2.
LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLANS
The
accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going
concern. As of June 30, 2018, the Company had cash and cash equivalents of $1,518, an accumulated deficit of $36,551 and a negative
working capital of $5,112. The Company has incurred recurring losses and reported losses for the three and six months ended June
30, 2018, totaled $6,997 and $13,092, respectively. In the past, the Company has financed its operations principally through issuances
of convertible debt, promissory notes and equity securities. During 2018, the Company continued to successfully obtain additional
equity and debt financing and in restructuring existing debt.
The
Company expects to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business
development initiatives and to support its working capital requirements. In March 2017, the Company was awarded a 3-year, $50
million purchase order by MTIX Ltd. (
“MTIX”
) to manufacture, install and service the Multiplex Laser
Surface Enhancement (
“MLSE”
) plasma-laser system. Management believes that the MLSE purchase order will
be a source of revenue and generate significant cash flows for the Company. Management believes that the Company has access to
capital resources through potential public or private issuance of debt or equity securities. However, if the Company is unable
to raise additional capital, it may be required to curtail operations and take additional measures to reduce costs, including
reducing its workforce, eliminating outside consultants and reducing legal fees to conserve its cash in amounts sufficient to
sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to continue
as a going concern. The accompanying financial statements do not include any adjustments that might become necessary should the
Company be unable to continue as a going concern.
3.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form
10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles
in the United States of America (“GAAP”). The Company has made estimates and judgments affecting the amounts reported
in our condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may
differ materially from our estimates. The condensed consolidated financial information is unaudited but reflects all normal adjustments
that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on April 17,
2018. The consolidated balance sheet as of December 31, 2017 was derived from the Company’s audited 2017 financial statements
contained in the above referenced Form 10-K. Results of the three and six months ended June 30, 2018, are not necessarily indicative
of the results to be expected for the full year ending December 31, 2018.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of DPW and its wholly-owned subsidiaries, Coolisys, DP Limited,
Power-Plus, Enertec, DP Lending and SC Mining and its majority-owned subsidiaries, Microphase and I.AM. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Accounting
Estimates
The
preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates, judgments and assumptions.
The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information
available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts
of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Key estimates include
acquisition accounting, fair value of certain financial instruments, reserve for trade receivables and inventories, carrying amounts
of investments, fair value of digital currencies, accruals of certain liabilities including product warranties, useful lives and
depreciation, and deferred income taxes and related valuation allowance.
Revenue
Recognition
The
Company recognizes revenue under ASC 606,
Revenue from Contracts with Customers
. The core principle of the new revenue
standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following
five steps are applied to achieve that core principle:
|
●
|
Step
1: Identify the contract with the customer
|
|
●
|
Step
2: Identify the performance obligations in the contract
|
|
●
|
Step
3: Determine the transaction price
|
|
●
|
Step
4: Allocate the transaction price to the performance obligations in the contract
|
|
●
|
Step
5: Recognize revenue when the company satisfies a performance obligation
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The
Company’s disaggregated revenues consist of the following for the six months ended June 30, 2018:
|
|
Six Months ended June 30, 2018
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Enertec
|
|
|
SC Mining
|
|
|
I.AM
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
8,967
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
956
|
|
|
$
|
502
|
|
|
$
|
10,432
|
|
Europe
|
|
|
—
|
|
|
|
645
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
645
|
|
Middle East
|
|
|
—
|
|
|
|
—
|
|
|
|
1,218
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,218
|
|
Other
|
|
|
259
|
|
|
|
86
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
345
|
|
|
|
$
|
9,226
|
|
|
$
|
738
|
|
|
$
|
1,218
|
|
|
$
|
956
|
|
|
$
|
502
|
|
|
$
|
12,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RF/Microwave Filters
|
|
$
|
1,232
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,232
|
|
Detector logarithmic video amplifiers
|
|
|
58
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58
|
|
Power Supply Units
|
|
|
4,268
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,268
|
|
Power Supply Systems
|
|
|
—
|
|
|
|
738
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
738
|
|
Healthcare diagnostic systems
|
|
|
—
|
|
|
|
—
|
|
|
|
416
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416
|
|
Defense systems
|
|
|
—
|
|
|
|
—
|
|
|
|
802
|
|
|
|
—
|
|
|
|
—
|
|
|
|
802
|
|
Digital Currency Mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
|
|
—
|
|
|
|
956
|
|
Restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
502
|
|
|
|
502
|
|
Lending activities
|
|
|
109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109
|
|
MLSE Systems
|
|
|
3,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,559
|
|
|
|
$
|
9,226
|
|
|
$
|
738
|
|
|
$
|
1,218
|
|
|
$
|
956
|
|
|
$
|
502
|
|
|
$
|
12,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
|
$
|
5,667
|
|
|
$
|
738
|
|
|
$
|
1,218
|
|
|
$
|
956
|
|
|
$
|
502
|
|
|
$
|
9,081
|
|
Services transferred over time
|
|
|
3,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,559
|
|
|
|
$
|
9,226
|
|
|
$
|
738
|
|
|
$
|
1,218
|
|
|
$
|
956
|
|
|
$
|
502
|
|
|
$
|
12,640
|
|
Sales
of Products
The
Company generates revenues from the sale of its products through a direct and indirect sales force. The Company’s performance
obligations to deliver products are satisfied at the point in time when products are received by the customer, which is when the
customer has title and the significant risks and rewards of ownership. The Company provides standard assurance warranties 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 not been material. 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 for fixed fees. The Company’s performance obligation for manufacturing
services is satisfied over time as the Company creates or enhances an asset that the customer controls as the asset is created
or enhanced. The Company recognizes revenue 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 faithful 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.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The
period between when the Company transfers its promised good or service to the customer and when the customer pays is one year
or less. Therefore, the Company has elected the practical expedient to not adjust the promised amount of consideration for the
effects of a significant financing component.
The
aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of June 30,
2018 was $48,691. The Company expects to recognize the remaining revenue related to the partially unsatisfied performance obligation
over the next two and a half years. The Company will be paid in installments for this performance obligation over the next two
and a half years.
Digital
Currency Blockchain Mining
The
Company derives its revenue by providing transaction verification services within the digital currency networks of cryptocurrencies,
such as Bitcoin, Bitcoin Cash and Litecoin. The Company satisfies its performance obligation at the point in time that which the
Company is awarded a unit of digital currency through its participation in the applicable network and network participants benefit
from the Company’s verification service. In consideration for these services, the Company receives digital currencies which
are recorded as revenue, using the closing U. S. dollar price of the related cryptocurrency on the date of receipt. The coins
are recorded on the balance sheet at their fair value and re–measured at each reporting date. Revaluation gains or losses,
as well as gains or losses on sale of digital currencies are recorded as a component of operating expenses in the statement
of operations. Expenses associated with running the cryptocurrency mining business, such as equipment deprecation and electricity
cost are recorded as a component of cost of revenues.
There
is currently no definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for the production and
mining of digital currencies. The Company has exercised significant judgement in determining appropriate accounting treatment
for the recognition of revenue for mining of digital currencies. Management has examined various factors surrounding the substance
of the Company’s operations and the guidance in ASC 606, Revenue from Contracts with Customers, including the transfer
of control being the completion and addition of a block to a blockchain and the reliability of the measurement of the digital
currency received. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”),
the Company may be required to change its policies which could result in a change in the Company’s financial statements.
Restaurant
Operations
The
Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals and complimentary
meals and gift cards. Restaurant cost of sales primarily includes the cost of good, beverages, and merchandise and disposable
paper and plastic goods used in preparing and selling the Company’s menu items, and exclude depreciation and amortization.
Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related
food and beverage costs as earned.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
Property
and Equipment, Net
Property
and equipment as well as an intangible asset are stated at cost, net of accumulated depreciation and amortization. Repairs and
maintenance costs are expensed as incurred. Depreciation and amortization are calculated using the straight-line method over the
estimated useful lives of the assets, at the following annual rates:
|
|
Useful
lives (in years)
|
Cryptocurrency
machines and related equipment
|
|
3
- 5
|
Computer,
software and related equipment
|
|
3
- 5
|
Office
furniture and equipment
|
|
5
- 10
|
Leasehold
improvements
|
|
Over
the term of the lease or the life of the asset, whichever is shorter.
|
Fair
value of Financial Instruments
In
accordance with ASC No. 820,
Fair Value Measurements and Disclosures
, fair value is defined as the exit price, or the amount
that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants
as of the measurement date.
The
guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs
are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained
from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors that market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs
that may be used to measure fair value:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or model-derived valuations. All significant inputs used in our valuations
are observable or can be derived principally from or corroborated with observable market data for substantially the full term
of the assets or liabilities. Level 2 inputs also include quoted prices that were adjusted for security-specific restrictions
which are compared to output from internally developed models such as a discounted cash flow models.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
The
carrying amounts of financial instruments carried at cost, including cash and cash equivalents, accounts receivables and accounts
and other receivable – related party, investments, notes receivable, trade payables and trade payables – related party
approximate their fair value due to the short-term maturities of such instruments.
As
of June 30, 2018 and December 31, 2017, the fair value of the Company’s investments were $4,554 and $9,563, respectively,
and were concentrated in equity securities of AVLP, a related party (See Note 9), which are classified as available-for-sale investments.
At June 30, 2018, the Company’s investment in AVLP included marketable equity securities of $758 and warrants to purchase
11,167,440 shares of AVLP common stock at an exercise price of $0.50 per share of common stock. At December 31, 2017, the Company’s
investment in AVLP included marketable equity securities of $826 and warrants to purchase 8,248,440 shares of AVLP common stock
at an exercise price of $0.50 per share of common stock. For investments in marketable equity securities, the Company took into
consideration general market conditions, the duration and extent to which the fair value is above cost, and the Company’s
ability and intent to hold the investment for a sufficient period of time to allow for recovery of value in the foreseeable future.
As a result of this analysis, the Company has determined that its investment in AVLP’s marketable equity securities are
valued based upon the closing market price of common stock at June 30, 2018 and December 31, 2017, which resulted in an unrealized
gain of $130 and $550, respectively.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
At
June 30, 2018, the Company held shares of common stock in four companies and held certain cryptocurrencies that it had either
purchased at the market or received from mining for its own account, for a total cost of $300. In accordance with ASC No. 320-10,
these investments are accounted for based upon the closing market prices of the respective common stock and cryptocurrency at
June 30, 2018 and December 31, 2017, resulting in an unrealized gain $27 and $133, respectively.
The
categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. The following table sets forth the Company’s financial instruments that were measured at
fair value on a recurring basis by level within the fair value hierarchy:
|
|
Fair Value Measurement at June 30, 2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in common stock and warrants of
AVLP – a related party
|
|
$
|
4,171
|
|
|
$
|
758
|
|
|
$
|
—
|
|
|
$
|
3,413
|
|
Investments in digital currencies
|
|
|
8
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
Investments in marketable securities
|
|
|
318
|
|
|
|
318
|
|
|
|
—
|
|
|
|
—
|
|
Investment in warrants of Parallax
|
|
|
57
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57
|
|
Total Investments
|
|
$
|
4,554
|
|
|
$
|
1,084
|
|
|
$
|
—
|
|
|
$
|
3,470
|
|
|
|
Fair Value Measurement at December 31, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investments in common stock and warrants of
AVLP – a related party
|
|
$
|
7,728
|
|
|
$
|
826
|
|
|
$
|
—
|
|
|
$
|
6,902
|
|
Investments in marketable securities
|
|
|
1,835
|
|
|
|
1,835
|
|
|
|
—
|
|
|
|
—
|
|
Total Investments
|
|
$
|
9,563
|
|
|
$
|
2,661
|
|
|
$
|
—
|
|
|
$
|
6,902
|
|
We
assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring
fair value are observable in the market:
|
●
|
Level
1 – inputs include quoted prices for identical instruments and are the most observable.
|
|
●
|
Level
2 – inputs include quoted prices for similar assets and observable inputs such
as interest rates, currency exchange rates and yield curves.
|
|
●
|
Level
3 – inputs are not observable in the market and include management’s judgments
about the assumptions market participants would use in pricing the asset or liability.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
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 317,460 warrants, with an exercise price of $.01, in its earnings per share calculation for the three and six months
ended June 30, 2018 and 2017. Anti-dilutive securities, which are convertible into the Company’s Class A common stock, consist
of the following at June 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
7,580,000
|
|
|
|
2,841,000
|
|
Warrants
1
|
|
|
18,410,160
|
|
|
|
7,426,080
|
|
Convertible notes
|
|
|
—
|
|
|
|
1,296,969
|
|
Conversion of preferred stock
|
|
|
1,785,714
|
|
|
|
4,606,131
|
|
Total
|
|
|
27,775,871
|
|
|
|
16,170,180
|
|
|
(1)
|
The
Company has excluded the 317,460 warrants with an exercise price of $0.01 per share in
its anti-dilutive securities but included the warrants in its weighted average shares
outstanding.
|
Recently
Issued Accounting Standards
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606)
, (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue
Recognition (“ASC 605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates
that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC
606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The
Company adopted ASC 606 effective January 1, 2018 to all contracts using the modified retrospective approach. The adoption of
ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity
or cash flows.
In
July 2017, the FASB issued ASU No. 2017-11,
Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480), Derivatives and Hedging (Topic 815)
(“ASU 2017-11”). ASU 2017-11 consists of two parts. The amendments in
Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As
a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as
a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with
Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as
a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options
that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part
II of this update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending
content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities,
the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. For all other entities, the amendments in Part I of this update are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted
for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part
II of this update do not require any transition guidance because those amendments do not have an accounting effect. The Company
is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements and related disclosures
but does not expect it to have a material impact.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
In
June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
, (“ASU
2018-07”). ASU 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services.
Under ASU 2018-07, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based
payments granted to employees. The changes take effect for public companies for fiscal years starting after Dec. 15, 2018, including
interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but
no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of adopting this
standard on its condensed consolidated financial statements and related disclosures but does not expect it to have a material
impact.
FASB,
the Emerging Issues Task Force and the SEC have issued certain other accounting standards, updates, and regulations as of June
30, 2018 that will become effective in subsequent periods; however, management does not believe that any of those updates would
have significantly affected our financial accounting measures or disclosures had they been in effect during 2018 or 2017, and
it does not believe that any of those pronouncements will have a significant impact on our condensed consolidated financial statements
at the time they become effective.
4.
Digital Currencies
The
following table presents additional information about digital currencies:
|
|
Digital Currencies
|
|
Balance at January 1, 2018
|
|
$
|
—
|
|
Additions of digital currencies
|
|
|
915
|
|
Realized loss on sale of digital currencies
|
|
|
(101
|
)
|
Payment on convertible notes payable with digital currencies
|
|
|
(605
|
)
|
Purchase of fixed assets with digital currencies
|
|
|
(201
|
)
|
Balance at June 30, 2018
|
|
$
|
8
|
|
As
June 30, 2018, the Company’s digital currencies consisted of Bitcoin, Bitcoin Cash and Litecoin. Digital currencies are
recorded at their fair value on the date they are received as revenues and are revalued to their current fair value at each reporting
date. Fair value is determined by taking the closing price from the most liquid exchanges.
5.
Marketable Securities
Marketable
securities in equity securities with readily determinable market prices consisted of the following as of June 30, 2018 and December 31,
2017:
|
|
|
Available-for-sale securities at June 30, 2018
|
|
|
|
|
|
|
|
Gross unrealized
|
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains
|
|
|
gains (losses)
|
|
Fair value
|
|
Common shares
|
|
|
$
|
291
|
|
|
$
|
27
|
|
|
$
|
—
|
|
$
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities at December 31, 2017
|
|
|
|
|
|
|
|
Gross unrealized
|
|
|
Gross realized
|
|
|
|
|
|
|
Cost
|
|
|
gains
|
|
|
gains (losses)
|
|
Fair value
|
|
Common shares
|
|
|
$
|
1,702
|
|
|
$
|
133
|
|
|
$
|
—
|
|
$
|
1,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The
following table presents additional information about marketable securities:
Balance at January 1, 2018
|
|
$
|
1,835
|
|
Purchases of marketable securities
|
|
|
856
|
|
Sales of marketable securities
|
|
|
(2,132
|
)
|
Realized losses on marketable securities
|
|
|
(158
|
)
|
Unrealized loss on marketable securities
|
|
|
(83
|
)
|
Balance at June 30, 2018
|
|
$
|
318
|
|
Available-for-sale
Securities
At
June 30, 2018 and December 31, 2017, the Company had invested in the marketable securities of certain publicly traded companies.
At June 30, 2018 and December 31, 2017, the Company recorded an unrealized loss of $27 and $132, respectively, representing the
difference between the cost basis and the estimated fair value, as accumulated other comprehensive income in the stockholder’s
equity section of the Company’s consolidated balance sheet and as a change in unrealized gains and losses on marketable
securities in the Company’s consolidated statements of comprehensive income (loss). The Company’s investment in marketable
securities shall be revalued on each balance sheet date. The fair value of the Company’s holdings in marketable
securities at June 30, 2018 and December 31, 2017 is a Level 1 measurement based on quoted prices in an active market.
6. PROPERTY
AND EQUIPMENT, NET
At
June 30, 2018 and December 31, 2017, property and equipment consist of:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cryptocurrency machines and related equipment
|
|
$
|
9,084
|
|
|
$
|
—
|
|
Computer, software and related equipment
|
|
|
2,423
|
|
|
|
2,432
|
|
Restaurant equipment
|
|
|
974
|
|
|
|
—
|
|
Office furniture and equipment
|
|
|
297
|
|
|
|
289
|
|
Buildings and improvements
|
|
|
305
|
|
|
|
—
|
|
Leasehold improvements
|
|
|
1,225
|
|
|
|
788
|
|
|
|
|
14,308
|
|
|
|
3,509
|
|
Accumulated depreciation and amortization
|
|
|
(3,026
|
)
|
|
|
(2,292
|
)
|
Property and equipment, net
|
|
$
|
11,282
|
|
|
$
|
1,217
|
|
For
the three and six months ended June 30, 2018, depreciation expense amounted to $643 and $758, respectively. During the three and
six months ended June 30, 2017, depreciation expense amounted to $45 and $78, respectively.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
7.
INTANGIBLE ASSETS, NET
At
June 30, 2018 and December 31, 2017 intangible assets consist of:
|
|
Intangible Assets
|
|
Balance as of January 1, 2017
|
|
$
|
—
|
|
Trade name and trademark
|
|
|
1,740
|
|
Customer list
|
|
|
988
|
|
Non-competition agreements
|
|
|
150
|
|
Domain name
|
|
|
81
|
|
Accumulated amortization
|
|
|
(60
|
)
|
Balance as of December 31, 2017
|
|
$
|
2,899
|
|
Trade name and trademark
|
|
|
3
|
|
Start-up costs
|
|
|
39
|
|
Accumulated amortization
|
|
|
(67
|
)
|
Balance as of June 30, 2018
|
|
$
|
2,874
|
|
During
2017, the Company acquired the trade name and trademark of Microphase, that was determined to have an indefinite life, for $1,740.
The remaining definite lived intangible assets are being amortized on a straight-line basis over their estimated useful lives.
Amortization expense was $34 and $67, respectively, for the three and six months ended June 30, 2018 and nil and $2, respectively,
for the three and six months ended June 30, 2017.
8.
GOODWILL
The
Company’s goodwill relates to the acquisitions of a controlling interest in Microphase on June 2, 2017 and I. AM, Inc. (“I.
AM”) on May 23, 2018, the acquisition of Enertec Systems 2001 Ltd. (“Enertec”) on May 22, 2018, and the acquisition
of all of the outstanding membership interests in Power Plus on September 1, 2017.
9.
INVESTMENTS – RELATED PARTIES
Investments
in AVLP at June 30, 2018 and December 31, 2017, are comprised of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Investment in convertible promissory note of AVLP
|
|
$
|
5,536
|
|
|
$
|
4,124
|
|
Investment in warrants of AVLP
|
|
|
3,413
|
|
|
|
6,902
|
|
Investment in common stock of AVLP
|
|
|
758
|
|
|
|
826
|
|
Accrued interest in convertible promissory note of AVLP
|
|
|
626
|
|
|
|
324
|
|
Total investment in AVLP – Gross
|
|
|
10,333
|
|
|
|
12,176
|
|
Less: original issue discount
|
|
|
(2,653
|
)
|
|
|
(2,115
|
)
|
Total investment in AVLP – Net
|
|
$
|
7,680
|
|
|
$
|
10,061
|
|
|
|
|
|
|
|
|
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The
following table summarizes the changes in our investments in AVLP during the six months ended June 30, 2018:
|
|
Investment in
|
|
|
Investment in
|
|
|
|
|
|
|
warrants and
|
|
|
convertible
|
|
|
Total
|
|
|
|
common stock
|
|
|
promissory
|
|
|
investment
|
|
|
|
of AVLP
|
|
|
note of AVLP
|
|
|
in AVLP – Net
|
|
Balance at January 1, 2018
|
|
$
|
7,728
|
|
|
$
|
2,333
|
|
|
$
|
10,061
|
|
Investment in convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
1,063
|
|
|
|
1,064
|
|
Payment of convertible promissory notes of AVLP
|
|
|
—
|
|
|
|
(1,108
|
)
|
|
|
(1,108
|
)
|
Investment in common stock of AVLP
|
|
|
352
|
|
|
|
—
|
|
|
|
352
|
|
Fair value of warrants issued by AVLP
|
|
|
1,456
|
|
|
|
—
|
|
|
|
1,456
|
|
Unrealized loss in warrants of AVLP
|
|
|
(4,945
|
)
|
|
|
—
|
|
|
|
(4,945
|
)
|
Unrealized loss in common stock of AVLP
|
|
|
(420
|
)
|
|
|
—
|
|
|
|
(420
|
)
|
Accretion of discount
|
|
|
—
|
|
|
|
918
|
|
|
|
918
|
|
Accrued Interest
|
|
|
—
|
|
|
|
302
|
|
|
|
302
|
|
Balance at June 30, 2018
|
|
$
|
4,171
|
|
|
$
|
3,508
|
|
|
$
|
7,680
|
|
The
Company has made a strategic decision to invest in AVLP, a related party controlled by Philou, a significant stockholder of the
Company. The Company’s investments in AVLP consist of convertible promissory notes, warrants and shares of common stock
of AVLP. On September 6, 2017, the Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan Agreement”)
with an effective date of August 21, 2017 pursuant to which the Company will provide Avalanche a non-revolving credit
facility of up to $5,000 for a period ending on August 21, 2019, subject to the terms and conditions stated in the Loan Agreement,
including that the Company having available funds to grant such credit. At June 30, 2018, the Company has provided loans to AVLP
in the principal amount $5,536 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants
to purchase 11,167,440 shares of AVLP common stock. Under the terms of the AVLP Loan Agreement, any notes issued by AVLP to the
Company are secured by the assets of AVLP.
The
warrants entitle the Company to purchase up to 11,167,440 shares of AVLP common stock at an exercise price of $0.50 per share
for a period of five years. The exercise price of $0.50 is subject to adjustment for customary stock splits, stock dividends,
combinations or similar events. The warrant may be exercised for cash or on a cashless basis. At June 30, 2018 and December 31,
2017, the Company recorded an unrealized gain (loss) on its investment in warrants of AVLP of ($432) and $4,513, respectively,
representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated
other comprehensive income in the stockholder’s equity section of the Company’s consolidated balance sheet and as
a change in net unrealized gains on securities available-for-sale in the Company’s consolidated statements of comprehensive
loss. During the three and six months ended June 30, 2018, the Company’s investment in warrants and common stock of AVLP
represented $705 and $5,365, respectively, of the Company’s aggregate $705 and $5,448, respectively, in net unrealized loss
on securities available-for-sale. The Company’s investment in Avalanche will be revalued on each balance sheet date. The
fair value of the Company’s holdings in the Avalanche warrants was estimated using the Black-Scholes option-pricing method.
The risk-free rate, which ranged between 1.92% and 2.43%, was derived from the U.S. Treasury yield curve, matching the term of
our investment, in effect at the measurement date. The volatility factor of 80.4% was determined based on historical stock prices
for similar technology companies with market capitalizations under $100 million. The warrant valuation is a Level 3 measurement.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
In
accordance with ASC No. 310,
Receivables
(“ASC 310”), the Company accounts for its convertible promissory
notes in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted
for accrued interest and accretion of original issue discount and discount attributed to the fair value of the 11,167,440 warrants
that the Company received in conjunction with its investment. Interest is accreted using the effective interest method. The Company
records interest on an accrual basis and recognizes it as earned in accordance with the contractual terms of the convertible promissory
notes, to the extent that such amounts are expected to be collected. The original issue discount of $165 on the New Note and the
discount attributed to the fair value of the warrants of $3,845 are being amortized as interest income through the maturity date.
During the three and six months ended June 30, 2018, the Company recorded $428 and $918, respectively, of interest income for
the discount accretion. During the three and six months ended June 30, 2017, the Company recorded $12 and $19, respectively, of
interest income for the discount accretion As of June 30, 2018 and December 31, 2017, the Company recorded contractual interest
receivable attributed to the AVLP Notes and AVLP Loan Agreement of $626 and $324, respectively.
The
Company evaluated the collectability of both interest and principal for the convertible promissory notes in AVLP to determine
whether there was an impairment. Based on current information and events, the Company determined that it is probable that it will
be able to collect amounts due according to the existing contractual terms. Impairment assessments require significant judgments
and are based on significant assumptions related to the borrower’s credit risk, financial performance, expected sales, and
estimated fair value of the collateral.
During
the six months ended June 30, 2018 and the year ended December 31, 2017, the Company also acquired in the open market 370,100
shares of AVLP common stock for $352 and 221,333 shares of AVLP common stock for $192, respectively. At June 30, 2018, the closing
market price of AVLP’s common stock was $0.90, a decline from $1.75 at December 31, 2017. The Company has determined that
its investment in AVLP marketable equity securities are accounted for pursuant to the fair value method and based upon the closing
market price of common stock at June 30, 2018, the Company has recognized an unrealized gain of $130.
10.
INVESTMENTS IN PREFERRED STOCK OF PRIVATE COMPANY AND OTHER INVESTMENTS
We
hold a portfolio of investments in equity and debt securities in other entities that are accounted for under the cost method.
Investment
in Preferred Stock of Private Company
On December
15, 2017, the Company and Sandstone Diagnostics, Inc. (“Sandstone”) entered into a Series A1 Preferred Stock Purchase
Agreement (“Loan Agreement”) pursuant to which the Company purchased 976,286 shares of Sandstone’s Series A1
Preferred Shares for $1,000. Sandstone is a medical device company focused on a data-driven approach to men’s reproductive
health. Founded in 2012 in part by government scientists from Sandia National Laboratories, Sandstone’s mission is to provide
innovative, data-driven tools to help men assess, manage, and improve their reproductive health. The funding from the Series
A1 Preferred Stock financing will support sales growth and continued product development leveraging the company’s unique
technology platform, Sandstone’s Trak™ Male Fertility Testing System.
The
Company elected to follow the guidance of ASC No. 321,
Equity Securities
(“ASC 321”), which provides a
measurement alternative to the requirement to carry equity interests at fair value in accordance with ASC 820, Fair value measurement,
for certain equity interests without readily determinable fair values. Equity interests measured in accordance with the measurement
alternative in ASC 321 are not required to be included within the fair value hierarchy. The Company’s equity investment
in Sandstone is recorded at cost. However, any change to the carrying amount will be subsequently adjusted up or down for observable
price changes (i.e., prices in orderly transactions for the identical investment or similar investment of the same issuer) and
any adjustments to the carrying amount shall be recorded in net income.
Other
Investments
On November
1, 2017, the Company and I. AM, Inc. (“I. AM”) entered into a Loan and Security Agreement pursuant to which the Company
provided I. AM with a non-revolving credit facility of up to $1,600 for a period ending on September 25, 2022. On May 23, 2018,
DP Lending entered into and closed a securities purchase agreement with I. AM. At the date of the acquisition, I. AM owed DP Lending
$1,715 in outstanding principal, pursuant to the loan and security agreement. The purchase agreement provides that as I. AM repays
the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending will on a pro rata basis transfer shares
of common stock of I. AM to David J. Krause, up to an aggregate of 471 shares (see Note 12).
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The
Company, primarily through DP Lending, has made additional investments in debt and equity securities of various entities. At June
30, 2018 and December 31, 2017, the outstanding balance of these investments was $2,348 and $1,637, respectively.
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 amount of $600 (“Note A”) and $1,668 (“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 600,000 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and
WT Johnson subsequently sold the 600,000 shares. The proceeds from the sale of Note A were sufficient to satisfy the entire $2,268
obligation as well as an additional $400 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 from MTIX and cancelled Note B. At June 30, 2018 and December 31,
2017, the Company has valued the note receivable at $600, the carrying amount of Note A. The Company will recognize the remainder
of the amount due from MTIX upon payment of the promissory note by MTIX.
Israeli
Property
During
the year ended December 31, 2017, our President, Amos Kohn, purchased certain real property that serves as a facility for the
Company’s business operations in Israel. The Company made $300 of payments to the seller of the property and received a
28% undivided interest in the real property (“Property”). The Company’s subsidiary, Coolisys, entered into a
Trust Agreement and Tenancy In Common Agreement with Roni Kohn, who owns a 72% interest in the Property, is the daughter of Mr.
Kohn and is an Israeli citizen. The Property was purchased to serve as a residence/office facility for the Company in order to
oversee its Israeli operations and to expand its business in the hi-tech industry located in Israel. Pursuant to the Trust Agreement,
Ms. Kohn will hold and manage Coolisys’ undivided 28% interest in the Property. The trust will be in effect until it is
terminated by mutual agreement of the parties. During the term of the trust, Ms. Kohn will not sell, lease, sublease, transfer,
grant, encumber, change or effect any other disposition with respect to the Property or Coolisys’ interest without the Company’s
approval.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
Under
the Tenancy In Common Agreement, Coolisys and its executive officers shall have the exclusive rights to use the Property for the
Company and its affiliates’ business operations. The Property shall be managed by Ms. Kohn. Further, pursuant to the Tenancy
In Common Agreement, for each completed calendar month of employment of Mr. Kohn by the Company, Ms. Kohn shall have the right
to purchase a portion of the Company’s interest in the Property. Such right shall fully vest at the end of five years of
continuous employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a
nominal value. The Company will amortize its $300 investment over ten years, subject to a cliff vesting after five years. During
the three and six months ended June 30, 2018, the Company recognized $7 and $14, respectively, in amortization expense. In the
event that Mr. Kohn is not employed by the Company, the Company shall have the right to demand that Ms. Kohn purchase the Company’s
remaining interest in the Property that was not subject to vesting for the fair market value of such unvested Property interest.
Other
investments and interest receivable
During
the year ended December 31, 2017, DP Lending made loans to Alzamend Neuro, Inc. (“Alzamend”), in the amount of $44,
these loans were repaid during the three months ended March 31, 2018. AVLP is a party to a management services agreement pursuant
to which Avalanche provides management, consulting and financial services to Alzamend. As additional consideration, the Company
received a warrant to purchase 22,000 shares of Alzamend’s common stock at an exercise price of $0.30 per share of common
stock. The warrants were determined to have a de minimis value.
12.
ACQUISITIONS
Microphase
Corporation and Power-Plus Technical Distributors
Enertec
Systems 2001 Ltd.
On
December 31, 2017, CooliSys entered into a share purchase agreement with Micronet Enertec Technologies, Inc. (“MICT”),
a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary of MICT (“EML”
and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”), an Israeli
corporation and wholly owned subsidiary of EML, pursuant to which Coolisys acquired Enertec (the “Acquisition”). The
Company believes that Enertec is Israel’s largest private manufacturer of specialized electronic systems for the military
market. On May 23, 2018, Coolisys acquired Enertec for an aggregate cash purchase price of $4,851.
I.
AM, Inc.
On
May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I. AM, David J. Krause and Deborah J. Krause.
Pursuant to the securities purchase agreement, I. AM sold to DPL, 981 shares of common stock for a purchase price of $981, representing,
upon the closing, 98.1% of I. AM’s outstanding common stock.
I.
AM owns and operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715 in outstanding
principal, pursuant to a loan and security agreement, between I. AM and DP Lending, which I. AM used to acquire the restaurants.
The purchase agreement provides that, as I. AM repays the outstanding loan to DP Lending in accordance with the loan agreement,
DP Lending will on a pro rata basis transfer shares of common stock of I. AM to David J. Krause, up to an aggregate of 471
shares.
The
acquisition of Enertec and I. AM are being accounted for under the purchase method of accounting in accordance with ASC No. 805,
Business
Combinations
. Under the purchase method, assets acquired and liabilities assumed are recorded at their estimated fair values.
Goodwill is recorded to the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets
acquired less liabilities assumed at the date of acquisition. The initial accounting for the acquisition is not yet complete,
and the Company is still performing procedures to determine the appropriate accounting.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
Upon
initial measurement, components of the preliminary purchase price are as follows:
|
|
Enertec
|
|
|
I. AM
|
|
Accounts receivable
|
|
$
|
3,078
|
|
|
$
|
29
|
|
Inventories
|
|
|
1,634
|
|
|
|
40
|
|
Prepaid expenses and other current assets
|
|
|
20
|
|
|
|
—
|
|
Property and equipment
|
|
|
649
|
|
|
|
985
|
|
Other assets
|
|
|
96
|
|
|
|
3
|
|
Accounts payable and accrued expenses
|
|
|
(2,615
|
)
|
|
|
(159
|
)
|
Notes payable
|
|
|
(4,236
|
)
|
|
|
—
|
|
Accrued severance pay
|
|
|
(132
|
)
|
|
|
—
|
|
Net liabilities assumed
|
|
|
(1,506
|
)
|
|
|
898
|
|
Goodwill
|
|
|
6,357
|
|
|
|
700
|
|
Non-controlling interest
|
|
|
—
|
|
|
|
(33
|
)
|
Purchase price
|
|
$
|
4,851
|
|
|
$
|
1,565
|
|
The
following pro forma data for the three and six months ended June 30, 2017 summarizes the results of operations for the period
indicated as if the Microphase, Power-Plus and Enertec acquisitions, which closed on June 2, 2017, September 1, 2017, and May
23, 2018, respectively, had been completed as of the beginning of each period presented. The pro forma data gives effect to actual
operating results prior to the acquisition. These pro forma amounts do not purport to be indicative of the results that would
have actually been obtained if the acquisition occurred as of the beginning of each period presented or that may be obtained in
future periods:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total Revenue
|
|
$
|
7,621
|
|
|
$
|
5,485
|
|
|
$
|
15,395
|
|
|
$
|
16,755
|
|
Net loss
|
|
$
|
(9,196
|
)
|
|
$
|
(2,484
|
)
|
|
$
|
(15,332
|
)
|
|
$
|
(5,295
|
)
|
Less: Net loss attributable
to non-controlling
interest
|
|
|
108
|
|
|
|
118
|
|
|
|
144
|
|
|
|
623
|
|
Net loss attributable to
common stockholders
|
|
$
|
(9,088
|
)
|
|
$
|
(2,366
|
)
|
|
$
|
(15,188
|
)
|
|
$
|
(4,672
|
)
|
Preferred deemed dividends
|
|
|
(108
|
)
|
|
|
(319
|
)
|
|
|
(108
|
)
|
|
|
(319
|
)
|
Preferred dividends
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
Loss available to common
shareholders
|
|
$
|
(9,196
|
)
|
|
$
|
(2,693
|
)
|
|
$
|
(15,296
|
)
|
|
$
|
(4,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
common shares outstanding
|
|
|
54,009,472
|
|
|
|
10,467,658
|
|
|
|
45,407,279
|
|
|
|
9,430,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders
|
|
$
|
(9,196
|
)
|
|
$
|
(2,693
|
)
|
|
$
|
(15,296
|
)
|
|
$
|
(4,999
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net foreign currency
translation adjustments
|
|
|
(158
|
)
|
|
|
78
|
|
|
|
(132
|
)
|
|
|
99
|
|
Net unrealized gain (loss) on
securities available-for-sale
|
|
|
(705
|
)
|
|
|
—
|
|
|
|
(5,446
|
)
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
|
(863
|
)
|
|
|
78
|
|
|
|
(5,578
|
)
|
|
|
99
|
|
Total Comprehensive loss
|
|
$
|
(10,059
|
)
|
|
$
|
(2,615
|
)
|
|
$
|
(20,874
|
)
|
|
$
|
(4,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
13.
STOCK-BASED COMPENSATION
Under
the Company’s 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive Plan (the “2016 Plan”)
and the 2012 Stock Option Plan, as amended (the “2012 Plan”) (collectively, the “Plans”), options may
be granted to employees, officers, consultants, service providers and directors of the Company. The Plans, as amended, provide
for the issuance of a maximum of 7,372,630 shares of the Company’s common stock. The Company also has 206,000 outstanding
options that were granted between 2009 and 2011 pursuant to the terms of the Company’s 2002 Stock Option Plan (the “2002
Plan”). Options granted pursuant to the 2002 Plan expire between September 2008 and February 2021.
Options
granted under the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date
of grant and become exercisable based on a vesting schedule determined at the date of grant. Typically, options granted generally
become fully vested after four years. Any options that are forfeited or cancelled before expiration become available for future
grants. The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plans
are subject to a vesting period determined at the date of grant. As of June 30, 2018, an aggregate of 55,773 of the Company’s
options are still available for future grant.
During
the six months ended June 30, 2018, the Company granted 1,000,000 options to its employees from the Plans and also granted 2,897,500
options outside of the Plans. During the six months ended June 30, 2017, the Company granted 510,000 options from the Plans. These
options become fully vested after four years. The Company estimated that the grant date fair value of options granted utilizing
the Black-Scholes option pricing model during the six months ended June 30, 2018 and 2017 was $514 and $229, respectively, which
is being recognized as stock-based compensation expense over the requisite four-year service period. During the six months ended
June 30, 2018 and 2017, the Company also issued 1,583,059 and nil, respectively, shares of common stock to its consultants and
service providers pursuant to the 2017 Plan. The Company estimated that the grant date fair value of these shares of common stock
was $2,640, which was determined from the closing price of the Company’s common stock on the date of issuance.
The
Company has valued the options at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent
upon several variables such as the options’ term, exercise price, current stock price, risk-free interest rate estimated
over the expected term and estimated volatility of our stock over the expected term of the options. The risk-free interest rate
used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating
the expected life of the options as calculated using the simplified method. The estimated volatility was determined based on the
historical volatility of our common stock.
During
the six months ended June 30, 2018 and 2017, the Company estimated the fair value of stock options granted using the Black-Scholes
option pricing model with the following weighted average assumptions:
|
|
Six
Months Ended
|
|
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Weighted average risk-free interest rate
|
|
2.41%
— 2.80%
|
|
|
1.89%
— 2.14%
|
|
Weighted average life (in
years)
|
|
|
4.75
|
|
|
|
5.0
|
|
Volatility
|
|
|
124.7%
— 131.7%
|
|
|
|
98.4%
— 98.6%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average grant-date fair value per share
of options granted
|
|
$
|
0.92
|
|
|
$
|
0.45
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The
options outstanding as of June 30, 2018, 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
|
|
|
$0.57 - $0.80
|
|
|
|
3,350,000
|
|
|
|
7.97
|
|
|
$
|
0.67
|
|
|
|
1,749,999
|
|
|
$
|
0.67
|
|
|
$1.00 - $1.38
|
|
|
|
170,000
|
|
|
|
9.03
|
|
|
$
|
1.37
|
|
|
|
36,875
|
|
|
$
|
1.36
|
|
|
$1.51 - $1.69
|
|
|
|
62,500
|
|
|
|
4.21
|
|
|
$
|
1.64
|
|
|
|
62,500
|
|
|
$
|
1.64
|
|
|
$0.57 - $1.69
|
|
|
|
3,582,500
|
|
|
|
7.95
|
|
|
$
|
0.72
|
|
|
|
1,849,374
|
|
|
$
|
0.71
|
|
Issuances outside of Plans
|
$0.80 - $2.32
|
|
|
3,997,500
|
|
|
|
7.90
|
|
|
$
|
1.30
|
|
|
|
325,694
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Options
|
$0.57 - 2.32
|
|
|
7,580,000
|
|
|
|
7.92
|
|
|
$
|
1.03
|
|
|
|
2,175,068
|
|
|
$
|
0.85
|
|
The
total stock-based compensation expense related to stock options and stock awards issued pursuant to the Plans to the Company’s
employees, consultants and directors, included in reported net loss for the three and six months ended June 30, 2018 and 2017,
is comprised as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Cost of revenues
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
4
|
|
Engineering and product development
|
|
|
—
|
|
|
|
6
|
|
|
|
13
|
|
|
|
13
|
|
Selling and marketing
|
|
|
—
|
|
|
|
6
|
|
|
|
12
|
|
|
|
11
|
|
General and administrative
|
|
|
843
|
|
|
|
557
|
|
|
|
1,507
|
|
|
|
668
|
|
Stock-based compensation from Plans
|
|
$
|
843
|
|
|
$
|
572
|
|
|
$
|
1,537
|
|
|
$
|
696
|
|
Stock-based compensation from issuances outside of Plans
|
|
|
530
|
|
|
|
—
|
|
|
|
1,274
|
|
|
|
—
|
|
Total Stock-based compensation
|
|
$
|
1,373
|
|
|
$
|
572
|
|
|
$
|
2,811
|
|
|
$
|
696
|
|
The
combination of stock-based compensation of $1,537 from the issuances of equity-based awards pursuant to the Plans and stock-based
compensation attributed to stock awards of $940 and warrants and options of $334, which were issued outside of the Plans, resulted
in aggregate stock-based compensation of $1,373 and $2,811 during the three and six months ended June 30, 2018. During the six
months ended June 30, 2018, the Company issued 2,897,500 options to purchase shares of common stock at an average exercise price
of $1.30 per share to its directors and officers. These shares were issued outside of the Plans and are subject to shareholder
approval. During the six months ended June 30, 2017, the only stock-based compensation expense was from issuances pursuant to
the Plans.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
A summary of option
activity under the Company’s stock option plans as of June 30, 2018, and changes during the three months ended are as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
of Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Value
|
|
January 1, 2018
|
|
|
2,538,832
|
|
|
|
2,742,500
|
|
|
$
|
0.77
|
|
|
|
8.80
|
|
|
$
|
6,688
|
|
Restricted stock awards
|
|
|
(1,583,059
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,000,000
|
)
|
|
|
1,000,000
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
100,000
|
|
|
|
(100,000
|
)
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
(60,000
|
)
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
55,773
|
|
|
|
3,582,500
|
|
|
$
|
0.72
|
|
|
|
7.95
|
|
|
$
|
0
|
|
The aggregate intrinsic
value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price on June
30, 2018, $0.54 and the exercise price, multiplied by the number of in-the-money-options).
As of June 30, 2018,
there was $949 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the
Plans. That cost is expected to be recognized over a weighted average period of 3.4 years.
14. WARRANTS
During the three months
ended March 31, 2018, the Company issued a total of 2,450,000 warrants at an average exercise price of $1.16 per share.
|
(i)
|
On
January 23, 2018, the Company issued warrants to purchase an aggregate of 625,000
shares of common stock at an exercise price equal to $2.20 per share of common stock
in connection with the issuance of a 10% senior convertible promissory note in the aggregate
principal amount of $1,250 (See Note 18c).
|
|
(ii)
|
On
January 25, 2018, the Company entered into three agreements for the Purchase and Sale
of Future Receipt, pursuant to which the Company sold up to (i) $562 of the Company’s
future receipts for a purchase price of $375, (ii) $337 in future receipts for a purchase
price of $225 and (iii) $118 in future receipts for a purchase price of $100. Under the
terms of these agreements, the Company issued warrants to purchase an aggregate of 112,500
shares of common stock at an exercise price of $2.25 per share of common stock and warrants
to purchase 162,500 shares of common stock at an exercise price of $2.50 per share of
common stock (See Note 15).
|
|
(iii)
|
On
March 22, 2018, the Company issued warrants to purchase an aggregate of 1,250,000
shares of common stock at an exercise price equal to $1.15 per share of common stock
in connection with the issuance of a promissory note in the principal amount of $1,750,000
with a term of two months, subject to the Company’s ability to prepay within one
month (See Note 16a).
|
|
(iv)
|
On
March 23, 2018, the Company entered into a securities purchase agreement to sell and
issue a 12% promissory note in the principal amount of $1,000 and a warrant to purchase
300,000 shares of common stock to an accredited investor if the promissory note is paid
in full on or before May 23, 2018, or up to 450,000 shares of common stock, if the promissory
note is paid by June 22, 2018 (See Note 16b).
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
During the three months
ended June 30, 2018, the Company issued a total of 12,252,758 warrants at an average exercise price of $0.71 per share.
|
(i)
|
On April 16, 2018, the Company issued warrants to purchase an aggregate of 993,588 shares
of common stock at an exercise price equal to $1.30 per share of common stock in connection with the issuance of 12% secured convertible
promissory notes in the aggregate principal amount of $1,722 (See Note 18b).
|
|
(ii)
|
On April 24, 2018, the Company issued warrants to purchase 357,143 shares of common stock, at an
exercise price of $0.70 per share of common stock, in connection with the Preferred Stock Purchase Agreement to purchase 25,000
shares of Series B Preferred Stock by Philou (See Note 20).
|
|
(iii)
|
On October 5, 2017, Ault & Company purchased 75,000 shares of the Company’s common stock
at $0.60 per share and a warrant to purchase up to 75,000 shares of the Company’s common stock at $0.60 per share for an
aggregate purchase price of $45. The shares and warrants were issued by the Company on May 8, 2018, the date all necessary approvals
to issue the shares were received. Ault & Company is controlled by Mr. Milton Ault, the Company’s Chairman and
Chief Executive Officer (See Note 20).
|
|
(iv)
|
On May 15, 2018, the Company entered into securities purchase agreements with certain investors
in which it sold an aggregate of 7,691,775 shares of its common stock for aggregate consideration of $6,000. In connection with
this financing, the Company issued (i) five-year warrants to purchase 1,922,944 shares of the Company’s Class A common stock
and (ii) five-year warrants to purchase 5,768,834 shares of the Company’s Class A common stock. The warrants were issued
at an exercise price of $0.94 per share of common stock
(See Note 20)
.
|
|
(v)
|
On May 15, 2018, the Company entered into a securities purchase agreement with an institutional
investor to sell and issue a senior secured convertible promissory note with a principal face amount of $6,000 and (i) a five-year
warrant to purchase 1,111,111 shares of the Company’s Class A common stock at an exercise price of $1.35 per share of Class
A common stock (the “Series A Warrant”) and (ii) a five-year warrant to purchase 1,724,138 shares of the Company’s
Class B common stock at an exercise price of $0.87 per share of Class A common stock (See Note 18a). In connection with the financing,
the Company issued the placement agent a warrant to purchase 150,000 shares of common stock with an exercise price of $1.00.
|
|
(vi)
|
Pursuant to the terms of a securities purchase agreement entered into on March 23, 2018, the Company
issued an additional warrant to purchase 150,000 shares of common stock, at an exercise price of $1.15 per share of common stock,
on May 23, 2018 (See Note 16b).
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
The following table
summarizes information about common stock warrants outstanding at June 30, 2018:
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$0.01
|
|
|
|
317,460
|
|
|
|
8.35
|
|
|
$
|
0.01
|
|
|
|
238,092
|
|
|
$
|
0.01
|
|
$0.55
|
|
|
|
283,636
|
|
|
|
4.36
|
|
|
$
|
0.55
|
|
|
|
283,636
|
|
|
$
|
0.55
|
|
$0.60
|
|
|
|
75,000
|
|
|
|
4.84
|
|
|
$
|
0.60
|
|
|
|
75,000
|
|
|
$
|
0.60
|
|
$0.66
|
|
|
|
148,133
|
|
|
|
4.34
|
|
|
$
|
0.66
|
|
|
|
148,133
|
|
|
$
|
0.66
|
|
$0.70
|
|
|
|
2,125,715
|
|
|
|
4.37
|
|
|
$
|
0.70
|
|
|
|
1,768,572
|
|
|
$
|
0.70
|
|
$0.75
|
|
|
|
135,909
|
|
|
|
3.88
|
|
|
$
|
0.75
|
|
|
|
135,909
|
|
|
$
|
0.75
|
|
$0.80
|
|
|
|
481,666
|
|
|
|
2.20
|
|
|
$
|
0.80
|
|
|
|
481,666
|
|
|
$
|
0.80
|
|
$0.87
|
|
|
|
1,724,138
|
|
|
|
4.87
|
|
|
$
|
0.87
|
|
|
|
1,724,138
|
|
|
$
|
0.87
|
|
$0.94
|
|
|
|
7,691,778
|
|
|
|
4.88
|
|
|
$
|
0.94
|
|
|
|
7,691,778
|
|
|
$
|
0.94
|
|
$1.00
|
|
|
|
280,000
|
|
|
|
4.45
|
|
|
$
|
1.00
|
|
|
|
280,000
|
|
|
$
|
1.00
|
|
$1.10
|
|
|
|
759,486
|
|
|
|
3.18
|
|
|
$
|
1.10
|
|
|
|
759,486
|
|
|
$
|
1.10
|
|
$1.15
|
|
|
|
1,700,000
|
|
|
|
4.74
|
|
|
$
|
1.15
|
|
|
|
1,700,000
|
|
|
$
|
1.15
|
|
$1.30
|
|
|
|
993,588
|
|
|
|
4.79
|
|
|
$
|
1.30
|
|
|
|
993,588
|
|
|
$
|
1.30
|
|
$1.35
|
|
|
|
1,111,111
|
|
|
|
4.87
|
|
|
$
|
1.35
|
|
|
|
1,111,111
|
|
|
$
|
1.35
|
|
$2.20
|
|
|
|
625,000
|
|
|
|
4.57
|
|
|
$
|
2.20
|
|
|
|
625,000
|
|
|
$
|
2.20
|
|
$2.25
|
|
|
|
112,500
|
|
|
|
4.57
|
|
|
$
|
2.25
|
|
|
|
112,500
|
|
|
$
|
2.25
|
|
$2.50
|
|
|
|
162,500
|
|
|
|
4.57
|
|
|
$
|
2.50
|
|
|
|
162,500
|
|
|
$
|
2.50
|
|
$0.01 - $2.50
|
|
|
|
18,727,620
|
|
|
|
4.68
|
|
|
$
|
1.01
|
|
|
|
18,291,109
|
|
|
$
|
1.02
|
|
The Company has valued
the warrants at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent upon several variables
such as the warrants’ term, exercise price, current stock price, risk-free interest rate and estimated volatility of our
stock over the contractual term of the warrants. The risk-free interest rate used in the calculations is based on the implied yield
available on U.S. Treasury issues with an equivalent term approximating the contractual life of the warrants.
The Company utilized
the Black-Scholes option pricing model and the assumptions used during the six months ended June 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Weighted average risk-free interest rate
|
|
|
2.41%
— 2.94%
|
|
|
|
1.42%
— 2.01%
|
|
Weighted average life (in
years)
|
|
|
4.8
|
|
|
|
4.8
|
|
Volatility
|
|
|
124.8%
— 138.4%
|
|
|
|
98.5%
— 107.1%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Weighted average grant-date fair value per share
of warrants granted
|
|
$
|
0.79
|
|
|
$
|
0.38
|
|
15. ADVANCES ON FUTURE RECEIPTS
During
the second half of 2017, the Company received funding as a result of entering into multiple Agreements for the Purchase
and Sale of Future Receipts pursuant to which the Company sold in the aggregate $4,068 in future receipts of the Company for $2,889.
As of December 31, 2017, the Company had repaid $1,526.
During
the three months ended March 31, 2018, the Company entered into a total of nine additional Agreements for the Purchase and Sale
of Future Receipts (collectively, the “Agreements on Future Receipts”) pursuant to which the Company sold up to $5,632
in “future receipts” for a purchase price in the amount of $4,100. During the three months ended June 30, 2018, the
Company did not enter into any of these Purchase and Sale of Future Receipts Agreements. The term “future receipts”
means cash, check, ACH, credit card, debit card, bank card, charge card or other form of monetary payment. The Agreements on Future
Receipts have been personally guaranteed by the Company’s Chief Executive Officer and in one instance has also been guaranteed
by Philou.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
During
the three months ended March 31, 2018, the Company recorded a discount in the amount of $1,651, in connection with these nine
additional agreements, based upon the difference between the amount of future receipts sold and the actual proceeds received by
the Company. Under the terms of these agreements, the Company also issued warrants to purchase an aggregate of 112,500 shares
of common stock at an exercise price of $2.25 per share of common stock and warrants to purchase 162,500 shares of common stock
at an exercise price of $2.50 per share of common stock. The Company recorded an additional discount of $258 based on the estimated
fair value of these warrants. The Company computed the fair value of these warrants using the Black-Scholes option pricing model.
These discounts are reflected as a reduction on the outstanding liability and are being amortized as non-cash interest expense
over the term of the agreement. As of June 30, 2018, the unamortized amount of the $258 discount was $39. During the three and
six months ended June 30, 2018, non-cash interest expense of $657 and $1,653, respectively, was recorded from the amortization
of debt discounts.
16.
NOTES PAYABLE
Notes
Payable at June 30, 2018 and December 31, 2017, are comprised of the following.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
12% short-term
promissory note
(b)
|
|
$
|
1,000
|
|
|
$
|
—
|
|
Other short-term notes
payable
(c)
|
|
|
889
|
|
|
|
—
|
|
Notes payable to Wells
Fargo
(d)
|
|
|
298
|
|
|
|
300
|
|
Note payable to Dept.
of Economic and Community Development
(e)
|
|
|
275
|
|
|
|
292
|
|
Power-Plus Credit Facilities
(f)
|
|
|
—
|
|
|
|
171
|
|
Note payable to Power-Plus
Member
(g)
|
|
|
66
|
|
|
|
130
|
|
Note payable to People’s
United Bank
(h)
|
|
|
20
|
|
|
|
19
|
|
10% short-term promissory
notes
(i)
|
|
|
—
|
|
|
|
15
|
|
Short
term bank credit
(j)
|
|
|
2,044
|
|
|
|
—
|
|
Total notes payable
|
|
|
4,592
|
|
|
|
927
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized
debt discounts
|
|
|
(23
|
)
|
|
|
—
|
|
Unamortized
financing cost
|
|
|
0
|
|
|
|
—
|
|
Total
notes payable, net of financing cost
|
|
$
|
4,569
|
|
|
$
|
927
|
|
Less:
current portion
|
|
|
(4,064
|
)
|
|
|
(402
|
)
|
Notes
payable – long-term portion
|
|
$
|
505
|
|
|
$
|
525
|
|
|
(a)
|
On
February 20, 2018, the Company issued promissory note in the principal face amount of
$900 to an accredited investor. This promissory note included an original issue discount
(“OID”) of $150 resulting in net proceeds of $750. The principal and OID
on this note was due and payable on March 22, 2018. On March 23, 2018, the Company entered
into a new promissory note in the principal amount of $2,100 for a term of two months,
subject to the Company’ ability to prepay within one month. The new promissory
note included an OID of $350 if paid within one month and $700 if paid within two months,
resulting in net proceeds of $1,750. The Company also issued to the lender a warrant
to purchase 1,250,000 shares of the Company’s common stock at an exercise price
of $1.15 per share. The principal amount of the new promissory note consisted of cash
of $1,000 and the cancellation of principal of $750 from the February 20, 2018 promissory
note. The interest on the February 20, 2018 note in the amount of $150 was paid to the
lender prior to entering into the new promissory note. The warrants are exercisable commencing
on issuance date for a term of three years. The exercise price of these warrants is subject
to adjustment for customary stock splits, stock dividends, combinations and other standard
anti-dilution events. The warrants may be exercised for cash or on a cashless basis.
During the quarter ended March 31, 2018, the Company recorded debt discount in the amount
of $604 based on the estimated fair value of these warrants. The Company computed the
fair value of these warrants using the Black-Scholes option pricing model. The debt discount
was amortized as non-cash interest expense over the term of the debt. During the three
and six months ended June 30, 2018, non-cash interest expense of $448 and $604, respectively,
was recorded from the amortization of debt discount and interest expense of $260 and
$350 was recorded from the amortization of the OID on the new promissory note. On April
23, 2018, the Company paid the entire outstanding principal on the new promissory note
of $2,100. The new promissory note had been guaranteed by our Chief Executive Officer
and had also been guaranteed by Philou.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
|
(b)
|
On
March 23, 2018, the Company entered into a securities purchase agreement to sell and
issue a 12% promissory note and a warrant to purchase 300,000 shares of common stock
to an accredited investor if the promissory note is paid in full on or before May 23,
2018, or up to 450,000 shares of common stock, if the promissory note is paid by June
22, 2018. The promissory note was issued with a 10% OID. The promissory note is in the
principal amount of $1,000 and was sold for $900, bears interest at 12% simple interest,
and was due on June 22, 2018. The Company is in negotiations with the investor to amend
the payment terms on this 12% promissory note. Interest only payments are due, in arrears,
on a monthly basis commencing on April 23, 2018. The exercise price of the warrant is
$1.15 per share. During the six months ended June 30, 2018, the Company recorded debt
discount in the amount of $271 based on the estimated fair value of these warrants. The
Company computed the fair value of these warrants using the Black-Scholes option pricing
model. The debt discount is being amortized as non-cash interest expense over the term
of the debt. During the three and six months ended June 30, 2018, non-cash interest expense
of $245 and $271, respectively, was recorded from the amortization of debt discount and
interest expense of $87 and $100, respectively, was recorded from the amortization of
the OID on the 12% promissory note. The 12% promissory note is unsecured by any of the
Company’s assets but is guaranteed by our Chief Executive Officer.
|
|
(c)
|
During
the six months ended June 30, 2018, the Company entered into three short-term promissory
notes:
|
|
(i)
|
On
February 7, 2018, the Company issued demand promissory notes in the aggregate principal
face amount of $440 to accredited investors. These promissory notes
included
an aggregate OID of $40 resulting in net proceeds to the Company of $400. The principal
and OID on these notes were due and payable on demand after April 24, 2018. These loans
were paid on April 27, 2018. During the three and six months ended June 30, 2018, the
Company recognized $14 and $40, respectively, from the amortization of OID on these demand
promissory notes.
|
|
(ii)
|
On
February 26, 2018, the Company issued a 10% promissory note in the principal amount of
$330 to an accredited investor. This promissory note
included
an OID of $30 resulting in net proceeds to the Company of $300. The principal and accrued
interest on this note was due and payable on April 12, 2018, subject to a 30-day extension
available to the Company. This 10% promissory note was paid on April 27, 2018. During
the three and six months ended June 30, 2018, the Company recognized $11 and $36 from
interest and the amortization of OID on this 10% promissory note.
|
|
(iii)
|
On
March 27, 2018, the Company issued a 10% promissory note in the principal amount of $200
to an accredited investor
.
The principal and accrued interest on this note was due and payable on March 29, 2018.
On March 29, 2018 and April 24, 2018, the Company paid $50 and $150, respectively, on
this 10% promissory note of $200,000.
|
|
(iv)
|
On
May 23, 2018, the Company issued a promissory note in the aggregate principal face amount
of $81 to an accredited investor. The promissory note
included
an aggregate OID of $6 resulting in net proceeds to the Company of $75. The principal
and OID on this note is due and payable on August 20, 2018. At June 30, 2018, the outstanding
balance on this note was $36, which was paid on July 25, 2018. During the three and six
months ended June 30, 2018, the Company recognized $3 from the amortization of OID on
this promissory note.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
|
(v)
|
On
May 23, 2018, the Company issued a promissory note in the aggregate principal face amount
of $360 to an accredited investor. The promissory note included an aggregate OID of $60
resulting in net proceeds to the Company of $300. The principal and OID on this note
was due and payable on June 22, 2018. At June 30, 2018, the outstanding balance on this
note was $277, which was paid on July 2, 2018. During the three and six months ended
June 30, 2018, the Company recognized $60 from the amortization of OID on this promissory
note.
|
|
(vi)
|
On
June 5, 2018, the Company received loans in the aggregate amount of $75 from accredited
investors. The principal and interest on these loans was paid on July 16, 2018.
|
|
(vii)
|
On
June 8, 2018, the Company issued a promissory note in the aggregate principal face amount
of $512 to an accredited investor. The promissory note included an aggregate OID of $67
resulting in net proceeds to the Company of $445. The principal and OID on this note
was due and payable on July 9, 2018. At June 30, 2018, the outstanding balance on this
note was $502. During the three and six months ended June 30, 2018, the Company recognized
$47 from the amortization of OID on this promissory note.
|
|
(d)
|
At
June 30, 2018, Microphase had guaranteed the repayment of two equity lines of credit
in the aggregate amount of $300 with Wells Fargo Bank, NA (“Wells Fargo”)
(collectively, the “Wells Fargo Notes”). These loans originated prior to
the Company’s acquisition of Microphase and Microphase was the recipient of the
actual proceeds from the loans. Microphase had previously guaranteed the payment under
the first Wells Fargo equity line during 2008, the proceeds of which Microphase had received
from a concurrent loan from Edson Realty Inc., a related party owned real estate holding
company. As of June 30, 2018, the first line of credit, which is secured by residential
real estate owned by a former officer, had an outstanding balance of $213, with an annual
interest rate of 4.00%. Microphase had guaranteed the payment under the second Wells
Fargo equity line in 2014. Microphase had received working capital loans from the former
CEO from funds that were drawn against the second Wells Fargo equity line. As of June
30, 2018, the second line of credit, secured by the former CEO’s principal residence,
had an outstanding balance of $85, with an annual interest rate of 3.00%. During the
three and six months ended June 30, 2018, Microphase incurred $3 and $12, respectively,
of interest on the Wells Fargo Notes.
|
|
(e)
|
In
August 2016, Microphase received a $300 loan, of which $25 has been repaid, pursuant
to the State of Connecticut Small Business Express Job Creation Incentive Program which
is administered through the Department of Economic and Community Development (“DECD”)
(the “DECD Note”). The DECD Note bears interest at a rate of 3% per annum
and is due in August 2026. Payment of principal and interest was deferred during the
initial year and commencing in September 2017, payable in equal monthly installments
over the remaining term. During the three and six months ended June 30, 2018, Microphase
incurred $3 and $5 of interest on the DECD Note. In conjunction with the DECD Note, Microphase
was awarded and received a Small Business Express Matching Grant of $100 by the State
of Connecticut. State grant funding requires Microphase to spend an equal amount of cash
on eligible expense. The Company has utilized $18 of the grant and the balance of $82
is reported within deferred revenue and classified in accounts payable and accrued in
the accompanying consolidated balance sheet at June 30, 2018.
|
|
(f)
|
At
December 31, 2017, Power-Plus had guaranteed the repayment of two lines of credit in
the aggregate amount of $169 with Bank of America NA and Wells Fargo (collectively, the
“Power-Plus Lines”). During the three months ended June 30, 2018, the Power-Plus
Lines had been paid.
|
|
(g)
|
Pursuant
to the terms of the Purchase Agreement with Power-Plus, the Company entered into a two-year
promissory note in the amount of $255 payable to the former owner as part of the purchase
consideration. The $255 note is payable in 24 equal monthly installments. On October
18, 2017, for cancellation of debt, the Company entered into a subscription agreement
with the former owner under which the Company sold 138,806 shares of common stock at
$0.67 per share for an aggregate purchase price of $93. During the three and six
months ended June 30, 2018, the Company paid $32 and $64, respectively, in principal
payments.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
|
(h)
|
In
December 2016, Microphase utilized a $20 overdraft credit line at People’s United
Bank with an annual interest rate of 15%. As of June 30, 2018, the balance of that overdraft
credit line was $20.
|
|
(i)
|
In
December 2016, Microphase issued $705 in 10% short-term promissory notes to nineteen
accredited investors which, after deducting $71 of placement fees to its selling agent,
Spartan Capital Securities, LLC (“Spartan”), resulted in $634 in net proceeds
to Microphase (the “10% Short-Term Notes”). The 10% Short-Term Notes were
due one year from the date of issuance. The amount due pursuant to the 10% Short-Term
Notes is equal to the entire original principal amount multiplied by 125% (the “Loan
Premium”) plus accrued interest. On December 5, 2017, in exchange for the cancellation
of $690 of outstanding principal and $250 of accrued interest owed to the investors by
Microphase Corporation, the Company entered into an Exchange Agreement pursuant to which
the Company issued an aggregate of 1,523,852 shares of common stock and warrants to purchase
380,466 shares of common stock with an exercise price of $1.10 per share of common stock.
During the three months ended March 31, 2018, the Company paid the remaining balance
of principal and accrued interest of $15 and $6, respectively.
|
|
(j)
|
On
January 25, 2018, the Company issued two 5% promissory notes, each in the principal face
amount of $2,500, for an aggregate debt of $5,000 to two institutional investors.
The entire unpaid balance of the principal and accrued interest on each of the 5% promissory
notes was due and payable on February 23, 2018, subject to a 30-day extension available
to the Company. The proceeds from these two 5% promissory notes were used to purchase
1,000 Antminer S9s manufactured by Bitmain Technologies, Inc. in connection with our
crypto mining operations. Between March 23 and March 27, 2018, the Company paid the entire
outstanding principal and accrued interest on the 5% promissory notes of $5,101,127.
|
|
(k)
|
At
June 30, 2018, Enertec had short term bank credit of $2,044 that bears interest of prime
plus 0.7% through 3.85% paid either on a monthly or weekly basis. Further, the Company
has committed to certain covenants under its bank loan. During the period from the date
of acquisition, May 23, 2018 to June 30, 2018, the Company recorded interest expense
of $10 from Enertec’s short term bank credit.
|
17. NOTES PAYABLE –
RELATED PARTIES
Notes
Payable – Related parties at June 30, 2018 and December 31, 2017, are comprised of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Notes payable to former officer
and employee
|
|
$
|
308
|
|
|
$
|
309
|
|
Total notes payable
|
|
|
308
|
|
|
|
309
|
|
Less: current portion
|
|
|
(166
|
)
|
|
|
(134
|
)
|
Notes payable – long-term portion
|
|
$
|
142
|
|
|
$
|
175
|
|
Microphase
is a party to several notes payable agreements with seven of its past officers, employees and their family members. As of June
30, 2018, the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $50 of accrued interest,
was $359, with annual interest rates ranging between 3.00% and 6.00%. During the three and six months ended June 30, 2018, Microphase
incurred $4 and $7 of interest on these notes payable agreements. In July 2016, one of these noteholders initiated litigation
to collect the balance owed under the terms of his respective agreement. In October 2017, Microphase and the noteholder entered
into a settlement agreement whereby Microphase agreed to pay the outstanding principal and interest of $122 and $43, respectively,
by issuing to the noteholder 95,834 shares of Microphase common stock valued at $115 and paying $25 in cash. The value of the
Microphase common stock was derived from the Company’s recent acquisition of a majority interest in Microphase. Further,
the parties agreed a final $25 would be paid within 18 months of the settlement agreement or Microphase would be required to pay
the noteholder an additional $25.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
18. CONVERTIBLE NOTES
Convertible Notes Payable
at June 30, 2018 and December 31, 2017, are comprised of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
10% Convertible secured note
(a)
|
|
$
|
4,806
|
|
|
$
|
—
|
|
12% April 2018 Convertible secured notes
(b)
|
|
|
1,287
|
|
|
|
—
|
|
5% Convertible secured notes
(c)
|
|
|
—
|
|
|
|
550
|
|
12% Convertible secured note
(d)
|
|
|
—
|
|
|
|
202
|
|
Total convertible notes payable
|
|
|
6,093
|
|
|
|
752
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized debt discounts
|
|
|
(1,719
|
)
|
|
|
(351
|
)
|
Unamortized financing cost
|
|
|
(309
|
)
|
|
|
(3
|
)
|
Total convertible notes payable, net of financing cost
|
|
$
|
4,065
|
|
|
$
|
398
|
|
|
(a)
|
On May 15, 2018, the Company entered into a securities purchase agreement to sell (i) a 10% convertible
note (the “10% Convertible Note”), (ii) a five-year warrant to purchase 1,111,111 shares of the Company’s common
stock at an exercise price of $1.35 per share; (iii) a five-year warrant to purchase 1,724,138 shares of the Company’s Class
A common stock at an exercise price of $0.87 per share; and (iv) 344,828 shares of the Company’s common stock to an institutional
investor. The 10% Convertible Note is convertible into common stock at $0.75 per share, but may only be converted if an event of
default thereunder has occurred and not been cured on a timely basis.
|
The 10% Convertible Note is in
the principal amount of $6,000 and bears interest at 10% simple interest on the principal amount with 50% of the total interest
due on the principal payable at the closing and the remaining 50% payable over the term of the 10% Convertible Note. The Company
is required to make principal and interest payments every 2 weeks until the 10% Convertible Note is satisfied in full on November
27, 2018. In connection with the financing, the Company agreed to pay the placement agent, Alliance Global Partners, a cash
fee of $300,000 and a warrant to purchase 150,000 shares of the Company’s common stock with an exercise price of $1.00 per
share.
The Company computed the fair
value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount
in the amount of $1,398 based on the estimated fair value of the warrants. The Company estimated that the grant date fair value
of the shares of common stock was $193, which was determined from the closing price of the Company’s common stock on the
date of issuance. In aggregate, the Company recorded debt discount in the amount of $1,958 based on the relative fair values of
the warrants, common stock and debt issuance costs of $367. During the three months ended June 30, 2018, non-cash interest expense
of $452 was recorded from the amortization of debt discounts. The fair value of the warrants was estimated using the Black-Scholes
option-pricing method. The risk-free rate of 2.94% was derived from the U.S. Treasury yield curve, matching the term of the warrant,
in effect at the measurement date. The volatility factor of 127.9% was determined based on the Company’s historical stock
prices.
As the effective conversion price
of the 10% Convertible Note was below the market price of the Company’s common stock on the date of issuance, it was determined
that these discounts represent contingent beneficial conversion features, or BCF. The BCF embedded in the 10% Convertible Note
is accounted for under ASC No. 470
, Debt
(“ASC 470”). At issuance, the intrinsic value of the BCF totaled
$2,198. However, the 10% Convertible Note may only be converted if an event of default thereunder has occurred and not been cured
on a timely basis. The BCF shall be recognized if an event of default occurs and is not timely cured.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
|
(b)
|
On April 16, 2018, the Company entered into securities purchase agreements to sell (i) a 12% convertible
note (the “12% April 2018 Convertible Note”), (ii) a five-year warrant to purchase 993,588 shares of the Company’s
common stock at an exercise price of $1.30 per share; and (iii) 200,926 shares of the Company’s common stock to three institutional
investors. The 12% April 2018 Convertible Note is convertible into common stock at $0.70 per share, but may only be converted if
an event of default thereunder has occurred and not been cured on a timely basis.
|
The 12% April 2018 Convertible
Note is in the principal amount of $1,722, included an OID of $172 resulting in net proceeds to the Company of $1,550 and bears
interest at 12% simple interest on the principal amount. The Company is required to make monthly principal and interest payments
until the 12% April 2018 Convertible Note is satisfied in full on October 16, 2018.
The Company computed the fair
value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount
in the amount of $539 based on the estimated fair value of the warrants. The Company estimated that the grant date fair value of
the shares of common stock was $129, which was determined from the closing price of the Company’s common stock on the date
of issuance.
In aggregate, the Company recorded
debt discount in the amount of $885 based on the relative fair values of the warrants, common stock, OID and debt issuance costs
of $45. During the three months ended June 30, 2018, non-cash interest expense of $363 was recorded from the amortization of debt
discounts. The fair value of the warrants was estimated using the Black-Scholes option-pricing method. The risk-free rate of 2.94%
was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the measurement date. The volatility
factor of 127.9% was determined based on the Company’s historical stock prices.
|
(c)
|
On December 4, 2017, the Company entered into a securities purchase agreement to sell a 5% Convertible
Note (the “5% Convertible Note”) and 150,000 shares of restricted common stock to an institutional investor. The principal
of the 5% Convertible Note and interest thereon was convertible into shares of common stock at $0.60 per share of common stock,
subject to adjustments for lower priced issuances, stock splits, stock dividends, combinations or similar events. The 5% Convertible
Note was in the principal amount of $550, included an OID of $50 resulting in net proceeds to the Company of $500, accrued interest
at 5% simple interest on the principal amount, and was due on August 13, 2018. Interest only payments were due on a quarterly basis
and the principal was due on June 3, 2018.
|
At the time of issuance of the
5% Convertible Note, the closing price of the Company’s common stock was in excess of the conversion price, resulting in
a BCF. The BCF embedded in the 5% Convertible Note is accounted for under ASC No.
470, De
bt. At issuance, the intrinsic
value of the BCF totaled $244 based on the difference between the effective conversion price and the fair value of the Company’s
common stock at the commitment date of the transaction. The intrinsic value of the BCF exceeded the proceeds allocated to the relative
fair value of the 5% Convertible Note. The BCF was amortized to interest expense over the term of the 5% Convertible Note using
the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with the
market price of the Company’s common stock on the date of issuance of the 5% Convertible Note.
In aggregate, the Company recorded
debt discount in the amount of $550 based on the relative fair values of the 150,000 shares of common stock of $256, BCF of $244
and OID of $50. The debt discount is being amortized as non-cash interest expense over the term of the debt. During the year ended
December 31, 2017, non-cash interest expense of $381 was recorded from the amortization of debt discounts. In January 2018, the
5% Convertible Note was converted into 921,645 shares of the Company’s common stock based upon the contractual rights included
in the 5% Convertible Note (See Note 20).
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
|
(d)
|
On August 3, 2017, the Company entered into a securities
purchase agreement to sell a 12% Convertible Note (the “12% Convertible Note”) and a warrant to purchase 666,666 shares
of common stock to an accredited investor. The principal of the 12% Convertible Note may be converted into shares of common stock
at $0.55 per share and under the terms of the Warrant, up to 666,666 shares of common stock may be purchased at an exercise price
of $0.70 per share.
|
The 12% Convertible Note was
in the principal amount of $400, included an OID of $40 resulting in net proceeds to the Company of $360, accrued interest at 12%
simple interest on the principal amount, and was due on August 13, 2018. Interest only payments were due on a quarterly basis and
the principal was due on August 3, 2018. The principal may be converted into shares of the Company’s common stock at $0.55
per share.
The Company computed the fair
value of the 666,666 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt
discount in the amount of $167 based on the estimated fair value of the 666,666 warrants.
The BCF embedded in the 12% Convertible
Note is accounted for under ASC 470. At issuance, the intrinsic value of the BCF totaled $187. The Company, however, was prohibited
from issuing shares of common stock pursuant to the 12% Convertible Note until stockholder approval of such issuance of securities
was obtained as required by applicable NYSE American listing rules. The Company received stockholder approval for the share issuances
on December 28, 2017. The intrinsic value of the BCF was amortized to interest expense over the term of the 12% Convertible Note
using the effective interest method. The valuation of the BCF was calculated based on the effective conversion price compared with
the market price of the Company’s common stock on the date of issuance of the 12% Convertible Note. In aggregate, the Company
recorded debt discount in the amount of $394 based on the relative fair values of the 666,666 warrants, BCF and OID of $40. During
the year ended December 31, 2017, non-cash interest expense of $212 was recorded from the amortization of debt discounts.
On December 28, 2017, principal
and accrued interest of $198 and $5, respectively, on the 12% Convertible Note was satisfied through the issuance of 368,760 shares
of the Company’s common stock and the remaining balance was converted into 377,678 shares of the Company’s common stock
on January 10, 2018 (See Note 20). The fair value of the warrants was estimated using the Black-Scholes option-pricing method.
The risk-free rate of 1.79% was derived from the U.S. Treasury yield curve, matching the term of the warrant, in effect at the
measurement date. The volatility factor of 107.3% was determined based on the Company’s historical stock prices.
|
(e)
|
On January 23, 2018, we entered into a securities purchase agreement with an institutional investor
to sell, for an aggregate purchase price of $1,000, a 10% senior convertible promissory note (the “January 2018 10% Convertible
Note”) with an aggregate principal face amount of $1,250, a warrant to purchase an aggregate of 625,000 shares of our common
stock and 543,478 shares of our common stock. The transactions contemplated by the Securities Purchase Agreement closed on February
8, 2018. The January 2018 10% Convertible Note was convertible into 625,000 shares of the Company’s common stock, a
conversion price of $2.00 per share. The exercise price of the warrant to purchase 625,000 shares of the Company’s common
stock is $2.20 per share. On February 9, 2018, in addition to the 543,478 shares of common stock provided for pursuant to the securities
purchase agreement, the Company issued to the investor an aggregate of 691,942 shares of the Company’s common stock upon
the conversion of the entire outstanding principal and accrued interest on the January 2018 10% Convertible Note of $1,384 (See
Note 20).
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
19. COMMITMENTS AND CONTINGENCIES
On July 31, 2018 a
shareholder derivative complaint was filed in the United States District Court for the Central District of California against the
Company as the nominal defendant, as well as its current directors and a former director styled
Ethan Young and Greg Young,
Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault, III, Amos Kohn, William B. Horne, Jeff Bentz,
Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and DPW Holdings, Inc.
, as the nominal defendant (Case No.: 2:18-cv-6587)
(the “
Complaint
”). No hearings have been scheduled as of the date hereof.
The Complaint alleges
violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants
as, in the view of the plaintiffs, the Company has entered into poorly advised loan transactions and related party transactions.
The Company and the individual defendants believe that these claims are without merit and intend to vigorously defend themselves.
Based on the Company’s assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary
stage of the case, the Company cannot estimate the reasonably possible loss or range of loss that may result from this action.
However, an unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.
20. STOCKHOLDERS’ EQUITY
Preferred Stock
The
Company is authorized to issue 25,000,000 shares of Preferred Stock $0.001 par value. The Board of Directors has designated 500,000
shares as Series B Convertible Preferred Stock (the “Series B Preferred Stock”), 460,000 shares as Series C Convertible
Preferred Stock (the “Series C Preferred Stock”), 378,776 shares as Series D Convertible Preferred Stock (the “Series
D Preferred Stock”) and 10,000 shares as Series E Convertible Preferred Stock (the “Series E Preferred Stock”).
The rights, preferences, privileges and restrictions on the remaining authorized 23,651,224 shares of Preferred Stock have not
been determined. The Company’s Board of Directors is authorized to create a new series of preferred shares and determine
the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of
preferred shares. As of June 30, 2018, there were 125,000 shares of Series B Preferred Stock and no other shares of Preferred
Stock issued or outstanding.
On April 24, 2018,
pursuant to the terms of the Preferred Stock Purchase Agreement, Philou purchased an additional 25,000 shares of Series B Preferred
Stock in consideration of the cancellation of short-term advances due to Philou in the aggregate amount of $250. In addition, Philou
received warrants to purchase 357,143 shares of common stock at an exercise price of $0.70 per share of common stock, which have
been classified as equity instruments. The Company determined that the estimated relative fair value of these warrants, which are
classified as equity, was $142 using the Black-Scholes option pricing model. Since the warrants were classified as equity securities,
the Company allocated the $250 purchase price based on the relative fair values of the Series B Preferred Stock and the warrants
following the guidance in ASC No. 470,
Debt
.
The Series B Convertible
Preferred Stock is convertible at any time, in whole or in part, at the option of Philou, into shares of common stock at a fixed
conversion price, which is subject to adjustment for stock splits, stock dividends, combinations or similar events, of $0.70 per
share. As the effective conversion price of the Series B Convertible Preferred Stock on a converted basis was below the market
price of the Company’s common stock on the date of issuance, it was determined that these discounts represent beneficial
conversion features, which were valued at $108 based on the difference between the effective conversion price and the market price
of the Company’s common stock on the date of issuance. These features are analogous to preference dividends and are recorded
as a non-cash return to preferred shareholders through accumulated deficit.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
Common Stock
Common stock confers
upon the holders the rights to receive notice to participate and vote in the general meeting of shareholders 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.
Issuance of Common Stock pursuant to
the At the Market Offering
On
February 27, 2018, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares
of the Company’s common stock, having an aggregate offering price of up to $50 million from time to time, through an “at
the market offering” program (the “ATM Offering”) under which HCW acts as sales agent. Between February 27, 2018
and June 30, 2018, the Company had received net proceeds of $14,551 through the sale of 14,922,167 shares of the Company’s
common stock through the ATM Offering. The offer and sale of the shares through the ATM Offering are made pursuant to the Company’s
effective “shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration
Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January 8, 2018, and declared effective by the
SEC on January 11, 2018, and a prospectus supplement related to the ATM Offering, dated February 27, 2018.
Issuance of Common Stock for Services
During the three and
six months ended June 30, 2018, the Company issued to its consultants a total of 1,000,000 shares and 2,683,059 shares, respectively,
of its common stock with an aggregate value of $3,758, an average of $1.40 per share for services rendered.
Issuance of common stock for conversion
of debt
On January 3, 2018,
accrued interest of $23 on the 10% Convertible Notes was satisfied through the issuance of 37,750 shares of the Company’s
common stock.
On January 10, 2018,
principal and accrued interest of $202 and $6, respectively, on the 12% Convertible Note was satisfied through the issuance of
377,678 shares of the Company’s common stock (See Note 18d).
On January 12, 2018,
principal and accrued interest of $550 and $3, respectively, on the 5% Convertible Note was satisfied through the issuance of 921,645
shares of the Company’s common stock (See Note 18c).
On February 9, 2018,
principal and accrued interest of $1,250 and $134, respectively, on the January 2018 10% Convertible Note was satisfied through
the issuance of 691,942 shares of the Company’s common stock (See Note 18e).
Issuances of Common Stock upon Exercise
of Stock Options
During January 2018,
the Company issued a total of 60,000 shares of its common stock upon the cash exercise of options. These options were issued pursuant
to the Company’s Plans. The Company received cash of $98 as a result of these option exercises.
Issuances of Common Stock upon Exercise
of Warrants
During January 2018,
the Company issued a total of 1,866,471 shares of its common stock upon the cash and cashless exercise of warrants to purchase
an aggregate of 2,187,646 shares of its common stock. These warrants were issued between August 2017 and December 2017 in conjunction
with various common stock and debt financings. The Company received cash of $867 as a result of these warrant exercises.
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
On May 8, 2018, the
Company issued 279,170 shares of common stock pursuant a cashless exercise of warrants issued to Divine Capital Markets, LLC, its
Placement Agent (the “Placement Agent”) for the 2017 private placement of the Series C Preferred Stock and warrants.
For its services, the Placement Agent received, a warrant to purchase 182,003 shares of the Company’s common stock at $0.72
per share and a second warrant to purchase 182,003 shares of the Company’s common stock at $1.00 per share.
Issuances of common stock in connection
with convertible notes
On February 9, 2018,
in conjunction with the securities purchase agreement to sell the January 2018 10% Convertible Note in the principal amount of
$1,250, the Company issued 543,478 shares of restricted common stock to the institutional investor (See Note 18c).
On April 16, 2018,
in conjunction with the securities purchase agreements to sell the 12% April 2018 Convertible Note in the principal amount of $1,722,
the Company issued 993,588 shares of restricted common stock to the institutional investor (See Note 18b).
On May 15, 2018, in
conjunction with the securities purchase agreements to sell the 10% Convertible Note in the principal amount of $6,000, the Company
issued 344,828 shares of restricted common stock to the institutional investor (See Note 18a).
Issuances of Common Stock upon Conversion
of Series D Preferred Stock
During the six months
ended June 30, 2018, pursuant to the conversion terms of the Series D Preferred Stock, 378,776 shares of the Series D Preferred
Stock was converted into 757,552 shares of the Company’s Common Stock.
Issuances of
Common Stock for cash and cancellation of short-term advances
On October 5, 2017,
Ault & Company purchased 75,000 shares of the Company’s common stock at $0.60 per share and a warrant to purchase up
to 75,000 shares of the Company’s common stock at $0.60 per share for an aggregate purchase price of $45. The shares and
warrants were issued by the Company on May 8, 2018. Ault & Company is controlled by Mr. Milton Ault, the Company’s
Chairman and Chief Executive Officer.
On May 15, 2018, the
Company entered into securities purchase agreements with certain investors in which the Company sold an aggregate of 7,691,775
shares of its common stock, and five-year warrants to purchase such number of shares of common stock equal to the shares of common
stock purchased by the investors. The Company received aggregate consideration of $6,000, consisting of cash and the cancellation
of short-term advances of $3,225 and $2,775, respectively. These securities were issued pursuant to our registration statement
filed with the Securities and Exchange Commission (File No. 333-222132) which became effective on January 11, 2018.
21. RELATED PARTY TRANSACTION
|
a.
|
The Company has made a strategic investment in AVLP in expectation of future business generated
by the Company from MTIX Ltd., an advanced materials and processing technology company located in Huddersfield, West Yorkshire,
UK (“MTIX”), a wholly-owned subsidiary of AVLP. The Company’s investments in AVLP consist of convertible promissory
notes, warrants and shares of common stock of AVLP. On September 6, 2017, the Company and AVLP entered into a Loan and Security
Agreement (“AVLP Loan Agreement”) with an effective date of August 21, 2017 pursuant to which the Company
will provide Avalanche a non-revolving credit facility of up to $5,000 for a period ending on August 21, 2019, subject to the terms
and conditions stated in the Loan Agreement, including that the Company having available funds to grant such credit. At June 30,
2018, the Company has provided loans to AVLP in the principal amount $5,536 and, in addition to the 12% convertible promissory
notes, AVLP has issued to the Company warrants to purchase 11,167,440 shares of AVLP common stock. Under the terms of the AVLP
Loan Agreement, any notes issued by AVLP are secured by the assets of AVLP. As of June 30, 2018 and December 31, 2017, the Company
recorded contractual interest receivable attributed to the AVLP Loan Agreement of $626 and $324, respectively.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
During
the six months ended June 30, 2018 and the year ended December 31, 2017, the Company also acquired in the open market 370,100
shares of AVLP common stock for $352 and 221,333 shares of AVLP common stock for $192, respectively. At June 30, 2018, the closing
market price of AVLP’s common stock was $0.90, a decline from $1.75 at December 31, 2017. The Company has determined that
its investment in AVLP marketable equity securities are accounted for pursuant to the fair value method and based upon the closing
market price of common stock at June 30, 2018, the Company has recognized an unrealized gain of $130.
Philou
is AVLP’s controlling shareholder. Mr. Ault is Chairman of AVLP’s Board of Directors and the Chairman of the Company’s
Board of Directors. Mr. William B. Horne is the Chief Financial Officer of AVLP and also a director of the Company.
During
the three and six months ended June 30, 2018, the Company recognized $1,766 and $3,559 in revenues resulting from its relationship
with MTIX, which was acquired by Avalanche on August 22, 2017 and is therefore deemed to be a related party. In March 2017, the
Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface
Enhancement (“MLSE”) plasma-laser system. Management believes that the MLSE purchase order will be a source of revenue
and generate significant cash flows for the Company. However, at June 30, 2018, the $3,545 in revenues recognized during the six
months ended June 30, 2018 and year ended December 31, 2017, had not yet been received and was reflected on the financial statements
as accounts receivable, related party.
|
b.
|
On April 13, 2018, the Company entered into an amended and restated consulting agreement with Mr.
Ault pursuant to which the parties thereto agreed to amend and restate that certain independent contractor agreement dated September
22, 2016, by and between the Company and Mr. Ault. In accordance with the terms set forth in the Agreement, Mr. Ault shall continue
to serve as the Company’s Chief Executive Officer and Chairman of the Board of Directors in consideration of a monthly fee
of $33, effective November 15, 2017. On June 17, 2018, the Company entered into a ten year executive employment agreement with
Mr. Ault. For his services, Mr. Ault will be paid a base salary of $400 per annum. For his services, Mr. Ault was paid $100
and $200 during the three and six months ended June 30, 2018 and $208 during the year ended December 31, 2017.
|
|
c.
|
On
March 9, 2017, the Company entered into a Preferred Stock Purchase Agreement with Philou.
Pursuant to the terms of the Preferred Stock Purchase Agreement, Philou may invest up
to $5,000 in the Company through the purchase of Series B Preferred Stock over 36 months.
Philou has purchased 125,000 shares of Series B Preferred Stock pursuant to the terms
of the Purchase Agreement, the most recent purchase having occurred on April 24, 2018
for the purchase of 25,000 shares of Series B Preferred Stock.
|
|
d.
|
Between
July 6, 2017 and June 30, 2018, Milton C. Ault, III, the Company’s Chairman and
Chief Executive Officer, personally guaranteed the repayment of (i) $8,218 from the sale
of Advances on Future Receipts (ii) and $4,380 from the sale of the promissory notes.
These personal guarantees were necessary to facilitate the consummation of these financing
transactions. Mr. Ault’s payment obligations would be triggered if the Company
failed to perform under these financing obligations. Our board of directors has agreed
to compensate Mr. Ault for his personal guarantees. The amount of annual compensation
for each of these guarantees, which will be in the form of non-cash compensation, is
approximately 1.5% of the amount of the obligation.
|
|
e.
|
During
the year ended December 31, 2017, DP Lending made loans to Alzamend Neuro, Inc. (“Alzamend”),
in the amount of $44. AVLP is a party to a management services agreement pursuant to
which Avalanche provides management, consulting and financial services to Alzamend. At
June 30, 2018, the outstanding principal under these loans had been repaid. As additional
consideration, the Company received a warrant to purchase 22,000 shares of Alzamend’s
common stock at an exercise price of $0.30 per share of common stock.
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
22. SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has five
reportable segments as of June 30, 2018 and two reportable segments as of June 30, 2017; see Note 1 for a brief description of
the Company’s business.
The following data presents the revenues,
expenditures and other operating data of the Company’s geographic operating segments and presented in accordance with ASC
No. 280.
|
|
Six
Months ended June 30, 2018
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Enertec
|
|
|
SC
Mining
|
|
|
I.AM
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
5,558
|
|
|
$
|
738
|
|
|
$
|
1,218
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,514
|
|
Revenue, cryptocurrency mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
Revenue, related party
|
|
|
3,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,559
|
|
Revenue, restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
502
|
|
|
|
—
|
|
|
|
502
|
|
Revenue, lending activities
|
|
|
109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109
|
|
Inter-segment revenues
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
9,231
|
|
|
$
|
738
|
|
|
$
|
1,218
|
|
|
$
|
956
|
|
|
$
|
502
|
|
|
$
|
(5
|
)
|
|
$
|
12,640
|
|
Depreciation and amortization expense
|
|
$
|
86
|
|
|
$
|
31
|
|
|
$
|
10
|
|
|
$
|
632
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
759
|
|
Loss from operations
|
|
$
|
(1,070
|
)
|
|
$
|
(451
|
)
|
|
$
|
146
|
|
|
$
|
(1,850
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(3,226
|
)
|
Capital expenditures for segment assets, as of June 30,
2018
|
|
$
|
343
|
|
|
$
|
1
|
|
|
$
|
32
|
|
|
$
|
8,807
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
9,206
|
|
Identifiable assets as of June 30, 2018
|
|
$
|
28,650
|
|
|
$
|
1,390
|
|
|
$
|
12,501
|
|
|
$
|
8,785
|
|
|
$
|
2,115
|
|
|
$
|
—
|
|
|
$
|
53,441
|
|
|
|
Six
Months ended June 30, 2017
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
2,329
|
|
|
$
|
1,121
|
|
|
$
|
—
|
|
|
$
|
3,450
|
|
Inter-segment revenues
|
|
|
37
|
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
2,366
|
|
|
$
|
1,121
|
|
|
$
|
(37
|
)
|
|
$
|
3,450
|
|
Depreciation and amortization expense
|
|
$
|
43
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
80
|
|
Loss from operations
|
|
$
|
(2,140
|
)
|
|
$
|
(91
|
)
|
|
$
|
—
|
|
|
$
|
(2,231
|
)
|
Capital expenditures for segment assets, as of June 30,
2018
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Identifiable assets as of June 30, 2018
|
|
$
|
12,315
|
|
|
$
|
1,666
|
|
|
$
|
—
|
|
|
$
|
13,981
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
|
|
Three
Months ended June 30, 2018
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Enertec
|
|
|
SC
Mining
|
|
|
I.AM
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
2,718
|
|
|
$
|
412
|
|
|
$
|
1,218
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,348
|
|
Revenue, cryptocurrency mining
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
719
|
|
|
|
—
|
|
|
|
—
|
|
|
|
719
|
|
Revenue, related party
|
|
|
1,766
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,766
|
|
Revenue, restaurant operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
502
|
|
|
|
—
|
|
|
|
502
|
|
Revenue, lending activities
|
|
|
109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109
|
|
Inter-segment revenues
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
4,598
|
|
|
$
|
412
|
|
|
$
|
1,218
|
|
|
$
|
719
|
|
|
$
|
502
|
|
|
$
|
(5
|
)
|
|
$
|
7,444
|
|
Depreciation and amortization expense
|
|
$
|
43
|
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
577
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
644
|
|
Loss from operations
|
|
$
|
(503
|
)
|
|
$
|
(199
|
)
|
|
$
|
146
|
|
|
$
|
(987
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1,544
|
)
|
Capital expenditures for segment assets, as of June 30,
2018
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
1,641
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
1,728
|
|
Identifiable assets as of June 30, 2018
|
|
$
|
28,650
|
|
|
$
|
1,390
|
|
|
$
|
12,501
|
|
|
$
|
8,785
|
|
|
$
|
2,115
|
|
|
$
|
—
|
|
|
$
|
53,441
|
|
|
|
Three
Months ended June 30, 2017
|
|
|
|
DPC
|
|
|
DPL
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue
|
|
$
|
1,316
|
|
|
$
|
506
|
|
|
$
|
—
|
|
|
$
|
1,822
|
|
Inter-segment revenues
|
|
|
12
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
—
|
|
Total revenues
|
|
$
|
1,328
|
|
|
$
|
506
|
|
|
$
|
(12
|
)
|
|
$
|
1,822
|
|
Depreciation and amortization expense
|
|
$
|
27
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
47
|
|
Loss from operations
|
|
$
|
(1,396
|
)
|
|
$
|
(48
|
)
|
|
$
|
—
|
|
|
$
|
(1,444
|
)
|
Capital expenditures for segment assets, as
of June 30, 2018
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Identifiable assets as of June 30, 2018
|
|
$
|
12,315
|
|
|
$
|
1,666
|
|
|
$
|
—
|
|
|
$
|
13,981
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
Concentration Risk:
The following table
provides the percentage of total revenues attributable to a single customer from which 10% or more of total revenues are derived:
|
|
For the three months ended June 30, 2018
|
|
|
For the six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
by Major
|
|
Percentage of
|
|
|
by Major
|
|
Percentage of
|
|
|
|
Customers
|
|
Total Company
|
|
|
Customers
|
|
Total Company
|
|
|
|
(in thousands)
|
|
Revenues
|
|
|
(in thousands)
|
|
Revenues
|
|
Customer A
|
|
$
|
1,766
|
|
|
24
|
%
|
|
$
|
3,559
|
|
|
28
|
%
|
|
|
For the three months ended June 30, 2017
|
|
|
For the six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
|
Total Revenues
|
|
|
|
|
|
by Major
|
|
Percentage of
|
|
|
by Major
|
|
Percentage of
|
|
|
|
Customers
|
|
Total Company
|
|
|
Customers
|
|
Total Company
|
|
|
|
(in thousands)
|
|
Revenues
|
|
|
(in thousands)
|
|
Revenues
|
|
Customer B
|
|
$
|
320
|
|
|
18
|
%
|
|
$
|
629
|
|
|
18
|
%
|
Revenue from Customer
A is related party revenue attributable to Coolisys and revenue from Customer B is also attributable to Coolisys. At June 30, 2018,
MTIX represented all of the Company’s accounts and other receivable, related party.
For the three and six
months ended June 30, 2018 and 2017, total revenues from external customers divided on the basis of the Company’s product
lines are as follows:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial products
|
|
$
|
5,136
|
|
|
$
|
1,083
|
|
|
$
|
8,801
|
|
|
$
|
2,023
|
|
Defense products
|
|
|
2,308
|
|
|
|
739
|
|
|
|
3,839
|
|
|
|
1,427
|
|
Total revenues
|
|
$
|
7,444
|
|
|
$
|
1,822
|
|
|
$
|
12,640
|
|
|
$
|
3,450
|
|
Financial data relating to geographic
areas:
The Company’s
total revenues are attributed to geographic areas based on the location. The following table presents total revenues for the years
ended December 31, 2017 and 2016. Other than as shown, no foreign country contributed materially to revenues or long-lived assets
for these periods:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
5,613
|
|
|
$
|
1,184
|
|
|
$
|
10,432
|
|
|
$
|
2,180
|
|
Europe
|
|
|
378
|
|
|
|
386
|
|
|
|
645
|
|
|
|
901
|
|
Middle East
|
|
|
1,218
|
|
|
|
—
|
|
|
|
1,218
|
|
|
|
—
|
|
Other
|
|
|
235
|
|
|
|
252
|
|
|
|
345
|
|
|
|
369
|
|
Total revenues
|
|
$
|
7,444
|
|
|
$
|
1,822
|
|
|
$
|
12,640
|
|
|
$
|
3,450
|
|
DPW HOLDINGS AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30,
2018
U.S. dollars
in thousands, except share and per share data
23. SUBSEQUENT EVENTS
In accordance with
FASB ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2018 and thru the date of this report being issued
and has determined that it does not have any material subsequent events to disclose in these financial statements except for the
following.
Between
July 1, 2018 and August 15, 2018, the Company had received net proceeds of $3,508 through the sale of 6,319,744 shares of the Company’s
common stock through the ATM Offering.
On July 2, 2018, the
Company entered into a securities purchase agreement with an institutional investor providing for the issuance of (i) a senior
secured convertible promissory note (the “
Convertible Note
”) with a principal face amount of $1,000, which Convertible
Note is, subject to certain conditions, convertible into 1,333,333 shares of Class A common stock of the Company at $0.75 per share
and (ii) up to 400,000 shares of Common Stock. The Company agreed to file a registration statement on Form S-3 to register
these securities by July 23, 2018. The Convertible Note has a principal face amount of bears interest at 10% per annum and is due
on January 1, 2019.
On
August 3, 2018, the Company and lender of the June 8, 2018 promissory note in the principal amount of $512 entered into an agreement
to extend the maturity date from July 9, 2018 to August 31, 2018. The Company agreed to pay the lender an extension fee of 100,000
shares of common stock.
On August 10, 2018, the Company issued
to its consultant 1,000,000 shares of its common stock with an aggregate value of $450 for services rendered.
On
August 16, 2018, the Company entered into a securities purchase agreement with certain institutional investors providing for the
issuance of (i) secured promissory notes (the “
Notes
”) in the aggregate principal face amount of $1,212 due
February 15, 2019, at an interest rate of eight percent (8%) per annum for which the Company received an aggregate of $1,010, and
(ii) an aggregate of 400,000 shares of common stock to be issued by the Company, subject to approval of the NYSE American. The
Company agreed that the 400,000 shares shall be registered under the Securities Act of 1933, as amended, within fourteen (14) days
after the date that the Securities and Exchange Commission shall have declared the Company’s presently filed registration
statement on Form S-3 (File No. 333-226301) effective.
On June 8, 2018, the
Company entered into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the “
NY
Partnership
”). The NY Partnership is a limited partner in the partnership that is responsible for the construction and
related activities of a hotel in New York City. In connection with this transaction, the Company has agreed to finance a portion
of the capital required by the NY Partnership. The Company used $1,000 from the proceeds of the August 16, 2018 Notes as an additional
capital contribution in the partnership. As of June 30, 2018, the Company had an initial investment in the NY Partnership of $720,
which is a component of other investments on the Company’s balance sheet. Subject to the occurrence of certain events and
other conditions over which the Company has no control, it is required to make monthly capital contributions of $500,000 every
thirty days until DPW’s commitment is funded in full, which is expected to occur in January 2020. If the Company fails to
make a monthly contribution when due, then the other entities affiliated with the NY Partnership could potentially have the right
to acquire fifty percent (50%) of the capital contributions that the Company will have made to the NY Partnership at that time.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this quarterly report,
the “Company,” “DPW Holdings,” “we,” “us” and “our” refer to DPW Holdings,
Inc., a Delaware corporation, our wholly-owned subsidiaries, Coolisys Technologies, Inc., Power-Plus Technical Distributors, LLC,
Digital Power Lending, LLC, Super Crypto Mining, Inc., Digital Power Limited, Enertec
Systems
2001 Ltd
and our majority owned subsidiaries, Microphase Corporation and I. AM, LLC.
Recent Developments
On
December 31, 2017, CooliSys entered into a share purchase agreement with Micronet Enertec Technologies, Inc. (“MICT”),
a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary of MICT (“EML”
and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”), an Israeli corporation
and wholly owned subsidiary of EML, pursuant to which Coolisys acquired Enertec (the “Acquisition”). Enertec is Israel’s
largest private manufacturer of specialized electronic systems for the military market. On May 23, 2018, Coolisys acquired Enertec
for an aggregate cash purchase price of $4,851.
On
February 27, 2018, we entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares of
our common stock, having an aggregate offering price of up to $50 million from time to time, through an “at the market offering”
program (the “ATM Offering”) under which HCW will act as sales agent. As of August 15, 2018, we had received net proceeds
of $18,059 through the sale of 21,241,911 shares of our common stock through the ATM Offering. The offer and sale of the shares
through the ATM Offering are made pursuant to our effective “shelf” registration statement on Form S-3 and an
accompanying base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18,
2017, amended on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to
the ATM Offering, dated February 27, 2018.
On
May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I.AM, Inc. (“I.AM”), David J.
Krause and Deborah J. Krause. Pursuant to the securities purchase agreement, I.AM sold to DPL, 981 shares of common stock for a
purchase price of $981, representing, upon the closing, 98.1% of I. AM’s outstanding common stock.
I.AM
owns and operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715 in outstanding
principal, pursuant to a loan and security agreement, between I.AM and DP Lending, that I.AM used to acquire the restaurants. The
purchase agreement provides that, as I.AM repays the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending
will on a pro rata basis transfer shares of common stock of I.AM to David J. Krause, up to an aggregate of 471 shares.
GENERAL
We are a growth company
seeking to increase our revenues through acquisitions. Our strategy reflects our management and Board’s current philosophy
which we began implementing upon the change in control that was completed on September 22, 2016. Our acquisition and development
target strategy include companies that have developed a “new way of doing business” in mature, well-developed industries
experiencing changes due to new technology; companies that may become profitable or more profitable through efficiency and reduction
of costs; companies that are related to our core business in the commercial and defense industries; and companies that will enhance
our overall revenues. It is our goal to substantially increase our gross revenues in the near future.
We were originally
a solution-driven organization that designs, develops, manufactures and sells high-grade customized and flexible power system solutions
for the medical, military, telecom and industrial markets. Although we intend to seek growth through acquisitions, we will continue
to focus on high-grade and custom product designs for the commercial, medical and military/defense markets, where customers demand
high density, high efficiency and ruggedized products to meet the harshest and/or military mission critical operating conditions.
We have operations
located in Europe through our wholly-owned subsidiary, Digital Power Limited (“DP Limited”), Salisbury, England, which
operates under the brand name of “Gresham Power Electronics” (“Gresham”). DP Limited designs, manufactures
and sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution
equipment, DC/AC (Direct Current/Active Current) inverters and UPS (Uninterrupted Power Supply) products. Our European defense
business is specialized in the field of naval power distribution products.
On November 30, 2016,
DPW Holdings formed Digital Power Lending, LLC (“DP Lending”), a wholly-owned subsidiary. DP Lending is engaged in
providing commercial loans to companies throughout the United States to provide them with operating capital to finance the growth
of their businesses. The loans will primarily be short-term, ranging from six to twelve months, but may be of longer duration.
On June 2, 2017, DPW
Holdings purchased 56.4% of the outstanding equity interests of Microphase Corporation (“Microphase”). Microphase is
a design-to-manufacture original equipment manufacturer (“OEM”) industry leader delivering world-class radio frequency
(“RF”) and microwave filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and detector
logarithmic video amplifiers (“DLVA”) to the military, aerospace and telecommunications industries. Microphase is headquartered
in Shelton, Connecticut.
On April 25, 2017,
DPW Holdings formed Coolisys Technologies, Inc. (“Coolisys”), a wholly-owned subsidiary. The Company intends to operate
its existing businesses in the customized and flexible power system solutions for the medical, military, telecom and industrial
markets, other than the European markets which are primarily served by DP Limited, in Coolisys.
Further, on September
1, 2017, Coolisys acquired all of the outstanding membership interests in Power-Plus Technical Distributors, LLC, a California
limited liability company (“
Power-Plus
”). Power-Plus is an industrial distributor of value added power supply
solutions, UPS systems, fans, filters, line cords, and other power-related components. In addition to its current business, Power-Plus
will serve as an extended sales organization for the Company’s overall flexible power system solutions.
We are a Delaware corporation
with our corporate office located at 201 Shipyard Way, Suite E, Newport Beach, California 92663. Our phone number is 510-657-2635
and our website address is www.dpwholdings.com.
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2018 AND 2017
The following table summarizes the results
of our operations for the three months ended June 30, 2018 and 2017.
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,348
|
|
|
$
|
1,822
|
|
Revenue, cryptocurrency mining
|
|
|
719
|
|
|
|
—
|
|
Revenue, related party
|
|
|
1,766
|
|
|
|
—
|
|
Revenue, restaurant operations
|
|
|
502
|
|
|
|
—
|
|
Revenue, lending activities
|
|
|
109
|
|
|
|
—
|
|
Total revenue
|
|
|
7,444
|
|
|
|
1,822
|
|
Cost of revenue
|
|
|
6,084
|
|
|
|
1,092
|
|
Gross profit
|
|
|
1,360
|
|
|
|
730
|
|
Total operating expenses
|
|
|
5,460
|
|
|
|
2,174
|
|
Loss from operations
|
|
|
(4,100
|
)
|
|
|
(1,444
|
)
|
Interest expense
|
|
|
(2,887
|
)
|
|
|
(407
|
)
|
Loss before income taxes
|
|
|
(6,987
|
)
|
|
|
(1,851
|
)
|
Income tax benefit
|
|
|
(10
|
)
|
|
|
—
|
|
Net loss
|
|
|
(6,997
|
)
|
|
|
(1,851
|
)
|
Less: Net loss attributable to non-controlling interest
|
|
|
108
|
|
|
|
112
|
|
Net loss attributable to DPW Holdings
|
|
$
|
(6,889
|
)
|
|
$
|
(1,739
|
)
|
Preferred deemed dividends on Series B and Series C Preferred Stock
|
|
|
(108
|
)
|
|
|
(319
|
)
|
Preferred dividends on Series C Preferred Stock
|
|
|
—
|
|
|
|
(8
|
)
|
Net loss available to common stockholders
|
|
$
|
(6,997
|
)
|
|
$
|
(2,066
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.20
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
54,009,472
|
|
|
|
10,467,658
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(6,997
|
)
|
|
$
|
(2,066
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(158
|
)
|
|
|
78
|
|
Net unrealized loss on securities available-for-sale
|
|
|
(705
|
)
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
|
(863
|
)
|
|
|
78
|
|
Total Comprehensive loss
|
|
$
|
(7,860
|
)
|
|
$
|
(1,988
|
)
|
Revenues
Our revenues increased
by $5,622 or 309% to $7,444 for the three months ended June 30, 2018, from $1,822 for the three months ended June 30, 2017. The
increase in revenue was primarily due to our acquisition of 56.4% of the outstanding equity interests of Microphase on June 2,
2017 and 98.1% of the outstanding equity interests of I.AM on May 23, 2018, combined with our acquisitions of all of the outstanding
equity interests of Power-Plus on September 1, 2017 and Enertec on May 23, 2018. Revenues generated by these four acquisitions
during the three months ended June 30, 2018, represented $2,963 of our increase in revenues. Excluding the increase in revenues
that were generated by our recent acquisitions, the Company generated revenues of $4,481, which represented an increase of $2,659.
As discussed below, the increase of $2,659 from the three months ended June 30, 2017, was primarily due to our cryptocurrency mining
operations and on revenue from the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system.
Revenues,
cryptocurrency mining
In
January 2018, we formed Super Crypto Mining, Inc. (“SC Mining”), a wholly-owned subsidiary. SC Mining was established
to operate our newly formed cryptocurrency business, which is pursuing a variety of digital currencies. We are mining the top
three cryptocurrencies for our own account. These cryptocurrencies include Bitcoin, Litecoin and Ethereum. During the
three months ended June 30, 2018, we recognized $719 of revenues generated by SC Mining.
Revenues,
related party
During
the three months ended June 30, 2018, we recognized $1,766 in revenues resulting from our relationship with MTIX Limited, a company
formed under the laws of England and Wales (“MTIX”). MTIX was acquired by Avalanche on August 22, 2017 and is therefore
deemed to be a related party. In March 2017, the Company was awarded a 3-year, $50 million purchase order by MTIX to manufacture,
install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system. Management believes that
the MLSE purchase order will be a source of revenue and generate significant cash flows for the Company. However, at June 30,
2018, $3,544 was reflected on the financial statements as accounts receivable, related party.
Gross
Margins
Gross
margins decreased to 18.3% for the three months ended June 30, 2018 compared to 40.1% for the three months ended June 30, 2017.
The decrease in gross margins was partially attributable to the lower margin revenue of $1,766 from MTIX, a related party, with
gross margins of 21.1% combined with negative margins of (116.4%) on revenues of $719 at SC Mining. The negative gross margins
at SC Mining are attributed to monthly recurring fixed costs at our colocation facilities which temporarily exceed the revenues
from our mining operations while we place our miners in service. If we had not recognized revenue, and the related cost of revenue,
from SC Mining and our contract with MTIX, then our adjusted gross margins for the three months ended June 30, 2018 would have
been 36.8%. The decrease in gross margins from 40.1% to 36.8% is mainly attributable to an increase in costs of our commercial
products sold in our U.S. operations, which historically have had much greater gross margins.
Engineering
and Product Development
Engineering
and product development expenses increased by $102 to $367 for the three months ended June 30, 2018 from $265 for the three months
ended June 30, 2017. The increase is primarily attributed to our acquisition of Microphase. Due to the timing of the acquisition
of Microphase, June 2, 2017, during the three months ended June 30, 2017 Microphase reported only $55 in engineering and product
development expenses as opposed to $115 during the three months ended June 30, 2018.
Selling
and Marketing
Selling
and marketing expenses were $775 for the three months ended June 30, 2018 compared to $327 for the three months ended June 30,
2017, an increase of $448. Our acquisition of Microphase and Power-Plus accounted for $36 and $224, respectively, of the
increase in selling and marketing expenses. The remaining increase of $188 is attributed to an increase in personnel costs directly
attributed to sales and marketing personnel at our U.S. and UK based operations. Throughout the quarter ended March 31, 2017,
we augmented our sales and marketing team in the U.S. with the addition of a Vice President of Business Development and two regional
sales managers. The increase in selling and marketing expenses is partially attributed to the increase in salaries and benefits
and travel related costs for the three new sales and marketing positions. Due to the timing of these personnel additions, the
full cost was only partially realized during the three months ended March 31, 2017. Further, during December 2017, we hired a
Sales Director at our UK operations.
General and Administrative
General and
administrative expenses were $4,388 for the three months ended June 30, 2018 compared to $1,582 for the three months ended June
30, 2017, an increase of $2,806. Our acquisitions of Microphase, Enertec and I. AM accounted for $635 of the increase in general
and administrative expenses. The adjusted increase of $2,171 from the comparative prior period was mainly due to higher stock-based
compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional
consultants to build an infrastructure in anticipation of our future growth and the increase in cost attributed to the hiring of
a new Chief Financial Officer. The remaining increase in general and administrative expenses is due to various costs, none of which
are significant individually.
|
·
|
In aggregate, we incurred $1,361 of stock-based compensation during the three months ended June
30, 2018. Of this amount, $831 was from issuances of equity-based awards pursuant to our Plans and $530 was from stock, options
and warrants which were issued outside the Plans. It has been our policy to allocate the majority of stock-based compensation to
general and administrative expense. During the three months ended June 30, 2018 and 2017, and inclusive of equity-based awards
issued outside the Plans, we recorded $1,361 and $580, respectively, of stock-based compensation in general and administrative
expense.
|
|
·
|
We experienced an aggregate increase of $16 in audit and legal fees due to an overall increase
in the operations conducted and the level of complexity and significant number of the transactions entered into during the three
months ended June 30, 2018.
|
|
·
|
Beginning during the quarter ended December 31, 2016, we spent significant effort on expanding
our investor base and on hiring additional consultants to assist building an infrastructure to support our anticipated growth.
These efforts were continued during the three months ended June 30, 2018 and resulted in an increase of $189 in costs attributed
to investor relations and other consulting fees.
|
|
·
|
During January 2018 we hired a new Chief Financial Officer and in September 2017 we hired a
senior executive to assist in management at Coolisys. These two hires resulted in an overall increase in payroll expense of
approximately $108 during the three months ended June 30, 2018.
|
|
·
|
Finally, in January 2018 we established SC Mining, our digital currency blockchain mining subsidiary
and DP Lending, our commercial lending subsidiary. During the three months ended June 30, 2018, general and administrative costs
attributed to these subsidiaries were $302.
|
Interest (expense) income, net
Interest expense was
$2,887 for the three months ended June 30, 2018 compared to $407 for the three months ended June 30, 2017. The increase in interest
expense for the three months ended June 30, 2018 is primarily related to the amortization of debt discount, in the aggregate amount
of $2,728, resulting from original issue discount the issuance of warrants in conjunction with the sale of debt instruments in
the aggregate amount of $18,745. During the three months ended June 30, 2018, as a result of these issuances, non-cash interest
expense of $2,728 was recorded from the amortization of debt discount and debt financing costs. The remaining increase in interest
expense was due to an increase in the amount of the Company’s total borrowings and which was primarily offset by interest
income and the accretion of original issue discount pursuant to the Loan and Security Agreement entered into on September 6, 2017,
between the Company and AVLP (“AVLP Loan Agreement”) of $585.
Operating Loss
The Company recorded
an operating loss of $4,100 for the three months ended June 30, 2018 compared to an operating loss of $1,444 for the three months
ended June 30, 2017. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.
Net Loss
For the foregoing reasons,
our net loss for the three months ended June 30, 2018, was $6,997 compared to a net loss of $1,851 for the three months ended June
30, 2017. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of
Microphase during the three months ended June 30, 2018 and 2017, of $108 and $112, respectively, the net loss available to common
shareholders during the three months ended June 30, 2018 and 2017, was $6,997 and $2,066, respectively.
As reflected in our
consolidated statement of cash flows for the three months ended June 30, 2018 and 2017, our reported net loss is comprised of non-cash
charges of $4,333 and $1,035, respectively. A summary of these non-cash charges is as follows:
|
|
For the Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Interest expense – debt discount
|
|
$
|
2,728
|
|
|
$
|
392
|
|
Stock-based compensation
|
|
|
1,373
|
|
|
|
595
|
|
Depreciation and amortization
|
|
|
677
|
|
|
|
47
|
|
Interest expense on conversion of promissory notes to common stock
|
|
|
—
|
|
|
|
13
|
|
Accretion of original issue discount on notes receivable – related party
|
|
|
(445
|
)
|
|
|
(12
|
)
|
Non-cash items included in net loss
|
|
$
|
4,333
|
|
|
$
|
1,035
|
|
Other
comprehensive income (loss)
Other comprehensive
income (loss) was ($863) and $78, respectively, for the three months ended June 30, 2018 and 2017. Other comprehensive loss for
the three months ended June 30, 2018, which decreased our equity, reflects the impact of the weakening of the British Pound on
the equity of DP Limited combined with unrealized losses in our investments in marketable securities, primarily in the warrants
that we received as a result of our investment in Avalanche International, Corp, a related party. During the three months ended
June 30, 2017, the effect of the foreign currency adjustment of the British Pound was the only component of our other comprehensive
income of $78.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2018
AND 2017
The following table summarizes the results
of our operations for the six months ended June 30, 2018 and 2017.
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,514
|
|
|
$
|
3,450
|
|
Revenue, cryptocurrency mining
|
|
|
956
|
|
|
|
—
|
|
Revenue, related party
|
|
|
3,559
|
|
|
|
—
|
|
Revenue, restaurant operations
|
|
|
502
|
|
|
|
—
|
|
Revenue, lending activities
|
|
|
109
|
|
|
|
—
|
|
Total revenue
|
|
|
12,640
|
|
|
|
3,450
|
|
Cost of revenue
|
|
|
9,887
|
|
|
|
2,012
|
|
Gross profit
|
|
|
2,753
|
|
|
|
1,438
|
|
Total operating expenses
|
|
|
9,820
|
|
|
|
3,669
|
|
Loss from operations
|
|
|
(7,067
|
)
|
|
|
(2,231
|
)
|
Interest expense
|
|
|
(6,019
|
)
|
|
|
(614
|
)
|
Loss before income taxes
|
|
|
(13,086
|
)
|
|
|
(2,845
|
)
|
Income tax benefit
|
|
|
(6
|
)
|
|
|
—
|
|
Net loss
|
|
|
(13,092
|
)
|
|
|
(2,845
|
)
|
Less: Net loss attributable to non-controlling interest
|
|
|
144
|
|
|
|
112
|
|
Net loss attributable to DPW Holdings
|
|
$
|
(12,948
|
)
|
|
$
|
(2,733
|
)
|
Preferred deemed dividends on Series B and Series C Preferred Stock
|
|
|
(108
|
)
|
|
|
(319
|
)
|
Preferred dividends on Series C Preferred Stock
|
|
|
—
|
|
|
|
(8
|
)
|
Net loss available to common stockholders
|
|
$
|
(13,056
|
)
|
|
$
|
(3,060
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.32
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
45,407,279
|
|
|
|
9,430,945
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(13,056
|
)
|
|
$
|
(3,060
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(132
|
)
|
|
|
99
|
|
Net unrealized loss on securities available-for-sale
|
|
|
(5,446
|
)
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
|
(5,578
|
)
|
|
|
99
|
|
Total Comprehensive loss
|
|
$
|
(18,634
|
)
|
|
$
|
(2,961
|
)
|
Revenues
Our revenues increased
by $9,190 or 266% to $12,640 for the six months ended June 30, 2018, from $3,450 for the six months ended June 30, 2017. The increase
in revenue was primarily due to our four acquisitions completed during 2017 and 2018. Revenues generated by these four acquisitions
during the six months ended June 30, 2018, represented $5,050 of our increase in revenues. Excluding the increase in revenues that
were generated by our recent acquisitions, the Company generated revenues of $7,813, which represented an increase of $4,362. As
discussed below, the increase of $4,362 from the six months ended June 30, 2017, was primarily due to our cryptocurrency mining
operations and on revenue from the manufacture of the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser system.
Revenues, cryptocurrency mining
In
January 2018, we formed SC Mining. During the six months ended June 30, 2018, we recognized $956 of revenues generated by SC Mining.
Revenues, related party
During the six months
ended June 30, 2018, we recognized $3,559 in revenues resulting from our relationship with MTIX. In March 2017, the Company was
awarded a 3-year, $50 million purchase order by MTIX to manufacture, install and service the MLSE plasma-laser system.
Gross Margins
Gross margins decreased
to 21.8% for the six months ended June 30, 2018 compared to 41.7% for the six months ended June 30, 2017. The decrease in gross
margins was partially attributable to the lower margin revenue of $3,559 from MTIX, a related party, with gross margins of 21.5%
combined with negative margins of (94.1%) on revenues of $956 at SC Mining. The negative gross margins at SC Mining are attributed
to monthly recurring fixed costs at our colocation facilities which temporarily exceed the revenues from our mining operations
while we place our miners in service. If we had not recognized revenue, and the related cost of revenue, from SC Mining and our
contract with MTIX, then our adjusted gross margins for the six months ended June 30, 2018 would have been 35.5%. The decrease
in gross margins from 41.7% to 35.5% is mainly attributable to an increase in costs of our commercial products sold in our U.S.
operations, which historically have had much greater gross margins.
Engineering and Product Development
Engineering and product
development expenses increased by $218 to $710 for the six months ended June 30, 2018 from $492 for the six months ended June 30,
2017. The increase is primarily attributed to our acquisition of Microphase. Due to the timing of the acquisition of Microphase,
June 2, 2017, during the six months ended June 30, 2017 Microphase reported only $55 in engineering and product development expenses
as opposed to $236 during the six months ended June 30, 2018.
Selling and Marketing
Selling and marketing
expenses were $1,500 for the six months ended June 30, 2018 compared to $622 for the six months ended June 30, 2017, an increase
of $878. Our acquisition of Microphase and Power-Plus accounted for $92 and $429, respectively, of the increase in selling
and marketing expenses. The remaining increase of $357 is attributed to an increase in personnel costs directly attributed to sales
and marketing personnel at our U.S. and UK based operations. Throughout the quarter ended March 31, 2017, we augmented our sales
and marketing team in the U.S. with the addition of a Vice President of Business Development and two regional sales managers. The
increase in selling and marketing expenses is partially attributed to the increase in salaries and benefits and travel related
costs for the three new sales and marketing positions. Due to the timing of these personnel additions, the full cost was only partially
realized during the three months ended March 31, 2017. Further, during December 2017, we hired a Sales Director at our UK operations.
General and Administrative
General and
administrative expenses were $7,610 for the six months ended June 30, 2018 compared to $2,555 for the six months ended June 30,
2017, an increase of $5,055. Our acquisitions of Microphase, Enertec and I. AM accounted for $870 of the increase in general and
administrative expenses. The adjusted increase of $4,185 from the comparative prior period was mainly due to higher stock-based
compensation expenses, an increase in legal and audit costs, an increase in investor relationship costs and hiring of additional
consultants to build an infrastructure in anticipation of our future growth and the increase in cost attributed to the hiring of
a new Chief Financial Officer. The remaining increase in general and administrative expenses is due to various costs, none of which
are significant individually.
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·
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In aggregate, we incurred $2,811 of stock-based compensation during the six months ended June 30,
2018. Of this amount, $1,537 was from issuances of equity-based awards pursuant to our Plans and $1,273 was from stock, options
and warrants which were issued outside the Plans. It has been our policy to allocate the majority of stock-based compensation to
general and administrative expense. During the six months ended June 30, 2018 and 2017, and inclusive of equity-based awards issued
outside the Plans, we recorded $2,781 and $651, respectively, of stock-based compensation in general and administrative expense.
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·
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We experienced an aggregate increase of $250 in audit and legal fees due to an overall increase
in the operations conducted and the level of complexity and significant number of the transactions entered into during the six
months ended June 30, 2018.
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·
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Beginning during the quarter ended December 31, 2016, we spent significant effort on expanding
our investor base and on hiring additional consultants to assist building an infrastructure to support our anticipated growth.
These efforts were continued during the six months ended June 30, 2018 and resulted in an increase of $378 in costs attributed
to investor relations and other consulting fees.
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·
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During January 2018 we hired a new Chief Financial Officer and in September 2017 we hired
a senior executive to assist in management at Coolisys. These two hires resulted in an overall increase in payroll expense of approximately
$230 during the six months ended June 30, 2018.
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·
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Finally, we recently established SC Mining, our digital currency blockchain mining subsidiary,
and DP Lending, our commercial lending subsidiary. During the six months ended June 30, 2018, general and administrative costs
attributed to these subsidiaries were $516.
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Interest (expense) income, net
Interest expense was
$6,019 for the six months ended June 30, 2018 compared to $614 for the six months ended June 30, 2017. The increase in interest
expense for the six months ended June 30, 2018 is primarily related to the amortization of debt discount, in the aggregate amount
of $5,779, resulting from original issue discount on the issuance of warrants in conjunction with the sale of debt instruments
in the aggregate amount of $18,745. During the six months ended June 30, 2018, as a result of these issuances, non-cash interest
expense of $5,779 was recorded from the amortization of debt discount and debt financing costs. The remaining increase in interest
expense was due to an increase in the amount of the Company’s total borrowings and which was primarily offset by interest
income and the accretion of original issue discount pursuant to the Loan and Security Agreement entered into on September 6, 2017,
between the Company and AVLP (“AVLP Loan Agreement”) of $1,219.
Operating Loss
The Company recorded
an operating loss of $7,067 for the six months ended June 30, 2018 compared to an operating loss of $2,231 for the six months ended
June 30, 2017. The increase in operating loss is mostly attributable from the increase of general and administrative expenses.
Net Loss
For the foregoing reasons,
our net loss for the six months ended June 30, 2018, was $13,092 compared to a net loss of $2,845 for the six months ended June
30, 2017. After taking into consideration the loss attributable to the non-controlling interest of the minority shareholders of
Microphase of $144 and $112 and preferred dividends of $108 and $327 during the six months ended June 30, 2018 and 2017, respectively,
the net loss available to common shareholders during the six months ended June 30, 2018 and 2017, was $13,056 and $3,060, respectively.
As reflected in our
consolidated statement of cash flows for the six months ended June 30, 2018 and 2017, our reported net loss is comprised of non-cash
charges of $8,485 and $1,413, respectively. A summary of these non-cash charges is as follows:
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For the Six Months Ended
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|
|
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June 30,
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|
|
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2018
|
|
|
2017
|
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Interest expense – debt discount
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|
$
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5,779
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|
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$
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587
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Stock-based compensation
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|
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2,811
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|
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752
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Depreciation and amortization
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|
|
825
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|
|
|
80
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Interest expense on conversion of promissory notes to common stock
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|
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—
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|
|
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13
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Accretion of original issue discount on notes receivable – related party
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|
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(930
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)
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|
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(19
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)
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Non-cash items included in net loss
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$
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8,485
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|
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$
|
1,413
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Other
comprehensive income (loss)
Other comprehensive
income (loss) was ($5,578) and $99, respectively, for the six months ended June 30, 2018 and 2017. Other comprehensive loss for
the six months ended June 30, 2018, which decreased our equity, reflects the impact of the weakening of the British Pound on the
equity of DP Limited combined with unrealized losses in our investments in marketable securities, primarily in the warrants that
we received as a result of our investment in Avalanche International, Corp, a related party. During the six months ended June 30,
2017, the effect of the foreign currency adjustment from the weakening of the British Pound was the only component of our other
comprehensive income of $99.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2018, we
had cash and cash equivalents of $1,518. This compares with cash and cash equivalents of $1,478 at December 31, 2017. The increase
in cash and cash equivalents was primarily due to cash provided by financing activities being slightly in excess of the amount
of cash used in operating and investing activities.
Net cash used in operating activities totaled $5,664 for the
six months ended June 30, 2018, compared to net cash used by operating activities of $873 for the six months ended June 30, 2017.
During the six months ended June 30, 2018, the increase in net cash used in operating activities compared to the six months ended
June 30, 2017 was mainly due to the net loss for the six months ended June 30, 2018 of $13,092. The net loss was partially offset
by a number of non-cash charges, the amortization of debt discount of $5,779 and stock-based compensation of $2,811, an increase
in accounts receivable, related party of $3,274 and accounts payable and accrued expenses of $2,465 and decreases in our accounts
receivable of $770.
Net
cash used in investing activities was $16,922 for the six months ended June 30, 2018 compared to $2,432 of net cash used in investing
activities for the six months ended June 30, 2017. The increase of the net usage of cash from investing activities was primarily
attributed to the purchase of property and equipment at SC Mining, the investment in AVLP, the acquisition of Enertec and investments
in debt and equity securities.
Net cash provided by
financing activities was $22,794 and $2,711 for the six months ended June 30, 2018 and 2017, respectively. The financing activities
primarily related to the sale of 19,056,783 shares of common stock through a registered direct offering and from our ATM Offering
for net proceeds of $18,552, net proceeds from the Company’s debt financings and from advances of future receipts of $21,735
which was offset by payments on debt instruments of $16,565 and proceeds from the exercise of options and warrants of $965.
Historically, the Company
has financed its operations principally through issuances of convertible debt, promissory notes and equity securities. During 2018,
as reflected below, the Company continued to successfully obtain additional equity and debt financing and in restructuring existing
debt.
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On January 23, 2018, we entered into a securities purchase agreement with an institutional investor
to sell, for an aggregate purchase price of $1,000, a 10% senior convertible promissory note (the “Note”) with an aggregate
principal face amount of $1,250, a warrant to purchase an aggregate of 625,000 shares of our common stock and 543,478 shares of
our common stock. The transactions contemplated by the securities purchase agreement closed on February 8, 2018. The Note
is convertible into 625,000 shares of our common stock, a conversion price of $2.00 per share, subject to adjustment. The exercise
price of the warrant to purchase 625,000 shares of our common stock is $2.20 per share, subject to adjustment. On February 9, 2018,
in addition to the 543,478 shares of common stock provided for pursuant to the securities purchase agreement, we issued to the
investor an aggregate of 691,942 shares of our common stock upon the conversion of the entire outstanding principal and accrued
interest on the Note of $1,384.
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On
January 25, 2018, we issued two 5% promissory notes, each in the principal face amount
of $2,500 for an aggregate debt of $5,000 to two institutional investors. The proceeds
from the two promissory notes was used to purchase 1,000 Antminer S9s manufactured by
Bitmain Technologies, Inc. in connection with our mining operations. We received delivery
of the Miners on February 1, 2018. On March 27, 2018, we paid the principal and accrued
interest on each of the 5% promissory notes.
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●
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On
February 20, 2018, we issued a promissory note in the principal face amount of $900 to
an accredited investor. This promissory note included an original issue discount (“OID”)
of $150 resulting in net proceeds of $750. The principal and OID on this note was due
and payable on March 22, 2018. On March 23, 2018, we entered into a new promissory note
in the principal amount of $1,750 for a term of two months, subject to our ability to
prepay within one month. The interest rate payable on this new promissory note shall
be twenty percent per thirty calendar days, payable in a lump sum on the maturity date.
We also issued to the lender a warrant to purchase 1,250,000 shares of our common stock
at an exercise price of $1.15 per share, pursuant to a consulting agreement. The principal
amount of the new promissory note consisted of net proceeds of $1,000 and the cancellation
of the principal of $750 from the February 20, 2018 promissory note. The interest on
the February 20, 2018 note in the amount of $150 was paid to the lender prior to entering
into the new promissory note. On April 23, 2018, we paid the entire outstanding principal
and accrued interest on the new promissory note of $2,100.
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On
February 26, 2018, we issued a 10% promissory note in the principal face amount of $330
to an accredited investor. This promissory note included an OID of $30 resulting in net
proceeds to us of $300. The principal and accrued interest on this note is due and payable
on April 12, 2018, subject to a 30-day extension available to us.
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●
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On
February 27, 2018, we entered into a sales agreement with H.C. Wainwright & Co.,
LLC (“HCW”) to sell shares of our common stock, having an aggregate offering
price of up to $50 million from time to time, through an “at the market offering”
program (the “ATM Offering”) under which HCW acts as sales agent. As of August
15, 2018, we had received net proceeds of $18,059 through the sale of 21,241,911 shares
of our common stock through the ATM Offering. The offer and sale of the shares through
the ATM Offering will be made pursuant to our effective “shelf” registration
statement on Form S-3 and an accompanying base prospectus contained therein (Registration
Statement No. 333-222132) filed with the SEC on December 18, 2017, amended on January
8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement
related to the ATM Offering, dated February 27, 2018.
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●
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On
March 23, 2018, we entered into a securities purchase agreement to sell and issue a 12%
promissory note and a warrant to purchase 300,000 shares of common stock to an accredited
investor if the promissory note is paid in full on or before May 23, 2018, or up to 450,000
shares of common stock, if the promissory note is paid by June 22, 2018. The promissory
note was issued with a 10% OID. The promissory note is in the principal amount of $1,000
and was sold for $900, bears interest at 12% simple interest on the principal amount,
and is due on June 22, 2018. Interest only payments are due, in arrears, on a monthly
basis commencing on April 23, 2018. The exercise price of the warrant is $1.15 per share.
The promissory note is unsecured by any of our assets but is guaranteed by our Chief
Executive Officer.
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On
March 27, 2018, we issued a 10% promissory note in the principal face amount of $200
to an accredited investor. The principal and accrued interest on this note was due and
payable on March 29, 2018. Between March 29 and April 24, 2018, we paid the entire outstanding
principal on this 10% promissory note of $200.
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●
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On
April 16, 2018, we entered into securities purchase agreements with three institutional
investors to sell, for an aggregate purchase price of $1,550, 12% secured convertible
promissory notes (“Convertible Notes”) with an aggregate principal face amount
of $1,722, warrants to purchase an aggregate of 993,588 shares of our common stock, and
an aggregate of 200,926 shares of our common stock. The Convertible Notes bear simple
interest at 12% on the principal amount with a guarantee of interest during the initial
six months in the amount of $103. Subject to certain beneficial ownership limitations
and an event of default having occurred and not been cured, the investors may convert
the principal amount of the Convertible Notes and accrued interest earned thereon into
shares of our common Stock at $0.70 per share, subject to adjustment for customary stock
splits, stock dividends, combinations or similar events. Beginning on May 16, 2018, we
are required to make six monthly cash payments in the aggregate amount of $304 until
the Convertible Notes are satisfied in full, which is to occur on October 16, 2018. The
warrants entitle the holders to purchase, in the aggregate, up to 993,588 shares of our
common stock at an exercise price of $1.30 per share for a period of five years subject
to certain beneficial ownership limitations. In connection with these three securities
purchase agreements, we entered into security agreements pursuant to which we granted
to each investor a security interest in, among others, SC Mining’s accounts, chattel
paper, documents, equipment, general intangibles, instruments and inventory, and all
proceeds, as set forth in the security agreements.
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●
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On
May 15, 2018, we entered into securities purchase agreements with certain investors for
the sale and issuance of an aggregate of 7,691,775 shares of our Class A common stock,
and five-year warrants to purchase such number of shares of common stock equal to the
shares of common stock purchased by the investors. We received aggregate consideration
of $6,000, consisting of cash and the cancellation of short-term advances of $3,225 and
$2,775, respectively. These securities were issued pursuant to our registration statement
filed with the Securities and Exchange Commission (File No. 333-222132) which became
effective on January 11, 2018.
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●
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On
May 15, 2018, we entered into a securities purchase agreement with an institutional investor
providing for the issuance of (i) a Senior Secured Convertible Promissory Note (the “Convertible
Note”) with a principal face amount of $6,000, which Convertible Note is, subject
to certain conditions, convertible into 8,000,000 shares (the “Conversion Shares”)
of the Company’s common stock at $0.75 per share; (ii) a five-year warrant to purchase
1,111,111 shares of the Company’s common stock (the “Series A Warrant Shares”)
at an exercise price of $1.35 (the “Series A Warrant”); (iii) a five-year
warrant to purchase 1,724,138 shares of the Company’s common stock (the “Series
B Warrant Shares” and with the Series A Warrant Shares, the “Warrant Shares”)
at an exercise price of $0.87 per share (the “Series B Warrant” and together
with the Series A Warrant, the “Warrants”); and (iv) 344,828 shares of our
common stock (the “Commitment Shares” and with the Conversion Shares and
the Warrant Shares, the “Issuable Shares”). The Warrant Shares and the Commitment
Shares will be registered under the Securities Act pursuant to the Company’s currently
effective registration statement on Form S-3 (File No. 333-222132). Pursuant to a registration
rights agreement entered into with the Investor on the Closing Date, the Company agreed
to file a registration statement on Form S-3 to register the Note and the Conversion
Shares within twenty-one (21) days of the Closing Date.
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The
Convertible Note bears interest at 10% per annum, with 50% of the total interest due on the principal payable at the closing and
the remaining 50% payable as Amortization Payments. We are required to make amortization payments in cash to the investor for
a period of 26 weeks in 13 equal payments every 2 weeks until the Convertible Note is satisfied in full (each, an “Amortization
Payment”). The Convertible Note is convertible into common stock at $0.75 per share, subject to adjustment, but may only
be converted if an event of default thereunder has occurred and not been cured on a timely basis. The conversion price of the
Convertible Note is subject to adjustment for customary stock splits, stock dividends, combinations or similar events. The Convertible
Note contains standard and customary events of default including, but not limited to, failure to make payments when due under
the Convertible Note, failure to comply with certain covenants contained in the Convertible Note, or bankruptcy or insolvency
of the Company. We may prepay the full outstanding principal and accrued and unpaid interest at any time without penalty.
In
connection with the financing, pursuant to an engagement agreement with Alliance Global Partners (“AGP”), a licensed
broker-dealer with FINRA, we agreed to pay to AGP a cash fee, or placement agent fee, equal to 5% of the aggregate gross proceeds
raised. Such fee was paid at the closing of the offering. In addition, AGP shall receive a cash fee equal to 5% of such cash exercise
price proceeds received by us, payable within 48 hours of our receipt of any cash exercise price proceeds from the exercise of
any warrants sold, provided that no such fee is due and payable hereunder in the event the warrants are not exercised for cash.
AGP is also entitled to receive a warrant to purchase 150,000 shares of common stock with an exercise price of $1.00, which warrant
shall be exercisable for 5-years via cashless exercise until registered and via cash thereafter.
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●
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On
July 2, 2018, we entered into a securities purchase agreement with an institutional investor
providing for the issuance of (i) a senior secured convertible promissory note (the “
Convertible
Note
”) with a principal face amount of $1,000, which Convertible Note is, subject
to certain conditions, convertible into 1,333,333 shares of Class A common stock of the
Company at $0.75 per share and (ii) up to 400,000 shares of Common Stock.
The Company agreed to file a registration statement on Form S-3 to register these securities
within twenty-one July 23, 2018. The Convertible Note bears interest at 10% per annum
and is due on January 1, 2019.
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●
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On
August 16, 2018, we entered into a securities purchase agreement with certain institutional
investors providing for the issuance of (i) secured promissory notes (the “
Notes
”)
in the aggregate principal face amount of $1,212 due February 15, 2019, at an interest
rate of eight percent (8%) per annum for which we received an aggregate of $1,010, and
(ii) an aggregate of 400,000 shares of common stock to be issued by us, subject to approval
of the NYSE American. We agreed that the 400,000 shares shall be registered under the
Securities Act of 1933, as amended, within fourteen (14) days after the date that the
Securities and Exchange Commission shall have declared our presently filed registration
statement on Form S-3 (File No. 333-226301) effective.
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We
expect to continue to incur losses for the foreseeable future and will be required to raise additional capital to continue to
support our working capital requirements. We believe that the MLSE purchase order contract of $50 million and revenue generated
by SC Mining will generate meaningful revenue and corresponding cash in 2018. In addition, 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 the Company’s ability to continue as a going concern.
CRITICAL
ACCOUNTING POLICIES
In
our Annual Report on Form 10-K for the year ended December 31, 2017, 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.