Item 1. Legal Proceedings
ITEM 1. LEGAL PROCEEDINGS
Blockchain Mining Supply and Services, Ltd.
On November 28, 2018, Blockchain
Mining Supply and Services, Ltd. (“Blockchain Mining”) a vendor who sold computers to the Company’s subsidiary, filed
a Complaint (the “Complaint”) in the United States District Court for the Southern District of New York against the Company
and the Company’s 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 Company and its 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.
The Company intends to vigorously
defend against the claims asserted against it in this action.
On April 13, 2020, the Company
and its subsidiary, jointly filed a motion to dismiss the Complaint in its entirety as against us, and the promissory estoppel claim as
against its subsidiary. On the same day, the Company’s 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, the Company
and its subsidiary, jointly filed a motion to dismiss the Amended Complaint in its entirety as against the Company, and the promissory
estoppel claim as against of its subsidiary. On the same day, the Company’s subsidiary also filed a partial Answer to the Amended
Complaint in connection with the breach of contract claim.
In its partial Answer, the
Company’s subsidiary admitted to the validity of the contract at issue and also asserted numerous affirmative defenses concerning
the proper calculation of damages.
On December 4, 2020, the Court
issued an Order directing the Parties to engage in limited discovery (the “Limited Discovery”) to be completed by March 4,
2021. In connection therewith, the Court also denied the defendants’ motion to dismiss without prejudice.
On June 2, 2021, the Company
and its subsidiary filed a motion to dismiss the amended complaint in its entirety as against the Company, and the promissory estoppel
claim as against the subsidiary.
The motion to dismiss has
been fully briefed and is currently pending before the Court.
Based on the Company’s
assessment of the facts underlying the claims, the uncertainty of litigation, and the preliminary stage of the case, the Company cannot
reasonably estimate the potential loss or range of loss that may result from this action. Notwithstanding, the Company has established
a reserve in the amount of the unpaid portion of the purchase agreement, which is included in accounts payable and accrued expenses. An
unfavorable outcome may have a material adverse effect on the Company’s business, financial condition and results of operations.
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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 the Company
and the Company’s 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 the Company,
in or about July 2019. The Complaint seeks, among other things, monetary damages in excess of $1.1 million, plus a decree of specific
performance directing the Company to deliver unrestricted shares of common stock to Gu, plus attorneys’ fees and costs.
The Company intends to vigorously
defend against the claims asserted against it in this action.
On May 4, 2020, the Company
and Ault jointly filed a motion to dismiss the Complaint in its entirety, with prejudice.
On July 28, 2021, the Court
conducted oral argument in connection with the motion to dismiss. During the oral argument, the Court informed the parties that the Court
was dismissing the fraud claim, in its entirety, and provided Plaintiffs an opportunity to amend their fraud claim within sixty days of
the date of the oral argument. The Court reserved decision on the other causes of action.
Based on the Company’s
assessment of the facts underlying the above claims, the uncertainty of litigation, and the preliminary stage of the case, the Company
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 the Company’s 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 believes 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 SEC 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
The Company is involved in
litigation arising from other matters in the ordinary course of business. The Company is 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. The Company records a liability when it believes that it is
probable that a loss has been incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably
possible and the loss or range of loss can be estimated, the Company discloses the reasonably possible loss. The Company evaluates developments
in its legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably
possible losses disclosed, and makes 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 the Company’s
other outstanding matters, based on the Company’s current knowledge, the Company believes that the amount or range of reasonably
possible loss will not, either individually or in aggregate, have a material adverse effect on the Company’s business, consolidated
financial position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject
to significant uncertainties.
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