UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
____________________________________________________________
 
FORM 8-K
 
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
__________________________________________________________________
 
Date of Report (Date of earliest event reported): November 7, 2017
 
Digital Power Corporation
(Exact Name of Registrant as Specified in Charter)
 
California
001-12711
94-1721931
(State or other jurisdiction
of incorporation)
(Commission File Number)
(IRS Employer
Identification No.)
 
 
 
48430 Lakeview Blvd, Fremont, CA
 
94538-3158
 
(Address of principal executive offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: (510) 657-2635
 
 
(Former name or former address, if changed since last report)
 

          Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 

 

 
ITEM 4.02
NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW

(b) On October 10, 2017, the Company’s current independent registered public accounting firm, Marcum LLP (“Marcum”), informed the Company of certain matters that it had identified relating to the Company’s Form 10-Q for the quarterly period ended June 30, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on August 21, 2017. The matters identified by Marcum included the Company’s accounting treatment of a related party transaction in an investment in real property and certain omitted disclosures in the subsequent event footnote in the Company’s Notes to Interim Condensed Consolidated Financial Statements (Unaudited). Upon Marcum’s notification, the Company’s Audit Committee conducted an independent review and subsequently determined that the Company had misclassified its investment in real property as a current asset and omitted certain subsequent event disclosures. However, the Company’s Total Assets, Total Liabilities, Total Equity and the Condensed Consolidated Statements of Operations and Comprehensive Loss for any period was not affected by the misclassification. On November 7, 2014, the Company, after consultation with Marcum and the Company’s Audit Committee (the “Audit Committee”), concluded that the previously issued unaudited quarterly financial statements as of and for the fiscal quarter ended June 30, 2017, as presented in the Company’s Quarterly Report on Form 10-Q filed with the SEC for the same period (the “June 30, 2017 10-Q”), should no longer be relied upon.  The Company is filing, contemporaneously with this Report, an amendment to the June 30, 2017 10-Q on Form 10-Q/A (the “Amendment”) restating its financial statements for this period.

The following discussion describes the Footnote and adjustments made in the Amendment (U.S. dollars in thousands, except per share date):

“Note 14 Related Party Transaction” in the June 30, 2017 10-Q the following additional disclosure will be added.

j.
During the three months ended June 30, 2017, our Chief Executive Officer Amos Kohn purchased certain real property that will serve as a facility for the Company’s business operations in Israel. The Company made $300,000 of payments to the seller of the property that will be applied to either (i) an ownership interest, that would be transferred to the Company upon the approval of certain governmental authorities that authorize foreign ownership of real property in Israel or (ii) a leasing arrangement providing for the Company’s use of the property should such authorization not be obtained. The payments are classified as Other investments, related party in the accompanying condensed consolidated balance sheet at June 30, 2017.
 

 
As a result, the Condensed Consolidated Balance Sheets amounts of “Prepaid expense and other current assets” and “Other investments” will be adjusted pursuant to the schedule below:

   
June 30, 2017
 
   
As Reported
   
Adjustment
   
As Restated
 
                   
ASSETS
                 
                   
CURRENT ASSETS
                 
                   
Cash and cash equivalents
 
$
443
   
$
-
   
$
443
 
Accounts receivable, net
   
1,253
             
1,253
 
Inventories, net
   
1,609
             
1,609
 
Prepaid expenses and other current assets
   
659
     
(300
)
   
359
 
TOTAL CURRENT ASSETS
   
3,964
     
(300
)
   
3,664
 
                         
Restricted cash
   
100
             
100
 
Intangible assets
   
93
             
93
 
Goodwill
   
6,002
             
6,002
 
Property and equipment, net
   
623
             
623
 
Investments - related parties, net of original issue discount of $103
   
2,582
             
2,582
 
Other investments
   
398
     
300
     
698
 
Deposits and loans
   
219
             
219
 
TOTAL ASSETS
 
$
13,981
   
$
-
   
$
13,981
 
 

 
Further, the reclassification will also result in a corresponding decrease in net cash used in operating activities and an increase in net cash used in investing activities, as reflected in the Companys Condensed Consolidated Statements of Cash Flows, as follows:

   
June 30, 2017
 
   
As Reported
   
Adjustment
   
As Restated
 
                   
Cash flows from operating activities:
                 
Net loss
 
$
(2,845
)
 
$
-
   
$
(2,845
)
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation
   
78
             
78
 
Amortization
   
2
             
2
 
Interest expense – debt discount
   
587
             
587
 
Accretion of original issue discount on notes receivable – related party
   
(19
)
           
(19
)
Interest expense on conversion of demand notes to common stock
   
13
             
13
 
Stock-based compensation
   
752
             
752
 
Changes in operating assets and liabilities:
                       
Accounts receivable
   
651
             
651
 
Inventories
   
216
             
216
 
Prepaid expenses and other current assets
   
(228
)
   
300
     
72
 
Other assets
   
(82
)
           
(82
)
Accounts payable and accrued expenses
   
(91
)
           
(91
)
Accounts payable, related parties
   
100
             
100
 
Other current liabilities
   
(307
)
           
(307
)
                         
Net cash (used in) provided by operating activities
   
(1,173
)
   
300
     
(873
)
                         
Cash flows from investing activities:
                       
Purchase of property and equipment
   
(21
)
           
(21
)
Investments – related party
   
(1,527
)
           
(1,527
)
Investment in real property
   
-
     
(300
)
   
(300
)
Investments – others
   
(95
)
           
(95
)
Loan to third party
   
(489
)
           
(489
)
                         
Net cash used in investing activities
   
(2,132
)
   
(300
)
   
(2,432
)
                         
Cash flows from financing activities:
                       
Gross proceeds from sales of common stock and warrants
   
300
             
300
 
Proceeds from issuance of preferred stock
   
1,540
             
1,540
 
Financing cost in connection with sales of equity securities
   
(275
)
           
(275
)
Proceeds from convertible notes payable
   
354
             
354
 
Proceeds from notes payable – related party
   
350
             
350
 
Proceeds from notes payable
   
710
             
710
 
Payments on revolving credit facility, net
   
(268
)
           
(268
)
                         
Net cash provided by financing activities
   
2,711
     
-
     
2,711
 
                         
Effect of exchange rate on cash and cash equivalents
   
41
             
41
 
                         
Net decrease in cash and cash equivalents
   
(553
)
   
-
     
(553
)
                         
Cash and cash equivalents at beginning of period
   
996
             
996
 
                         
Cash and cash equivalents at end of period
 
$
443
   
$
-
   
$
443
 
 

 
“Note 16 Subsequent Events” in the June 30, 2017 10-Q the following additional disclosures will be added.

On July 7, 2017, the Company entered into an asset purchase agreement to acquire the intellectual property of Coolisys.com, consisting of the common law rights associated with the trademarks and name as well as the domain name and content of www.Coolisys.com. The aggregate purchase price of $81 was comprised of 50,000 shares of common stock, valued at $31 based on the closing price of the Common Stock on the date of the acquisition, and $50.

On July 14, 2017, as a result of a notice that Microphase received from Gerber identifying several events of default under the terms of the Revolving Credit Facility, Microphase and Gerber entered into a Forbearance Agreement (See Note 8). The events of default were primarily related to (i) the change in control that occurred on June 2, 2017, when Digital Power acquired a majority interest in Microphase, and (ii) borrowings under the Revolving Credit Facility exceeding the collateral borrowing base. The Forbearance agreement accelerated the repayment of $250, that was secured by eligible inventories and equipment, by an amount of $20 per week until such borrowings were repaid and required the Company to provide a corporate guarantee for amounts advanced under the Revolving Credit Facility, which guarantee was provided on July 20, 2017.

Between July 6, 2017 and August 21, 2017, Milton C. Ault, III, the Company’s Executive Chairman, personally guaranteed the repayment of (i) $1,091 to TVT Capital, (ii) $400 from the sale of the Convertible Note and (iii) $880 from the sale of the Convertible Notes. These personal guarantees were necessary to facilitate the consummation of these financing transactions. Mr. Ault’s payment obligations would be triggered if the Company failed to perform under these financing obligations. Our board of directors has agreed to compensate Mr. Ault for his personal guarantees. The amount of annual compensation for each of these guarantees, which will be in the form of non-cash compensation, is 2% of the amount of the obligation.

Due to the restatement described above, the Company's management and Audit Committee reevaluated Part I, Item 4 ("Controls and Procedures") in the previously filed June 30, 2017 Form 10-Q and have now concluded that the Company’s disclosure controls and procedures and internal control over financial reporting were not effective as of that date.  The Board has been actively engaged in developing a remediation plan to address the identified ineffective controls that existed as of June 30, 2017. Implementation of the remediation plan is in process and consists of, among other things, redesigning the procedures to enhance the identification, capture, review, approval and recording of contract terms and required disclosures.
 

 
Item 9.01
Financial Statements and Exhibits
          
(d) Exhibits
 
7.1
 

 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
  
         
 
 
DIGITAL POWER CORPORATION
     
Date:  November 14, 2017
 
By:
 
/s/ Amos Kohn
 
 
 
 
Amos Kohn,
 
 
 
 
Chief Executive Officer
 
 
 
 
(Duly Authorized Officer)