2. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying condensed
consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. As of March
31, 2020, the Company had cash and cash equivalents of $626,337, an accumulated deficit of $95,186,473 and negative working capital
of $19,229,061. The Company has incurred recurring losses and reported losses for the three months ended March 31, 2020 and 2019,
totaling $6,531,548 and $6,711,026, respectively. In the past, the Company has financed its operations principally through issuances
of convertible debt, promissory notes and equity securities. During 2020, the Company continued to successfully obtain additional
equity and debt financing and restructured 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. During February 2020, 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. Management believes that the Company has access to capital resources through potential
public or private issuances of debt or equity securities. However, if the Company is unable to raise additional capital, which
ability could be adversely affected by the 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 AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
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-Q. The Company is still assessing its business operations and system supports and the impact COVID-19 may have on its results
and financial condition, but there can be no assurance that this analysis will enable the Company to avoid part or all of any impact
from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in its sectors in particular.
The Company’s
operations are located in Alameda County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom, Israel and members of
senior management work in Seattle, WA and New York, NY. The Company has been following the recommendations of local health authorities
to minimize exposure risk for its employees, including the temporary closures of its offices and having employees work remotely
to the extent possible, which has to an extent adversely affected their efficiency.
Updates by business
unit are as follows:
|
·
|
DPW Holdings’ corporate headquarters, located in Newport Beach, CA, 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.
|
|
·
|
Coolisys Technologies Corp., located in Fremont, CA, had temporarily suspended operations as a
result of the Alameda County Public Health Department’s order to cease all activities at facilities located within the County.
|
|
·
|
Microphase Corporation, located in Shelton, CT, has developed an emergency plan to ensure that
its mission critical manufacturing and logistical functions are up and running. Microphase has implemented additional steps to
ensure a higher level of cleanliness in its facility. Employees at greater risk of major health issues from COVID-19, which include
key members of its finance department, are not required to work on site. The crisis management team meets regularly to monitor
the situation, and modifies and communicates the plan as the need arises. Once the COVID-19 crisis has passed, the team will work
on transitioning Microphase back to normal operations.
|
|
·
|
Gresham Power Electronics Limited, located in Salisbury, UK, temporarily suspended operations on
March 19, 2020.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
|
·
|
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.
|
3. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation
S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States
of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated
financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our estimates.
The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management,
necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K/A for
the year ended December 31, 2019, filed with the Securities and Exchange Commission on June 1, 2020. The condensed consolidated
balance sheet as of December 31, 2019 was derived from the Company’s audited 2019 financial statements contained in the above
referenced Form 10-K/A. Results of the three months ended March 31, 2020, are not necessarily indicative of the results to be expected
for the full year ending December 31, 2020.
Principles of Consolidation
The consolidated financial
statements include the accounts of DPW and its wholly-owned subsidiaries, GWW, Coolisys, Digital Power Corporation (a wholly owned
subsidiary of Coolisys), 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, reserve for trade receivables and inventories, carrying amounts of investments, carrying
amounts of digital currencies, accruals of certain liabilities including product warranties, useful lives and the recoverability
of long-lived assets, impairment analysis of intangibles and goodwill, and deferred income taxes and related valuation allowance.
Impairment of long-lived assets:
Management reviews
long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted expected future cash flows expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by comparing the amount by which the carrying amount of the assets to their fair value. During
the three months ended March 31, 2020, management determined that its operating right-of-use assets attributed to the discontinued
operations of I.AM were impaired by $1,020,514.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
Revenue Recognition
The Company recognizes
revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the new revenue standard is that a company
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve
that core principle:
|
·
|
Step 1: Identify the contract with the
customer,
|
|
·
|
Step 2: Identify the performance obligations
in the contract,
|
|
·
|
Step 3: Determine the transaction price,
|
|
·
|
Step 4: Allocate the transaction price
to the performance obligations in the contract, and
|
|
·
|
Step 5: Recognize revenue when the company
satisfies a performance obligation.
|
The Company’s disaggregated revenues
consist of the following for the three months ended March 31, 2020:
|
|
Three Months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWW
|
|
|
Coolisys
|
|
|
DP Lending
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,672,726
|
|
|
$
|
866,928
|
|
|
$
|
36,152
|
|
|
$
|
2,575,806
|
|
Europe
|
|
|
310,569
|
|
|
|
227,328
|
|
|
|
—
|
|
|
|
537,897
|
|
Middle East
|
|
|
2,306,288
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,306,288
|
|
Other
|
|
|
97,864
|
|
|
|
87,579
|
|
|
|
—
|
|
|
|
185,443
|
|
|
|
$
|
4,387,447
|
|
|
$
|
1,181,835
|
|
|
$
|
36,152
|
|
|
$
|
5,605,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave Filters
|
|
$
|
1,501,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,501,380
|
|
Detector logarithmic video amplifiers
|
|
|
288,846
|
|
|
|
—
|
|
|
|
—
|
|
|
|
288,846
|
|
Power Supply Units
|
|
|
—
|
|
|
|
1,181,835
|
|
|
|
—
|
|
|
|
1,181,835
|
|
Power Supply Systems
|
|
|
290,933
|
|
|
|
—
|
|
|
|
—
|
|
|
|
290,933
|
|
Healthcare diagnostic systems
|
|
|
214,303
|
|
|
|
—
|
|
|
|
—
|
|
|
|
214,303
|
|
Defense systems
|
|
|
2,091,985
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,091,985
|
|
Lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
36,152
|
|
|
|
36,152
|
|
|
|
$
|
4,387,447
|
|
|
$
|
1,181,835
|
|
|
$
|
36,152
|
|
|
$
|
5,605,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
|
$
|
2,081,159
|
|
|
$
|
1,181,835
|
|
|
$
|
36,152
|
|
|
$
|
3,299,146
|
|
Services transferred over time
|
|
|
2,306,288
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,306,288
|
|
|
|
$
|
4,387,447
|
|
|
$
|
1,181,835
|
|
|
$
|
36,152
|
|
|
$
|
5,605,434
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
|
|
Three Months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWW
|
|
|
Coolisys
|
|
|
DP Lending
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,015,124
|
|
|
$
|
1,375,428
|
|
|
$
|
185,089
|
|
|
$
|
2,575,641
|
|
Europe
|
|
|
532,747
|
|
|
|
15,252
|
|
|
|
—
|
|
|
|
547,999
|
|
Middle East
|
|
|
2,312,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,312,902
|
|
Other
|
|
|
281,885
|
|
|
|
47,117
|
|
|
|
—
|
|
|
|
329,002
|
|
|
|
$
|
4,142,658
|
|
|
$
|
1,437,797
|
|
|
$
|
185,089
|
|
|
$
|
5,765,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave filters
|
|
$
|
652,559
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
652,559
|
|
Detector logarithmic video amplifiers
|
|
|
435,365
|
|
|
|
—
|
|
|
|
—
|
|
|
|
435,365
|
|
Power supply units
|
|
|
—
|
|
|
|
1,408,993
|
|
|
|
—
|
|
|
|
1,408,993
|
|
Power supply systems
|
|
|
556,514
|
|
|
|
—
|
|
|
|
—
|
|
|
|
556,514
|
|
Healthcare diagnostic systems
|
|
|
648,668
|
|
|
|
—
|
|
|
|
—
|
|
|
|
648,668
|
|
Defense systems
|
|
|
1,849,552
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,849,552
|
|
Lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
185,089
|
|
|
|
185,089
|
|
Digital currency mining
|
|
|
—
|
|
|
|
28,804
|
|
|
|
—
|
|
|
|
28,804
|
|
|
|
$
|
4,142,658
|
|
|
$
|
1,437,797
|
|
|
$
|
185,089
|
|
|
$
|
5,765,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
|
$
|
1,507,537
|
|
|
$
|
1,437,797
|
|
|
$
|
185,089
|
|
|
$
|
3,130,423
|
|
Services transferred over time
|
|
|
2,635,121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,635,121
|
|
|
|
$
|
4,142,658
|
|
|
$
|
1,437,797
|
|
|
$
|
185,089
|
|
|
$
|
5,765,544
|
|
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.
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 is entitled to cost plus
$100,000 for the manufacture of the first two MLSE units. The Company has determined that the costs of manufacturing the MLSE units
will decline over time because of a learning curve which will result in a greater amount of revenue being recognized for these
initial two MLSE units.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
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 March 31, 2020, for the MLSE
units was approximately $48 million, representing 24 MLSE units. Based on our expectations regarding funding of the production
process and our experience building the first machines, the Company expects to recognize the remaining revenue related to the partially
unsatisfied performance obligation over an estimated three year period. The Company will be paid in installments for this performance
obligation over the estimated period that the remaining revenue is recognized.
Lending Activities
DP Lending generates
revenue from lending activities primarily through interest, origination fees and late/other fees. Interest income on these products
is calculated based on the contractual interest rate and recorded as interest income as earned. The origination fees or original
issue discounts are recognized over the life of the loan using the effective interest method.
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.
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 5 and Note 9) that were measured
at fair value on a recurring basis by level within the fair value hierarchy:
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
|
|
Fair Value Measurement at March 31, 2020
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in convertible promissory note of
AVLP – a related party
|
|
$
|
5,591,381
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,591,381
|
|
Investments in common stock and derivative
instruments of AVLP – a related party
|
|
|
138,688
|
|
|
|
49,959
|
|
|
|
—
|
|
|
|
88,729
|
|
Investment in common stock of Alzamend – a
related party
|
|
|
575,925
|
|
|
|
—
|
|
|
|
—
|
|
|
|
575,925
|
|
Investments in marketable equity securities
|
|
|
426,432
|
|
|
|
426,432
|
|
|
|
—
|
|
|
|
—
|
|
Investments in warrants of public companies
|
|
|
896
|
|
|
|
—
|
|
|
|
—
|
|
|
|
896
|
|
Total Investments
|
|
$
|
6,733,322
|
|
|
$
|
476,391
|
|
|
$
|
—
|
|
|
$
|
6,256,931
|
|
|
|
Fair Value Measurement at December 31, 2019
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in convertible promissory note of
AVLP – a related party
|
|
$
|
6,540,720
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,540,720
|
|
Investments in common stock and derivative
instruments of AVLP – a related party
|
|
|
1,569,286
|
|
|
|
238,602
|
|
|
|
—
|
|
|
|
1,330,684
|
|
Investment in common stock of Alzamend – a
related party
|
|
|
558,938
|
|
|
|
—
|
|
|
|
—
|
|
|
|
558,938
|
|
Investments in marketable equity securities
|
|
|
639,647
|
|
|
|
639,647
|
|
|
|
—
|
|
|
|
—
|
|
Investments in warrants of public companies
|
|
|
9,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,174
|
|
Total Investments
|
|
$
|
9,317,765
|
|
|
$
|
878,249
|
|
|
$
|
—
|
|
|
$
|
8,439,516
|
|
We assess the inputs used to measure fair
value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market.
Net Loss per Share
Net loss per share
is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding. The calculation
of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock
equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. The Company has included 6,500
warrants, which are exercisable for shares of the Company’s common stock on a one-for-one basis, in its earnings per share
calculation for the three months ended March 31, 2020. Anti-dilutive securities, which are convertible into or exercisable for
the Company’s common stock, consist of the following at March 31, 2020 and 2019:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
950
|
|
|
|
9,006
|
|
Warrants (1)
|
|
|
765,422
|
|
|
|
23,410
|
|
Convertible notes
|
|
|
561,158
|
|
|
|
35,961
|
|
Conversion of preferred stock
|
|
|
2,232
|
|
|
|
2,232
|
|
Total
|
|
|
1,329,762
|
|
|
|
70,609
|
|
|
(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.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
Reclassifications
Certain prior year
amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation. These
reclassifications had no effect on previously reported results of operations. In addition, certain prior year amounts from the
restated amounts have been reclassified for consistency with the current period presentation.
Recently Issued Accounting Standards
In December 2019, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. ASU 2019-12 is effective for fiscal years
beginning after December 15, 2021. The Company has not early adopted ASU 2019-12 and is currently evaluating its impact on the
Company’s financial position, results of operations, and cash flows.
4. Discontinued Operations
On March 16, 2020,
to try and mitigate the spread of the novel coronavirus (“COVID-19”), San Diego County health officials issued orders
mandating that all restaurants must end dine-in services. As a 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
the operations of Digital Farms and I. AM was ultimately in its best interest.
Digital
Farms was established to pursue a variety of digital currencies and mined the top three cryptocurrencies for its own account. Although
the Company has ceased operations at Digital Farms, since the assets and operations have not yet been abandoned, sold or distributed,
these assets do not yet meet the requirement for presentation as discontinued operations. In the first quarter of 2020, management
determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations.
Accordingly, the results of the restaurant operations are presented as discontinued operations in our condensed consolidated statements
of operations and comprehensive loss and are excluded from continuing operations for all periods presented. In addition, the assets
and liabilities of the restaurant operations are classified as held for sale in our condensed consolidated balance sheets for all
periods presented.
The following tables
summarize the major classes of assets and liabilities included as part of discontinued operations:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
5,170
|
|
Accounts receivable
|
|
|
—
|
|
|
|
83,885
|
|
Inventories, net
|
|
|
—
|
|
|
|
60,341
|
|
Prepaid expenses and other current assets
|
|
|
—
|
|
|
|
131,956
|
|
Total current assets classified as held for sale
|
|
|
—
|
|
|
|
281,352
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
504,802
|
|
Right-of-use assets
|
|
|
—
|
|
|
|
1,098,466
|
|
Total assets classified as held for sale
|
|
$
|
—
|
|
|
$
|
1,884,620
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
788,314
|
|
|
$
|
881,601
|
|
Operating lease liability, current
|
|
|
211,098
|
|
|
|
229,574
|
|
Other current liabilities
|
|
|
461,738
|
|
|
|
482,375
|
|
Total current liabilities classified as held for sale
|
|
|
1,461,150
|
|
|
|
1,593,550
|
|
Long term liabilities
|
|
|
|
|
|
|
|
|
Operating lease liability, non-current
|
|
|
897,842
|
|
|
|
951,072
|
|
Total liabilities classified as held for sale
|
|
$
|
2,358,992
|
|
|
$
|
2,544,622
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
The restaurant operations
are included in our results as discontinued operations through March 16, 2020, the date of closing of the restaurants. The following
tables summarize the major classes of line items included in loss from discontinued operations:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
543,327
|
|
|
$
|
1,173,499
|
|
Cost of revenue
|
|
|
(160,310
|
)
|
|
|
(292,483
|
)
|
Selling and marketing
|
|
|
—
|
|
|
|
(56,721
|
)
|
General and administrative
|
|
|
(555,445
|
)
|
|
|
(929,437
|
)
|
Impairment of property and equipment
|
|
|
(1,525,316
|
)
|
|
|
—
|
|
Loss from discontinued operations
|
|
$
|
(1,697,744
|
)
|
|
$
|
(105,142
|
)
|
5. Marketable Equity Securities
Marketable securities
in equity securities with readily determinable market prices consisted of the following as of March 31, 2020 and December 31, 2019:
|
|
Marketable equity securities at March 31, 2020
|
|
|
|
|
|
|
Gross unrealized
|
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains (losses)
|
|
|
gains (losses)
|
|
|
Fair value
|
|
Common shares
|
|
$
|
330,878
|
|
|
$
|
95,554
|
|
|
$
|
—
|
|
|
$
|
426,432
|
|
|
|
Marketable equity securities at December 31, 2019
|
|
|
|
|
|
|
Gross unrealized
|
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains (losses)
|
|
|
gains (losses)
|
|
|
Fair value
|
|
Common shares
|
|
$
|
423,025
|
|
|
$
|
216,622
|
|
|
$
|
—
|
|
|
$
|
639,647
|
|
The following table presents additional information about marketable
equity securities:
|
|
Marketable
|
|
|
|
Equity Securities
|
|
Balance at January 1, 2020
|
|
$
|
639,647
|
|
Sales of marketable equity securities
|
|
|
(106,589
|
)
|
Realized gains on marketable equity securities
|
|
|
14,442
|
|
Unrealized losses on marketable equity securities
|
|
|
(121,068
|
)
|
Balance at March 31, 2020
|
|
$
|
426,432
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
At March 31, 2020 and
December 31, 2019, the Company had invested in the marketable equity securities of certain publicly traded companies. During the
three months ended March 31, 2020, unrealized losses of $121,068 were included in net income as a component of change in fair value
of equity securities. During the year ended December 31, 2019, the Company recognized unrealized gains of $258,905. The Company’s
investment in marketable equity securities will be revalued on each balance sheet date. The fair value of the Company’s
holdings in marketable equity securities at March 31, 2020 and December 31, 2019 is a Level 1 measurement based on quoted prices
in an active market.
At March 31, 2020 and
December 31, 2019, the Company also held equity investments in private companies and an investment in a limited partnership. These
investments do not have readily determinable fair values and have been measured at cost less impairment, if any, and adjusted for
observable price changes for identical or similar investments of the issuer.
6. PROPERTY AND EQUIPMENT, NET
At March 31, 2020 and December
31, 2019, property and equipment consist of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cryptocurrency machines and related equipment
|
|
$
|
567,216
|
|
|
$
|
567,216
|
|
Computer, software and related equipment
|
|
|
2,561,129
|
|
|
|
2,518,187
|
|
Office furniture and equipment
|
|
|
410,266
|
|
|
|
441,613
|
|
Leasehold improvements
|
|
|
1,174,500
|
|
|
|
1,230,407
|
|
|
|
|
4,713,111
|
|
|
|
4,757,423
|
|
Accumulated depreciation and amortization
|
|
|
(2,981,986
|
)
|
|
|
(2,970,030
|
)
|
Property and equipment, net
|
|
$
|
1,731,125
|
|
|
$
|
1,787,393
|
|
Under the guidance
of ASC 360, Impairment or Disposal of Long-lived Assets, a long-lived asset or asset group (including intangibles) will be tested
for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. During
the three months ended March 31, 2020, based upon the deteriorating business conditions for restaurants in the San Diego County
as result of the spread of COVID-19 and the decline in projected cash flows over the life of the restaurant equipment, the Company
performed an undiscounted cash flow test to determine if the restaurant equipment was impaired. The undiscounted cash flows
were less than the carrying amount of the Company’s restaurant equipment and therefore, the carrying amount of the assets
were compared to the fair value of the restaurant equipment, and the Company determined that there were impairment charges to be
recorded on the restaurant equipment. Impairment charges for the three months ended March 31, 2020 were in an amount equal to the
cost of the Company’s restaurant equipment, net of depreciation of $504,802, and are included as a component of net loss
from discontinued operations (see Note 4).
For the three months
ended March 31, 2020 and 2019, depreciation expense amounted to $174,947 and $799,023, respectively.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
7. INTANGIBLE ASSETS, NET
At March 31, 2020 and December
31, 2019 intangible assets consist of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Trade name and trademark
|
|
$
|
1,039,307
|
|
|
$
|
1,039,307
|
|
Customer list
|
|
|
2,360,010
|
|
|
|
2,406,434
|
|
Domain name and other intangible assets
|
|
|
622,185
|
|
|
|
641,809
|
|
|
|
|
4,021,502
|
|
|
|
4,087,550
|
|
Accumulated depreciation and amortization
|
|
|
(940,779
|
)
|
|
|
(880,562
|
)
|
Intangible assets, net
|
|
$
|
3,080,723
|
|
|
$
|
3,206,988
|
|
The Company’s
trade names and trademarks were determined to have an indefinite life. The remaining definite lived intangible assets are primarily
being amortized on a straight-line basis over their estimated useful lives.
Amortization expense was $83,285 and $162,415,
respectively, for the three months ended March 31, 2020 and 2019.
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
three months ended March 31, 2020:
|
|
Goodwill
|
|
Balance as of January 1, 2020
|
|
$
|
8,100,947
|
|
Effect of exchange rate changes
|
|
|
(150,733
|
)
|
Balance as of March 31, 2020
|
|
$
|
7,950,214
|
|
9. INVESTMENTS – RELATED PARTIES
Investments in AVLP
and Alzamend Neuro, Inc. (“Alzamend”) at March 31, 2020 and December 31, 2019, are comprised of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Investment in convertible promissory note of AVLP
|
|
$
|
9,645,879
|
|
|
$
|
9,595,079
|
|
Accrued interest in convertible promissory note of AVLP
|
|
|
2,025,475
|
|
|
|
2,025,475
|
|
Total investment in convertible promissory note of AVLP – Gross
|
|
|
11,671,354
|
|
|
|
11,620,554
|
|
Less: provision for loan losses
|
|
|
(6,079,973
|
)
|
|
|
(5,079,834
|
)
|
Total investment in convertible promissory note of AVLP
|
|
$
|
5,591,381
|
|
|
$
|
6,540,720
|
|
|
|
|
|
|
|
|
|
|
Investment in derivative instruments of AVLP
|
|
|
88,729
|
|
|
|
1,330,684
|
|
Investment in common stock of AVLP
|
|
|
49,959
|
|
|
|
238,602
|
|
Investment in common stock of Alzamend
|
|
|
575,925
|
|
|
|
558,938
|
|
Investment in derivative instruments and common stock of AVLP and Alzamend
|
|
$
|
714,613
|
|
|
$
|
2,128,224
|
|
|
|
|
|
|
|
|
|
|
Total investment in AVLP and Alzamend – Net
|
|
$
|
6,305,994
|
|
|
$
|
8,668,944
|
|
|
|
|
|
|
|
|
|
|
Investment in warrants and common stock of AVLP and Alzamend
|
|
$
|
714,613
|
|
|
$
|
2,128,224
|
|
Investment in convertible promissory note of AVLP
|
|
|
5,591,381
|
|
|
|
6,540,720
|
|
Total investment in AVLP and Alzamend – Net
|
|
$
|
6,305,994
|
|
|
$
|
8,668,944
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
The following table
summarizes the changes in our investments in AVLP and Alzamend during the three months ended March 31, 2020:
|
|
Investment in
|
|
|
|
|
|
|
|
|
|
warrants and
|
|
|
Investment in
|
|
|
Total
|
|
|
|
common stock
|
|
|
convertible
|
|
|
investment
|
|
|
|
of AVLP and
|
|
|
promissory
|
|
|
in AVLP and
|
|
|
|
Alzamend
|
|
|
note of AVLP
|
|
|
Alzamend – Net
|
|
Balance at January 31, 2020
|
|
$
|
2,128,224
|
|
|
$
|
6,540,720
|
|
|
$
|
8,668,944
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
50,661
|
|
|
|
50,661
|
|
Investment in common stock of AVLP and Alzamend
|
|
|
10,334
|
|
|
|
—
|
|
|
|
10,334
|
|
Fair value of derivative instruments issued by AVLP
|
|
|
139
|
|
|
|
—
|
|
|
|
139
|
|
Unrealized loss in derivative instruments of AVLP
|
|
|
(1,242,094
|
)
|
|
|
—
|
|
|
|
(1,242,094
|
)
|
Unrealized loss in common stock of AVLP and Alzamend
|
|
|
(181,990
|
)
|
|
|
—
|
|
|
|
(181,990
|
)
|
Provision for loan losses
|
|
|
—
|
|
|
|
(1,000,000
|
)
|
|
|
(1,000,000
|
)
|
Balance at March 31, 2020
|
|
$
|
714,613
|
|
|
$
|
5,591,381
|
|
|
$
|
6,305,994
|
|
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 March 31, 2020, the Company has provided loans to
AVLP in the principal amount $9,645,879 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company
warrants to purchase 19,291,758 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 March 31, 2020 and December 31, 2019, the
Company recorded a cumulative unrealized loss on its investment in warrants of AVLP of $5,606,350 and $4,364,256, respectively,
representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated
other comprehensive income in the stockholder's equity section of the Company’s consolidated balance sheet. During the three
months ended March 31, 2020 and 2019, the Company recognized, in other comprehensive loss, net unrealized loss on derivative securities
of related party of $1,242,094 and $736,680, 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 0.23% and 2.60%, was derived from the U.S. Treasury yield curve, matching the
term of our investment, in effect at the measurement date. The volatility factor which ranged between 68.7% and 89.4% was determined
based on historical stock prices for similar technology companies with market capitalizations under $100 million. The warrant valuation
is a Level 3 measurement.
In accordance with
ASC No. 310, Receivables (“ASC 310”), the Company 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 warrants that the Company received
in conjunction with its investment. Interest was accreted using the effective interest method. The Company recorded interest on
an accrual basis and recognized 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. During the three months ended March 31, 2019, the Company recorded $619,809
of interest income for the discount accretion and $210,191 of interest income from the contractual 12% rate provided for by the
convertible promissory notes. During the three months ended March 31, 2020, no interest income was recognized from the Company’s
investment in AVLP.
The Company evaluated
the collectability of both interest and principal for the convertible promissory notes in AVLP to determine whether there was an
impairment. Based on current information and events, primarily the value of the underlying
conversion feature and current economic events, the Company concluded that an impairment existed at December 31, 2019. At
March 31, 2020, the Company determined that the fair value of the convertible promissory notes in AVLP was approximately $5,591,381.
The Company’s determination of fair value was based upon the estimated present value of a future liquidity event combined
with the closing price of AVLP’s common stock at March 31, 2020. Accordingly, the Company recorded a $1,000,000 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.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
During the three months
ended March 31, 2020 and year ended December 31, 2019, the Company also acquired in the open market 5,000 shares of AVLP common
stock for $1,274 and 91,000 shares of AVLP common stock for $53,032, respectively. At March 31, 2020, the closing market price
of AVLP’s common stock was $0.05, a decline from $0.24 at December 31, 2019. The Company has determined that its investment
in AVLP marketable equity securities should be accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures
and based upon the closing market price of AVLP common stock at March 31, 2020, the Company’s investment in AVLP common stock
had an unrealized loss of $697,876.
In aggregate, the Company
has 999,175 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 March 31, 2020, the Company had invested an aggregate of $1,869,000 in the NY Partnership
and $100,000 in another real estate investment. The Company has no obligation to make any capital contributions until the hotel
is open for business to the public.
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 March 31, 2020 and December 31, 2019, the Company has valued the note receivable at $600,000, the carrying amount of
Note A. The Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
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 in payments to the seller of the property and received a 28% undivided
interest in the real property (the “Property”). The Company’s indirectly held wholly owned subsidiary, Coolisys
Technologies, Inc. (“CTI”), entered into a Trust Agreement and Tenancy in Common Agreement with Roni Kohn, who owns
a 72% interest in the Property, the daughter of Mr. Kohn and an Israeli citizen. The Property was purchased to serve as a residence/office
facility for the Company in order to oversee its Israeli operations and to expand its business in the high-tech industry located
in Israel. Pursuant to the Trust Agreement, Ms. Kohn will hold and manage CTI’s undivided 28% interest in the Property. The
trust will be in effect until it is terminated by mutual agreement of the parties. During the term of the trust, Ms. Kohn will
not sell, lease, sublease, transfer, grant, encumber, change or effect any other disposition with respect to the Property or CTI’s
interest without the Company’s approval.
Under the Tenancy in
Common Agreement, CTI 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 three months ended March 31, 2020 and 2019,
the Company recognized $7,500 in amortization expense. At March 31, 2020 and December 31, 2019, the unamortized balance of the
Israeli Property was $225,000 and $232,500, respectively. If Mr. Kohn is not employed by the Company, the Company shall have the
right to demand that Ms. Kohn purchase the Company’s remaining interest in the Property that was not subject to vesting for
the fair market value of such unvested Property interest.
12. STOCK-BASED COMPENSATION
Under the Company's
2018 Stock Incentive Plan (the “2018 Plan”), 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive
Plan (the “2016 Plan”) and the 2012 Stock Option Plan, as amended (the “2012 Plan”) (collectively, the
“Plans”), options may be granted to employees, officers, consultants, service providers and directors of the Company.
On July 19, 2019, the Company’s stockholders approved an amendment to the 2018 Plan which increased the number of shares
of the Company’s common stock that may be issued thereunder to a total of 175,000 shares. The Plans, as amended, provide
for the issuance of a maximum of 184,216 shares of the Company’s common stock.
Options granted under
the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and
become exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally become
fully vested after four years. Any options that are forfeited or cancelled before expiration become available for future grants.
The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans are subject
to a vesting period determined at the date of grant. As of March 31, 2020, an aggregate of 53,543 of the Company's options are
still available for future grant.
During the three months
ended March 31, 2020 and the year ended December 31, 2019, the Company did not grant any options under the Plans. Generally, options
granted under the Plans become fully vested after four years. During the three months ended March 31, 2020 and 2019, the Company
also issued 65,000 and 9,375, respectively, shares of common stock to its consultants and service providers. The grant date fair
value of these shares amounted to $73,450 and $253,019 respectively, which was determined from the closing price of the Company’s
common stock on the date of issuance.
The Company has valued
the options at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables
such as the options’ term, exercise price, current stock price, risk-free interest rate estimated over the expected term
and estimated volatility of our stock over the expected term of the options. The risk-free interest rate used in the calculations
is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the
options as calculated using the simplified method. The estimated volatility was determined based on the historical volatility of
our common stock.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
The options outstanding as of March 31,
2020, have been classified by exercise price, as follows:
Outstanding
|
|
Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
Price
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
|
Exercisable
|
|
Price
|
$480.00 - $560.00
|
|
919
|
|
5.69
|
|
$537.96
|
|
484
|
|
$528.47
|
$1,208.00 - $1,352.00
|
|
31
|
|
3.38
|
|
$1,339.20
|
|
31
|
|
$1,339.20
|
$480.00 - $1,352.00
|
|
950
|
|
5.61
|
|
$564.32
|
|
515
|
|
$577.68
|
On
March 31, 2020 and December 31, 2019, there was no aggregate intrinsic value of stock options that were outstanding and exercisable.
The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of
such awards as of the period-end date
The total stock-based
compensation expense related to stock options and stock awards issued pursuant to the Plans to the Company’s employees, consultants
and directors, included in reported net loss for the three months ended March 31, 2020 and 2019, is comprised as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Stock-based compensation from Plans
|
|
$
|
90,513
|
|
|
$
|
162,326
|
|
Stock-based compensation from issuances
|
|
|
|
|
|
|
|
|
outside of Plans
|
|
|
32,250
|
|
|
|
458,962
|
|
Total Stock-based compensation
|
|
$
|
122,763
|
|
|
$
|
621,288
|
|
A summary of option
activity under the Company's stock option plans as of March 31, 2020, and changes during the three months ended are as follows:
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Value
|
|
January 1, 2020
|
|
|
103,105
|
|
|
|
1,388
|
|
|
$
|
636.47
|
|
|
|
6.33
|
|
|
$
|
0
|
|
Restricted stock awards
|
|
|
(50,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
438
|
|
|
|
(438
|
)
|
|
$
|
793.14
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
53,543
|
|
|
|
950
|
|
|
$
|
564.32
|
|
|
|
5.61
|
|
|
$
|
0
|
|
As of March 31, 2020,
there was $187,996 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 2.22 years.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
13. WARRANTS
During the three months
ended March 31, 2020, the Company issued a total of 692,904 warrants at an average exercise price of $1.27 per share. No warrants
were issued during the three months ended March 31, 2019.
|
(i)
|
On February 20, 2020, pursuant to the Master Exchange Agreement, the Company issued warrants to
purchase an aggregate of 270,198 shares of common stock at an average exercise price equal to $1.43 per share of common stock
(see Note 17).
|
|
(ii)
|
During the quarter ended March 31, 2020, the Company issued warrants to purchase an aggregate of 422,706
shares of common stock at an average exercise price equal to $1.17 per share of common stock in connection with the issuance of
the Esousa 12% short-term promissory notes in the aggregate principal amount of $450,000 (see Note 17).
|
The following table
summarizes information about common stock warrants outstanding at March 31, 2020:
Outstanding
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$
|
—
|
|
|
|
6,500
|
|
|
|
4.00
|
|
|
$
|
—
|
|
|
|
6,500
|
|
|
$
|
—
|
|
$
|
1.14
|
|
|
|
144,928
|
|
|
|
4.94
|
|
|
$
|
1.14
|
|
|
|
—
|
|
|
$
|
1.14
|
|
$
|
1.19
|
|
|
|
277,778
|
|
|
|
4.91
|
|
|
$
|
1.19
|
|
|
|
—
|
|
|
$
|
1.19
|
|
$
|
1.43
|
|
|
|
270,198
|
|
|
|
4.86
|
|
|
$
|
1.43
|
|
|
|
—
|
|
|
$
|
1.43
|
|
$
|
8.00
|
|
|
|
397
|
|
|
|
1.59
|
|
|
$
|
8.00
|
|
|
|
397
|
|
|
$
|
8.00
|
|
$
|
8.80
|
|
|
|
25,000
|
|
|
|
4.25
|
|
|
$
|
8.80
|
|
|
|
25,000
|
|
|
$
|
8.80
|
|
$
|
12.00
|
|
|
|
12,500
|
|
|
|
4.11
|
|
|
$
|
12.00
|
|
|
|
12,500
|
|
|
$
|
12.00
|
|
$
|
19.80
|
|
|
|
15,555
|
|
|
|
4.00
|
|
|
$
|
19.80
|
|
|
|
15,555
|
|
|
$
|
19.80
|
|
$
|
440.00
|
|
|
|
355
|
|
|
|
2.61
|
|
|
$
|
440.00
|
|
|
|
355
|
|
|
$
|
440.00
|
|
$
|
480.00
|
|
|
|
94
|
|
|
|
3.08
|
|
|
$
|
480.00
|
|
|
|
94
|
|
|
$
|
480.00
|
|
$
|
528.00
|
|
|
|
186
|
|
|
|
2.59
|
|
|
$
|
528.00
|
|
|
|
186
|
|
|
$
|
528.00
|
|
$
|
560.00
|
|
|
|
2,657
|
|
|
|
2.62
|
|
|
$
|
560.00
|
|
|
|
2,657
|
|
|
$
|
560.00
|
|
$
|
600.00
|
|
|
|
170
|
|
|
|
2.12
|
|
|
$
|
600.00
|
|
|
|
170
|
|
|
$
|
600.00
|
|
$
|
640.00
|
|
|
|
200
|
|
|
|
2.07
|
|
|
$
|
640.00
|
|
|
|
200
|
|
|
$
|
640.00
|
|
$
|
752.00
|
|
|
|
9,614
|
|
|
|
3.13
|
|
|
$
|
752.00
|
|
|
|
9,614
|
|
|
$
|
752.00
|
|
$
|
800.00
|
|
|
|
350
|
|
|
|
2.69
|
|
|
$
|
800.00
|
|
|
|
350
|
|
|
$
|
800.00
|
|
$
|
880.00
|
|
|
|
947
|
|
|
|
1.42
|
|
|
$
|
880.00
|
|
|
|
947
|
|
|
$
|
880.00
|
|
$
|
920.00
|
|
|
|
2,126
|
|
|
|
2.99
|
|
|
$
|
920.00
|
|
|
|
2,126
|
|
|
$
|
920.00
|
|
$
|
1,040.00
|
|
|
|
1,243
|
|
|
|
3.04
|
|
|
$
|
1,040.00
|
|
|
|
1,243
|
|
|
$
|
1,040.00
|
|
$
|
1,760.00
|
|
|
|
781
|
|
|
|
2.81
|
|
|
$
|
1,760.00
|
|
|
|
781
|
|
|
$
|
1,760.00
|
|
$
|
1,800.00
|
|
|
|
140
|
|
|
|
2.82
|
|
|
$
|
1,800.00
|
|
|
|
140
|
|
|
$
|
1,800.00
|
|
$
|
2,000.00
|
|
|
|
203
|
|
|
|
2.82
|
|
|
$
|
2,000.00
|
|
|
|
203
|
|
|
$
|
2,000.00
|
|
|
$1.14 - $2,000.00
|
|
|
|
771,922
|
|
|
|
4.84
|
|
|
$
|
22.29
|
|
|
|
79,018
|
|
|
$
|
206.57
|
|
The Company has valued
the warrants at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables
such as the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our
stock over the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield
available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
The Company utilized
the Black-Scholes option pricing model and the assumptions used during the three months ended March 31, 2020:
Weighted average risk free interest rate
|
|
0.46% — 1.38%
|
Weighted average life (in years)
|
|
5.0
|
Volatility
|
|
86.3%
|
Expected dividend yield
|
|
0%
|
Weighted average grant-date fair value per
share of warrants granted
|
|
$0.79
|
14. OTHER CURRENT LIABILITIES
Other current liabilities at
March 31, 2020 and December 31, 2019 consist of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accrued payroll and payroll taxes
|
|
$
|
1,720,216
|
|
|
$
|
1,237,054
|
|
Warranty liability
|
|
$
|
78,139
|
|
|
$
|
80,412
|
|
Other accrued expenses
|
|
|
171,686
|
|
|
|
227,744
|
|
|
|
$
|
1,970,041
|
|
|
$
|
1,545,210
|
|
15. LEASES
We have operating leases
for office space and restaurant locations. Our leases have remaining lease terms of 1 month 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 March 31, 2020:
|
|
March 31, 2020
|
|
Operating right-of-use assets
|
|
$
|
4,055,556
|
|
Operating lease liability - current
|
|
|
468,388
|
|
Operating lease liability - non-current
|
|
|
3,627,574
|
|
The components of lease
expenses for the three months ended March 31, 2020, were as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
Operating lease cost
|
|
$
|
226,362
|
|
Short-term lease cost
|
|
|
-
|
|
Variable lease cost
|
|
|
106,927
|
|
The following tables
provides a summary of other information related to leases for the three months ended March 31, 2020:
|
|
March 31, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
320,360
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
-
|
|
Weighted-average remaining lease term - operating leases
|
|
|
7.6 years
|
|
Weighted-average discount rate - operating leases
|
|
|
10%
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
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 March 31, 2020, are as follows:
Payments due by period
|
|
|
|
2020 (remainder)
|
|
$
|
664,587
|
|
2021
|
|
|
787,506
|
|
2022
|
|
|
776,229
|
|
2023
|
|
|
786,645
|
|
2024
|
|
|
755,298
|
|
Thereafter
|
|
|
2,233,700
|
|
Total lease payments
|
|
|
6,003,965
|
|
Less interest
|
|
|
(1,908,003
|
)
|
Present value of lease liabilities
|
|
$
|
4,095,962
|
|
16. ADVANCES ON FUTURE RECEIPTS
The
Company has received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts
(the “Agreements on Future Receipts”). The Agreements on Future Receipts have been personally guaranteed by the Company’s
Chief Executive Officer and in one instance has also been guaranteed by Philou. During the three months ended March 31, 2020, the
Company made payments of $20,000 on the outstanding balance. The Company is in default on its payment obligations on these Agreements
on Future Receipts.
17. NOTES PAYABLE
Notes Payable at March
31, 2020 and December 31, 2019, are comprised of the following.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Dominion short-term promissory note
|
|
$
|
2,510,173
|
|
|
$
|
2,510,173
|
|
CSOF short-term promissory note
|
|
|
318,150
|
|
|
|
318,150
|
|
12% short-term promissory note
|
|
|
585,919
|
|
|
|
—
|
|
Other short-term notes payable
|
|
|
1,113,970
|
|
|
|
1,050,339
|
|
12% January ’20 promissory note
|
|
|
235,796
|
|
|
|
—
|
|
Esousa short-term promissory notes
|
|
|
450,000
|
|
|
|
—
|
|
Notes payable to Wells Fargo
|
|
|
285,735
|
|
|
|
290,560
|
|
Note payable to Dept. of Economic and Community Development
|
|
|
221,062
|
|
|
|
229,096
|
|
Short term bank credit
|
|
|
1,507,320
|
|
|
|
1,622,337
|
|
Total notes payable
|
|
|
7,228,125
|
|
|
|
6,020,655
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(122,908
|
)
|
|
|
(29,348
|
)
|
Unamortized financing cost
|
|
|
—
|
|
|
|
(3,668
|
)
|
Total notes payable, net of financing cost
|
|
$
|
7,105,217
|
|
|
$
|
5,987,639
|
|
Less: current portion
|
|
|
(6,611,816
|
)
|
|
|
(5,505,015
|
)
|
Notes payable – long-term portion
|
|
$
|
493,401
|
|
|
$
|
482,624
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
Master Exchange
Agreement
On February 10, 2020,
the Company entered into a master exchange agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa”
or the “Creditor”) which acquired $4,163,481 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 Short-Term Promissory 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 shares of the Company’s common stock (the “Exchange Shares”) in exchange for the Notes.
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 the Company receives stockholder approval at a special meeting
thereof for the Exchange of the Additional Notes for the Company’s common stock, 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 receipt thereof, subject to extension as provided
for in the Exchange Agreement, and the second of which shall commence on the date on which the Creditor receives the Exchange Shares
pursuant to the Second Exchange and ending on the date that is 90 days after receipt thereof, in either case, unless earlier terminated
by the Creditor by written notice.
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 issued warrants to purchase an aggregate of 1,832,597 shares of common stock at an average
exercise price equal to $1.43 per share of common stock. The warrants shall be exercisable commencing on the date upon which the
Company receives the Required Approvals therefor. In connection therewith, the Company has agreed to file a registration statement
to register the sale of the shares of common stock underlying the exercise of the warrants 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 warrants from the Creditor for an aggregate price of $1.00. Consequently, at March 31, 2020, since
the Creditor had not purchased all of the Additional Notes, the option represented the right to acquire 1,562,399 of the warrants
from the Creditor. Therefore, only 270,198 options are deemed outstanding at March 31, 2020.
The Company computed
the fair value of the 270,198 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded
a loss on extinguishment in the amount of $232,177 based on the estimated fair value of the warrants. The fair value of the warrants
was estimated using the Black-Scholes option-pricing method. The risk-free rate of 1.38% was derived from the U.S. Treasury yield
curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor of 86.31% was determined based
on historical stock prices of similar technology companies. The Company, however, is prohibited from issuing the shares of common
stock issuable upon exercise of the warrants unless stockholder approval of such issuance of securities is obtained as required
by applicable NYSE American listing rules. The Company has not yet received stockholder approval of such share issuances.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
During
the quarter ended March 31, 2020, the Company issued to the investor an aggregate of 645,216 shares of the Company’s common
stock upon the exchange of interest in the amount of $720,650. A loss on extinguishment of $210,612 was recognized on the issuances
of common stock based on the fair value of the Company’s common stock at the date of the exchanges.
12% short-term
promissory note
On February 5, 2020,
the Company issued a 12% promissory note in the principal face amount of $585,919. The 12% short-term promissory note was issued
pursuant to the February 2020 Exchange Agreement (see Note 19) and was due upon issuance.
12% January
’20 short-term promissory note
On January 29, 2020,
the Company issued a 12% promissory note in the principal amount of $235,796 to an accredited investor. The maturity date of the
promissory note was February 28, 2020 and included an OID of $28,296 and debt issuance costs of $7,500, resulting in net proceeds
of $200,000. The Company received cash of $150,000 and cancelled $50,000 of accrued liabilities
due the investor. In addition, Mr. Ault and MCKEA Holdings, LLC (“MCKEA”) guaranteed the Company’s obligation
to repay this note pursuant to a Guaranty.
Esousa short-term promissory notes
During the quarter
ended March 31, 2020, the Company issued to Esousa 12% short-term promissory notes in the aggregate principal amount of $450,000
and two five-year warrants to purchase an aggregate of 422,706 shares of common stock at an average exercise price equal to
$1.17 per share of common stock. The Esousa 12% short-term promissory notes have a term of three months.
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 $182,718 based on the estimated fair value of the warrants. During the three months ended March 31, 2020,
non-cash interest expense of $59,810 was recorded from the amortization of debt discounts. The fair value of the warrants was estimated
using the Black-Scholes option-pricing method. The risk-free rates of 0.46% and 1.11% were derived from the U.S. Treasury yield
curve, matching the term of the warrants, in effect at the measurement dates. The volatility factor of 86.31% was determined based
on historical stock prices of similar technology companies. The Company, however, is prohibited from issuing the shares of common
stock issuable upon exercise of the warrants unless stockholder approval of such issuance of securities is obtained as required
by applicable NYSE American listing rules. The Company has not yet received stockholder approval of such share issuances.
18. NOTES PAYABLE – RELATED PARTIES
Notes Payable –
Related parties at March 31, 2020 and December 31, 2019, are comprised of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Notes payable, related parties
|
|
$
|
284,317
|
|
|
$
|
284,317
|
|
Less: current portion
|
|
|
(170,085
|
)
|
|
|
(169,153
|
)
|
Notes payable, related parties – long-term portion
|
|
$
|
114,232
|
|
|
$
|
115,164
|
|
Microphase is a party
to several notes payable agreements with seven of its past officers, employees and their family members. As of March 31, 2020,
the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $54,879 of accrued interest, was $339,196,
with annual interest rates ranging between 3.00% and 6.00%.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
19. CONVERTIBLE NOTES
Convertible Notes Payable
at March 31, 2020 and December 31, 2019, are comprised of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
8% Convertible promissory note
|
|
$
|
58,812
|
|
|
$
|
935,772
|
|
12% Convertible promissory note
|
|
|
—
|
|
|
|
815,218
|
|
4% Convertible promissory note
|
|
|
660,000
|
|
|
|
660,000
|
|
12% July 2019 convertible promissory note
|
|
|
632,000
|
|
|
|
632,000
|
|
12% November 2019 Convertible promissory note
|
|
|
350,000
|
|
|
|
350,000
|
|
Total convertible notes payable
|
|
|
1,700,812
|
|
|
|
3,392,990
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(334,961
|
)
|
|
|
(355,227
|
)
|
Total convertible notes payable, net of financing cost
|
|
$
|
1,365,851
|
|
|
$
|
3,037,763
|
|
Less: current portion
|
|
|
(1,040,812
|
)
|
|
|
(2,732,990
|
)
|
Convertible notes payable, net of financing cost – long-term portion
|
|
$
|
325,039
|
|
|
$
|
304,773
|
|
8% Convertible Promissory Note
On
November 15, 2019, the Company entered into an exchange agreement with a lender pursuant to which the Company issued to the lender
a convertible promissory note in the principal amount of $935,772 with an interest rate of 8% per annum. The 8% convertible promissory
note is convertible into shares of the Company’s common stock at conversion price of $1.80. During the quarter ended March
31, 2020, the Company issued 496,500 shares of common stock upon the conversion of principal and interest of $893,700. Subsequent
to March 31, 2020, the Company issued an additional 32,925 shares of common stock upon the conversion of the remaining outstanding
principal and interest of $59,265. Since the proceeds received by the investor from the sales of common stock were less than the
amount of principal and accrued interest, the investor was due a true up payment in the amount of $210,049, which was recognized
as additional interest expense.
12% Convertible Promissory Note
On
February 5, 2020 the Company entered into an exchange agreement (the “February 2020 Exchange Agreement”) with an institutional
investor pursuant to which the Company issued to the investor a 12% convertible promissory note in the principal amount of $295,000
with a conversion price of $1.45 per share of common stock and a 12% promissory note in the principal amount of $585,919 (see Note
17). 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. On February 25, 2020, the Company issued to the investor 203,448 shares of the Company’s common stock
upon the conversion of principal of $295,000. Since the exchange provided the institutional investor with a substantive conversion
feature, the debt instruments were determined to be substantially different and a loss on extinguishment of $20,345 was recognized.
20. CONVERTIBLE NOTE PAYABLE – RELATED PARTY
On
February 5, 2020, the Company issued an 8% convertible promissory note in the principal
amount of $1,000,000 to Ault & Company (the “Ault & Company Convertible Note”). The principal amount of this
note, plus any accrued and unpaid interest at a rate of 8% per annum, shall be due and payable on August 5, 2020. The Ault &
Company Convertible Note shall be convertible into shares of the Company’s common stock at a conversion price of $1.45 per
share, subject to the approval of the Company’s stockholders at a special meeting thereof, and subsequently, authorization
from the NYSE American.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
At
the time of issuance of the Ault & Company 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 Ault & Company
Convertible Note is accounted for under ASC No. 470, Debt (“ASC 470”). At issuance, the intrinsic
value of the BCF totaled $68,966, 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, however, is prohibited from issuing the shares of common stock
issuable pursuant to the Ault & Company Convertible Note unless stockholder approval of such issuance of securities is obtained
as required by applicable NYSE American listing rules. The Company has not yet received stockholder approval of such share issuances.
This provision resulted in a contingent BCF that shall be recognized once the contingency is resolved.
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.
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 we 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.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
Although the Settlement
Agreement has been preliminarily 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.
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.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
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 July 14, 2020.
Based on our assessment
of the facts underlying the above claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably
estimate the potential loss or range of loss that may result from this action. An unfavorable outcome may have a material adverse
effect on our business, financial condition and results of operations.
Subpoena
The Company received
a subpoena from the SEC for the voluntary production of documents. The Company is fully cooperating with this non-public, fact-finding
inquiry and Management believe that the Company has operated our business in compliance with all applicable laws. The subpoena
expressly provides that the inquiry is not to be construed as an indication by the Commission or its staff that any violations
of the federal securities laws have occurred, nor should it be considered a reflection upon any person, entity or security. However,
there can be no assurance as to the outcome of this matter.
Other Litigation Matters
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 March 31, 2020. The Company also recorded
an aggregate of approximately $450,000 of trade liabilities for judgments settled in favor of two trade creditors as of March 31,
2020 and is currently a defendant in several other claims made by trade creditors in which the maximum loss exposure is currently
estimated to be approximately $350,000. The outcome of any matters relating to unresolved trade credit obligations cannot
be predicted at this time.
The Company is involved
in litigation arising from other matters in the ordinary course of business. We are regularly subject to claims, suits, regulatory
and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters. Such
claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other
adverse consequences.
Certain of these outstanding
matters include speculative, substantial or indeterminate monetary amounts. We record a liability when we believe that it is probable
that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and
the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters
that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses
disclosed, and make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and
the estimated amount of a loss related to such matters.
With respect to our
other outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will
not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results
of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
22. STOCKHOLDERS’ EQUITY
Preferred Stock
The
Company is authorized to issue 25,000,000 shares of Preferred Stock $0.001 par value. The Board has designated 1,000,000 shares
as Series A Convertible Preferred Stock (the “Series A Preferred Stock”), 500,000 shares as Series B Convertible Preferred
Stock (the “Series B Preferred Stock”) and 2,500 shares as Series C Convertible Redeemable Preferred Stock (the “Series
C Preferred Stock”). The rights, preferences, privileges and restrictions on the remaining authorized 23,497,500 shares of
Preferred Stock have not been determined. The Board is authorized to designate a new series of preferred shares and determine the
number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred
shares. As of March 31, 2020, there were 7,040 shares of Series A Preferred Stock, 125,000
shares of Series B Preferred Stock and no other shares of Preferred Stock issued or outstanding.
Common Stock
Common stock confers
upon the holders the rights to receive notice to participate and vote at any meeting of stockholders of the Company, to receive
dividends, if and when declared, and to participate in a distribution of surplus of assets upon liquidation of the Company. The
Class B common stock carries the voting power of 10 shares of Class A common stock.
2020 Issuances
Issuances of
Common Stock for Services
During March 2020,
the Company issued 65,000 shares of its common stock as payment for services to its consultants. The shares were valued at $73,450,
an average of $1.13 per share.
Issuance of
common stock in payment of short term advances, 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.
Issuance of common stock in payment
of accrued liability
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 17).
Issuance of common stock for conversion
of debt
During the three months
ended March 31, 2020, principal and accrued interest of $1,171,960 and $809,455, respectively, on the Company’s debt securities
was satisfied through the issuance of 1,345,164 shares of the Company’s common stock.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
23. RELATED PARTY TRANSACTIONS
|
a.
|
The Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”)
with an effective date of August 21, 2017, pursuant to which the Company will provide AVLP a non-revolving credit facility
of up to $10,000,000 for a period ending on August 21, 2021, subject to the terms and conditions stated in the Loan Agreement,
including that the Company having available funds to grant such credit. At March 31, 2020, the Company has provided loans to AVLP
in the principal amount $9,645,879 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants
to purchase 19,291,758 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 March 31, 2020, the Company recorded contractual interest receivable attributed to the AVLP Loan Agreement
of $2,025,475 and a provision for loss losses of $6,079,973.
|
During the three months ended
March 31, 2020 and the year ended December 31, 2019, the Company also acquired in the open market 5,000 shares of AVLP common stock
for $1,274 and 91,000 shares of AVLP common stock for $53,032, respectively. At March 31, 2020, the Company’s investment
in AVLP common stock had an unrealized loss of $697,876.
Philou is AVLP’s controlling
shareholder. Mr. Ault is Chairman of AVLP’s Board of Directors and the Chairman of the Board. Mr. William B. Horne is the
Chief Financial Officer and a director of AVLP and the Company.
In March 2017, the Company was
awarded a $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”)
plasma-laser systems. On April 12, 2019, the Company received payment of $2,676,219 for manufacturing services performed during
the year ended December 31, 2018 on the first MLSE system. At March 31, 2020, the Company had recorded a receivable from MTIX of
$1,238,856.
|
b.
|
During the three months ended March 31, 2020, the Company recognized an unrealized gain of $7,927
resulting from its investment in Alzamend common stock.
|
|
c.
|
During the three months ended March 31, 2020, Ault & Company, Inc. (“Ault & Company”)
has provided $544,975 in short-term advances, net of repayments. Ault and Company is the Manager of Philou which presently owns
125,000 shares of the Company’s Series B Preferred Stock. Mr. Ault and Mr. Horne serve as the Chief Executive Officer and
Chief Financial Officer, respectively, of Ault & Company.
|
|
d.
|
On December 22, 2019, the Company entered into a securities
purchase agreement with Ault & Company. Pursuant to the terms of the agreement, Ault & Company purchased an aggregate of
660,667 shares of the Company’s common stock for a total purchase price of $739,948, at a purchase price per share of $1.12,
subject to the approval of the NYSE American. The NYSE American approved the purchase on January 15, 2020.
|
|
e.
|
On February 5, 2020, the Company issued
an 8% convertible promissory note in the principal amount of $1,000,000 and a maturity date of August 5, 2020 to Ault & Company
(see Note 20).
|
|
f.
|
Ault & Company guaranteed the prompt and complete payment and performance of the Dominion Short-Term
Promissory Note with a principal face amount of $2,900,000.
|
|
g.
|
Milton C. Ault, III, the Company’s Chairman and Chief Executive Officer and MCKEA guaranteed
the Company’s obligation to repay the 12% January ’20 short-term promissory note in the principal amount of $235,796.
MCKEA is the majority member of Philou and Kristine L. Ault, a former director and the wife of Mr. Ault III, is the manager and
owner of MCKEA.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
24. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has three
reportable segments; see Note 1 for a brief description of the Company’s business.
The following data
presents the revenues, expenditures and other operating data of the Company’s operating segments and presented in accordance
with ASC No. 280.
|
|
Three Months ended March 31, 2020
|
|
|
|
GWW
|
|
|
Coolisys
|
|
|
DP Lending
|
|
|
Total
|
|
Revenue
|
|
$
|
4,387,447
|
|
|
$
|
1,181,835
|
|
|
$
|
—
|
|
|
$
|
5,569,282
|
|
Revenue, lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
36,152
|
|
|
|
36,152
|
|
Total revenues
|
|
$
|
4,387,447
|
|
|
$
|
1,181,835
|
|
|
$
|
36,152
|
|
|
$
|
5,605,434
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
150,014
|
|
|
$
|
108,218
|
|
|
$
|
—
|
|
|
$
|
258,232
|
|
Loss from operations
|
|
$
|
95,756
|
|
|
$
|
(218,544
|
)
|
|
$
|
(35,713
|
)
|
|
$
|
(158,501
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
$
|
138,672
|
|
|
$
|
669
|
|
|
$
|
16,640
|
|
|
$
|
155,981
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
$
|
20,827,301
|
|
|
$
|
15,352,192
|
|
|
$
|
1,586,215
|
|
|
$
|
37,765,708
|
|
|
|
Three Months ended March 31, 2019
|
|
|
|
GWW
|
|
|
Coolisys
|
|
|
DP Lending
|
|
|
Total
|
|
Revenue
|
|
$
|
4,142,658
|
|
|
$
|
1,408,993
|
|
|
$
|
—
|
|
|
$
|
5,551,651
|
|
Revenue, cryptocurrency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining
|
|
|
—
|
|
|
|
28,804
|
|
|
|
—
|
|
|
|
28,804
|
|
Revenue, lending activities
|
|
|
—
|
|
|
|
—
|
|
|
|
185,089
|
|
|
|
185,089
|
|
Total revenues
|
|
$
|
4,142,658
|
|
|
$
|
1,437,797
|
|
|
$
|
185,089
|
|
|
$
|
5,765,544
|
|
Depreciation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization expense
|
|
$
|
214,781
|
|
|
$
|
746,657
|
|
|
$
|
—
|
|
|
$
|
961,438
|
|
Loss from operations
|
|
$
|
(282,906
|
)
|
|
$
|
(1,103,001
|
)
|
|
$
|
75,295
|
|
|
$
|
(1,310,612
|
)
|
Capital expenditures for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segment assets, as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
$
|
—
|
|
|
$
|
9,606
|
|
|
$
|
—
|
|
|
$
|
9,606
|
|
Identifiable assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
$
|
19,804,325
|
|
|
$
|
29,993,617
|
|
|
$
|
2,911,565
|
|
|
$
|
52,709,507
|
|
Concentration Risk:
The following tables
provide the percentage of total revenues for the three months ended March 31, 2020 and 2019 attributable to a single customer from
which 10% or more of total revenues are derived.
|
|
For the Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
|
by Major
|
|
|
Total Company
|
|
|
|
Customers
|
|
|
Revenues
|
|
Customer A
|
|
$
|
1,854,295
|
|
|
|
33
|
%
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
|
|
For the Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
Percentage of
|
|
|
|
by Major
|
|
|
Total Company
|
|
|
|
Customers
|
|
|
Revenues
|
|
Customer A
|
|
$
|
1,416,086
|
|
|
|
25
|
%
|
Revenue from Customer
A is attributable to Enertec. Further, at March 31, 2020, MTIX represented all the Company’s accounts and other receivable,
related party.
25. SUBSEQUENT EVENTS
In accordance with
FASB ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2020, and thru the date of this report being issued
and has determined that it does not have any material subsequent events to disclose in these financial statements except for the
following.
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 and the Company’s majority owned
subsidiary, Microphase, received loans in the principal amount of $467,333. 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.
Economic Injury Disaster
Loan
On
May 27, 2020, the Company received an Economic Injury Disaster Loan in the principal amount of $150,000 with an annual interest
rate of 3.75%. The Company shall begin making principal and interest payments of $731
every month beginning on May 27, 2021. All remaining principal and interest is due and payable thirty years from the date of the
note.
April 2020 Convertible Promissory Note
On April 13, 2020,
the Company issued a convertible promissory note in the principal amount of $100,000 with an interest rate of 10% per annum and
a five-year warrant to purchase shares of the Company’s common stock equal to 50% of the number of shares of common stock
issuable pursuant to the convertible promissory note, at an exercise price equal to $1.17 per share of common stock. The number
of shares to be issued upon conversion of the note shall be equal to (x) the principal and accrued but unpaid interest due on the
note being exchanged multiplied by 1.35, divided by (y) the closing bid price effective on date of conversion, provided, however,
that the Company shall theretofore have obtained the approval of the issuance of the shares of common stock by the NYSE American.
The total number of shares of the Company’s common stock to be issued to creditor in connection with the conversion of the
note shall be adjusted based upon the VWAP of the Company’s common stock over the applicable pricing period. The amount of
the adjustment shall be determined by dividing (x) the aggregate amount of principal and interest converted multiplied by 1.1,
by (y) the greater of (I) seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable pricing
period, or (II) $0.35 per share.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – Unaudited (Continued)
MARCH 31, 2020
May 2020 Convertible Promissory Note
On
May 28, 2020, the Company entered into a securities purchase and exchange agreement with an institutional investor. Pursuant to
the agreement, the Company exchanged the 12% January ’20 short-term promissory note in the principal amount of $235,796 for
a new note due and payable on June 30, 2020 (the “Exchanged Note”) that would become convertible into common stock
of the Company should the Company be in default under the terms of the Exchanged Note. In addition, pursuant to the agreement,
the Company issued to the investor a note due and payable on November 28, 2020 in the principal amount of $200,000 that becomes
convertible into the Company’s common stock commencing June 30, 2020 (the “Convertible Note” and with the Exchanged
Note, the “Notes”) with an original issue discount of twenty percent (20%). In conjunction with the issuance of the
Convertible Note, the Company also issued to the investor a warrant to purchase an aggregate of 400,000 shares of Common Stock
at an exercise price of $1.07. The conversion of the Notes and the exercise of the warrant is subject to approval of the NYSE American.
Esousa short-term promissory notes
During the quarter
ended June 30, 2020, the Company issued to Esousa 12% short-term promissory notes in the aggregate principal amount of $425,000
and three five-year warrants to purchase an aggregate of 467,397 shares of the Company’s common stock at an average
exercise price equal to $1.00 per share of common stock. The Esousa 12% short-term promissory notes have a term of three months.
The warrants may not be exercised until the Company has obtained the approval of the NYSE American.
June
2020 short-term promissory notes
On
June 26, 2020, the Company issued to several institutional investors unsecured 12% short-term promissory notes in the aggregate
principal amount of $800,000 and seventeen month warrants to purchase an aggregate of 361,991 shares of the Company’s common
stock at an exercise price of $2.43 per share of common stock. These notes have a term of three months. The Warrants are immediately
exercisable once the Company obtains approval thereof by the NYSE American. The Warrants may be exercised via cashless exercise
at the option of the Investor. These warrants to purchase common stock do not qualify to be treated as equity, and accordingly,
shall be recorded as a liability. The Company is required to present these instruments at fair value at each reporting date and
any changes in fair values shall be recorded as an adjustment to earnings.
Issuances of
Common Stock for exchange of Debt
On
April 6, 2020 the Company issued to Esousa 216,354 shares of the Company’s common stock pursuant to the terms of the Master
Exchange Agreement.
Issuances of Common Stock for conversion
of Debt
During the quarter
ended June 30, 2020, the Company issued 474,032 shares of its common stock pursuant to the terms of the 8% Convertible Promissory
Note and the 12% November 2019 Convertible Promissory Note.
Issuance of common stock in payment
of accrued liability
During the quarter
ended June 30, 2020, the Company issued 20,000 shares of its common stock in satisfaction of an accrued liability of $21,000.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this quarterly report, the “Company,”
“DPW Holdings,” “we,” “us” and “our” refer to DPW Holdings, Inc., a Delaware corporation,
our wholly-owned subsidiaries, Gresham Worldwide, Inc., Coolisys Technologies, Corp, Digital Power Lending, LLC, Digital Farms,
Inc., Gresham Power Electronics, Enertec Systems 2001 Ltd. and our majority owned subsidiary, Microphase Corporation.
Recent Developments
On January 7, 2020, we formed Coolisys
Technologies Corp. (“CTC”), a wholly-owned subsidiary, in order to hold Digital Power Corporation which designs,
develops, manufactures and sells high-grade customized and flexible power system solutions. Coolisys Technologies, Inc. (“CTI”)
is presently owned by Gresham Worldwide, Inc. (“GWW”) and owns Microphase Corporation, Gresham Power Electronics
and Enertec Systems. We may dispose of CTI in the future, leaving GWW as the direct owner of the three foregoing subsidiaries.
On February 10, 2020, we entered
into a Master Exchange Agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa”
or the “Creditor”) that acquired approximately $4.2 million dollars in principal amount, plus accrued but unpaid
interest, of certain promissory notes that had been previously issued by us to Dominion Capital, LLC, a Connecticut limited liability
company (the “Dominion Note”) and the Canadian Special Opportunity Fund, LP (the “CSOF Note”
and with the Dominion Note, the “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 Exchange Agreement,
the Creditor has the unilateral right to acquire shares of the Company’s common stock (the “Exchange Shares”)
in exchange for the Notes, which Notes evidence an aggregate of up to approximately $7.7 million of indebtedness of the Company.
This special meeting is presently scheduled to occur on July 8, 2020.
Settlement of Derivative Litigation
On February 24, 2020, we entered
into a definitive settlement agreement (the “Settlement Agreement”) that is intended to settle the previously
disclosed derivative litigation captioned Ethan Young and Greg Young, Derivatively on Behalf of Nominal Defendant, DPW Holdings,
Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz, Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and
DPW Holdings, Inc., as the nominal defendant (Case No. 18-cv-6587) (as amended on March 11, 2019, 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.
On April 15, 2020, the Court issued
an Order (the “Order”) approving a Motion for Preliminary Approval of Settlement in the Derivative Action filed
against DPW as a Nominal Defendant and its directors who served on its board of directors on July 31, 2018.
Under the terms of the Order approving
the Agreement, the Board shall adopt and/or maintain resolutions and amendments to committee charters and/or the Company’s
bylaws to ensure adherence to certain corporate governance policies (collectively, the “Reforms”), which shall
remain in effect for no less than five (5) years, subject to any of the following: (a) a determination by a majority of the independent
directors that the 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. While the Settlement Agreement has been preliminarily approved by the Court, there can be no assurance
that the settlement will be finalized and approved by the Court or properly objected to by any 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.
Other Matters
During the first quarter
of 2020, we made the decision to discontinue the operations of Digital Farms and I. AM. On March 16, 2020, to try and mitigate
the spread of the novel coronavirus, San Diego County health officials issued orders mandating that all restaurants must end dine-in
services. As a result of these temporary closures by the San Diego County health officials and the deteriorating business conditions
at both our cryptocurrency mining and restaurant businesses, management concluded that discontinuing these operations was ultimately
in our best interest. Although the Company has ceased operations at Digital Farms, since the assets and operations have not yet
been abandoned, sold or distributed, these assets do not yet meet the requirement for presentation as discontinued operations.
However, management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued
operations.
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-Q.
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.
GENERAL
As a holding company, our business
strategy is designed to increase shareholder value. Under this strategy, we are focused on managing and financially supporting
our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value
returned to shareholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual
partner companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof,
as well as other opportunities to maximize shareholder value. We anticipate returning value to shareholders after satisfying our
debt obligations and working capital needs.
From time to time, we engage in discussions
with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process
we initiate. To the extent we believe that a subsidiary partner company’s further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to
sell some or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales
of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in
the case of publicly traded partner companies, sales of their securities in the open market. Our plans may include taking subsidiaries
or partner companies public through rights offerings and directed share subscription programs. We will continue to consider these
(or similar) programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize
value for our shareholders.
Over the recent past we have provided
capital and relevant expertise to fuel the growth of businesses in defense/aerospace, industrial, telecommunications, medical and
textiles. We have provided capital to subsidiaries as well as partner companies in which we have an equity interest or may be actively
involved, influencing development through board representation and management support.
We are a Delaware corporation with
our corporate office located at 201 Shipyard Way, Suite E, Newport Beach, California 92663. Our phone number is 949-444-5464 and
our website address is www.dpwholdings.com.
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
The following table summarizes the
results of our operations for the three months ended March 31, 2020 and 2019.
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,569,282
|
|
|
$
|
5,551,651
|
|
Revenue, cryptocurrency mining
|
|
|
—
|
|
|
|
28,804
|
|
Revenue, lending activities
|
|
|
36,152
|
|
|
|
185,089
|
|
Total revenue
|
|
|
5,605,434
|
|
|
|
5,765,544
|
|
Cost of revenue
|
|
|
3,853,435
|
|
|
|
4,825,830
|
|
Gross profit
|
|
|
1,751,999
|
|
|
|
939,714
|
|
Total operating expenses
|
|
|
4,681,783
|
|
|
|
5,373,326
|
|
Loss from continuing operations
|
|
|
(2,929,784
|
)
|
|
|
(4,433,612
|
)
|
Interest income
|
|
|
320
|
|
|
|
836,927
|
|
Interest expense
|
|
|
(1,086,163
|
)
|
|
|
(2,099,541
|
)
|
Change in fair value of marketable equity securities
|
|
|
(365,359
|
)
|
|
|
(116,042
|
)
|
Loss on extinguishment of convertible debt
|
|
|
(463,134
|
)
|
|
|
(807,784
|
)
|
Change in fair value of warrant liability
|
|
|
4,411
|
|
|
|
—
|
|
Loss from continuing operations before income taxes
|
|
|
(4,839,709
|
)
|
|
|
(6,620,052
|
)
|
Income tax benefit
|
|
|
5,905
|
|
|
|
14,168
|
|
Net loss from continuing operations
|
|
|
(4,833,804
|
)
|
|
|
(6,605,884
|
)
|
Net loss from discontinued operations
|
|
|
(1,697,744
|
)
|
|
|
(105,142
|
)
|
Net loss
|
|
|
(6,531,548
|
)
|
|
|
(6,711,026
|
)
|
Less: Net loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
32,416
|
|
Net loss attributable to DPW Holdings
|
|
|
(6,531,548
|
)
|
|
|
(6,678,610
|
)
|
Preferred dividends
|
|
|
(4,460
|
)
|
|
|
(1,869
|
)
|
Net loss available to common stockholders
|
|
$
|
(6,536,008
|
)
|
|
$
|
(6,680,479
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(6,536,008
|
)
|
|
$
|
(6,680,479
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(148,607
|
)
|
|
|
29,857
|
|
Net unrealized loss on derivative securities of related party
|
|
|
(1,242,094
|
)
|
|
|
(736,680
|
)
|
Other comprehensive loss
|
|
|
(1,390,701
|
)
|
|
|
(706,823
|
)
|
Total comprehensive loss
|
|
$
|
(7,926,709
|
)
|
|
$
|
(7,387,302
|
)
|
Revenues
Our revenues decreased by $160,110,
or 2.8%, to $5,605,434 for the three months ended March 31, 2020, from $5,765,544 for the three months ended March 31, 2019. The
decrease from the three months ended March 31, 2019, was due to a decrease in revenue from our commercial lending segment, attributed
to a reduction in our loan portfolio and, to a lesser extent, our decision to cease operations at our cryptocurrency mining operations.
We also experienced a decrease in revenue from our customized and flexible power system solutions for the commercial markets caused
by temporary shortages in components required for the manufacture of these solutions. However, this decrease was offset by an increase
in revenue from customized solutions for the military markets as we continue to experience the benefit of capital that was allocated
to our defense business during the second half of 2019.
Revenues, cryptocurrency mining
In January 2018, we formed Digital
Farms, Inc. (“Digital Farms”). Digital Farms was established to operate our cryptocurrency business, which was pursuing
a variety of digital currencies. During the three months ended March 31, 2020, due to deteriorating business conditions in the
cryptocurrency mining sector, the Company ceased operations at Digital Farms. The market prices of digital currencies have declined
since the formation of Digital Farms which, due to power cost considerations, negatively affected the number of active miners we
operated. These factors, coupled with a significant increase in the difficulty of mining blocks of cryptocurrency, led to our decision
to cease cryptocurrency mining operations.
Gross Margins
Gross margins increased to 31.3%
for the three months ended March 31, 2020 compared to 16.3% for the three months ended March 31, 2019. The Company’s gross
margins have typically ranged between 33% and 37%, with slight variations depending on the overall composition of our revenue.
Our gross margins during the three months ended March 31, 2020, of 31.3%, were affected by the negative margins on no revenues
at Digital Farms. Excluding the effects of Digital Farms, then our adjusted gross margins for the three months ended March 31,
2020, would have been 33.0%, within our historical range.
Our gross margins of 16.3% recognized
during the three months ended March 31, 2019, was also impacted by the negative margins at Digital Farms. Excluding the effects
of Digital Farms, our adjusted gross margins for the three months ended March 31, 2019, would have been 28.9%, slightly less than
our historical average as a result of lower revenues in our defense business to allocate manufacturing overhead during the quarter
ended March 31, 2019
Engineering and Product Development
Engineering and product development
expenses decreased by $15,052 to $440,626 for the three months ended March 31, 2020, from $455,678 for the three months ended March
31, 2019. The decrease in engineering and product development expenses is due to various costs, none of which are significant individually.
Selling and Marketing
Selling and marketing expenses were
$338,163 for the three months ended March 31, 2020, compared to $417,622 for the three months ended March 31, 2019, a decrease
of $79,459. This decrease was the result of decreases in personnel costs directly attributed to a reduction in sales and marketing
personnel throughout our operations.
General and Administrative
General and administrative expenses
were $2,902,902 for the three months ended March 31, 2020, compared to $4,501,529 for the three months ended March 31, 2019, a
decrease of $1,598,627. General and administrative expenses decreased from the comparative prior period, mainly due to lower stock
compensation expense, forbearance fees and audit fees, which we did not incur until the quarter ended June 30, 2020 due to delays
in the timing of our audit from COVID-19.
Provision for Credit Losses
Loans
are generally carried at the amount of unpaid principal, adjusted for unearned loan fees and original issue discount,
which are amortized over the term of the loan using the effective interest rate method. Interest on loans is accrued based on the
principal amounts outstanding. During the year ended December 31, 2019 we determined that our investment in the convertible
promissory notes of AVLP were impaired. At March 31, 2020, the Company determined that the fair value of the convertible promissory
notes in AVLP was approximately $5,591,381, resulting in an increase in our provision for credit loss of $1,000,000.
Loss from Continuing Operations
The Company recorded a loss from
continuing operations of $2,929,784 for the three months ended March 31, 2020, compared to an operating loss of $4,433,612 for
the three months ended March 31, 2019. The decrease in operating loss is mostly attributable to an increase in our gross margins
and the decrease in general and administrative expenses.
Interest Income
Interest income was $320 for the three
months ended March 31, 2020 compared to $836,927 for the three months ended March 31, 2019. The decrease in interest income for
the three months ended March 31, 2020 is related to a decrease in interest income pursuant to the Loan and Security Agreement entered
into on September 6, 2017, with AVLP, a related party. Due to the impaired status of the loan, no interest was recognized during
the three months ended March 31, 2020.
Interest Expense
Interest expense was $1,086,163 for
the three months ended March 31, 2020 compared to $2,099,541 for the three months ended March 31, 2019. The decrease in interest
expense for the three months ended March 31, 2020 is primarily related to a reduction of amortization of debt discount resulting
from original issue discount from the issuance of warrants in conjunction with the sale of debt instruments. During the three months
ended March 31, 2020 and 2019, as a result of these issuances, non-cash interest expense of $677,022 and $1,491,065, respectively,
was recorded from the amortization of debt discount and debt financing costs.
Net Loss from Discontinued Operations
During the three months ended March
31, 2020, the permanent closing of the restaurant operations at I. AM, which owned and operated the Prep Kitchen brand restaurants
located in the San Diego area, met the criteria for presentation as discontinued operations. We determined that the assets of I.
AM, primarily consisting of restaurant equipment and right-of-use assets related to I. AM’s operating leases, were impaired
in the amount of $1,525,316. These impairment charges represented the majority of our net loss from discontinued operations of
$1,697,744 during the three months ended March 31, 2020. The remaining increase in our net loss from discontinued operations is
attributed to an overall decline in revenues at the restaurants and general inefficiencies during the final months of operations.
Net Loss
For the foregoing reasons, our net
loss for the three months ended March 31, 2020, was $6,531,548 compared to a net loss of $6,711,026 for the three months ended
March 31, 2019. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders
of Microphase during the three months ended March 31, 2020 and 2019, of nil and $32,416, respectively, and preferred dividends
of $4,460 and $1,869, respectively, the net loss available to common shareholders during the three months ended March 31, 2020
and 2019, was $6,536,008 and $6,680,479, respectively.
During the three months ended March
31, 2020 and 2019, our reported net loss included non-cash charges of $2,582,684 and $2,411,977, respectively. A summary of these
non-cash charges is as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest expense – debt discount
|
|
$
|
677,022
|
|
|
$
|
1,491,065
|
|
Stock-based compensation
|
|
|
122,763
|
|
|
|
621,288
|
|
Depreciation and amortization
|
|
|
258,232
|
|
|
|
961,438
|
|
Impairment of property and equipment
|
|
|
1,525,316
|
|
|
|
—
|
|
Accretion of original issue discount on notes receivable – related party
|
|
|
7,500
|
|
|
|
(612,309
|
)
|
Accretion of original issue discount on notes receivable
|
|
|
(3,738
|
)
|
|
|
(49,505
|
)
|
Change in fair value of warrant liability
|
|
|
(4,411
|
)
|
|
|
—
|
|
Non-cash items included in net loss
|
|
$
|
2,582,684
|
|
|
$
|
2,411,977
|
|
Other comprehensive income (loss)
Other comprehensive loss was $7,926,709
and $7,387,302, respectively, for the three months ended March 31, 2020 and 2019. Other comprehensive loss for the three months
ended March 31, 2020, which decreased our equity, was primarily due to unrealized losses in the warrant derivative securities that
we received as a result of our investment in Avalanche International, Corp., or AVLP, a related party, and from fluctuations in
exchange rates between the U.S. dollar and the Israeli Shekel. During the three months ended March 31, 2019, unrealized losses
in the warrant derivative securities of AVLP was the primary component of other comprehensive loss.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2020, we had cash and
cash equivalents of $626,337. This compares with cash and cash equivalents of $483,383 at December 31, 2019. The increase in cash
and cash equivalents was primarily due to cash provided by financing activities with the remaining variance attributed to fluctuations
in exchange rates between the U.S. dollar and the Israeli Shekel.
Net cash used in operating activities
totaled $1,115,954 for the three months ended March 31, 2020, compared to $2,169,632 for the three months ended March 31, 2019.
During the three months ended March 31, 2020, the decrease in net cash used in operating activities compared to the three months
ended March 31, 2019, was mainly due to several non-cash charges, a decrease in amortization of debt discount of $814,043, stock-based
compensation of $498,525, and depreciation and amortization of $703,206, and an increase in our provision for loan losses of $1,000,000.
Net cash used in investing activities
was $101,976 for the three months ended March 31, 2020, compared to $965,425 for the three months ended March 31, 2019. The decrease
of the net usage of cash from investing activities was primarily attributed to a decrease in related party investments.
Net cash provided by financing activities
was $1,271,690 and $3,709,501 for the three months ended March 31, 2020 and 2019, respectively. Financing activities during the
three months ended March 31, 2020, primarily related to proceeds from notes payable and short-term advances, related party. During
the three months ended March 31, 2019, the financing activities primarily related to the sale of shares of common stock through
our at-the-market offering, net proceeds from the Company’s debt financings and from advances on future receipts.
Historically, we have financed our
operations principally through issuances of convertible debt, promissory notes and equity securities. During 2020, as reflected
below, we continued to successfully obtain additional equity and debt financing and in restructuring existing debt.
|
·
|
On February 10, 2020, we entered into a Master Exchange Agreement with Esousa, which acquired approximately
$4.2 million dollars in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously
issued by the Company. Esousa also agreed to purchase additional notes up to an additional principal amount, plus accrued but unpaid
interest, of $3.5 million (collectively, the “Notes”). Pursuant to the Master Exchange Agreement, Esousa has
the unilateral right to acquire shares of the Company’s common stock in exchange for the Notes. We anticipate the second
exchange to acquire an additional $3.5 million of certain promissory notes if the Company receives stockholder approval at a special
meeting thereof for the Master Exchange Agreement, and subsequently, authorization from the NYSE American. This
special meeting is presently scheduled to occur on July 8, 2020.
|
We expect to continue incurring losses
for the foreseeable future and will be required to raise additional capital to continue to support our working capital requirements.
We have been successful over the last 12 months in raising capital to support our working capital requirements. We anticipate that
we will continue to raise capital through public and private equity offerings, debt financings, or other means. If we are unable
to secure additional capital, we may be required to curtail our current operations and take additional measures to reduce costs
expenses, including reducing our workforce, eliminating outside consultants, ceasing or reducing our due diligence of potential
future acquisitions, including the associated legal fees, in order to conserve cash in order to sustain operations and meet our
obligations.
Based on the above, these matters
raise substantial doubt about our ability to continue as a going concern and amounts reported in our financial statements do not
reflect the effects of any adjustments to the carrying amounts of our assets and liabilities should we be unable to continue as
a going concern.
CRITICAL ACCOUNTING POLICIES
In our Annual Report on Form 10-K
for the year ended December 31, 2019, we identified the critical accounting policies which affect our more significant estimates
and assumptions used in preparing our consolidated financial statements. The basis for developing the estimates and assumptions
within our critical accounting policies is based on historical information and known current trends and factors. The estimates
and assumptions are evaluated on an ongoing basis and actual results have been within our expectations. We have not changed
these policies from those previously disclosed in our Annual Report.