systems and technology infrastructure to adjust working arrangements
for its employees and believes it has adequate internal communications system and can remain operational with a remote staff.
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·
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Coolisys Technologies Corp., located in Fremont, CA, has temporarily suspended operations as a
result of the Alameda County Public Health Department’s order to cease all activities at facilities located within the County.
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DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
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Microphase Corporation, located in Shelton, CT, has developed an emergency plan to ensure that
its mission critical manufacturing and logistical functions are up and running. Microphase has implemented additional steps to
ensure a higher level of cleanliness in its facility. Employees at greater risk of major health issues from COVID-19, which include
key members of its finance department, are not required to work on site. The crisis management team meets regularly to monitor
the situation, and modifies and communicates the plan as the need arises. Once the COVID-19 crisis has passed, the team will work
on transitioning Microphase back to normal operations.
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Gresham Power Electronics Limited, located in Salisbury, UK, temporarily suspended operations on
March 19, 2020.
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Enertec Systems 2001 Ltd., located in Karmiel, Israel, has been granted a waiver by the Israeli
government to remain open to complete key projects that impact national security. Approximately 50% of the Enertec workforce is
working remotely.
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Discontinued
Operations
The Company continuously
assess the composition of its business operations to ensure they are aligned with its strategic objectives and positioned to maximize
growth and return to its shareholders. On March 16, 2020, to try and mitigate the spread of COVID-19, San Diego County health
officials issued orders mandating that all restaurants must end dine-in services. As a result of these temporary closures and the
deteriorating business conditions at both the Company’s cryptocurrency mining and restaurant businesses, the Company concluded
that discontinuing these operations was ultimately in its best interest. During the first quarter of 2020, the Company discontinued
the operations of Digital Farms and I. AM. Digital Farms was established to pursue a variety
of digital currency and mined the top three cryptocurrencies for its own account. I.AM owns and operates the Prep Kitchen
brand restaurants located in the San Diego area. Accordingly, during the first quarter of 2020, the Company will begin to separately
report the results of the cryptocurrency mining and restaurant businesses as discontinued operations in its consolidated statements
of operations and present the related assets and liabilities as held for sale in its consolidated balance sheets.
Paycheck Protection
Program
In
March 2020, U.S. lawmakers agreed on the passage of a $2 trillion stimulus bill called
the CARES (Coronavirus Aid, Relief, and Economic Security) Act to blunt the impact
of an economic downturn set in motion by the global coronavirus pandemic. On March 27, 2020, President Trump signed the bill into
law. The main driver of small business stimulus in the CARES Act is contained in the
Paycheck Protection Program (PPP). PPP Loans may be used to cover payroll, benefits, and salaries, as well as interest payments,
rent, and utilities. Fees are waived, and collateral and personal guarantees are not required. Payments
are deferred for a minimum of six months, up to one year, and there are no prepayment penalties.
During
April 2020, the Company received loans under the PPP in the principal amount of $715,101. The principal of the loan may be forgiven
up to the total cost of payroll, mortgage interest payments, rent and utility payments made during the eight-week period after
origination. In addition to meeting the size requirement (500 or fewer employees for most
companies), the Company was required to demonstrate that its business had been negatively impacted by COVID-19.
DPW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 2019
February 2020 Exchange Agreement
On
February 5, 2020 the Company entered into an exchange agreement (the “February ‘20 Exchange Agreement”) with
an institutional investor pursuant to which the Company issued to the investor a 12% convertible promissory note in the principal
amount of $295,000 with a conversion price of $1.45 per share of common stock and a 12% promissory note in the principal amount
of $585,919. These two notes were issued upon the exchange of the 12% Convertible Note, in the principal amount of $815,218, issued
on September 26, 2019 (see note 20). On February 25, 2020, the Company issued to the investor 203,448 shares of the Company’s
common stock upon the conversion of principal of $295,000.
Issuances of Common Stock for conversion
of Debt
Between January and
April 2020, the Company issued 650,049 shares of its common stock pursuant to the terms of the 8% Convertible Promissory Note,
in the principal face amount of $935,772, issued on November 15, 2019 (see note 20).
Issuances of
Common Stock for Services
During March 2020,
the Company issued 65,000 shares of its common stock as payment for services to its consultants. The shares were valued at $73,450,
an average of $1.13 per share.
Issuances of Common Stock in connection
with Promissory Note
On March 4, 2020, pursuant
to the terms of the securities purchase agreement for the sale of the Dominion short-term promissory note, the Company issued to
Dominion 12,500 shares of its common stock (see note 18).
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