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 Company’s 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)