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, 2020 , the Company had cash and cash equivalents of $1,691,289 , an accumulated deficit of $96,564,940 and negative working capital of $20,818,885 .The Company has incurred recurring losses and reported losses for the six months ended June 30, 2020 and 2019, totaling $7,907,081 and $10,769,923 , respectively.In the past, the Company has financed its operations principally through issuances of convertible debt, promissory notes and equity securities.During 2020, the Company continued to successfully obtain additional equity and debt financing and restructured existing debt.The Company expects to continue to incur losses for the foreseeable future and needs to raise additional capital to continue its business development initiatives and to support its working capital requirements.During February 2020 , the Company entered into a Master Exchange Agreement with an entity that has agreed to purchase up to approximately $7.7 million in certain promissory notes previously issued by the Company.Management believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities.
However, if the Company is unable to raise additional capital, which ability could be adversely affected by the outbreak of COVID-19, it may be required to curtail operations and take additional measures to reduce costs, including reducing its workforce and eliminating outside consultants to conserve its cash in amounts sufficient to sustain operations and meet its obligations.These matters raise substantial doubt about the Company’s ability to continue as a going concern.The accompanying financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.F-10 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
Coronavirus disease 2019 and 2020 pandemic
In March 2020 , the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to spread throughout the United States and the world.
The Company is monitoring the outbreak of COVID-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on operations, financial position, cash flows, inventory, supply chains, customer purchasing trends, customer payments, and the industry in general, in addition to the impact on its employees.Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s operations and liquidity is uncertain as of the date of this report.However, the Company’s business has been disrupted and materially adversely affected by the outbreak of COVID-19.The Company is still assessing its business operations and system supports and the impact COVID-19 may have on its results and financial condition, but there can be no assurance that this analysis will enable the Company to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in its sectors in particular.
The Company’s operations are located in Alameda County, CA , Orange County, CA , Fairfield County, CT , the United Kingdom , Israel and members of senior management work in Seattle, WA and New York, NY .The Company has been following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary closures of its offices and having employees work remotely to the extent possible, which has to an extent adversely affected their efficiency.
Updates by business unit are as follows:
· DPW Holdings’ corporate headquarters, located in Newport Beach, CA , continues to work
remotely, based on the occupancy and social distancing order from the Orange County
Health Officer
( http://www.ochealthinfo.com/phs/about/epidasmt/epi/dip/prevention/novel_coronavirus) .
The headquarters staff has tested the secure remote access systems and technology
infrastructure to adjust working arrangements for its employees and believes it has
adequate internal communications system and can remain operational with a remote
staff.
The Company is reviewing the reopening guidance by the Orange County Health
Agency and the State of California along with COVID-19 General Checklist for Office
Workspaces published by the California Department of Public Health .The corporate
headquarters will reopen when the Company can provide a safe workspace for its
employees.
· Coolisys Technologies Corp.
, located in Fremont, CA , had temporarily suspended
operations as a result of the Alameda County Public Health Department’s order
to cease all activities at facilities located within the County.Currently,
manufacturing and logistics personnel operate on site whereas administrative
personnel work remotely.
· Microphase Corporation , located in Shelton, CT , has developed an emergency plan
to ensure that its mission critical manufacturing and logistical functions are
up and running.Microphase has implemented additional steps to ensure a higher
level of cleanliness in its facility.Employees at greater risk of major health
issues from COVID-19, which include key members of its finance department, are
not required to work on site.The crisis management team meets regularly to
monitor the situation, and modifies and communicates the plan as the need
arises.
Once the COVID-19 crisis has passed, the team will work on transitioning Microphase back to normal operations.
· Gresham Power Electronics Limited , located in Salisbury, UK , continues to
follow UK Government and Public Health England COVID-19 safety guidelines,
which includes a combination of working remotely and adhering to social
distancing and health and safety procedures on site.Essential staff are on
site for specific work as required.
· Enertec Systems 2001 Ltd., located in Karmiel, Israel , has been granted a
waiver by the Israeli government to remain open to complete key projects that
impact national security.Approximately 50% of the Enertec workforce is working remotely.F-11 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
3.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).
The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes.The actual results experienced by the Company may differ materially from our estimates.The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented.These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2019 , filed with the Securities and Exchange Commission on June 1, 2020 .The condensed consolidated balance sheet as of December 31, 2019 was derived from the Company’s audited 2019 financial statements contained in the above referenced Form 10-K/A.
Results of the three and six months ended June 30, 2020 , are not necessarily indicative of the results to be expected for the full year ending December 31, 2020 .Principles of Consolidation The consolidated financial statements include the accounts of DPW and its wholly-owned subsidiaries, GWW, Coolisys, Digital Power Corporation (a wholly owned subsidiary of Coolisys), Gresham Power, Enertec, DP Lending and Digital Farms and its majority-owned subsidiaries, Microphase and I.AM.All significant intercompany accounts and transactions have been eliminated in consolidation.Accounting Estimates The preparation of financial statements in conformity with U.S.GAAP requires management to make estimates, judgments and assumptions.
The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made.These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.Key estimates include acquisition accounting, fair value of certain financial instruments, reserve for trade receivables and inventories, carrying amounts of investments, carrying amounts of digital currencies, accruals of certain liabilities including product warranties, useful lives and the recoverability of long-lived assets, impairment analysis of intangibles and goodwill, and deferred income taxes and related valuation allowance.
Impairment of long-lived assets:
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted expected future cash flows expected to be generated by the asset.If such assets are considered to be impaired, the impairment to be recognized is measured by comparing the amount by which the carrying amount of the assets to their fair value.During the six months ended June 30, 2020 , management determined that its operating right-of-use assets attributed to the discontinued operations of I.AM were impaired by $1,020,514 .F-12 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 Revenue Recognition The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers.The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The following five steps are applied to achieve that core principle:
· Step 1: Identify the contract with the customer,
· Step 2: Identify the performance obligations in the contract,
· Step 3: Determine the transaction price,
· Step 4: Allocate the transaction price to the performance obligations in the
contract, and
· Step 5: Recognize revenue when the company satisfies a performance obligation.
The Company’s disaggregated revenues consist of the following for the six months ended June 30, 2020 : Six Months ended June 30, 2020 GWW Coolisys DP Lending Total Primary Geographical Markets North America $ 3,370,374 $ 1,965,465 $ 2,396 $ 5,338,235 Europe 447,603 287,157 – 734,760 Middle East 4,605,482 – – 4,605,482 Other 153,123 174,814 – 327,937 $ 8,576,582 $ 2,427,436 $ 2,396 $ 11,006,414 Major Goods RF/Microwave Filters $ 2,545,967 $ – $ – $ 2,545,967 Detector logarithmic video amplifiers 878,372 – – 878,372 Power Supply Units – 2,427,436 – 2,427,436 Power Supply Systems 546,761 – – 546,761 Healthcare diagnostic systems 523,228 – – 523,228 Defense systems 4,082,254 – – 4,082,254 Lending activities – – 2,396 2,396 $ 8,576,582 $ 2,427,436 $ 2,396 $ 11,006,414 Timing of Revenue Recognition Goods transferred at a point in time $ 3,971,100 $ 2,427,436 $ 2,396 $ 6,400,932 Services transferred over time 4,605,482 – – 4,605,482 $ 8,576,582 $ 2,427,436 $ 2,396 $ 11,006,414 F-13 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 Six Months ended June 30, 2019 GWW Coolisys DP Lending Total Primary Geographical Markets North America $ 1,569,939 $ 2,790,091 $ 374,710 $ 4,734,740 Europe 1,012,761 16,804 – 1,029,565 Middle East 4,488,553 – – 4,488,553 Other 327,799 171,822 – 499,621 $ 7,399,052 $ 2,978,717 $ 374,710 $ 10,752,479 Major Goods RF/Microwave filters $ 989,114 $ – $ – $ 989,114 Detector logarithmic video amplifiers 473,150 – – 473,150 Power supply units 180,475 2,693,797 – 2,874,272 Power supply systems 1,082,442 – – 1,082,442 Healthcare diagnostic systems 1,260,700 – – 1,260,700 Defense systems 3,413,171 – – 3,413,171 Lending activities – – 374,710 374,710 Digital currency mining – 284,920 – 284,920 $ 7,399,052 $ 2,978,717 $ 374,710 $ 10,752,479 Timing of Revenue Recognition Goods transferred at a point in time $ 2,588,280 $ 2,978,717 $ 374,710 $ 5,941,707 Services transferred over time 4,810,772 – – 4,810,772 $ 7,399,052 $ 2,978,717 $ 374,710 $ 10,752,479 Sales of Products The Company generates revenues from the sale of its products through a direct and indirect sales force.
The Company’s performance obligations to deliver products are satisfied at the point in time when products are received by the customer, which is when the customer obtains control over the goods.The Company provides standard assurance warranties, which are not separately priced, that the products function as intended.The Company primarily receives fixed consideration for sales of product.Some of the Company’s contracts with distributors include stock rotation rights after six months for slow moving inventory, which represents variable consideration.The Company uses an expected value method to estimate variable consideration and constrains revenue for estimated stock rotations until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.To date, returns have been insignificant.
The Company’s customers generally pay within 30 days from the receipt of an invoice.Because the Company’s product sales agreements have an expected duration of one year or less, the Company has elected to adopt the practical expedient in ASC 606-10-50-14(a) of not disclosing information about its remaining performance obligations.Manufacturing Services The Company provides manufacturing services in exchange primarily for fixed fees; however, the initial two MLSE units are subject to variable pricing under the $50 million purchase order from MTIX.Under the terms of the MLSE purchase order, the Company is entitled to cost plus $100,000 for the manufacture of the first two MLSE units.
The Company has determined that the costs of manufacturing the MLSE units will decline over time because of a learning curve which will result in a greater amount of revenue being recognized for these initial two MLSE units.F-14 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 For manufacturing services, which include revenues generated by Enertec and in certain instances revenues generated by Gresham Power, the Company’s performance obligation for manufacturing services is satisfied over time as the Company creates or enhances an asset based on criteria that are unique to the customer and that the customer controls as the asset is created or enhanced.Generally, the Company recognizes revenue based upon proportional performance over time using a cost to cost method which measures progress based on the costs incurred to total expected costs in satisfying its performance obligation.
This method provides a depiction of the progress in providing the manufacturing service because there is a direct relationship between the costs incurred by the Company and the transfer of the manufacturing service to the customer.Manufacturing services that are recognized based upon the proportional performance method are included in the above table as services transferred over time and to the extent the customer has not been invoiced for these revenues, as accrued revenue in the accompanying consolidated balance sheets.Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified.The Company has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component to the extent that the period between when the Company transfers its promised good or service to the customer and when the customer pays in one year or less.The aggregate amount of the transaction price allocated to the performance obligation that is partially unsatisfied as of June 30, 2020 , for the MLSE units was approximately $48 million , representing 24 MLSE units.Based on our expectations regarding funding of the production process and our experience building the first machines, the Company expects to recognize the remaining revenue related to the partially unsatisfied performance obligation over an estimated three year period.The Company will be paid in installments for this performance obligation over the estimated period that the remaining revenue is recognized.
Lending Activities
DP Lending generates revenue from lending activities primarily through interest, origination fees and late/other fees.Interest income on these products is calculated based on the contractual interest rate and recorded as interest income as earned.
The origination fees or original issue discounts are recognized over the life of the loan using the effective interest method.
Fair value of Financial Instruments
In accordance with ASC No.820, Fair Value Measurements and Disclosures, fair value is defined as the exit price, or the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs include those that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability.
The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1: Quote: d 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 Quote: d prices for similar assets or liabilities; Quote: d 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 Quote: d prices that were adjusted for security-specific restrictions which are compared to output from internally developed models such as a discounted cash flow model.F-15 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, accounts receivables and accounts and other receivable – related party, investments, notes receivable, trade payables and trade payables – related party approximate their fair value due to the short-term maturities of such instruments.The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.The following table sets forth the Company’s financial instruments (see Note 5 and Note 9) that were measured at fair value on a recurring basis by level within the fair value hierarchy: Fair Value Measurement at June 30, 2020 Total Level 1 Level 2 Level 3 Investments in convertible promissory note of AVLP – a related party $ 6,739,234 $ – $ – $ 6,739,234 Investments in common stock and derivative instruments of AVLP – a related party 1,028,424 169,860 – 858,564 Investment in common stock of Alzamend – a related party 575,925 – – 575,925 Investments in marketable equity securities 596,313 596,313 – – Investments in warrants of public companies 2 – – 2 Total Investments $ 8,939,898 $ 766,173 $ – $ 8,173,725 Fair Value Measurement at December 31, 2019 Total Level 1 Level 2 Level 3 Investments in convertible promissory note of AVLP – a related party $ 6,540,720 $ – $ – $ 6,540,720 Investments in common stock and derivative instruments of AVLP – a related party 1,569,286 238,602 – 1,330,684 Investment in common stock of Alzamend – a related party 558,938 – – 558,938 Investments in marketable equity securities 639,647 639,647 – – Investments in warrants of public companies 9,174 – – 9,174 Total Investments $ 9,317,765 $ 878,249 $ – $ 8,439,516 We assess the inputs used to measure fair value using the three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market.F-16 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 Net Loss per Share Net loss per share is computed by dividing the net loss to common stockholders by the weighted average number of common shares outstanding.
The calculation of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented.The Company has included 6,500 warrants, which are exercisable for shares of the Company’s common stock on a one-for-one basis, in its earnings per share calculation for the six months ended June 30, 2020 and 2019.Anti-dilutive securities, which are convertible into or exercisable for the Company’s common stock, consist of the following at June 30, 2020 and 2019: June 30, 2020 2019 Stock options 950 9,006 Warrants (1) 2,151,953 51,465 Convertible notes 551,104 75,000
Conversion of preferred stock 2,232 2,232 Total
2,706,239 137,703
(1) The Company has excluded 6,500 warrants issued in April 2019 , which may be
exercised by means of a cashless exercise into 6,500 shares of the Company’s
common stock, in its anti-dilutive securities but included the warrants in
its weighted average shares outstanding.Reclassifications Certain prior year amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation.These reclassifications had no effect on previously reported results of operations.In addition, certain prior year amounts from the restated amounts have been reclassified for consistency with the current period presentation.
Recently Issued Accounting Standards
In December 2019 , the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes.
ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.ASU 2019-12 is effective for fiscal years beginning after December 15, 2021 .The Company has not early adopted ASU 2019-12 and is currently evaluating its impact on the Company’s financial position, results of operations, and cash flows.4.Discontinued Operations On March 16, 2020 , to try and mitigate the spread of the novel coronavirus (“COVID-19”), San Diego County health officials issued orders mandating that all restaurants must end dine-in services.
As a result of these temporary closures and the deteriorating business conditions at both the Company’s cryptocurrency mining and restaurant businesses, the Company concluded that discontinuing the operations of Digital Farms and I.AM was ultimately in its best interest.Digital Farms was established to pursue a variety of digital currencies and mined the top three cryptocurrencies for its own account.Although the Company has ceased operations at Digital Farms , since the assets and operations have not yet been abandoned, sold or distributed, these assets do not yet meet the requirement for presentation as discontinued operations.In the first quarter of 2020, management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations.
Accordingly, the results of the restaurant operations are presented as discontinued operations in our condensed consolidated statements of operations and comprehensive loss and are excluded from continuing operations for all periods presented.In addition, the assets and liabilities of the restaurant operations are classified as held for sale in our condensed consolidated balance sheets for all periods presented.F-17 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
The following tables summarize the major classes of assets and liabilities included as part of discontinued operations:
June 30, December 31, 2020 2019 (Unaudited) Current assets Cash and cash equivalents $ – $ 5,170 Accounts receivable – 83,885 Inventories, net – 60,341 Prepaid expenses and other current assets –
131,956
Total current assets classified as held for sale – 281,352 Property and equipment, net – 504,802 Right-of-use assets – 1,098,466 Total assets classified as held for sale $ – $ 1,884,620 Current liabilities Accounts payable and accrued expenses $ 788,314 $ 881,601 Operating lease liability, current 265,920
229,574
Other current liabilities 461,738
482,375
Total current liabilities classified as held for sale 1,515,972
1,593,550
Long term liabilities Operating lease liability, non-current 843,020
951,072
Total liabilities classified as held for sale $ 2,358,992 $ 2,544,622 The restaurant operations are included in our results as discontinued operations through March 16, 2020 , the date of closing of the restaurants.The following tables summarize the major classes of line items included in loss from discontinued operations: For the Three Months Ended For the Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenue $ – $ 1,161,132 $ 543,327 $ 2,334,631 Cost of revenue – (322,008 ) (160,310 ) (614,491 ) Selling and marketing – (43,929 ) – (100,650 ) General and administrative – (1,123,312 ) (555,445 ) (2,052,749 ) Impairment of property and equipment – – (1,525,316 ) – Loss from discontinued operations $ – $ (328,117 ) $ (1,697,744 ) $ (433,259 )
5.Marketable Equity Securities
Marketable securities in equity securities with readily determinable market prices consisted of the following as of June 30, 2020 and December 31, 2019 : Marketable equity securities at June 30, 2020 Gross unrealized Gross realized Cost gains (losses) gains (losses) Fair value Common shares $ 327,378 $ 268,935 $ – $ 596,313 F-18 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 Marketable equity securities at December 31, 2019 Gross unrealized Gross realized Cost gains (losses) gains (losses) Fair value Common shares $ 423,025 $ 216,622 $ – $ 639,647 The following table presents additional information about marketable equity securities: Marketable Equity Securities Balance at January 1, 2020 $ 639,647 Sales of marketable equity securities (110,355 ) Realized gains on marketable equity securities 14,708 Unrealized losses on marketable equity securities 52,313 Balance at June 30, 2020 $ 596,313 At June 30, 2020 and December 31, 2019 , the Company had invested in the marketable equity securities of certain publicly traded companies.
During the three and six months ended June 30, 2020 , unrealized gains of $173,381 and $52,313 , respectively, were included in net income as a component of change in fair value of equity securities.During the year ended December 31, 2019 , the Company recognized unrealized gains of $258,905 .The Company’s investment in marketable equity securities will be revalued on each balance sheet date.The fair value of the Company’s holdings in marketable equity securities at June 30, 2020 and December 31, 2019 is a Level 1 measurement based on Quote: d prices in an active market.At June 30, 2020 and December 31, 2019 , the Company also held equity investments in private companies and an investment in a limited partnership.
These investments do not have readily determinable fair values and have been measured at cost less impairment, if any, and adjusted for observable price changes for identical or similar investments of the issuer.
6.PROPERTY AND EQUIPMENT, NET
At June 30, 2020 and December 31, 2019 , property and equipment consist of:
June 30 , December 31, 2020 2019
Cryptocurrency machines and related equipment $ 567,216 $ 567,216 Computer, software and related equipment
2,595,114
2,518,187
Office furniture and equipment 412,234 441,613 Leasehold improvements 1,186,796 1,230,407 4,761,360 4,757,423
Accumulated depreciation and amortization (3,067,140 ) (2,970,030 ) Property and equipment, net
$ 1,694,220 $ 1,787,393 Under the guidance of ASC 360, Impairment or Disposal of Long-lived Assets, a long-lived asset or asset group (including intangibles) will be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
During the first quarter of 2020, based upon the deteriorating business conditions for restaurants in the San Diego County as result of the spread of COVID-19 and the decline in projected cash flows over the life of the restaurant equipment, the Company performed an undiscounted cash flow test to determine if the restaurant equipment was impaired.The undiscounted cash flows were less than the carrying amount of the Company’s restaurant equipment and therefore, the carrying amount of the assets were compared to the fair value of the restaurant equipment, and the Company determined that there were impairment charges to be recorded on the restaurant equipment.Impairment charges for the three and six months ended June 30, 2020 were in an amount equal to the cost of the Company’s restaurant equipment, net of depreciation of $504,802 , and are included as a component of net loss from discontinued operations (see Note 4).F-19 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 For the three and six months ended June 30, 2020 , depreciation expense amounted to $84,959 and $259,906 , respectively.For the three and six months ended June 30, 2019 , depreciation expense amounted to $1,027,698 and $1,826,721 , respectively.7.INTANGIBLE ASSETS, NET
At June 30, 2020 and December 31, 2019 intangible assets consist of:
June 30, December 31, 2020 2019 Trade name and trademark $ 1,039,307 $ 1,039,307 Customer list 2,402,054 2,406,434 Domain name and other intangible assets 639,957 641,809 4,081,318 4,087,550
Accumulated depreciation and amortization (1,046,873 ) (880,562 ) Intangible assets, net
$ 3,034,445 $ 3,206,988
The Company’s trade names and trademarks were determined to have an indefinite life.The remaining definite lived intangible assets are primarily being amortized on a straight-line basis over their estimated useful lives.
Amortization expense was $83,412 and $166,697 , respectively, for the three and six months ended June 30, 2020 and $137,047 and $299,462 , respectively, for the three and six months ended June 30, 2019 .
8.GOODWILL The Company’s goodwill relates to the acquisition of a controlling interest in Microphase on June 2, 2017 and the acquisition of Enertec Systems 2001 Ltd.(“Enertec”) on May 22, 2018 .The following table summarizes the changes in our goodwill during the six months ended June 30, 2020 : Goodwill Balance as of January 1, 2020 $ 8,100,947 Effect of exchange rate changes (14,224 ) Balance as of June 30, 2020 $ 8,086,723 F-20 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
9.INVESTMENTS – RELATED PARTIES
Investments in AVLP and Alzamend Neuro, Inc.(“Alzamend”) at June 30, 2020 and December 31, 2019 , are comprised of the following:
June 30 , December 31, 2020 2019
Investment in convertible promissory note of AVLP $ 9,802,686 $
9,595,079
Accrued interest in convertible promissory note of AVLP
2,025,475
2,025,475
Total investment in convertible promissory note of AVLP – Gross
11,828,161
11,620,554
Less: provision for loan losses (5,088,927 )
(5,079,834 ) Total investment in convertible promissory note of AVLP
$ 6,739,234 $
6,540,720
Investment in derivative instruments of AVLP 858,564
1,330,684
Investment in common stock of AVLP 169,860
238,602
Investment in common stock of Alzamend 575,925
558,938
Investment in derivative instruments and common stock of AVLP and Alzamend $ 1,604,349 $
2,128,224
Total investment in AVLP and Alzamend – Net $ 8,343,583 $
8,668,944
Investment in warrants and common stock of AVLP and Alzamend $ 1,604,349 $
2,128,224
Investment in convertible promissory note of AVLP 6,739,234
6,540,720
Total investment in AVLP and Alzamend – Net $ 8,343,583 $
8,668,944 F-21 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
The following table summarizes the changes in our investments in AVLP and Alzamend during the six months ended June 30, 2020 :
Investment in warrants and Investment in Total common stock convertible investment of AVLP and promissory in AVLP and Alzamend note of AVLP Alzamend – Net Balance at January 1, 2020 $ 2,128,224 $ 6,540,720 $ 8,668,944 Investment in convertible promissory notes of AVLP – 198,514 198,514 Investment in common stock of AVLP and Alzamend 12,884 – 12,884 Fair value of derivative instruments issued by AVLP 9,093 – 9,093 Unrealized loss in derivative instruments of AVLP (481,213 ) – (481,213 ) Unrealized loss in common stock of AVLP and Alzamend (64,639 ) – (64,639 ) Balance at June 30, 2020 $ 1,604,349 $ 6,739,234 $ 8,343,583 The Company’s investments in AVLP, a related party controlled by Philou Ventures, LLC , or Philou, an affiliate of the Company, consist of convertible promissory notes, derivative instruments and shares of AVLP common stock.
At June 30, 2020 , the Company has provided loans to AVLP in the principal amount $9,802,686 and, in addition to the 12% convertible promissory notes, AVLP has issued to the Company warrants to purchase 19,605,372 shares of AVLP common stock at an exercise price of $0.50 per share for a period of five years.The warrants were determined by the issuer to be derivative financial instruments.
At June 30, 2020 and December 31, 2019 , the Company recorded a cumulative unrealized loss on its investment in warrants of AVLP of $4,845,469 and $4,364,256 , respectively, representing the difference between the cost basis and the estimated fair value of the warrants in the Company’s accumulated other comprehensive income in the stockholder’s equity section of the Company’s consolidated balance sheet.During the three and six months ended June 30, 2019 , the Company recognized, in other comprehensive loss, net unrealized gain (loss) on derivative securities of related party of $760,881 and ( $1,242,094 ), respectively, which compares with a net unrealized gain (loss) on derivative securities of related party of $375,499 and ( $361,181 ), respectively during the three and six months ended June 30, 2019 .The Company’s investment in AVLP will be revalued on each balance sheet date.The fair value of the Company’s holdings in the AVLP warrants was estimated using the Black-Scholes option-pricing method.
The risk-free rate, which ranged between 0.23% and 2.60%, was derived from the U.S.Treasury yield curve, matching the term of our investment, in effect at the measurement date.The volatility factor which ranged between 68.7% and 89.4% was determined based on historical stock prices for similar technology companies with market capitalizations under $100 million .The warrant valuation is a Level 3 measurement.
In accordance with ASC No.310, Receivables (“ASC 310”), the Company had accounted for its convertible promissory notes in AVLP at amortized cost, which represents the amount at which the convertible promissory notes were acquired, adjusted for accrued interest and accretion of original issue discount and discount attributed to the fair value of the warrants that the Company received in conjunction with its investment.Interest was accreted using the effective interest method.The Company recorded interest on an accrual basis and recognized it as earned in accordance with the contractual terms of the convertible promissory notes, to the extent that such amounts are expected to be collected.
During the three and six months ended June 30, 2019 , the Company recorded $657,613 and $1,277,422 , respectively, of interest income for the discount accretion and $253,923 and $464,114 , respectively, of interest income from the contractual 12% rate provided for by the convertible promissory notes.During the six months ended June 30, 2020 , no interest income was recognized from the Company’s investment in AVLP.F-22 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 The Company evaluated the collectability of both interest and principal for the convertible promissory notes in AVLP to determine whether there was an impairment.Based on current information and events, primarily the value of the underlying conversion feature and current economic events, the Company concluded that an impairment existed at December 31, 2019 .
At June 30, 2020 , the Company determined that the fair value of the convertible promissory notes in AVLP was approximately $6,739,234 .The Company’s determination of fair value was based upon the estimated present value of a future liquidity event combined with the closing price of AVLP’s common stock at June 30, 2020 .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, 2020 and year ended December 31, 2019 , the Company also acquired in the open market 5,000 shares of AVLP common stock for $1,274 and 91,000 shares of AVLP common stock for $53,032 , respectively.At June 30, 2020 , the closing market price of AVLP’s common stock was $0.17 , a decline from $0.24 at December 31, 2019 .The Company has determined that its investment in AVLP marketable equity securities should be accounted for in accordance with ASC No.820, Fair Value Measurements and Disclosuresand based upon the closing market price of AVLP common stock at June 30, 2020 , the Company’s investment in AVLP common stock had an unrealized loss of $577,975 .In aggregate, the Company has 999,175 shares of AVLP common stock which represents 18.0% of AVLP’s outstanding shares of common stock.
The Company has determined that AVLP is a variable interest entity (“VIE”) as it does not have sufficient equity at risk.The Company does not consolidate AVLP because the Company is not the primary beneficiary and does not have a controlling financial interest.To be a primary beneficiary, an entity must have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, among other factors.Although the Company has made a significant investment in AVLP, the Company has determined that Philou, which controls AVLP through the voting power conferred by its equity investment and which is deemed to be more closely associated with AVLP, is the primary beneficiary.As a result, AVLP’s financial position and results of operations are not consolidated in our financial position and results of operations.
10.INVESTMENTS IN LIMITED PARTNERSHIP
On June 8, 2018 , the Company entered into a limited partnership agreement, in which it agreed to become a limited partner in the partnership (the ” NY Partnership “).The NY Partnership is a limited partner in the partnership that is responsible for the construction and related activities of a hotel in New York City .In connection with this transaction, the Company has agreed to finance a portion of the capital required by the NY Partnership .
As of June 30, 2020 , the Company had invested an aggregate of $1,869,000 in the NY Partnership and $100,000 in another real estate investment.The Company has no obligation to make any capital contributions until the hotel is open for business to the public.
11.
OTHER INVESTMENTS, RELATED PARTIES
The Company’s other related party investments primarily consist of two investments.
MTIX, Ltd.On December 5, 2017 , the Company entered into an exchange agreement with WT Johnson pursuant to which the Company issued to WT Johnson two convertible promissory notes in the principal amounts of $600,000 (“Note A”) and $1,667,766 (“Note B”), in exchange for cancellation of amounts due to WT Johnson by MTIX Ltd., a related party of the Company.F-23 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 During December 2017 , the Company issued 750 shares of its common stock to WT Johnson & Sons upon the conversion of Note A and WT Johnson subsequently sold the 750 shares.The proceeds from the sale of shares of common stock received upon the conversion of Note A were sufficient to satisfy the entire $2,267,766 obligation as well as an additional $400,500 of value added tax due to WT Johnson.Concurrent with entering into the exchange agreement, the Company received a promissory note in the amount of $2,668,266 from MTIX and cancelled Note B.
At June 30, 2020 and December 31, 2019 , the Company has valued the note receivable at $600,000 , the carrying amount of Note A.The Company will recognize the remainder of the amount due from MTIX upon payment of the promissory note by MTIX.
Israeli Property During the year ended December 31, 2017 , our President, Amos Kohn
, purchased certain real property that serves as a facility for the Company’s business operations in Israel .The Company made $300,000 in payments to the seller of the property and received a 28% undivided interest in the real property (the “Property”).The Company’s indirectly held wholly owned subsidiary, Coolisys Technologies, Inc.(“CTI”), entered into a Trust Agreement and Tenancy in Common Agreement with Roni Kohn
, who owns a 72% interest in the Property, the daughter of Mr.Kohn
and an Israeli citizen.
The Property was purchased to serve as a residence/office facility for the Company in order to oversee its Israeli operations and to expand its business in the high-tech industry located in Israel .Pursuant to the Trust Agreement, Ms.Kohn
will hold and manage CTI’s undivided 28% interest in the Property.The trust will be in effect until it is terminated by mutual agreement of the parties.During the term of the trust, Ms.
Kohn
will not sell, lease, sublease, transfer, grant, encumber, change or effect any other disposition with respect to the Property or CTI’s interest without the Company’s approval.Under the Tenancy in Common Agreement, CTI and its executive officers shall have the exclusive rights to use the Property for the Company and its affiliates’ business operations.The Property shall be managed by Ms.Kohn
.
Further, pursuant to the Tenancy in Common Agreement, for each completed calendar month of employment of Mr.Kohn
by the Company, Ms.Kohn
shall have the right to purchase a portion of the Company’s interest in the Property.Such right shall fully vest at the end of five years of continuous employment and the Trustee shall have the right to purchase the Company’s 28% interest in the Property for a nominal price.The Company will amortize its $300,000 investment over ten years, subject to a cliff vesting after five years.During the three and six months ended June 30, 2020 and 2019, the Company recognized $7,500 and $15,000 , respectively, in amortization expense.At June 30, 2020 and December 31, 2019 , the unamortized balance of the Israeli Property was $217,500 and $232,500 , respectively.If Mr.
Kohn
is not employed by the Company, the Company shall have the right to demand that Ms.Kohn
purchase the Company’s remaining interest in the Property that was not subject to vesting for the fair market value of such unvested Property interest.12.STOCK-BASED COMPENSATION Under the Company’s 2018 Stock Incentive Plan (the “2018 Plan”), 2017 Stock Incentive Plan (the “2017 Plan”), 2016 Stock Incentive Plan (the “2016 Plan”) and the 2012 Stock Option Plan, as amended (the “2012 Plan”) (collectively, the “Plans”), options may be granted to employees, officers, consultants, service providers and directors of the Company.
On July 19, 2019 , the Company’s stockholders approved an amendment to the 2018 Plan which increased the number of shares of the Company’s common stock that may be issued thereunder to a total of 175,000 shares.The Plans, as amended, provide for the issuance of a maximum of 184,216 shares of the Company’s common stock.
Options granted under the Plans have an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant.Typically, options granted generally become fully vested after four years.
Any options that are forfeited or cancelled before expiration become available for future grants.The options expire between 5 and 10 years from the date of grant.Restricted stock awards granted under the Plans are subject to a vesting period determined at the date of grant.As of June 30, 2020 , an aggregate of 53,543 of the Company’s options are still available for future grant.
F-24 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 During the six months ended June 30, 2020 and the year ended December 31, 2019 , the Company did not grant any options under the Plans.Generally, options granted under the Plans become fully vested after four years.During the six months ended June 30, 2020 and 2019, the Company also issued 65,000 and 9,375, respectively, shares of common stock to its consultants and service providers.The grant date fair value of these shares amounted to $73,450 and $253,019 respectively, which was determined from the closing price of the Company’s common stock on the date of issuance.
The Company has valued the options at their date of grant utilizing the Black-Scholes option pricing model.This model is dependent upon several variables such as the options’ term, exercise price, current stock price, risk-free interest rate estimated over the expected term and estimated volatility of our stock over the expected term of the options.The risk-free interest rate used in the calculations is based on the implied yield available on U.S.Treasury issues with an equivalent term approximating the expected life of the options as calculated using the simplified method.The estimated volatility was determined based on the historical volatility of our common stock.The options outstanding as of June 30, 2020 , have been classified by exercise price, as follows: Outstanding Exercisable Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price $480 – $560 919 5.44 $537.96 525 $530.95 $1,208 – $1,352 31 3.13 $1,339.20 31 $1,339.20 $480 – $1,352 950 5.36 $564.32 556 $576.36 On June 30, 2020 and December 31, 2019 , there was no aggregate intrinsic value of stock options that were outstanding and exercisable.The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of such awards as of the period-end date The total stock-based compensation expense related to stock options and stock awards issued pursuant to the Plans to the Company’s employees, consultants and directors, included in reported net loss for the three and six months ended June 30, 2020 and 2019, is comprised as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Stock-based compensation from Plans $ 20,178 $ 162,764 $ 110,691 $ 325,090 Stock-based compensation from issuances outside of Plans – 208,231 32,250 667,193
Total Stock-based compensation $ 20,178 $ 370,995 $ 142,941 $ 992,283
F-25 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
A summary of option activity under the Company’s stock option plans as of June 30, 2020 , and changes during the six months ended are as follows:
Outstanding Options Weighted Weighted Average Shares Average Remaining Aggregate Available Number
Exercise Contractual Intrinsic
for Grant of Shares Price Life (years) Value January 1, 2020 103,105 1,388 $ 636.47 6.33 $ 0 Restricted stock awards (50,000 ) – Forfeited 438 (438 ) $ 793.14 June 30, 2020 53,543 950 $ 564.32 5.36 $ 0 As of June 30, 2020 , there was $167,818 of unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plans.That cost is expected to be recognized over a weighted average period of 2.02 years.
13.
WARRANTS
During the six months ended June 30, 2020 , the Company issued a total of 2,079,435 warrants at an average exercise price of $1.37 per share.
(i) On February 20, 2020 , pursuant to the Master Exchange Agreement, the Company
issued warrants to purchase an aggregate of 270,198 shares of common stock at
an average exercise price equal to $1.43 per share of common stock (see Note
17).
(ii) During the six months ended June 30, 2020 , the Company issued warrants to
purchase an aggregate of 890,103 shares of common stock at an average
exercise price equal to $1.08 per share of common stock in connection with
the issuance of the Esousa 12% short-term promissory notes in the aggregate
principal amount of $875,000 (see Note 17).
(iii) On April 14, 2020 , the Company issued warrants to purchase up to 157,143
shares of common stock at an exercise price equal to $1.17 per share of
common stock in connection with the issuance of a convertible promissory
note in the principal amount of $100,000 (see Note 19).
(iv) On May 28, 2020 , the Company issued warrants to purchase an aggregate
of 400,000 shares of common stock at an exercise price equal to $1.07 per
share of common stock in connection with the issuance of a convertible
promissory note in the principal amount of $200,000 (see Note 19).
(v) On June 26, 2020 , the Company issued warrants to purchase an aggregate
of 361,991 shares of common stock at an exercise price equal to $2.43 per
share of common stock in connection with the issuance of promissory notes in
the aggregate principal face amount of $800,000 (see Note 17).F-26 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
The following table summarizes information about common stock warrants outstanding at June 30, 2020 :
Outstanding Exercisable Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price $ – 6,500 3.75 $ – 6,500 $ – $ 0.88 281,250 4.77 $ 0.88 – $ 0.88 $ 1.07 400,000 4.91 $ 1.07 400,000 $ 1.07 $ 1.14 144,928 4.69 $ 1.14 – $ 1.14 $ 1.16 95,238 4.91 $ 1.16 – $ 1.16 $ 1.17 157,143 4.79 $ 1.17 157,143 $ 1.17 $ 1.19 277,778 4.66 $ 1.19 – $ 1.19 $ 1.21 90,909 4.81 $ 1.21 – $ 1.21 $ 1.43 270,198 4.61 $ 1.43 – $ 1.43 $ 2.43 361,991 1.41 $ 2.43 361,991 $ 2.43 $ 8.00 397 1.34 $ 8.00 397 $ 8.00 $ 8.80 25,000 4.01 $ 8.80 25,000 $ 8.80 $ 12.00 12,500 3.86 $ 12.00 12,500 $ 12.00 $ 19.80 15,555 3.75 $ 19.80 15,555 $ 19.80 $ 440.00 355 2.36 $ 440.00 355 $ 440.00 $ 480.00 94 2.84 $ 480.00 94 $ 480.00 $ 528.00 186 2.34 $ 528.00 186 $ 528.00 $ 560.00 2,657 2.37 $ 560.00 2,657 $ 560.00 $ 600.00 170 1.87 $ 600.00 170 $ 600.00 $ 640.00 200 1.82 $ 640.00 200 $ 640.00 $ 752.00 9,614 2.88 $ 752.00 9,614 $ 752.00 $ 800.00 350 2.44 $ 800.00 350 $ 800.00 $ 880.00 947 1.17 $ 880.00 947 $ 880.00 $ 920.00 2,126 2.74 $ 920.00 2,126 $ 920.00 $ 1,040.00 1,243 2.79 $ 1,040.00 1,243 $ 1,040.00 $ 1,760.00 781 2.56 $ 1,760.00 781 $ 1,760.00 $ 1,800.00 140 2.57 $ 1,800.00 140 $ 1,800.00 $ 2,000.00 203 2.57 $ 2,000.00 203 $ 2,000.00 $ 0.88 – $ 2,000.00 2,158,453 4.16 $ 8.88 998,152 $ 17.85
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, 2020 and 2019:
Six Months Ended June 30, 2020 June 30, 2019 Weighted average risk free interest rate 0.17% – 1.38% 2.18% – 2.28% Weighted average life (in years) 1.42 – 5 5.0 Volatility 86.3% – 103.1% 87.5% Expected dividend yield 0% 0% Weighted average grant-date fair value per share of warrants granted $ 0.78 $ 10.48 F-27 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 14.OTHER CURRENT LIABILITIES Other current liabilities at June 30, 2020 and December 31, 2019 consist of: June 30, December 31, 2020 2019 Accrued payroll and payroll taxes $ 1,818,109 $ 1,237,054 Warrant liability 833,982 9,364 Warranty liability 86,070 80,412 Other accrued expenses 280,183 218,380 $ 3,018,344 $ 1,545,210 15.LEASES We have operating leases for office space and restaurant locations.
Our leases have remaining lease terms of 1 month to 11 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year.
The following table provides a summary of leases by balance sheet category as of June 30, 2020 :
June 30, 2020 Operating right-of-use assets $ 3,930,609 Operating lease liability – current 471,651
Operating lease liability – non-current 3,505,559
The components of lease expenses for the six months ended June 30, 2020 , were as follows: Six Months Ended June 30, 2020 Operating lease cost $ 452,725 Short-term lease cost – Variable lease cost 106,927
The following tables provides a summary of other information related to leases for the six months ended June 30, 2020 :
June 30, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $
540,561
Right-of-use assets obtained in exchange for new operating lease liabilities
$
–
Weighted-average remaining lease term – operating leases 7.8 years Weighted-average discount rate – operating leases 10 % The Company determined that using a discount rate of 10% is reasonable, as this is consistent with the mortgage rates for commercial properties for the time period commensurate with the terms of the leases.
Maturity of lease liabilities under our non-cancellable operating leases as of June 30, 2020 , are as follows:
Payments due by period 2020 (remainder) $ 444,385 2021 787,506 2022 776,229 2023 786,645 2024 755,298 Thereafter 2,233,700 Total lease payments 5,783,763 Less interest (1,806,553 ) Present value of lease liabilities $ 3,977,210 F-28 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
16.ADVANCES ON FUTURE RECEIPTS
The Company has received funding as a result of entering into multiple Agreements for the Purchase and Sale of Future Receipts (the “Agreements on Future Receipts”).The Agreements on Future Receipts have been personally guaranteed by the Company’s Chief Executive Officer and in one instance has also been guaranteed by Philou.During the six months ended June 30, 2020 , the Company made payments of $20,000 on the outstanding balance.The Company is in default on its payment obligations on these Agreements on Future Receipts.17.NOTES PAYABLE Notes Payable at June 30, 2020 and December 31, 2019 , are comprised of the following: June 30, December 31, 2020 2019 Esousa Purchased promissory notes $ 2,828,323 $
2,828,323
June ’20 short-term promissory notes 800,000
–
12% short-term promissory note 585,919
–
Other short-term notes payable 1,537,760
1,050,339
12% May ’20 promissory note 354,781
–
Esousa short-term promissory notes 875,000
–
Notes payable to Wells Fargo 197,362
290,560
Note payable to Dept.
of Economic and Community Development 212,968
229,096
Paycheck Protection Program Loans 1,162,302
–
SBA Economic Injury Disaster Loan 150,000 – Short term bank credit 1,484,193 1,622,337 Total notes payable 10,188,608 6,020,655 Less: Unamortized debt discounts (804,856 ) (29,348 ) Unamortized financing cost – (3,668 ) Total notes payable, net of financing cost $ 9,383,752 $
5,987,639
Less: current portion (9,014,567 ) (5,505,015 ) Notes payable – long-term portion $ 369,185 $ 482,624 Master Exchange Agreement On February 10, 2020 , the Company entered into a master exchange agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa” or the “Creditor”) which acquired $4,163,481 in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously issued by us to Dominion (the “Dominion Short-Term Promissory Note”) and the Canadian Special Opportunity Fund, LP (the “CSOF Short-Term Promissory Note” and with the Dominion Short-Term Promissory Note, the “Esousa Purchased Notes”) in separate transactions.The Creditor also agreed to purchase additional notes up to an additional principal amount, plus accrued but unpaid interest, of $3.5 million (the “Additional Notes” and collectively, with the Esousa Purchased Notes, the “Notes”).Pursuant to the Master Exchange Agreement, the Creditor has the unilateral right to acquire shares of the Company’s common stock (the “Exchange Shares”) in exchange for the Notes.
The first exchange occurred on the date of the Master Exchange Agreement upon which the Creditor may exchange, in whole or in part, the Esousa Purchased Notes for the Exchange Shares (the “Initial Exchange”) and the second exchange (the “Second Exchange” and together with the Initial Exchange, the “Exchange”) shall occur if the Company receives stockholder approval at a special meeting thereof for the Exchange of the Additional Notes for the Company’s common stock, and subsequently, authorization from the NYSE American (together, the “Required Approvals”).F-29 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 The Exchange Agreement provides for two pricing periods, the first of which shall commence after the date on which the Creditor receives the Exchange Shares pursuant to the Initial Exchange and ending on the date that is 90 days after receipt thereof, subject to extension as provided for in the Exchange Agreement, and the second of which shall commence on the date on which the Creditor receives the Exchange Shares pursuant to the Second Exchange and ending on the date that is 90 days after receipt thereof, in either case, unless earlier terminated by the Creditor by written notice.
The number of shares to be issued upon each Exchange will be equal to (x) the principal and accrued but unpaid interest due on the Notes being exchanged multiplied by 1.35, divided by (y) the closing bid price effective on each date of an exchange notice, provided, however, that the Company shall theretofore have obtained the Required Approvals (the “Exchange Price”).The total number of shares of the Company’s common stock to be issued to Creditor in connection with the applicable Exchange shall be adjusted on the Business Day immediately following the Pricing Period based upon the volume weighted average price (“VWAP”) of the Company’s common stock over the applicable Pricing Period (the “VWAP Shares”).VWAP Shares means the number of shares determined by dividing (x) the Exchange Amount of the applicable Exchange, multiplied by 1.1, by (y) the greater of (I) seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable Pricing Period, or (II) $0.30 per share.Pursuant to the Master Exchange Agreement, the Company issued warrants to purchase an aggregate of 1,832,597 shares of common stock at an average exercise price equal to $1.43 per share of common stock.
The warrants shall be exercisable commencing on the date upon which the Company receives the Required Approvals therefor.In connection therewith, the Company has agreed to file a registration statement to register the sale of the shares of common stock underlying the exercise of the warrants by the Creditor pursuant to the Master Exchange Agreement.In the event that the Creditor does not purchase all of the Additional Notes, the Company shall have the option to acquire a portion of the warrants from the Creditor for an aggregate price of $1.00 .Consequently, at June 30, 2020 , since the Creditor had not purchased all of the Additional Notes, the option represented the right to acquire 1,562,399 of the warrants from the Creditor.Therefore, only 270,198 options are deemed outstanding at June 30, 2020 .
The Company computed the fair value of the 270,198 warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded a loss on extinguishment in the amount of $232,177 based on the estimated fair value of the warrants.The fair value of the warrants was estimated using the Black-Scholes option-pricing method.The risk-free rate of 1.38% was derived from the U.S.
Treasury yield curve, matching the term of the warrants, in effect at the measurement dates.The volatility factor of 86.31% was determined based on historical stock prices of similar technology companies.The Company, however, is prohibited from issuing the shares of common stock issuable upon exercise of the warrants unless stockholder approval of such issuance of securities is obtained as required by applicable NYSE American listing rules.On July 8, 2020 , the Company received stockholder approval of such share issuances.
During the six months ended June 30, 2020 , the Company issued to the investor an aggregate of 861,580 shares of the Company’s common stock upon the exchange of interest in the amount of $836,845 .A loss on extinguishment of $222,232 was recognized on the issuances of common stock based on the fair value of the Company’s common stock at the date of the exchanges.
June ’20 short-term promissory notes
On June 26, 2020 , the Company issued to several institutional investors unsecured 12% short-term promissory notes in the aggregate principal amount of $800,000 and seventeen month warrants to purchase an aggregate of 361,991 shares of the Company’s common stock at an exercise price of $2.43 per share of common stock.These notes have a term of three months.
The Warrants are immediately exercisable once the Company obtains approval thereof by the NYSE American.The Warrants may be exercised via cashless exercise at the option of the Investor.These warrants to purchase common stock do not qualify to be treated as equity, and accordingly, shall be recorded as a liability.The Company is required to present these instruments at fair value at each reporting date and any changes in fair values shall be recorded as an adjustment to earnings.F-30 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
12% short-term promissory note
On February 5, 2020 , the Company issued a 12% promissory note in the principal face amount of $585,919 .
The 12% short-term promissory note was issued pursuant to the February 2020 Exchange Agreement (see Note 19) and was due upon issuance.
12% January ’20 short-term promissory note
On January 29, 2020 , the Company issued a 12% promissory note in the principal amount of $235,796 to an accredited investor.The maturity date of the promissory note was February 28, 2020 and included an OID of $28,296 and debt issuance costs of $7,500 , resulting in net proceeds of $200,000 .The Company received cash of $150,000 and cancelled $50,000 of accrued liabilities due the investor.In addition, Mr.
Ault
and MCKEA Holdings, LLC (“MCKEA”) guaranteed the Company’s obligation to repay this note pursuant to a Guaranty.Esousa short-term promissory notes
During the six months ended June 30, 2020 , the Company issued to Esousa 12% short-term promissory notes in the aggregate principal amount of $875,000 and five-year warrants to purchase an aggregate of 890,103 shares of common stock at an average exercise price equal to $1.08 per share of common stock.The Esousa 12% short-term promissory notes have a term of three months.The Company computed the fair value of the warrants using the Black-Scholes option pricing model and, as a result of this calculation, recorded debt discount in the amount of $354,426 based on the estimated fair value of the warrants.During the six months ended June 30, 2020 , non-cash interest expense of $310,957 was recorded from the amortization of debt discounts.The fair value of the warrants was estimated using the Black-Scholes option-pricing method.
The risk-free rates ranged from 0.34% and 1.11% and were derived from the U.S.Treasury yield curve, matching the term of the warrants, in effect at the measurement dates.
The volatility factor was between 86.31% and 94.51% and was determined based on historical stock prices of similar technology companies.
The Company was prohibited from issuing the shares of common stock issuable upon exercise of the warrants until stockholder approval of such issuance of securities was obtained as required by applicable NYSE American listing rules.The Company received stockholder approval of such share issuances on July 8, 2020 .Paycheck Protection Program In March 2020 , U.S.
lawmakers agreed on the passage of a $2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic.On March 27, 2020 , President Trump
signed the bill into law.The main driver of small business stimulus in the CARES Act is contained in the Paycheck Protection Program (PPP).PPP Loans may be used to cover payroll, benefits, and salaries, as well as interest payments, rent, and utilities.
Fees are waived, and collateral and personal guarantees are not required.Payments are deferred for a minimum of six months, up to one year, and there are no prepayment penalties.During April 2020 , the Company received loans under the PPP in the principal amount of $715,101 and the Company’s majority owned subsidiary, Microphase , received loans in the principal amount of $467,333 .The principal of the loan may be forgiven up to the total cost of payroll, mortgage interest payments, rent and utility payments made during the eight-week period after origination.In addition to meeting the size requirement (500 or fewer employees for most companies), the Company was required to demonstrate that its business had been negatively impacted by COVID-19.The Company expects that the entire amount received under the PPP is eligible for loan forgiveness.F-31 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 Economic Injury Disaster Loan On May 27, 2020 , the Company received an Economic Injury Disaster Loan in the principal amount of $150,000 with an annual interest rate of 3.75%.The Company shall begin making principal and interest payments of $731 every month beginning on May 27, 2021 .
All remaining principal and interest is due and payable thirty years from the date of the note.18.NOTES PAYABLE – RELATED PARTIES
Notes Payable – Related parties at June 30, 2020 and December 31, 2019 , are comprised of the following: June 30, December 31, 2020 2019 Notes payable, related parties $ 283,507 $
284,317
Less: current portion (193,222 )
(169,153 ) Notes payable, related parties – long-term portion $ 90,285 $ 115,164
Microphase is a party to several notes payable agreements with seven of its past officers, employees and their family members.As of June 30, 2020 , the aggregate outstanding balance pursuant to these notes payable agreements, inclusive of $39,982 of accrued interest, was $323,489 , with annual interest rates ranging between 3.00% and 6.00%.19.CONVERTIBLE NOTES Convertible Notes Payable at June 30, 2020 and December 31, 2019 , are comprised of the following: June 30, December 31, 2020 2019 8% Convertible promissory note $ – $
935,772
12% Convertible promissory note –
815,218
4% Convertible promissory note 660,000
660,000
12% July 2019 convertible promissory note 632,000
632,000
12% November 2019 convertible promissory note –
350,000
May 2020 convertible promissory note 200,000
–
April 2020 convertible promissory note 100,000
–
Total convertible notes payable 1,592,000
3,392,990
Less:
Unamortized debt discounts (505,145 ) (355,227 ) Total convertible notes payable, net of financing cost $ 1,086,855 $
3,037,763
Less: current portion (741,550 ) (2,732,990 ) Convertible notes payable, net of financing cost – long-term portion $ 345,305 $ 304,773
8% Convertible Promissory Note
On November 15, 2019 , the Company entered into an exchange agreement with a lender pursuant to which the Company issued to the lender a convertible promissory note in the principal amount of $935,772 with an interest rate of 8% per annum.
The 8% convertible promissory note is convertible into shares of the Company’s common stock at conversion price of $1.80 .
During the six months ended June 30, 2020 , the Company issued 529,425 shares of common stock upon the conversion of principal and interest of $952,965 .Since the proceeds received by the investor from the sales of common stock were less than the amount of principal and accrued interest, the investor was due a true up payment in the amount of $210,049 , which was recognized as additional interest expense.F-32 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
12% Convertible Promissory Note
On February 5, 2020 the Company entered into an exchange agreement (the ” February 2020 Exchange Agreement”) with an institutional investor pursuant to which the Company issued to the investor a 12% convertible promissory note in the principal amount of $295,000 with a conversion price of $1.45 per share of common stock and a 12% promissory note in the principal amount of $585,919 (see Note 17).These two notes were issued upon the exchange of the 12% Convertible Note, in the principal amount of $815,218 , issued on September 26, 2019 .On February 25, 2020 , the Company issued to the investor 203,448 shares of the Company’s common stock upon the conversion of principal of $295,000 .Since the exchange provided the institutional investor with a substantive conversion feature, the debt instruments were determined to be substantially different and a loss on extinguishment of $20,345 was recognized.
April 2020 Convertible Promissory Note
On April 13, 2020 , the Company issued a convertible promissory note in the principal amount of $100,000 with an interest rate of 10% per annum and a five-year warrant to purchase shares of the Company’s common stock equal to 50% of the number of shares of common stock issuable pursuant to the convertible promissory note, at an exercise price equal to $1.17 per share of common stock.
The number of shares to be issued upon conversion of the note shall be equal to (x) the principal and accrued but unpaid interest due on the note being exchanged multiplied by 1.35, divided by (y) the closing bid price effective on date of conversion, provided, however, that the Company shall theretofore have obtained the approval of the issuance of the shares of common stock by the NYSE American.The total number of shares of the Company’s common stock to be issued to creditor in connection with the conversion of the note shall be adjusted based upon the VWAP of the Company’s common stock over the applicable pricing period.The amount of the adjustment shall be determined by dividing (x) the aggregate amount of principal and interest converted multiplied by 1.1, by (y) the greater of (I) seventy-five percent (75.0%) of the VWAP of the Company’s common stock over the applicable pricing period, or (II) $0.35 per share.
May 2020 Convertible Promissory Note
On May 28, 2020 , the Company entered into a securities purchase and exchange agreement with an institutional investor.Pursuant to the agreement, the Company exchanged the 12% January ’20 short-term promissory note in the principal amount of $235,796 for a new note due and payable on June 30, 2020 (the “Exchanged Note”) that would become convertible into common stock of the Company should the Company be in default under the terms of the Exchanged Note.In addition, pursuant to the agreement, the Company issued to the investor a note due and payable on November 28, 2020 in the principal amount of $200,000 that becomes convertible into the Company’s common stock commencing June 30, 2020 (the “Convertible Note” and with the Exchanged Note, the “Notes”) with an original issue discount of twenty percent (20%).In conjunction with the issuance of the Convertible Note, the Company also issued to the investor a warrant to purchase an aggregate of 400,000 shares of Common Stock at an exercise price of $1.07 .The conversion of the Notes and the exercise of the warrant is subject to approval of the NYSE American.
20.
CONVERTIBLE NOTE PAYABLE – RELATED PARTY
On February 5, 2020 , the Company issued an 8% convertible promissory note in the principal amount of $1,000,000 to Ault & Company (the ” Ault & Company Convertible Note”).The principal amount of this note, plus any accrued and unpaid interest at a rate of 8% per annum, shall be due and payable on August 5, 2020 .
The Ault & Company Convertible Note shall be convertible into shares of the Company’s common stock at a conversion price of $1.45 per share, subject to the approval of the Company’s stockholders at a special meeting thereof, and subsequently, authorization from the NYSE American.F-33 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020 At the time of issuance of the Ault & Company Convertible Note, the closing price of the Company’s common stock was in excess of the conversion price, resulting in a beneficial conversion feature (“BCF”).
The BCF embedded in the Ault & Company Convertible Note is accounted for under ASC No.470, Debt (“ASC 470”).At issuance, the intrinsic value of the BCF totaled $68,966 , based on the difference between the effective conversion price and the fair value of the Company’s common stock at the commitment date of the transaction.
The Company was prohibited from issuing the shares of common stock issuable pursuant to the Ault & Company Convertible Note unless stockholder approval of such issuance of securities was obtained as required by applicable NYSE American listing rules.
The Company received stockholder approval subsequent to June 30, 2020 .This provision resulted in a contingent BCF that shall be recognized during the quarter ended September 30, 2020 .
21.COMMITMENTS AND CONTINGENCIES
Derivative Action On July 31, 2018 , Ethan Young
and Greg Young
(collectively, “Plaintiffs”) filed a stockholder derivative complaint (the “Complaint”) in the United States District Court for the Central District of California (the “Court”) against the Company as the nominal defendant, as well as its current directors and a former director, in action captioned, Ethan Young
and Greg Young
, Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc.v.Milton C.Ault
, III, Amos Kohn
, William B.
Horne
, Jeff Bentz
, Mordechai Rosenberg
, Robert O.Smith
, and Kristine Ault
and DPW Holdings, Inc., as the nominal defendant, (collectively, “Defendants”) Case No.18-cv-6587 (the “Derivative Action”).The Complaint alleged violations of state law and breaches of fiduciary duty, unjust enrichment and gross mismanagement by the individual defendants, in connection with various transactions entered into by the Company.
The Defendants moved to dismiss the Complaint, and on February 25, 2019 , the Court granted Defendants motion to dismiss, in its entirety, without prejudice, and also granted Plaintiffs leave to amend their Complaint.
On March 11, 2019 , Plaintiffs filed an amended complaint asserting violations of breaches of fiduciary duties and unjust enrichment claims based on the previously pled transactions (the “Amended Complaint”).
On March 25, 2019 , Defendants filed a motion to dismiss (the “Motion”) the Amended Complaint.On May 21, 2019 , the Court granted in part, and denied in part, the Defendants’ Motion.On February 24, 2020 , the Company entered into a definitive settlement agreement (the “Settlement Agreement”) with Plaintiffs to settle the claims asserted in the Amended Complaint.
On April 15, 2020 , the Court issued an Order (the “Order”) approving a Motion for Preliminary Approval of Settlement in the Derivative Action.On July 16, 2020 , the Court issued an Order (the “Final Order”) approving a Motion for Final Approval of Settlement in the Derivative Action filed against DPW as a Nominal Defendant and its directors who served on its board of directors on July 31, 2018 who were not dismissed from the action as a result of the Court’s partial grant of the Motion.
On July 16, 2020 , the Court entered a Judgment based upon the Final Order
Under the terms of the Final Order, the Board shall adopt and/or maintain certain resolutions and amendments to the Company’s committee charters and/or bylaws, to ensure adherence to certain corporate governance policies (collectively, the “Reforms”).The Final Order further provides that such Reforms shall remain in effect for a period of no less than five (5) years and shall be subject to any of the following: (a) a determination by a majority of the independent directors that the Reforms are no longer in the best interest of the Company, including, but not limited to, due to circumstances making the Reforms no longer applicable, feasible, or available on commercially reasonable terms, or (b) modifications which the Company reasonably believes are required by applicable law or regulation.In connection with the Settlement Agreement, the parties have agreed upon a payment of attorneys’ fees in the amount of $600,000 , which sum shall be payable by our Director & Officer liability insurance.The Settlement Agreement contains no admission of wrongdoing.F-34 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
We have always maintained and continue to believe that neither we nor our current or former directors engaged in any wrongdoing or otherwise committed any violation of federal or state securities laws or any other laws or regulations.
Blockchain Mining Supply and Services, Ltd.
On November 28, 2018 , Blockchain Mining Supply and Services, Ltd.(“Blockchain Mining”) a vendor who sold computers to our subsidiary, filed a Complaint (the “Complaint”) in the United States District Court for the Southern District of New York against us and our subsidiary, Digital Farms, Inc.
(f/k/a Super Crypto Mining, Inc.), in an action captioned Blockchain Mining Supply and Services, Ltd.v.Super Crypto Mining, Inc.and DPW Holdings, Inc., Case No.
18-cv-11099.
The Complaint asserts claims for breach of contract and promissory estoppel against the us and our subsidiary arising from the subsidiary’s alleged failure to honor its obligations under the purchase agreement.The Complaint seeks monetary damages in excess of $1,388,495 , plus attorneys’ fees and costs.
We believe that these claims are without merit and intend to vigorously defend them.
On April 13, 2020 , we and our subsidiary, jointly filed a motion to dismiss the Complaint in its entirety as against us, and the promissory estoppel claim as against our subsidiary.On the same day, our subsidiary also filed a partial Answer to the Complaint in connection with the breach of contract claim.
On April 29, 2020 , Blockchain Mining filed an amended complaint (the “Amended Complaint”).The Amended Complaint asserts the same causes of action and seeks the same damages as the initial Complaint.On May 13, 2020 , we and our subsidiary, jointly filed a motion to dismiss the Amended Complaint in its entirety as against us, and the promissory estoppel claim as against of our subsidiary.On the same day, our subsidiary also filed a partial Answer to the Amended Complaint in connection with the breach of contract claim.Based on our assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably estimate the potential loss or range of loss that may result from this action.Notwithstanding, we have established a reserve in the amount of the unpaid portion of the purchase agreement.An unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.
Ding Gu
(a/k/a Frank Gu
) and Xiaodan Wang Litigation On January 17, 2020 , Ding Gu
(a/k/a Frank Gu
) (“Gu”) and Xiaodan Wang
(“Wang” and with “Gu” collectively, “Plaintiffs”), filed a Complaint (the “Complaint”) in the Supreme Court of the State of New York , County of New York against us and our Chief Executive Officer, Milton C.
Ault
, III, in an action captioned Ding Gu
(a/k/a Frank Gu
) and Xiaodan Wang
v.DPW Holdings, Inc.and Milton C.
Ault III (a/k/a Milton Todd Ault III a/k/a Todd Ault
), Index No.650438/2020.The Complaint asserts causes of action for declaratory judgment, specific performance, breach of contract, conversion, attorneys’ fees, permanent injunction, enforcement of Guaranty, unjust enrichment, money had and received, and fraud arising from: (i) a series of transactions entered into between Gu and us, as well as Gu and Ault, in or about May 2019 ; and (ii) a term sheet entered into between Plaintiffs and DPW, in or about July 2019 .The Complaint seeks, among other things, monetary damages in excess of $1,100,000 , plus a decree of specific performance directing DPW to deliver unrestricted shares of DPW’s common stock to Gu, plus attorneys’ fees and costs.We believe that these claims are without merit and intend to vigorously defend them.
On May 4, 2020 , we and Ault jointly filed a motion to dismiss the Complaint in its entirety, with prejudice.
F-35 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
On July 24, 2020 , Plaintiffs filed their opposition papers to our joint motion to dismiss.
The return date for the motion to dismiss is presently set for August 25, 2020 .
Based on our assessment of the facts underlying the above claims, the uncertainty of litigation, and the preliminary stage of the case, we cannot reasonably estimate the potential loss or range of loss that may result from this action.
An unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations.Subpoena The Company received a subpoena from the SEC for the voluntary production of documents.The Company is fully cooperating with this non-public, fact-finding inquiry and Management believe that the Company has operated its business in compliance with all applicable laws.The subpoena expressly provides that the inquiry is not to be construed as an indication by the Commission or its staff that any violations of the federal securities laws have occurred, nor should it be considered a reflection upon any person, entity or security.
However, there can be no assurance as to the outcome of this matter.
Other Litigation Matters
Several non-trade creditors of the Company commenced litigation against the Company for payment of approximately $4.2 million of debt obligations not paid according to contractual terms.The Company has since repaid approximately $3.6 million of such debt obligations and entered into settlement agreements for the remaining amount of approximately $600,000 which are included within future receipts obligations in the accompanying consolidated balance sheet at June 30, 2020 .
The Company also recorded approximately $400,000 of trade liabilities for a judgment settled in favor of a trade creditor as of June 30, 2020 and is currently a defendant in several other claims made by trade creditors in which the maximum loss exposure is currently estimated to be approximately $800,000 .
The outcome of any matters relating to unresolved trade credit obligations cannot be predicted at this time.
The Company is involved in litigation arising from other matters in the ordinary course of business.We are regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving labor and employment, commercial disputes, and other matters.
Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil penalties, or other adverse consequences.Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts.
We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated.If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss.
We evaluate developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments as appropriate.Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.With respect to our other outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.F-36 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 22.STOCKHOLDERS’ EQUITY Preferred Stock The Company is authorized to issue 25,000,000 shares of Preferred Stock $0.001 par value.
The Board has designated 1,000,000 shares as Series A Convertible Preferred Stock (the “Series A Preferred Stock”), 500,000 shares as Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and 2,500 shares as Series C Convertible Redeemable Preferred Stock (the “Series C Preferred Stock”).The rights, preferences, privileges and restrictions on the remaining authorized 23,497,500 shares of Preferred Stock have not been determined.The Board is authorized to designate a new series of preferred shares and determine the number of shares, as well as the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred shares.As of June 30, 2020 , there were 7,040 shares of Series A Preferred Stock, 125,000 shares of Series B Preferred Stock and no other shares of Preferred Stock issued or outstanding.Common Stock Common stock confers upon the holders the rights to receive notice to participate and vote at any meeting of stockholders of the Company, to receive dividends, if and when declared, and to participate in a distribution of surplus of assets upon liquidation of the Company.The Class B common stock carries the voting power of 10 shares of Class A common stock.
2020 Issuances
Issuances of Common Stock for Services
During March 2020 , the Company issued 65,000 shares of its common stock as payment for services to its consultants.The shares were valued at $73,450 , an average of $1.13 per share.
Issuance of common stock in payment of short term advances, related party
On December 23, 2019 , the Company entered into a securities purchase agreement with Ault & Company .Pursuant to the terms of this agreement, Ault & Company agreed to purchase an aggregate of 660,667 shares of the Company’s common stock for a total purchase price of $739,948 at a purchase price per share of $1.12 , subject to the approval of the NYSE American.The sale was authorized by the NYSE American on January 15, 2020 .As a result, at the closing on January 15, 2020 , Ault & Company became the beneficial owner of 666,945 shares of Common Stock.
Issuance of common stock in payment of accrued liability
On March 4, 2020 , pursuant to the terms of the securities purchase agreement for the sale of the Dominion short-term promissory note, the Company issued to Dominion 12,500 shares of its common stock (see Note 17).
During the quarter ended June 30, 2020 , the Company issued 140,624 shares of its common stock in satisfaction of accrued liabilities of $155,547 .
Issuance of common stock for conversion of debt
During the six months ended June 30, 2020 , principal and accrued interest of $1,580,772 and $885,622 , respectively, on the Company’s debt securities was satisfied through the issuance of 1,914,936 shares of the Company’s common stock.The Company recognized a loss on extinguishment of $222,232 as a result of these issuances.
F-37 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
23.RELATED PARTY TRANSACTIONS
a.The Company and AVLP entered into a Loan and Security Agreement (“AVLP Loan
Agreement”) with an effective date of August 21, 2017 , pursuant to which the
Company will provide AVLP a non-revolving credit facility of up to $10,000,000
for a period ending on August 21, 2021 , subject to the terms and conditions
stated in the Loan Agreement, including that the Company having available
funds to grant such credit.At June 30, 2020 , the Company has provided loans
to AVLP in the principal amount $9,802,686 and, in addition to the 12%
convertible promissory notes, AVLP has issued to the Company warrants to
purchase 19,605,372 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, 2020 , the Company recorded contractual interest receivable
attributed to the AVLP Loan Agreement of $2,025,475 and a provision for loan
losses of $5,088,927 .
During the six months ended June 30, 2020 and the year ended December 31, 2019 , the Company also acquired in the open market 5,000 shares of AVLP common stock for $1,274 and 91,000 shares of AVLP common stock for $53,032 , respectively.At June 30, 2020 , the Company’s investment in AVLP common stock had an unrealized loss of $577,975 .Philou is AVLP’s controlling shareholder.Mr.
Ault
is Chairman of AVLP’s Board of Directors and the Chairman of the Board.Mr.William B.Horne
is the Chief Financial Officer and a director of AVLP and the Company.In March 2017 , the Company was awarded a $50 million purchase order by MTIX to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”) plasma-laser systems.On April 12, 2019 , the Company received payment of $2,676,219 for manufacturing services performed during the year ended December 31, 2018 on the first MLSE system.At June 30, 2020 , the Company had recorded a receivable from MTIX of $1,238,856 .b.
During the six months ended June 30, 2020 , the Company recognized an
unrealized gain of $5,377 resulting from its investment in Alzamend common
stock.
c.During the six months ended June 30, 2020 , Ault & Company, Inc.(“Ault &
Company”) has provided $505,829 in short-term advances, net of repayments.
Ault and Company is the Manager of Philou which presently owns 125,000 shares
of the Company’s Series B Preferred Stock.Mr.
Ault
and Mr.Horne
serve as the Chief Executive Officer and Chief Financial Officer, respectively, of Ault &
Company.
d.On December 22, 2019 , the Company entered into a securities purchase agreement
with Ault & Company .
Pursuant to the terms of the agreement, Ault & Company
purchased an aggregate of 660,667 shares of the Company’s common stock for a
total purchase price of $739,948 , at a purchase price per share of $1.12 ,
subject to the approval of the NYSE American.The NYSE American approved the
purchase on January 15, 2020 .
e.On February 5, 2020 , the Company issued an 8% convertible promissory note in
the principal amount of $1,000,000 and a maturity date of August 5, 2020 to
Ault & Company (see Note 20).
f.Ault & Company guaranteed the prompt and complete payment and performance of
the Dominion Short-Term Promissory Note, which was purchased by Esousa, with a
principal face amount of $2,900,000 .
g.Milton C.
Ault
, III, the Company’s Chairman and Chief Executive Officer and MCKEA guaranteed the Company’s obligation to repay the 12% January ’20
short-term promissory note in the principal amount of $235,796 .MCKEA is the
majority member of Philou and Kristine L.Ault
, a former director and the wife of Mr.Ault III
, is the manager and owner of MCKEA.F-38 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
24.
SEGMENT, CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has three reportable segments; see Note 1 for a brief description of the Company’s business.
The following data presents the revenues, expenditures and other operating data of the Company’s operating segments and presented in accordance with ASC No.
280.Three Months ended June 30, 2020 GWW Coolisys DP Lending Total Revenue $ 4,189,135 $ 1,245,601 $ – $ 5,434,736 Revenue, lending activities – – ( $ 33,756 ) (33,756 ) Total revenues $ 4,189,135 $ 1,245,601 $ (33,756 ) $ 5,400,980 Depreciation and amortization expense $ 157,742 $ 10,629 $ – $ 168,371 Loss from operations $ 88,255 $ 64,491 $ (45,703 ) $ 108,994 Capital expenditures for segment assets, as of June 30, 2020 $ 25,611 $ 887 $ 7 638 $ 34,136 Identifiable assets as of June 30, 2020 $ 21,386,419 $ 17,543,671 $ 1,564,065 $ 40,494,155 Three Months ended June 30, 2019 GWW Coolisys DP Lending Total Revenue $ 3,256,394 $ 1,284,804 $ – $ 4,541,198 Revenue, cryptocurrency mining – 256,116 – 256,116 Revenue, lending activities – – 189,621 189,621 Total revenues $ 3,256,394 $ 1,540,920 $ 189,621 $ 4,986,935 Depreciation and amortization expense $ 187,604 $ 746,267 $ – $ 933,871 Loss from operations $ (235,178 ) $ (1,035,212 ) $ (34,005 ) $ (1,304,395 ) Capital expenditures for segment assets, as of June 30, 2019 $ 77,229 $ 6,771 $ – $ 84,000 Identifiable assets as of June 30, 2019 $ 19,440,320 $ 28,079,982 $ 2,983,046 $ 50,503,348 Six Months ended June 30, 2020 GWW Coolisys DP Lending Total Revenue $ 8,576,582 $ 2,427,436 $ – $ 11,004,018 Revenue, lending activities – – $ 2,396 2,396 Total revenues $ 8,576,582 $ 2,427,436 $ 2,396 $ 11,006,414 Depreciation and amortization expense $ 307,756 $ 118,847 $ – $ 426,603 Loss from operations $ 184,011 $ (154,053 ) $ (81,416 ) $ (51,458 ) Capital expenditures for segment assets, as of June 30, 2020 $ 164,283 $ 1,556 $ 24,278 $ 190,117 Identifiable assets as of June 30, 2020 $ 21,386,419 $ 17,543,671 $ 1,564,065 $ 40,494,155 F-39 DPW HOLDINGS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued) JUNE 30, 2020 Six Months ended June 30, 2019 GWW Coolisys DP Lending Total Revenue $ 7,399,052 $ 2,693,797 $ – $ 10,092,849 Revenue, cryptocurrency mining – 284,920 – 284,920 Revenue, lending activities – – 374,710 374,710 Total revenues $ 7,399,052 $ 2,978,717 $ 374,710 $ 10,752,479 Depreciation and amortization expense $ 402,385 $ 1,492,924 $ – $ 1,895,309 Loss from operations $ (518,084 ) $ (2,138,213 ) $ 41,290 $ (2,615,007 ) Capital expenditures for segment assets, as of June 30, 2019 $ 77,229 $ 16,377 $ – $ 93,606 Identifiable assets as of June 30, 2019 $ 19,440,320 $ 28,079,982 $ 2,983,046 $ 50,503,348 Concentration Risk: The following tables provide the percentage of total revenues for the three and six months ended June 30, 2020 and 2019 attributable to a single customer from which 10% or more of total revenues are derived.
For the Three Months Ended For the Six Months Ended June 30, 2020 June 30, 2020 Total Total Revenues Percentage of Revenues Percentage of by Major Total Company by Major Total Company Customers Revenues Customers Revenues Customer A $ 1,427,134 26% $ 3,281,429 30% For the Three Months Ended For the Six Months Ended June 30, 2019 June 30, 2019 Total Total Revenues Percentage of Revenues Percentage of by Major Total Company by Major Total Company Customers Revenues Customers Revenues Customer A $ 1,429,455 29% $ 2,845,541 26%
Revenue from Customer A is attributable to Enertec.Further, at June 30, 2020 , MTIX represented all the Company’s accounts and other receivable, related party.
25.SUBSEQUENT EVENTS In accordance with FASB ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2020 , and thru the date of this report being issued and has determined that it does not have any material subsequent events to disclose in these financial statements except for the following.
Esousa short-term promissory notes
F-40 DPW HOLDINGS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited (Continued)
JUNE 30, 2020
On July 24, 2020 , the Company issued to Esousa a 12% short-term promissory note in the aggregate principal amount of $1,125,000 .The note has a term of two weeks.
August ’20 short-term promissory notes
On August 5, 2020 , the Company issued to Esousa a secured 13% short-term promissory note in the aggregate principal amount of $2,000,000 and eighteen month warrants to purchase an aggregate of 729,927 shares of the Company’s common stock at an exercise price of $3.01 per share of common stock.These notes have a term of three months.The Warrants are immediately exercisable once the Company obtains approval thereof by the NYSE American.
The Warrants m.
