Company Overview
BitNile Holdings, Inc., a
Delaware corporation formerly known as Ault Global Holdings, Inc., was incorporated in September 2017 (sometimes referred to as “BitNile,”
the “Company,” “we” or “us”). We are a diversified holding company owning subsidiaries engaged in,
among others, the following operating businesses: commercial and defense solutions, commercial lending, data center operations, Bitcoin
mining and advanced textile technology. Our direct and indirect wholly owned subsidiaries include Gresham Worldwide, Inc. (“GWW”),
TurnOnGreen, Inc., formerly known as Coolisys Technologies Corp. (“TOGI”), TOG Technologies, Inc. (“TOG Technologies”),
Digital Power Corporation (“Digital Power”), Gresham Power Electronics Ltd. (“Gresham Power”), Enertec Systems
2001 Ltd. (“Enertec”), Relec Electronics Ltd. (“Relec”), Digital Power Lending, LLC (“DP Lending”),
Ault Alliance, Inc. (“Ault Alliance”), Ault Global Real Estate Equities, Inc. (“AGREE”) and BitNile, Inc. (“BNI”).
We also have a controlling interest in Microphase Corporation (“Microphase”), BNI has a controlling interest in Alliance Cloud
Services, LLC (“ACS”), and Ault Alliance has a significant investment in Avalanche International Corp. (“Avalanche”
or “AVLP”).
BitNile was founded by Milton
C. (Todd) Ault, III, its Executive Chairman, and is led by Mr. Ault, William B. Horne, its Chief Executive Officer and Vice Chairman,
and Henry Nisser, its President and General Counsel. Together, they constitute the Executive Committee, which manages the day-to-day operations
of the holding company. The Company’s long-term objective is to maximize per share intrinsic value. All major investment and capital
allocation decisions are made for us by Mr. Ault and the Executive Committee. We have four reportable segments:
| ● | Ault Alliance digital learning, commercial lending and trading through DP Lending, real estate investing
through AGREE, and textile treatment through Avalanche; |
| ● | BNI: Bitcoin mining operation and data center operations through ACS; |
| ● | GWW: defense solutions with operations conducted by Microphase, Enertec, Gresham Power and Relec; and |
| ● | TOGI: commercial electronics solutions with operations conducted by Digital Power, and EV charging solutions
through TOG Technologies. |
We operate as a holding company
with operations conducted primarily through our subsidiaries. We conduct our activities in a manner so as not to be deemed an investment
company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Generally, this means that we
do not invest or intend to invest in securities as our primary business and that no more than 40% of our total assets will be invested
in investment securities, as that term is defined in the Investment Company Act. Pursuant to the Investment Company Act, companies such
as our subsidiary DP Lending are excluded from the definition of an investment company since its business consists of making loans and
industrial banking. We also maintain a considerable investment in Avalanche, which does business as MTIX
International (“MTIX”).
Originally, we were primarily
a solution-driven organization that designed, developed, manufactured and sold high-grade customized and flexible power system solutions
for the medical, military, telecom and industrial markets. Currently, this business is conducted by Digital Power. Although we actively
seek growth through acquisitions, we will also continue to focus on high-grade and custom product designs for the commercial, medical
and military/defense markets, where customers demand high density, high efficiency and ruggedized products to meet the harshest and/or
military mission critical operating conditions.
We have operations located
in Europe through our wholly owned subsidiaries, Gresham Power and Relec, each of which is located in England. Gresham Power designs,
manufactures and sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution
equipment, DC/AC (Direct Current/Active Current) inverters and UPS (Uninterrupted Power Supply) products. Our European defense business
is specialized in the field of naval power distribution products. On November 30, 2020, we acquired Relec pursuant to a stock purchase,
under which we paid approximately $4,000,000 with additional contingent cash payments up to approximately $665,000 based on Relec’s
future financial performance. Relec specializes in AC/DC power supplies, DC-DC converters, displays and electromagnetic compatibility
(“EMC”) filters.
We have operations based in
Israel through our wholly owned subsidiary Enertec, which designs, develops, manufactures and maintains advanced end-to-end high technology
electronic solutions for military, medical, telecommunications and industrial markets.
On November 30, 2016, we formed
DP Lending, a wholly owned subsidiary. DP Lending provides commercial loans to companies throughout the U.S. to provide them with operating
capital to finance the growth of their businesses. The loans range in duration from six months to three years, DP Lending loans made or
arranged pursuant to a California Financing Law license (Lic.no. 60 DBO77905).
On June 2, 2017, we purchased
56.4% of the outstanding equity interests of Microphase. Microphase is a design-to-manufacture original equipment manufacturer (“OEM”)
industry leader delivering world-class radio frequency (“RF”) and microwave filters, diplexers, multiplexers, detectors, switch
filters, integrated assemblies and detector logarithmic video amplifiers (“DLVAs”) to the military, aerospace and telecommunications
industries. Microphase is headquartered in Shelton, Connecticut.
On January 7, 2020, we formed
TOGI, a wholly owned subsidiary. TOGI operates its existing businesses in the customized and flexible power system solutions for the automotive,
medical, military, telecom, commercial and industrial markets, other than the European markets, which are primarily served by Gresham
Power. In April 2021, TOGI formed TOG Technologies as a Nevada corporation to provide flexible and scalable EV charging solutions with
a portfolio of residential, commercial and ultra-fast charging products, and comprehensive charging management software and network services.
On
December 31, 2017, Coolisys Technologies, Inc., a Delaware corporation (“CTI”), entered into a share purchase agreement with
Micronet Enertec Technologies, Inc. (“MICT”), a Delaware corporation, Enertec Management Ltd., an Israeli corporation and
wholly owned subsidiary of MICT (“EML”), and Enertec, an Israeli corporation and wholly owned subsidiary of EML, pursuant
to which CTI acquired Enertec. Enertec is Israel’s largest private manufacturer of specialized electronic systems for the military
market. On May 23, 2018, CTI completed its acquisition of Enertec. Effective as of December 30, 2021, CTI was merged with and into GWW
as a result which upstream merger CTI ceased to exist.
GWW
was incorporated under the laws of the State of Delaware on November 21, 2018 as DPW Technologies Group, Inc. and effected a name change
on December 6, 2019.
Recent Events and Developments
On February 10, 2020, we entered
into a Master Exchange Agreement (the “Master Exchange Agreement”) with Esousa Holdings, LLC (“Esousa”) that acquired
approximately $4.2 million in principal amount, plus accrued but unpaid interest, of certain promissory notes that had been previously
issued by us to Dominion Capital, LLC, a Connecticut limited liability company (the “Dominion Note”) and the Canadian Special
Opportunity Fund, LP (the “CSOF Note” and, with the Dominion Note, the “Esousa Purchased Notes”) in separate transactions.
Esousa 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, Esousa had the unilateral right to acquire shares of our common stock (the “Exchange Shares”) in exchange
for the Notes, which Notes evidence an aggregate of up to approximately $7.7 million of indebtedness of the Company. In aggregate, we
issued to Esousa a total of 8,332,904 Exchange Shares.
Between
August 2020 and November 2020, we received $5,450,000 in loans from Esousa and certain affiliates pursuant to which we agreed to issue
unsecured short-term promissory notes with interest rates of 13% and 14% and warrants with terms of approximately one and a half years
to purchase an aggregate of 3,850,220 shares of common stock at an average exercise price of $2.28 per share.
On October 2, 2020, we entered
into an At-The-Market Issuance Sales Agreement (the “2020 Sales Agreement”) with Ascendiant Capital Markets, LLC (“Ascendiant”)
to sell shares of common stock having an aggregate offering price of up to $8,975,000 from time to time, through an “at the market
offering” program (the “2020 ATM Offering”). On December 1, 2020, we filed an amendment to the prospectus supplement
with the SEC to increase the amount of common stock that may be offered and sold in the 2020 ATM Offering, as amended under the 2020 Sales
Agreement to $40,000,000 in the aggregate, inclusive of the up to $8,975,000 in shares of common stock previously sold in the 2020 ATM
Offering. The offer and sale of shares of common stock from the 2020 ATM Offering was made pursuant to our effective “shelf”
registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration No. 333-222132), which became effective
on January 11, 2018. Through December 31, 2020, we had received gross proceeds of $39,978,350 through the sale of 12,582,000 shares of
our common stock from the 2020 ATM Offering. The 2020 ATM Offering was terminated on December 31, 2020.
On January 22, 2021, we entered
into an At-The-Market Issuance Sales Agreement (the “2021 Sales Agreement”) with Ascendiant to sell shares of common stock
having an aggregate offering price of up to $50 million from time to time, through an “at the market offering” program (the
“2021 ATM Offering”). On February 16, 2021, we filed an amendment to the prospectus supplement with the SEC to increase the
amount of common stock that may be offered and sold in the 2021 ATM Offering, as amended under the 2021 Sales Agreement to $125 million
in the aggregate, inclusive of the up to $50 million in shares of common stock previously sold in the 2021 ATM Offering. On March 5, 2021,
we filed a second amendment to the prospectus supplement with the SEC to further increase the amount of common stock that may be offered
and sold in the 2021 ATM Offering, as amended under the 2021 Sales Agreement to $200 million in the aggregate, inclusive of the up to
$125 million in shares of common stock previously sold in the 2021 ATM Offering. The offer and sale of shares of common stock from the
2021 ATM Offering was made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying base prospectus
contained therein (Registration Statement No. 333-251995) which became effective on January 20, 2021. Through December 31, 2021, we had
received gross proceeds of $200 million through the sale of 52,552,353 shares of common stock from the 2021 ATM Offering. The 2021 ATM
Offering was terminated in December 2021.
On
January 29, 2021, ACS closed on the acquisition of a 617,000 square foot energy-efficient facility located on a 34.5 acre site in southern
Michigan for a purchase price of $3,991,497 (the “Facility”). The purchase price was paid by our own working capital. Ownership
of the Facility was subsequent assigned to BNI.
On March 9, 2021, DP Lending
entered into a securities purchase agreement with Alzamend Neuro, Inc. (“Alzamend”), a related party, to invest $10 million
in Alzamend common stock and warrants, subject to the achievement of certain milestones. We agreed to fund $4 million upon execution of
the securities purchase agreement and to fund the balance upon Alzamend achieving certain milestones related to the U.S. Food and Drug
Administration approval of Alzamend’s Investigational New Drug application and Phase 1a human clinical trials for Alzamend’s
lithium based ionic cocrystal therapy, known as AL001. As of the date of this Annual Report, we have funded an aggregate of $6 million
pursuant to the securities purchase agreement. Under the securities purchase agreement, Alzamend has agreed to sell up to 6,666,667 shares
of its common stock to DP Lending for $10 million, or $1.50 per share, and issue to DP Lending warrants to acquire up to 3,333,334 shares
of Alzamend common stock with an exercise price of $3.00 per share. The transaction was approved by our independent directors after receiving
a third-party valuation report of Alzamend.
On May 12, 2021, we issued
275,862 shares of common stock to Ault & Company, Inc. (“A&C”), a related party, upon the conversion of $400,000 of
principal on an 8% Convertible Promissory Note dated February 5, 2020.
On June 11, 2021, we entered
into a securities purchase agreement with A&C, pursuant to which A&C is entitled to purchase 1,000,000 shares of our common stock
for a total purchase price of $2,990,000, at a purchase price per share of $2.99, which was $0.05 per share above the closing stock price
on June 10, 2021.
On June 15, 2021, Alzamend
closed an initial public offering at a price to the public of $5.00 per share. DP Lending purchased 2,000,000 shares of Alzamend’s
common stock in the initial public offering for an aggregate of $10,000,000. Alzamend’s common stock is listed on The Nasdaq Capital
Market under the ticker symbol “ALZN.”
During
the quarter ended September 30, 2021, we executed contracts to purchase 4,000 Antminer S-19 Pro Bitcoin miners. The gross purchase price
is $27.3 million. In November 2021, we executed contracts to purchase an aggregate of 16,000 Bitcoin miners for $121 million. The purchase
includes both the environmentally friendly S19 XP Antminers that feature a processing power of 140 terahashes per second (“TH/s”)
with an energy consumption of 3.01 kilowatt-hours (“kWh”) and the S19j Pro Antminers that feature a processing power of 100
TH/s with an energy consumption of 2.95 kWh. As of March 31, 2022, 4,754 were in our possession, and the remaining miners are expected
to be shipped between April 2022 and September 2022. Approximately $92.4 million of the gross purchase price has been paid as of March
24, 2022 with the balance scheduled to be paid between April 2022 and November 2022.
On December 13, 2021, BNI
closed an investment of Series A preferred stock of Earnity Inc. (“Earnity”), a decentralized finance (“DeFi”)
marketplace based in San Mateo, California. BNI paid approximately $11.5 million for the shares of Earnity’s Series A preferred
stock. Following the investment, BNI beneficially owned approximately 19.99% of Earnity’s common stock.
On December 15, 2021, DP Lending
entered into an exchange agreement with Imperalis Holding Corp. (“IMHC”) pursuant to which IMHC issued us a convertible promissory
note (the “IMHC Note”) in the principal amount of $101,528.77, in exchange for those certain promissory notes dated August
18, 2021 and November 5, 2021 previously issued by IMHC to DP Lending in the aggregate principal amount of $100,000, which prior notes
had accrued interest of $1,528.77 as of the December 15, 2021. The IMHC Note accrues interest at 10% per annum, is due on December 15,
2023, and the principal, together with any accrued but unpaid interest on the amount of principal, is convertible into shares of IMHC’s
common stock at DP Lending’s option at a conversion price of $0.01 per share.
On December 16, 2021, we entered
into a stock purchase agreement (the “Agreement”) with the majority stockholders of IMHC. Pursuant to the Agreement, we purchased
129,363,756 shares of IMHC’s common stock from the sellers in exchange for $200,000. Upon the closing of the Agreement, we owned
a majority of IMHC’s common stock, resulting in a change in control of IMHC.
On
December 22, 2021 (the “Closing Date”), AGREE Madison, LLC, a wholly owned subsidiary of AGREE (“AGREE Madison”),
through various wholly owned subsidiaries (the “Property Owners”), entered into construction loan agreements (the “Loan
Agreements”) in the aggregate amount of $68,750,000 (the “Loans”) in connection with the acquisition of four hotel properties
(the “Properties”). The Properties were acquired on the Closing Date for an aggregate purchase price of $69,200,000, of which
$2,500,000 was previously funded on deposit, $21,378,000 was paid by the Company on the Closing Date, and the remaining amounts were funded
from the Loans. The remaining $23,428,000 of the Loans are available to be drawn upon by the Property Owners towards the completion of
the $13,700,000 in property improvement plans (“PIPs”) the Property Owners agreed to undertake, as well as to fund working
capital, interest reserves, franchise fees and other costs and expenses related to the acquisition. The Loans are due on January 1, 2025
(the “Maturity Date”), but may be extended by the Property Owners for two additional 12-month terms, subject to certain terms
and conditions as set forth in the Loan Agreements. The Loans accrue interest at a rate equal to the greater of (i) the LIBOR Rate plus
675 basis points or (ii) 7% per annum. The Property Owners will make monthly installment payments of interest only, starting January 1,
2022.
On
December 27, 2021, the Company and GWW entered into a Share Exchange Agreement (the “Exchange Agreement”) with Giga-tronics
Incorporated, a California corporation (“GIGA”). Pursuant to the Exchange Agreement, GIGA will acquire all of the outstanding
shares of capital stock of GWW in exchange for (i) issuing to the Company 2,920,085 shares of GIGA’s common stock (“GIGA Common
Stock”) and 514.8 shares of a new series of preferred stock (“GIGA Preferred Stock”) which are convertible into an aggregate
of 3,960,043 shares of GIGA Common Stock, subject to adjustment, and (ii) the assumption of GWW’s equity awards representing, on
an as-assumed basis, 249,875 shares of GIGA Common Stock (the “Exchange Transaction”). Completion of the Exchange Transaction
is subject to the approval of GIGA’s shareholders and customary closing conditions.
Immediately
following the completion of the Exchange Transaction, GWW will be a wholly owned subsidiary of GIGA. In addition, the Exchange Agreement
provides that the Company shall loan to GIGA $4.25 million pursuant to a convertible promissory note (“Closing Date Loan”)
upon the closing of the Exchange Transaction (the “Closing”), and following the Closing, GIGA will repurchase or redeem all
of its shares of Series B, Series C, Series D and Series E preferred stock currently outstanding (the “Outstanding Preferred”).
Assuming the repurchase of the Outstanding Preferred and based upon 2,725,010 shares of GIGA Common Stock currently outstanding, following
the issuance to the Company of the shares of GIGA Common Stock and GIGA Preferred Stock pursuant to the Exchange Transaction, the Company
would hold approximately 68% of the outstanding voting power and capital stock of GIGA, and existing holders of GIGA Common Stock would
hold approximately 32%.
On
December 30, 2021, Third Avenue Apartments LLC (“Third Avenue Apartments”), which is a wholly owned subsidiary of AGREE Madison,
closed upon the acquisition of certain real property located in St. Petersburg, Florida (the “Real Property”) together with
all improvements on the Real Property and all singular rights and appurtenances pertaining thereto, including, but not limited to, (i) all
entitlements, easements, rights, mineral rights, oil and gas rights, water, water rights, air rights, development rights and privileges
appurtenant to the Real Property, (ii) all tangible personal property, owned and assignable by Seller, located on or used in connection
with the Real Property, including, without limitation, engineering studies, soils reports, (iii) all warranties, guaranties, indemnities
and other similar rights relating to the Real Property and/or the assets transferred hereby, (iv) all permits, licenses, consents,
approvals and entitlements related to the Real Property, (v) any rights of way, appendages appurtenances, easements, sidewalks, alleys,
gores or strips of land adjoining or appurtenant to the Real Property or any portion thereof, if any, and used in conjunction therewith,
and (vi) all intangible rights directly relating to the Real Property (collectively, with the Real Property, the “Property”).
The
Property was acquired from Third Avenue at St Petersburg LLC (the “Seller”) pursuant to a contract of entered into by Third
Avenue Apartments and the Seller. The purchase price for the Property was $15,500,000, of which $1,500,000 was previously funded on deposit
and the remaining $14,000,000 was paid by the Company on the closing date. We plan to use the Property for the development of a high-rise
multi-family project.
On
December 30, 2021, we issued of (i) secured promissory notes (individually, a “Note” and collectively, the “Notes”)
with an aggregate principal face amount of approximately $66,000,000; (ii) five-year Class A warrants to purchase an aggregate of 14,095,350
shares of our common stock at an exercise price of $2.50, subject to adjustment; and (iii) five-year Class B warrants to purchase an aggregate
of 1,942,508 shares of our common stock at an exercise price of $2.50 per share, subject to adjustment. We agreed to file a registration
statement to register the shares of common stock underlying the foregoing warrants and certain other shares underlying previously issued
warrants to one of the investors.
We,
certain of our subsidiaries and Esousa, as the collateral agent on behalf of the investors (the “Agent”) entered into a security
agreement, pursuant to which we (i) pledged the equity interests in substantially all of our U.S. based subsidiaries and (ii) granted
to the investors a security interest in substantially all of our deposit accounts, securities accounts, chattel paper, documents, equipment,
general intangibles, instruments and inventory, and all proceeds therefrom. The entirety of the loan, including the original issue discount
and accrued but unpaid interest, was fully paid off on March 30, 2022.
On
February 4, 2022, we and Ault Alliance entered into a securities purchase agreement providing for our purchase of BNI from Ault Alliance.
As a result of this transaction, both BNI and Ault Alliance are each stand-alone wholly owned subsidiaries of ours.
On
February 10, 2022, consistent with our objective to have BNI operate the entirety of our business that relates to cryptocurrencies, Ault
Alliance assigned the entirety of its interest in ACS to BNI.
On February 25, 2022, we entered
into an At-The-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with Ascendiant to sell shares of common stock
having an aggregate offering price of up to $200 million from time to time, through an “at the market offering” program (the
“2022 ATM Offering”). The offer and sale of shares of common stock from the 2022 ATM Offering was made pursuant to our effective
“shelf” registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No.
333-260618) which became effective on November 12, 2021. Through March 31, 2022, we had received gross proceeds of approximately $110
million through the sale of 140,658,096 shares of common stock from the 2022 ATM Offering.
On
March 20, 2022, we and IMHC entered into a securities purchase agreement (the “Acquisition Agreement”) with TOGI. According
to the Acquisition Agreement, we will (i) deliver to IMHC all of the outstanding shares of common stock of TOGI that we own, and (ii)
forgive and eliminate the intracompany accounts between us and TOGI evidencing historical equity investments made by us in TOGI, in the
approximate amount of $25,000,000, in consideration for the issuance by IMHC to us (the “Transaction”) of an aggregate of
25,000 newly designated shares of Series A Preferred Stock (the “IMHC Preferred Stock”), with each such share having a stated
value of $1,000. The closing of the Transaction is subject to our delivery to IMHC of audited financial statements of TOGI and other customary
closing conditions. Immediately following the completion of the Transaction, TOGI will be a wholly owned subsidiary of IMHC. The parties
to the Agreement have agreed that, upon completion of the Transaction, IMHC will change its name to TurnOnGreen, Inc., and, through an
upstream merger whereby the current TOGI shall cease to exist, IMHC shall own TOGI’s two operating subsidiaries, TOG Technologies
and Digital Power. Promptly following the closing of the Transaction, IMHC will dissolve its three dormant subsidiaries.
Corporate Information
We are a Delaware corporation,
initially formed in California in 1969 and reincorporated in Delaware in 2017. We are located at 11411 Southern Highlands Parkway, Suite
240, Las Vegas, NV 89141. Our phone number is (949) 444-5464 and our website address is www.bitnile.com.
Our Corporate Structure
On January 19, 2021, we changed
our corporate name from DPW Holdings, Inc. to Ault Global Holdings, Inc. and, on December 13, 2021, we changed our corporate name from
Ault Global Holdings, Inc. to BitNile Holdings, Inc. (together, the “Name Changes”). The Name Changes were each effected through
a parent/subsidiary short form merger pursuant to an Agreement and Plan of Merger dated January 7, 2021 and December 1, 2021, respectively.
Neither of the mergers nor the corresponding Name Changes affected the rights of our security holders. Our common stock is traded on the
NYSE American under the symbol “NILE.” Existing stock certificates that reflect our prior corporate names continue to be valid.
Certificates reflecting the new corporate name are issued as old stock certificates are tendered for exchange or transfer to our transfer
agent. Concurrently with the change in our name to Ault Global Holdings, Inc., Milton C. Ault III was appointed as our Executive Chairman,
William B. Horne was appointed as our Chief Executive Officer and remains as Vice Chairman of our board of directors (the “Board”),
and Henry Nisser was appointed as our President and remains as our General Counsel.
Commencing in October 2019
and continuing through February 2022, we reorganized our corporate structure pursuant to a series of transactions by and among BitNile
and its directly and indirectly owned subsidiaries. The purpose of the reorganization was to align our various businesses by the products
and services that constitute the majority of each subsidiaries’ revenues. As a result of the foregoing transactions, our streamlined
corporate structure is currently as follows:
Our Business Strategy
As principally a holding company,
our business strategy is designed to increase stockholder value. Under this strategy, we are focused on managing and financially supporting
our existing subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned
to stockholders. We have, are and will consider initiatives including, among others: public offerings, the sale of individual partner
companies, the sale of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as
other opportunities to maximize stockholder value, such as activist trading. We anticipate returning value to stockholders after satisfying
our debt obligations and working capital needs.
On October 7, 2019, we created
an Executive Committee which is comprised of our Executive Chairman, Chief Executive Officer and President. The Executive Committee meets
on a daily basis to address the Company’s critical needs and provides a forum to approve transactions which are communicated to
our Chief Financial Officer and Senior Vice President of Finance on a bi-weekly basis by our Chief Executive Officer.
Our Executive Committee approves
and manages our investment and trading strategy. The Executive Committee has decades of experience in financial, investing and securities
transactions. Led by our Founder and Executive Chairman, Milton C. (Todd) Ault, III, we seek to find undervalued companies and disruptive
technologies with a global impact. We use a traditional methodology for valuing securities that primarily looks for deeply depressed prices.
Upon making an investment, we often become actively involved in the companies we seek to acquire. That activity may involve a broad range
of approaches, from influencing the management of a target to take steps to improve stockholder value, to acquiring a controlling or sizable
but non-controlling interest or outright ownership of the target company in order to implement changes that we believe are required to
improve its business, and then operating and expanding that business. Mr. Ault relies heavily on William B. Horne, our Vice Chairman and
Chief Executive Officer, and Henry Nisser, our President and General Counsel, to provide analysis and guidance on all acquisition targets
and throughout the acquisition process.
From time to time, we engage
in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a subsidiary partner company’s further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our stockholders’ best interests, we will seek to sell some
or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets,
mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly traded
partner companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies
public through rights offerings, mergers or spin-offs and directed share subscription programs. We will continue to consider these and
functionally equivalent programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize
value for our stockholders.
Our Executive Committee acts
as the underwriting committee for DP Lending and approves all lending transactions. Under its business model, DP Lending generates revenue
through origination fees charged to borrowers and interest generated from each loan. DP Lending may also generate income from appreciation
of investments in marketable securities as well as any shares of common stock underlying convertible notes or warrants issued to DP Lending
in any particular financing.
Over the recent past, we have
provided capital and relevant expertise to fuel the growth of businesses in cryptocurrency mining, DeFi, defense/aerospace, industrial,
telecommunications, medical and textiles. We have provided capital to subsidiaries as well as partner companies in which we have an equity
interest or may be actively involved, influencing development through board representation and management support.
Our Subsidiaries and their Businesses
BitNile, Inc.
BNI conducts data center operations
and Bitcoin mining through ACS.
Overview
BNI is a blockchain technology
company focused on mining of Bitcoin, among other activities. We mine using purpose-built computers (or “miners”) to solve
complex cryptographic algorithms (or “verify” or “solve” blocks) in the blockchain in exchange for rewards and
fees denominated in the native token of that blockchain network.
We will evaluate each digital
asset in our portfolio, or that we propose to acquire in the future (including by mining), to determine whether it would likely be considered
a security under U.S. federal securities laws, in consultation with outside counsel, as applicable. We will base our analysis on relevant
caselaw, applying the frameworks established by the U.S. Supreme Court and taking into consideration relevant guidance by the SEC and
its staff. See “Risk Factors — Risks Related to Our Bitcoin Operations – Legal and Regulatory —
A particular digital asset’s status as a ‘security’ in any relevant jurisdiction is subject to a high degree of uncertainty
and if a regulator disagrees with our characterization of a digital asset, we may be subject to regulatory scrutiny, investigations, fines
and penalties, which may adversely affect our business, operating results and financial condition. A determination that Bitcoin that we
own or mine is a ‘security’ may adversely affect the value of Bitcoin and our business.”
Since commencement of our
mining operations in 2021 at the Facility, we have mined 45.7 Bitcoin for our own account through December 31, 2021. While we mine for
cryptocurrency for sale in the ordinary course of business, we believe that cryptocurrency represents an attractive, appreciating investment
opportunity, and as such we have historically held cryptocurrency assets that we do not otherwise sell to fund our operating expenses.
On December 31, 2021, we held 46.75 Bitcoin valued at approximately $2.2 million based on prices as of such date. Our total revenue
from mining operation was $3.5 million during the fiscal year ended December 31, 2021. Our mining operations generated net income
of $1.5 million during the fiscal year ended December 31, 2021. As of December 31, 2021, the carrying value of our approximately
46.75 Bitcoins was $2.2 million, representing 0.4% of our total assets of $490.8 million as of such date.
Our Vision
Traditional finance has historically
had poor customer service and a less than desirable user experience in mobile and web-based platforms, which opens the door to massive
disruption through digital technologies. Additionally, central bank intervention in the financial markets has increasingly turned to money
printing through quantitative easing, which increasingly dilutes the buying power of the global fiat currency market and leads the world
to seek more scarce alternatives. The first phase of the digital transformation has been through the creation of blockchain-based digital
assets. We believe the second phase of this transition will be take form in bridges being built between DeFi and traditional finance to
help improve customer service and user experience in traditional finance.
We foresee a time when traditional
banking is done in the palm of our hands in community-based, peer-to-peer transactions as opposed through financial intermediaries. This
community-based, peer-to-peer network is otherwise known as DeFi. Although we do not believe DeFi will replace traditional finance in
the near- to medium-term, we believe this transition will happen rapidly over the next 20 years as Millennials and Gen-Xers become the
power class and the Baby Boomers retire. DeFi is a concept whereby traditional financial intermediaries are not required to process transactions.
The proliferation of blockchain-based protocols will enable participants to offer novel financial products to banking customers. For instance,
in a world where traditional finance provides savings account rates less than 1%, DeFi protocols can provide savings accounts with significantly
higher yields. Traditional financial platforms are not currently designed to distribute these products to its customers. We believe that
in the near-term integrating a traditional broker dealer could help facilitate the distribution of these decentralized finance protocols
to a broad base of customers. While we recognize DeFi is in its infancy stage, we believe blockchain will be integral to its advancement.
We recognize the uncertainties in DeFi and its effect on our economy both in the U.S. and globally, and acknowledge that this is a new
evolving area that may not evolve as we anticipate and in which we may never be a material participant.
Cryptocurrency and Cryptocurrency Mining Overview
Blockchain and Cryptocurrencies Overview
Cryptocurrencies are a type
of digital asset that function as a medium of exchange, a unit of account and/or a store of value (i.e. a new form of digital money).
Cryptocurrencies operate by means of blockchain technology, which generally uses open-source, peer-to-peer software to create a decentralized
digital ledger that enables the secure use and transfer of digital assets. We believe cryptocurrencies and associated blockchain technologies
have potential advantages over traditional payment systems, including: the tamper-resistant nature of blockchain networks; rapid-to-immediate
settlement of transactions; lower fees; elimination of counterparty risk; protection from identify theft; broad accessibility; and a decentralized
nature that enhances network security by reducing the likelihood of a “single point of failure.” Recently, cryptocurrencies
have gained widespread mainstream attention and have begun to experience greater adoption by both retail and institutional investors and
the broader financial markets. For example, Bitcoin’s aggregate market value exceeded $800 trillion in February 2022, $1 trillion
in February 2021 compared to $160 billion in February 2020, based on Bitcoin prices quoted on major exchanges. As cryptocurrencies,
and blockchain technologies more generally, have entered the mainstream, prices of digital assets have reached all-time highs and the
broader ecosystem has continued to develop. While we expect the value of Bitcoin to remain volatile, we believe this increase in aggregate
market value signals institutionalization and wider adoption of cryptocurrency.
Cryptocurrencies are decentralized
currencies that enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol platform which uses
peer-to-peer technology to operate with no central authority. The online network hosts the public transaction ledger, known as the
blockchain, and each cryptocurrency is associated with a source code that comprises the basis for the cryptographic and algorithmic protocols
governing the blockchain. In a cryptocurrency network, every peer has its own copy of the blockchain, which contains records of every
historical transaction — effectively containing records of all account balances. Each account is identified solely by
its unique public key (making it effectively anonymous) and is secured with its associated private key (kept secret, like a password).
The combination of private and public cryptographic keys constitutes a secure digital identity in the form of a digital signature, providing
strong control of ownership.
No single entity owns or operates
the network. The infrastructure is collectively maintained by a decentralized public user base. As the network is decentralized, it does
not rely on either governmental authorities or financial institutions to create, transmit or determine the value of the currency units.
Rather, the value is determined by market factors, supply and demand for the units, the prices being set in transfers by mutual agreement
or barter among transacting parties, as well as the number of merchants that may accept the cryptocurrency. Since transfers do not require
involvement of intermediaries or third parties, there are currently little to no transaction costs in direct peer-to-peer transactions.
Units of cryptocurrency can be converted to fiat currencies, such as the U.S. dollar, at rates determined on various exchanges, such as
Binance, Coinbase, FTX, Kraken, Gemini, and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility.
We believe cryptocurrencies
offer many advantages over traditional, fiat currencies, although many of these factors also present potential disadvantages and may introduce
additional risks, including:
| ● | acting as a fraud deterrent, as cryptocurrencies are digital and cannot be counterfeited or reversed arbitrarily
by a sender; |
| ● | elimination of counterparty risk; |
| ● | no trusted intermediary required; |
| ● | identity theft prevention; |
| ● | transactions are verified and protected through a confirmation process, which prevents the problem of
double spending; |
| ● | decentralized — no central authority (government or financial institution); and |
| ● | not recognized universally and not bound by government imposed or market exchange rates. |
However, cryptocurrencies may not provide all
of the benefits they purport to offer.
Limitations on Bitcoin Mining
In addition to competition,
there are two factors that may affect all digital asset mining companies and Bitcoin in particular: (i) limitations on the supply of the
cryptocurrency being mined; and (ii) the market price of the cryptocurrency.
The blockchain’s method
for creating new Bitcoins is mathematically determined in a manner so that the supply of Bitcoins grows at a limited rate pursuant to
a pre-set schedule. Specifically, the number of Bitcoins awarded for solving a new block is automatically halved for every 210,000
blocks that are solved. The current fixed reward for solving a new block is 6.25 Bitcoins per block, which was reduced from 12.5 Bitcoins
in May 2020. This deliberately controlled rate of Bitcoin creation means that the number of Bitcoins in existence will never exceed 21 million
and that Bitcoins cannot be devalued through excessive production unless the Bitcoin network’s source code and the underlying protocol
for Bitcoin issuance is altered. This also means, however, that our revenue prospects will decline unless the price of a Bitcoin increases
commensurately or we acquire more miners.
We currently only mine Bitcoin.
Our ability to generate revenue from our mining operations will be dependent on the price of Bitcoin. On September 24, 2021, the
Bank of China announced that all cryptocurrency trading and mining are illegal in China. Bitcoin and Ethereum, the second largest digital
currency, fell 5% and 7%, respectively. The prices of cryptocurrencies, specifically Bitcoin, have experienced substantial volatility,
including fluctuation patterns which may reflect “bubble” type volatility, meaning that high or low prices at a given time
may not be indicative of the current or future value of Bitcoin. The price of a Bitcoin may be subject to rapidly changing investor and
market sentiment, and may be influenced by factors such as technology, regulatory developments and media coverage. Further, Bitcoin’s
value, like that of other cryptocurrencies, may be based on various factors, including their acceptance as a means of exchange or purchasing
power by consumers and vendors, volume, liquidity and transferability and market demand. Bitcoin’s current price reflects, in part,
the belief by some that Bitcoin could become a widely accepted form of currency, however if this prediction turns out to be incorrect
its price could decrease dramatically, as would our prospects for future revenue and profits. See “Risk Factors – Risks Related
to Our Bitcoin Operations” for more information on the risks we face due to our mining of Bitcoin and its speculative and volatile
nature.
Cryptocurrency Mining and Mining Pools
As a cryptocurrency miner,
we use specialized miners to solve cryptographic math problems necessary to record and “publish” cryptocurrency transactions
to blockchain ledgers. Generally, each cryptocurrency has its own blockchain, which consists of software code (also known as a protocol),
which is run by all the computers on the network for such blockchain. Within this code, transactions are collated into blocks, and these
blocks must meet certain requirements to be verified by the blockchain software, added to the blockchain or ledger of all transactions
and published to all participants on the network that are running the blockchain software. After a transaction is verified, it is combined
with other transactions to create a new block of data for the blockchain. For proof-of-work blockchains, the process of verifying valid
blocks requires computational effort to solve a cryptographic equation, and this computational effort protects the integrity of the blockchain
ledger. This process is referred to as “mining.” As a reward for verifying a new block, miners receive payment in the form
of the native cryptocurrency of the network (e.g., Bitcoin). This payment is comprised of a block reward (i.e., the automatic issue of
new cryptocurrency tokens) and the aggregated transaction fees for the transactions included in the block (paid in existing cryptocurrency
tokens by the participants to the transactions). The block reward payments and the aggregated transaction fees are what provide the incentive
for miners to contribute hash rate to the network.
A “hash” is the
actual cryptographic function run by the miners, and is a unique set of numbers and letters derived from the content of the block. The
protocol governing the relevant blockchain sets certain requirements for the hash. Miners compete to be the first to generate a valid
hash meeting these requirements and, thereby, secure payment for solving the block. Hash rate is the speed at which miners can complete
the calculation, and therefore is a critical measure of performance and computational power. A high rate means a miner may complete more
calculations over a given period and has a greater chance to solve a block. An individual miner has a hash rate total of its miners seeking
to mine a specific cryptocurrency, and the blockchain-wide hash rate for a specific cryptocurrency can be understood as the aggregate
of the hash rates of all of the miners actively trying to solve a block on that blockchain at a given time.
The protocols governing Bitcoin
and other cryptocurrencies are coded to regulate the frequency at which new blocks are verified by automatically adjusting what is known
as the “mining difficulty,” which is the level of computational activity required before a new block is solved and verified.
For example, on the Bitcoin blockchain the protocol is coded such that a new block is solved and verified approximately every ten minutes,
while on Ethereum blocks are designed to be solved approximately every twelve to fifteen seconds. As such, to the extent the hash power
on the network is increased or decreased due to, for example, fluctuations in the number of active miners online, mining difficulty is
correspondingly increased or decreased to maintain the preset interval for the verification of new blocks.
On certain cryptocurrency
networks, including Bitcoin, the rewards for solving a block are also subject to periodic incremental halving. Halving is a process designed
to control the overall supply and reduce the risk of inflation in cryptocurrencies using a proof-of-work consensus algorithm. After a
predetermined number of blocks are added to the blockchain, the mining reward is cut in half, hence the term “halving.” The
last halving for Bitcoin occurred on May 11, 2020. The next halving for Bitcoin is expected to occur in 2024, and as such, absent
any changes to the Bitcoin protocols, the block reward will remain stable until then. By contrast, Ethereum does not have a maximum supply
limit or pre-determined reduction in reward amounts. Rather, Ethereum currently has a fixed issuance schedule of 2.0 Ether per block mined.
However, Ethereum has on two separate occasions reduced the quantity of ETH rewarded per block and may make additional changes in the
future, whether or not Ethereum ultimately transitions to a proof-of-stake consensus mechanism. Transaction fees are variable and depend
on the level of activity on the network. Generally, transaction fees increase during times of network congestion, as miners will prefer
transactions with higher fees, and therefore a higher fee can reduce the time to process a transaction, and decrease when there are fewer
transactions on the network.
As the total amount of available
hash rate has increased (particularly on the Bitcoin network), it has become increasingly difficult for any individual miner to independently
solve a block and as a result “mining pools” have emerged as an efficient way for miners to pool resources. Mining pools aggregate
the hash rate of various miners participating in the mining pool. In this way the mining pool, rather than an individual miner, receives
the block reward and related transaction fees. The mining pool is organized by a third party who, in return for a percentage of the
earned block rewards and transaction fees as a fee, administers the pool and ensures that the participants in the pool receive their share
of the block reward and related transaction fees, generally pro-rata to their contributed hash rate. Mining pools offer miners more predictable
and consistent revenue compared to mining individually. We participate in mining pools.
Our Strategy
Smart Growth
We aim to optimize our mining
by identifying and purchasing the most profitable miners with industry-leading returns on investment and actively monitoring and adjusting
the operation of those machines to enhance their performance. When planning our short- and long-term operating strategies and capital
expenditures, we carefully monitor fluctuations and longer-term trends in the value of certain cryptocurrencies, which impacts the return
on investment of machines. We also regularly evaluate potential innovations in geography, physical footprint, computing technology and
similar areas to improve our operations and productivity. We believe this smart-growth strategy, including our commitment to mining efficiency
and return on investment in miners, will enable us to build value over the long term.
Own and Operate Our Mining Facilities
We are investing heavily in
purchasing, building and operating our mining facilities. By owning and operating our miners at facilities that offer competitive advantages,
including access to reliable, low-cost, renewable power and room for expansion, we expect to have greater control over the timing of the
purchase and deployment of our miners. We also may enhance our ability to intelligently and quickly adapt our operating model and reap
savings compared to paying for outsourced operations and infrastructure. We anticipate that we will continue to consider other opportunities
to integrate our operations, including with respect to both the software utilized by our fleet and the associated hardware.
Reliable, Low-Cost, Renewable Power
Power represents our highest
variable direct cost for our mining operations, with electrical power required to operate the miners. We believe the combination of increased
mining difficulty, driven by greater hash rates, and the periodic adjustment of reward rates, such as the halving of Bitcoin rewards,
will drive the increasing importance of power efficiency in cryptocurrency mining over the long term. As a result, we are focused on deploying
our miners at locations with access to reliable, renewable power sources, as successfully doing so should enable us to reduce our power
costs.
Miners require considerable
amounts of electrical energy to perform their functions and mine Bitcoin; consequently, a critical aspect of operating in the cryptocurrency
mining industry is obtaining a reliable supply of electricity at a relatively low and stable cost. To this end, in January 2021, ACS purchased
the Facility, which currently has access to 28 megawatts of power in preparation for the planned purchase of Bitcoin mining equipment.
Since the purchase of the Facility, we have invested in infrastructure improvements and began both ramping up the sites power capacity
and installing S19jPro miners. To date, we have increased power load from 1.5 megawatts to 14 megawatts and expect to have 28 megawatts
installed at this location by July 2022. In addition, we have received a commitment by the utility company that currently provides our
power to expand the site’s capacity up to 297 megawatts, for which we are currently working on setting forth in a formal agreement.
Our relationship with the utility company has grown as we have demonstrated our ability to upgrade and use power at our site effectively.
We are in the midst of finalizing those expansion details with the utility company, engineers, and Economic Development Agency. This planned
expansion would allow the operation of up to as many as 90,000 Bitcoin miners at the Facility.
We continue to evaluate other
sites, locations, and partnerships for additional and alternative support of future mining operations. While we have not at present entered
into any other agreements, we will continue to explore and evaluate additional facilities that that would enable us to expand our mining
operations as needed.
We expect to enter into power
agreements that will allow us to have one of the highest carbon-free energy footprints at a price equal to or less than the current cost
of fossil fuel energy in other locations, based on current market power costs as of the date of this Annual Report.
Our Mining Operations
On January 29, 2021, ACS closed
on the acquisition of the 617,000 square foot energy-efficient Facility for a purchase price of $4.0 million. The purchase price was paid
by our own working capital. The Facility has been remodeled and converted over the past year into a site focused on three types of business
(commercial real estate, enterprise data center, and high-density computing).
The buildout of the initial
30,000 square feet will be used primarily for our Bitcoin mining operations. While we believe the Facility and its anticipated future
operations will be successful, there is a risk that its expectations will not materialize in a timely manner, if at all.
During the fiscal year ended
December 31, 2021, we executed contracts to purchase 4,000 Antminer S-19 Pro Bitcoin miners. As of February 15, 2022, we have 2,160 Bitcoin
miners in operation. The remaining units are expected to be delivered at a rate of approximately 300 units per month through July 2022.
The total purchase price is $27.3 million. In November 2021, we executed contracts to purchase 16,600 Bitcoin miners for $128 million.
The purchase includes both the environmentally friendly S19 XP Antminers that feature a processing power of 140 terahashes per second
(TH/s) with an energy consumption of 3.01 kilowatt-hours (kWh) and the S19j Pro Antminers that feature a processing power of 100 TH/s
with an energy consumption of 2.95 kWh. Based on current delivery schedules, we expect that the 16,600 newly purchased miners will be
shipped by Bitmain Technologies Limited (“Bitmain”) between approximately April 2022 and September 2022. Approximately $89
million of the total purchase price has been paid as of March 8, 2022 with the balance scheduled to be paid between March 2022 and November
2022. The supplier, Bitmain, does not disclose when the miners are manufactured. We have a futures purchase contract and Bitmain has been
supplying equipment according to the scheduled delivery as outlined in these agreements. All dollar amounts provided in this paragraph
include fees payable in connection with obtaining the ability to enter into the contracts, and not solely the cost of the miners.
Our strategy includes identifying
less expensive, clean power for our Bitcoin mining operations. Management of the company has considered the issues surrounding the environmental
impact of our Bitcoin mining operations. Based on this review, we have concluded that the environmental impact of our mining operations
is not material given that approximately 85% of the energy we use is “green,” meaning it is sourced from nuclear, wind or
solar power. In addition to our continued expansion investments at the Facility, we also seek out new locations to support our Bitcoin
mining business. We consider sites with a variety of offerings, including purchasing the site (as we have done in Michigan), but also
leasing buildings and facilities, hosting relationships and strategic partnerships. At this time, we have not entered into any new mining
agreements at locations other than the Facility. We currently mine Bitcoin only.
Coins that are mined are held
in a custodial account as digital assets. We securely store assets at NYDIG ABL LLC (“NYDIG”), a regulated, audited and insured
cryptocurrency custodian. The custody arrangements require that we mine to a custodial wallet address where the private key is held by
the custodian and all keys for the wallet are held in cold storage. This provides a layer of protection in both the transaction and liquidation
phases of the operations by using multi-factor and multi-person approval processes, to include Know Your Customer and Anti-Money Laundering
procedures of the receiving party. We will either hold the digital assets or may choose to convert those assets into fiat currency depending
on financial needs and plans. When we opt to convert the digital assets we sell or exchange our Bitcoin through NYDIG, the custodian of
our digital wallet. When we elect to make a sale or exchange our Senior Vice President - Finance submits a request to NYDIG’s execution
department to exchange Bitcoin for U.S. dollars. NYDIG sends an approval email to our CEO to approve. Once approved by our CEO, NYDIG
executes the sale/exchange on its trading platform at current market prices, less commissions, and deposits the U.S. dollars into our
bank account.
Currently, we are converting
Bitcoin received from our mining activities into fiat currency on a bimonthly basis, on average, to pay for operating costs and purchase
commitments for new mining equipment. We are not currently holding any digital assets for investment.
Our Contracts with Bitmain
Between July and November
2021, we entered into five separate Non-Fixed Price Sales and Purchase Agreements (collectively, the “Bitmain Agreements”)
with Bitmain, as follows:
| ● | Pursuant to the Bitmain Agreement dated July 23, 2021, Bitmain agreed to sell 1,000 Antminer S-19 Pro
miners for the estimated total purchase price of $2,550,000, which miners have been delivered; |
| ● | Pursuant to the Bitmain Agreement, dated September 12, 2021, Bitmain agreed to sell 3,000 Antminer S-19
Pro miners for the estimated total purchase price of $20,509,500, which miners have been delivered; |
| ● | Pursuant to the Bitmain Agreement dated November 10, 2021, Bitmain agreed
to sell 4,000 S19 XP miners for the estimated total purchase price of $45,360,000, which miners are expected to be shipped monthly
between July and September 2022; |
| ● | Pursuant to the Bitmain Agreement dated November 17, 2021, Bitmain agreed
to sell 12,000 S19j miners for the estimated total purchase price of $76,000,000, of which 754 have miners have been delivered
and the balance of the miners are expected to be shipped monthly between April and August 2022; and |
| ● | Pursuant to the Bitmain Agreement dated November 17, 2021, Bitmain agreed
to sell 600 S19XP miners for the estimated total purchase price of $6,510,000, which miners are expected to be shipped monthly
between July and December 2022. |
Within seven days after the
signing of each Bitmain Agreement, we paid Bitmain a down payment within the range of 25% and 31.86% of the estimated total purchase price,
and an additional prepayment within the range of 28.14% and 35% of the actual purchase price for each monthly batch scheduled for shipment,
which is due six months prior to shipment. The actual purchase price for such batch to be shipped six months later will be provided by
Bitmain one month prior to the shipment of the current batch, provided that the actual purchase price will not be higher than the total
purchase price set forth in the payment schedules in the Bitmain Agreements.
All of the miners we are purchasing
are newly manufactured and not pre-owned. We are not aware if Bitmain is experiencing any supply side constraints in its ability to fulfill
the Bitmain Agreements; to date, Bitmain has timely delivered all miners pursuant to the delivery schedule in such agreements.
Regulation
The laws and regulations applicable
to cryptocurrency are evolving and subject to interpretation and change. Governments around the world have reacted differently to cryptocurrencies;
certain governments, such as the People’s Republic of China, have deemed them illegal, and others have allowed their use and trade
without restriction, while in some jurisdictions, such as in the U.S., cryptocurrencies are subject to extensive, and in some cases overlapping,
unclear and evolving regulatory requirements. As cryptocurrencies have grown in both popularity and market value, the U.S. Congress and
a number of U.S. federal and state agencies, including the Financial Crimes Enforcement Network (the “FinCEN”), the SEC, the
Commodity Futures Trading Commission (the “CFTC”), the Financial Industry Regulatory Authority (the “FINRA”),
the Consumer Financial Protection Bureau (the “CFTC”), the Department of Justice (the “DOJ”), the Department of
Homeland Security, the Federal Bureau of Investigation, the Internal Revenue Service and state financial regulators, have been examining
the operations of cryptocurrency networks, cryptocurrency users and cryptocurrency exchange markets, with particular focus on the extent
to which cryptocurrencies can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the
safety and soundness and consumer-protective safeguards of exchanges or other service-providers that hold, transfer, trade or exchange
digital assets for users. For instance, the Cyber-Digital Task Force of the DOJ published a report entitled “Cryptocurrency: An
Enforcement Framework” in October 2020. This report provides a comprehensive overview of the possible threats and enforcement challenges
the DOJ views as associated with the use and prevalence of cryptocurrency, as well as the regulatory and investigatory means the DOJ has
at its disposal to deal with these possible threats and challenges.
Many of these federal and
state agencies have issued consumer advisories regarding the risks posed by cryptocurrencies to investors. In addition, federal and state
agencies, and other countries have issued rules or guidance about the treatment of cryptocurrency transactions or requirements for businesses
engaged in activities related to cryptocurrencies. Depending on the regulatory characterization of the cryptocurrencies we mine, the markets
for those cryptocurrencies in general, and our activities in particular, may be subject to one or more regulators in the U.S. and globally.
Ongoing and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of cryptocurrency markets and our
cryptocurrency operations. Additionally, U.S. state and federal, and foreign regulators and legislatures have taken action against cryptocurrency
businesses or enacted restrictive regimes in response to adverse publicity arising from hacks, consumer harm, or criminal activity stemming
from cryptocurrency activity. There is also increasing attention being paid by U.S. federal and state energy regulatory authorities as
the total load of crypto-mining grows and potentially alters the supply and dispatch functionality of the wholesale grid and retail distribution
systems. Many state legislative bodies are also actively reviewing the impact of crypto-mining in their respective states.
We are unable to predict the
effect that any future regulatory change, or any overlapping or unclear regulations, may have on us, but such change, overlap or lack
of clarity could be substantial and make it difficult for us to operate our business or materially impact the market for cryptocurrencies
that we mine or may mine in the future. FinCEN has issued guidance stating its position that it does not differentiate between fiat currency
(which FinCEN calls “real currency”) and cryptocurrencies that are convertible into fiat currency or other forms of convertible
virtual currencies (which FinCEN calls “virtual currency”) for purposes of determining whether a person or entity is engaging
in “money transmission services.” Persons and entities engaging in virtual currency activities that amount to “money
transmission services,” or otherwise cause them to be deemed a “money services business” under FinCEN’s regulations,
must register as a money services business, implement an “effective” anti-money laundering program and comply with FinCEN’s
reporting and recordkeeping requirements.
In May 2019, FinCEN issued
guidance relating to how the U.S. Bank Secrecy Act (“BSA”) and its implementing regulations relating to money services businesses
apply to certain businesses that transact in convertible virtual currencies. Although the guidance generally indicates that certain mining
and mining pool operations will not be treated as money transmission, the guidance also addresses when certain activities, including certain
services offered in connection with operating mining pools such as hosting convertible virtual currency wallets on behalf of pool members
or purchasers of computer mining power, may be subject to regulation. Although we believe that our mining activities do not presently
trigger FinCEN registration requirements under the BSA, if our activities cause us to be deemed a “money transmitter,” “money
services business” or equivalent designation, under federal law, we may be required to register at the federal level and comply
with laws that may include the implementation of anti-money laundering programs, reporting and recordkeeping regimes, and other operational
requirements. In that event, to the extent we decide to proceed with some or all of our operations, the required registration and regulatory
compliance steps may result in extraordinary, non-recurring expenses to us, as well as on-going recurring compliance costs, possibly affecting
operating results or financial condition in a material and adverse manner. Failure to comply with these requirements may expose us to
fines, penalties and/or interruptions in our operations that could have a material adverse effect on our financial position, results of
operations and cash flows.
According to the CFTC, at
least some cryptocurrencies, including Bitcoin, fall within the definition of a “commodity” under the U.S. Commodities Exchange
Act of 1936, as amended (the “CEA”). Under the CEA, the CFTC has broad enforcement authority to police market manipulation
and fraud in spot cryptocurrency markets in which we may transact. Beyond instances of fraud or manipulation, the CFTC generally does
not oversee cash or spot market exchanges or transactions involving cryptocurrencies that do not utilize margin, leverage, or financing.
The National Futures Association (“NFA”) is the self-regulatory agency for the U.S. futures industry, and as such has jurisdiction
over Bitcoin futures contracts and certain other cryptocurrency derivatives. However, the NFA does not have regulatory oversight authority
for the cash or spot market for cryptocurrency trading or transactions. In addition, CFTC regulations and CFTC oversight and enforcement
authority apply with respect to futures, swaps, other derivative products, and certain retail leveraged commodity transactions involving
cryptocurrencies, including the markets on which these products trade.
The SEC has taken the position
that many cryptocurrencies may be securities under U.S. federal securities laws. Some senior members of the staff of the SEC have expressed
the view that Bitcoin and Ethereum are not securities under U.S. federal securities laws. However, such statements are not official policy
statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot
be generalized to any other cryptocurrency. The SEC’s Strategic Hub for Innovation and Financial Technology published a framework
for analyzing whether any given cryptocurrency is a security in April 2019. However, this framework is also not a rule, regulation
or statement of the SEC and is similarly not binding on the SEC. Notwithstanding that the SEC has not asserted regulatory authority over
Bitcoin or trading or ownership of Bitcoin and has not expressed the view that Bitcoin should be classified or treated as a security for
purposes of U.S. federal securities laws, the SEC has commented on Bitcoin and Bitcoin-related market developments and has taken action
against investment schemes involving Bitcoin. For example, the SEC has charged at least three Bitcoin mining companies in connection with
a Ponzi scheme to defraud investors in their mining operation. The SEC has also repeatedly denied proposed rule changes by exchanges to
list and trade shares of certain Bitcoin-related investment vehicles on public markets, citing significant investor protection concerns
regarding the markets for cryptocurrencies, including the potential for market manipulation and fraud. Although the SEC has not stated
that mining Bitcoin is itself a regulated activity, to the extent any cryptocurrencies we mine are deemed to be securities, the offer,
sale, and trading of those cryptocurrencies would be subject to the U.S. federal securities laws.
In addition to the SEC, state
securities regulators and several foreign governments have also issued warnings that certain cryptocurrencies may be classified as securities
in their jurisdictions, and that transactions in such cryptocurrencies may be subject to applicable securities regulations. Furthermore,
certain state securities regulators have taken the position that certain cryptocurrency mining operations may involve the offer of securities.
For example, the Texas State Securities Board has taken enforcement action against the operator of a cloud mining company, whereby customers
could purchase hash rate managed by the cloud mining company in exchange for a share of the mining reward, for offering unregistered securities.
State financial regulators,
such as the New York State Department of Financial Services (“NYDFS”), have also implemented licensure regimes, or repurposed
pre-existing fiat money transmission licensure regimes, for the supervision, examination and regulation companies that engage in certain
cryptocurrency activities. The NYDFS requires that businesses apply for and receive a license, known as the “BitLicense,”
to participate in a “virtual currency business activity” in New York or with New York customers, and prohibits any person
or entity involved in such activity from conducting activities without a license. Louisiana also has enacted a licensure regime for companies
engaging in a “virtual currency business activity,” and other states are considering proposed laws to establish licensure
regimes for certain cryptocurrency businesses as well. Some state legislatures have amended their money transmitter statutes to require
businesses engaging in certain cryptocurrency activities to seek licensure as a money transmitter, and some state financial regulators
have issued guidance applying existing money transmitter licensure requirements to certain cryptocurrency businesses. The Conference of
State Bank Supervisors also has proposed a model statute for state level cryptocurrency regulation. Although we believe that our mining
activities do not presently trigger these state licensing requirements in any state in which we operate or plan to operate, if our activities
cause us to be deemed a “money transmitter,” “money services business” or equivalent designation under the law
of any state in which we operate or plan to operate, we may be required to seek a license or register at the state level and comply with
laws that may include the implementation of anti-money laundering programs, reporting and recordkeeping regimes, consumer protective safeguards,
and other operational requirements. In such an event, to the extent we decide to proceed with some or all of our operations, the required
registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us, as well as on-going
recurring compliance costs, possibly affecting our net income in a material and adverse manner. Failure to comply with these requirements
may expose us to fines, penalties and/or interruptions in our operations that could have a material adverse effect on our financial position,
results of operations and cash flows.
Competition
Our business environment is
constantly evolving, and cryptocurrency miners can range from individual enthusiasts to professional mining operations with dedicated
data centers. We compete with other companies that focus all or a portion of their activities on cryptocurrency mining activities at scale.
We face significant competition in every aspect of our business, including, but not limited to, the acquisition of new miners, the ability
to raise capital, obtaining the lowest cost of electricity, obtaining access to energy sites with reliable sources of power, and evaluating
new technology developments in the industry.
At present, the information
concerning the activities of these enterprises may not be readily available as the vast majority of the participants in this sector do
not publish information publicly or the information may be unreliable. Published sources of information include “bitcoin.org”
and “blockchain.info”; however, the reliability of that information and its continued availability cannot be assured and the
contents of these sites are not incorporated into this Annual Report.
A number of public companies
(traded in the U.S. and internationally) and private companies may be considered to compete with us, including the following companies
which we have identified as our competitors:
| ● | Bitcoin Investment Trust; |
| ● | Bitfarms Technologies Ltd. (formerly Blockchain Mining Ltd); |
| ● | Blockchain Industries, Inc. (formerly Omni Global Technologies, Inc.); |
| ● | Digihost International, Inc.; |
| ● | DMG Blockchain Solutions Inc.; |
| ● | Galaxy Digital Holdings Ltd.; |
| ● | Greenidge Generation Holdings Inc.; |
| ● | HashChain Technology, Inc.; |
| ● | Hive Blockchain Technologies Inc.; |
| ● | Layer1 Technologies, Inc.; |
| ● | Marathon Digital Holdings, Inc.; |
| ● | MGT Capital Investments, Inc.; |
| ● | Stronghold Digital Mining, Inc. |
Intellectual Property
We plan to use specific hardware
and software for our cryptocurrency mining operations. In certain cases, source code and other software assets may be subject to an open
source license, as much technology development underway in this sector is open source. For these works, we intend to adhere to the terms
of any license agreements that may be in place.
We do not currently own, and
do not have any current plans to seek, any patents in connection with our existing and planned blockchain and cryptocurrency related operations.
We do expect to rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights and
expect to license the use of intellectual property rights owned and controlled by others. In addition, we have developed and may further
develop certain proprietary software applications for purposes of our planned cryptocurrency mining operations.
Accounting for Digital Currencies
Digital currencies are included
in current assets in the combined balance sheet. Digital currencies are recorded at cost less any impairment. An intangible asset with
an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances
occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value. In testing for impairment, we have the option to first perform a qualitative assessment to determine whether it
is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists,
a quantitative impairment test is not necessary. If we conclude otherwise, we will be required to perform a quantitative impairment test.
To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment
losses is not permitted. We account for our mining-related gains or losses in accordance with the first-in, first-out method of accounting.
Blockchain Background
Blockchain technology first
came to public attention in 2008 as the database technology that underpins Bitcoin, the world’s first cryptocurrency. Blockchains
are generally open-source, peer-to-peer software programs that act as decentralized digital ledgers, each comprising a series of data
“blocks” that are linked and secured using cryptography in a “chain.” The blockchain program consists of a software
protocol with several functions. The software protocol is run by multiple computer systems or “nodes.” For many blockchain
networks, each node has its own copy of the blockchain ledger, which contains a historical record of every transaction. The digital ledger
continuously grows as new blocks are added to it to record the most recent transactions in a linear, chronological order. The same information
is stored across a network of computers all over the world, and this record makes it possible to track the ownership and transfer of cryptocurrency
from the creation of the blockchain to its current state, and effectively, records of all account balances (as you can identify what account
holds what value through the decentralized ledger).
The blockchain protocol allows
users to submit transactions to the network for confirmation. However, a transaction will not be accepted by the protocol if the inputs
to the transaction have previously been used in another transaction. This prevention of “double spending” is a key security
feature of blockchain networks.
Another key function of the
blockchain that protects the integrity of the network is the hashing process, which acts as a tamper-evident seal that confirms the validity
of the new block and all earlier blocks. Hashing is the process of a block being posted to the network. Hashing results from miners, who
are responsible for receiving broadcast transactions, processing those transactions into new blocks and updating the blockchain with the
new blocks through hashing. The hashing process ties every new block to the existing block on the blockchain to ensure each is a continuous
record of verified transactions.
The hashing algorithm on
a proof-of-work blockchain network is a mathematical transformation function with two key properties. The first important function of
hashing is that the algorithm accepts any alphanumeric dataset as an input and produces a unique output code. The smallest change in the
dataset results in a significant change in the unique code. Any tampering of the dataset can be detected by re-hashing the data and checking
for a change in the unique code. Any user that runs the hash algorithm on the same data will derive the same unique code. Consequently,
the data on the distributed ledger can be run through a series of hash algorithms to create a unique code, which would reveal if any changes
to the ledger have been made.
Second, whenever a new set
or “block” of transactions is added to the ledger, it is appended with the code from the prior state of the ledger before
it is hashed. Thus, the hash created from the new block will incorporate the hash from the previous block. An alteration made to an earlier
block would make the hashes of all subsequent blocks invalid, as the discrepancy would be easily detected by future miners through the
protocols governing the blockchain. If a hacker were to attempt to make a change to an earlier block and broadcast it along with following
blocks to the other nodes on the network, that broadcast would be discarded in favor of one from a different node which complied with
the requirements of the protocol.
Thus, in addition to creating
new block, miners “vote” with their computer power, expressing their acceptance of valid blocks by working on adding them
to the blockchain, and rejecting invalid blocks by refusing to work on them. If a miner’s proposed block is added to the blockchain
by a majority of the nodes on the network, it is considered part of the blockchain. The nodes on the network synchronize with each other
to ensure that once a block is accepted by the majority, the new block will eventually be added to all the nodes. Thus the historical
state of the ledger can be changed if control of more than 50% of the network is obtained; however, in the case of widely held cryptocurrencies
with non-trivial valuations, it may be economically prohibitive for any actor or group of actors acting in concert to obtain computing
power that consists of more than 50% of the network.
Unlike proof-of-work networks,
in which miners expend computational resources to compete to validate transactions and are rewarded cryptocurrency in proportion to the
amount of computational resources expended, in a proof-of-stake network, miners (sometimes called validators) risk or “stake”
assets to compete to be randomly selected to validate transactions and are rewarded cryptocurrency in proportion to the amount of assets
staked. Any malicious activity, such as mining multiple blocks, disagreeing with the eventual consensus or otherwise violating protocol
rules, results in the forfeiture or “slashing” of a portion of the staked assets. Proof-of-stake is viewed by some as more
energy efficient and scalable than proof-of-work.
Blockchain technology enables
the secure use and transfer of digital assets. “Digital asset” is a broad term that encompasses additional applications, including
ownership, transaction tracking, identity management, and smart contracts. A digital asset can represent physical or virtual assets, a
value, or a use right/service (e.g., computer storage space).
Whereas digital assets can
take many forms and be used for a variety of functions, cryptocurrencies are a type of digital asset that primarily function as a medium
of exchange, a unit of account, and/or a store of value. Cryptocurrencies allow anyone who holds a compatible wallet, anywhere in the
world, to hold and transfer that cryptocurrency without the need for an intermediary or trusted third party. Units of a cryptocurrency
may exist only as data on the internet, and often are not issued or controlled by any single institution, authority or government. Whereas
most of the world’s money currently exists in the form of electronic records managed by central authorities such as banks, units
of a non-government cryptocurrency exist as electronic records in a decentralized blockchain database. Because cryptocurrencies have no
inherent intrinsic value, the value of cryptocurrencies is determined by the value that various market participants place on them through
their transactions. Bitcoin, Ethereum and other cryptocurrencies have historically exhibited high price volatility relative to more traditional
asset classes.
Private entities also issue
digital assets called “stablecoins” that are designed to represent an underlying fiat currency or other physical asset and
therefore less susceptible to volatility. Stablecoins can be backed by fiat money, physical assets, or other crypto assets. Government
institutions are also reportedly testing and considering issuing Central Bank Digital Currencies (“CBDC’s”). While stablecoins
or CBDC’s may exhibit less price volatility than other cryptocurrencies, both rely on a central authority to establish the value
of the asset, and therefore represent an exception to the general discussion of the design of cryptocurrencies herein.
Each cryptocurrency has a
source code that comprises the basis for the cryptographic and algorithmic protocols, which govern the blockchain. The source code is
commonly open source and therefore can be inspected by anyone, and is maintained on an ongoing basis through contributors proposing amendments
to the protocol, which are peer reviewed and adopted by consensus among participants on the blockchain network. These protocols govern
the functioning of the network, including the ownership and transfer of the cryptocurrency, and are executed on the decentralized peer-to-peer
blockchain infrastructure. The peer-to-peer infrastructure on which a blockchain operates is not owned or operated by a single entity.
Instead, the infrastructure is collectively maintained by a decentralized user base. Each peer user is generally known as a “node”
or “miner,” and each miner processes transactions on the network in accordance with the protocols of the relevant cryptocurrency.
As a result, these cryptocurrencies
do not rely on either governmental authorities or financial institutions to create, transmit or determine the value of units of cryptocurrency.
Rather:
| ● | the creation of units of cryptocurrency generally is governed by the source code, not a central entity; |
| ● | the transmission of a cryptocurrency is governed by the source code and processed by the decentralized
peer-to-peer network of nodes or miners; and |
| ● | the value of a cryptocurrency is generally determined by the market supply of and demand for the cryptocurrency,
with prices set in transfers by mutual agreement or barter, as well as through acceptance directly by merchants in exchange for goods
and services. |
Cryptocurrencies may be open
source projects with no official developer or group of developers that control the network. However, certain networks’ development
may be overseen informally by a core group of developers that may propose quasi-official releases of updates and other changes to the
network’s source code. The release of updates to a blockchain network’s source code does not guarantee that the updates will
be automatically adopted. Users and miners must accept any changes made to the source code by downloading the proposed modification of
the network’s source code. A modification of the network’s source code is effective only with respect to the users and miners
that download it. If a modification is accepted by only a percentage of users and miners, a division in the network will occur such
that one network will run the pre-modification source code and the other network will run the modified source code. Such a division is
known as a “fork.” Consequently, a modification to the source code becomes part of a blockchain network only if accepted by
participants collectively having most of the processing power on the network.
Each “account”
on a blockchain network is identified by its unique public key, and is secured with its associated private key (which the account holder
must keep secret, like a password). Cryptocurrencies are treated as bearer assets, because possession of the private key generally determines
who controls or owns a cryptocurrency. Protecting private keys from unwarranted access and theft is critically important, as once the
private key is taken, in most circumstances, control over the related cryptocurrency is gone. The combination of private and public cryptographic
keys constitutes a secure digital identity in the form of a digital signature. As long as the private key is kept private (i.e., confidential
to the owner of the account) it provides strong control of ownership.
Ault Alliance
We
acquire controlling or non-controlling interests in and actively manage businesses that we generally believe (i) are undervalued and have
disruptive technologies with a global impact, (ii) operate in industries with long-term macroeconomic growth opportunities, (iii) have
positive and stable cash flows, (iv) face minimal threats of technological or competitive obsolescence, and (v) have strong
management teams largely in place. We offer investors a unique opportunity to own a diverse group of leading middle-market businesses
in the niche-industrial and branded-consumer sectors.
We
use a traditional methodology for valuing securities that primarily looks for deeply depressed prices. Upon making an investment, we often
become actively involved in the companies we seek to acquire. That activity may involve a broad range of approaches, from influencing
the management of a target to take steps to improve stockholder value, to acquiring a controlling or non-controlling interest or outright
ownership of the target company in order to implement changes that we believe are required to improve its business, and then operating
and expanding that business.
We
believe that private company operators and corporate parents looking to sell their business units may consider us an attractive purchaser
because of our ability to:
| ● | provide ongoing strategic and financial support for their businesses, including professionalization of
our subsidiaries at scale; |
| ● | maintain a long-term outlook as to the ownership of those businesses; |
| ● | sustainably invest in growth capital and/or add-on acquisitions where appropriate; and |
| ● | consummate transactions efficiently without being dependent on third-party transaction financing. |
In
particular, we believe that our outlook on length of ownership and active management on our part may alleviate the concern that many private
company operators and parent companies may have with regard to their businesses going through multiple sale processes in a short period
of time. We believe this outlook enhances our ability to develop a comprehensive strategy to grow the earnings and cash flows of each
of our businesses.
Finally,
it has been our experience that our ability to acquire businesses without the cumbersome delays and conditions typical of third party
transactional financing is appealing to sellers of businesses who are interested in confidentiality, speed and certainty to close.
We
believe our management team’s strong relationships with industry executives, accountants, attorneys, business brokers, commercial
and investment bankers, and other potential sources of acquisition opportunities offer us substantial opportunities to assess small businesses
available for acquisition. In addition, the flexibility, creativity, experience and expertise of our management team in structuring transactions
allows us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In
terms of the businesses in which we have a controlling interest as of December 31, 2021, we believe that these businesses have strong
management teams, operate in strong markets with defensible market niches, and maintain long-standing customer relationships.
Our Subsidiaries
The following is a brief
summary of the businesses in which Ault Alliance owns a controlling interest at December 31, 2021:
DP Lending
DP Lending provides funding
to businesses through loans and investments. DP Lending offers a variety of loan types including commercial loans, convertible notes and
revolving lines of credit. DP Lending is engaged in providing commercial loans to companies throughout the U.S. to provide them with operating
capital to finance the growth of their businesses. The loans are primarily short-term, ranging from six to twelve months, but may be of
longer duration. These terms are subject to change as market needs dictate, and DP Lending anticipates offering additional products in
the future.
DP Lending uses its considerable
financial experience, data analytics, and a credit scoring model to assess the creditworthiness of each small business borrower applicant.
If the business meets DP Lending’s criteria, DP Lending sets the initial interest rate according to its credit and financial models.
The final interest rate offered to the borrower will be determined by DP Lending’s interpretation of the marketplace. In order to
borrow from DP Lending, borrowers must display characteristics indicative of durable business and financial situations. These include
factors such as revenue, time in business, number of employees, and financial and credit variables. In order to qualify, business borrower
applicants must be approved through DP Lending’s underwriting process, which analyzes credit and financial data of both the business
and the business owner. DP Lending takes into account several business factors (including revenue, age of business, cash flows, and other
variables). The underwriting process determines the loan amount to approve, how loans will be priced, and whether to include a blanket
lien is based on the above analysis, as well as additional factors (including length of loan, estimated default rates by type and grade,
and general economic environment).
Our Executive Committee, which
is comprised of our Executive Chairman, Chief Executive Officer and President, acts as the underwriting committee for DP Lending and approves
all lending transactions. The Executive Committee has decades of experience in financial, investing and securities transactions. Under
its business model, DP Lending generates revenue through origination fees charged to borrowers and interest generated from each loan.
DP Lending may also generate income from appreciation of investments in marketable securities as well as any shares of common stock underlying
convertible notes or warrants issued to DP Lending in any particular financing.
As noted above, we will from
time to time, through DP Lending, engage in discussions with other companies interested in our subsidiaries or partner companies, either
in response to inquiries or as part of a process we initiate. To the extent we believe that a subsidiary partner company’s further
growth and development can best be supported by a different ownership structure or if we otherwise believe it is in our stockholders’
best interests, we will seek to sell some or all of our position in the subsidiary or partner company. These sales may take the form of
privately negotiated sales of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s
securities and, in the case of publicly traded partner companies, transactions in their securities in the open market. Our plans may include
taking subsidiaries or partner companies public through rights offerings, mergers or spin-offs and directed share subscription programs.
We will continue to consider these and functionally equivalent programs and the sale of certain subsidiary or partner company interests
in secondary market transactions to maximize value for our stockholders.
During 2022, we anticipate
providing significant new funding to expand DP Lending’s loan and investment portfolio. DP Lending loans made or arranged pursuant
to a California Financing Law license (Lic.no. 60 DBO77905).
Ault Alpha
DP Lending is the principal
owner of Ault Alpha, a term we use that comprises an investment fund, a general partner and an investment manager all formed on July 15,
2021. Ault Alpha generally seeks to invest in public companies or private companies with public debt that have strong relative value metrics
but poor Wall Street recognition; such companies can often experience valuation inefficiencies. Ault Alpha seeks to identify and invest
in these undervalued companies. In certain companies, Ault Alpha will actively intervene to assist management to maximize stockholder
value. Ault Alpha believes that an activist role can result in the creation of significant value and larger than average returns on investment.
Ault Alpha will own a concentrated portfolio, and typically invest with a long-term perspective. Further, Ault Alpha will employ a systematic
process, developed over decades of collective experience in the capital and credit markets, to seek specific value-creating events and/or
special situations, to provide compelling return potential and generate competitive capital appreciation and total return by making investments
in three key categories: (i) undervalued or overvalued assets; (ii) activist trading; and (iii) volatility trading and arbitrage. Ault
Alpha has purchased the Company’s common stock in open-market transactions.
AGREE
AGREE seeks to invest in various
classes of commercial and residential real estate including hospitality, multifamily, and industrial properties targeting the middle market
segment in locations demonstrating relative value. AGREE’s objective is to generate risk adjusted returns through development, capital
investment and operational improvement, leveraging the management team’s expertise and well-established relationships with real
estate investment professionals, brokers, lenders and developers. The focus will be in U.S. tertiary markets with growing populations,
income growth and access to highly populated metropolitan areas as primary demand drivers. AGREE is one of BitNile’s strategies
to invest in inflation-resistant undervalued assets and realize capital appreciation through cap rate compression over time. AGREE owns
and operates both Third Avenue Apartments and AGREE Madison.
Ault Media Group
Ault
Media Group (“AMG”) is comprised of a diverse team of media professionals with expertise in creating all forms of media, communications,
and content including web development, corporate communications, social media, scripted, and unscripted television. Our online virtual
training courses (via the LightSpeedVT platform) also offer in-depth business learning. AMG’s specialized team of producers brings
years of university-proven training methods and a history of developing educational materials up to a Master's degree level. AMG’s
first course, relating to initial public offerings, is currently in the final stages of production, with more courses soon to follow.
Along
with training and communications strategies, AMG also offers comprehensive consulting for the development and execution of large and small
scale conferences and event planning. From event space acquisition to digital ticketing, keynote speakers, lighting, stage crews, and
advertising media buys, AMG will provide the necessary contacts and guidance to assure a successful and smooth-running event.
Our
Strategy
Our business strategy is designed
to increase shareholder value. Under this strategy, we are focused on managing and financially supporting our existing subsidiaries and
partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to shareholders. We have, are
and will consider initiatives including, among others: public offerings, the sale of individual partner companies, the sale of certain
or all partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize
shareholder value, such as activist trading. We anticipate returning value to shareholders after satisfying our debt obligations and working
capital needs.
Our Executive Committee approves
and manages our investment strategy. Upon making an investment, we often become actively involved in the companies we seek to acquire.
That activity may involve a broad range of approaches, from influencing the management of a target to take steps to improve stockholder
value, to acquiring a controlling or sizable but non-controlling interest or outright ownership of the target company in order to implement
changes that we believe are required to improve its business, and then operating and expanding that business.
From time to time, we engage
in discussions with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of
a process we initiate. To the extent we believe that a subsidiary partner company’s further growth and development can best be supported
by a different ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to sell
some or all of our position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock
or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly
traded partner companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies
public through rights offerings and directed share subscription programs. We will continue to consider these and functionally equivalent
programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our shareholders.
Management Strategy
Our
management strategy involves the proactive financial and operational management of the businesses we own in order to increase cash flows
and stockholder value. Ault Alliance actively oversees and supports the management teams of each of our businesses by, among other things:
| ● | recruiting and retaining talented managers to operate our businesses using structured incentive compensation
programs, including non-controlling equity ownership, tailored to each business; |
| ● | regularly monitoring financial and operational performance, instilling consistent financial discipline,
and supporting management in the development and implementation of information systems to effectively achieve these goals; |
| ● | identifying and aligning with external policy and performance tailwinds such as those influenced by growing
climate, health, and social justice concerns (and similar environmental, social and governance (“ESG”) drivers); |
| ● | assisting management in their analysis and pursuit of prudent organic growth strategies; |
| ● | identifying and working with management to execute attractive external growth and acquisition opportunities; |
| ● | assisting management in controlling and right-sizing overhead costs; |
| ● | nurturing an internal culture of transparency, alignment, accountability and governance, including regular
reporting; |
| ● | professionalizing our subsidiaries at scale; and |
| ● | forming strong subsidiary level boards of directors to supplement management in their development and
implementation of strategic goals and objectives. |
Specifically,
while our businesses have different growth opportunities and potential rates of growth, we expect Ault Alliance to work with the management
teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including:
| ● | making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing
costs of our businesses; |
| ● | investing in product research and development for new products, processes or services for customers; |
| ● | improving and expanding existing sales and marketing programs; |
| ● | pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain
processes and products; and |
| ● | consolidating or improving management of certain overhead functions. |
Our
businesses typically acquire and integrate complementary businesses. We believe that complementary add-on acquisitions improve our overall
financial and operational performance by allowing us to:
| ● | leverage manufacturing and distribution operations; |
| ● | leverage branding and marketing programs, as well as customer relationships; |
| ● | add experienced management or management expertise; |
| ● | increase market share and penetrate new markets; and |
| ● | realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger
number of businesses and by implementing and coordinating improved management practices. |
Acquisition Strategy
Our
acquisition strategy is to acquire businesses that we believe to be to undervalued and have disruptive technologies with a global impact
that we expect to produce stable and growing earnings and cash flow. In this respect, we expect to make acquisitions in industries other
than those in which our businesses currently operate if we believe an acquisition presents an attractive opportunity. We believe that
attractive opportunities will continue to present themselves, as private sector owners seek to monetize their interests in long-standing
and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.
Our
ideal acquisition candidate has the following characteristics:
| ● | is a leading branded consumer or niche industrial company headquartered in North America; |
| ● | maintains highly defensible position in the markets it serves and with customers; |
| ● | operates in an industry with favorable long-term macroeconomic trends; |
| ● | has a strong management team, either currently in place or previously identified, and meaningful incentives; |
| ● | has low technological and/or product obsolescence risk; and |
| ● | maintains a diversified customer and supplier base. |
We
benefit from Ault Alliance’s ability to identify potential diverse acquisition opportunities in a variety of industries. In addition,
we rely upon our Executive Committee and other members of our management team’s experience and expertise in researching and valuing
prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because there
may be a lack of information available about these target businesses, which may make it more difficult to understand or appropriately
value such target businesses, Ault Alliance:
| ● | engages in a substantial level of internal and third-party due diligence; |
| ● | critically evaluates the target management team; |
| ● | identifies and assesses any financial and operational strengths and weaknesses of the target business; |
| ● | analyzes comparable businesses to assess financial and operational performances relative to industry competitors; |
| ● | actively researches and evaluates information on the relevant industry; and |
| ● | thoroughly negotiates appropriate terms and conditions of any acquisition. |
The
process of acquiring new businesses is both time-consuming and complex. Our management team historically has taken from two to
six months to perform due diligence, negotiate and close acquisitions. Although our management team is at various stages of evaluating
several transactions at any given time, there may be periods of time during which our management team does not recommend any new acquisitions.
Even if an acquisition is recommended by our management team, our Board may not approve it.
A
component of our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide both equity
capital and debt capital. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital
resources raised by us, rather than negotiating separate third-party financing, provides us with an advantage in successfully acquiring
attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In addition,
our strategy of providing this intercompany debt financing within the capital structure of the businesses we acquire and manage allows
us the ability to distribute cash to the parent company through monthly interest payments and amortization of principle on these intercompany
loans.
Upon
acquisition of a new business, we rely on our management team’s experience and expertise to work efficiently and effectively with
the management of the new business to jointly develop and execute a successful business plan.
Strategic Advantages
Based
on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are well-positioned to
acquire additional businesses. Our management team has strong relationships with business brokers, investment and commercial bankers,
accountants, attorneys and other potential sources of acquisition opportunities. In addition, our management team has a successful track
record of acquiring and managing businesses in various industries. In negotiating these acquisitions, we believe our management team has
been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned
businesses, management buy-outs and reorganizations.
Our
management team has a large network of deal intermediaries whom we expect to expose us to
potential acquisitions. Through this network, as well as our management team’s proprietary transaction sourcing efforts, we have
a substantial pipeline of potential acquisition targets. Our management team also has a well-established network of contacts, including
professional managers, attorneys, accountants and other third-party consultants and advisors, who may be available to assist us in the
performance of due diligence and the negotiation of acquisitions, as well as the management and operation of our acquired businesses.
Valuation and Due Diligence
When
evaluating businesses or assets for acquisition, our management team performs rigorous due diligence and a financial evaluations process
including an evaluation of the operations of the target business and the outlook for its industry. While valuation of a business is a
subjective process, we define valuations under a variety of analyses, including:
| ● | discounted cash flow analyses; |
| ● | evaluation of trading values of comparable companies; |
| ● | expected value matrices; and |
| ● | examination of comparable recent transactions. |
One
outcome of this process is a projection of the expected cash flows from the target business. A further outcome is an understanding of
the types and levels of risk associated with those projections. While future performance and projections are always uncertain, we believe
that with detailed due diligence, future cash flows will be better estimated and the prospects for operating the business in the future
better evaluated. To assist us in identifying material risks and validating key assumptions in our financial and operational analysis,
in addition to our own analysis, we engage, as necessary, third-party experts to review key risk areas, including legal, tax, regulatory,
accounting, insurance and environmental. We also engage technical, operational or industry consultants, as necessary.
A
further critical component of the evaluation of potential target businesses is the assessment of the capability of the existing management
team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary, and consistent with our
management strategy, we actively seek to augment, supplement or replace existing members of management who we believe are not likely to
execute our business plan for the target business. Similarly, we analyze and evaluate the financial and operational information systems
of target businesses and, where necessary, we enhance and improve those existing systems that are deemed to be inadequate or insufficient
to support our business plan for the target business.
Financing
We
incur third party debt financing almost entirely at the parent company level, which we use, in combination with our equity capital, to
provide debt financing to each of our businesses and to acquire additional businesses. We believe this financing structure is beneficial
to the financial and operational activities of each of our businesses by aligning our interests as both equity holders of, and lenders
to, our businesses, in a manner that we believe is more efficient than each of our businesses borrowing from third-party lenders.
Ault Disruptive Technologies Corporation
Ault Disruptive Technologies
Corporation, a Delaware corporation (“ADTC”), is a recently-organized special purpose acquisition company, or SPAC, incorporated
in February 2021 whose business purpose is to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization
or similar business combination with one or more businesses, which ADTC refers to as its initial business combination. To date, ADTC’s
efforts have been limited to organizational activities, activities related to its initial public offering and preliminary discussions
with certain parties that could become ACTC’s target company. ADTC has not selected any specific business combination target and
it has not, nor has anyone on its behalf, engaged in any substantive discussions, directly or indirectly, with any business combination
target with respect to an initial business combination with ADTC.
While ADTC may pursue an initial
business combination opportunity in any business, industry, sector or geographical location, ADTC intends to focus on opportunities to
acquire companies with innovative and emerging technologies, products or services that have the potential to transform major industries
and radically impact society. ADTC intends to acquire a target business or businesses with disruptive technologies that our management
team believes can achieve mainstream adoption and create opportunities for long-term appreciation in value. ADTC’s sponsor, Ault
Disruptive Technologies Company, LLC, is a wholly owned subsidiary of BitNile.
IMHC
On March 20, 2022, we, TOGI
and IMHC entered into the Acquisition Agreement whereby TOGI will, upon closing, become a subsidiary of IMHC (the “Acquisition”).
Upon completion of the Acquisition,
which is contingent upon the completion of an audit of TOGI and each party’s satisfaction or waiver of certain customary closing
conditions set forth in the Acquisition Agreement, IMHC will change its name to TurnOnGreen and, through an upstream merger whereby the
current TOGI shall cease to exist, have two operating subsidiaries, TOG Technologies and Digital Power. Promptly following the closing
of the Acquisition, IMHC will dissolve its three dormant subsidiaries. Subsequent to the Acquisition, we will assist TurnOnGreen in pursuing
an uplisting to the Nasdaq Capital Market, subject to Nasdaq’s seasoning rules and other criteria for listing.
We anticipate that our stockholders
will in due course receive a dividend of securities of TOGI. We expect to distribute to our stockholders approximately 140 million common
shares of IMHC we own and an equal number of warrants to purchase such shares of IMHC at the time of the record date to be set therefor,
subject to regulatory approval and compliance with U.S. federal securities laws.
TOGI
TOGI, through Digital Power
and TOG Technologies, is engaged in the design, development, manufacture and sale of highly engineered, feature-rich, high-grade power
conversion and power system solutions for mission-critical applications and processes. For more than 50 years, Digital Power has been
devoted to the perfection of our power solution products that have enabled customer innovation in complex product applications covering
a wide range of industries. A natural outgrowth of our development of these power systems has been our effort to apply our proprietary
core power technologies to optimizing the design and performance of electric vehicle (“EV”) charging solutions. We introduced
our product line of residential and commercial high-speed EV charging solutions in late 2021. We believe that our EV charging solutions
represent an entire new generation of new chargers due to dramatic improvements in electronic circuitry size reduction, power conversion
efficiency, modular topology, and output density. We believe that our feature-rich EV chargers address the specific needs of multifamily
unit home dwellers and single family homeowners by providing adjustable electric current options, restricted user access, LCD touch screen
for simple point of operation use, Bluetooth connectivity and programmable RFID card features. By leveraging our experience and expertise
in power conversion and generation, we believe we can rapidly become a meaningful participant in the high growth EV charging solution
market.
At Digital Power, we currently
provide a comprehensive range of integrated power system solutions that are designed to meet the diverse and precise needs of our customers
with the highest levels of efficiency, flexibility, and scalability. We design, develop, and manufacture
custom-made power systems incorporating our products to meet performance and/or form factor requirements that cannot be met with standard
products. These power system solutions are designed to function reliably in harsh environments for defense and aerospace applications
and are capable of being utilized under other environmental conditions in specialized product applications ranging from industrial equipment
to medical instrumentation. Our products are highly adaptive and feature soft configurations to meet the requirements of both our customers
and OEMs. These products include our Open-Frame series of products, which are the industry’s smallest open frame AC/DC switchers,
high-performance AC/DC desktop adaptor power supplies and a full range of compact AC or DC power supplies. We have been advised by our
customers that our power supply products have achieved general recognition as quality products.
We recently formed TOG Technologies,
following more than two years of engineering design and product prototypes, to provide EV drivers of all types with easy access to convenient,
reliable, and high-speed EV charging. We offer a Level 2 AC charging infrastructure for use at home, work and at play, and a Level 3 DC
Fast charger infrastructure for high traffic, high density urban, suburban, and exurban locations. Our EV charging solutions are designed
to address the expected rapid expansion of infrastructure required to support broad adoption of EVs globally. Our innovative
charging solutions produce a full charge for an EV with a 150-mile range battery in approximately 30 minutes. We provide a wide
range of EV charging solutions, including a Level 2 AC charging product line compatible with the SAE J1772
standard, and a Level 3 DC Fast charging product line compatible with the Combined Charging System and CHArge de MOve industry
standards.
Our charging network is capable
of natively charging all EV models and supports all charging standards currently available in the U.S., including Tesla models, with SAE
J1772 adapters typically included with the purchase or with third-party adapters that may be purchased separately. This network can serve
a wide variety of private, retail and commercial customers. Our charging systems have been tested and certified by nationally recognized
testing laboratories including Underwriters Laboratories, Intertek and TÜV Rheinland for operating safety according to the highest
standards in the market coordinated by the American National Standards Institute, an independent organization. We anticipate rapid growth
in the number of EVs in North America, in part in response to consumer demand for vehicles with greater fuel efficiency and lower environmental
emissions. We intend to expand our network of charging stations to accommodate this growth while prioritizing development of locations
with favorable traffic and utilization characteristics.
We are currently in the process
of installing our DC Fast chargers at multiple Tim Hortons locations (North America’s fourth largest publicly traded quick service
restaurant chain) in Canada pursuant to a pilot program agreement with Okanogan TH Holdings Ltd., a licensed franchisee of that chain.
During the pilot period, EV charging net revenues are split between us and the franchisee. The agreement will allow TOGI to retain 100%
of the gross revenue until our capital expenditures are fully recovered and subsequently we will share 50% of the net revenue with the
franchisee. We will own and operate the electric vehicle supply equipment (“EVSE”) at
select locations and be responsible for the costs associated with designing, manufacturing, installing and maintaining the EV chargers.
Our “go to market”
strategy is to be supplier of choice across numerous specialized markets that require high-quality power system solutions where custom
design, product quality, responsiveness and reliability are critical to business success. We believe that we provide advanced custom product
design services to deliver high-grade products that reach a high level of efficiency and density and can meet rigorous environmental requirements.
We believe this integrated approach, which many of our competitors do not provide, allows our customers to obtain all their needs for
designing and manufacturing power solutions and products from a single source, enabling us to establish an ongoing relationship with our
customers to provide for their future requirements. By implementing our proprietary core technology, including process implementation
in integrated circuits, we can provide cost reductions to our customers by replacing their existing power sources with our custom-designed
and engineered products.
Looking ahead, our mission
is to maintain our core power electronics business and existing relationships while leveraging the experience and expertise we have gained
in the development of power system solutions to introduce EV charging solutions. By offering EV charging solutions, as well as a convenient,
reliable and affordable EV charging e-mobility network through TOG Technologies, we intend to drive sustainable, mission-driven growth
related to powering environmentally beneficial EVs while continuing to be recognized as a trusted provider of advanced power supply technology.
Our Growth Strategies
Our power products and charging
solutions are sold in the form of hardware, extended warranty purchases, recurring network subscriptions, operations and maintenance plans,
and other related services. We will continue to optimize our operating model, combining high quality power and charging hardware and related
services with appealing business models for our customers. We believe that this approach creates significant customer network effects
and provides the potential for recurring revenues. Key elements of our growth strategies include:
| Ø | Continue to Innovate and Enhance Our EV
Products. While maintaining our core power electronics business in existing product markets, we intend to support the growth of
the company by introducing advanced, new power technologies with respect to our eMobility network and EV charging infrastructures. Specifically,
we intend to take advantage of a significant increase in eMobility market opportunities that we expect to see over the next five to ten
years for our non-networked and networked Level 2 AC chargers and our high-power Level 3 DC Fast charging solutions. Subject to obtaining
sufficient capital, we intend to invest in EV charging station components for use in connection with installations of charging solutions
at customer sites. We will expand our eMobility charging services through our TurnOnGreen Served (“TOGS”) Software Platform
as a Service (“SPaaS”) for commercial and fleet customers and continue to design and develop innovative products and services
leveraging our knowledge of power electronics technology and advanced charging network management. |
| Ø | Develop Our Strategic Channel Partnership
Network. To achieve our goals, particularly with respect to the rapid deployment of our EV charging products, we will evaluate
and enter strategic channel partnerships and independent distribution arrangements that facilitate our ability to bring solutions to a
wider network of EV drivers than we would be able to reach on our own. For example, we are an approved vendor for Consolidated Electrical
Distributors, Inc. (“CED”), a large privately owned electrical distribution company with locations throughout the U.S. We
are currently supplying our EV charging equipment to CED centers on the West coast and in several southern states. |
| Ø | Expand Within Existing Customers.
We are focused on maintaining our customer retention model, which encourages existing customers to increase their utilization of our power
products and establishing an ongoing relationship to provide for their future requirements. We expect additional growth to result from
the breadth of ecosystem integrations that are enabled through our TOGS SPaaS charging services. This eMobility network would integrate
platforms such as in-vehicle infotainment systems, consumer mobile applications, payment systems, mapping tools, home automation assistants,
fleet fuel cards and residential utility programs. |
| Ø | Make Opportunistic Investments in Marketing.
We intend to continue to aggressively market and sell our core power products through our existing domestic and international markets,
with an emphasis on the North American market. We also intend to generate revenues by our eMobility charging services through various
strategic channel partnerships and business models to reach new customers, in each case coordinated through our dedicated sales groups.
|
| Ø | Pursue Strategic Business Acquisitions
for Growth. Through selective acquisitions of, or investments in, complementary businesses, products, services and technologies
in the power electronics, EV charging solutions and other electronics-driven industries, we aim to broaden our existing product and technology
base, build on our long-standing industry relationships and enhance our ability to penetrate new markets. We are experienced at evaluating
prospective operations to increase efficiencies and capitalize on market and technological synergies. We currently have no commitments
or agreements with respect to any such acquisitions or investments. |
Our Power System Markets and Customers
Our power systems sell as
integrated solutions to diverse customers to address a wide range of product applications in the specialized markets we serve, including
medical and healthcare, defense and aerospace, and industrial and telecommunications. We also sell our products as stand-alone products
to our commercial customers, which are frequently custom made to specifications. Our current commercial customer base consists of approximately
220 companies, which are served through our direct sales team and our strategic channel partnerships. Successful marketing of our products
is dependent on the maintenance of strong relationships in the following key markets.
Medical and Healthcare.
Our power solutions are ideal for healthcare and medical applications that require a high level of reliability and performance due to
their quality, output power and high-power density. Our power supplies meet the rigorous medical safety requirements and major industrial
safety standards related to such products to major industrial safety standards, including the EN60601-1-2 4.1 series of technical standards
for medical equipment and the EMC compliance requirements, and facilitate medical device and system manufacturers’ compliance testing
of their own products. Our third-party qualification testing facilities are also approved by various safety agencies to test and qualify
power products to be used in medical devices. We have obtained the medical quality management systems ISO 13485 certification to support
rigorous design requirements and high-quality manufacturing of our medical power systems. Our medical power products help OEMs minimize
the risk of encountering unexpected development problems outside of their own areas of expertise. Representative applications that utilize
or incorporate our power products in the medical and healthcare industry include portable oxygen concentrators, patient monitoring systems,
pulsed lasers drivers for dental and surgical treatment, DNA sequencers, medical beds and ultrasounds.
Defense and Aerospace.
We offer a broad range of rugged power solutions for the defense and aerospace market. These solutions feature the ability to withstand
harsh environments. For more than 50 years, we provided rugged commercial off the shelf (“COTS”) products and custom power
solutions designed for end-to-end military and aerospace applications. We offer a wide variety of units designed to comply with the most
demanding MIL-STDs. Our military products meet all relevant military standards in accordance with the Defense Standardization Program
Policies and Procedures. This includes specifications related to space, weight, output power, electromagnetic compatibility, power density
and multiple output requirements, all of which we meet due to the decades of experience held by our engineering team. Certain of our products
that are specifically designed, modified, configured or adapted for military systems are subject to the U.S. International Traffic in
Arms Regulations (“ITAR”), which are administered by the U.S. Department of State. We obtain required export licenses for
any exports subject to ITAR. Our third-party defense manufacturing facilities are compliant with the AS9100 international Quality Management
System standard for the aviation, space and defense industry. Representative applications that utilize or incorporate our power products
in the defense and aerospace industry include mobile and ground communications, naval power conversion, automated test and simulation
equipment for weapon systems, combat and airborne power supplies, radar arrays power source, tactical gyro position and navigation systems
and active protection of tactical vehicles.
Industrial and Telecommunications.
We build products for custom and standard applications used in industrial and telecommunication markets to the highest standards in flexibility,
efficiency, and reliability. Our compact, high-density, and flexible power supplies and power converters are designed for optimal performance,
functionality, and reduced cost. Due to the breadth of our experience, our products have proven to meet
stringent design requirements. Our industrial power solutions are designed to stand up to the extreme temperatures, input surges, vibration
and shock found through uses such as industrial automation, material handling, industrial lasers, robotics, agriculture, oil and gas,
mining, and outdoor applications. Our proprietary technology is designed for thermal management, reliability, electromagnetic interference
(“EMI”) and EMC specifications and power density, with rugged performance that is typically unavailable in standard supplies
from our competitors. Representative applications that utilize or incorporate our power products in the industrial and telecommunications
industry include packaging equipment, laboratory and diagnostic equipment, industrial laser drivers, datacenter computing and turbomachinery
control solutions.
The EV Charging Industry and Our Revenue Models
The market for battery electric
vehicles (“BEVs”) and plug-in hybrid electric vehicles (“PHEVs”) has experienced substantial growth in the past
five years, and we believe that growth will increase significantly over the next five years. As the economic and environmental costs of
fossil fuel burning automobiles increases each year, consumer demand for vehicles with greater fuel efficiency, greater performance and
with lower or no environmental emissions has also increased. With a variety of federal, state and municipal incentive
programs for both EV drivers and EV supply equipment infrastructure construction, we anticipate a significant increase in the demand for
BEV and PHEV charging solutions at home, work and in public settings.
The market
for sustained growth of the EV charging industry is substantial and continuing worldwide. Multiple states and municipalities have set
ambitious zero emission vehicle goals for the next ten years. In order to meet these goals, mandates for EV sales have been established
by states like California, New York, Oregon and Washington. At the same time, oil and gas prices continue to rise and EV battery
technology continues to improve and become more affordable. The average consumer cost to acquire an EV declined 13.5% from 2018 to 2019,
according to general industry statistics, and continues to fall as more automobile manufacturers introduce new EV models to the market
each year.
According
to the Electric Drive Transportation Association, sales of plug-in vehicles since introduction to the market in 2010 is over 500,000 vehicles
and, according to a third-party research firm, sales are expected to grow by a factor of 12 to over 4,000,000 vehicles in 2025.
The cost to maintain an EV is half of what it costs to maintain an internal combustion engine (“ICE”) automobile, according
to third party research, and the cost to add 200 miles of range to an ICE car is roughly twice the cost of its all-electric counterpart.
The final
barrier to widespread BEV and PHEV adoption is the current status of the EV charging infrastructure. We believe that the demand for EV
charging is increasing each day. Utility companies are upgrading their grid infrastructure in preparation for the increased
demand. We expect the demand from businesses, municipalities and individuals to outpace supply over the next five years, creating
a highly favorable environment for EVSE companies.
We believe that providing
energy efficiency in all our power supply and EV charging products leads to long term environmental benefits for society. Increasing consumer
demand for EVs provides an opportunity for our charging infrastructure and solutions to be used for powering vehicles with little to no
tailpipe emissions or other pollutants. With a shared mission to do our part to fight climate change, we strive to bring to established
and emerging markets innovative electronics-driven solutions that provide value for our company and stockholders.
EV Charging Revenue Models
We
intend to generate revenues with TOG Technologies primarily through the sale of networked charging hardware, combined with cloud-based
services that provide end users the ability to locate and transact with EV chargers, and provide site host customers with the ability
to operate and manage their chargers (the “TOG Network” or “TOG Network Services”). TOG Network Services, and
an optional extended warranty, are billed as an annual subscription, and access to the network is available through each of our commercial
charging ports. We expect that the revenue contribution for recurring TOG Network or extended warranty sales will equal the revenue contribution
from one-time EV1100 charger sales for commercial use after approximately seven years. TOG Technologies also offers a hardware portfolio
powered by software, which cannot be accessed without a TOG Network subscription.
EV Charging Unit Sales.
We recognize revenues through the sale of our charging solutions in the form of hardware sales and extended warranty purchases. We intend
to employ various business models with customers for our EV charging unit sales based on which party bears the costs of installation,
equipment and maintenance, and the relative percentages of the continuing, long-term revenue-sharing arrangement.
EV Charging Network Services.
We intend to provide EV charging network services, including management of user authentication, billing and payments, and power management
(also called load balancing). These services will be made available through a recurring subscription business model or through a revenue
sharing arrangement that enables us to retain a percentage of the revenue generated from EV charging.
OEM Charging and Related
Services. Through discussions with OEM partners, we are pioneering innovative revenue models to meet a wide variety of OEM objectives
related to the availability of charging infrastructure and provisioning charging services for EV drivers. We are contracting directly
with OEMs to provide charging services to drivers who have purchased or leased EVs from such OEMs and who access our public charger network.
Retail Charging. We
intend to sell electricity directly to EV drivers who access our publicly available networked chargers. We offer various pricing plans
for customers. Drivers have the choice of charging either as members (with monthly fees and reduced per-minute pricing) through a subscription
service, or on a per-use basis as non-members. Drivers locate chargers through our mobile application, their vehicle’s in-dash navigation
system, or third-party databases that license charger location information from us. We aim to install our chargers in parking spaces owned
or leased by commercial or public entity site hosts that desire to provide our charging services at their locations. Commercial suite
hosts include retail centers, offices, medical complexes, airports and convenience stores. We offer charging hosts a range of revenue-sharing
arrangements.
Commercial Charging.
High volume fleet customers, such as delivery services, can access our charging infrastructure through our public network. Pricing for
charging services is to be negotiated directly between us and the fleet owner based on business needs and usage patterns of the fleet,
and we will typically contract with and bill the fleet owner directly rather than the individual fleet drivers who utilize our chargers.
Access to our public network enables fleet and rideshare operators to support mass adoption of transportation electrification and achieve
sustainability goals while avoiding direct capital investments in charging infrastructure or the incurrence of operating costs associated
with charging equipment.
Our Competitive Strengths
We offer highly engineered,
feature-rich, high-grade power conversion and power system solutions on a global scale. We believe that we differentiate ourselves from
our competition and have been able to grow our business because of the following key competitive strengths:
| Ø | Proprietary Custom-Designed and Engineered
Products. We have designed our base model power system platform so that it can be quickly and economically adapted to the specific
power needs of any hosting platform or OEM, which minimizes the time between customer consultation and delivery of our power products
and systems. |
| Ø | End-to-End Solutions for Customers.
We provide end-to-end solutions for the business needs of our customers, from product design and development to multi-year warranty,
technical support and ongoing services. |
| Ø | Specialized Technical Expertise and Experience.
We have more than 50 years of expertise in power technologies and energy generation, which has given us a wealth of experience in designing
and manufacturing AC/DC and DC/DC power conversion solutions, and positions us to benefit from the ongoing transformation towards eMobility
with smarter and greener EV charging infrastructure solutions. |
| Ø | Diverse Product and Customer Base and Revenue
Streams. We have a diverse power supply product and customer base. With our growing EV charging solution product line, we will
receive additional revenue streams through a range of different sources such as energy sales, hardware sales, network management services,
advertising sales and energy services. We will also offer customers a variety of business model options, particularly with respect to
our EV charging solution installation and maintenance services. |
| Ø | Minimal Non-Recurring Engineering Expenses.
Our ability to seamlessly modify our base model power system platform to produce bespoke products for our customer needs results in minimal
non-recurring engineering (“NRE”) expenses, meaning we generally avoid charging our OEM customers for those expenses. |
| Ø | Emphasis on Product Design and Development
Efforts. Our design and development efforts are focused at the present time on the optimization of the design and performance
of our power system and EV charging solutions. This enables us to develop cutting-edge products to support highly complex and evolving
markets such as eMobility, cloud computing, military and aerospace. |
| Ø | Commitment to Domestic Production.
The Federal government is the largest consumer of electricity in the U.S. and has committed to purchase 100% zero emission vehicles for
its 600,000-vehicle fleet by 2035. Subject to obtaining sufficient capital, we intend to lease and equip a new manufacturing and assembly
plant to focus on developing our domestic production capabilities to produce Level 2 EV chargers and bid on future Federal EV infrastructure
projects. |
GWW
GWW provides defense solutions
with operations conducted by Gresham Power, Microphase, Enertec and Relec.
Gresham Power (formerly known as Digital Power
Limited)
Gresham Power designs, manufactures,
and distributes switching power supplies, uninterruptible power supplies and power conversion and distribution equipment frequency converters
for the commercial and military markets, under the name Gresham. Frequency converters manufactured by Gresham are used by naval warships
to convert their generated 60-cycle electricity supply to 400 cycles. This 400-cycle supply is used to power their critical equipment
such as gyro, compass, and weapons systems. Gresham Power also designs and manufactures transformer rectifiers for naval use. Typically,
these provide battery supported back up for critical DC systems, such as machinery and communications. In addition, higher power rectifiers
are used for the starting and servicing of helicopters on naval vessels, and Gresham now supplies these as part of overall helicopter
start and servicing systems. We believe that Gresham Power products add diversity to our product line, provide greater access to the U.K.
and European markets, and strengthen our engineering and technical resources.
Gresham Power specializes
in engineering, designing and developing power conversion and distribution solutions for Naval applications, with equipment installed
on virtually all the U.K. Royal Navy’s submarine and surface fleet. Many of Gresham Power’s ultra-reliable offerings support
shipboard distribution of electrical power in emergencies (such as loss of main ship’s power) to enable continued operation of weapons
systems, tactical communications and lighting. Gresham Power specializes in a comprehensive range of activities from printed circuit board
and mechanical design through prototype development to board and system assembly and test. Its engineers ruggedize Marine power products
to meet high levels of shock, vibration, harsh climate conditions and the most rigorous MIL-STD requirements. Gresham Power also has deployed
its equipment on vessels of the navies of 15 other countries, including Australia, Malaysia, Oman, Spain, Turkey and Japan.
Microphase
Microphase designs, manufactures
and sells microwave electronics components for radar, electronic warfare and communication systems. Such components include RF and microwave
filters, diplexers, multiplexers, detectors, switch filters, integrated assemblies and DLVAs. Microphase’s customers are comprised
of the U.S. military and allied militaries, and contractors to the U.S. military including prime contractors and sub-contractors. Microphase’s
recent technology innovations are used in many significant U.S. Government defense programs, including the Polaris submarine, the F-16,
the F-35 and the Predator drone. Other notable programs in which Microphase’s products are or were used include the Atlas Missile,
Vanguard Missile, Polaris Missile System, SHRIKE Missile, ARM Missile, Patriot Missile System, THAAD (or Terminal High Altitude Area Defense),
the Samos, Tiros, and Currier Space Probes, the B-1 Bomber, F-18, JAS Gripen fighter and the Tornado fighter as well as various land-based
improvised explosive devices countermeasures programs and UAV programs including the Predator, the Reaper and the Shadow.
Microphase’s advanced
technology products enable the ultra-sensitive detection and high precision video amplification that are necessary to accurately recover
the signals and facilitate use of the information received. These products include:
| ● | filters that sort and clarify microwave signals,
including multiplexers with a series of filters combined in a single package; |
| ● | solid state amplifiers that amplify microwave
signals; |
| ● | detectors and limiters that are semiconductor
devices for detection of radar signals and protection of receivers from damage from high power signals and jamming; |
| ● | detector log video amplifiers that are fully
integrated, ruggedized, MIL-STD signal detection systems; and |
| ● | integrated assemblies that combine multiple functions
from a range of components and devices, including transmitters, receivers, filters, amplifiers, detectors, and other functionality into
single, efficient, high performance, multifunction assemblies. |
Manufacturing and Testing
Microphase continually improves
internal processes to ensure the highest quality and consistent manufacturing of all our RF, microwave and millimeter wave electronics
solutions. We test all our products under stress operating conditions per defined test procedures that we have developed in collaboration
with our customers. This approach ensures that our customers can implement our component solutions in broader systems and platforms. Customer
specific testing services are offered with custom designed test standards to simulate operation within customer applications.
Compliance with international
safety agency standards is critical in every mission critical application that Microphase supports, and electronics solutions play a major
role in meeting these compliance requirements. Our safety engineers and quality assurance teams help ensure that our custom products are
designed to meet all safety requirements and are appropriately documented to expedite safety approval processes.
Enertec
Based in Israel, Enertec designs,
develops, manufactures and maintains advanced end-to-end high technology electronic solutions for military, medical, telecommunications
and industrial markets. Those solutions include custom computer-based automated test equipment and turnkey systems to ensure combat readiness,
provide command and control, and direct and deploy resources in military operations in harsh environments and battlefield conditions.
Enertec also designs, develops, manufactures and maintains high precision calibration equipment for lifesaving medical operations for
a global health care products company as well as advance power systems for EV, telecom and other industrial applications. Enertec delivers
complete end-to-end project management with requirements definition, systems engineering, design/development, production, testing, integration,
field support, maintenance and optimization. Its custom engineered solutions enable and support mission critical air, land and sea military
platforms, e.g., missiles, UAVs, combat aircraft, boats, submarines, trailers and satellites.
Enertec’s primary customers
include the three major defense contractors in Israel – Israel Air Industries, Rafael and Elbit Systems. In addition, Enertec has
a strategic partnership with Cyient to build and deliver solutions for the Indian military. High tech capabilities to deliver advance
electronics solutions create opportunities for other GWW operating subsidiaries – Microphase, Relec and Gresham Power – to
possibly supply components for future Enertec high technology electronic solutions. Enertec also provides geographic reach into the Middle
East and India to broaden GWW’s footprint in delivering the highest quality and most advance technology solutions across the globe.
Enertec is one of Israel’s
largest, most well-established manufacturer of test equipment and simulators. Enertec develops and manufactures test systems and simulators
for all types of weapons systems at all levels of maintenance, development, and integration. We are currently working on developing a
new generation of electronics cards and assemblies to build a new generation of test systems.
Enertec complies with all
information security requirements included in its customer contracts as well as all the confidentiality laws that the State of Israel
mandates for work related to defense of the country.
Relec
Relec was established in 1978
with the aim of providing specialist power conversion and display solutions to support professionals in the electronics industry. Relec
markets and distributes power electronics and display solutions for mission critical rail, industrial, medical, telecoms and military
applications. Relec develops custom solutions for various applications ranging from light industrial to heavily ruggedized for the harshest
of environments. Relec exerts its utmost effort to customize a product or a feature to achieve optimum performance and service delivery.
Relec continues to be guided by this philosophy and currently operates in specific fields, specializing in AC-DC power supplies, DC-DC
converters, displays and EMC filters.
Markets
GWW’s operating subsidiaries
design, manufacture, and distribute specialized electronic solutions, automated test solutions, power electronics, supply and distribution
solutions, and radio, microwave and millimeter wave communication systems and components, with a focus on supporting the global defense
industry and mission critical applications in the medical, industrial, transportation and telecommunications markets. The essential nature
of these applications provides a degree of insulation from volatility associated with other segments of the global economy while accounting
for stability and steady growth of the addressable market opportunities available in market segments that GWW serves. Demand for solutions
to meet these requirements continues unaffected, and in many instances increases, in times of global crisis. GWW’s current business
base consists of approximately 500 customers in 45 countries situated all over the world.
Total defense spending in
the three countries in which GWW currently operates will total more than an estimated $856 billion in 2022. GWW sells to the militaries
and defense contractors in 18 other countries as well. Overall global defense spending is expected to grow at a compound annual growth
rate (“CAGR”), of 3% through 2028, with U.S. defense spending continuing to lead the world in the same period, according to
ASD Reports, Global Defense Budget Analysis—Forecast to 2028. The current conflict in the Ukraine has intensified interest
and investment in defense platforms throughout the United Kingdom (U.K.”) and Europe.
We believe that the drive
for increased situational awareness and close coordination of air, land, sea, space and cyber operations will fuel an increase in defense
electronics subsystems and components with total spending in 2022 of $130 billion and a projected CAGR of 5.6% through 2024, according
to Global Defense Electronics Market, Trends, Driver and Outlook for 2020 and Beyond, Renaissance Strategic Advisors, September
2020. The drive for greater connectivity and analytics will in turn increase demand for RF communications, power solutions and electronic
control systems content in new major military platforms, right in the sweet spot of GWW’s operating units.
Tens of thousands of companies
compete in this market to deliver electronics solutions to meet defense and other mission critical applications. However, GWW’s
operating units have longstanding relationships with dominant defense contractors in the U.S. (Lockheed, BAE Systems, L3Harris, Raytheon,
Boeing), in the U.K. (BAE, Rolls Royce, Thales, Babcock) and in Israel (Israeli Air Industries, Rafael, Elbit Systems), which hold contracts
for major defense platforms with very long life cycles. These relationships enable GWW to narrow the field of competition considerably
and thereby to grow based on repeat business with relatively low selling costs.
Beyond the defense arena,
initiatives to complete $63 billion in upgrades to the current National Railway System in the U.K. over the next five years while spending
$130 billion over the next 10 years to build a high speed rail to link London with the Midlands cities of Birmingham, Leeds and Manchester
will generate significant opportunities for growth in demand for power solutions to upgrade and replace current infrastructure, both in
rolling stock and track side controls. Relec’s current relationships and track record for supplying power solutions to the U.K.
rail industry position GWW ideally to capitalize on these ongoing refurbishment and expansion efforts. A similarly robust market in the
medical power supply markets with a CAGR at 6.9%, to reach $1.8 billion in 2025, creates tremendous growth opportunities for our Relec
subsidiary in the U.K. The coronavirus pandemic has put healthcare and the medical device industry front and center in the U.S., Europe
and Asia, fueling intense interest in the power electronics and display solutions that Relec distributes.
We sell products to our OEM
customers through direct sales or through our sales channels, including manufacturers’ representatives for our Gresham Power subsidiary.
Our sales strategy is to identify and focus on strategic accounts. This strategy allows us to maintain a close and direct relationship
with such accounts, which positions us as the supplier of choice for these customers’ challenging, innovative and demanding new
product requirements.
Commercial Customers.
We serve global commercial markets including transportation, medical, telecom, and industrial companies. Our products are used in a variety
of applications and operate in a broad range of systems where customers require mission critical power reliability and occasionally extreme
environmental conditions. Our commercial customers include Elma GmbH, BioSense Webster, a subsidiary of Johnson & Johnson, RS Components,
Premier Farnell, Parker Hannifin, Vanderbilt, Zollner, Spectrum Medical and Comnet Communications.
Military/Defense Customers.
We have developed a broad range of rugged product solutions for the military and defense market, featuring the ability to withstand harsh
environments. These ruggedized product solutions, which include both custom modifications and full custom designs, are designed for combat
environments and meet the requirements of our defense customers. We manufacture our military products through a domestic manufacturer
that complies with US International Traffic in Arms Regulations (“ITAR”) and is certified to perform such manufacturing services.
We are compliant with the ITAR regulations and are an approved vendor for the U.S. Air Force, Navy and Army.
At the core of every military
electronic system is a power supply. Mission critical systems require rugged high performance power platforms that will operate and survive
the harsh environmental conditions placed upon such systems. Our power supplies, which include the following, function effectively in
these severe military environments, including missiles – ground-to-air, air-to-air and sea-to-air; naval – naval power conversion
and distribution; mobile and ground communications – active protection, communications and navigation; artillery – gyro modular
azimuth position and navigation system; surveillance, test equipment; and unmanned aerial vehicle (“UAV”) – Very lightweight
power systems.
Our military products meet
the relevant U.S. and international Military Standards (“MIL-STDs”) in accordance with the Defense Standardization Program
Policies and Procedures. Space, weight, output power, EMC, power density and multiple output requirements are only part of the challenges
that any military power supply design faces. With many decades of experience, our engineering teams meet these tough challenges. Our
power supplies are a critical component of many major weapon systems worldwide.
Gresham Power develops and
manufactures some military and defense products mainly being deployed in several naval fleets.
Sales and Marketing
GWW markets electronics products
and solutions directly to customers primarily through the internal sales forces and executives of its operating subsidiaries.
Gresham Power makes limited
use strategic operating partners in the Middle East, India and Australia. These representatives promote Gresham Power products and serve
as the customer interface in specific parts of the world as agreed. Typically, either Gresham Power or the manufacturing representatives
are entitled to terminate the manufacturer representative agreement upon 30 days’ written notice.
Relec advertises in highly
targeted industry-specific publications such as Electronics Weekly, New Electronics, Electronic Product Design & Test, Electronics
Specifier, Components in Electronics, Design Products & Applications, Rail Technology Magazine, Rail Engineer, and Rail Professional.
In addition, Relec also posts regular podcasts on topics of interest to customers and prospects as well as running an active public relations
campaign to get placements of earned media and coverage in a wide range of media. We look to replicate similar campaigns in other operating
subsidiaries to generate inquiries/leads, raise awareness of GWW and support talent recruiting efforts.
We provide comprehensive collateral
materials including product data sheets, participation in trade shows, and our websites, www.greshamwordwide.com, www.relec.co.uk,
www.microphase.com and www.greshampower.com. We use our websites to describe our capabilities and emphasize our offerings
of bespoke technology solutions to draw inquiries from prospective customers. Our future promotional activities will likely include advertising
in industry-specific publications, earned media placements of articles, regular public relations releases and social media postings as
well as direct outreach to prospective customers at trade shows, conferences and small group seminars and/or virtual webinars.
Competition
The markets in which Microphase
operates is highly competitive and sensitive to technological advances. Many of Microphase’s competitors are larger than it is and
maintain higher levels of expenditures for research and development. Principal competitive factors in Microphase’s markets are product
quality and reliability; technological capabilities; service; past performance; ability to develop and implement complex, integrated solutions;
ability to meet delivery schedules; the effectiveness of third-party sales channels in international markets; and cost-effectiveness.
In the RF Communications market,
principal competitors for filter components products include K& L Microwave, a Dover company located in Salisbury, MD; RS Microwave,
a privately held company headquartered in Butler, NJ; Lorch Microwave of Salisbury, MD, a member of the Smith Group, a global technology
company listed on the London Stock Exchange; and Delta Diversified Products, a private company based in Arizona.
In the video amplifier segment,
principal competitors for DLVA sensor products include American Microwave Corporation, a privately held company headquartered in Frederick,
MD; Akon Inc., a privately held company based in San Jose, CA; Planar Monolithics Industries, a privately held company based in Frederick,
MD; L-3 Narda-Miteq, a subsidiary of L-3 Communications Inc., a publicly traded company based in New York, NY; and Signal Technology,
a subsidiary of Crane Co., a publicly traded company based in Stamford, CT.
Our Enertec subsidiary faces
direct competition from smaller firms than itself such as Nir Or, EPS, MER, Alexander Schneider, Symcotech and Chaban, which specialize
in components of electronic solutions. Offering end-to-end, turnkey solutions gives Enertec a competitive advantage over other private
contractors competing to provide the Israeli Ministry of Defense and major OEMs with electronic systems and components. That competitive
advantage results in a significant portion of Enertec’s business being de facto “sole source” work without other viable
competition.
Gresham Power confronts competition
from Ultra Electronics and Rolls Royce. As in the case of Microphase, elegant designs, strong engineering and a long track record for
delivering ultra-reliable high quality power electronics solutions enables Gresham Power to compete effectively.
Relec competes against many
other distributors of power electronics and display offerings, facing competition from the likes of Fidus Power Ltd, Mouser Electronics
and Avnet Abacus as well as power supply and electronics manufacturers like XP and ABB who sell direct, many of which have significantly
more fiscal and marketing resources than Relec. However, a high touch, customer-focused approach enables Relec to compete effectively
against high volume distributors and direct selling manufacturers. Optimizing and designing solutions into customer product lines has
proven tremendously effective in building relationships with customers and suppliers alike that endure over time, generating regular repeat
business and builds a reputation for customer service that provides a strong competitive advantage when pursuing new customers.
We also face competition from
current and prospective customers who may decide to design and manufacture power electronics, communications components and electronic
solutions needed to satisfy their internal programmatic requirements.
Consolidation in the defense
technology solutions market, including through mergers, acquisitions and/or strategic alliances among major entities to which we sell
our products, has the potential to intensify the competitive pressures that we face. Many of our existing and potential competitors may
be better positioned than we are to acquire other companies, technologies or products. We believe we compete favorably on the basis of
multiple factors, including product quality and reliability, technological capabilities, service, past performance, design flexibility
and ability to develop and implement complex, integrated solutions customized to our customers’ needs, and cost-effectiveness. Focusing
on bespoke technology offerings with relatively low volumes and high margins enables our operating subsidiaries to compete favorably on
price against larger companies with much high indirect cost structures. Finally, the fragmentation of the defense technology market also
creates opportunities for GWW to grow through acquiring competitors and/or potential competitors.
Compliance with Material Government (Including
Environmental) Regulations
ACS
ACS is subject to various
federal, state, local and non-U.S. laws and regulations relating to environmental protection and remediation of hazardous substances and
wastes. ACS continually assesses compliance status and management of environmental matters to ensure our operations are in compliance
with all applicable environmental laws and regulations. Investigation, remediation, and operation and maintenance costs associated with
environmental compliance and management of sites are a normal, recurring part of operations. While ACS’s regulatory compliance costs
are currently not considered material, it is reasonably possible that costs incurred to ensure continued environmental compliance could
have a material impact on results of operations, financial condition or cash flows if new areas of soil, air and groundwater contamination
are discovered and/or expansions of work scope are prompted by the results of ongoing monitoring.
The Facility is subject to
a final corrective measures plan with the Environment Protection Agency. The seller performed remedial activities at the Facility relating
to historical soil and groundwater contamination and ACS is responsible for ongoing monitoring and final remediation plans. We estimate
cost of the environmental remediation obligation is approximately $369,000 and reflects our best estimate of probable future costs for
remediation based on the current assessment data and regulatory obligations. Future costs will depend on many factors, including the extent
of work necessary to implement monitoring and final remediation plans and ACS’s time frame for remediation. We may incur actual
costs in the future that are materially different than this estimate and such costs could have a material impact on results of operations,
financial condition, and cash flows during the period in which they are recorded.
TOGI
TOGI’s businesses are
heavily regulated in most of its markets. TOGI handles power electronics products mainly in the form of power conversion. TOGI must take
into account several standards for electronic safety to protect the health of humans and animals. TOGI serves diverse markets including
automotive, defense/aerospace, medical/healthcare, industrial and telecommunications, each of which has its own set of their safety regulations
and standard that TOGI must comply with.
Government Contracts.
The U.S. Government, and other governments, may terminate any of TOGI’s government contracts at their convenience, as well as for
default based on our failure to meet specified performance requirements. If any of TOGI’s U.S. Government contracts were to be terminated
for convenience, TOGI would generally be entitled to receive payment for work completed and allowable termination or cancellation costs.
If any of TOGI’s government contracts were to be terminated for default, generally the U.S. Government would pay only for the work
that has been accepted and could require TOGI to pay the difference between the original contract price and the cost to re-procure the
contract items, net of the work accepted from the original contract. The U.S. Government can also hold TOGI liable for damages resulting
from the default.
Medical device power supplies.
TOGI’s medical power supplies must incorporate one or more means of protection (“MOP”) to avoid electrocution. A MOP
can be safety insulation, a protective earth, a defined creepage distance, an air gap (clearance) or other protective impedance. These
can be used in various combinations - having two MOPs means if one fails, there is another in place. A MOP can be achieved through safety
insulation, protective earth, a defined creepage distance, an air gap, other protective impedances, or by implementing a combination of
these techniques. TOGI must comply with a standard that treats operators and patients, resulting in the classifications “means of
operator protection” and “means of patient protection.” The latter requirements are more stringent because the patient
may be physically connected via an applied part and unconscious when the fault occurs.
Environmental. TOGI
is subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge,
treatment, storage, disposal and remediation of hazardous substances and wastes. TOGI continually assesses its compliance status and management
of environmental matters to ensure that its operations are in compliance with all applicable environmental laws and regulations. Investigation,
remediation, and operation and maintenance costs associated with environmental compliance and management of sites are a normal, recurring
part of TOGI’s operations.
Non-U.S. Sales. TOGI’s
non-U.S. sales are subject to both U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations
relating to import-export control, tariffs, investment, exchange controls, anti-corruption, and repatriation of earnings. Non-U.S. sales
are also subject to varying currency, political and economic risks.
GWW
GWW’s businesses are
heavily regulated in most of its markets. GWW transacts with numerous U.S. Government agencies and entities, including but not limited
to the U.S. Department of Defense (“DoD”), branches of the U.S. military and the Department of Homeland Security. Similar
government authorities exercise similar regulatory oversight in GWW’s non-U.S. markets.
Government Contracts.
The governments of the U.S., U.K. and Israel may terminate any of GWW’s applicable operating subsidiaries’ government contracts
at their convenience, as well as for default based on our failure to meet specified performance requirements. If the U.S. Government terminated
any of GWW’s contracts for convenience, GWW generally would be entitled to receive payment for work completed and allowable termination
or cancellation costs. If any of GWW’s government contracts were to be terminated for default, generally the U.S. government would
pay only for the work that has been accepted and could require GWW to pay the difference between the original contract price and the cost
to re-procure the contract items, net of the work accepted from the original contract. The U.S. Government can also hold GWW liable for
damages resulting from the default. Similar provisions apply to GWW’s contracts with other governments and to GWW’s subcontractors
with major defense contractors who provide systems or military platforms directly to the government.
Power Electronics.
In all of GWW’s markets in the U.S., GWW’s commercial power electronics offerings must comply with safety, energy use and
operational performance regulations and standards (IEC/EN/UL/CSA) issued and administered by international standards organizations. In
the U.S., the Department of Energy, the Environmental Protection Agency and the Federal Communications Commission mandate and enforce
compliance with these standards. Outside the U.S., various government agencies in the U.K., Europe and Israel mandate and enforce compliance
with these international requirements for safety, energy use and operational performance. In commercial markets, GWW’s suppliers
bear most of the expense of compliance with international standards as a standard cost of business. Given the universal application of
these requirements, the costs of compliance do not create any competitive disadvantage because all competitors must comply to sell into
the market.
Environmental. GWW
must meet applicable regulatory, environmental, emissions, safety and other requirements where its customer specifies, or as applicable
local regulations or laws require. The products that GWW markets and sells in Europe also may be subject to the 2003 European Directive
on Restriction of Hazardous Substances (“RoHS”), which restricts the use of six hazardous materials in the manufacture of
certain electronic and electrical equipment, as well as the 2002 European Directive on Waste Electrical and Electronic Equipment (“WEEE”),
which determines collection, recycling and recovery goals for electrical goods. In July 2006, GWW’s industry began phasing in RoHS
and WEEE requirements in most geographical markets with specific emphasis on consumer-based products. GWW believes that RoHS and WEEE-compliant
components may be subject to longer lead-times and higher prices as the industry transitions to these new requirements. REACH (Registration,
Evaluation, Authorization and Restriction of Chemicals Registration) is a European Union regulation dating from 18 December 2006. REACH
addresses the production and use of chemical substances, and their potential impacts on both human health and the environment.
These regulatory mandates
apply to all of GWW’s operating subsidiaries. GWW has structured operations to comply with these requirements and have experienced
little to no impact on lead times or prices. Give the applicability of these requirements to all competitors alike, compliance has had
no impact on the competitive position of any operating subsidiary.
Non-U.S. Sales. GWW’s
non-U.S. sales are subject to both U.S. and non-U.S. governmental regulations and procurement policies and practices, including regulations
relating to import-export control, tariffs, investment, exchange controls, anti-corruption, and repatriation of earnings. Non-U.S. sales
are also subject to varying currency, political and economic risks.
Security Clearance
As a U.S. Government contractor
working on classified projects, Microphase is required to maintain facility and personnel security clearances complying with the DoD and
other federal agency requirements. Microphase maintains strict protocols for handling classified information and Confidential Unclassified
Information (“CUI”) associated with its work for the DoD and has built a secure restricted area within its Shelton production
facility certified for generating, storing and reviewing classified information.
Gresham Power works on many
contracts classified as “Official Sensitive” that require individual security clearances and adherence to information security
protocols for receiving, handling and storing confidential information as required in the U.K. Official Secrets Act and its implementing
regulations.
Enertec complies with all
information security requirements included in their customer contracts as well as all the confidentiality laws that the State of Israel
mandates for work related to defense of the country.
Audits and Investigations
As a government contractor,
we are subject to audits and investigations by U.S. Government agencies including the Defense Contract Audit Agency (the “DCAA”),
the Defense Contract Management Agency (the “DCMA”), the Inspector General of the DoD and other departments and agencies,
the Government Accountability Office, the DOJ and Congressional Committees. From time-to-time, these and other agencies investigate or
conduct audits to determine whether a contractor’s operations are being conducted in accordance with applicable requirements. The
DCAA and DCMA also review the adequacy of, and compliance with, a contractor’s internal control systems and policies, including
the contractor’s accounting, purchasing, property, estimating, earned value management and material management accounting systems.
Our final allowable incurred costs for each year are also subject to audit and have from time to time resulted in disputes between us
and the U.S. Government. Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded
if already reimbursed. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties
and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension
or prohibition from doing business with the U.S. Government.
Enertec conducts operations
under constant supervision of the Ministry of Defense of Israel and the contractors through which the Ministry of Defense does most of
its business. All its contracts are subject to audits of performance, quality and price reasonableness.
Gresham Power contracts with
the U.K. Ministry of Defence, Royal Navy or major defense contractors serving those agencies include standard provisions which give the
customer the right to audit our performance under those contracts when they see fit. Audits are part of doing business with the government
and typically focus on deliveries – on time project milestones as well as quality. The Royal Navy will review Gresham Power pricing
of services provided under support contract every 12 months for reasonableness.
The Defense Federal Acquisition
Regulation, as implemented in standard contract clauses, mandates that Microphase establish and follow extensive detailed processes and
protocols to protect classified information and CUI from disclosure and unauthorized access. That mandate includes a requirement that
Microphase formulate and implement a system security plan with 110 different elements and protocols for handling and protecting classified
information and CUI. Over the next three years, the DoD will require all participants in the defense supply chain to demonstrate compliance
with the Capability Model Maturity Cybersecurity as verified through an independent third-party auditor. Compliance with these mandates
requires and will require Microphase to invest significant resources to maintain compliance. For instance, compliance requires extensive
security controls on access to Microphase information technology systems, strong firewalls and intrusion monitoring. Microphase will have
to hire a full-time person to ensure information security and act as a Facility Security Officer as well as oversee security of all Microphase
employees. These investments add to indirect cost pools that Microphase must recover in the price of its products for DoD and contractors.
Gresham Power Electronics
Ltd is fully certified as “Cyber Essentials Plus Compliant.” Cyber Essentials Plus is a government-backed, industry-supported
scheme to help organizations protect themselves against common online threats. The UK Government requires all suppliers bidding for contracts
involving the handling of sensitive and personal information to be certified against the Cyber Essentials Plus program criteria.
Enertec has implemented the
strongest possible cyber security protections consistent with the resources available to a company its size.
Other Compliance Matters
In addition, we are subject
to the local, state and national laws and regulations of the jurisdictions where we operate that affect companies generally, including
laws and regulations governing commerce, intellectual property, trade, health and safety, contracts, privacy and communications, consumer
protection, web services, tax, and corporate laws and securities laws. These regulations and laws may change over time. Unfavorable changes
in existing and new laws and regulations could increase our cost of doing business and impede our growth.
Research and Development
During the years ended December 31, 2021 and 2020, we spent approximately
$2.0 million and $1.8 million, respectively, on research and development.
Human Capital Resources
We are committed to attracting
and retaining the brightest and best talent, so investing in human capital is critical to our success. The employee traits we value include
industriousness, intellectual curiosity, growth mindset and deeply caring about the quality of work. The human capital measures and objectives
that we focus on in managing our business include employee safety, talent acquisition and retention, employee engagement, development
and training, diversity and inclusion, and compensation and pay equity. None of our employees is represented by a collective bargaining
unit or is a party to a collective bargaining agreement. We believe that our relationship with our employees is good.
The following description
provides an overall view of our Company. Since we are a holding company, however, every statement may not be applicable to every subsidiary,
particularly since some are located in foreign countries and others operate in industries deemed essential by the DoD and therefore remained
at work during the COVID-19 pandemic.
Employee Profile
As of December 31, 2021, we
had 323 employees located in the U.S., the U.K. and Israel, of whom 44 were engaged in engineering and product development, 35 in sales
and marketing, 175 in general operations and 69 in general administration and finance. All but 10 of these employees are employed on a
full-time basis. None of our employees is currently represented by a trade union. We consider our relations with our employees to be good.
As of December 31, 2021, approximately
45% of our current workforce is female, 55% male, and our average tenure is 6.2 years, a decrease of 38% from an average tenure of 10
years as of December 31, 2020. The decrease is primarily due to the addition of 102 employees related to our hotel operations acquired
in December 2021.
Talent
A core tenet of our talent
system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty and commitment in our
employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports
a continuous improvement mindset and our goals of a diverse and inclusive workforce. We believe that our average tenure of 6.2 years as
of the end of the fiscal year 2021 reflects the engagement of our employees in this core talent system tenet.
The Company believes it materially
complies with all applicable state, local and international laws governing nondiscrimination in employment in every location in which
the Company operates. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity,
religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran
status.
Employee Engagement and Development
Our employee engagement efforts
include our frequent and transparent “all-hands” meetings and executive communications, through which we aim to keep our employees
well-informed and to increase transparency. We believe in continual improvement and use employee feedback to drive and improve processes
that support our customers and ensure a deep understanding of our employees' needs. We plan to conduct annual confidential employee surveys
as we believe that ongoing performance feedback encourages greater engagement in our business and improves individual performance. Our
employees will participate in a 360-degree evaluation process to identify critical capabilities for development and establish new stretch
goals.
Pay Equity
Our employee compensation
strategy supports three primary objectives: attract and retain the best team members; reflect and reinforce our most important values;
and align team member interests with stockholder interests in building enduring value. We believe people should be paid for what they
do and how they do it, regardless of their gender, race or other personal characteristics. To deliver on that commitment, we benchmark
and set pay ranges based on market data and consider factors such as an employee’s role and experience, the location of their job,
and their performance. We also regularly review our compensation practices, both in terms of our overall workforce and individual employees,
to ensure our pay is fair and equitable.
Total Rewards
As part of our compensation
philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract
and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, healthcare and
insurance benefits, paid time off, family leave, family care resources and flexible work schedules. We established a Company matched 401(k)
plan during 2021 and plan to establish a Company-wide augmented employee stock purchase plan in 2022.
Health and Safety
The success of our business
is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees.
We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including
benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health
status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest
of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes having a
significant portion of our employees work from home, while implementing additional safety measures for employees continuing critical on-site
work.
An investment in our common
stock involves significant risks. You should carefully consider the following risks and all other information set forth in this Annual
Report before deciding to invest in our common stock. If any of the events or developments described below occurs, our business, financial
condition and results of operations may suffer. In that case, the value of our common stock may decline and you could lose all or part
of your investment.
You should consider each of
the following risk factors and any other information set forth in this Annual Report and the other reports filed by the Company with the
SEC, including the Company’s financial statements and related notes, in evaluating the Company’s business and prospects. The
risks and uncertainties described below are not the only ones that impact on the Company’s operations and business. Additional risks
and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business
or operations. If any of the following risks actually occurs, the Company’s business and financial condition, results or prospects
could be harmed. Please also read carefully the section entitled “Note About Forward-Looking Statements” at the beginning
of this Annual Report.
Risks Related to Our Company
We will need to raise
additional capital to fund our operations in furtherance of our business plan.
Until
we are profitable, we will need to quickly raise additional capital in order to fund our operations in furtherance of our business plan.
The proposed financing may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred
stock, debt securities, units consisting of the foregoing securities, equity investments from strategic development partners or some combination
of each. Any additional equity financings may be financially dilutive to, and will be dilutive from an ownership perspective to, our stockholders,
and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available
on a timely basis, in needed quantities, or on terms favorable to us, if at all.
We have an evolving business model, which increases the complexity
of our business.
Our business model has evolved
in the past and continues to do so. In prior years we have added additional types of services and product offerings and in some cases,
we have modified or discontinued those offerings. We intend to continue to try to offer additional types of products or services, and
we do not know whether any of them will be successful. From time to time we have also modified aspects of our business model relating
to our product mix. We do not know whether these or any other modifications will be successful. The additions and modifications to our
business have increased the complexity of our business and placed significant strain on our management, personnel, operations, systems,
technical performance, financial resources, and internal financial control and reporting functions. Future additions to or modifications
of our business are likely to have similar effects. Further, any new business or website we launch that is not favorably received by the
market could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our business.
We received a subpoena from the Commission
in the investigation now known as “In the Matter of DPW Holdings, Inc.,” the consequences of which are
unknown.
We received a subpoena in
November of 2019 from the Commission that stated that the staff of the Commission is conducting an investigation now known as “In
the Matter of DPW Holdings, Inc.” We understand that the subpoena was issued as part of an investigation as to whether we
and certain of our officers, directors, employees, partners, subsidiaries and/or affiliates, and/or other persons or entities, directly
or indirectly, violated certain provisions of the Securities Act and the Exchange Act, in connection with the offer and sale of our securities.
Certain affiliates and related parties of ours have also been subpoenaed. Although the order states that the Commission may have information
relating to such alleged violations, 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. We have produced documents in response to the subpoena.
Since the original subpoena was issued, we have received further subpoenas seeking additional documents and testimony from certain members
of our management team.
We do not know when the Commission’s
investigation will be concluded nor what action, if any, might be taken in the future by the Commission or its staff as a result of the
matters that are the subject to its investigation or what impact, if any, the cost of continuing to respond to subpoenas might have on
our financial position or results of operations. We have not established any provision for losses in respect of this matter. In addition,
complying with any such future requests by the Commission for documents or testimony would distract the time and attention of our officers
and directors or divert our resources away from ongoing business matters. This investigation has resulted in, and may continue to result,
in significant legal expenses, the diversion of management’s attention from our business, could cause damage to our business and
reputation, and could subject us to a wide range of remedies, including enforcement actions by the Commission. There can be no assurance
that any final resolution of this and any similar matters will not have a material adverse effect on our financial condition or results
of operations.
We are heavily dependent on our senior management, and a loss
of a member of our senior management team could cause our stock price to suffer.
If we lose the services of
Milton C. Ault, III, our Executive Chairman, William B. Horne, our Chief Executive Officer, Henry Nisser, our President and General Counsel,
or Ken Cragun, our Chief Financial Officer and/or certain key employees, we may not be able to find appropriate replacements on a timely
basis, and our business could be adversely affected. Our existing operations and continued future development depend to a significant
extent upon the performance and active participation of these individuals and certain key employees. Although we have entered into employment
agreements with Messrs. Ault, Horne and Nisser, and we may enter into employment agreements with additional key employees in the future,
we cannot guarantee that we will be successful in retaining the services of these individuals. If we were to lose any of these individuals,
we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially
adversely affected.
We rely on highly skilled personnel and the
continuing efforts of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be
severely disrupted.
Our performance largely depends
on the talents, knowledge, skills, know-how and efforts of highly skilled individuals and in particular, the expertise held by our Executive
Chairman, Milton C. Ault, III. His absence, were it to occur, would materially and adversely impact development and implementation of
our projects and businesses. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly
skilled personnel for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract, among
others, new technology developers and to retain and motivate our existing contractors. If one or more of our executive officers are unable
or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may
be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives
joins a competitor or forms a competing company, we may lose some customers.
We may be classified as an inadvertent investment company.
We are not engaged in the
business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. Under
the Investment Company Act, however, a company may be deemed an investment company under section 3(a)(1)(C) of the Investment Company
Act if the value of its investment securities is more than 40% of its total assets (exclusive of government securities and cash items)
on a consolidated basis.
Our lending subsidiary, DP
Lending, operates under California Finance Lending License #60DBO-77905. Per the Investment Company Act of 1940 companies with substantially
all their business confined to making small loans, industrial banking or similar business, such as DP Lending, are excluded from the definition
of an investment company.
We have commenced digital
asset mining, the output of which is Bitcoin, which the Commission has not indicated it deems a security. In the event that the digital
assets that are securities held by us exceed 40% of our total assets, exclusive of cash, we inadvertently become an investment company.
An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions under the
Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace
period of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the
issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes to acquire
investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities
and cash items) on an unconsolidated basis. We are putting in place policies that we expect will work to keep the investment securities
held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our investment securities
or seeking a no-action letter from the Commission if we are unable to acquire sufficient assets or liquidate sufficient investment securities
in a timely manner.
As Rule 3a-2 is available
to a company no more than once every three years, and assuming no other exclusion were available to us, we would have to keep within the
40% limit for at least three years after we cease being an inadvertent investment company. This may limit our ability to make certain
investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to
become an investment company engaged in the business of investing and trading securities.
Classification as an investment
company under the Investment Company Act requires registration with the Commission. If an investment company fails to register, it would
have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive and would
require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered investment
company. Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons
and portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result
in our incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact to conduct
our operations.
We will not be able to successfully execute
our business strategy if we are deemed to be an investment company under the Investment Company Act.
U.S. companies that have more
than 100 stockholders or are publicly traded in the U.S. and are, or hold themselves out as being, engaged primarily in the business of
investing, reinvesting or trading in securities are subject to regulation under the Investment Company Act. Unless a substantial part
of our assets consists of, and a substantial part of our income is derived from, interests in majority-owned subsidiaries and companies
that we primarily control, we may be required to register and become subject to regulation under the Investment Company Act. If Bitcoin
and other virtual currencies were to be deemed securities for purposes of the Investment Company Act, or if we were deemed to own but
not operate one or more of our other subsidiaries, we would have difficulty avoiding classification and regulation as an investment company.
If we were deemed to be, and
were required to register as, an investment company, we would be forced to comply with substantive requirements under the Investment Company
Act, including limitations on our ability to borrow, limitations on our capital structure; restrictions on acquisitions of interests in
associated companies, prohibitions on transactions with affiliates, restrictions on specific investments, and compliance with reporting,
record keeping, voting, proxy disclosure and other rules and regulations. If we were forced to comply with the rules and regulations of
the Investment Company Act, our operations would significantly change, and we would be prevented from successfully executing our business
strategy. To avoid regulation under the Investment Company Act and related rules promulgated by the Commission, we could need to sell
Bitcoin and other assets which we would otherwise want to retain and could be unable to sell assets which we would otherwise want to sell.
In addition, we could be forced to acquire additional, or retain existing, income-generating or loss-generating assets which we would
not otherwise have acquired or retained and could need to forgo opportunities to acquire Bitcoin and other assets that would benefit our
business. If we were forced to sell, buy or retain assets in this manner, we could be prevented from successfully executing our business
strategy.
Securitization of our assets subjects us to various risks.
We may securitize assets to
generate cash for funding new investments. We refer to the term securitize to describe a form of leverage under which a company (sometimes
referred to as an “originator” or “sponsor”) transfers income producing assets to a single-purpose, bankruptcy-remote
subsidiary (also referred to as a “special purpose entity” or “SPE”), which is established solely for the purpose
of holding such assets and entering into a structured finance transaction. The SPE would then issue notes secured by such assets. The
special purpose entity may issue the notes in the capital markets either publicly or privately to a variety of investors, including banks,
non-bank financial institutions and other investors. There may be a single class of notes or multiple classes of notes, the most senior
of which carries less credit risk and the most junior of which may carry substantially the same credit risk as the equity of the SPE.
An important aspect of most
debt securitization transactions is that the sale and/or contribution of assets into the SPE be considered a true sale and/or contribution
for accounting purposes and that a reviewing court would not consolidate the SPE with the operations of the originator in the event of
the originator's bankruptcy based on equitable principles. Viewed as a whole, a debt securitization seeks to lower risk to the note purchasers
by isolating the assets collateralizing the securitization in an SPE that is not subject to the credit and bankruptcy risks of the originator.
As a result of this perceived reduction of risk, debt securitization transactions frequently achieve lower overall leverage costs for
originators as compared to traditional secured lending transactions.
In accordance with the above
description, to securitize loans, we may create a wholly owned subsidiary and contribute a pool of our assets to such subsidiary. The
SPE may be funded with, among other things, whole loans or interests from other pools and such loans may or may not be rated. The SPE
would then sell its notes to purchasers whom we would expect to be willing to accept a lower interest rate and the absence of any recourse
against us to invest in a pool of income producing assets to which none of our creditors would have access. We would retain all or a portion
of the equity in the SPE. An inability to successfully securitize portions of our portfolio or otherwise leverage our portfolio through
secured and unsecured borrowings could limit our ability to grow our business and fully execute our business strategy, and could decrease
our earnings, if any. However, the successful securitization of portions of our portfolio exposes us to a risk of loss for the equity
we retain in the SPE and might expose us to greater risk on our remaining portfolio because the assets we retain may tend to be those
that are riskier and more likely to generate losses. A successful securitization may also impose financial and operating covenants that
restrict our business activities and may include limitations that could hinder our ability to finance additional loans and investments.
The Investment Company Act may also impose restrictions on the structure of any securitizations.
Interests we hold in the SPE,
if any, will be subordinated to the other interests issued by the SPE. As such, we will only receive cash distributions on such interests
if the SPE has made all cash interest and other required payments on all other interests it has issued. In addition, our subordinated
interests will likely be unsecured and rank behind all of the secured creditors, known or unknown, of the SPE, including the holders of
the senior interests it has issued. Consequently, to the extent that the value of the SPE's portfolio of assets has been reduced as a
result of conditions in the credit markets, or as a result of defaults, the value of the subordinated interests we retain would be reduced.
Securitization imposes on us the same risks as borrowing except that our risk in a securitization is limited to the amount of subordinated
interests we retain, whereas in a borrowing or debt issuance by us directly we would be at risk for the entire amount of the borrowing
or debt issuance.
We may also engage in transactions
utilizing SPEs and securitization techniques where the assets sold or contributed to the SPE remain on our balance sheet for accounting
purposes. If, for example, we sell the assets to the SPE with recourse or provide a guarantee or other credit support to the SPE, its
assets will remain on our balance sheet. Consolidation would also generally result if we, in consultation with our auditors, determine
that consolidation would result in a more accurate reflection of our assets, liabilities and results of operations. In these structures,
the risks will be essentially the same as in other securitization transactions but the assets will remain our assets for purposes of the
limitations described above on investing in assets that are not qualifying assets and the leverage incurred by the SPE will be treated
as borrowings incurred by us for purposes of our limitation on the issuance of senior securities.
We may not be able to utilize our net operating loss carry forwards.
At December 31, 2021, we had
federal and state net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $25.3 million and $19.2
million after application of limitation set forth in Section 382 of the Internal Revenue Code (“§382”). In accordance
with §382, future utilization of our NOLs is subject to an annual limitation as a result of ownership changes that occurred previously.
We also maintain NOLs in various foreign jurisdictions.
Our corporate structure and intercompany arrangements
are subject to the tax laws of various jurisdictions, and we could face greater than anticipated tax liabilities, which would harm our
results of operations.
We are subject to tax laws
in the U.S. and certain foreign jurisdictions, including Israel and the U.K. Our income tax obligations
are based in part on our corporate structure and intercompany arrangements. The tax laws applicable to our business are increasingly complex,
are subject to interpretation and their application can be uncertain. The amount of taxes we pay in the jurisdictions in which we operate
could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised
interpretations of existing tax laws and precedents.
We are subject to the examination
of our income tax returns by the Internal Revenue Service and foreign tax authorities in the jurisdictions in which we operate, and we
may be subject to assessments or audits in the future in any such jurisdictions. The tax authorities in these jurisdictions may aggressively
interpret their laws in an effort to raise additional tax revenue and may claim that various withholding requirements apply to us or our
subsidiaries, challenge the availability to us or our subsidiaries of certain benefits under tax treaties, and challenge our methodologies
for valuing developed technology or intercompany arrangements or our revenue recognition policies, which could result in an increase of
our worldwide effective tax rate and have a material adverse effect on our financial condition and operating results.
Risks Related to Our Bitcoin Operations
Risks Related to Our Bitcoin Operations – General
Acceptance and/or widespread use of Bitcoin
is uncertain.
Currently, there is a limited
use of any Bitcoin in the retail and commercial marketplace, thus contributing to price volatility that could adversely affect an investment
in our securities. Banks and other established financial institutions may refuse to process funds for Bitcoin transactions or process
wire transfers to or from Bitcoin exchanges, Bitcoin-related companies or service providers, which we have experienced, or maintain accounts
for persons or entities transacting in Bitcoin. Conversely, a significant portion of Bitcoin demand is generated by investors seeking
a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines
any Bitcoin’s role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization
for a Bitcoin as a medium of exchange and payment method may always be low.
The relative lack of acceptance
of Bitcoins in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for
goods and services. Such lack of acceptance or decline in acceptances could have a material adverse effect on our ability to continue
as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or
operations and potentially the value of Bitcoins we mine or otherwise acquire or hold for our own account.
The development and acceptance of cryptographic
and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of special economic,
geopolitical and regulatory factors, which could slow the growth of the industry in general and our company as a result.
The use of cryptocurrencies,
including Bitcoin, to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving
industry that employs cryptocurrency assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance
of cryptocurrencies as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of Bitcoin
in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing
protocols may occur unpredictably. The factors include, but are not limited to:
| ● | the progress of worldwide growth in the adoption and use of Bitcoin and other cryptocurrencies as a medium
of exchange; |
| ● | the experience of businesses in using Bitcoin; |
| ● | the impact from prominent business leaders in criticizing Bitcoin’s potential harm to the environment
and the effect of announcements critical of Bitcoin, such as those that occurred with Elon Musk of Tesla; |
| ● | governmental and organizational regulation of Bitcoin and other cryptocurrencies and their use, or restrictions
on or regulation of access to and operation of the network or similar cryptocurrency systems (such as the recent ban in China); |
| ● | changes in consumer demographics and public tastes and preferences, including as may result from coverage
of Bitcoin or other cryptocurrencies by journalists and other sources of information and media; |
| ● | the maintenance and development of the open-source software protocol of the network; |
| ● | the increased consolidation of contributors to the Bitcoin blockchain through mining pools and scaling
of mining equipment by well-capitalized market participants; |
| ● | the availability and popularity of other forms or methods of buying and selling goods and services, including
new means of using fiat currencies; |
| ● | the use of the networks supporting Bitcoin or other cryptocurrencies for developing smart contracts and
distributed applications; |
| ● | general economic conditions and the regulatory environment relating to Bitcoin and other cryptocurrencies; |
| ● | the impact of regulators focusing on cryptocurrencies and the costs, financial and otherwise, associated
with such regulatory oversight; and |
| ● | a decline in the popularity or acceptance of Bitcoin could adversely affect an investment in us. |
The outcome of these factors
could have negative effects on our ability to continue as a going concern or to pursue our business strategy, which could have a material
adverse effect on our business, prospects or operations as well as potentially negative effects on the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire, which would harm investors in our securities. If Bitcoin or other cryptocurrencies we mine do not gain widespread
market acceptance or accrete in value over time, our prospects and your investment in us would diminish.
We rely on a sole supplier for our Bitcoin
mining machines, and may not be able to find replacements or immediately transition to alternative suppliers. If we were to lose Bitmain
as a supplier, or if Bitmain were unable or unwilling to fulfill our orders, any delay or interruption in planned delivery could seriously
interrupt our business.
We rely on Bitmain as the
sole supplier for our Bitcoin miners. According to Bitmain, it supplies approximately 80% of the global market for ASIC miners, which
are used to mine Bitcoin. Currently, we have contracts with Bitmain for the delivery of 20,600 miners, of which approximately 4,754 have
been delivered to date, with the remaining miners scheduled to be delivered monthly through December 2022. The market price and availability
of new mining machines fluctuates with the price of Bitcoin and can be volatile. Higher Bitcoin prices increase the demand for mining
equipment and increases the cost. In addition, as more companies seek to enter the mining industry, the demand for machines may outpace
supply and create mining machine equipment shortages. Any future purchase orders with Bitmain for additional miners are subject to availability
and price considerations. If we were to lose Bitmain as a supplier, or if Bitmain were unable or unwilling to fulfill our orders or make
miners available to use in the future on terms acceptable to us, there can be no assurance that we will be able to identify or enter into
agreements with alternative suppliers on a timely basis or on acceptable terms, if at all. Any delay or interruption in the planned delivery
of our contracted miners could significantly affect our business, financial condition and results of operations.
Political or economic crises may motivate large-scale sales
of cryptocurrencies, which could result in a reduction in values of cryptocurrencies such as Bitcoin and adversely affect an investment
in us.
Geopolitical crises, in particular
major ones such as Russia’s invasion of Ukraine, may motivate large-scale purchases of Bitcoin and other cryptocurrencies, which
could increase the price of Bitcoin and other cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease
as crisis-driven purchasing behavior dissipates, adversely affecting the value of our Bitcoin following such downward adjustment. Such
risks are similar to the risks of purchasing commodities in general uncertain times, such as the risk of purchasing, holding or selling
gold. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic
downturn may discourage investment in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of
hedging their investment risk.
As an alternative to fiat
currencies that are backed by central governments, cryptocurrencies, which are relatively new, are subject to supply and demand forces.
How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us and investors in our
common stock. Political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally or locally.
Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which
could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or any other cryptocurrencies
we mine or otherwise acquire or hold for our own account.
Negative media attention and public perception
surrounding energy consumption by cryptocurrency mining may adversely affect our reputation and, consequently, our stock price; particularly
in the eyes of some of our investors who may be more interested in our non-crypto operations as a holding company.
Cryptocurrency mining has
experienced negative media attention surrounding its perceived high electricity use and environmental impact, which has adversely influenced
public perception of the industry as a whole. We believe these factors are overstated for the cryptocurrency mining industry because of
the informational disparity between cryptocurrency mining and other energy intensive industries. Cryptocurrency miners (particularly Bitcoin
miners) have freely and publicly disclosed their energy consumption statistics because electricity usage, and the associated utility fees,
is a cost of production. As increasing numbers of publicly traded cryptocurrency miners enter the market, more data, reliably disclosed
in compliance with GAAP, has become available; however, such data has not been made as readily available for competitive payment systems
and fiat currencies.
Nevertheless, this negative
media attention and public perception may materially and adversely affect our reputation and, consequently, our stock price, particularly
in the eyes of our investors who are more interested in our non-crypto operations as a holding company. As a single company within the
broader cryptocurrency industry, we are likely incapable of effectively countering this negative media attention and affecting public
perception. Therefore, we may not be able to adequately respond to these external pressures, which may cause a significant decline in
the price of our common stock.
Banks and financial institutions may not provide
banking services, or may cut off services, to businesses like us that engage in cryptocurrency-related activities.
A number of companies that
engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are
willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated
with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial
institutions in response to government action. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities
have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness
of cryptocurrencies as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness and harm
their public perception in the future.
The usefulness of cryptocurrencies
as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the
accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance
risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national securities
exchanges and derivatives on commodities exchanges, the over-the-counter market, and the Depository Trust Company (“DTC”),
which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships
with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material
adverse effect on our ability to continue as a going concern or to monetize our mining efforts, which could have a material adverse effect
on our business, prospects or operations and harm investors.
The price of cryptocurrencies may be affected
by the sale of such cryptocurrencies by other vehicles investing in cryptocurrencies or tracking cryptocurrency markets. Such events could
have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine.
The global market for cryptocurrency
is characterized by supply constraints that differ from those present in the markets for commodities or other assets such as gold and
silver. The mathematical protocols under which certain cryptocurrencies are mined permit the creation of a limited, predetermined amount
of digital currency, while others have no limit established on total supply. Increased numbers of miners and deployed mining power globally
will likely continue to increase the available supply of Bitcoin and other cryptocurrencies, which may depress their market price. Further,
large “block sales” involving significant numbers of Bitcoin following appreciation in the market price of Bitcoin may also
increase the supply of Bitcoin available on the market, which, without a corresponding increase in demand, may cause its price to fall.
Additionally, to the extent that other vehicles investing in cryptocurrencies or tracking cryptocurrency markets form and come to represent
a significant proportion of the demand for cryptocurrencies, large redemptions of the securities of those vehicles and the subsequent
sale of cryptocurrencies by such vehicles could negatively affect cryptocurrency prices and therefore affect the value of the cryptocurrency
inventory we hold. Such events could have a material adverse effect on our business, prospects or operations and potentially the value
of any Bitcoin or other cryptocurrencies we mine.
Tariffs have increased costs of digital asset
mining equipment, and new or additional tariffs or other restrictions on the import of equipment necessary for digital asset mining could
have a material adverse effect on our business, financial condition and results of operations.
Equipment necessary for digital
asset mining is almost entirely manufactured outside of the U.S. There is currently significant uncertainty about the future relationship
between the U.S. and various other countries, including Russia, China, the European Union, Canada, and Mexico, with respect to trade policies,
treaties, tariffs and customs duties, and taxes. For example, since 2019, the U.S. Government has implemented significant changes to U.S.
trade policy with respect to China. These tariffs have subjected certain digital asset mining equipment manufactured overseas to additional
import duties of up to 25%. The amount of the additional tariffs and the number of products subject to them has changed numerous times
based on action by the U.S. Government. These tariffs have increased costs of digital asset mining equipment, and new or additional tariffs
or other restrictions on the import of equipment necessary for digital asset mining could have a material adverse effect on our business,
financial condition and results of operations.
Because there has been limited precedent set
for financial accounting for Bitcoin and other digital assets, the determinations that we have made for how to account for digital assets
transactions may be subject to change.
Because there has been limited
precedent set for the financial accounting for Bitcoin and other digital assets and related revenue recognition and no official guidance
has yet been provided by the Financial Accounting Standards Board or the SEC, it is unclear how companies may in the future be required
to account for digital asset transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards
could result in the necessity to change the accounting methods we currently intend to employ in respect of our anticipated revenues and
assets and restate any financial statements produced based on those methods. Such a restatement could adversely affect our business, prospects,
financial condition and results of operation.
Risks Related to Our Bitcoin Operations – Operational and
Financial
Our results of operations are expected to be
impacted by fluctuations in the price of Bitcoin because a significant portion of our revenue is expected to come from Bitcoin mining
production.
The price of Bitcoin has experienced
significant fluctuations over its relatively short existence and may continue to fluctuate significantly in the future. Bitcoin prices
ranged from approximately $7,220 per coin as of December 31, 2019 and $28,922 per coin as of December 31, 2020 to $46,306 per coin as
of December 31, 2021, with a high of $68,790 per coin and a low of $28,804 per coin during 2021, according to Coin Market Cap.
We expect our results of operations
to continue to be affected by the Bitcoin price as a significant portion of our revenue is expected to come from Bitcoin mining production.
Any future significant reductions in the price of Bitcoin will likely have a material and adverse effect on our results of operations
and financial condition. We cannot assure you that the Bitcoin price will remain high enough to sustain our operations or that the price
of Bitcoin will not decline significantly in the future. Further, fluctuations in the Bitcoin price can have an immediate impact on the
trading price of our shares even before our financial performance is affected, if at all.
Various factors, mostly beyond
our control, could impact the Bitcoin price. For example, the usage of Bitcoins in the retail and commercial marketplace is relatively
low in comparison with the usage for speculation, which contributes to Bitcoin’s price volatility. Additionally, the reward for
Bitcoin mining will decline over time, with the most recent halving event having occurred in May 2020 and the next one expected to occur
in 2024, which may further contribute to Bitcoin price volatility.
Because of our focus on Bitcoin mining, the
trading price of shares of our common stock may increase or decrease with the trading price of Bitcoin, which subjects investors to pricing
risks, including “bubble” type risks, and volatility.
The trading prices of our
common stock may at times be tied to the trading prices of Bitcoin. Specifically, we may experience adverse effects on our stock price
when the value of Bitcoin drops. Furthermore, if the market for Bitcoin mine operators’ shares or the stock market in general experiences
a loss of investor confidence, the trading price of our stock could decline for reasons unrelated to our business, operating results or
financial condition. The trading price of our common stock could be subject to arbitrary pricing factors that are not necessarily associated
with traditional factors that influence stock prices or the value of non-cryptocurrency assets such as revenue, cash flows, profitability,
growth prospects or business activity since the value and price, as determined by the investing public, may be influenced by uncertain
contingencies such as future anticipated adoption or appreciation in value of cryptocurrencies or blockchains generally, and other factors
over which we have little or no influence or control.
Bitcoin and other cryptocurrency
market prices, which have historically been volatile and are impacted by a variety of factors, are determined primarily using data from
various exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as
those that impact commodities, more so than business activities, which could be affected by additional influence from fraudulent or illegitimate
actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue
to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making their market prices
more volatile or creating “bubble” type risks for the trading price of Bitcoin.
The price of Bitcoin has experienced
significant fluctuations over its relatively short existence and may continue to fluctuate significantly in the future. Bitcoin prices
ranged from approximately $7,220 per coin as of December 31, 2019 and $28,922 per coin as of December 31, 2020 to $46,306 per coin as
of December 31, 2021, with a high of $68,790 per coin and a low of $28,804 per coin during 2021, according to Coin Market Cap. There can
be no assurance that similar fluctuations in the trading price of Bitcoin will not occur in the future. Accordingly, since our revenue
will depend in part on the price of Bitcoin, and the trading price of our securities may therefore at times be connected to the trading
price of Bitcoin, if the trading price of Bitcoin again experiences a significant decline, we could experience a similar decline in revenue
and/or in the trading price for shares of our common stock. If this occurs, you may lose some or all of your investment.
Our future success will depend in large part
upon the value of Bitcoin. The value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings.
Our operating results from
this sector will depend in large part upon the value of Bitcoin because it is the sole digital asset we currently mine. Specifically,
our revenues from our Bitcoin mining operations are principally based upon two factors: the number of Bitcoin rewards we successfully
mine and the value of Bitcoin. We also receive transaction fees paid in Bitcoin by participants who initiated transactions associated
with new blocks that we mine. In addition, our operating results are directly impacted by changes in the value of Bitcoin, because under
the value measurement model, both realized and unrealized changes will be reflected in our statement of operations (i.e., we will be marking
Bitcoin to fair value each quarter). This means that our operating results will be subject to swings based upon increases or decreases
in the value of Bitcoin. Our strategy currently focuses primarily on Bitcoin (as opposed to other digital assets). Further, our miners
are principally utilized for mining Bitcoin and cannot mine other digital assets, such as ETH, that are not mined utilizing the “SHA-256
algorithm.” If other digital assets were to achieve acceptance at the expense of Bitcoin, causing the value of Bitcoin to decline,
or if Bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which our miners are not specialized, or
the value of Bitcoin were to decline for other reasons, particularly if such decline were significant or over an extended period of time,
our operating results would be adversely affected, and there could be a material adverse effect on our ability to continue as a going
concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations,
and harm investors.
Bitcoin and other cryptocurrency
market prices, which have historically been volatile and are impacted by a variety of factors are determined primarily using data from
various exchanges, over-the-counter markets and derivative platforms. Such prices may be subject to factors such as those that impact
commodities, more so than business activities, which could be subject to additional influence from fraudulent or illegitimate actors,
real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to
result in, speculation regarding future appreciation in the value of digital assets, or our share price, inflating and making their market
prices more volatile or creating “bubble” type risks for both Bitcoin and our shares of common stock.
We lack a significant operating history
in the cryptocurrency mining space, and our focus on this relatively new business is subject to a number of significant risks and uncertainties
that could affect our future viability.
We recently transferred all
our mining activity from Ault Alliance to BNI, both of which are wholly owned subsidiaries of our company. As of the date of this Annual
Report, we have invested approximately $127 million and agreed to invest approximately $49 million towards the development of
our new Bitcoin mining business. BNI was formed to, and has assumed the agreements for the acquisition of miners from Bitmain and other
agreements for the acquisition of equipment and services originally entered into by Ault Alliance, but has only recently commenced cryptocurrency
mining operations. In order to proceed, we have installed miners and mining infrastructure at our mining facility in Michigan, as well
as entered into a long-term contract to purchase electric power from the power grid in our data center in Michigan and use the power
to mine cryptocurrencies. Among the risks and uncertainties are:
| ● | We are currently in discussions with a number of key players in this industry, but have not yet executed
any agreements to purchase the power needed over the 28 megawatts (“MW”) we currently possess. While we are in negotiations
with one entity in particular that we believe would increase our available power to approximately 300 MW’s at our Michigan facility,
we cannot assure you that we will reach an agreement satisfactory to us with this provider on a timely basis, if at all. Even if we do
obtain that level of energy at our Michigan facility, we will need to obtain more capacity at a different location to be able to install
and power 12,000 of the additional miners we have purchased and will receive from Bitmain over the next six to twelve months. If we are
able to enter into agreements for additional power, the terms may not be as attractive as we currently expect, which may inhibit the profitability
of this venture; |
| ● | There is a limited number of available miners and the demand from competitors is fierce; |
| ● | Because of supply chain disruptions including those relating to computer chips, we could in the future
encounter delivery delays or other difficulties with the purchase, installing and operating of our mining equipment at our facility, which
would adversely affect our ability to generate material revenue from our operations; |
| ● | There are a growing number of well capitalized cryptocurrency mining companies including some that have
agreed to merge with special purpose acquisition companies, which competitors have significant capital resources, a large supply of miners
and operators with experience in cryptocurrency mining. For example, in 2021 Cipher Mining Inc. and Core Scientific, large cryptocurrency
mining companies, entered into business combinations Nasdaq-listed special purpose acquisition vehicles; |
| ● | Bans from governments such as China, together with pending legislation in Congress and other regulatory
initiatives threaten the ability to use cryptocurrencies as a medium of exchange; and |
| ● | We may not be able to liquidate our holdings of cryptocurrencies at our desired prices if a precipitous
decline in market prices occurs and this could negatively impact our future operations. |
For all of these reasons,
our cryptocurrency mining business may not be successful.
The emergence of competing blockchain platforms
or technologies may harm our business as presently conducted by preventing us from realizing the anticipated profits from our investments
and forcing us to expend additional capital in an effort to adapt.
If blockchain platforms or
technologies which compete with Bitcoin and its blockchain, including competing cryptocurrencies which our miners may not be able to mine,
such as cryptocurrencies being developed or may be developed by popular social media platforms, online retailers, or government sponsored
cryptocurrencies, consumers may use such alternative platforms or technologies. If that were to occur, we would face difficulty adapting
to such emergent digital ledgers, blockchains, or alternative platforms, cryptocurrencies or other digital assets. This may adversely
affect us by preventing us from realizing the anticipated profits from our investments and forcing us to expend additional capital in
an effort to adapt. Further, to the extent we cannot adapt, be it due to our specialized miners or otherwise, we could be forced to cease
our mining or other cryptocurrency-related operations. Such circumstances would have a material adverse effect on our business, and
in turn your investment in our securities.
There is a risk that some or all of the Bitcoin
we mine could be lost or stolen.
There is a risk that some
or all of the Bitcoin we mine could be lost or stolen. In general, cryptocurrencies are stored in cryptocurrency sites commonly referred
to as “wallets” by holders of cryptocurrencies which may be accessed to exchange a holder’s cryptocurrency assets. Access
to our Bitcoin could also be restricted by cybercrime (such as a denial of service attack). While we plan to take steps to attempt to
secure the Bitcoin we hold, there can be no assurance our efforts to protect our cryptocurrencies will be successful.
Hackers or malicious actors
may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the cryptocurrency network source code, exchange
miners, third-party platforms, cold and hot storage locations or software, or by other means. Any of these events may adversely affect
our operations and, consequently, our ability to generate revenue and become profitable. The loss or destruction of a private key required
to access our digital wallets may be irreversible and we may be denied access for all time to our Bitcoin holdings. Our loss of access
to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our business.
Cryptocurrencies are controllable
only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held,
which wallet’s public key or address is reflected in the network’s public blockchain. We will be required to publish the public
key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information into the network, but
we will need to safeguard the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise
compromised, we will be unable to access our Bitcoin rewards and such private keys may not be capable of being restored by any network.
Any loss of private keys relating to digital wallets used to store our mined Bitcoin could have a material adverse effect on our results
of operations and ability to continue as a going concern, which could have a material adverse effect on our business, prospects or operations
and potentially the value of any Bitcoin we mine. For example, the New York Times reported in January 2021 that about 20% of
existing Bitcoin appears to be “lost” due to password issues.
We rely on one or more third parties for depositing,
storing and withdrawing the Bitcoin we mine, which could result in a loss of assets, disputes and other liabilities or risks which could
adversely impact our business.
We currently use a custodial
wallet to store the Bitcoin we mine. In order to own, transfer and use Bitcoin on the blockchain network, we must have a private and public
key pair associated with a network address, commonly referred to as a “wallet.” Each wallet is associated with a unique “public
key” and “private key” pair, each of which is a string of alphanumerical characters. To deposit Bitcoin into our digital
wallet, we must direct the transaction to the public key of a wallet that our NYDIG custodial account controls and provides to us, and
broadcast the deposit transaction onto the underlying blockchain network. To withdraw Bitcoin from our custodial account, an assigned
account representative must initiate the transaction from our custodial account, then an approver must approve the transaction. Once the
custodian has verified that the request is valid and who the recipient is through Know Your Customer/Anti-Money Laundering protocols,
the custodian then “signs” a transaction authorizing the transfer. In addition, some cryptocurrency networks require additional
information to be provided in connection with any transfer of cryptocurrency such as Bitcoin.
A number of errors or other
adverse events can occur in the process of depositing, storing or withdrawing Bitcoin into or from our custodial account, such as typos,
mistakes or the failure to include the information required by the blockchain network. For instance, a user may incorrectly enter our
wallet’s public key or the desired recipient’s public key when depositing and withdrawing Bitcoin. Additionally, our reliance
on third parties such as NYDIG and the maintenance of keys to access and utilize our digital wallet will expose us to enhanced cybersecurity
risks from unauthorized third parties employing illicit operations such as hacking, phishing and social engineering, notwithstanding the
security systems and safeguards employed by us and others. Cyberattacks upon systems across a variety of industries, including the cryptocurrency
industry, are increasing in frequency, persistence and sophistication and, in many cases, are being conducted by sophisticated, well-funded,
and organized groups and individuals. For example, attacks may be designed to deceive employees and service providers into releasing control
of the systems on which we depend to a hacker, while others may aim to introduce computer viruses or malware into such systems with a
view to stealing confidential or proprietary data. These attacks may occur on our digital wallet or the systems of our third-party service
providers or partners, which could result in asset losses and other adverse consequences. Alternatively, we may inadvertently transfer
Bitcoin to a wallet address that we do not own, control or hold the private keys to. In addition, a Bitcoin wallet address can only be
used to send and receive Bitcoin, and if the Bitcoin is inadvertently sent to an Ethereum or other cryptocurrency wallet address, or if
any of the foregoing errors occur, all of the Bitcoin will be permanently and irretrievably lost with no means of recovery. Such incidents
could result in asset loss or disputes, any of which could materially and adversely affect our business.
If a malicious actor or botnet obtains control
of more than 50% of the processing power on a cryptocurrency network, such actor or botnet could manipulate blockchains to adversely affect
us, which would adversely affect an investment in our company and our ability to operate.
If a malicious actor or botnet
(a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority
of the processing power dedicated to mining a cryptocurrency, it may be able to alter blockchains on which transactions of cryptocurrency
reside and rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The
malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new units or transactions
using such control. The malicious actor could “double-spend” its own cryptocurrency (i.e., spend the same Bitcoin in more
than one transaction) and prevent the confirmation of other users’ transactions for as long as it maintained control. To the extent
that such malicious actor or botnet does not yield its control of the processing power on the network or the cryptocurrency community
does not reject the fraudulent blocks as malicious, reversing any changes made to blockchains may not be possible. The foregoing description
is not the only means by which the entirety of blockchains or cryptocurrencies may be compromised but is only an example.
Although we are unaware of
any reports of malicious activity or control of blockchains achieved through controlling over 50% of the processing power on the network,
it is believed that certain mining pools may have exceeded the 50% threshold in Bitcoin. The possible crossing of the 50% threshold indicates
a greater risk that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin
community, and the administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power, the
feasibility of a botnet or malicious actor obtaining control of the blockchain’s processing power will increase, because such botnet
or malicious actor could more readily infiltrate and seize control over the blockchain by compromising a single mining pool, if the mining
pool compromises more than 50% of the mining power on the blockchain, than it could if the mining pool had a smaller share of the blockchain’s
total hashing power. Conversely, if the blockchain remains decentralized it is inherently more difficult for the botnet or malicious actor
to aggregate enough processing power to gain control of the blockchain. If this were to occur, the public may lose confidence in the Bitcoin
blockchain, and blockchain technology more generally. This would likely have a material and adverse effect on the price of Bitcoin, which
could have a material adverse effect on our business, financial results and operations, and harm investors.
Risks Related to Our Bitcoin Operations – Legal and Regulatory
A particular digital asset’s status as
a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if a regulator disagrees with our
characterization of a digital asset, we may be subject to regulatory scrutiny, investigations, fines and penalties, which may adversely
affect our business, operating results and financial condition. A determination that Bitcoin is a “security” may adversely
affect the value of Bitcoin and our business.
The SEC and its staff have
taken the position that certain digital assets fall within the definition of a “security” under U.S. federal securities laws.
The legal test for determining whether any given digital asset is a security is a highly complex, fact-driven analysis that may evolve
over time, and the outcome is difficult to predict. Our determination that the digital assets we hold are not securities is a risk-based
assessment and not a legal standard or one binding on regulators. The SEC generally does not provide advance guidance or confirmation
on the status of any particular digital asset as a security. Furthermore, the SEC’s views in this area have evolved over time and
it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration
or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public statements made by senior
officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin is a security (as currently offered and sold;
in this context, it should be noted that we have no intention of conducting any initial coin offerings). However, such statements are
not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency
or court and cannot be generalized to any other digital asset. As of the date of this Annual Report, with the exception of certain centrally
issued digital assets that have received “no-action” letters from the SEC staff, Bitcoin and Ethereum’s ether are the
only digital assets which senior officials at the SEC have publicly stated are unlikely to be considered securities. As a Bitcoin mining
company, we do not believe we are an issuer of any “securities” as defined under the federal securities laws. Our internal
process for determining whether the digital assets we hold or plan to hold is based upon the public statements of the SEC and existing
case law. Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology published a framework for analyzing
whether any given digital asset is a security in April 2019, this framework is also not a rule, regulation or statement of the SEC and
is not binding on the SEC.
The classification of a digital
asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale,
trading, and clearing of such assets. For example, a digital asset that is a security may generally only be offered or sold pursuant to
a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions
in digital assets that are securities may be subject to registration with the SEC as a “broker” or “dealer.” Platforms
that bring together purchasers and sellers to trade digital assets that are securities are generally subject to registration as national
securities exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading
system (“ATS”), in compliance with rules for ATS’s. Persons facilitating clearing and settlement of securities may be
subject to registration with the SEC as a clearing agency.
We analyze whether the digital
assets that we mine, hold and sell for our own account could be deemed to be a
“security” under applicable laws. Our procedures do not constitute a legal standard, but rather represent our management’s
assessment regarding the likelihood that a particular digital asset could be deemed a “security” under applicable laws. Regardless
of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a foreign regulatory authority, or a court
were to determine that a digital asset currently held by us is a “security” under applicable laws. If the digital assets mined
and held by us are deemed securities, it could limit distributions, transfers, or other actions involving such digital assets, including
mining.
There can be no assurances
that we will properly characterize any given digital asset as a security or non-security for purposes of determining which digital assets
to mine, hold and trade, or that the SEC, or a court, if the question was presented to it, would agree with our assessment. We could be
subject to judicial or administrative sanctions for failing to offer or sell digital assets in compliance with the registration requirements,
or for acting as a broker or dealer without appropriate registration. Such an action could result in injunctions, cease and desist orders,
as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. For instance, all transactions
in such supported digital asset would have to be registered with the SEC, or conducted in accordance with an exemption from registration,
which could severely limit its liquidity, usability and transactability. Further, it could draw negative publicity and a decline in the
general acceptance of the digital asset. Also, it may make it difficult for such digital asset to be traded, cleared, and custodied as
compared to other digital assets that are not considered to be securities.
Current interpretations require the regulation
of Bitcoin under the Commodity Exchange Act by the Commodity Futures Trading Commission, and we may be required to register and comply
with such regulations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous
to our investors.
Current and future legislation,
regulation by the Commodity Futures Trading Commission (the “CFTC”) and other regulatory developments, including interpretations
released by a regulatory authority, may impact the manner in which Bitcoin and other cryptocurrencies are treated for classification and
clearing purposes. In particular, derivatives on these assets are not excluded from the definition of “commodity future” by
the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin and other cryptocurrencies
under the law.
Bitcoin has been deemed to
fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the Commodity
Exchange Act, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register
as a commodity pool operator and to register as a commodity pool with the CFTC through the National Futures Association. Such additional
registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us.
If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations.
Any such action may adversely affect an investment in us.
Additionally, governments
may develop and deploy their own blockchain-based digital assets, which may have a material adverse impact on Bitcoin’s price
and utility.
Governmental action against digital assets
and Bitcoin mining may have a materially adverse effect on the industry, and could affect us if widely adopted.
We and the cryptocurrencies
on which our operations will depend are and could become subject to bans and other regulations aimed at preventing what are perceived
as some of the negative attributes of Bitcoin and Bitcoin mining. For example, on September 24, 2021, China declared all transactions
in and mining of cryptocurrencies, including Bitcoin, illegal. While the ultimate long-term effect of this ban remains uncertain,
it could significantly hinder our prospects by limiting a large market for cryptocurrencies within a growing economy. In the hours
following China’s announcement of the ban, the price of Bitcoin, which is tied to some extent to public perception of its future
value as a form of currency, dropped by nearly $4,000. The ban followed piecemeal regulatory action within China against cryptocurrencies,
which was due in part to concerns about the potential for manipulative practices and excessive energy consumption. This could demonstrate
the beginning of a regional or global regulatory trend in response to these or other concerns surrounding cryptocurrencies, and similar
action in a jurisdiction in which we operate or in general could have devastating effects to our operations. If further regulation follows,
it is possible that our industry may not be able to adjust to a sudden and dramatic overhaul to our ability to deploy energy towards the
operation of mining equipment.
Because we are unable to influence
or predict future regulatory actions taken by governments, we may face difficulty monitoring and responding to rapid regulatory developments
affecting Bitcoin mining, which may have a materially adverse effect on our industry and, therefore, our business and results of operations.
If further regulatory action is taken by governments in the U.S., our business may be materially harmed, and you could lose some or all
of your investment.
The markets for Bitcoin and other cryptocurrencies
and the existing markets may be under-regulated and, as a result, the market price of Bitcoin may be subject to significant volatility
or manipulation, which could decrease consumer confidence in cryptocurrencies and have a materially adverse effect on our business and
results of operations.
Cryptocurrencies that are
represented and trade on a ledger-based platform and those who hold them may not enjoy the same benefits as traditional securities
available on trading markets and their investors. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected
to rigorous listing standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These conditions
may not necessarily be replicated on a distributed ledger platform, depending on the platform’s controls and other policies. The
more lax a distributed ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform, the higher
the potential risk for fraud or the manipulation of the ledger due to a control event. We believe that Bitcoin is not a security under
federal and state law.
Bitcoin and other cryptocurrency
market prices have historically been volatile, are impacted by a variety of factors, and are determined primarily using data from various
exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that
impact commodities, more so than business activities, which could be subjected to additional influence from fraudulent or illegitimate
actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue
to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making their market prices
more volatile or creating “bubble” type risks for both Bitcoin and shares of our common stock.
These factors may inhibit
consumer trust in and market acceptance of cryptocurrencies as a means of exchange which could have a material adverse effect on our business,
prospects, or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire.
We are subject to risks associated with our
need for significant electrical power. Government regulators may potentially restrict the ability of electricity suppliers to provide
electricity to mining operations, such as ours.
The operation of a Bitcoin
or other Bitcoin mine can require massive amounts of electrical power. We presently have access to 28 megawatt capacity at our Facility,
but require an additional 37 megawatt capacity to operate the miners that we expect to receive from Bitmain during 2022. Our mining operations
can only be successful and ultimately profitable if the costs, including electrical power costs, associated with mining a Bitcoin are
lower than the price of a Bitcoin. As a result, any mine we establish can only be successful if we can obtain sufficient electrical power
for that mine on a cost-effective basis, and our establishment of new mines requires us to find locations where that is the case. There
may be significant competition for suitable mine locations, and government regulators may potentially restrict the ability of electricity
suppliers to provide electricity to mining operations in times of electricity shortage or may otherwise potentially restrict or prohibit
the provision or electricity to mining operations. Any shortage of electricity supply or increase in electricity cost in a jurisdiction
may negatively impact the viability and the expected economic return for Bitcoin mining activities in that jurisdiction.
Our interactions with a blockchain may expose
us to SDN or blocked persons or cause us to violate provisions of law that did not contemplate distributed ledger technology.
The Office of Financial Assets
Control of the U.S. Department of Treasury (“OFAC”) requires us to comply with its sanction program and not conduct business
with persons named on its specially designated nationals (“SDN”) list. However, because of the pseudonymous nature of blockchain
transactions, we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list. Our internal
policies prohibit any transactions with such SDN individuals, but we may not be adequately capable of determining the ultimate identity
of the individual with whom we transact with respect to selling digital assets. In addition, in the future OFAC or another regulator may
require us to screen transactions for OFAC addresses or other bad actors before including such transactions in a block, which may increase
our compliance costs, decrease our anticipated transaction fees and lead to decreased traffic on our network. Any of these factors, consequently,
could have a material adverse effect on our business, prospects, financial condition, and operating results.
Moreover, federal law prohibits
any U.S. person from knowingly or unknowingly possessing any visual depiction commonly known as child pornography. Recent media reports
have suggested that persons have imbedded such depictions on one or more blockchains. Because our business requires us to download and
retain one or more blockchains to effectuate our ongoing business, it is possible that such digital ledgers contain prohibited depictions
without our knowledge or consent. To the extent government enforcement authorities literally enforce these and other laws and regulations
that are impacted by decentralized distributed ledger technology, we may be subject to investigation, administrative or court proceedings,
and civil or criminal monetary fines and penalties, all of which could harm our reputation and could have a material adverse effect on
our business, prospects, financial condition, and operating results.
Risks Related to Our Bitcoin Operations – Technological
Cryptocurrencies face significant
scaling obstacles that can lead to high fees or slow transaction settlement times and attempts to increase the volume of transactions
may not be effective, which could adversely affect an investment in our securities.
Cryptocurrencies face significant
scaling obstacles that can lead to high fees or slow transaction settlement times and attempts to increase the volume of transactions
may not be effective. Scaling cryptocurrencies is essential to the widespread acceptance of cryptocurrencies as a means of payment, which
widespread acceptance is necessary to the continued growth and development of our business. Many Bitcoin networks face significant scaling
challenges. For example, cryptocurrencies are limited with respect to how many transactions can occur per second. Participants in the
Bitcoin ecosystem debate potential approaches to increasing the average number of transactions per second that the network can handle
and have implemented mechanisms or are researching ways to increase scale, such as increasing the allowable sizes of blocks, and therefore
the number of transactions per block, and sharding (a horizontal partition of data in a database or search engine), which would not require
every single transaction to be included in every single miner’s or validator’s block. However, there is no guarantee that
any of the mechanisms in place or being explored for increasing the scale of settlement of Bitcoin transactions will be effective, or
how long they will take to become effective, which could adversely affect an investment in our securities.
There is a possibility of Bitcoin mining algorithms
transitioning to proof of stake validation and other mining related risks, which could make us less competitive and ultimately adversely
affect our business and the value of our shares.
The protocol pursuant to which
transactions are confirmed automatically on the Bitcoin blockchain through mining is known as proof of work. Proof of stake is an alternative
method in validating digital asset transactions. Should the Bitcoin algorithm shift from a proof of work validation method to a proof
of stake method, mining would require less energy and may render any company that maintains advantages in the current climate (for example,
from lower priced electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to optimize and improve
the efficiency of our Bitcoin mining operations, may be exposed to the risk in the future of losing the benefit of our capital investments
and the competitive advantage we hope to gain from this as a result, and may be negatively impacted if a switch to proof of stake validation
were to occur. This may additionally have an impact on other various investments of ours. Such events could have a material adverse effect
on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on
our business, prospects or operations and potentially the value of any Bitcoin or other digital assets we mine or otherwise acquire or
hold for our own account.
Bitcoin is subject to halving, meaning that
the Bitcoin rewarded for solving a block will be reduced in the future and its value may not commensurately adjust to compensate us for
such reductions, and the overall supply of Bitcoin is finite.
Bitcoin is subject to “halving,”
which is the process by which the Bitcoin reward for solving a block is reduced by 50% for every 210,000 blocks that are solved. This
means that the amount of Bitcoin we (or any other mining company) are rewarded for solving a block in the blockchain is permanently cut
in half. For example, the latest halving having occurred in May 2020, with a revised payout of 6.25 Bitcoin per block solved, down
from the previous reward rate of 12.5 Bitcoin per block solved. There can be no assurance that the price of Bitcoin will sufficiently
increase to justify the increasingly high costs of mining for Bitcoin given the halving feature. If a corresponding and proportionate
increase in the trading price of these cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our
mining operations would see a corresponding decrease, which would have a material adverse effect on our business and operations. To illustrate,
even if the price of Bitcoin remains at its current price, all other factors being equal (including the same number of miners and a stable
hash rate), our revenue would decrease substantially upon the next halving.
Further, due to the halving
process, unless the underlying code of the Bitcoin blockchain is altered (which may be unlikely given its decentralized nature), the supply
of Bitcoin is finite. Once 21 million Bitcoin have been generated by virtue of solving blocks in the blockchain, the network will
stop producing more which is anticipated to occur in approximately 2140. Currently, there are approximately 19 million Bitcoin in
circulation representing about 90% of the total supply of Bitcoin under the current source code. For the foregoing reasons, the halving
feature exposes us to inherent uncertainty and reliance upon the historically volatile price of Bitcoin, rendering an investment in us
particularly speculative, especially in the long-term. If the price of Bitcoin does not significantly increase in value, your investment
in our common stock could decline significantly.
Bitcoin has forked multiple times and additional
forks may occur in the future which may affect the value of Bitcoin that we hold or mine.
To the extent that a significant
majority of users and mining companies on a cryptocurrency network install software that changes the cryptocurrency network or properties
of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency
network would be subject to new protocols and software. However, if less than a significant majority of users and mining companies on
the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the software prior to its
modification, the consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software
and the other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running
in parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks.
Additionally, it may be unclear following a fork which fork represents the original cryptocurrency and which is the new cryptocurrency.
Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core
developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains
with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an investment in our securities or
our ability to operate.
Since August 1, 2017,
Bitcoin’s blockchain was forked multiple times creating alternative versions of the cryptocurrency such as Bitcoin Cash, Bitcoin
Gold and Bitcoin SV. The forks resulted in a new blockchain being created with a shared history, and a new path forward. The value
of the newly created versions including Bitcoin Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect
the price of Bitcoin if interest is shifted away from Bitcoin to the newly created cryptocurrencies. The value of Bitcoin after the creation
of a fork is subject to many factors including the value of the fork product, market reaction to the creation of the fork product, and
the occurrence of forks in the future. As such, the value of Bitcoin could be materially reduced if existing and future forks have a negative
effect on Bitcoin’s value.
Incorrect or fraudulent cryptocurrency transactions
may be irreversible and it is possible that, through computer or human error, or through theft or criminal action, our cryptocurrency
rewards could be transferred in incorrect amounts or to unauthorized third parties.
Cryptocurrency transactions
are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed or
fraudulent cryptocurrency transactions, such as a result of a cybersecurity breach against our Bitcoin holdings, could adversely affect
our investments and assets. This is because cryptocurrency transactions are not, from an administrative perspective, reversible without
the consent and active participation of the recipient of the cryptocurrencies from the transaction. Once a transaction has been verified
and recorded in a block that is added to a blockchain, an incorrect transfer of a cryptocurrency or a theft thereof generally will not
be reversible and we may not have sufficient recourse to recover our losses from any such transfer or theft. Further, it is possible that,
through computer or human error, or through theft or criminal action, our cryptocurrency rewards could be transferred in incorrect amounts
or to unauthorized third parties, or to uncontrolled accounts. If an errant or fraudulent transaction in our Bitcoin were to occur, we
would have very limited means of seeking to reverse the transaction or seek recourse. To the extent that we are unable to recover our
losses from such action, error or theft, such events could have a material adverse effect on our business.
Because many of our digital assets may in the
future be held by digital asset exchanges, we could face heightened risks from cybersecurity attacks and financial stability of digital
asset exchanges.
We may transfer our digital
assets from our wallet to digital asset exchanges prior to selling them. Digital assets not held in our wallet are subject to the risks
encountered by digital asset exchanges including a DDoS Attack or other malicious hacking, a sale of the digital asset exchange, loss
of the digital assets by the digital asset exchange and other risks similar to those described herein. We do not expect to maintain a
custodian agreement with any of the digital asset exchanges that may in the future hold our digital assets. These digital asset exchanges
do not provide insurance and may lack the resources to protect against hacking and theft. If this were to occur, we may be materially
and adversely affected.
Our use of third-party
mining pools exposes us to additional risks.
We
receive Bitcoin rewards from our mining activity through third-party mining pool operators. Mining pools allow miners to combine their
processing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed by the pool
operator, proportionally to our contribution to the pool’s overall mining power, used to solve a block on the Bitcoin blockchain.
Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction or other issue, it will negatively
impact our ability to mine and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool operator’s record
keeping to accurately record the total processing power provided to the pool for a given Bitcoin mining application in order to assess
the proportion of that total processing power we provided. While we have internal methods of tracking both the hash rate we provide and
the total used by the pool, the mining pool operator uses its own record-keeping to determine our proportion of a given reward, which
may not match our own. If we are unable to consistently obtain accurate proportionate rewards from our mining pool operators, we may experience
reduced reward for our efforts, which would have an adverse effect on our business and operations.
Risks Relates to Our Status as a Holding
Company
Our inability to successfully integrate new
acquisitions could adversely affect our combined business; our operations are widely disbursed.
Our
growth strategy through acquisitions is fraught with risk. On June 2, 2017, we acquired a majority interest in Microphase, on May 23,
2018 we acquired Enertec, on November 30, 2020 we acquired Relec, on January 29, 2021 we acquired the Facility in Michigan, on December
16, 2021, we acquired a majority interest in IMHC, on December 22, 2021 we acquired the four Properties in and around Madison and on December
30, 2021, we acquired certain real property located in St. Petersburg, Florida. Our strategy and business plan are dependent on our ability
to successfully integrate Microphase’s, Enertec’s and our other acquisition’s operations, particularly those of Relec
and Gresham Power. In addition, while we are based in Las Vegas, NV, our finance department is in Newport Beach, CA, Microphase’s
operations are located in Shelton, Connecticut, Enertec’s operations are located in Karmiel, Israel, Gresham Power’s operations
are located in Salisbury, England, Madison is located in or near Wisconsin and the St. Petersburg property is located in Florida. These
distant locations and others that we may become involved with in the future will stretch our resources and management time. Further, failure
to quickly and adequately integrate all of these operations and personnel could adversely affect our combined business and our ability
to achieve our objectives and strategy. No assurance can be given that we will realize synergies in the areas we currently operate.
If we make any additional acquisitions, they may disrupt or have
a negative impact on our business.
We have plans to eventually
make additional acquisitions beyond Microphase, Enertec, Relec, the Facility, IMHC, the Madison Properties and the St. Petersburg property. Whenever
we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition,
the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core
business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract
our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:
| ● | If senior management and/or management of future acquired companies terminate their employment prior to
our completion of integration; |
| ● | difficulty of integrating acquired products, services or operations; |
| ● | integration of new employees and management into our culture while maintaining focus on operating efficiently
and providing consistent, high-quality goods and services; |
| ● | potential disruption of the ongoing businesses and distraction of our management and the management of
acquired companies; |
| ● | unanticipated issues with transferring customer relationships; |
| ● | complexity associated with managing our combined company; |
| ● | difficulty of incorporating acquired rights or products into our existing business; |
| ● | difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses
in maintaining such facilities; |
| ● | difficulties in maintaining uniform standards, controls, procedures and policies; |
| ● | potential impairment of relationships with employees and customers as a result of any integration of new
management personnel; |
| ● | potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing
of the products to new and existing customers; |
| ● | effect of any government regulations which relate to the business acquired; and |
| ● | potential unknown liabilities associated with acquired businesses or product lines, or the need to spend
significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether
or not successful, resulting from actions of the acquired company prior to our acquisition. |
Our business could be severely
impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection
with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our results of operations.
We may not be able to successfully identify
suitable acquisition targets and complete acquisitions to meet our growth strategy, and even if we are able to do so, we may not realize
the full anticipated benefits of such acquisitions, and our business, financial conditions and results of operations may suffer.
Increasing revenues through
acquisitions is one of the key components of our growth strategy. Identifying suitable acquisition candidates can be difficult, time-consuming
and costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis
or at all.
We will have to pay cash,
incur debt, or issue equity as consideration in any future acquisitions, each of which could adversely affect our financial condition
or the market price of our common stock. The sale of equity or issuance of equity-linked debt to finance any future acquisitions could
result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could limit our
flexibility in managing our business due to covenants or other restrictions contained in debt instruments.
Further, we may not be able
to realize the anticipated benefits of completed acquisitions. Some acquisition targets may not have a developed business or are experiencing
inefficiencies and incur losses. Additionally, small defense contractors which we consider suitable acquisition targets may be uniquely
dependent on their prior owners and the loss of such owners’ services following the completion of acquisitions may adversely affect
their business. Therefore, we may lose our investment in the event that the acquired businesses do not develop as planned, we cannot retain
key employees or that we are unable to achieve the anticipated cost efficiencies or reduction of losses.
Additionally, our acquisitions
have previously required, and any similar future transactions may also require, significant management efforts and expenditures. Regardless
of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, divert the attention of our
management and key employees and increase our expenses.
We face risks with respect to the evaluation and management of future
platform or add-on acquisitions.
A component of our strategy
is to continue to acquire additional add-on businesses for our existing businesses. Generally, because such acquisition targets are held
privately, we may experience difficulty in evaluating potential target businesses as the information concerning these businesses is not
publicly available. In addition, we and our subsidiary companies may have difficulty effectively managing or integrating acquisitions.
We may experience greater than expected costs or difficulties relating to such acquisition, in which case we might not achieve the anticipated
returns from any particular acquisition, which may have a material adverse effect on our financial condition, business and results of
operations.
We may not be able to successfully fund future
acquisitions of new businesses due to the lack of availability of debt or equity financing at the parent company level on acceptable terms,
which could impede the implementation of our acquisition strategy and materially adversely impact our financial condition, business and
results of operations.
In order to make future acquisitions,
we intend to raise capital primarily through debt financing, additional equity offerings, the sale of stock or assets of our businesses,
or by undertaking a combination of any of the above. Since the timing and size of acquisitions cannot be readily predicted, we may need
to be able to obtain funding on short notice to benefit fully from attractive acquisition opportunities. Such funding may not be available
on acceptable terms, if at all. In addition, the level of our indebtedness that we may incur may impact our ability to borrow. Another
source of capital for us may be the sale of additional shares, subject to market conditions and investor demand for the shares at prices
that we consider to be in the interests of our stockholders. These risks may materially adversely affect our ability to pursue our acquisition
strategy successfully and materially adversely affect our financial condition, business and results of operations.
To service any future indebtedness and other
obligations, we will require a significant amount of cash.
Our ability to generate cash
depends on many factors beyond our control, and any failure to meet our debt service obligations, of which we currently have very few
but may in the future incur, including our obligations under our indebtedness or future outstanding shares of preferred stock, could harm
our business, financial condition and results of operations. Our ability to make payments on and to refinance any indebtedness and outstanding
preferred stock and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other
factors that are beyond our control.
If our business does not generate
sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us and our subsidiaries
to pay our indebtedness or make dividend payments with respect to our any shares of preferred stock that we may issue, or to fund our
other liquidity needs, we may need to refinance all or a portion of our indebtedness or redeem the preferred stock, on or before the maturity
thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse
effect on us.
In addition, we may not be
able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance
our indebtedness or redeem the preferred stock will depend on the condition of the capital markets and our financial condition at such
time. Any refinancing of our debt or financings related to the redemption of any shares of preferred stock that we may issue could be
at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
The terms of future debt instruments or preferred stock may limit or prevent us from taking any of these actions. In addition, any failure
to make scheduled payments of interest and principal on any future outstanding indebtedness or dividend payments on any shares of preferred
stock that we may issue could harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable
terms or at all. Our inability to generate sufficient cash flow to satisfy any future debt service and other obligations, or to refinance
or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our
business, financial condition and results of operations.
Because we face significant competition for
acquisition and business opportunities, including from numerous companies with a business plan similar to ours, it may be difficult for
us to fully execute our business strategy. Additionally, our subsidiaries also operate in highly competitive industries, limiting their
ability to gain or maintain their positions in their respective industries.
We expect to encounter intense
competition for acquisition and business opportunities from both strategic investors and other entities having a business objective similar
to ours, such as private investors (which may be individuals or investment partnerships), blank check companies including special purpose
acquisition companies, and other entities, domestic and international, competing for the type of businesses that we may acquire. Many
of these competitors possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital,
than we do, and our financial resources may be relatively limited when contrasted with those of many of these competitors. These factors
may place us at a competitive disadvantage in successfully completing future acquisitions and investments.
In addition, while we believe
that there are numerous target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition
of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing
in order to consummate future acquisitions and investment opportunities and cannot assure you that any additional financing will be available
to us on acceptable terms, or at all, or that the terms of our existing financing arrangements will not limit our ability to do so. This
inherent competitive limitation gives others an advantage in pursuing acquisition and investment opportunities.
Furthermore, our subsidiaries
also face competition from both traditional and new market entrants that may adversely affect them as well, as discussed elsewhere in
these risk factors.
We may be required to expend substantial sums
in order to bring the companies we have acquired or may acquire in the future, into compliance with the various reporting requirements
applicable to public companies and/or to prepare required financial statements, and such efforts may harm our operating results or be
unsuccessful altogether.
The Sarbanes-Oxley Act requires
our management to assess the effectiveness of the internal control over financial reporting for the companies we acquire and our external
auditor to audit these companies. In order to comply with the Sarbanes-Oxley Act, we will need to implement or enhance internal control
over financial reporting at acquired companies and evaluate the internal controls. We do not conduct a formal evaluation of companies’
internal control over financial reporting prior to an acquisition. We may be required to hire additional staff and incur substantial costs
to implement the necessary new internal controls at the companies we acquire. Any failure to implement required internal controls, or
difficulties encountered in their implementation, could harm our operating results or increase the risk of material weaknesses in internal
controls, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in
a timely and accurate manner.
Future acquisitions or business opportunities
could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations.
We are a diversified holding
company that owns interests in a number of different businesses across several industries. We have in the past, and intend in the future,
to acquire businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which
will be particular to the industry in which the investment or acquisition targets operate, including risks in industries with which we
are not familiar or experienced. There can be no assurance our due diligence investigations will identify every matter that could have
a material adverse effect on us or the entities that we may acquire. We may be unable to adequately address the financial, legal and operational
risks raised by such investments or acquisitions, especially if we are unfamiliar with the relevant industry, which can lead to significant
losses on material investments. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent
or limit us from realizing the projected benefits of the investments or acquisitions, which could adversely affect our financial condition
and liquidity. In addition, our financial condition, results of operations and the ability to service our debt may be adversely impacted
depending on the specific risks applicable to any business we invest in or acquire and our ability to address those risks.
We face certain risks associated with the acquisition
or disposition of businesses and lack of control over certain of our investments.
In pursuing our corporate
strategy, we may acquire, dispose of or exit businesses or reorganize existing investments. The success of this strategy is dependent
upon our ability to identify appropriate opportunities, negotiate transactions on favorable terms and ultimately complete such transactions.
In the course of our acquisitions,
we may not acquire 100% ownership of certain of our operating subsidiaries or we may face delays in completing certain acquisitions, including
in acquiring full ownership of certain of our operating companies. Once we complete acquisitions or reorganizations there can be no assurance
that we will realize the anticipated benefits of any transaction, including revenue growth, operational efficiencies or expected synergies.
If we fail to recognize some or all of the strategic benefits and synergies expected from a transaction, goodwill and intangible assets
may be impaired in future periods. The negotiations associated with the acquisition and disposition of businesses could also disrupt our
ongoing business, distract management and employees or increase our expenses.
In addition, we may not be
able to integrate acquisitions successfully and we could incur or assume unknown or unanticipated liabilities or contingencies, which
may impact our results of operations. If we dispose of or otherwise exit certain businesses, there can be no assurance that we will not
incur certain disposition related charges, or that we will be able to reduce overhead related to the divested assets.
In the ordinary course of
our business, we evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives or that no
longer fit with our broader strategy, such as the planned merger between TOGI and IMHC. When we decide to sell assets or a business, we
may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the
accomplishment of our strategic objectives, or we may dispose of a business at a price or on terms which are less than we had anticipated.
In addition, there is a risk that we sell a business whose subsequent performance exceeds our expectations, in which case our decision
would have potentially sacrificed enterprise value.
Our development stage companies may never produce
revenues or income.
We have made investments in
and own stakes, either majority or minority, in a certain development stage companies. Each of these companies is at an early stage of
development and is subject to all business risks associated with a new enterprise, including constraints on their financial and personnel
resources, lack of established credit, the need to establish meaningful and beneficial vendor and customer relationships and uncertainties
regarding product development and future revenues. We anticipate that many of these companies will continue to incur substantial additional
operating losses for at least the next several years and expect their losses to increase as research and development efforts expand. There
can be no assurance as to when or whether any of these companies will be able to develop significant sources of revenue or that any of
their respective operations will become profitable, even if any of them is able to commercialize any products. As a result, we may not
realize any returns on our investments in these companies for a significant period of time, if at all, which could adversely affect our
business, results of operations, financial condition or liquidity.
Divestitures and contingent liabilities from
divested businesses could adversely affect our business and financial results.
We continually evaluate the
performance and strategic fit of all of our businesses and may sell businesses or product lines. Divestitures involve risks, including
difficulties in the separation of operations, services, products and personnel, the diversion of management's attention from other business
concerns, the disruption of our business, the potential loss of key employees and the retention of uncertain contingent liabilities, including
environmental liabilities, related to the divested business. When we decide to sell assets or a business, we may encounter difficulty
in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic
objectives. We may also dispose of a business at a price or on terms that are less desirable than we had anticipated, which could result
in significant asset impairment charges, including those related to goodwill and other intangible assets, that could have a material adverse
effect on our financial condition and results of operations. In addition, we may experience greater dis-synergies than expected, the impact
of the divestiture on our revenue growth may be larger than projected, and some divestitures may be dilutive to earnings. There can be
no assurance whether the strategic benefits and expected financial impact of the divestiture will be achieved. We cannot assure you that
we will be successful in managing these or any other significant risks that we encounter in divesting a business or product line, and
any divestiture we undertake could materially and adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to Related Party Transactions
There may be conflicts of
interest between our company and certain of our related parties and their respective directors and officers which might not be resolved
in our favor. More importantly, there may be conflicts between certain of our related parties and their respective directors and officers
which might not be resolved in our favor. These risks are set forth below appurtenant to the relevant related party.
Ault & Company
Our relationship with Ault & Company may
enhance the difficulty inherent in obtaining financing for us as well as expose us to certain conflicts of interest.
At April 11, 2022, Ault &
Company, of which Milton C. Ault is the chief executive officer, beneficially owned 9,766,882 shares of our common stock, consisting of
(i) 1,658,916 shares of common stock owned, (ii) warrants to purchase 94 shares of common stock that are currently exercisable, (iii)
1,000,000 shares of common stock purchasable by Ault & Company pursuant to a securities purchase agreement entered into on June 11,
2021 between Ault & Company and BitNile, (iv) 7,100,000 shares owned by Ault Alpha, of which Ault & Company is the sole member
of Ault Alpha GP LLC, the general partner of Ault Alpha, and (v) 7,872 shares owned by Philou Ventures, LLC (“Philou”), of
which Ault & Company is the Manager, consisting of: (A) 125,000 shares of Series B Preferred Stock that are convertible into 2,232
shares of common stock, (B) warrants to purchase 2,232 shares of common stock that are currently exercisable and (C) 3,408 shares of common
stock. As April 11, 2022, Ault & Company beneficially owns 3.6% of our common stock.
Given the close relationship
between Ault & Company on the one hand, and our company on the other, it is not inconceivable that we could enter into additional
securities purchase agreements with Ault & Company.
Although we have relied on
Philou, which no longer beneficially owns a meaningful number of our shares of common stock, to finance us in the past, we cannot assure
you that either Philou or Ault & Company will assist us in the future. We would far prefer to rely on these entities’ assistance
compared to other sources of financing as the terms they provide us are in general more favorable to us than we could obtain elsewhere.
However, Messrs. Ault, Horne and Nisser could face a conflict of interest in that they serve on the board of directors of each of Ault
& Company and our company. If they determine that an investment in our company is not in Ault & Company’s best interest,
we could be forced to seek financing from other sources that would not necessarily be likely to provide us with equally favorable terms.
Other conflicts of interest
between us, on the one hand, and Ault & Company, on the other hand, may arise relating to commercial or strategic opportunities or
initiatives. Mr. Ault, as the controlling stockholder of Ault & Company, may not resolve such conflicts in our favor. For example,
we cannot assure you that Ault & Company would not pursue opportunities to provide financing to other entities whether or not it currently
has a relationship with such other entities. Furthermore, our ability to explore alternative sources of financing other than Ault &
Company may be constrained due to Mr. Ault’s vision for us and he may not wish for us to receive any financing at all other than
from entities that he controls.
Alzamend
Our relationship with Alzamend may expose us
to certain conflicts of interest.
In August 2020, Alzamend entered
into a securities purchase agreement with our company to sell a convertible promissory note of Alzamend, in the aggregate principal amount
of $50,000 and issue a 5-year warrant to purchase 16,667 of shares of its common stock. The convertible promissory note bears interest
at 8% per annum, which principal and all accrued and unpaid interest was due six months after the date of issuance. The principal and
interest earned on the convertible promissory note was convertible into shares of Alzamend’s common stock at $1.50 per share. The
exercise price of the warrant is $3.00 per share.
In December 2020, we provided
Alzamend $750,000 in short-term advances and in March of 2021 we entered into an agreement with Alzamend under which we purchased $10
million worth of shares of Alzamend’s common stock. We paid for the last tranche of $4 million with a note on February 17, 2022,
which becomes due and payable on April 29, 2022.
Messrs. Horne and Nisser could
face a conflict of interest in that they serve on the board of directors of each of Alzamend and our company.
Avalanche
We have lent a substantial amount of funds
to Avalanche, a related party, whose ability to repay us is subject to significant doubt and it may not be in our stockholders’
best interest to convert the notes into shares of Avalanche common stock even if we had a reasonably viable means of doing so.
On September 6, 2017, we entered
into a Loan and Security Agreement with Avalanche (as amended, the “AVLP Loan Agreement”) with an effective date of August
21, 2017 pursuant to which we will provide Avalanche a non-revolving credit facility. The AVLP Loan Agreement was increased to up to $20.0
million in June of 2021 and extended to December 31, 2023. We current hold a convertible note issued to us by AVLP in the amount of $17.8
million (the “AVLP Note”).
At December 31, 2020, we had
provided Avalanche with $11.3 million pursuant to the AVLP Loan Agreement. The warrants issued in conjunction with the non-revolving credit
facility entitles us to purchase up to 22,538,272 shares of Avalanche common stock at an exercise price of $0.50 per share for a period
of five years. The exercise price is subject to adjustment for customary stock splits, stock dividends, combinations or similar events.
The warrants may be exercised for cash or on a cashless basis.
While Avalanche received funds
from a third party in the amount of $2.75 million in early April of 2019 in consideration for its issuance of a convertible promissory
note to such third party (the “Third Party Note”), $2.7 million was used to pay an outstanding receivable due us and no amount
was used to repay the debt Avalanche owes us pursuant to the AVLP Loan Agreement. On October 12, 2021, Ault Alpha, an affiliate of ours,
repaid the Third Party Note in full and also acquired a warrant to purchase 1.6 million shares of AVLP common stock. In consideration
therefor, AVLP issued Ault Alpha a term note in the principal amount of $3.6 million, which term note matures on June 30, 2022.
There is doubt as to whether
Avalanche will be able to repay this amount on a timely basis, if at all, unless it generates significant net income from its operations
or receives additional financing from another source; even then, unless such financing consists solely of the issuance by Avalanche of
its equity securities, it will only add to the amount that Avalanche owes other parties, which would in all likelihood not be provided
unless we agreed to subordinate our right to repayment to such other third party source.
There is currently no liquid
market for the Avalanche common stock. Consequently, even if we were inclined to convert the debt owed us by Avalanche into shares of
its common stock, our ability to sell such shares would be severely limited. Avalanche is not current in its filings with the Commission
and is not required to register the shares of its common stock underlying the AVLP Note or any other loan arrangement we have made with
Avalanche described above
As a result, there is some
doubt as to whether Avalanche will ever have the ability to repay its debt to us, or if we convert the debt owed us by Avalanche into
shares of its common stock, our ability to convert such shares into cash through the sale of such shares would be severely limited until
such time, if ever, a liquid market for Avalanche’s common stock develops. If we are unable to recoup our investment in Avalanche
in the foreseeable future or at all, such failure would have a materially adverse effect on our financial condition and future prospects.
Originally, the loans we made to Avalanche
were secured by a lien on all of Avalanche’s assets. Presently, we only have a second priority interest.
Originally, the loans we made
to Avalanche were secured by a lien on all of Avalanche’s assets. When Avalanche entered into the exchange agreement with MTIX,
the former owners of MTIX were granted a first priority interest in all of MTIX’s assets, which constitute virtually all of Avalanche’s
assets and reduced our interest to that of a second position, greatly diminishing its value. Since our security interests have been reduced
to a second position, we will have no ability to use Avalanche’s assets to offset any default in Avalanche’s debt obligations
to us unless and until the other security interest is terminated, which would not occur until Avalanche’s debts to the senior creditor
has been repaid. We do not anticipate that Avalanche will repay its debts to this creditor within the foreseeable future and we will therefore
have no recourse should Avalanche default on its debts to us during this period of time. Any failure by Avalanche to repay us would therefore
have a materially adverse effect on our results of operations, financial condition and future prospects.
Milton C. Ault, III and William Horne, our
Executive Chairman and Chief Executive Officer, respectively, and two of our directors are directors of Avalanche. In addition, Philou
is the controlling stockholder of Avalanche.
Milton C. Ault, III and William
Horne, our Executive Chairman and Chief Executive Officer, respectively, and two of our directors, are also directors of Avalanche. In
addition, Philou is the controlling stockholder of Avalanche. Certain conflicts of interest between us, on the one hand, and Avalanche,
on the other hand, may arise relating to commercial or strategic opportunities or initiatives, in addition to the conflicts related to
the debt that Avalanche owes us. For example, Messrs. Ault and Horne may find it difficult to determine how to meet their fiduciary duties
to us as well as Avalanche, which could result in a less favorable result for us than would be the case if they were solely directors
of our company. Further, even if Messrs. Ault and Horne were able to successfully meet their fiduciary obligations to us and Avalanche,
the fact that they are members of the board of directors of both companies could attenuate their ability to focus on our business and
best interests, possibly to the detriment of both companies. Mr. Ault’s control of Philou through Ault & Company only enhances
the risk inherent in having Messrs. Ault and Horne serve as directors of both our company and Avalanche.
Risks Related to Our Business and Industry - Overview
If we fail to anticipate and adequately respond
to rapid technological changes in our industry, including evolving industry-wide standards, in a timely and cost-effective manner, our
business, financial condition and results of operations would be materially and adversely affected.
The markets in which we operate
are characterized by technological changes. Such changes, including evolving industry standards, changes in customer requirements and
new product introductions and enhancements, could render our products obsolete. Accordingly, we are required to constantly monitor and
anticipate technological changes in our industry and develop new product offerings and technologies or adapt or modify our existing offerings
and technologies to keep pace with technological advances in our industry and remain competitive.
Our ability to implement
our business strategy and continue to grow our revenues will depend on a number of factors, including our continuing ability to:
| ● | identify emerging technological trends in our current and target markets; |
| ● | identify additional uses for our existing technology to address customer needs in our current and future
markets; |
| ● | enhance our offerings by adding innovative features that differentiate our offerings from those of our
competitors; and |
| ● | design, develop, manufacture, assemble, test, market and support new products and enhancements in a timely
and cost-effective manner. |
We believe that, to remain competitive in the
future, we will need to continue to invest significant financial resources in developing new offerings and technologies or to adapt or
modify our existing offerings and technologies, including through internal research and development, strategic acquisitions and joint
ventures or other arrangements. However, these efforts may be more costly than we anticipate and there can be no assurance that they will
be successful.
If we are unable to identify, attract, train
and retain qualified personnel, especially our design and technical personnel, our business and results of operations would be materially
and adversely affected and we may not be able to effectively execute our business strategy.
Our performance and future
success largely depends on our continuing ability to identify, attract, train, retain and motivate qualified personnel, including our
management, sales and marketing, finance and in particular our engineering, design and technical personnel. For example, we currently
have limited number of qualified personnel for the assembling and testing processes. We do not know whether we will be able to retain
all these personnel as we continue to pursue our business strategy. Our engineering, design and technical personnel represent a significant
asset. The competition for qualified personnel in our industries is intense and constrains our ability to attract qualified personnel.
The loss of the services of one or more of our key employees, especially of our key engineering, design and technical personnel, or our
inability to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition
and operating results.
Our future results will depend on our ability
to maintain and expand our existing sales channels and to build out marketing, business development and sales functions for the operating
subsidiaries.
To grow our legacy businesses,
we must add new customers for our products in addition to retaining and increasing sales to our current customers. Currently, only Relec,
the operating subsidiary that we acquired in November 2020, has an effective sales force focused on establishing relationships with customers
that we expect to endure over time. In other subsidiaries, we have historically relied on key executives to drive growth through return
business with existing customers. Building out marketing, business development and sales functions in all operating subsidiaries is critical
to drive significant growth in line with our strategic plans. While we perform certain of these activities ourselves, we may contract
for marketing services to improve our websites, manage public relations and optimize our social media presence. Failure to recruit and
retain the business development and sale personnel to execute on outreach and capture of new business, or the failure of those new hires
or marketing services to perform as expected, will limit our ability to achieve our growth targets.
We are dependent upon our ability, and our
contract manufacturers’ ability, to timely procure electronic components.
Because of the global economy,
many raw material vendors have reduced capacities, closed production lines and, in some cases, even discontinued their operations. As
a result, there is a global shortage of certain electronic or mineral components, which may extend our production lead-time and our production
costs. Some materials are no longer available to support some of our products, thereby requiring us to search for cross materials or,
even worse, redesign some of our products to support currently-available materials. Such redesign efforts may require certain regulatory
and safety agency re-submittals, which may cause further production delays. While we have initiated actions that we believe will limit
our exposure to such problems, the dynamic business conditions in many of our markets may challenge the solutions that have been put in
place, and issues may recur in the future.
In addition, some of our products
are manufactured, assembled and tested by third party subcontractors and contract manufacturers located in Asia. While we have had relationships
with many of these third parties in the past, we cannot predict how or whether these relationships will continue in the future. In addition,
changes in management, financial viability, manufacturing demand or capacity, or other factors, at these third parties could hurt our
ability to manufacture our products.
We depend
upon a few major customers for a majority of our revenues, and the loss of any of these customers, or the substantial reduction in the
quantity of products that they purchase from us, would significantly reduce our revenues and net income.
We currently depend upon a
few major OEMs and other customers for a significant portion of our revenues. If our major OEM customers will reduce or cancel their orders
scaling back some of their activities, our revenues and net income would be significantly reduced. Furthermore, diversions in the capital
spending of certain of these customers to new network elements have and could continue to lead to their reduced demand for our products,
which could, in turn, have a material adverse effect on our business and results of operations. If the financial condition of one or more
of our major customers should deteriorate, or if they have difficulty acquiring investment capital due to any of these or other factors,
a substantial decrease in our revenues would likely result. We are dependent on the electronic equipment industry, and accordingly will
be affected by the impact on that industry of current economic conditions.
Substantially all of our existing
customers are in the electronic equipment industry, and they manufacture products that are subject to rapid technological change, obsolescence,
and large fluctuations in demand. This industry is further characterized by intense competition and volatility. The OEMs serving this
industry are pressured for increased product performance and lower product prices. OEMs, in turn, make similar demands on their suppliers,
such as us, for increased product performance and lower prices. Such demands may adversely affect our ability to successfully compete
in certain markets or our ability to sustain our gross margins.
Our reliance on subcontract manufacturers to
manufacture certain aspects of our products involves risks, including delays in product shipments and reduced control over product quality.
Since we do not own significant
manufacturing facilities, we must rely on, and will continue to rely on, a limited number of subcontract manufacturers to manufacture
our power supply products. Our reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing
costs, delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures
on many of the raw materials used in the manufacturing of our power supply products. If we were to encounter a shortage of key manufacturing
components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, inability of our
subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition
to our new subcontract manufacturers or other factors, we could experience lost revenues, increased costs, and delays in, or cancellations
or rescheduling of, orders or shipments, any of which would materially harm our business.
We outsource, and are dependent upon developer
partners for, the development of some of our custom design products.
We made an operational decision
to outsource some of our custom design products to numerous developer partners. This business structure will remain in place until the
custom design volume justifies expanding our in house capabilities. Incomplete product designs that do not fully comply with the customer
specifications and requirements might affect our ability to transition to a volume production stage of the custom designed product where
the revenue goals are dependent on the high volume of custom product production. Furthermore, we rely on the design partners’ ability
to provide high quality prototypes of the designed product for our customer approval as a critical stage to approve production.
We face intense industry competition, price erosion and product
obsolescence, which, in turn, could reduce our profitability.
We operate in an industry
that is generally characterized by intense competition. We believe that the principal bases of competition in our markets are breadth
of product line, quality of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price
erosion, and rapid product obsolescence due to technological improvements are therefore common in our industry as competitors strive to
retain or expand market share. Product obsolescence can lead to increases in unsaleable inventory that may need to be written off and,
therefore, could reduce our profitability. Similarly, price erosion can reduce our profitability by decreasing our revenues and our gross
margins. In fact, we have seen price erosion over the last several years on most of the products we sell, and we expect additional price
erosion in the future.
Our future results are dependent on our ability
to establish, maintain and expand our manufacturers’ representative OEM relationships and our other relationships.
We market and sell our products
through domestic and international OEM relationships and other distribution channels, such as manufacturers’ representatives and
distributors. Our future results are dependent on our ability to establish, maintain and expand our relationships with OEMs as well as
with manufacturers’ representatives and distributors to sell our products. If, however, the third parties with whom we have entered
into such OEM and other arrangements should fail to meet their contractual obligations, cease doing, or reduce the amount of their, business
with us or otherwise fail to meet their own performance objectives, customer demand for our products could be adversely affected, which
would have an adverse effect on our revenues.
We may not be able to procure necessary key
components for our products, or we may purchase too much inventory or the wrong inventory.
The power supply industry,
and the electronics industry as a whole, can be subject to business cycles. During periods of growth and high demand for our products,
we may not have adequate supplies of inventory on hand to satisfy our customers' needs. Furthermore, during these periods of growth, our
suppliers may also experience high demand and, therefore, may not have adequate levels of the components and other materials that we require
to build products so that we can meet our customers' needs. Our inability to secure sufficient components to build products for our customers
could negatively impact our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for
certain key components. Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail
to materialize or if there are negative factors impacting our customers’ end markets. If we purchase too much inventory or the wrong
inventory, we may have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect
on our gross margins and on our results of operations.
Although we depend on sales of our legacy products
for a meaningful portion of our revenues, these products are mature and their sales will decline.
A relatively large portion
of our sales have historically been attributable to our legacy products. However, these sales are declining. Although we are unable to
predict future prices for our legacy products, we expect that prices for these products will continue to be subject to significant downward
pressure in certain markets for the reasons described above. Accordingly, our ability to maintain or increase revenues will be dependent
on our ability to expand our customer base, to increase unit sales volumes of these products and to successfully, develop, introduce and
sell new products such as custom design and value-added products. We cannot assure you that we will be able to expand our customer base,
increase unit sales volumes of existing products or develop, introduce and/or sell new products.
Failure of our information technology infrastructure
to operate effectively could adversely affect our business.
We depend heavily on information
technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption
could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal
course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.
We are subject to certain governmental regulatory
restrictions relating to our international sales.
Some of our products are subject
to International Traffic In Arms Regulation (“ITAR”), which are interpreted, enforced and administered by the U.S. Department
of State. ITAR regulation controls not only the export, import and trade of certain products specifically designed, modified, configured
or adapted for military systems, but also the export of related technical data and defense services as well as foreign production. Any
delays in obtaining the required export, import or trade licenses for products subject to ITAR regulation and rules could have a material
adverse effect on our business, financial condition, and/or operating results. In addition, changes in U.S. export and import laws that
require us to obtain additional export and import licenses or delays in obtaining export or import licenses currently being sought could
cause significant shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions
or charges imposed by the U.S. or any other country on our international sales or foreign subsidiary could have a materially adverse effect
on our business, financial condition, and/or operating results. In addition, from time to time, we have entered into contracts with the
Israeli Ministry of Defense which were governed by the U.S. Foreign Military Financing program (“FMF”). Any such future sales
would be subject to these regulations. Failure to comply with ITAR or FMF rules could have a material adverse effect on our financial
condition, and/or operating results.
We depend on international operations for a
substantial majority of our components and products.
We purchase a substantial
majority of our components from foreign manufacturers and have a substantial majority of our commercial products assembled, packaged,
and tested by subcontractors located outside the U.S. These activities are subject to the uncertainties associated with international
business operations, including trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange
fluctuations, reduced protection for intellectual property, war and other military activities, terrorism, changes in social, political,
or economic conditions, and other disruptions or delays in production or shipments, any of which could have a materially adverse effect
on our business, financial condition, and/or operating results.
We depend on international sales for a portion of our revenues.
Sales to customers outside
of North America accounted for 37% and 52% of net revenues for the years ended December 31, 2021 and 2020, respectively, and we expect
that international sales will continue to represent a material portion of our total revenues. International sales are subject to the risks
of international business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts
receivable, and currency restrictions. In addition, GWW supports our European and other international customers, distributors, and sales
representatives, and therefore is also subject to local regulation. International sales are also subject to the export laws and regulations
of the U.S. and other countries.
Because a significant portion of our revenues
and expenses is denominated in foreign currencies, fluctuations in exchange rates could have a material adverse effect on our operating
results.
We face foreign exchange risks
because a significant portion of our revenue and expenses is denominated in foreign currencies. Further, some suppliers to Enertec and
Relec require payment in U.S. dollars, which exposes us to risk. Generally, U.S. dollar strength adversely impacts the translation of
the portion of our revenue that is generated in foreign currencies into the U.S. dollar. For the years ended December 31, 2021 and
2020, approximately 35.9% and 46.9% of our revenue, respectively, was denominated in currencies other than U.S. dollars. Our results of
operations could also be negatively impacted by a strengthening of the U.S. dollar as a large portion of our costs are U.S. dollar denominated.
We also have foreign exchange risk exposure with respect to certain of our assets, that are denominated in currencies other than the functional
currency of our subsidiaries, and our financial results are affected by the re-measurement and translation of these non-U.S. currencies
into U.S. dollars, which is reflected in the effect of exchange rate changes on cash, cash equivalents, and restricted cash on the consolidated
statements of cash flows. For the years ended December 31, 2021 and 2020, the effects of exchange rates on our cash, cash equivalents,
and restricted cash totaled $266,000 and $123,000, respectively, due to fluctuations in exchange rates and the strengthening of the U.S.
dollar. While we may choose to enter into transactions to hedge portions of our foreign currency translation and balance sheet exposure
in the future, it is impossible to predict or eliminate the effects of foreign exchange rate exposure. Strengthening of the U.S. dollar
could materially adversely affect our results of operations and financial condition.
Our insurance coverage and indemnity may be
insufficient to cover potential liabilities we may face due to the risks inherent in the products and services we provide.
We are exposed to liabilities
that are unique to the products and services we provide. A significant portion of our business relates to designing, developing and manufacturing,
components, integrated assemblies and subsystems for advanced defense, medical, transportation, industrial, technology and communications
systems and products. New technologies associated with these systems and products may be untested or unproven. Components of certain of
the defense systems and products we develop are inherently dangerous. Failures of satellites, missile systems, air traffic control systems,
homeland security applications and aircraft have the potential to cause loss of life and extensive property damage. In most circumstances,
we may receive indemnification from the government end users of our defense offerings in the U.S., the U.K.and
Israel. In addition, failures of products and systems that we manufacture or distribute for medical devices, transportation controls or
industrial systems also have the potential to result in loss of life, personal injury and/or extensive property damage.
While we maintain insurance
for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to
bear substantial costs from an accident or incident. It also is not possible for us to obtain insurance to protect against all operational
risks and liabilities. Substantial claims resulting from an incident in excess of government indemnity and our insurance coverage would
harm our financial condition, results of operations and cash flows. Moreover, any accident or incident for which we are liable, even if
fully insured, could negatively affect our standing with our customers and the public, thereby making it more difficult for us to compete
effectively, and could significantly impact the cost and availability of adequate insurance in the future.
If we are unable to satisfy our customers’
specific product quality, certification or network requirements, our business could be disrupted and our financial condition could be
harmed.
Our customers demand that
our products meet stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying
such standards. Defects or failures have occurred in the past, and may in the future occur, relating to our product quality, performance
and reliability. From time to time, our customers also require us to implement specific changes to our products to allow these products
to operate within their specific network configurations. If we are unable to remedy these failures or defects or if we cannot effect such
required product modifications, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and
costs associated with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts,
any of which would harm our business.
Some
of our business is subject to U.S. Government procurement laws and regulations.
We
must comply with certain laws and regulations relating to the formation, administration and performance of federal government contracts.
These laws and regulations affect how we conduct business with our federal government contracts, including the business that we do as
a subcontractor. In complying with these laws and regulations, we may incur additional costs, and non-compliance may lead to the assessment
of fines and penalties, including contractual damages, or the loss of business.
Failure to comply with anti-bribery, anti-corruption,
anti-money laundering laws, and similar laws, or allegations of such failure, could have a material adverse effect on our business, financial
condition and operating results.
We are subject to various
anti-bribery, anti-corruption, anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”),
the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, Chapter 9 (sub-chapter
5) of the Israeli Penal Law, 1977, the Israeli Prohibition on Money Laundering Law–2000, and possibly other similar laws in countries
outside of the U.S. in which we conduct our business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent
years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party
intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public
or private sector.
We, our employees, agents,
representatives, business partners and third-party intermediaries may have direct or indirect interactions with officials and employees
of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these
employees, agents, representatives, business partners or third-party intermediaries even if we do not explicitly authorize such activities.
These laws also require that
we keep accurate records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have
policies and procedures to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives,
business partners or third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be
ultimately held responsible. In addition, we may be held liable for violations committed of the FCPA or similar foreign laws by companies
that we acquire.
Any alleged or actual violation
of the FCPA or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints,
investigations, enforcement actions, fines and other criminal or civil sanctions, adverse media coverage, loss of export privileges, or
suspension or termination of government contracts. Responding to any investigation or enforcement action would require significant attention
of our management and resources, including significant defense costs and other professional fees. Failure to comply with anti-bribery,
anti-corruption, anti-money laundering laws, and similar laws, or allegations of such failure, could therefore have a material adverse
effect on our business, results of operations, financial condition and future prospects.
Compliance with the regulations, standards,
and contractual obligations promulgated by the European Union related to privacy, data protection, and data security, may cause Gresham
Power and Relec to incur additional expenses and failure to comply with such obligations could harm our business and future results of
operations.
The European Union General
Data Protection Regulation (“GDPR”) contains robust obligations on data “controllers” and data “processors”
with heavy documentation requirements for data protection compliance programs that apply to both Gresham Power and Relec. Among other
requirements, the GDPR regulates the transfer of personal data subject to the GDPR to third countries that have not been found to provide
adequate protection to such personal data, including the U.S. In the U.K., the GDPR requires informed consent for disclosure of names,
transfer of email addresses, the use of cookies and direct electronic marketing. The GDPR also imposes conditions on obtaining valid consent
to transfer of any personal data that Gresham Power or Relec collect or process. Failure to comply with the GDPR could result in penalties
for noncompliance (including possible fines of up to the greater of £8.7 million and 2% of our global annual revenue for the preceding
financial year for the violations, as well as the right to compensation for financial or non-financial damages claimed by individuals
under Article 82 of the GDPR).
The U.K. has enacted a Data
Protection Act substantially implementing the GDPR, effective in May 2018, which was further amended to align more substantially with
the GDPR following Brexit. The latest revisions of the GDPR in the U.K. post-Brexit have resulted in even more stringent restrictions
on the transfer of data about a person. Data considered in the public domain in the U.S. now falls within the protections of GDPR, which
complicates documenting business, marketing, sales outreach, securing infrastructure, audit and business management.
Compliance with the regulations,
standards, and contractual obligations promulgated by the U.K. related to privacy, data protection, and data security, may cause Gresham
Power and Relec to incur additional expenses and failure to comply with such obligations could harm our business and future results of
operations.
Risks Related to Our Business and Industry – Hotel Properties
We operate in a highly
competitive industry.
The
lodging industry is highly competitive. Our principal competitors are other owners and investors in full-service hotels as well as major
hospitality chains with well-established and recognized brands. Our hotels face competition for individual guests, group reservations
and conference business. We also compete against smaller hotel chains and independent and local hotel owners and operators. Additionally,
we face competition from peer-to-peer inventory sources that allow travelers to stay at homes and apartments booked from owners. New hotels
may be constructed, and these additions create new competitors, in some cases without corresponding increases in demand for hotel rooms.
Our competitors may have greater commercial, financial and marketing resources and more efficient technology platforms, which could allow
them to improve their properties and expand and improve their marketing efforts in ways that could affect our ability to compete for guests
effectively and adversely affect our revenues and profitability as well as limit or slow our future growth.
The
growth of internet reservation channels is another source of competition that could adversely affect our business. A significant percentage
of hotel rooms for individual customers are booked through internet travel intermediaries. As intermediary bookings increase, they may
be able to obtain higher commissions, reduced room rates or other significant contract concessions from our hotels. While internet travel
intermediaries traditionally have competed to attract transient business rather than group and convention business, in recent years they
have expanded their business to include marketing to large group and convention business. If that expansion continues, it could both divert
group and convention business away from our hotels and increase our cost of sales for group and convention business and materially adversely
affect our revenues and profitability.
Our franchisors and
brand managers require us to make capital expenditures pursuant to property improvement plans (“PIPs”), and any failure on
our part to make the expenditures required under the PIPs or to comply with brand standards could cause the franchisors or hotel brands
to terminate the franchise, management or operating lease agreements.
In
connection with our acquisition of the Properties in December 2021, our franchisors and brand managers required us to agree to undertake
PIPs in the amount of $13.7 million. If we do not satisfy the PIP renovation requirements, the franchisor or hotel brand may have the
right to terminate the applicable agreement. In addition, in the event that we are in default under any franchise agreement as a result
of our failure to comply with the PIP requirements, in general, we will be required to pay the franchisor liquidated damages, generally
equal to a percentage of gross room revenue for the preceding two-, three- or five-year period for the hotel or a percentage of gross
revenue for the preceding twelve-month period for all hotels operated under the franchised brand if the hotel has not been operating for
at least two years. In addition, our franchisors and brand managers may require that we make renovations to certain of our hotels in connection
with revisions to our franchise, management or operating lease agreements. In addition, upon regular inspection of our hotels, our franchisors
and hotel brands may determine that additional renovations are required to bring the physical condition of our hotels into compliance
with the specifications and standards each franchisor or hotel brand has developed.
All of our hotels
operate under a brand owned by Marriott or Hilton. Should either of these brands experience a negative event, or receive negative publicity,
our operating results may be harmed.
All
of our hotels are operated under nationally recognized brands, either Marriott or Hilton, which are among the most respected and widely
recognized brands in the lodging industry. As a result, a significant concentration of our success is dependent in part on the success
of Marriott and Hilton. Consequently, if market recognition or the positive perception of Marriott and/or Hilton is reduced or compromised,
the goodwill associated with our Marriott and/or Hilton branded hotels may be adversely affected, which may have an adverse effect on
our results of operations. Additionally, any negative perceptions or negative impact to operating results from any proposed or future
consolidations between nationally recognized brands could have an adverse effect on our results of operations.
Our franchisors and
brand managers may change certain policies or cost allocations that could negatively impact our hotels.
Our
franchisors and brand managers incur certain costs that are allocated to our hotels subject to our franchise, management, or operating
lease agreements. Those costs may increase over time or our franchisors and brand managers may elect to introduce new programs that could
increase costs allocated to our hotels. In addition, certain policies, such as our third-party managers’ frequent guest programs,
may be altered resulting in reduced revenue or increased costs to our hotels.
Because our hotels
are operated under franchise agreements or are brand managed, termination of these franchise, management or operating lease agreements
could cause us to lose business at our hotels or lead to a default or acceleration of our obligations under certain of our debt instruments.
All
of our hotels are operated under franchise, management or operating lease agreements with franchisors or hotel management companies, such
as Marriott and Hilton. In general, under these arrangements, the franchisor or brand manager provides marketing services and room reservations
and certain other operating assistance, but requires us to pay significant fees to it and to maintain the hotel in a required condition.
If we fail to maintain these required standards, then the franchisor or hotel brand may terminate its agreement with us and obtain damages
for any liability we may have caused. Moreover, from time to time, we may receive notices from franchisors or the hotel brands regarding
our alleged non-compliance with the franchise agreements or brand standards, and we may disagree with these claims that we are not in
compliance. Any disputes arising under these agreements could also lead to a termination of a franchise, management or operating lease
agreement and a payment of liquidated damages. Such a termination may trigger a default or acceleration of our obligations under some
of our debt instruments. In addition, as our franchise, management or operating lease agreements expire, we may not be able to renew them
on favorable terms or at all. If we were to lose a franchise or hotel brand for a particular hotel, it could harm the operation, financing
or value of that hotel due to the loss of the franchise or hotel brand name, marketing support and centralized reservation system. Furthermore,
the loss of a franchise license at a particular hotel could harm our relationship with the franchisor or brand manager and cause us to
incur significant costs to obtain a new franchise license or brand management agreement for the particular hotel. Accordingly, if we lose
one or more franchise licenses or brand management agreements, it could materially and adversely affect our results of operations and
profitability as well as limit or slow our future growth.
Our hotels are geographically
concentrated and, accordingly, we could be disproportionately harmed by adverse changes to these markets, natural disasters, regulations,
or terrorist attacks.
Our
hotels are located in a single geographic market, which exposes us to greater risk to local economic or business conditions, changes in
hotel supply in this market, and other conditions than more geographically diversified hotel owners. An economic downturn, an increase
in hotel supply, a force majeure event, a natural disaster, changing weather patterns, a terrorist attack or similar event in this market
likely would cause a decline in the hotel market and adversely affect occupancy rates, the financial performance of our hotels and our
overall results of operations, which could be material, and could significantly increase our costs.
The need for business-related travel, and,
therefore, demand for rooms in our hotels may be adversely affected by the increased use of business-related technology.
During 2020 and 2021, the
COVID-19 pandemic caused a significant decrease in business-related travel as companies turned to virtual meetings in order to protect
the health and safety of their employees. While business transient demand improved in 2021 as compared to 2020, it remains well below
pre-pandemic levels. The increased use of teleconferencing and video-conference technology by businesses may continue in the future, which
could result in further decreases in business travel as companies become accustomed to the use of technologies that allow multiple parties
from different locations to participate in meetings without traveling to a centralized meeting location, such as our hotels. To the extent
that such technologies, or new technologies, play an increased role in day-to-day business interactions and the necessity for business-related
travel decreases, demand for hotel rooms may decrease and our hotels could be adversely affected.
Rising operating expenses or low occupancy
rates could reduce cash flow.
Our hotels, and any hotels
we may buy in the future, are and will be subject to operating risks common to the lodging industry in general. If any hotel is not occupied
at a level sufficient to cover our operating expenses, then we could be required to spend additional funds for that hotel’s operating
expenses. For example, during 2020 and 2021, operations at many hotels were either temporarily suspended or reduced due to the COVID-19
pandemic, and hotel owners were required to fund hotel payroll expenses, maintenance expenses, fixed hotel costs such as ground rent,
insurance expenses, property taxes and scheduled debt payments. Hotels may be subject to increases in real estate and other tax rates,
utility costs, operating expenses including labor and employee-related benefits, insurance costs, repairs and maintenance and administrative
expenses, which could reduce cash flow.
Laws and governmental regulations may restrict
the ways in which we use our hotel properties and increase the cost of compliance with such regulations. Noncompliance with such regulations
could subject us to penalties, loss of value of our properties or civil damages.
Our hotel properties are subject
to various federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these
laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the
property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property
at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property
and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental
laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such
as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court
decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person
exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these
environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business
using chemicals (such as swimming pool chemicals at our hotels) to manage them carefully and to notify local officials that the chemicals
are being used.
We could be responsible for
the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental
laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose
material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition
of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated
to us.
Our hotel properties are also
subject to the Americans with Disabilities Act (“ADA”). Under the ADA, all public accommodations must meet various federal
requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access
barriers and non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are
required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and
regulations, our financial condition and results of operations could be harmed. In addition, we are required to operate our hotel properties
in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental
agencies and become applicable to our properties.
Risks Related to Our Business and Industry - Microphase
Microphase has a history of losses and our
future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on our business and the value of our
company.
Microphase has incurred losses
from operations during 2019. These losses are attributable to lower volumes of its products sold to major defense contractors partially
as a result of the overall reduction in defense spending and sequestration by the U.S. Congress. While Microphase has been profitable,
to a certain extent, during 2020 and 2021, there is always the possibility that its results of operations could worsen in the future,
whether as a result of new outbreaks of COVID-19, supply chain issues or any of a number of other factors. Since the financial crisis
of 2008, Microphase has been significantly short of capital needed to acquire parts for production of its products to complete orders
for such products. At times, Microphase has not had the cash available to make advance payments for the purchase of parts, and then, as
a consequence, Microphase would not receive the parts from its vendors required to finish a customer order. This would then delay the
delivery of products to customers, and would also delay recognition of the resulting revenues and the receipt of cash from the customer.
Sometimes after experiencing a delay in delivery of an order from Microphase, the customer would not place its next order with Microphase,
resulting in a loss of business.
Microphase’s future
profitability depends upon many factors, including several that are beyond its control. These factors include, without limitation:
| ● | economic dislocation, supply chain disruption or mandated shutdowns attributable to the COVID-19 pandemic; |
| ● | changes in the demand for its products and services; |
| ● | loss of key customers or contracts; |
| ● | the introduction of competitive products; |
| ● | the failure to gain market acceptance of its new and existing products; and |
| ● | the failure to successfully and cost effectively develop, introduce and market new products, services
and product enhancements in a timely manner. |
A large percentage of Microphase’s current
revenue is derived from prime defense contractors to the U.S. Government and its allies, and the loss of these relationships, a reduction
in U.S. Government funding or a change in U.S. Government spending priorities or bidding processes could have an adverse impact on its
business, financial condition, results of operations and cash flows.
Microphase is
highly dependent on sales to major defense contractors of the U.S. military and its allies, including Lockheed Martin, Raytheon, BAE Systems
and SAAB. The percentages of its revenue that were derived from sales to these named major defense contractors and directly to the U.S.
Government were 78.1% in fiscal 2021 and 50.7% in fiscal 2020. Therefore, any significant disruption or deterioration of Microphase’s
relationship with any such major defense contractors or the U.S. Government could materially reduce its revenue. During the year ended
December 31, 2020 there were five customers that accounted for more than 10% of Microphase’s sales: BAE Systems; Boeing/Argonist,
Inc.; DFAS Columbus Center; Raytheon Company and Sierra Nevada Corporation. During the year ended December 31, 2021 there were two customers
that accounted for more than 10% of Microphase’s sales: BAE Systems; and Lockheed Martin. Microphase’s competitors continuously
engage in efforts to expand their business relationships with the same major defense contractors and the U.S. Government and will continue
these efforts in the future, and the U.S. Government may choose to use other contractors. Microphase expects that a majority of the business
that it seeks will be awarded through competitive bidding. Microphase operates in highly competitive markets and its competitors have
more extensive or more specialized engineering, manufacturing and marketing capabilities than Microphase does in many areas, and Microphase
may not be able to continue to win competitively awarded contracts or to obtain task orders under multi-award contracts. Further, the
competitive bidding process involves significant cost and managerial time to prepare bids and proposals for contracts that may not be
awarded to Microphase, as well as the risk that Microphase may fail to accurately estimate the resources and costs required to fulfill
any contract awarded to us. Following any contract award, Microphase may experience significant expense or delay, contract modification
or contract rescission as a result of its competitors protesting or challenging contracts awarded to it in competitive bidding. Major
defense contractors to whom Microphase supplies components for systems must compete with other major defense contractors (to which Microphase
may not supply components) for military orders from the U.S. Government.
In addition, Microphase competes
with other policy needs, which may be viewed as more necessary, for limited resources and an ever-changing amount of available funding
in the budget and appropriations process. Budget and appropriations decisions made by the U.S. Government are outside of Microphase control
and have long-term consequences for its business. U.S. Government spending priorities and levels remain uncertain and difficult to predict
and are affected by numerous factors, including until recently sequestration (automatic, across-the-board U.S. Government budgetary spending
cuts), and the purchase of our products could be superseded by alternate arrangements. While the US defense budget was recently increased,
there can be no assurance that this increase will be maintained for the foreseeable future, particularly in light of the recent federal
expenditures the federal government has made with a view to ameliorating the economic damage suffered as a result of COVID-19. A change
in U.S. Government spending priorities or an increase in non-procurement spending at the expense of our programs, or a reduction in total
U.S. Government spending, could have material adverse consequences on Microphase’s future business.
Microphase’s U.S. Government contracts
may be terminated by the federal government at any time prior to their completion, which could lead to unexpected loss of sales and reduction
in Microphase’s backlog.
Under the terms of Microphase’s U.S. Government
contracts, the U.S. Government may unilaterally:
| ● | terminate or modify existing contracts; |
| ● | reduce the value of existing contracts through partial termination; and |
| ● | delay the payment of Microphase’s invoices by government payment offices. |
The federal government can
terminate or modify any of its contracts with Microphase or its prime contractors either for the federal government’s convenience,
or if Microphase or its prime contractors default, by failing to perform under the terms of the applicable contract. A termination arising
out of Microphase’s default could expose it to liability and have a material adverse effect on its ability to compete for future
federal government contracts and subcontracts. If the federal government or its prime contractors terminate and/or materially modify any
of Microphase’s contracts or if any applicable options are not exercised, Microphase’s failure to replace sales generated
from such contracts would result in lower sales and would adversely affect its earnings, which could have a material adverse effect on
Microphase’s business, results of operations and financial condition. Microphase’s backlog as of December 31, 2021 was
approximately $9.6 million. Microphase’s backlog could be adversely affected if contracts are modified or terminated.
Microphase’s products with military applications
are subject to export regulations, and compliance with these regulations may be costly.
Microphase is required to
obtain export licenses before filling foreign orders for many of its products that have military or other governmental applications. U.S.
Export Administration regulations control technology exports like its products for reasons of national security and compliance with foreign
policy, to guarantee domestic reserves of products in short supply and, under certain circumstances, for the security of a destination
country. Thus, any foreign sales of its products requiring export licenses must comply with these general policies. Compliance with these
regulations is costly, and these regulations are subject to change, and any such change may require Microphase to improve its technologies,
incur expenses or both in order to comply with such regulations.
Microphase depends on U.S. Government contracts
issued to major defense contractors, which often are only partially funded, subject to immediate termination, and heavily regulated and
audited. The termination or failure to fund, or negative audit findings for, one or more of these contracts could have an adverse impact
on Microphase’s business.
Over its lifetime, a U.S.
Government program awarded to a major defense contractor may be implemented by the award of many different individual contracts and subcontracts.
The funding of U.S. Government programs is subject to Congressional appropriations. Although multi-year contracts may be authorized and
appropriated in connection with major procurements, Congress generally appropriates funds on a fiscal year basis. Procurement funds are
typically made available for obligations over the course of one to three years. Consequently, programs often receive only partial funding
initially, and additional funds are designated only as Congress authorizes further appropriations. The termination of funding for a U.S.
Government program with respect to major defense contractors for which Microphase is a subcontractor would result in a loss of anticipated
future revenue attributable to that program, which could have an adverse impact on its operations. In addition, the termination of, or
failure to commit additional funds to, a program for which Microphase is a subcontractor could result in lost revenue and increase its
overall costs of doing business.
Generally, U.S. Government
contracts are subject to oversight audits by U.S. Government representatives. Such audits could result in adjustments to Microphase’s
contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed
must be refunded. Microphase has recorded contract revenues based on costs Microphase expect to realize upon final audit. However, Microphase
does not know the outcome of any future audits and adjustments, and Microphase may be required to materially reduce its revenues or profits
upon completion and final negotiation of audits. Negative audit findings could also result in termination of a contract, forfeiture of
profits, suspension of payments, fines and suspension or debarment from U.S. Government contracting or subcontracting for a period of
time.
In addition, U.S. Government
contracts generally contain provisions permitting termination, in whole or in part, without prior notice at the U.S. Government’s
convenience upon the payment only for work done and commitments made at the time of termination. Microphase can give no assurance that
one or more of the U.S. Government contracts with a major defense contractor under which Microphase provides component products will not
be terminated under these circumstances. Also, Microphase can give no assurance that it will be able to procure new contracts to offset
the revenue or backlog lost as a result of any termination of its U.S. Government contracts. Because a significant portion of Microphase’s
revenue is dependent on its performance and payment under its U.S. Government contracts, the loss of one or more large contracts could
have a material adverse impact on its business, financial condition, results of operations and cash flows.
Microphase’s government
business also is subject to specific procurement regulations and other requirements. These requirements, though customary in U.S. Government
contracts, increase its performance and compliance costs. In addition, these costs might increase in the future, thereby reducing Microphase’s
margins, which could have an adverse effect on its business, financial condition, results of operations and cash flows. Failure to comply
with these regulations and requirements could lead to fines, penalties, repayments, or compensatory or treble damages, or suspension or
debarment from U.S. Government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various
laws, including those related to procurement integrity, export control, U.S. Government security regulations, employment practices, protection
of the environment, accuracy of records, proper recording of costs and foreign corruption. The termination of a U.S. Government contract
or relationship as a result of any of these acts would have an adverse impact on Microphase’s operations and could have an adverse
effect on its standing and eligibility for future U.S. Government contracts.
Microphase’s business could be negatively
impacted by cybersecurity threats and other security threats and disruptions.
As a U.S. Government defense
contractor, Microphase faces certain security threats, including threats to its information technology infrastructure, attempts to gain
access to its proprietary or classified information, threats to physical security, and domestic terrorism events. Microphase’s information
technology networks and related systems are critical to the operation of its business and essential to its ability to successfully perform
day-to-day operations. Microphase is also involved with information technology systems for certain customers and other third parties,
which generally face similar security threats. Cybersecurity threats in particular, are persistent, evolve quickly and include, but are
not limited to, computer viruses, attempts to access information, denial of service and other electronic security breaches. Microphase
believes that it has implemented appropriate measures and controls and has invested in skilled information technology resources to appropriately
identify threats and mitigate potential risks, but there can be no assurance that such actions will be sufficient to prevent disruptions
to mission critical systems, the unauthorized release of confidential information or corruption of data. A security breach or other significant
disruption involving these types of information and information technology networks and related systems could:
| ● | disrupt the proper functioning of these networks and systems and therefore its operations and/or those
of certain of its customers; |
| ● | result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary,
confidential, sensitive or otherwise valuable information of Microphase or its customers, including trade secrets, which others could
use to compete against Microphase or for disruptive, destructive or otherwise harmful purposes and outcomes; |
| ● | compromise national security and other sensitive government functions; |
| ● | require significant management attention and resources to remedy the damages that result; |
| ● | subject Microphase to claims for breach of contract, damages, credits, penalties or termination; and |
| ● | damage Microphase’s reputation with its customers (particularly agencies of the U.S. Government)
and the public generally. |
Any or all of the foregoing
could have a negative impact on its business, financial condition, results of operations and cash flows. Compliance with Defense Department
requirements for information security require Microphase to invest significant resources to implement and maintain cyber defenses against
compromise of information technology architecture, malicious attacks and data breaches.
Microphase enters into fixed-price contracts
that could subject it to losses in the event of cost overruns or a significant increase in inflation.
Microphase has a number of
fixed-price contracts which allow it to benefit from cost savings but subject it to the risk of potential cost overruns, particularly
for firm fixed-price contracts, because Microphase assumes the entire cost burden. If its initial estimates are incorrect, Microphase
can lose money on these contracts. U.S. Government contracts can expose Microphase to potentially large losses because the U.S. Government
can hold Microphase responsible for completing a project or, in certain circumstances, paying the entire cost of its replacement by another
provider regardless of the size or foreseeability of any cost overruns that occur over the life of the contract. Because many of these
contracts involve new technologies and applications, unforeseen events such as technological difficulties, fluctuations in the price of
raw materials, problems with its suppliers and cost overruns, can result in the contractual price becoming less favorable or even unprofitable
to Microphase. The U.S. and other countries also may experience a significant increase in inflation. A significant increase in inflation
rates could have a significant adverse impact on the profitability of these contracts. Furthermore, if Microphase does not meet contract
deadlines or specifications, Microphase may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated
damages or suffer major losses if the customer exercises its right to terminate. In addition, some of its contracts have provisions relating
to cost controls and audit rights, and if Microphase fails to meet the terms specified in those contracts Microphase may not realize their
full benefits. Microphase’s results of operations are dependent on its ability to maximize its earnings from its contracts. Cost
overruns could have an adverse impact on its financial results.
Compliance with the regulations, standards,
and contractual obligations related to privacy, data protection, and data security, may cause us to incur additional expenses and failure
to comply with such obligations could harm our business and future results of operations.
We expect that the regulatory
framework for privacy, data protection and data security will continue to evolve, which may result in additional operating costs for internal
compliance and risks to our business. Nearly all of Microphase’s current contracts include provisions that require compliance with
detailed cyber security standards laid out in NIST 800-171, which mandates implementation of security controls to protect Microphase’s
information systems from compromise, malicious attacks and/or data breaches. Microphase must maintain a System Security Plan with a Plan
of Action & Milestones for any controls not yet implemented. To continue doing business with the DoD or major prime contractors working
with DoD, Microphase must ultimately achieve Cybersecurity Model Maturity Certification not later than 2026. In addition, Microphase maintains
a certified restricted area and must obtain and maintain authority to operate equipment to perform work on classified projects. Compliance
with all of these mandates will require Microphase to invest substantial resources to implement, maintain and monitor information systems
security controls, facility clearances, personnel clearance and authorities to operate classified systems, which adds to the costs of
operating the business.
Risks Related to Our Business and Industry - Enertec
Potential political, economic and military
instability in Israel could adversely affect our operations.
A significant portion
of our business is conducted through Enertec, our Israeli subsidiary. Accordingly, political, economic and military conditions in Israel
and the surrounding region may directly affect our Israeli operations. In recent years, Israel has been involved in sporadic armed conflicts
with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large
portions of Southern Lebanon, and with Iranian-backed military forces in Syria. Some of these hostilities were accompanied by missile
strikes from the Gaza Strip against civilian targets in various parts of Israel, including areas in which our facilities are located,
and negatively affected business conditions in Israel. The change in the U.S. Presidency may continue to change the dynamics in the Middle
East as forces hostile to the existence of Israel seek to reverse the recent stability and commercial opportunities created by the Abraham
Accords. For example, there have been increasing concerns related to a potential attack by Iran. The tension between Israel and Iran and/or
these groups may escalate in the future and turn even more violent, which could affect the Israeli economy in general and us in particular.
Our commercial insurance does
not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers
the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government
coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have
a material adverse effect on our business.
In addition, Israel-based
companies and companies doing business with Israel have been the subject of an economic boycott by members of the Arab League and certain
other predominantly Muslim countries since Israel’s establishment. Although Israel has entered into various agreements with certain
Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of
the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. Wars
and acts of terrorism have resulted in significant damage to the Israeli economy, including reducing the level of foreign and local investment.
Many of our Enertec employees are obligated
to perform military reserve duty in Israel, which could have a disruptive impact on our business.
Generally, Israeli adult male
and certain female citizens and permanent residents are obligated to perform annual military reserve duty in the Israel Defense Forces
up to a specified age. They also may be called to active military duty at any time under emergency circumstances. These military service
obligations could have a disruptive impact on our business, if hostilities develop in the future.
Enertec may become subject to claims for remuneration
or royalties for assigned service invention rights by its employees, which could result in litigation and harm our business.
A significant portion of the
intellectual property covered by Enertec’s products has been developed by Enertec’s employees in the course of their employment
for Enertec. Under the Israeli Patent Law, 5727-1967, or the Patent Law, and recent decisions by the Israeli Supreme Court and the Israeli
Compensation and Royalties Committee, a body constituted under the Patent Law, Israeli employees may be entitled to remuneration for intellectual
property that they develop for us unless they explicitly waive any such rights. To the extent that Enertec is unable to enter into agreements
with its future employees pursuant to which they agree that any inventions created in the scope of their employment or engagement are
owned exclusively by Enertec (as it has done in the past), Enertec may face claims demanding remuneration. As a consequence of such claims,
Enertec could be required to pay additional remuneration or royalties to its current and former employees, or be forced to litigate such
claims, which could negatively affect its business.
Risks Related to Our Business and Industry – Relec
The third parties on which we rely to supply
certain products are located outside the United States.
Relec distributes products
from foreign manufacturers located in Europe, Asia and North America. Our future operating results will depend, among other things, on
our ability to continue to rely on these arrangements. If we are no longer able to rely on these or other similar arrangements for the
supply of certain products, or if our cost of relying on such arrangements materially increases, as the result of the imposition of or
changes in customs, tariffs, quotas, trade barriers, or other trade protection measures, or otherwise, it could have a materially adverse
effect on our business, financial condition, and operating results.
Our strategic focus on our custom power supply
and display solution competencies and concurrent cost reduction plans may be ineffective or may limit our ability to compete.
As a result of our strategic
focus on custom power supply solutions, we will continue to devote significant resources to developing and manufacturing custom power
supply solutions for a large number of customers, where each product represents a uniquely tailored solution for a specific customer’s
requirements. Failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards
may put us at risk with one or more of these customers. Moreover, changes in market conditions and strategic changes at the direction
of our customers may affect their decision to continue to purchase from us. The loss of one or more of our significant custom power supply
solution customers could have a material adverse impact on our revenues, business or financial condition.
We have also implemented a
series of initiatives designed to increase efficiency and reduce costs. While we believe that these actions will reduce costs, they may
not be sufficient to achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market
or result in the improvements in our business that we anticipate. In such event, we may be forced to take additional cost-reducing initiatives,
including those involving our personnel, which may negatively impact quarterly earnings and profitability as we account for severance
and other related costs. In addition, there is the risk that such measures could have long-term adverse effects on our business by reducing
our pool of talent, decreasing or slowing improvements in our products or services, making it more difficult for us to respond to customers,
limiting our ability to increase production quickly if and when the demand for our solutions increases and limiting our ability to hire
and retain key personnel. These circumstances could cause our earnings to be lower than they otherwise might be.
Risks Related to Ownership of Our Common
Stock
If we do not continue
to satisfy the NYSE American continued listing requirements, our common stock could be delisted from NYSE American.
The
listing of our common stock on the NYSE American is contingent on our compliance with the NYSE American’s conditions for continued
listing. While we are presently in compliance with all such conditions, it is possible that we will fail to meet one or more of these
conditions in the future.
If
we were to fail to meet a NYSE American listing requirement, we may be subject to delisting by the NYSE American. In the event our common
stock is no longer listed for trading on the NYSE American, our trading volume and share price may decrease and we may experience further
difficulties in raising capital which could materially affect our operations and financial results. Further, delisting from the NYSE American
could also have other negative effects, including potential loss of confidence by partners, lenders, suppliers and employees and could
also trigger various defaults under our lending agreements and other outstanding agreements. Finally, delisting could make it harder for
us to raise capital and sell securities. You may experience future dilution as a result of future equity offerings. In order to raise
additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable
for our common stock.
Our common stock price is volatile; volatility
in our common stock price may subject us to securities litigation.
Our common stock is listed
on the NYSE American. In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with
our operations or business prospects. During the past 52-week period (through April 11, 2022), our stock closed at prices between $3.70
per share and $0.50 per share, as reported on Nasdaq.com. On April 11, 2022, the price of our common stock closed at $0.58 per share.
Stock
markets, in general, have experienced, and continue to experience, significant price and volume volatility, and the market price of our
common stock may continue to be subject to similar market fluctuations unrelated to our operating performance or prospects. This increased
volatility, coupled with depressed economic conditions, could continue to have a depressive effect on the market price of our common stock.
The following factors, many of which are beyond our control, may influence our stock price:
| ● | the status of our growth strategy including the development of new products with any proceeds we may be
able to raise in the future; |
| ● | announcements of technological or competitive developments; |
| ● | announcements or expectations of additional financing efforts; |
| ● | our ability to market new and enhanced products on a timely basis; |
| ● | changes in laws and regulations affecting our business; |
commencement of, or involvement in,
litigation involving us;
| ● | regulatory developments affecting us, our customers or our competitors; |
| ● | announcements regarding patent or other intellectual property litigation or the issuance of patents to
us or our competitors or updates with respect to the enforceability of patents or other intellectual property rights generally in the
U.S. or internationally; |
| ● | actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results
of companies perceived to be similar to us; |
| ● | changes in the market’s expectations about our operating results; |
| ● | our operating results failing to meet the expectations of securities analysts or investors in a particular
period; |
| ● | changes in the economic performance or market valuations of our competitors; |
| ● | additions or departures of our executive officers; |
| ● | sales or perceived sales of our common stock by us, our insiders or our other stockholders; |
| ● | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
and |
| ● | general economic, industry, political and market conditions and overall fluctuations in the financial
markets in the U.S. and abroad, including as a result of ongoing COVID-19 pandemic. |
In addition, the securities
markets have, from time to time, experienced significant price and volume fluctuations that are not related to the operating performance
of particular companies. Any of these factors could result in large and sudden changes in the volume and trading price of our common stock
and could cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted securities class action litigation against that company. If we were involved in a class
action suit or other securities litigation, it would divert the attention of our senior management, require us to incur significant expense
and, whether or not adversely determined, have a material adverse effect on our business, financial condition, results of operations and
prospects.
We have a substantial
number of convertible notes, warrants, options and preferred stock outstanding that could affect our price.
Due
to a number of financings, we have a substantial number of shares that are subject to issuance pursuant to outstanding convertible debt,
warrants and options. These conversion prices and exercise prices range from $0.88 to $2,000 per share of common stock. As of the date
of this Annual Report, the number of shares of common stock subject to convertible notes, warrants, options, restricted stock grants,
and preferred stock were 165,000, 20,014,787, 6,395,919, 2,062,504 and 2,232, respectively. The issuance of common stock pursuant to convertible
notes, warrants, options and preferred stock at conversion or exercise prices less than market prices may have the effect of limiting
an increase in market price of our common stock until all of these underling shares have been issued.
The issuance of shares
of our Class B common stock to our management or others could provide such persons with voting control leaving our other stockholders
unable to elect our directors and the holders of our shares of common stock will have little influence over our Management.
Although
there are currently no shares of our Class B common stock issued and outstanding, our certificate of incorporation authorizes the issuance
of 25,000,000 shares of Class B common stock. Each share of Class B common stock provides the holder thereof with ten (10) votes on all
matters submitted to a stockholder vote. Our certificate of incorporation does not provide for cumulative voting for the election of directors.
Any person or group who controls or can obtain more than 50% of the votes cast for the election of each director will control the election
of directors and the other stockholders will not be able to elect any directors or exert any influence over management decisions. As a
result of the super-voting rights of our shares of Class B common stock, the issuance of such shares to our management or others could
provide such persons with voting control and our other stockholders will not be able to elect our directors and will have little influence
over our management. While we are listed on the NYSE American or any other national securities exchange it is highly unlikely that we
would issue any shares of Class B common stock as doing so would jeopardize our continued listing on any such exchange. However, if were
to be delisted for some other reason and our shares of Class A common stock trade on an over-the-counter market, then we would face no
restriction on issuing shares of Class B common stock.
General Risk Factors
Our limited operating history makes it difficult
to evaluate our future business prospects and to make decisions based on our historical performance.
Although our executive officers
have been engaged in the industries in which we operate for varying degrees of time, we did not begin operations of our current business
until recently. We have a very limited operating history in our current form, which makes it difficult to evaluate our business on the
basis of historical operations. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical
data. Reliance on our historical results may not be representative of the results we will achieve, and for certain areas in which we operate,
principally those unrelated to defense contracting, will not be indicative at all. Because of the uncertainties related to our lack of
historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in sales, product costs
or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses,
which may result in a decline in our stock price.
Deterioration of global economic conditions
could adversely affect our business.
The global economy and capital
and credit markets have experienced exceptional turmoil and upheaval over the past several years. Ongoing concerns about the systemic
impact of potential long-term and widespread recession and potentially prolonged economic recovery, volatile energy costs, fluctuating
commodity prices and interest rates, volatile exchange rates, geopolitical issues, including the recent outbreak of armed conflict in
Ukraine, natural disasters and pandemic illness, instability in credit markets, cost and terms of credit, consumer and business confidence
and demand, a changing financial, regulatory and political environment, and substantially increased unemployment rates have all contributed
to increased market volatility and diminished expectations for many established and emerging economies, including those in which we operate.
Furthermore, austerity measures that certain countries may agree to as part of any debt crisis or disruptions to major financial trading
markets may adversely affect world economic conditions and have an adverse impact on our business. These general economic conditions could
have a material adverse effect on our cash flow from operations, results of operations and overall financial condition.
The availability, cost and
terms of credit also have been and may continue to be adversely affected by illiquid markets and wider credit spreads. Concern about the
stability of the markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors
to reduce credit to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers over the past
several years, and a corresponding slowdown in global infrastructure spending.
Continued uncertainty in the
U.S. and international markets and economies and prolonged stagnation in business and consumer spending may adversely affect our liquidity
and financial condition, and the liquidity and financial condition of our customers, including our ability to access capital markets and
obtain capital lease financing to meet liquidity needs.
No assurance of successful expansion of operations.
Our significant increase in
the scope and the scale of our operations, including the hiring of additional personnel, has resulted in significantly higher operating
expenses. We anticipate that our operating expenses will continue to increase. Expansion of our operations may also make significant demands
on our management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon
a significant expansion of our accounting and other internal management systems and the implementation and subsequent improvement of a
variety of systems, procedures and controls. We cannot assure that significant problems in these areas will not occur. Failure to expand
these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business
could have a material adverse effect on our business, financial condition and results of operations. We cannot assure that attempts to
expand our marketing, sales, manufacturing and customer support efforts will succeed or generate additional sales or profits in any future
period. As a result of the expansion of our operations and the anticipated increase in our operating expenses, along with the difficulty
in forecasting revenue levels, we expect to continue to experience significant fluctuations in its results of operations.
If we fail to establish and maintain an effective
system of internal control over financial reporting, we may not be able to report our financial results accurately or prevent fraud. Any
inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price
of our common stock.
Effective internal control
over financial reporting is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed,
and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies
may adversely affect our financial condition, results of operations and access to capital. We have carried out an evaluation under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent period covered
by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure
controls and procedures were not effective at the reasonable assurance level due to the material weakness described below.
A material weakness is a deficiency,
or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Audit Standard
No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material
weakness which has caused management to conclude that as of December 31, 2021 our internal control over financial reporting (“ICFR”)
was not effective at the reasonable assurance level:
We do not have sufficient
resources in our accounting function, which restricts our ability to gather, analyze and properly review information related to financial
reporting, including fair value estimates, in a timely manner. In addition, due to our size and nature, segregation of all conflicting
duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions,
the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of
our failure to have segregation of duties during our assessment of our disclosure controls and procedures and concluded that the resulting
control deficiency represented a material weakness.
We are currently working to
improve and simplify our internal processes and implement enhanced controls to address the material weakness in our internal control over
financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. This material weakness will not be considered
to be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded,
through testing, that these controls are operating effectively.
If our accounting
controls and procedures are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.
We
evaluate our disclosure controls and procedures as of the end of each fiscal quarter, and annually review and evaluate our internal control
over financial reporting in order to comply with the Commission’s rules relating to internal control over financial reporting adopted
pursuant to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
If we fail to maintain effective internal control over financial reporting or our management does not timely assess the adequacy of such
internal control, we may be subject to regulatory sanctions, and our reputation may decline.
Our internal computer
systems may fail or suffer security breaches, which could result in a material disruption of our operations.
Like
any other business, we rely on e-mail and other digital communications methods as part of our normal operations. As such, our internal
computer systems and servers could fail or suffer security breaches, possibly resulting in a material disruption to our operations. The
secure operation of our IT networks and systems as well as the secure processing and maintenance of information is critical to our operations
and business strategy. Notwithstanding these priorities, we have experienced attempts at cybercrime such as phishing and other electronic
fraud, including efforts to misdirect payments to imposter vendors and service providers. After experiencing a financial loss due to e-mail
fraud in November 2021, we have instituted greater internal controls and procedures, both electronic and non-electronic, to combat such
fraudulent conduct. We also maintain an insurance policy to cover any losses or injuries suffered from cybercrime of this nature; however,
it may not be sufficient to cover all damages. Despite our efforts, attempts at fraud such as spoofed e-mails, requests for payment and
similar deceptions have become commonplace in the world of e-commerce and are expected to continue. If we are unable to prevent such security
breaches in the future, these events or circumstances could materially and adversely affect our operations, financial condition and operating
results and impair our ability to execute our business strategy.
We face significant competition, including changes in pricing.
The markets for our products
are both competitive and price sensitive. Many competitors have significant financial, operations, sales and marketing resources, plus
experience in research and development, and compete with us by offering lower prices. Competitors could develop new technologies that
compete with our products to achieve a lower unit price. If a competitor develops lower cost and/or superior technology or cost-effective
alternatives to our products and services, our business could be seriously harmed.
The markets for some of our
products are also subject to specific competitive risks because these markets are highly price sensitive. Our competitors have competed
in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would
reduce sales revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate
losses.
Many of our competitors are larger and have
greater financial and other resources than we do.
Our products compete and will
compete with similar if not identical products produced by our competitors. These competitive products could be marketed by well-established,
successful companies that possess greater financial, marketing, distribution personnel, and other resources than we do. Using said resources,
these companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts
by competitors. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial
resources may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products
that compete with our products or present cost features that consumers may find attractive.
Our growth strategy is subject to a significant
degree of risk.
Our
growth strategy through acquisitions involves a significant degree of risk. Some of the companies that we have identified as acquisition
targets or made a significant investment in may not have a developed business or are experiencing inefficiencies and incur losses. Therefore,
we may lose our investment in the event that these companies’ businesses do not develop as planned or that they are unable to achieve
the anticipated cost efficiencies or reduction of losses.
Further,
in order to implement our growth plan, we have hired additional staff and consultants to review potential investments and implement our
plan. As a result, we have substantially increased our infrastructure and costs. If we fail to quickly find new companies that provide
revenue to offset our costs, we will continue to experience losses. No assurance can be given that our product development and investments
will produce sufficient revenues to offset these increases in expenditures.
Our business and operations are growing rapidly.
If we fail to effectively manage our growth, our business and operating results could be harmed.
We have experienced, and may
continue to experience, rapid growth in our operations. This has placed, and may continue to place, significant demands on our management,
operational and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer,
which could negatively affect our operating results. To effectively manage our growth, we must continue to improve our operational, financial
and management controls and reporting systems and procedures. These systems improvements may require significant capital expenditures
and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial position.
Our operating results may vary from quarter to quarter.
Our operating results have
in the past been subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in
magnitude, in future periods. Demand for our products is driven by many factors, including the availability of funding for our products
in our customers’ capital budgets. There is a trend for some of our customers to place large orders near the end of a quarter or
fiscal year, in part to spend remaining available capital budget funds. Seasonal fluctuations in customer demand for our products driven
by budgetary and other concerns can create corresponding fluctuations in period-to-period revenues, and we therefore cannot assure you
that our results in one period are necessarily indicative of our revenues in any future period. In addition, the number and timing of
large individual sales and the ability to obtain acceptances of those sales, where applicable, have been difficult for us to predict,
and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all.
The loss or deferral of one or more significant sales in a quarter could harm our operating results for such quarter. It is possible that,
in some quarters, our operating results will be below the expectations of public market analysts or investors. In such events, or in the
event adverse conditions prevail, the market price of our common stock may decline significantly.
Changes in the U.S. tax and other laws and regulations may adversely
affect our business.
The U.S. Government may revise
tax laws, regulations or official interpretations in ways that could have a significant adverse effect on our business, including modifications
that could reduce the profits that we can effectively realize from our international operations, or that could require costly changes
to those operations, or the way in which they are structured. For example, the effective tax rates for most U.S. companies reflect the
fact that income earned and reinvested outside the U.S. is generally taxed at local rates, which may be much lower than U.S. tax rates.
If we expand abroad and there are changes in tax laws, regulations or interpretations that significantly increase the tax rates on non-U.S.
income, our effective tax rate could increase and our profits could be reduced. If such increases resulted from our status as a U.S. company,
those changes could place us at a disadvantage to our non-U.S. competitors if those competitors remain subject to lower local tax rates.
Our sales and profitability may be affected by changes in
economic, business and industry conditions.
If the economic climate in
the U.S. or abroad deteriorates, customers or potential customers could reduce or delay their technology investments. Reduced or delayed
technology and entertainment investments could decrease our sales and profitability. In this environment, our customers may experience
financial difficulty, cease operations and fail to budget or reduce budgets for the purchase of our products and professional services.
This may lead to longer sales cycles, delays in purchase decisions, payment and collection, and can also result in downward price pressures,
causing our sales and profitability to decline. In addition, general economic uncertainty and general declines in capital spending in
the information technology sector make it difficult to predict changes in the purchasing requirements of our customers and the markets
we serve. There are many other factors which could affect our business, including:
| ● | The introduction and market acceptance of new technologies, products and services; |
| ● | New competitors and new forms of competition; |
| ● | The size and timing of customer orders (for retail distributed physical product); |
| ● | The size and timing of capital expenditures by our customers; |
| ● | Adverse changes in the credit quality of our customers and suppliers; |
| ● | Changes in the pricing policies of, or the introduction of, new products and services by us or our competitors; |
| ● | Changes in the terms of our contracts with our customers or suppliers; |
| ● | The availability of products from our suppliers; and |
| ● | Variations in product costs and the mix of products sold. |
These
trends and factors could adversely affect our business, profitability and financial condition and diminish our ability to achieve our
strategic objectives.
The sale of our products is dependent upon
our ability to satisfy the proprietary requirements of our customers.
We depend upon a relatively
narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance
by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to
satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.
The sale of our products is dependent on our
ability to respond to rapid technological change, including evolving industry-wide standards, and may be adversely affected by the development,
and acceptance by our customers, of new technologies which may compete with, or reduce the demand for, our products.
Rapid technological change,
including evolving industry standards, could render our products obsolete. To the extent our customers adopt such new technology in place
of our products, the sales of our products may be adversely affected. Such competition may also increase pricing pressure for our products
and adversely affect the revenues from such products.
Our limited ability to protect our proprietary
information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property
rights of others, resulting in claims against us, the results of which could be costly.
Many of our products consist
entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights,
trade secret laws and contractual obligations, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual
property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior
to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent
as the laws of the U.S. In order to defend our proprietary rights in the technology utilized in our products from third party infringement,
we may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business.
If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results
could be adversely affected.
Although we attempt to avoid
infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and
claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party
proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require
us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to
us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the U.S.
or abroad.
If we ship products that contain defects, the
market acceptance of our products and our reputation will be harmed and our customers could seek to recover their damages from us.
Our products are complex,
and despite extensive testing, may contain defects or undetected errors or failures that may become apparent only after our products have
been shipped to our customers and installed in their network or after product features or new versions are released. Any such defect,
error or failure could result in failure of market acceptance of our products or damage to our reputation or relations with our customers,
resulting in substantial costs for us and our customers as well as the cancellation of orders, warranty costs and product returns. In
addition, any defects, errors, misuse of our products or other potential problems within or out of our control that may arise from the
use of our products could result in financial or other damages to our customers. Our customers could seek to have us pay for these losses.
Although we maintain product liability insurance, it may not be adequate.
The rights of the holders of common stock may
be impaired by the potential issuance of preferred stock.
Our certificate of incorporation
gives our Board the right to create new series of preferred stock. As a result, the Board may, without stockholder approval, issue preferred
stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest
of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized
as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect
the price of our common stock. We may issue shares of preferred stock in the future.
The requirements of being a public company
may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
We are a public company and
subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act of 2002. The Exchange Act requires, among other
things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting.
For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal controls
structure and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant
amount of time and effort to complete. If we fail to maintain compliance under Section 404, or if our internal control over financial
reporting continues to not be effective as defined under Section 404, we could be subject to sanctions or investigations by the NYSE
American, the Commission, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could
cause a decline in the market price of our common stock. Any failure of our internal controls could have a material adverse effect on
our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent
auditors. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing
obligations as a public company, particularly if we become fully subject to Section 404 and its auditor attestation requirements, which
will increase costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives
and to meeting the obligations that are associated with being a public company, which may divert attention from other business concerns,
which could have a material adverse effect on our business, financial condition and results of operations.
We have identified material weaknesses in our
internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain
an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to
meet our periodic reporting obligations.
We are required to comply with certain provisions
of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). Section 404 requires that we document and test our
internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Based on our assessment, as of December 31, 2021, we concluded that our internal control over financial reporting
contained material weaknesses.
The weakness will not be considered remediated,
however, until the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that
these controls are operating effectively. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy
and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition,
a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud
and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements,
each of which could have a material adverse effect on our business, results of operations and financial condition.
If we fail to comply with the rules under
the Sarbanes-Oxley Act of 2002 related to accounting controls and procedures, or if we discover material weaknesses and deficiencies in
our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
If we fail to comply with
the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses
and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital
could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our
internal control over financial reporting. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to
achieve and maintain the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover,
effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial
fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors
could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.
If securities or industry analysts do not publish
research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading
volume could decline.
The trading market for our
common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our
research coverage by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the
analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock
price or trading volume to decline.
The elimination of monetary liability against
our directors, officers and employees under law and the existence of indemnification rights for or obligations to our directors, officers
and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our certificate of incorporation
contains a provision permitting us to eliminate the personal liability of our directors to us and our stockholders for damages for the
breach of a fiduciary duty as a director or officer to the extent provided by Delaware law. We may also have contractual indemnification
obligations under any future employment agreements with our officers. The foregoing indemnification obligations could result in us incurring
substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup.
These provisions and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of
their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and
officers even though such actions, if successful, might otherwise benefit us and our stockholders.
We do not anticipate paying dividends on our
common stock and, accordingly, stockholders must rely on stock appreciation for any return on their investment.
We have never declared or
paid cash dividends on our common stock and do not expect to do so in the foreseeable future. The declaration of dividends is subject
to the discretion of our Board and will depend on various factors, including our operating results, financial condition, future prospects
and any other factors deemed relevant by our Board. You should not rely on an investment in our company if you require dividend income
from your investment in our company. The success of your investment will likely depend entirely upon any future appreciation of the market
price of our common stock, which is uncertain and unpredictable. There is no guarantee that our common stock will appreciate in value.