Filed Pursuant to Rule 424(b)(5)
Registration No. 333-260618
PROSPECTUS SUPPLEMENT |
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(To Prospectus dated November 12, 2021) |
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Up to $10,000,000
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AULT ALLIANCE, INC.
(formerly known as
BitNile Holdings, Inc.)
Shares of Common Stock
We have entered into an At-The-Market
Issuance Sales Agreement, or the sales agreement, with Ascendiant Capital Markets, LLC, or ACM, relating to shares of our common stock
offered by this prospectus supplement and the accompanying prospectus. In accordance with the terms of the sales agreement, we may offer
and sell shares of our common stock, par value $0.001 per share, having an aggregate offering price of up to $10,000,000 from time to
time through ACM, acting as sales agent, at our discretion.
Our common stock is traded
on the NYSE American, or the Exchange, under the symbol “AULT.” The closing price of our common stock on June 8, 2023 was
$10.58 per share.
As of June 8, 2023, the aggregate
market value of our outstanding common stock held by non-affiliates, or the public float, was $39,178,854, which was calculated based
on 1,187,238 shares of our outstanding common stock held by non-affiliates at a price of $33.00 per share, the closing price of our common
stock on April 20, 2023. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell shares pursuant to this prospectus
supplement with a value of more than one-third of the aggregate market value of our common stock held by non-affiliates in any 12-month
period, or $13,059,618, which period commenced on April 17, 2023, the date we filed our Annual Report on Form 10-K and became subject
to the General Instruction I.B.6. of Form S-3, so long as the aggregate market value of our common stock held by non-affiliates is less
than $75,000,000. During the period beginning April 18, 2023 through the date of the filing of this prospectus supplement, we have sold
shares of our Series D Preferred Stock in the aggregate amount of $1,219,731, all of which sales were made pursuant to General Instruction
I.B.6 of Form S-3, leaving $11,839,887 to be sold under this prospectus supplement.
Sales of our common stock,
if any, under this prospectus supplement and accompanying prospectus may be made in sales deemed to be “at the market offerings”
as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. ACM is not required to sell any specific number
or dollar amount of securities, but will act as a sales agent using commercially reasonable efforts consistent with its normal trading
and sales practices, on terms mutually agreed to by ACM and us. There is no arrangement for funds to be received in any escrow, trust
or similar arrangement.
The compensation to ACM for
sales of common stock sold pursuant to the sales agreement will be an amount equal to 3.5% of the gross proceeds of any shares of common
stock sold under the sales agreement. In connection with the sale of the common stock on our behalf, ACM may be deemed to be an “underwriter”
within the meaning of the Securities Act and the compensation of ACM may be deemed to be underwriting commissions or discounts. We have
also agreed to provide indemnification and contribution to ACM with respect to certain liabilities, including liabilities under the Securities
Act or the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning on page S-8 of this prospectus supplement,
on page 10 of the accompanying prospectus and under similar headings in the other documents that are incorporated by reference into this
prospectus supplement and the accompanying prospectus.
Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus
supplement or the prospectus to which it relates is truthful or complete. Any representation to the contrary is a criminal offense.
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The date of this Prospectus
Supplement is June 9, 2023
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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Page
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About this Prospectus Supplement |
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ii |
Disclosure Regarding Forward-Looking Statements |
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ii |
About the Company |
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S-1 |
Risk Factors |
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S-8 |
Use of Proceeds |
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S-55 |
Plan of Distribution |
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S-56 |
Description of Our Securities |
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S-57 |
Legal Matters |
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S-58 |
Experts |
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S-58 |
Where You Can Find More Information |
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S-58 |
Incorporation of Documents by Reference |
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S-58 |
PROSPECTUS
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Page
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About this Prospectus |
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1 |
Disclosure Regarding Forward-Looking Statements |
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1 |
About the Company |
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2 |
Risk Factors |
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10 |
Use of Proceeds |
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33 |
The Securities We May Offer |
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33 |
Description of Capital Stock |
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34 |
Description of Debt Securities |
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34 |
Description of Warrants |
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42 |
Description of Rights |
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44 |
Description of Units |
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44 |
Plan of Distribution |
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45 |
Legal Matters |
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47 |
Experts |
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47 |
Where you can find more Information |
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47 |
Incorporation of Documents by Reference |
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48 |
You should rely only on
the information contained in this prospectus supplement and the accompanying prospectus. We have not authorized anyone else to provide
you with additional or different information. We are offering to sell, and seeking offers to buy, our securities only in jurisdictions
where offers and sales are permitted. You should not assume that the information in this prospectus supplement or the accompanying prospectus
is accurate as of any date other than the date on the front of those documents or that any document incorporated by reference is accurate
as of any date other than its filing date.
No action is being taken
in any jurisdiction outside the United States to permit a public offering of our securities or possession or distribution of this prospectus
supplement or the accompanying prospectus in that jurisdiction. Persons who come into possession of this prospectus supplement or the
accompanying prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions
as to this offering and the distribution of this prospectus supplement and the accompanying prospectus applicable to that jurisdiction.
ABOUT THIS PROSPECTUS
SUPPLEMENT
This
document is in two parts. The first part is this prospectus supplement, which describes the specific terms of this offering and also adds
to and updates information contained in the accompanying prospectus and the documents incorporated by reference into this prospectus supplement
and the accompanying prospectus. The second part, the accompanying prospectus, gives more general information about securities we may
offer from time to time, some of which does not apply to this offering. Generally, when we refer to this prospectus, we are referring
to both parts of this document combined together with all documents incorporated by reference. If the description of the offering varies
between this prospectus supplement and the accompanying prospectus, you should rely on the information contained in this prospectus supplement.
However, if any statement in one of these documents is inconsistent with a statement in another document having a later date — for
example, a document incorporated by reference into this prospectus supplement or the accompanying prospectus — the statement in
the document having the later date modifies or supersedes the earlier statement. You should rely only on the information contained in
or incorporated by reference into this prospectus supplement or contained in or incorporated by reference into the accompanying prospectus
to which we have referred you.
Neither
we nor ACM have authorized anyone to provide you with information that is different. If anyone provides you with different or inconsistent
information, you should not rely on it. We do not, and ACM does not, take responsibility for, and can provide no assurances as to, the
reliability of any information that others provide you. The information contained in, or incorporated by reference into, this prospectus
supplement and contained in, or incorporated by reference into, the accompanying prospectus is accurate only as of the respective dates
thereof, regardless of the time of delivery of this prospectus supplement and the accompanying prospectus or of any sale of securities.
It is important for you to read and consider all information contained in this prospectus supplement and the accompanying prospectus,
including the documents incorporated by reference herein and therein, in making your investment decision. You should also read and consider
the information in the documents to which we have referred you under the captions “Where You Can Find More Information” and
“Incorporation of Documents by Reference” in this prospectus supplement and in the accompanying prospectus.
We
are offering to sell, and are seeking offers to buy, the shares only in jurisdictions where such offers and sales are permitted. The distribution
of this prospectus supplement and the accompanying prospectus and the offering of the shares in certain jurisdictions or to certain persons
within such jurisdictions may be restricted by law. Persons outside the United States who come into possession of this prospectus supplement
and the accompanying prospectus must inform themselves about and observe any restrictions relating to the offering of the shares and the
distribution of this prospectus supplement and the accompanying prospectus outside the United States. This prospectus supplement and the
accompanying prospectus do not constitute, and may not be used in connection with, an offer to sell, or a solicitation of an offer to
buy, any securities offered by this prospectus supplement and the accompanying prospectus by any person in any jurisdiction in which it
is unlawful for such person to make such an offer or solicitation.
We own or have rights to various
trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus supplement, the
accompanying prospectus and the information incorporated herein and thereby by reference may also contain trademarks, service marks and
trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks,
service marks, trade names or products in this prospectus supplement or the accompanying prospectus is not intended to, and does not imply
a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred
to in this prospectus may appear without the ®, TM or SM symbols, but such references are not
intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the
applicable licensor to these trademarks, service marks and trade names.
Unless otherwise stated or
the context requires otherwise, references to “Ault Alliance,” the “Company,” “we,” “us”
or “our” are to Ault Alliance, Inc., a Delaware corporation, and its subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents
incorporated by reference in it contain forward-looking statements regarding future events and our future results that are subject to
the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements
of historical facts are statements that could be deemed forward-looking statements. These statements are based on our expectations, beliefs,
forecasts, intentions and future strategies and are signified by the words “expects,” “anticipates,” “intends,”
“believes” or similar language. In addition, any statements that refer to projections of our future financial performance,
our anticipated growth, trends in our business and other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict,
including those identified above, under “Risk Factors” and elsewhere in this prospectus. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking statements. All forward-looking statements included in this prospectus
are based on information available to us on the date of this prospectus and speak only as of the date hereof.
We disclaim any current intention to update our
“forward-looking statements,” and the estimates and assumptions within them, at any time or for any reason, except as required
by U.S. federal securities laws. In particular, the following factors, among others, could cause actual results to differ materially from
those described in the “forward-looking statements”:
| • | Adverse economic conditions; |
| • | Our ability to effectively execute our business plan; |
| • | Our inability to raise sufficient additional capital to operate our business; |
| • | Our ability to manage our expansion, growth and operating expenses; |
| • | Our ability to evaluate and measure our business, prospects and performance metrics; |
| • | Our ability to compete and succeed in highly competitive and evolving industries; |
| • | Our ability to respond and adapt to changes in technology and customer behavior; |
| • | Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand;
and |
| • | The risk factors included in our most recent filings with the SEC, including, but not limited to, our
Forms 10-K, 10-Q and 8-K. All filings are also available on our website at www.ault.com. |
ABOUT THE COMPANY
This summary highlights
selected information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information
that you should consider in making your investment decision. Before investing in our securities, you should read the entire prospectus
carefully, including the information set forth under the heading “Risk Factors.”
Company Overview
Ault Alliance, Inc., a Delaware
corporation formerly known as BitNile Holdings, Inc., was incorporated in September 2017 (sometimes referred to as “AAI,”
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 (i) Ault Lending, LLC (“Ault Lending,”
formerly known as Digital Power Lending, LLC), (ii) Ault Global Real Estate Equities, Inc. (“AGREE”), (iii) Ault Disruptive
Technologies Company, LLC (“ADTC”), (iv) BitNile, Inc. (“BNI”) which wholly owns Alliance Cloud Services, LLC
(“ACS”) and (v) Circle 8 Holdco LLC, a Delaware limited liability company (“Circle 8 Holdco”). We have a direct
and, through Ault Lending, indirect controlling interest in BitNile Metaverse, Inc. (“BMI”), a Nevada corporation formerly
known as Ecoark Holdings, Inc., to which we recently transferred our majority owned subsidiary BitNile.com, Inc. (“BNC”).
We also have a direct controlling interest in (i) Imperalis Holding Corp. (“IMHC”), which wholly owns TOG Technologies, Inc.
(“TOG Technologies”) and Digital Power Corporation (“Digital Power”), (ii) Giga-tronics Incorporated (“GIGA”),
which wholly owns Gresham Worldwide, Inc. (“GWW”), which in turn wholly owns Gresham Power Electronics Ltd. (“Gresham
Power”), Enertec Systems 2001 Ltd. (“Enertec”), Relec Electronics Ltd. (“Relec”) and has a controlling interest
in Microphase Corporation (“Microphase”) and (iii) in Avalanche International Corp. (“Avalanche” or “AVLP”).
Ault Lending has a controlling interest in The Singing Machine Company, Inc. (“SMC”), Circle 8 Holdco has a controlling interest
in Circle 8 NewCo LLC, a newly formed Delaware limited liability company (“Circle 8”), and ADTC is the sponsor of Ault Disruptive
Technologies Corporation (“Ault Disruptive”).
AAI 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 the following reportable
segments:
| · | AAI directly conducts digital learning, commercial lending and trading through Ault Lending (this business
was previously conducted by our former subsidiary, which was merged out of existence on January 3, 2023, under that name); |
| · | BNI: Bitcoin mining operation and data center operations through ACS; |
| · | BMI: has begun to operate the metaverse platform, which went live to the public on March 1, 2023, and
allows users to engage with a new social networking community and purchase both digital and physical products while playing 3D immersive
games. |
| · | GIGA: defense solutions with operations conducted by GWW’s subsidiaries Microphase, Enertec, Gresham
Power and Relec as well as the business previously conducted by GIGA prior to the closing of the share exchange agreement entered into
by AAI, GWW and GIGA; |
| · | IMHC: commercial electronics solutions with operations conducted by Digital Power, and EV charging solutions
through TOG Technologies; |
| · | SMC: karaoke audio equipment; |
| · | AVLP: advanced textiles processing technology; |
| · | AGREE: hotel operations, real estate investing and other commercial real estate holdings; |
| · | Circle 8: crane rental and lifting solutions provider for oilfield, construction, commercial and infrastructure
markets; and |
| · | Ault Disruptive: a special purpose acquisition company (“SPAC”). |
We operate as a holding company
with operations conducted primarily through our subsidiaries. We intend to 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, we believe
that our subsidiary Ault Lending is excluded from the definition of an investment company. We also maintain a controlling interest in
Avalanche, a textile company, 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 majority 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 majority 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
Digital Power Lending, a wholly owned subsidiary. On September 21, 2022, Digital Power Lending changed its name to Ault Lending. Ault
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. Ault Lending loans are 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
TurnOnGreen, Inc., formerly known as Coolisys Technologies Corp. (“TOGI”), a wholly owned subsidiary. Until recently, TOGI
operated 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. See below for further information
regarding TOGI.
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
and, as a result of the 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 4, 2022, we and our former subsidiary Ault Alliance, Inc. (the “Former AAI”) entered into a securities purchase agreement
providing for our purchase of BNI from the Former AAI. As a result of this transaction, both BNI and the Former AAI became stand-alone
wholly owned subsidiaries of ours. The Former AAI was merged out of existence on January 3, 2023 in connection with the change in our
corporate name from BitNile Holdings, Inc. to Ault Alliance, Inc.
On
February 10, 2022, consistent with our objective to have BNI operate the entirety of our business that relates to cryptocurrencies, the
Former AAI 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 13, 2023, we received gross proceeds of approximately $177 million
through the sale of approximately 1.1 million shares of common stock from the 2022 ATM Offering. The 2022 Sales Agreement has been terminated.
On March 20, 2022, we and
IMHC entered into a securities purchase agreement (the “Acquisition Agreement”) with TOGI, which closed on September 6, 2022
(the “Closing Date”). According to the Acquisition Agreement, we (i) delivered to IMHC all of the outstanding shares of common
stock of TOGI that we owned, and (ii) forgave and eliminated the intracompany accounts between us and TOGI evidencing historical equity
investments made by us in TOGI, in the approximate amount of $36,000,000, 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. Immediately following the Closing Date, TOGI became a wholly owned subsidiary of IMHC. The parties
to the Agreement have agreed that, upon completion of the Transaction but subject to IMHC’s compliance with the federal securities
laws, IMHC will change its name to TurnOnGreen, Inc. Further, through an upstream merger whereby the current TOGI ceased to exist, which
was consummated on September 8, 2022, IMHC owns the former TOGI’s two operating subsidiaries, TOG Technologies and Digital Power.
IMHC intends to dissolve its dormant subsidiary.
On
September 5, 2022, we, IMHC and TOGI entered into an amendment to the Acquisition Agreement (the “Amendment”), pursuant to
which IMHC agreed to (i) use commercially reasonable efforts to effectuate a distribution by us of approximately 140 million shares of
Common Stock that we beneficially own (the “Distribution”), including the filing of a registration statement (the “Distribution
Registration Statement”) with the SEC, (ii) to issue to us warrants to purchase an equivalent number of shares of Common Stock to
be issued in the Distribution (the “Warrants”), and (iii) to register the Warrants and the shares of Common Stock issuable
upon exercise of the Warrants on the Distribution Registration Statement.
On June 1, 2022, the Company
converted the principal amount under the convertible promissory notes issued to it by AVLP and accrued but unpaid interest into common
stock of AVLP. The Company converted $20.0 million in principal and $5.9 million of accrued interest receivable at a conversion price
of $0.50 per share and received 51,889,168 shares of common stock increasing its common stock ownership of AVLP from less than 20% to
approximately 92%.
On
June 8, 2022, Ault Lending entered into a securities purchase agreement with BitNile Metaverse (“BMI”) whereby Ault Lending
agreed to purchase $12,000,000 of a new series of convertible preferred stock of BMI, which transaction closed on June 29, 2022. As part
of the transaction we were issued 102,881 shares of BMI’s common stock and a warrant to purchase forty-nine percent (49%) of BMI’s
common stock calculated on a fully diluted basis, subject to certain terms and conditions. Pursuant to a mutually agreed upon use of proceeds,
BMI intends to deploy significant proceeds via its subsidiary White River Holdings Corp. (“White River”) towards an oil drilling
program across its cumulative 30,000 acres of active mineral leases at both shallow, intermediate, and deep levels. BMI also intends to
also deploy additional proceeds via its subsidiary Agora Digital Holdings, Inc. (“Agora Digital”) to provide us with up to
78 megawatts (“MW”) of power within the State of Texas for digital asset mining capacity, subject to our election to proceed
with this facility after having conducted the requisite due diligence.
On
December 6, 2022, BNI entered into a hosting agreement with Agora Digital securing up to 78 MW of power. Agora Digital will initially
provide up to 12 MW of electricity for our use, which we believe will enable us to initially power 3,750 S19j Pro miners in the second
half of 2023. The Agora Digital power capacity would, if the project proceeds as presently anticipated, expedite our recently announced
plans to significantly expand our Bitcoin mining production capacity, including growing our number of deployed Bitcoin miners in our owned
and operated facilities to approximately 20,000, representing an expected mining production capacity of approximately 2.2 exahashes per
second.
On June 10, 2022, we entered
into an At-The-Market Issuance Sales Agreement (the “2022 Preferred Sales Agreement”) with Ascendiant to sell shares of our
13.00% Series D Cumulative Redeemable Preferred Stock (the “Preferred Shares”) having an aggregate offering price of up to
$46.4 million from time to time, through an “at the market offering” program (the “2022 ATM Preferred Offering”).
The offer and sale of Preferred Shares from the 2022 ATM Preferred 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, 2023, we had received gross proceeds of approximately $1.7 million through the sale of 119,022
Preferred Shares in the 2022 ATM Preferred Offering.
In June 2022, Ault Lending
purchased a majority of the issued and outstanding shares of SMC in open market transactions. SMC is a Nasdaq-listed company that is
a worldwide leader in consumer karaoke products. The first to provide karaoke systems for home entertainment in the United
States, SMC sells its products worldwide through major mass merchandisers and online retailers. SMC
products incorporate the latest technology for singing practice, music listening, entertainment and social sharing and provides access
to over 100,000 songs for streaming and download.
On July 11, 2022, we announced
the formation of Ault Energy, LLC (“Ault Energy”), a wholly owned subsidiary of ours. Ault Energy will partner with White
River Holdings Corp. (“White River”), a wholly owned subsidiary of BitNile Metaverse, Inc. (referred to herein as BMI), formerly
known as Ecoark Holdings, Inc. on drilling projects across 30,000 acres in Texas, Louisiana and Mississippi. Ault Energy, as Ault Lending’s
designee, has the right to purchase up to 25%, or such higher percentages at the discretion of White River, in various drilling projects
of White River. In August 2022, Ault Energy committed to purchasing 40% of the first drilling project offered, at a cost to Ault Energy
of approximately $1 million.
On August 10, 2022, we, through
our BNI and Ault Lending subsidiaries, entered into a note purchase agreement providing for the issuance of secured promissory notes with
an aggregate principal face amount of $11,000,000 and an interest rate of 10%. The purchase price for the secured promissory notes was
$10.0 million. The holders of the secured promissory notes have a security interest in marketable securities, investments and certain
Bitcoin mining equipment. The secured promissory notes are further secured by a guaranty provided by us, as well as by Milton C. Ault,
our Executive Chairman. The maturity date of the secured promissory notes is August 10, 2023. BNI is required to make monthly payments
(principal and interest) of $1,000,000 on the tenth calendar day of each month, starting in September 2022. After six months, BNI may
elect to pay a forbearance fee of $250,000 in lieu of a monthly payment, which would extend the maturity date of the related secured promissory
notes.
On
August 15, 2022, BNI entered into a hosting agreement with Compute North LLC (“Compute North”) to host 6,500 S19j Pro Antminers
owned by BNI for a period of five years. BNI granted Compute North a continuing first-position security interest in the hosted miners,
as collateral for BNI’s obligations under the hosting agreement. On September 22, 2022, Compute North filed for bankruptcy protection,
effectively rendering this hosting agreement null and void. We have recovered the hosted miners and have entered claims against Compute
North for damages stemming from its failure to perform under the hosting agreement.
During 2022 and more recently
in 2023, a number of companies in the crypto assets industry have declared bankruptcy, including Celsius Network LLC, Voyager Digital
Ltd., BlockFi Lending LLC, FTX Trading Ltd. and Genesis Global Holdco LLC. Such bankruptcies have contributed, at least in part, to further
price decreases in Bitcoin, a loss of confidence in the participants of the digital asset ecosystem and negative publicity surrounding
digital assets more broadly. To date, aside from BNI’s claim against Compute North under the hosting agreement, the general decrease
in the price of Bitcoin and in our and our peers’ stock price that may be indirectly attributable to the bankruptcies in the crypto
assets industry, we have not been indirectly or directly materially impacted by such bankruptcies. BNI has not failed to recover any material
assets due to the bankruptcies or otherwise lost or misappropriated any such assets. On December 6, 2022, as noted above, BNI entered
into a new hosting agreement with Agora Digital to replace the Compute North hosting agreement. We continue to conduct diligence, including
into liquidity or insolvency issues, on third parties in the crypto asset space with whom we have potential or ongoing relationships.
While we have not been materially impacted by any liquidity or insolvency issues with such third parties to date, there is no guarantee
that our counterparties will not experience liquidity or insolvency issues in the future.
On November 7, 2022, we and
certain of our subsidiaries borrowed $18.9 million of principal amount of term loans (the “Loans”) from a group of institutional
investors (the “Financing”). The Loans mature in 18 months, which may be extended to 24 months, accrue interest at the rate
of 8.5% per annum and are secured by certain of our and certain of our subsidiaries’ assets. Starting in January 2023, the lenders
have the right to require us to make monthly payments of $0.6 million, which will increase to $1.1 million in November 2023. The Loans
were issued with an original issue discount of $1.89 million.
The lenders received warrants
to purchase approximately 15,000 shares of our common stock, exercisable for four years at $135 per share and warrants to purchase another
approximately 15,000 shares of our common stock, exercisable for four years at $225 per share, subject to adjustment.
On November 7, 2022, Ault
Aviation, LLC, a wholly owned subsidiary of the Company (“Ault Aviation”), used proceeds from the Loans to purchase a private
aircraft for a total purchase price of $15.8 million. In addition, the Company and certain of its subsidiaries entered into various
agreements as collateral for the repayment of the Loans, including (i) a security interest in certain Bitcoin mining equipment, (ii) a
pledge of the membership interests of Third Avenue Apartments, (iii) a pledge of the membership interests of ACS, (iv) a pledge of the
membership interests of Ault Aviation, (v) a pledge in a segregated deposit account of $1.5 million of cash, (vi) a mortgage and security
agreement by Third Avenue Apartments on the real estate property owned by Third Avenue Apartments in St. Petersburg, Florida, (vii) a
future advance mortgage by ACS on the real estate property owned by ACS in Dowagiac, Michigan, and (viii) an aircraft mortgage and security
agreement by Ault Aviation on the private aircraft purchased by Ault Aviation on November 7, 2022. The Loans are guaranteed by Ault Lending,
LLC, Ault & Company, Inc., an affiliate of the Company, as well as Milton C. Ault, III, our Executive Chairman and the Chief Executive
Officer of Ault & Company, Inc.
On November 18, 2022, Circle
8, entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Circle 8 Crane Services LLC, a Delaware
limited liability company (“Circle 8 Crane Services”) pursuant to which Circle 8 agreed to purchase substantially all of the
assets (the “Acquired Assets”) and assume certain specified liabilities of Circle 8 Crane Services (the “Circle 8 Transaction”).
Circle 8 is a wholly owned subsidiary of Circle 8 Holdco LLC, a Delaware limited liability company.
On
December 19, 2022, the Asset Purchase Agreement referred to above closed and Circle 8 purchased the Acquired Assets. As consideration
for the acquisition of the Acquired Assets, Circle 8 Crane Services received Class D equity interests in Circle 8 Holdco and is eligible
to receive cash earnout payments in an aggregate maximum amount of up to $2,100,000 based on the achievement by Circle 8 of certain EBITDA
targets over the three year period following the completion of the acquisition of the Acquired Assets by Circle 8. We contributed $12
million to Circle 8, and an independent third party contributed $4 million, of which approximately $11,650,000 was used to pay down a
portion of the Circle 8 Crane Services’ senior debt facility at the closing, $3,000,000 of which was used to pay off Circle 8 Crane
Services’ subordinated debt facility in full at the closing and $1,350,000 was used to pay the expenses of Circle 8 and Circle 8
Crane Services. In addition, Circle 8 assumed a new line of credit issued by Circle 8 Crane Services’ current senior lender. Circle
8 Holdco is a subsidiary of the former AAI, a Delaware corporation but is presently directly owned by us. We own a controlling interest
in Circle 8 Holdco.
On
December 16, 2022 we entered into a Securities Purchase Agreement (the “SPA”) with an accredited investor (the “Investor”)
providing for the issuance of a secured promissory note (the “Note”) with an aggregate principal face amount of $14,700,000
(the “Financing”). On December 29, 2022, the Company and the accredited investor entered into an amended and restated amendment
to the SPA, pursuant to which the total amount of the financing was increased to $17,456,245 and the Company sold an additional note to
a second accredited investor.
Under the SPA, we are obligated
to repay, while the Note remains outstanding, (i) eighty percent (80%) of the proceeds we may receive from any financing conducted, other
than at-the-market offerings and (ii) one hundred percent (100%) of the proceeds we may receive from the sale of marketable securities
by Ault Lending. In addition, if Third Avenue Apartments, LLC (“Third Avenue”), our wholly owned subsidiary, sells the property
it owns in St. Peterburg, Florida, then we will use the net proceeds from the sale of such property in excess of $10 million, to repay
the Note. In addition, we agreed to issue 38,687 shares of our common stock to the Investor in exchange for the cancellation of all outstanding
warrants previously issued to the Investor, which warrants were exercisable for 38,687 shares of our common stock.
On January 23, 2023, we filed
a Certificate of Elimination with the Secretary of State of the State of Delaware with respect to our Series C convertible redeemable
preferred stock (“Series C Preferred Stock”) which, effective upon filing, eliminated the Series C Preferred Stock.
On
February 8, 2023, we entered into a Share Exchange Agreement (the “Agreement”) with BitNile Metaverse (formerly known as Ecoark
Holdings, Inc.), or BMI, and the other signatories thereto. The Agreement provides that, subject to the terms and conditions set forth
therein, BMI will acquire all of the outstanding shares of capital stock of our then subsidiary, BNC, of which we owned approximately
86%, and the remaining 14% was owned by minority shareholders (the “Minority Shareholders”), as well as Ault Iconic (formerly
Ault Media Group) and the securities of Earnity beneficially owned by BNC (which represented approximately 19.9% of the outstanding equity
securities of Earnity as of the date of the Agreement), in exchange for the following: (i) 8,637.5 shares of newly designated Series B
Convertible Preferred Stock of BMI to be issued to our company (the “Series B Preferred”), and (ii) 1,362.5 shares of newly
designated Series C Convertible Preferred Stock of BMI to be issued to the to the Minority Shareholders (the “Series C Preferred,”
and together with the Series B Preferred, the “Preferred Stock”). The Series B Preferred and the Series C Preferred each have
a stated value of $10,000 per share (the “Stated Value”), for a combined stated value of the Preferred Stock to be issued
by BMI, of $100,000,000, and subject to adjustment, are convertible into an aggregate of 400,000,000 shares of common stock of BMI (the
“BMI Common Stock”), which would represent approximately 92.4% of the outstanding BMI Common Stock on a fully diluted basis
as of the date of the Agreement. However, pending approval of the transaction by BMI’s shareholders, the Preferred Stock is subject
to a 19.9% beneficial ownership limitation, including the Series A Convertible Preferred Stock that we acquired from BMI in June of 2022.
The Agreement provides that BMI will seek shareholder approval (the “Shareholder Approval”) following the closing.
Pursuant to the Certificates
of Designations of the Rights, Preferences and Limitations of the Series B Preferred and the Series C Preferred (collectively, the “Preferred
Stock Certificates”), each share of Preferred Stock will be convertible into a number of shares of Ecoark Common Stock determined
by dividing the Stated Value by $0.25 (the “Conversion Price”), or 40,000 shares of Ecoark Common Stock. The Conversion Price
will be subject to certain adjustments, including potential downward adjustment if Ecoark closes a qualified financing resulting in at
least $25,000,000 in gross proceeds at a price per share that is lower than the Conversion Price then in effect. The holders of Preferred
Stock will be entitled to receive dividends at a rate of 5% of the Stated Value per annum from issuance until February 7, 2033 (the “Dividend
Term”). During the first two years of the Dividend Term, dividends will be payable in additional shares of Preferred Stock rather
than cash, and thereafter dividends will be payable in either additional shares of Preferred Stock or cash as each holder may elect. If
Ecoark fails to make a dividend payment as required by the Preferred Stock Certificates, the dividend rate will be increased to 12% for
as long as such default remains ongoing and uncured. Each share of Preferred Stock will also have an $11,000 liquidation preference in
the event of a liquidation, change of control event, dissolution or winding up of Ecoark, and will rank senior to all other capital stock
of Ecoark with respect thereto, except that the Series B Preferred and Series C Preferred shall rank pari passu. Each share of Series
B Preferred was originally entitled to vote with the Ecoark Common Stock at a rate of 10 votes per share of Common Stock into which the
Series B Preferred is convertible, but that provision was subsequently eliminated. Other than certain rights granted to the Company relating
to amendments or waiver of various negative covenants, the terms, rights, preferences and limitations of the Preferred Stock Certificates
are essentially identical. The Agreement closed on March 6, 2023.
On March 28, 2023, we entered
into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”),
pursuant to which we agreed to issue and sell, in a private placement, an aggregate of 100,000 shares of our preferred stock, with each
such share having a stated value of $100.00 and consisting of (i) 83,000 shares of Series E Convertible Preferred Stock (the “Series
E Preferred Stock”), (ii) 1,000 shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) and
(iii) 16,000 shares of Series G Convertible Preferred Stock (the “Series G Preferred Stock” and collectively, the “Preferred
Shares”). The Preferred Shares will be convertible into shares of our common stock at the option of the holders and, in certain
circumstances, by us.
Each share of Series E Preferred
Stock and Series F Preferred Stock had a purchase price of $100.00, equal to each such share’s stated value. The purchase price
of the Series E Preferred Stock and the Series F Preferred Stock was paid for by the Investors’ canceling outstanding secured promissory
notes in the principal amount of $8.4 million, whereas the purchase price of the shares of Series G Preferred Stock consisted of accrued
but unpaid interest on these notes, as well as for other good and valuable consideration. Each Preferred Share is convertible into shares
of our common stock at a conversion price equal to 85% of the closing sale price of our common stock on the trading day prior to the date
of conversion, subject to a floor price of $0.10. The Preferred Shares are convertible at the option of the holder at any time.
We held a special meeting
of stockholders on May 15, 2023 to consider an amendment (the “Amendment”) to our certificate of incorporation to authorize
a reverse split of our common stock (the “Reverse Split”), which was approved. Our board of directors subsequently approved
a Reverse Split ratio of 1 for 300. The Investors agreed in the Purchase Agreement to not transfer, offer, sell, contract to sell, hypothecate,
pledge or otherwise dispose of the Preferred Shares until after the Reverse Split. Pursuant to the certificate of designation of the Series E
Preferred Stock, the shares of Series E Preferred Stock have the right to vote on such Amendment on an as converted to common stock
basis. In addition, pursuant to the certificate of designation of the Series F Preferred Stock, the shares of Series F Preferred
Stock have the right to vote on such Amendment. Each Investor separately agreed to, and did, vote the shares of the Series E Preferred
Stock in favor of the Amendment and that the shares of the Series F Preferred Stock shall automatically be voted in a manner that
“mirrors” the proportions on which the shares of our common stock and Series E Preferred Stock are voted on the Amendment.
The Amendment requires the approval of the majority of the votes associated with our outstanding capital stock entitled to vote on the
proposal, which was obtained on May 15, 2023. Because the Series F Preferred Stock
will automatically and without further action of the purchaser be voted in a manner that “mirrors” the proportions on which
the shares of common stock and Series E Preferred Stock are voted on the Reverse
Split, abstentions by common stockholders had no effect on the votes cast by the holders of the Series F Preferred Stock. The Series
G Preferred Stock does not carry any voting rights, except as required by law or expressly provided by its certificate of designation.
On May 1, 2023 (the “Execution
Date”), we entered into a Securities Purchase Agreement (the “Agreement”) with Ault & Company, Inc., a Delaware
corporation (the “Purchaser”), pursuant to which we agreed to sell to the Purchaser up to 40,000 shares of Series C convertible
preferred stock (the “Series C Convertible Preferred Stock”), and warrants (the “Series C Warrants”) to purchase
shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) for a total purchase price of
up to $40,000,000 (the “Financing”). The Purchaser is an affiliate of the Company.
The closing of the Financing
is expected to occur on or prior to June 30, 2023. The consummation of the transactions contemplated by the Agreement are subject to various
customary closing conditions and the receipt of certain third party consents. In addition to customary closing conditions, the closing
of the Financing is also conditioned upon the receipt by the Purchaser of financing in an amount sufficient to consummate the transaction.
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.ault.com.
THE OFFERING
The following summary
is provided solely for your convenience and is not intended to be complete. You should read the full text and more specific details contained
elsewhere in this prospectus. For a more detailed description of our common stock, see “Description of Our Securities.”
Common stock offered by us pursuant to this
prospectus supplement: |
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Shares of our common stock having an aggregate offering price of up to $10,000,000. |
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Manner of offering: |
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“At the market offering” that may be made from time to time through our sales agent, ACM. See “Plan of Distribution” on page S-56 |
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Use of Proceeds: |
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We intend to use the net proceeds, if any, from this offering for working capital and general corporate purposes, which may include the repayment, refinancing, redemption or repurchase of future indebtedness or capital stock. See “Use of Proceeds” on page S-55. |
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NYSE American Symbol |
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AULT |
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Risk Factors: |
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Investing in our securities is highly speculative and involves a significant degree of risk. See “Risk Factors” and other information included in this prospectus supplement for a discussion of factors you should carefully consider before deciding to invest in our securities. |
RISK FACTORS
An investment
in our securities is speculative and involves a high degree of risk. Our business, financial condition or results of operations could
be adversely affected by any of these risks. You should carefully consider the risks described below and those risks set forth in the
reports that we file with the SEC and that we incorporate by reference into this prospectus, before deciding to invest in our securities.
The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our operations. Past financial performance may not be a reliable indicator of
future performance, and historical trends should not be used to anticipate results or trends in future periods. If any of these risks
actually occurs, our business, business prospects, financial condition or results of operations could be seriously harmed. This could
cause the trading price of our shares of common stock to decline, resulting in a loss of all or part of your investment. Please also read
carefully the section above entitled “Disclosure Regarding Forward-Looking Statements.”
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 or 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 or 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 an unconsolidated basis. Further, per the Investment Company Act of 1940 companies who are not making, and do not propose to make,
a public offering of its securities and whose outstanding securities (other than short-term paper) are beneficially owned by fewer than
100 persons are excluded from the definition of an investment company.
Our lending subsidiary, Ault
Lending, operates under California Finance Lending License #60DBO-77905 and is regulated by the California Department of Financial Protection
and Innovation as a finance lender. Substantially all of Ault Lending’s business consists of providing funding to smaller businesses
through making small loans and, in some cases, investments. Ault Lending offers a variety of loan types including commercial loans, convertible
notes and revolving lines of credit. Ault Lending is engaged in providing commercial loans to smaller companies throughout the United
States to provide them with operating capital to finance the growth of their businesses. The loans are primarily short-term, ranging from
six to 12 months (but may be longer in duration), and are generally in an amount of not more than $4.0 million. We believe Ault Lending
qualifies for the exemption from being an “investment company” pursuant to Section 3(c)(4) of the Investment Company Act.
Under this exemption, “any person substantially all of whose business is confined to making small loans, industrial banking, or
similar businesses” is not an investment company. We believe that Ault Lending is subject to this exemption from registration under
the Investment Company Act because it is in the business of making small loans. Additionally, by being licensed and regulated under California’s
financing laws, Ault Lending’s business will not be in need of safeguards of the sort that the Investment Company Act imposes on
the operations and investment policies of investment companies.
We have commenced digital
asset mining, the output of which is Bitcoin, which the SEC has not indicated it deems a security. In the event that securities we hold,
including any digital assets that may in the future be deemed securities, exceed 40% of our total assets, exclusive of cash, we would
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 SEC 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 SEC. 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 (i) are,
or hold themselves out as being, engaged primarily in the business of investing, reinvesting or trading in securities (Section 3(a)(1)(A)),
(ii) are engaged or propose to engage in the business of issuing face-amount certificates of the installment type (or have been engaged
in such business and have any such certificate outstanding) (Section 3(a)(1)(B)) or (iii) are engaged or propose to engage in the business
of investing, reinvesting, owning, holding or trading securities, and own or propose to acquire investment securities having a value exceeding
40 percent of the value of the company’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis
(Section 3(a)(1)(C)) are subject to regulation under the Investment Company Act, unless the company is able to satisfy an exemption from
the definition of “investment company” in either Section 3(b) or 3(c) of the Investment Company Act (or the rules adopted
thereunder) or is otherwise not required to register as an “investment company” under the Investment Company Act.
To qualify
for a Section 3(b)(1) exemption from the Act, a company must demonstrate that it is primarily engaged in a business other than investing
or trading in securities. To make such a determination, the SEC and the courts have analyzed five factors: (1) a company’s historical
development; (2) its public representations of policy; (3) the activities of its officers and directors; (4) the nature of its present
assets; and (5) the source of its present income.
Generally,
if a company has historically been engaged in an operating business, if the vast majority of its officers, directors and employees are
engaged in that operating business, if less than 45% of its assets are comprised of securities, and if less than 45% of the company’s
income is generated by investments in securities, the company may qualify for an exemption from the Act, notwithstanding an investment
in securities which exceeds 40% of the company’s assets. Section 3(a)(1) of the Act defines an investment company as a company which
either is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or
trading in securities. The SEC and the courts have applied the same five factor analysis under Section 3(a)(1), which they have used in
determining the availability of a Section 3(b)(1) exemption.
In applying the tests under
Section 3(a)(1) and (3) of the Act to our company, we believe it is clear that we are primarily engaged in businesses other than investing
in securities and a substantial part of our assets consists of, and a substantial part of our income is derived from, interests in wholly
owned and majority-owned subsidiaries and companies that we primarily control. Further, because Bitcoin is not deemed to be a security,
we do not fall under the 40% investment securities test in Section 3(a)(1)(C) for purposes of the Investment Company Act.
Regardless, if Bitcoin and
other virtual currencies were to be deemed securities for purposes of the Investment Company Act, or if we were to own minority positions
in or otherwise not operate one or more of our subsidiaries, we would have difficulty avoiding classification and regulation as an investment
company. As such, we would be forced to comply with substantive requirements under the 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 would 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.
As of December 31, 2022, we
had federal and state net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $23.7 million and
$104.2 million after application of the limitations set forth in Section 382 of the Internal Revenue Code. In accordance with Section
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.
There has been a recent disruption in the crypto
asset markets and a loss of confidence in the participants in the digital asset ecosystem, which may continue or could get worse.
Digital asset exchanges
on which cryptocurrencies trade are relatively new and, in most cases, largely unregulated. Many digital exchanges do not provide the
public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance.
As a result, the marketplace and customer demand in particular may lose confidence in, or may experience problems relating to, cryptocurrency
exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading. During 2022 and more recently
in 2023, a number of companies in the crypto industry have declared bankruptcy, including Celsius Network, Voyager Digital, BlockFi, FTX
and Genesis Global. In June 2022, Celsius began pausing all withdrawals and transfers between accounts on its platform, and in July 2022,
it filed for Chapter 11 bankruptcy protection. Further, in November 2022, FTX, one of the major cryptocurrency exchanges, also filed for
Chapter 11 bankruptcy. Such bankruptcies have contributed, at least in part, to further price decreases in Bitcoin, a loss of confidence
in the participants of the digital asset ecosystem and negative publicity and reputational harm surrounding digital assets more broadly,
and other participants and entities in the digital asset industry, like our company, have been, and may continue to be, negatively affected.
These events have also negatively impacted the liquidity of the digital assets markets as certain entities affiliated with FTX engaged
in significant trading activity. These events have also contributed to the collapse of several banks and lenders that had conducted business
in the crypto market including Silvergate Capital, Silicon Valley Bank and Signature Bank.
Shortly FTX’s bankruptcy,
its CEO resigned and FTX and several affiliates of FTX filed for bankruptcy. The U.S. Department of Justice (“DOJ”) subsequently
brought criminal charges, including charges of fraud, violations of federal securities laws, money laundering, and campaign finance offenses,
against FTX’s former CEO and others. FTX is also under investigation by the SEC, the DOJ, and the CFTC, as well as by various regulatory
authorities in the Bahamas, Europe and other jurisdictions. In response to these events, the digital asset markets have experienced extreme
price volatility and declines in liquidity, and regulatory and enforcement scrutiny has increased, including from the DOJ, the SEC, the
CFTC, the White House and Congress. The SEC also brought charges against Genesis Global Capital, LLC and Gemini Trust Company, LLC on
January 12, 2023 for their alleged unregistered offer and sale of securities to retail investors.
We are dependent on the
overall crypto assets industry, and such recent events have contributed, at least in part, to depreciation in and volatility to our and
our peers stock price as well as the price of Bitcoin. If the liquidity of the digital assets markets continues to be negatively impacted,
digital asset prices (including the price of bitcoin) may continue to experience significant volatility and confidence in the digital
asset markets may be further undermined. A perceived lack of stability in the digital asset exchange market and the closure or temporary
shutdown of digital asset exchanges due to business failure, hackers or malware, government-mandated regulation, or fraud, may reduce
confidence in digital asset networks and result in greater volatility in cryptocurrency values. These potential consequences of a digital
asset exchange’s failure could adversely affect an investment in our company.
We cannot provide any assurance
that we will not be materially impacted in the future by bankruptcies of participants in the crypto asset space, such as the recent bankruptcy
filings by Celsius Network, Voyager Digital, BlockFi, FTX and Genesis Global, or by potential liquidity or insolvency issues of our service
providers and other counterparties. We continue to monitor the digital assets industry as a whole, though these events are continuing
to develop and it is not possible at this time to predict all of the risks stemming from these events that may result to us, our service
providers, including custodians, our counterparties, and the broader industry as a whole. At this time, Gemini Trust Company, LLC is the
only company we use to store our digital assets, and we do not utilize any other custodians. In the past we have used other custodians
and may do so again in the future, subject to diligence on the security of any such custodian.
Any of these events may adversely
affect our operations and results of operations and, consequently, an investment in our company.
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 16,017 S19j
Pro Antminers and 4,424 S19 XP Antminers have been delivered to date with
another 204 S19 XP Antminers in the hands of our carrier and in route to our Facility, which brings us to a total of 20,645 S19j Pro and
S19 XP Antminers in our possession. The remaining miners scheduled to be delivered monthly through December 2023. 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, whether due to supply shortages, foreign country hostilities, extended national holidays
or otherwise, 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 customer demand, may cause its price
to fall. Currently, the loss of customer demand is also accentuated by disruptions in the crypto assets market. Additionally, to the extent
that other vehicles investing in cryptocurrencies or tracking cryptocurrency markets form and come to represent a significant proportion
of the customer 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 may in the future 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 operations.
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 $29,002 per coin as of December 31, 2020 and $46,306 per coin as of December 31, 2021 to $16,548 per coin as
of December 31, 2022, with a high of $68,790 per coin and a low of $28,804 per coin during 2021, according to Coin Market Cap. The fluctuation
during 2022 ranged between a high of $48,087 to a low of $15,683, according to Coin Market Cap. As of May 11, 2023, the price of Bitcoin
was $26,380.
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 $29,002 per coin as of December 31, 2020 and $46,306 per coin as of December 31, 2021 to $16,548 per coin as
of December 31, 2022, with a high of $68,790 per coin and a low of $28,804 per coin during 2021, according to Coin Market Cap. The fluctuation
during 2022 ranged between a high of $48,087 to a low of $15,683, according to Coin Market Cap. There can be no assurance that similar
fluctuations in the trading price of Bitcoin will not occur in 2023 and 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. 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. Our operating results are subject to volatility
based upon changes in the value of Bitcoin that could lead to increased losses or impairments in our investments or other assets. 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 former AAI to BNI. While the former AAI has been dissolved, BNI remains a wholly owned subsidiary of our company.
As of the date of this prospectus, excluding the investment in our data center in Michigan, we have invested approximately $145 million
towards the development of our new Bitcoin mining business. These investments include the price of the Bitcoin miners, fees payable in
connection with obtaining the ability to enter into the Bitcoin miner purchase contracts, shipping of the Bitcoin miners and third-party
commissions. BNI was formed to conduct our Bitcoin operations, 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 the Former AAI, but has only recently commenced
Bitcoin 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 the total of 23,065 miners purchased from Bitmain. 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, Inc., large cryptocurrency
mining companies, entered into business combinations with 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.
We may be unable to raise additional capital needed to grow our
Bitcoin business.
We have operated and expect
to continue to operate at a loss as we continue to establish our business model and as Bitcoin prices continue to be low or decline further.
In addition, we expect to need to raise additional capital to fund our working capital requirements, expand our operations, pursue our
growth strategy and to respond to competitive pressures or working capital requirements. We may not be able to obtain additional debt
or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations. The global
economy, including credit and financial markets, has recently experienced extreme volatility and disruptions, including diminished credit
availability, rising interest and inflation rates, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. Such macroeconomic conditions could also make it more difficult for us to incur additional
debt or obtain equity financing. If we raise additional equity financing, our stockholders may experience significant dilution of their
ownership interests, and the per share value of our common stock could decline. Further, if we engage in additional debt financing, the
holders of debt likely would have priority over the holders of our common stock on order of payment preference. We may be required to
accept terms that restrict our ability to incur additional indebtedness, take other actions including accepting terms that require us
to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders. Further, the crypto
assets industry has been negatively impacted by recent events such as the bankruptcies of Celsius Network, Voyager Digital, BlockFi, FTX
and Genesis Global. In response to these events, the digital asset markets, including the market for Bitcoin specifically, have experienced
extreme price volatility and several other entities in the digital asset industry have been, and may continue to be, negatively affected,
further undermining confidence in the digital assets markets and in Bitcoin. Increased credit pressures on the cryptocurrency industry,
such as banks, investors and other companies reducing or eliminating their exposure to the cryptocurrency industry through lending, have
had and may continue to have a material impact on our business. In light of conditions impacting our industry, it may be more difficult
for us to obtain equity or debt financing in the future.
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 that 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 hold could be lost or stolen.
There is a risk that some
or all of the Bitcoin we hold 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 receive, 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 receive. 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 Gemini 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 Gemini 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
We are subject to a highly evolving regulatory landscape and any
adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our business, prospects or operations.
Our business is subject to
extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, crypto
asset custody, exchange and transfer, data governance, data protection, cybersecurity and tax. Many of these legal and regulatory regimes
were adopted prior to the advent of the Internet, mobile technologies, crypto assets and related technologies. As a result, they do not
contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across
U.S. federal, state and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules and regulations
thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another,
and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding
the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to
us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have not complied with
such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect
our business, prospects or operations. As Bitcoin has grown in popularity and in market size, the Federal Reserve Board, U.S. Congress
and certain U.S. agencies (e.g., the CFTC, SEC, the Financial Crimes Enforcement Network (“FinCEN”) and the Federal Bureau
of Investigation) have begun to examine the operations of the Bitcoin network, Bitcoin users and the Bitcoin exchange market. Regulatory
developments and/or our business activities may require us to comply with certain regulatory regimes. For example, to the extent that
our activities cause us to be deemed a money service business under the regulations promulgated by FinCEN under the authority of the U.S.
Bank Secrecy Act, we may be required to comply with FinCEN regulations, including those that would mandate us to implement certain anti-money
laundering programs, make certain reports to FinCEN and maintain certain records.
On November 23, 2022, the
governor of New York signed into law a two year moratorium on new or renewed permits for certain electricity-generating facilities that
use fossil fuel and provide energy for proof-of-work digital asset mining operations. While this action does not directly impact our current
operations, as our power generation plans are currently located in Michigan and we have no plans to establish any facilities in New York,
it may be the beginning of a new wave of climate change regulations aimed at preventing or reducing the growth of Bitcoin mining in jurisdictions
in the United States, including potentially jurisdictions in which we now operate or may in the future operate. The above-described developments
could also demonstrate the beginning of a regional or global regulatory trend in response to environmental and energy preservation or
other concerns surrounding crypto assets, and similar action in a jurisdiction in which we operate or in general could have a devastating
effect on our operations. If further regulation follows, it is possible that the Bitcoin mining 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. We are not currently aware of
any legislation in Michigan being a near-term possibility. If further regulatory action is taken by various governmental entities, our
business may suffer and investors in our securities may lose part or all of their investment.
We cannot quantify the effects
of this regulatory action on our industry as a whole. If further regulation follows, it is possible that our industry may not be able
to cope with the sudden and extreme loss of mining power. Because we are unable to influence or predict future regulatory actions taken
by governments in China, the United States, or elsewhere, we may have little opportunity or ability to respond to rapidly evolving regulatory
positions which may have a materially adverse effect on our industry and, therefore, our business and results of operations.
Ongoing and future regulatory actions may impact
our ability to continue to operate, and such actions could affect our ability to continue as a going concern or to pursue our strategy
at all, which could have a material adverse effect on our business, prospects or operations.
The crypto economy is novel and has little to no access to policymakers
or lobbying organizations, which may harm our ability to effectively react to proposed legislation and regulation of crypto assets or
crypto asset platforms adverse to our business.
As crypto assets have grown
in both popularity and market size, various U.S. federal, state and local and foreign governmental organizations, consumer agencies and
public advocacy groups have been examining the operations of crypto networks, users and platforms, with a focus on how crypto assets can
be used to launder the proceeds of illegal activities, fund criminal or terrorist enterprises, and the safety and soundness of platforms
and other service providers that hold crypto assets for users. Many of these entities have called for heightened regulatory oversight,
and have issued consumer advisories describing the risks posed by crypto assets to users and investors. For instance, in July 2019, then-U.S.
Treasury Secretary Steven Mnuchin stated that he had “very serious concerns” about crypto assets. In recent months, members
of Congress have made inquiries into the regulation of crypto assets, and Gary Gensler, Chair of the Commission, has made public statements
regarding increased regulatory oversight of crypto assets. Outside the United States, several jurisdictions have banned so-called initial
coin offerings, such as China and South Korea, while Canada, Singapore, Hong Kong, have opined that token offerings may constitute securities
offerings subject to local securities regulations. In July 2019, the United Kingdom’s Financial Conduct Authority proposed rules
to address harm to retail customers arising from the sale of derivatives and exchange-traded notes that reference certain types of crypto
assets, contending that they are “ill-suited” to retail investors due to extreme volatility, valuation challenges and association
with financial crimes. In May 2021, the Chinese government called for a crackdown on Bitcoin mining and trading, and in September 2021,
Chinese regulators instituted a blanket ban on all crypto mining and transactions, including overseas crypto exchange services taking
place in China, effectively making all crypto-related activities illegal in China. In January 2022, the Central Bank of Russia called
for a ban on cryptocurrency activities ranging from mining to trading, and on March 8, 2022, President Biden announced an executive order
on cryptocurrencies which seeks to establish a unified federal regulatory regime for currencies.
The crypto economy is novel
and has little to no access to policymakers and lobbying organizations in many jurisdictions. Competitors from other, more established
industries, including traditional financial services, may have greater access to lobbyists or governmental officials, and regulators that
are concerned about the potential for crypto assets for illicit usage may affect statutory and regulatory changes with minimal or discounted
inputs from the crypto economy. As a result, new laws and regulations may be proposed and adopted in the United States and internationally,
or existing laws and regulations may be interpreted in new ways, that harm the crypto economy or crypto asset platforms, which could adversely
impact our business.
Pending regulation
related to electricity consumption by mining companies may impact our result of operation.
On
September 16, 2022, the U.S. Department of the Treasury (“Treasury”), the Department of Justice (the “DOJ”), and
other U.S. government agencies released eight reports (the “Reports”), including Action Plan to Address Illicit Financial
Risks of Digital Assets issued by Treasury, Crypto-Assets: Implications for Consumers, Investors and Businesses issued by Treasury,
The Future of Money and Payments issued by Treasury, Climate and Energy Implications of Crypto-Assets in the United States issued
by the White House, Policy Objectives for a U.S. Central Bank Digital Currency System issued by the White House, Technical Evaluation
for a U.S. Central Bank Digital Currency System issued by the White House, The Role of Law Enforcement in Directing, Investigating,
and Prosecuting Criminal Activity Related to Digital Assets issued by the DOJ, and Responsible Advancement of US Competitiveness
in Digital Assets issued by the U.S. Department of Commerce. The Reports were issued in response to White House Executive Order 14067
on Ensuring Responsible Development of Digital Assets, which calls for a whole-of-government alignment of the federal government’s
approach to digital assets.
In December 2022, Senator
Edward J. Markey, Chair of the Senate Environment and Public Works Subcommittee on Clean Air, Climate, and Nuclear Safety, and Representative
Jared Huffman Senate introduced the Crypto-Asset Environmental Transparency Act. The legislation would require the Environmental Protection
Agency to conduct a comprehensive impact study of U.S. crypto mining activity and require the reporting of greenhouse gas emissions from
crypto mining operations that consume more than 5 megawatts of power. If the bill is passed by both the Senate and the House and
signed into law, mining facilities may be required to report greenhouse gas emissions and to obtain permits and the price to rent
mining facilities may increase. If the price increase significantly and if we are not able to find alternative facilities with reasonable
price acceptable to us, our operation will be disrupted and our results of operation will be negatively impact.
A particular digital asset’s status as
a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if we did not or are unable to properly
characterize our digital assets, we may become subject to regulatory scrutiny, investigations, fines and other 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. 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. It is possible
that a change in the governing administration or the appointment of new SEC commissioners could 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 May 12, 2023, 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 U.S. 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. Although 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 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 have properly characterized 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.
Several foreign jurisdictions
have taken a broad-based approach to classifying crypto assets as “securities,” while other foreign jurisdictions, such as
Switzerland, Malta, and Singapore, have adopted a narrower approach. As a result, certain crypto assets may be deemed to be a “security”
under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations,
or directives that affect the characterization of crypto assets as “securities.” If Bitcoin or any other supported crypto
asset is deemed to be a security under any U.S. federal, state, or foreign jurisdiction, or in a proceeding in a court of law or otherwise,
it may have adverse consequences for such supported crypto asset. For instance, all transactions in such supported crypto asset would
have to be registered with the SEC or other foreign authority, or conducted in accordance with an exemption from registration, which could
severely limit its liquidity, usability and transactability. Moreover, the networks on which such supported crypto assets are utilized
may be required to be regulated as securities intermediaries, and subject to applicable rules, which could effectively render the network
impracticable for its existing purposes.
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 specially designated nationals 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 Related 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, on December
30, 2021, we acquired certain real property located in St. Petersburg, Florida and in June 2022, we acquired a majority interest in SMC.
On December 19, 2022, we acquired substantially all the assets and certain specified liabilities of Circle 8 Crane Service. Our strategy
and business plan are dependent on our ability to successfully integrate Microphase’s, Enertec’s and our other acquisitions’
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, the St. Petersburg property,
SMC and Circle 8 Crane Services. 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.
As of June 9, 2023, Ault &
Company, of which Milton C. (Todd) Ault III is the chief executive officer, beneficially owned 193,421 shares of our common stock, consisting
of (i) 5,528 shares of common stock owned, (ii) 3,333 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) 184,542 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) 18 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 7 shares of common stock and (B) and 11 shares of common stock. As of June 9, 2023, Ault & Company beneficially
owned 13.92% 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 agreed to purchase
$10 million worth of shares of Alzamend’s common stock. We paid for the last tranche of $4 million on April 26, 2022. Consequently,
as of the date of this prospectus, we have funded an aggregate of $10 million pursuant to the securities purchase agreement and have thus
acquired all of the shares and warrants issuable by Alzamend to us under the agreement.
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; in addition, we currently beneficially own a
significant percentage of Avalanche’s issued and outstanding shares of common stock, for which there is presently no market.
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 provided 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. Until recently, we held a convertible note issued to us by AVLP in the amount
of $20.0 million (the “Prior AVLP Note”).
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 had a maturity date of June 30,
2022.
On June 27, 2022, AVLP exchanged
the term note it had issued to Ault Alpha for a 10% senior secured convertible note in the principal face amount of $3,797,260 due June
15, 2024 (the “Ault Alpha Note”). The Ault Alpha Note is convertible, subject to adjustment, at $0.50 per share. AVLP also
issued Ault Alpha a warrant to purchase an aggregate of 1,617,647 shares of Avalanche common stock at an exercise price of $0.50. Pursuant
to a security agreement entered into by Avalanche and Ault Alpha, as amended by an intercreditor agreement entered into by and among the
foregoing parties, our company and certain other persons, Ault Alpha has a second priority interest in AVLP’s assets securing the
repayment of the Ault Alpha Note.
On July 11, 2022, AVLP issued
us a 10% senior secured convertible note in the principal face amount of $3,000,000 due July 10, 2024 (the “AVLP Note”). The
AVLP Note is convertible, subject to adjustment, at $0.50 per share. AVLP also issued us warrants to purchase an aggregate of 40,998,272
shares of Avalanche common stock at an exercise price of $0.50. Pursuant to a security agreement entered into by Avalanche and Ault Alpha,
as amended by an intercreditor agreement entered into by and among the foregoing parties, our company and certain other persons, we have
a first priority interest in AVLP’s assets securing the repayment of the AVLP Note.
On June 1, 2022, we converted
the entire principal and accrued interest on the Prior AVLP Note into an aggregate of 51,889,168 shares of common stock of Avalanche,
representing approximately 90.2% of Avalanche’s issued and outstanding shares of common stock. There is currently no liquid market
for the Avalanche common stock. Consequently, even if we were inclined to sell such shares of common stock on the open market, our ability
to do so 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 Prior AVLP Note or any other loan arrangement we have made with Avalanche described above.
There is some doubt as to
whether Avalanche will ever have the ability to repay its debt to us, as well as our ability to sell the shares we beneficially own since
at present there is no market for these shares. 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.
Milton C. Ault, III and William B. Horne, our
Executive Chairman and Chief Executive Officer, respectively, and two of our directors are directors of Avalanche.
Milton C. Ault, III and William
B. Horne, our Executive Chairman and Chief Executive Officer, respectively, and two of our directors, are also directors 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.
Risks Related to BNC
Risks Related to the
transaction with BitNile Metaverse
BitNile Metaverse
may not obtain approval of its shareholders to issue us the shares we are entitled to.
As
stated above, on February 8, 2023, we entered into a Share Exchange Agreement (the “Agreement”) with BitNile Metaverse (formerly
known as Ecoark Holdings, Inc.), or BMI, and the other signatories thereto. The Agreement provides that, subject to the terms and conditions
set forth therein, BMI will acquire all of the outstanding shares of capital stock of our then subsidiary, BNC, of which we owned approximately
86%, and the remaining 14% was owned by minority shareholders (the “Minority Shareholders”), as well as Ault Iconic (formerly
Ault Media Group) and the securities of Earnity beneficially owned by BNC (which represented approximately 19.9% of the outstanding equity
securities of Earnity as of the date of the Agreement), in exchange for the following: (i) 8,637.5 shares of newly designated Series B
Convertible Preferred Stock of BMI to be issued to our company (the “Series B Preferred”), and (ii) 1,362.5 shares of newly
designated Series C Convertible Preferred Stock of BMI to be issued to the to the Minority Shareholders (the “Series C Preferred,”
and together with the Series B Preferred, the “Preferred Stock”). The Series B Preferred and the Series C Preferred each have
a stated value of $10,000 per share (the “Stated Value”), for a combined stated value of the Preferred Stock to be issued
by BMI, of $100,000,000, and subject to adjustment, are convertible into an aggregate of 400,000,000 shares of common stock of BMI (the
“BMI Common Stock”), which would represent approximately 92.4% of the outstanding BMI Common Stock on a fully diluted basis
as of the date of the Agreement. However, pending approval of the transaction by BMI’s shareholders, the Preferred Stock is subject
to a 19.9% beneficial ownership limitation, including the Series A Convertible Preferred Stock that we acquired from BMI in June of 2022.
The Agreement provides that BMI will seek shareholder approval (the “Shareholder Approval”) following the closing.
However,
there can be no assurance that BMI will obtain Shareholder Approval on a timely basis, if at all, particularly since we will not be permitted
to vote on that proposal under Nasdaq’s rules. Should we not be able to be issued the shares of Preferred Stock that we are entitled
to under the Agreement, we will effectively have sold an asset we determined to be worth $100 million in consideration for shares of BMI
worth far less than that figure.
If BNC does not successfully
develop its business, the shares that we own as well as those we are entitled to may have very little value, if any.
We
sold BNC to BMI under the assumption that BNC is worth $100 million, of which we would receive shares of Series B Preferred valued at
$86 million, assuming BMI obtains Shareholder Approval, as discussed above. However, if BNC does not successfully develop its business
within the foreseeable future, it could be required to seek additional capital, which could result in a decrease in the value of our shares
of Series B Preferred, whether due to dilution or the terms of such financing. There can be no assurance that BMI would be able to raise
the requisite financing to maintain or develop its business on reasonably favorable terms, whether to it or to us, if at all. Further,
whether or not BNC seeks or receives additional financing, if its business never develops, then our shares of Series B Preferred will
in all likelihood have no value at all.
Risks Related to BNC’s Product Offerings
If BNC fails to retain
existing users or add new users, or if BNC’s users decrease their level of engagement with BNC’s products, BNC’s revenue,
financial results, and business may be significantly harmed.
The
size of BNC’s user base and BNC’s users’ level of engagement across BNC’s products are critical to BNC’s
success. BNC’s financial performance will be significantly determined by BNC’s success in adding, retaining, and engaging
active users of BNC’s products that deliver ad impressions. User growth and engagement are also impacted by a number of other factors,
including competitive products and services, such as TikTok, that could reduce some users’ engagement with BNC’s products
and services, as well as global and regional business, macroeconomic, and geopolitical conditions. Any future declines in the size of
BNC’s active user base, which to date is minimal, may adversely impact BNC’s ability to deliver ad impressions and, in turn,
BNC’s financial performance.
If
people do not perceive BNC’s products to be useful, reliable, and trustworthy, BNC may not be able to attract or retain users or
otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved
early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee
that BNC will not experience a similar inability to generate a significant used baser or, if achieved, subsequent erosion of BNC’s
active user base or engagement levels. User engagement can be difficult to measure, particularly as BNC introduces new and different products
and services. Any number of factors can negatively affect user retention, growth, and engagement, including if:
| • | users increasingly engage with other competitive products or services; |
| • | BNC fails to introduce new features, products, or services that users find engaging or if BNC introduces
new products or services, or makes changes to existing products and services, that are not favorably received; |
| • | users feel that their experience is diminished as a result of the decisions BNC makes with respect to
the frequency, prominence, format, size, and quality of ads that BNC displays; |
| • | users have difficulty installing, updating, or otherwise accessing BNC’s products on mobile devices
as a result of actions by BNC or third parties that BNC relies on to distribute BNC’s products and deliver BNC’s services; |
| • | BNC is unable to develop products for mobile devices that users find engaging, that work with a variety
of mobile operating systems and networks, and that achieve a high level of market acceptance; |
| • | there are decreases in user sentiment due to questions about the quality or usefulness of BNC’s
products or BNC’s user data practices, concerns about the nature of content made available on BNC’s products, or concerns
related to privacy, safety, security, well-being, or other factors; |
| • | BNC is unable to manage and prioritize information to ensure users are presented with content that is
appropriate, interesting, useful, and relevant to them; |
| • | BNC is unable to obtain or attract engaging third-party content; |
| • | BNC is unable to successfully maintain or grow usage of and engagement with applications that integrate
with BNC’s products; |
| • | users adopt new technologies where BNC’s products may be displaced in favor of other products or
services, or may not be featured or otherwise available; |
| • | there are changes mandated by legislation, government and regulatory authorities, or litigation that adversely
affect BNC’s products or users; |
| • | BNC is unable to offer a number of BNC’s products and services in Europe, or are otherwise limited
in BNC’s business operations, as a result of European regulators, courts, or legislative bodies determining that BNC’s reliance
on Standard Contractual Clauses or other legal bases BNC may rely upon to transfer user data from the European Union to the United States
is invalid; |
| • | there is decreased engagement with BNC’s products, or failure to accept BNC’s terms of service,
as part of privacy-focused changes that BNC has implemented or may implement in the future, whether voluntarily, in connection with the
General Data Protection Regulation (“GDPR”), the European Union’s ePrivacy Directive, the California Privacy Rights
Act (“CPRA”), or other laws, regulations, or regulatory actions, or otherwise; |
| • | technical or other problems prevent BNC from delivering its products in a rapid and reliable manner or
otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content, or users feel
their experience is diminished as a result of BNC’s efforts to protect the security and integrity of the Platform; |
| • | BNC adopts terms, policies, or procedures related to areas such as sharing, content, user data, or advertising,
or BNC takes, or fails to take, actions to enforce BNC’s policies, that are perceived negatively by BNC’s users or the general
public; |
| • | BNC elects to focus its product decisions on longer-term initiatives that do not prioritize near-term
user growth and engagement; |
| • | BNC makes changes in its user account login or registration processes or changes in how BNC promotes different
products and services across its family of products; |
| • | initiatives designed to attract and retain users and engagement, including the use of new technologies
such as artificial intelligence, are unsuccessful, whether as a result of actions by BNC, its competitors, or other third parties, or
otherwise; |
| • | there is decreased engagement with BNC’s products as a result of taxes imposed on the use of social
media or other mobile applications in certain countries, internet shutdowns, or other actions by governments that affect the accessibility
of BNC’s products in their countries; |
| • | BNC fails to provide adequate customer service to users, marketers, developers, or other partners; or |
| • | BNC, developers whose products are integrated with BNC’s products, or other partners and companies
in BNC’s industry are the subject of adverse media reports or other negative publicity, including as a result of BNC’s or
its user data practices. |
From
time to time, certain of these factors have negatively affected user retention, growth, and engagement to varying degrees. If BNC are
unable to maintain or increase BNC’s user base and user engagement, particularly for BNC’s significant revenue-generating
products like Facebook and Instagram, BNC’s revenue and financial results may be adversely affected. Any significant decrease in
user retention, growth, or engagement could render BNC’s products less attractive to users, marketers, and developers, which is
likely to have a material and adverse impact on BNC’s ability to deliver ad impressions and, accordingly, BNC’s revenue, business,
financial condition, and results of operations. As the size of BNC’s active user base fluctuates in one or more markets from time
to time, BNC will become increasingly dependent on BNC’s ability to maintain or increase levels of user engagement and monetization
in order to grow revenue.
BNC’s user growth,
engagement, and monetization on mobile devices depend upon effective operation with mobile operating systems, networks, technologies,
products, and standards that BNC does not control.
The
substantial majority of BNC’s revenue is expected to be generated from advertising on mobile devices. There is no guarantee that
popular mobile devices will feature BNC’s products, or that mobile device users will ever use BNC’s products rather than competing
products. BNC is dependent on the interoperability of BNC’s products with popular mobile operating systems, networks, technologies,
products, and standards that BNC does not control, such as the Android and iOS operating systems and mobile browsers. Changes, bugs, or
technical issues in such systems, or changes in BNC’s relationships with mobile operating system partners, handset manufacturers,
browser developers, or mobile carriers, or in the content or application of their terms of service or policies that degrade BNC’s
products’ functionality, reduce or eliminate BNC’s ability to update or distribute BNC’s products, give preferential
treatment to competitive products, limit BNC’s ability to deliver, target, or measure the effectiveness of ads, or charge fees related
to the distribution of BNC’s products or BNC’s delivery of ads have in the past adversely affected, and could in the future
adversely affect, the usage of BNC’s products and monetization on mobile devices.
BNC’s products
and changes to such products could fail to attract or retain users or generate revenue and profits, or otherwise adversely affect BNC’s
business.
BNC’s
ability to retain, increase, and engage its user base and to increase BNC’s revenue depends heavily on BNC’s ability to continue
to evolve BNC’s existing products and to create successful new products, both independently and in conjunction with developers or
other third parties. BNC may introduce significant changes to BNC’s products or acquire or introduce new and unproven products,
including using technologies with which BNC has little or no prior development or operating experience. For example, BNC does not have
significant experience with consumer hardware products or virtual or augmented reality technology, which may adversely affect BNC’s
ability to successfully develop and market these products and technologies. BNC will incur substantial costs, and BNC may not be successful
in generating profits, in connection with these efforts. These efforts, including the introduction of new products or changes to existing
products, may result in new or enhanced governmental or regulatory scrutiny, litigation, ethical concerns, or other complications that
could adversely affect BNC’s business, reputation, or financial results. If BNC’s new products or changes to existing products
fail to engage users, marketers, or developers, or if BNC’s business plans are unsuccessful, BNC may fail to attract or retain users
or to generate sufficient revenue, operating margin, or other value to justify BNC’s investments, and BNC’s business may be
adversely affected.
BNC may not be successful
in its metaverse strategy and investments, which could adversely affect BNC’s business, reputation, or financial results.
BNC
believes that the metaverse, an embodied internet where people have immersive experiences beyond two-dimensional screens, is the next
evolution in social technology. BNC intends to focus on helping to bring the metaverse to life. BNC expects this will be
a complex, evolving, and long-term initiative that will involve the development of new and emerging technologies, require significant
investment in infrastructure as well as privacy, safety, and security efforts, and collaboration with other companies, developers,
partners, and other participants. However, the metaverse may not develop in accordance with BNC’s expectations, and market acceptance
of features, products, or services BNC may build for the metaverse is uncertain. BNC intends to regularly evaluate BNC’s product
roadmaps and make significant changes as BNC’s understanding of the technological challenges and market landscape and BNC’s
product ideas and designs evolve. In addition, BNC has virtually no experience with consumer hardware products and virtual and augmented
reality technology, which may enable other companies to compete more effectively than it can. BNC may be unsuccessful in BNC’s future
research and product development efforts, including if BNC is unable to develop relationships with key participants in the metaverse or
develop products that operate effectively with metaverse technologies, products, systems, networks, or standards. BNC hopes to make investments
in virtual and augmented reality and other technologies to support these efforts, and BNC’s ability to support these efforts is
dependent on generating sufficient profits from BNC’s business. In addition, as BNC’s metaverse efforts evolve, BNC may be
subject to a variety of existing or new laws and regulations in the United States and international jurisdictions, including in the areas
of privacy, safety, competition, content regulation, consumer protection, and e-commerce, which may delay or impede the development of
BNC’s products and services, increase BNC’s operating costs, require significant management time and attention, or otherwise
harm BNC’s business. As a result of these or other factors, BNC’s metaverse strategy and investments may not be successful
in the foreseeable future, or at all, which could adversely affect BNC’s business, reputation, or financial results.
BNC may not be able
to successfully grow usage of and engagement with applications that integrate with BNC’s products.
BNC
hopes to make investments to enable developers to build, grow, and monetize applications that integrate with BNC’s products. Such
existing and prospective developers may not be successful in building, growing, or monetizing applications that create and maintain user
engagement. Additionally, developers may choose to build on other platforms, including platforms controlled by third parties, rather than
building products that integrate with BNC’s products. BNC is continuously seeking to balance the distribution objectives of BNC’s
developers with BNC’s desire to provide an optimal user experience, and BNC may not be successful in achieving a balance that attracts
or retains such developers. In addition, as part of BNC’s efforts related to privacy, safety, and security, BNC intends to conduct
investigations and audits of platform applications from time to time. In some instances, these actions will adversely affect BNC’s
relationships with developers. If BNC is not successful in BNC’s efforts to grow the number of developers that choose to build products
that integrate with BNC’s products or if BNC is unable to continue to build and maintain good relations with such developers, BNC’s
user growth and user engagement as well as its financial results may be adversely affected.
Risks Related to BNC’s
Business Operations and Financial Results
Our business is highly
competitive. Competition presents an ongoing threat to the success of BNC’s business.
BNC
expects to compete with companies providing connection, sharing, discovery, and communication products and services to users online, as
well as companies that sell advertising to businesses looking to reach consumers and/or develop tools and systems for managing and optimizing
advertising campaigns. BNC faces significant competition in every aspect of BNC’s business, including, but not limited to, companies
that facilitate the ability of users to create, share, communicate, and discover content and information online or enable marketers to
reach their existing or prospective audiences. BNC expects to compete to attract, engage, and retain people who use BNC’s products,
to attract and retain businesses that use BNC’s free or paid business and advertising services, and to attract and retain developers
who build compelling applications that integrate with BNC’s products. BNC also expects to compete with companies that develop and
deliver virtual and augmented reality products and services. As BNC introduces or acquires new products, or as other companies introduce
new products and services, including as part of efforts to develop the metaverse or innovate through the application of new technologies
such as artificial intelligence, BNC may become subject to additional competition.
Virtually
all BNC’s current and potential competitors have greater resources, experience, or stronger competitive positions in the product
segments, geographic regions, or user demographics in which BNC intends to operate than BNC does. For example, some of BNC’s competitors
may be domiciled in different countries and subject to political, legal, and regulatory regimes that enable them to compete more effectively
than BNC could. These factors may allow BNC’s competitors to respond more effectively than BNC to new or emerging technologies and
changes in market conditions. In the event that users engage with other products and services, BNC may never see any growth in use and
engagement in key user demographics or more broadly, in which case BNC’s business would be harmed.
BNC’s
competitors may develop products, features, or services that are similar to its own or that achieve greater acceptance, may undertake
more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Some
competitors may gain a competitive advantage against BNC, including: by making acquisitions; by limiting BNC’s ability to deliver,
target, or measure the effectiveness of ads; by imposing fees or other charges related to BNC’s delivery of ads; by making access
to BNC’s products more difficult or impossible; by making it more difficult to communicate with BNC’s users; or by integrating
competing platforms, applications, or features into products they control such as mobile device operating systems, search engines, browsers,
or e-commerce platforms. BNC’s competitors may, and in some cases will, acquire and engage users or generate advertising or other
revenue at the expense of BNC’s own efforts, which would negatively affect BNC’s business and financial results. In addition,
from time to time, BNC may take actions in response to competitive threats, but BNC cannot assure you that these actions will be successful
or that they will not negatively affect BNC’s business and financial results.
Real or perceived
inaccuracies in BNC’s community and other metrics may harm BNC’s reputation and negatively affect BNC’s business.
The
numbers for BNC’s key metrics are calculated using internal company data based on the activity of user accounts, at times augmented
by other sources. While these numbers are based on what BNC believes to be reasonable estimates of BNC’s user base for the applicable
period of measurement, there are inherent challenges in measuring usage of BNC’s products across online and mobile populations around
the world. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other
technical errors. In addition, BNC is seeking to establish mechanisms to improve its estimates of its user base, and such estimates may
change due to improvements or changes in BNC’s methodology. BNC intends to regularly review BNC’s processes for calculating
these metrics, and from time to time BNC expects to discover inaccuracies in these metrics or make adjustments to improve their accuracy.
The lack of comprehensive
encryption for communications on the Platform may increase the impact of a data security incident.
Communications
on the Platform are not comprehensively encrypted at this time. As such, any data security incident that involves unauthorized access,
acquisition, disclosure, or use may be highly impactful to BNC’s business. BNC may experience considerable incident response forensics,
data recovery, legal fees, and costs of notification related to any such potential incident, and BNC may face an increased risk of reputational
harm, regulatory enforcement, and consumer litigation, which could further harm BNC’s business, financial condition, results of
operations, and future business opportunities.
Risks Related to Government
Regulation and Enforcement
Actions by governments
that restrict access to BNC’s products in their countries, censor or moderate content on BNC’s products in their countries,
or otherwise impair BNC’s ability to sell advertising in their countries, could substantially harm BNC’s business and financial
results.
BNC
expects that governments will from time to time seek to censor or moderate content available on BNC’s products, should such products
ever be developed, distributed and used by customers, in their country, restrict access to BNC’s products from their country partially
or entirely, or impose other restrictions that may affect the accessibility of BNC’s products in their country for an extended period
of time or indefinitely. In addition, government authorities may seek to restrict user access to BNC’s products if they consider
us to be in violation of their laws or a threat to public safety or for other reasons. It is also possible that government authorities
could take action that impairs BNC’s ability to sell advertising, including in countries where access to BNC’s consumer-facing
products may be blocked or restricted. In the event that content shown on BNC’s products is subject to censorship, access to BNC’s
products is restricted, in whole or in part, in one or more countries, BNC would be required to or could elect to make changes to BNC’s
future operations, or other restrictions are imposed on BNC’s products, or BNC’s competitors are able to successfully penetrate
new geographic markets or capture a greater share of existing geographic markets that BNC cannot access or where BNC face other restrictions,
BNC’s ability to increase BNC’s user base, user engagement, or the level of advertising by marketers may be adversely affected,
and BNC may not be able to grow BNC’s revenue as anticipated, and BNC’s financial results could be adversely affected.
Our business is subject
to complex and evolving U.S. and foreign laws and regulations regarding privacy, data use and data protection, content, competition, safety
and consumer protection, e-commerce, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation,
and could result in claims, changes to BNC’s products and business practices, monetary penalties, increased cost of operations,
or declines in user growth or engagement, or otherwise harm BNC’s business.
BNC
is subject to a variety of laws and regulations in the United States and abroad that will involve matters central to BNC’s business,
including privacy, data use, data protection and personal information, biometrics, encryption, rights of publicity, content, integrity,
intellectual property, advertising, marketing, distribution, data security, data retention and deletion, data localization and storage,
data disclosure, artificial intelligence and machine learning, electronic contracts and other communications, competition, protection
of minors, consumer protection, civil rights, accessibility, telecommunications, product liability, e-commerce, taxation, economic or
other trade controls including sanctions, anti-corruption and political law compliance, securities law compliance, and online payment
services. The introduction of new products, expansion of BNC’s activities in certain jurisdictions, or other actions that BNC may
take may subject it to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content,
competition, consumer protection, and other laws and regulations can impose different obligations or be more restrictive than those in
the United States.
These
U.S. federal, state, and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government
entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement
of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which BNC operates, and may
be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with BNC’s current policies and practices.
For example, regulatory or legislative actions or litigation affecting the manner in which BNC displays content to BNC’s users,
moderate content, or obtain consent to various practices could adversely affect user growth and engagement. Such actions could affect
the manner in which BNC provides its services or adversely affect BNC’s financial results.
As
its business develops, BNC expects to become subject to significant legislative and regulatory developments, and proposed or new legislation
and regulations could significantly affect BNC’s business in the future. For example, BNC intends to implement certain product changes
and controls as a result of requirements under the European General Data Protection Regulation (“GDPR”), and may implement
additional changes in the future. The interpretation of the GDPR is still evolving and draft decisions in investigations are subject to
review by several European privacy regulators as part of the GDPR’s consistency mechanism, which may lead to significant changes
in the final outcome of such investigations. As a result, the interpretation and enforcement of the GDPR, as well as the imposition and
amount of penalties for non-compliance, are subject to significant uncertainty. The California Consumer Privacy Act (“CCPA”),
as amended by the California Privacy Rights Act (“CPRA”), also establishes certain transparency rules and creates new data
privacy rights for users, including limitations on BNC’s use of certain sensitive personal information and more ability for users
to control the purposes for which their data is shared with third parties. Other states have proposed or enacted similar comprehensive
privacy laws that afford users with similar data privacy rights and controls. These laws and regulations are evolving and subject to interpretation,
and resulting limitations on BNC’s advertising services, or reductions of advertising by marketers, could adversely affect BNC’s
advertising business.
These
laws and regulations, as well as any associated claims, inquiries, or investigations or any other government actions, have in the past
led to, and may in the future lead to, unfavorable outcomes including increased compliance costs, loss of revenue, delays or impediments
in the development of new products, negative publicity and reputational harm, increased operating costs, diversion of management time
and attention, and remedies that harm BNC’s business, including fines or demands or orders that BNC modify or cease existing business
practices.
Changes in laws affecting
gaming and gambling or the public perception of gaming and gambling may adversely impact our or BNC’s business.
BNC offers a number of products
and services, which may include a selection of gaming options, including games, sweepstakes, gambling, and social gaming experiences.
Social gaming experiences have recently been the subject of civil lawsuits, and some jurisdictions have taken an adverse position to interactive
social gaming, including “social casinos” and sweepstakes-based gaming. This could lead to states adopting legislation or
imposing a regulatory framework to govern interactive social gaming or social casino or sweepstakes-based gaming specifically. These could
also result in a prohibition on interactive social gaming or social casino or sweepstakes-based gaming altogether, restrict BNC’s
ability to advertise its games, or substantially increase BNC or our costs to comply with these regulations, all of which could have an
adverse effect on our or BNC’s results of operations, cash flows and financial condition. It is not possible to predict the likelihood,
timing, scope, or terms of any such legislation or regulation or the extent to which they may affect our or BNC’s business.
Regulators in the future may
pass additional rules and regulations that could adversely affect our or BNC’s business. In May 2019, the World Health Organization
adopted a new edition of its International Classification of Diseases, which lists gaming addiction as a disorder. The American Psychiatric
Association (“APA”) and U.S. regulators have yet to decide whether gaming addiction should be considered a behavioral disorder,
but the APA has noted that research and the debate on its classification are ongoing. Certain countries, including China and South Korea,
have enacted regulations, such as imposing both gaming curfews and spending limits for minors, and established treatment
programs aimed at addressing gaming addiction. It is not possible to predict the likelihood, timing, scope, or terms of any
similar regulations in any of the markets in which BNC operates, or the extent to which implementation of such regulations may adversely
affect our or BNC’s reputation and business.
Consumer protection and health
concerns regarding games and gambling such as BNC’s have been raised in the past and may again be raised in the future. Such concerns
could lead to increased scrutiny over the manner in which BNC’s games are designed, developed, distributed, and presented. We and
BNC cannot predict the likelihood, timing or scope of any concern reaching a level that will impact its business, or whether it would
suffer any adverse impacts to our or BNC’s results of operations, cash flows and financial condition.
Our reputation may
be harmed due to unfamiliarity or negative press associated with activities BNC is undertaking, including the online metaverse landscape,
virtual markets, real world goods marketplaces, gaming, social activities, sweepstakes, gambling, and digital assets.
BNC is focused on the development
of the online metaverse landscape and is focused on immersive digital experiences, including virtual markets, real world goods marketplaces,
gaming, social activities, sweepstakes, gambling, and more. The activities BNC is undertaking are based on technology that is relatively
new. Many companies operating in similar industries are unlicensed, unregulated and/or operate without supervision by any governmental
authorities. As a result, users and the general public may lose confidence in BNC’s products and services. Companies like BNC that
deal in digital assets are appealing targets for hackers and malware and may also be more likely to be targets of regulatory enforcement
actions. Negative perception, a lack of stability and standardized regulation in the industries in which BNC operates and the failure
of similar companies due to fraud, business failure, hackers or malware, or government mandated regulation, may reduce confidence in our
or BNC’s business. Any of these events could have a material and adverse impact on our or BNC’s reputation and business.
We may be subject
to regulatory and other government investigations, enforcement actions, settlements, and other inquiries in the future, which could cause
us to incur substantial costs or require us or BNC to change its business practices in a manner materially adverse to its business.
Should
BNC’s business ever expand to a significant degree, we and BNC’s management expects to receive formal and informal inquiries
from government authorities and regulators regarding BNC’s compliance with laws and regulations, many of which are evolving and
subject to interpretation. In such a scenario, we and BNC expect to be the subject of investigations, inquiries, data requests, requests
for information, actions, and audits in the United States, particularly in the areas of privacy and data protection, including with respect
to minors, law enforcement, consumer protection, civil rights, content moderation, blockchain technologies, sweepstakes, promotions, gaming,
gambling, and competition. In addition, we or BNC may in the future be subject to regulatory orders or consent decrees.
We
or BNC may also become subject to various litigation and formal and informal inquiries and investigations by competition authorities in
the United States, which may relate to many aspects of BNC’s future business, including with respect to users and advertisers, as
well as BNC’s industry. Such inquiries, investigations, and lawsuits concern, among other things, BNC’s business practices
in the areas of social networking or social media services, digital advertising, gambling, and sweepstakes activities and/or mobile or
online applications.
Orders
issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause us or BNC to incur substantial
costs, expose us to civil and criminal liability (including liability for personnel) or penalties (including substantial monetary remedies),
interrupt or require us or BNC to change its business practices in a manner materially adverse to our or BNC’s business (including
changes products or user data practices), result in negative publicity and reputational harm, divert resources and the time and attention
of management from our or BNC’s business, or subject us or BNC to other structural or behavioral remedies that adversely affect
our or BNC’s business.
BNC expects, should
its business ever develop, to be subject to regulatory and other government investigations, enforcement actions, settlements and other
inquiries in the future, which could cause us BNC incur substantial costs or require BNC to change its business practices in a manner
materially adverse to its business.
Should
BNC’s business ever expand and to a significant degree, its management expects it to receive formal and informal inquiries from
government authorities and regulators regarding BNC’s compliance with laws and regulations, many of which are evolving and subject
to interpretation. In such a scenario, BNC expects to be the subject of investigations, inquiries, data requests, requests for information,
actions, and audits in the United States, Europe, and around the world, particularly in the areas of privacy and data protection, including
with respect to minors, law enforcement, consumer protection, civil rights, content moderation, and competition. In addition, BNC may
in the future be subject to regulatory orders or consent decrees.
BNC
may also become subject to various litigation and formal and informal inquiries and investigations by competition authorities in the United
States, Europe, and other jurisdictions, which may relate to many aspects of BNC’s future business, including with respect to users
and advertisers, as well as BNC’s industry. Such inquiries, investigations, and lawsuits concern, among other things, BNC’s
business practices in the areas of social networking or social media services, digital advertising, and/or mobile or online applications.
Orders
issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause BNC to incur substantial
costs, expose us to civil and criminal liability (including liability for BNC’s personnel) or penalties (including substantial monetary
remedies), interrupt or require BNC to change its business practices in a manner materially adverse to BNC’s business (including
changes to BNC’s products or user data practices), result in negative publicity and reputational harm, divert resources and the
time and attention of management from BNC’s business, or subject it to other structural or behavioral remedies that adversely affect
BNC’s business.
Payment transactions
may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm
BNC’s business.
Several
of BNC’s future products may offer payments functionality, including enabling BNC’s users to purchase tangible, virtual, and
digital goods from merchants and developers that offer applications using BNC’s payment infrastructure, send money to other users,
and make donations to certain charitable organizations, among other activities. BNC is or may become subject to a variety of laws and
regulations in the United States, Europe and elsewhere, including those governing anti-money laundering and counter-terrorist financing,
money transmission, stored value, gift cards and other prepaid access instruments, electronic funds transfer, virtual currency, consumer
protection, charitable fundraising, trade sanctions, and import and export restrictions. Depending on how BNC’s payment products
evolve, BNC may also be subject to other laws and regulations including those governing gambling, banking, and lending. In some jurisdictions,
the application or interpretation of these laws and regulations is not clear. BNC’s efforts to comply with these laws and regulations
could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that BNC is
found to be in violation of any such legal or regulatory requirements, BNC may be subject to monetary fines or other penalties such as
a cease and desist order, or BNC may be required to make product changes, any of which could have an adverse effect on BNC’s business
and financial results.
Risks Related to Data,
Security, and Intellectual Property
Security breaches,
improper access to or disclosure of BNC’s data or user data, other hacking and phishing attacks on BNC’s systems, or other
cyber incidents could harm BNC’s reputation and adversely affect BNC’s business.
BNC’s
industry is prone to cyber-attacks by third parties seeking unauthorized access to BNC’s data or users’ data or to disrupt
BNC’s ability to provide service. BNC’s products and services involve the collection, storage, processing, and transmission
of a large amount of data. Any failure to prevent or mitigate security breaches and improper access to or disclosure of BNC’s data
or user data, including personal information, content, or payment information from users, or information from marketers, could result
in the loss, modification, disclosure, destruction, or other misuse of such data, which could harm BNC’s business and reputation
and diminish BNC’s competitive position. In addition, computer malware, viruses, social engineering (such as spear phishing attacks),
scraping, and general hacking continue to be prevalent in BNC’s industry and are expected to occur on BNC’s systems in the
future. BNC expects to regularly encounter attempts to create false or undesirable user accounts, purchase ads, or take other actions
on BNC’s platform for purposes such as spamming, spreading misinformation, or other objectionable ends. Such attacks may cause interruptions
to the services BNC intends to provide, degrade the user experience, cause users or marketers to lose confidence and trust in BNC’s
products, impair BNC’s internal systems, or result in financial harm to BNC. BNC’s efforts to protect its data or the information
BNC receives, and to disable undesirable activities on BNC’s platform, may also be unsuccessful due to software bugs or other technical
malfunctions; employee, contractor, or vendor error or malfeasance, including defects or vulnerabilities in BNC’s vendors’
information technology systems or offerings; government surveillance; breaches of physical security of BNC’s facilities or technical
infrastructure; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose
information in order to gain access to BNC’s data or BNC’s users’ data. Cyber-attacks continue to evolve in sophistication
and volume, and inherently may be difficult to detect for long periods of time. Although BNC intends to try to develop systems and processes
that are designed to protect BNC’s data and user data, to prevent data loss, to disable undesirable accounts and activities on BNC’s
platform, and to prevent or detect security breaches, BNC cannot assure you that such measures, if implemented, will provide adequate
security, that BNC will be able to react in a timely manner, or that BNC’s remediation efforts will be successful. The changes in
BNC’s work environment as a result of certain personnel working remotely could also impact the security of BNC’s systems,
as well as BNC’s ability to protect against attacks and detect and respond to them quickly.
In
addition, some of BNC’s developers or other partners, such as those that help us measure the effectiveness of ads, may receive or
store information provided by us or by BNC’s users through mobile or web applications integrated with BNC’s products. BNC
provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers
fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, BNC’s data or BNC’s
users’ data may be improperly accessed, used, or disclosed.
BNC
expects to experience such cyber-attacks and other security incidents of varying degrees from time to time, and BNC expects to incur significant
costs in protecting against or remediating such incidents. In addition, BNC is subject to a variety of laws and regulations in the United
States and abroad relating to cybersecurity and data protection. As a result, affected users or government authorities could initiate
legal or regulatory actions against BNC in connection with any actual or perceived security breaches or improper access to or disclosure
of data, which has occurred in the past and which could cause BNC to incur significant expense and liability or result in orders or consent
decrees forcing BNC to modify its business practices. Such incidents or BNC’s efforts to remediate such incidents may also result
in a decline in BNC’s active user base or engagement levels. Any of these events could have a material and adverse effect on BNC’s
business, reputation, or financial results.
We anticipate that
BNC’s efforts related to privacy, safety, security, and content review will identify additional instances of misuse of user data
or other undesirable activity by third parties on BNC’s platform.
In
addition to BNC’s efforts to mitigate cybersecurity risks, BNC intends to make investments in privacy, safety, security, and content
review efforts to combat misuse of BNC’s services and user data by third parties, including investigations and audits of platform
applications, as well as other enforcement efforts. As a result of these efforts BNC anticipates that BNC will discover and announce additional
incidents of misuse of user data or other undesirable activity by third parties. BNC may not discover all such incidents or activity,
whether as a result of BNC’s data or technical limitations, including BNC’s lack of visibility over BNC’s encrypted
services, the allocation of resources to other projects, or other factors, and BNC may be notified of such incidents or activity by the
FTC, the media or other third parties. Such incidents and activities may in the future include the use of user data or BNC’s systems
in a manner inconsistent with BNC’s terms, contracts or policies, the existence of false or undesirable user accounts, improper
advertising practices, activities that threaten people’s safety on or offline, or instances of spamming, scraping, data harvesting,
unsecured datasets, or spreading misinformation. BNC may also be unsuccessful in its efforts to enforce BNC’s policies or otherwise
remediate any such incidents. Consequences of any of the foregoing developments include negative effects on user trust and engagement,
harm to BNC’s reputation, changes to BNC’s business practices in a manner adverse to BNC’s business, and adverse effects
on BNC’s business and financial results. Any such developments may also subject BNC to additional litigation and regulatory inquiries,
which could subject BNC to monetary penalties and damages, divert management’s time and attention, and lead to enhanced regulatory
oversight.
BNC’s products
and internal systems rely on software and hardware that is highly technical, and any errors, bugs, or vulnerabilities in these systems,
or failures to address or mitigate technical limitations in BNC’s systems, could adversely affect BNC’s business.
BNC’s
products and internal systems rely on software and hardware, including software and hardware developed or maintained internally and/or
by third parties, that is highly technical and complex. In addition, BNC’s products and internal systems depend on the ability of
such software and hardware to store, retrieve, process, and manage considerable amounts of data. The software and hardware on which BNC
relies is expected to contain, errors, bugs, or vulnerabilities, and BNC’s systems are subject to certain technical limitations
that may compromise BNC’s ability to meet BNC’s objectives. Some errors, bugs, or vulnerabilities inherently may be difficult
to detect and may only be discovered after the code has been released for external or internal use. Errors, bugs, vulnerabilities, design
defects, or technical limitations within the software and hardware on which BNC relies, or human error in using such systems, may in the
future lead to outcomes including a negative experience for users and marketers who use BNC’s products, compromised ability of BNC’s
products to perform in a manner consistent with BNC’s terms, contracts, or policies, delayed product introductions or enhancements,
targeting, measurement, or billing errors, compromised ability to protect the data of BNC’s users and/or BNC’s intellectual
property or other data, or reductions in BNC’s ability to provide some or all of BNC’s services. In addition, any errors,
bugs, vulnerabilities, or defects in BNC’s systems or the software and hardware on which BNC relies, failures to properly address
or mitigate the technical limitations in BNC’s systems, or associated degradations or interruptions of service or failures to fulfill
BNC’s commitments to BNC’s users, are expected to lead to outcomes including damage to BNC’s reputation, loss of users,
loss of marketers, prevention of its ability to generate revenue, regulatory inquiries, litigation, or liability for fines, damages, or
other remedies, any of which could adversely affect BNC’s business and financial results.
If BNC is unable to
protect BNC’s intellectual property, the value of its brands and other intangible assets may be diminished, and its business may
be adversely affected.
BNC
relies, and expects to continue to rely on a combination of confidentiality, assignment, and license agreements with BNC’s employees,
consultants, and third parties with whom BNC has relationships, as well as intellectual property laws, to protect BNC’s proprietary
rights. In the United States and internationally, BNC expects to file various applications for protection of certain aspects of BNC’s
intellectual property. Third parties may knowingly or unknowingly infringe BNC’s proprietary rights, third parties may challenge
proprietary rights held by BNC in the future, and future trademark and patent applications may not be approved. In addition, effective
intellectual property protection may not be available in every country in which BNC operates or intends to operate. In any or all of these
cases, BNC may be required to expend significant time and expense in order to prevent infringement or to enforce BNC’s rights. Although
BNC expects to take measures to protect BNC’s proprietary rights, there can be no assurance that others will not offer products
or concepts that are substantially similar to BNC’s and compete with BNC’s business. If the protection of BNC’s proprietary
rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of BNC’s brands and other intangible
assets may be diminished and competitors may be able to more effectively mimic BNC’s products, services and methods of operations.
Any of these events could have an adverse effect on BNC’s business and financial results.
BNC expects to be
party to patent lawsuits and other intellectual property rights claims that are expensive and time consuming and, if resolved adversely,
could have a significant impact on BNC’s business, financial condition, or results of operations.
Companies,
in particular established ones, in the internet, technology, and media industries typically own large numbers of patents, copyrights,
trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations
of intellectual property or other rights. In the event that BNC ever develops a significant intellectual property portfolio, it would
face similar challenges that established companies do. In addition, various "non-practicing entities" that own patents and other
intellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies. Furthermore,
from time to time BNC may introduce or acquire new products, which could increase BNC’s exposure to patent and other intellectual
property claims from competitors and non-practicing entities.
From
time to time, BNC may receive notices from patent holders and other parties alleging that certain of BNC’s products and services,
or user content, infringe their intellectual property rights. BNC expects, should its business ever develop, to be involved in a number
of intellectual property lawsuits. Defending patent and other intellectual property litigation is costly and can impose a significant
burden on management and employees, and there can be no assurances that favorable final outcomes will be obtained in all or even most
cases. In addition, plaintiffs may seek, and BNC may become subject to, preliminary or provisional rulings in the course of any such litigation,
including potential preliminary injunctions requiring us to cease some or all of BNC’s anticipated operations. BNC may seek, if
possible, to settle such lawsuits and disputes on terms that are unfavorable to it. Similarly, if any litigation to which BNC is a party
is resolved adversely, BNC may be subject to an unfavorable judgment that may not be reversed upon appeal, if appealed. The terms of such
a settlement or judgment may require us to cease some or all of BNC’s operations or require us pay substantial amounts to the other
party, which we may not be able to afford. In addition, BNC may have to seek a license to continue practices found to be in violation
of a third party’s rights, which may not be available on reasonable terms, or at all, and may significantly increase BNC’s
operating costs and expenses. As a result, BNC may also be required to develop alternative non-infringing technology or practices or discontinue
the practices. The development of alternative non-infringing technology or practices could require significant effort and expense, could
result in less effective technology or practices or otherwise negatively affect the user experience, or may not be feasible. BNC’s
business, financial condition, and results of operations could be adversely affected as a result of an unfavorable resolution of the disputes
and litigation referred to above.
Risks Related to Circle 8
Circle 8 uses substantial leverage in its capital
structure which could adversely affect its financial condition. Although Circle 8’s debt-to-EBITDA ratio is below the industry median,
operational disruptions or economic shocks could hinder Circle 8’s ability to service its debt and impact its solvency. Additionally,
the industry tends to heavily rely on debt to finance expansionary initiatives, whether through organic growth or acquisitions.
Circle 8 currently has a substantial
amount of outstanding debt. As of December 31, 2022, it had total outstanding indebtedness of approximately $25.6 million, of which $15.1
million was borrowed from CIT Northbridge Credit, LLC (“CITN”) in a senior secured asset-based revolving line of credit and
$10.6 million consists of outstanding equipment notes transferred from De Lage Landen Group, LLC (“DLL”). Circle 8 has the
ability to increase the CITN loan by $10 million. Circle 8 may further increase its debt balance where permitted by incumbent lenders
for growth and expansionary purposes. Circle 8’s substantial indebtedness could have important consequences. For example, it may:
| • | increase Circle 8’s vulnerability to general adverse economic, industry and competitive conditions; |
| • | require management to dedicate a substantial portion of Circle 8’s cash flow from operations to
interest payments and principal repayment, thereby reducing the availability of cash flow to fund working capital, capital expenditures,
acquisitions, dividend payments to its owners and other general corporate purposes; |
| • | limit Circle 8’s flexibility in planning for, or reacting to, changes in Circle 8’s specific
business and the industry in which it operates; |
| • | place Circle 8 at a competitive disadvantage compared to its competitors that have less debt; and |
| • | limit Circle 8’s ability to obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes. |
Circle 8 expects to use cash
flow from operations and borrowings under the CITN commitment to meet current and future financial obligations, including funding operations,
debt service and capital expenditures. Circle 8’s ability to make these payments depends on future operational performance, which
will be affected by financial, business, economic and other factors, many of which Circle 8 cannot control. Circle 8’s business
may not generate sufficient cash flow from operations in the future or be able to appropriately adjust operations to suit organic industry
developments, which could result in Circle 8’s inability to service its debt obligations, or to fund other liquidity needs. If Circle
8 has insufficient capital to cover its debt obligations, it may be forced to reduce or delay ongoing or growth activities and capital
expenditures, sell assets, obtain additional debt or dilutive equity capital or restructure or refinance all or a portion of its debt,
including the incumbent CITN and DLL loans, and any other incremental loans, on or before maturity. There can be no assurance that Circle
8 will be able to accomplish any of these alternatives on terms acceptable to it or to us, if at all. In addition, the terms of existing
or future indebtedness, including the agreements governing the incumbent loans, may limit Circle 8’s ability to pursue any of other
alternatives.
While Circle 8 has had an industry-leading
safety record throughout its history, it operates in a potentially hazardous industry, and any safety incident could significantly impact
its operations. A blemish on Circle 8’s safety record could lead to direct consequences such as fines, levies, and increased insurance
premiums, as well as indirect consequences such as customers preferring competitors with better safety records.
The lifting solutions business
is inherently risky, and accidents can occur due to a variety of factors, including negligence and unforeseeable events. Despite this,
Circle 8 has maintained an industry-leading safety record and has not experienced any incidents that have significantly impacted its operations.
While Circle 8 has a safety program in place, it cannot guarantee protection against unforeseeable events or “acts of God.”
Any safety transgressions can have a material impact on sales and operating results, leading to fines and levies, and potentially causing
customers to prefer competitors with better safety records. Therefore, Circle 8 places a great emphasis on maintaining its safety program
and continually improving its practices to minimize the risk of incidents occurring.
The lifting solutions business is dependent
on the domestic oil markets’ activity, oil pricing, construction and industrial activities, and the overall economic conditions.
Any downturn in these areas could adversely affect the demand for lifting solutions, leading to decreased sales and lower lifting solutions
prices, which may result in a decline in Circle 8’s revenues, gross margins and operating results.
Circle 8 primarily provides
lifting solutions for the U.S. domestic oil market. As such, any downturn in the U.S. domestic oil market or the economy as a whole could
result in reduced demand for its services or lower sales prices. Additionally, its business may face temporary or long-term negative impacts
due to:
| • | a reduction in extraction levels by customers due to increased costs and break-even oil price and lower
levels of reserves due to depletion of existing reserves and resources; |
| • | exploration and drilling are capital intensive and results are uncertain, which may limit Circle 8’s
current clients’ demand for Circle 8’s services and adversely affect its ability to generate new clients; |
| • | until it executes on its expansion program, dependence on a limited number of clients in a niche oil services
market could make Circle 8 vulnerable compared to larger industry incumbents with greater client diversity; |
| • | unfavorable credit and equity markets affecting end-user access to capital or cost of capital, also potentially
increasing the all-in cash costs and break-even oil prices may make operations of its current and future clients no longer economically
viable; |
| • | adverse changes in federal, state, tribal and local government infrastructure spending; |
| • | an increase in the cost of consumables and construction materials related to oil extraction and infrastructure
construction; |
| • | adverse weather conditions or natural disasters which may affect a particular region; |
| • | a decrease in the level of exploration, development, production activity and capital spending by oil and
natural gas companies; |
| • | an increase in inflationary pressure on materials and labor; |
| • | labor issues such as strikes or worker shortages; |
| • | a prolonged shutdown of the U.S. government; |
| • | an increase in interest rates; |
| • | supply chain disruptions; |
| • | changes in federal and state regulations related to climate change and greenhouse gas emissions may materially
adversely impact Circle 8’s and/or its clients’ revenues, operating results and profitability; |
| • | public health crises and epidemics, such as COVID-19; or |
| • | terrorism or hostilities involving the United States and/or its allies. |
Weakness or deterioration
in the oil services industry, renewables infrastructure construction, plant turn-around and public and industrial infrastructure construction
sectors caused by the above or other factors could have a material adverse effect on Circle 8’s financial position, results of operations
and cash flows in the future and may also have a material adverse effect on residual values realized on the disposition of the existing
and future rental fleet.
Circle 8’s business is highly reliant
on the availability of specialized skilled labor, and this dependency is particularly pronounced given the current scarcity of domestic
U.S. skilled labor. This scarcity is at an all-time high, which is further compounded as labor requirements to operate in Circle 8 ‘s
business becomes even more specialized.
The lifting solutions business
requires licensed operators to operate safely and within U.S. domestic regulatory requirements. It takes several months and material funding
to be trained to become a licensed crane operator, making the availability of qualified labor scarce for the lifting solutions industry
in general and specifically in remote locations in which Circle 8’s client set operates its oil services. Availability of labor
may have a significant impact on Circle 8’s ability to service its current client set and to be able to execute on its expansion
program.
Additionally, the training
and licensing requirements for crane operators can vary by state and even by municipality, which can create further challenges for Circle
8 in sourcing and deploying qualified labor in different geographic locations. Moreover, the competitive labor market for skilled workers
in the oil services industry could potentially drive up labor costs for Circle 8, which would impact its profitability and competitiveness.
Circle 8’s business is, directly and
indirectly, dependent on a functioning global supply chain system. The oil and steel markets are global, and many suppliers, vendors,
OEM’s and parts manufacturers for Circle 8 and its clients’ industries are offshore.
The lifting solutions business
success is heavily dependent on the availability and efficient conversion to elevated utilization rates of the lifting assets. This metrics
can be fundamentally impacted by the functionality of the global supply chain, which plays several roles in the lifting solutions business.
For example, supply chain disruptions could delay the delivery of critical parts and components needed for maintenance and repair of lifting
assets, leading to longer downtime periods and reduced utilization rates.
In addition, fluctuations
in commodity prices could impact the cost of raw materials needed to manufacture lifting assets, potentially affecting the company’s
profitability. These fluctuations, among others, could impact the efficiency and profitability of Circle 8’s lifting solutions business
and can be impacted by a variety of factors, including the following:
| • | possible geopolitical unrest and conflict may impact ability to receive new parts or new cranes in a timely
manner, if at all, to optimize utilization and ultimately, profitability; |
| • | reliance on foreign suppliers for cranes and exposure to trade embargoes could impede its ability to procure
necessary parts and equipment to execute its growth strategies and maintain its fleet; |
| • | inflationary pressures resulting from supply chain disruptions and labor shortages could make it difficult
for Circle 8 to repair and replace its crane equipment at regular costs; |
| • | fuel price escalation could have a material impact on gross profit since it is typically approximately
7% of the operating cost structure in recent history; |
| • | oil market sanctions and political pressure on domestic production reduction may adversely impact Circle
8’s core clients and its revenues and profitability; or |
| • | steel market sanctions, trade embargoes and other supply chain shocks may adversely impact public and
private infrastructure and renewables new construction and maintenance projects, ultimately slowing Circle 8’s strategic transition
to diversify its end markets and client base. |
Furthermore, as Circle 8 expands
its operations, it may need to rely on suppliers and logistics partners in new geographic regions, which could expose the company to additional
supply chain risks.
Circle 8’s reliance on a limited number
of equipment manufacturers exposes the company to significant risks, as the termination or disruption of relationships with any of these
manufacturers could adversely impact Circle 8’s ability to obtain equipment in a timely or adequate manner, potentially leading
to operational disruptions and financial losses.
Circle 8 purchases most of
its equipment from a leading, nationally recognized original equipment manufacturer (“OEM”). For the year ended December 31,
2022, the company did not purchase any new equipment as it was in a period of restructuring and right sizing its fleet. Prior to that,
it purchased 100% of its equipment from Manitowoc. Circle 8 plans to diversify its supplier base going forward to alleviate this risk
to some extent. The termination of its existing relationship with any major supplier could have a material adverse effect on the business,
financial condition or results of operations if it were unable to obtain equipment in an adequate or timely manner.
Circle 8 faces risks related to heightened
inflation, recession, financial and credit market disruptions and other economic conditions.
Circle 8 financial results,
operations and forecasts depend significantly on worldwide economic and geopolitical conditions, the demand for Circle 8’s products,
and the financial condition of its customers and suppliers. Economic weakness and geopolitical uncertainty have in the past resulted,
and may result in the future, in reduced demand for lifting solutions resulting in decreased sales, margins and earnings. In 2022, the
U.S. experienced significantly heightened inflationary pressures which have continued into 2023. It is difficult to fully mitigate the
impact of inflation through price increases passed through to customers that are operating in commodity sector with global end market
pricing mechanisms, productivity initiatives and cost savings, which could have an adverse effect on Circle 8’s financial results
and position. In addition, if the U.S. economy enters a recession, Circle 8’s sales may decline, which could have an adverse effect
on its overall business, operating results and financial condition. Similarly, disruptions in financial and/or credit markets may impact
Circle 8’s ability to manage normal commercial relationships with its customers, suppliers and creditors. Further, in the event
of a recession or threat of a recession, Circle 8’s customers and suppliers may suffer their own financial and economic challenges
and as a result they may demand pricing accommodations, delay payment, or become insolvent, which could harm Circle 8’s ability
to meet its customer demands or collect revenue or otherwise could harm the business and its ability to service incumbent loans, ultimately
leading to possible insolvency. An economic or credit crisis could occur and impair credit availability and Circle 8’s ability to
raise capital as required for ongoing working capital, maintenance capital and expansion capex. A disruption in the financial markets
could impair Circle 8’s banking or other business partners, on whom it relies for access to capital. In addition, changes in tax
or interest rates in the U.S. or other nations, whether due to recession, economic disruptions or other reasons, could have an adverse
effect on Circle 8’s operating results. Economic weakness and geopolitical uncertainty may also lead to asset impairment, restructuring
actions or adjust Circle 8’s operating strategy and reduce expenses in response to decreased sales or margins. Circle 8 may not
be able to adequately adjust its cost structure in a timely fashion, which could have an adverse effect on its operating results and financial
condition. Uncertainty about economic conditions may increase foreign currency volatility in markets in which it transacts business, which
could have an adverse effect on Circle 8 operating results.
The inability to forecast trends accurately
may have an adverse impact on Circle 8’s business and financial condition.
An economic downturn or economic
uncertainty makes it difficult to forecast trends. For example, the economic uncertainty caused by COVID-19, and its impact on Circle
8’s future operational and financial performance was highly dependent on the depth and duration of the pandemic, as well as the
government-mandated restrictions on economic activity and government economic stimulus packages passed in response to the economic downturn.
More recently, rising interest rates, higher than expected inflation, and several bank failures also underscore the potential impact of
ongoing economic risks to Circle 8’s operations and financial performance. These factors can lead to increased borrowing costs,
reduced consumer spending, and reduced access to credit, among other potential challenges.
This uncertainty makes it
difficult to forecast Circle 8’s future operating performance, cash flows and financial position, which could have an adverse impact
on its business and financial condition. Additionally, uncertainty regarding future oil and natural gas prices have negatively impacted
the exploration, production and construction activity of Circle 8’s customers in those markets. Uncertainty regarding future lifting
solutions demand could cause Circle 8 to maintain excess equipment inventory and increase its equipment inventory carrying costs, decrease
utilization and cause a technical default in certain covenants. Alternatively, difficulty forecasting, in addition to labor shortages
and supply chain disruptions could cause a shortage incremental rental equipment that could result in an inability to satisfy demand for
Circle 8 service and a loss of market share.
Circle 8’s revenue and operating results
may fluctuate, which could result in a decline in profitability and make it more difficult to grow the business.
Circle 8’s revenue and
operating results have historically varied from month to month and quarter to quarter. Periods of decline could result in an overall decline
in profitability and make it more difficult to adequately service indebtedness and grow the business using incremental leverage. It can
be expected that Circle 8’s quarterly results will continue to fluctuate in the future due to a number of factors, including the
following:
| • | general economic conditions in the markets in which the company operates; |
| • | the cyclical nature of Circle 8’s customers’ business, particularly Circle 8’s oil services
customer and prospective customers in the construction industry; |
| • | sales patterns in general in the construction industry, with sales activity tending to be lower in the
winter months, which causes significant volatility in utilization; |
| • | changes in the size of Circle 8’s fleet due to rapid growth followed by a slow-down and Circle 8’s
ability to service and maintain its fleet in a timely manner; |
| • | an overcapacity of fleet in the crane services industry; |
| • | severe weather and seismic conditions temporarily affecting the regions in which Circle 8 operates; |
| • | supply chain or other disruptions that impact its ability to obtain equipment and other supplies from
key suppliers on acceptable terms or at all; |
| • | changes in corporate spending for plants and facilities or changes in government spending for infrastructure
projects; |
| • | changes in interest rates and related changes in Circle 8’s interest expense and debt service obligations;
or |
| • | the possible need, from time to time, to record impairment charges or other write-offs or charges due
to a variety of occurrences, such as the impairment of assets, existing location divestitures, dislocation in the equity and/or credit
markets, consolidations or closings, restructurings, or the refinancing of existing indebtedness. |
Circle 8 is subject to competition, which may
have a material adverse effect on its business by reducing its ability to increase or maintain revenues or profitability.
The full-service crane services
and lifting solutions industry is highly competitive and fragmented. Many of the markets in which Circle 8 operates are served by numerous
competitors, ranging from global, national and multi-regional equipment rental companies to small, independent businesses with a limited
number of locations. Circle 8 has historically competed on the bases of availability, quality, reliability, delivery and price. Some of
Circle 8’s competitors have significantly greater financial, marketing and other resources than it does, and may be able to reduce
rates. Circle 8 may encounter increased competition from existing competitors or new market entrants in the future, which could have a
material adverse effect on its business, financial condition and results of operations.
The cost of new Circle 8 rental fleet units
may increase and therefore may require a larger equity investment equipment. In some cases, it may not be possible to procure equipment
on a timely basis due to supplier constraints, among other reasons.
The cost of new equipment
from manufacturers of Circle 8 fleet may increase because of increased raw material costs, including increases in the cost of steel, which
is a primary material used in almost all of the equipment Circle 8 uses, labor shortages, supply chain disruptions or due to increased
regulatory requirements, such as those related to emissions. In addition, in an effort to combat climate change, Circle 8’s customers
may require Circle 8’s fleet to meet certain standards which may not be able to be met without capital intensive and time-consuming
fleet unit retrofits or ultimately cost prohibitive replacements. If such retrofits or replacements cannot be achieved in a timely manner,
or at all, Circle 8’s sales, financial results and financial position would be materially adversely impacted. These increases could
materially impact Circle 8 financial condition or results of operations in future periods if Circle 8 is not able to pass such cost increases
through to its customers.
Circle 8’s fleet is subject to residual
value risk upon disposition.
The market value of any given piece of equipment
could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors,
including:
| • | the market price for new equipment of a like kind; |
| • | wear and tear on the equipment relative to its age; |
| • | the time of year that it is sold (prices are generally higher during the busy season); |
| • | worldwide and domestic demands for used equipment; |
| • | the supply of used equipment on the market; and |
| • | general economic conditions. |
Circle 8 typically includes
in operating income the difference between the sales price and the depreciated value of an item of equipment sold. Although for the year
ended December 31, 2022, Circle 8 sold used equipment from Circle 8 rental fleet reducing its fleet from 65 to 54 cranes at an average
selling price above of net orderly liquidation value, it cannot be assured that used equipment selling prices will not decline. Any significant
decline in the selling prices for used equipment could have a material adverse effect on Circle 8’s business, financial condition,
results of operations or cash flows.
As Circle 8’s rental fleet ages, its
operating costs may increase, it may be unable to pass along such costs to customers, and earnings may decrease. The costs of new fleet
units may increase, requiring Circle 8 to spend more for replacement equipment or preventing it from procuring equipment on a timely basis.
If Circle 8’s rental
equipment ages, the costs of maintaining such equipment, if not replaced within a certain period of time, will likely increase. The costs
of maintenance may materially increase in the future and could lead to material adverse effects on Circle 8’s results of operations.
The cost of new equipment for use in Circle 8’s rental fleet could also increase due to increased material costs for its suppliers
(including tariffs on raw materials) or other factors beyond Circle 8’s control. Such increases could materially adversely impact
Circle 8’s financial condition and results of operations in future periods. Furthermore, changes in customer demand could cause
certain of Circle 8’s existing equipment to become obsolete and require Circle 8 to purchase new equipment at increased costs.
Labor disputes could disrupt Circle 8’s
ability to serve its customers and/or lead to higher labor costs.
As of December 31, 2022, Circle
8 had approximately 110 employees in Texas, Louisiana and Oklahoma, none of whom is unionized. While Circle 8 has no current plans to
unionize any of its locations, it recognizes the possibility of a branch or group of branches in a state becoming unionized against Circle
8’s wishes in the future. However, Circle 8 is committed to maintaining positive and productive relationships with its employees
without union influence, prioritizing open communication and collaboration to address any concerns and ensure a positive work environment.
Circle 8 employee’s
union organizing efforts or collective bargaining negotiations could potentially lead to work stoppages and/or slowdowns or strikes by
certain of Circle 8 employees, which could adversely affect its ability to serve its customers.
Climate change, climate change regulations
and greenhouse effects may materially adversely impact Circle 8 operations and markets.
Climate change and its association
with greenhouse gas emissions is receiving increased attention from the scientific and political communities. The U.S. federal government,
certain U.S. states and certain other countries and regions have adopted or are considering legislation or regulation imposing overall
caps or taxes on greenhouse gas emissions from certain sectors or facility categories. Such new laws or regulations, or stricter enforcement
of existing laws and regulations, could increase the costs of operating Circle 8’s businesses, reduce the demand for its products
and services and impact the prices charged to customers, any or all of which could adversely affect Circle 8’s results of operations.
Failure to comply with any legislation or regulations could potentially result in substantial fines, criminal sanctions or operational
changes. Moreover, even without such legislation or regulation, the perspectives of Circle 8’s customers, employees and other stakeholders
regarding climate change are continuing to evolve, and increased awareness of, or any adverse publicity regarding, the effects of greenhouse
gases could harm Circle 8’s reputation or reduce customer demand for Circle 8’s products and services. Additionally, as severe
weather events become increasingly common, Circle 8’s and its customers’ operations may be disrupted, which could result in
increased operational costs or reduced demand for its products and services, which could have an adverse effect on Circle 8’s results
of operations. In addition, climate change may also reduce the availability or increase the cost of insurance for weather-related events
as well as may impact the global economy, including as a result of disruptions to supply chains. Circle 8 anticipates that climate change-related
risks will increase over time.
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 into 2022,
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 2022 as compared to 2020, it remains 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 into 2022, 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 Ownership of Our
Common Stock and Future Offerings
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 at prices that may not be the same as the price per share in this offering. We may sell shares or other securities
in any other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower
than the price per share paid by investors in this offering.
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 at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any
other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower
than the price per share paid by investors in this offering.
Our common stock price is volatile.
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 June 8, 2023), our stock closed at prices between $10.58
per share and $114.00 per share, as reported on Nasdaq.com. On June 8, 2023, the price of our common stock closed at $10.58 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
US 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 United States 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.
Volatility in our common stock price may subject us to securities
litigation.
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 have a depressing effect on the market price of our common stock.
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.
There could be a potential
depressive effect on our market price from sales of our shares upon conversion of the Preferred Stock.
The
275,779 shares being offered hereby to the Investors through another prospectus supplement filed in May of 2023 equal approximately 16.6%
of the 1,661,601 shares of our common stock that would be outstanding assuming full conversion of the Preferred Stock offered for sale
in that prior prospectus supplement. Sales of the shares offered thereby and hereby could have a depressive effect on the market price
of our common stock and such sales could also affect our ability to raise additional capital in the equity markets in the future.
A possible “short squeeze” due to a sudden increase
in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.
Investors may purchase our
common stock to hedge existing exposure in our common stock or to speculate on the price of our common stock. Speculation on the price
of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common
stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock
for delivery to lenders of our common stock. Those repurchases may in turn, dramatically increase the price of our common stock until
investors with short exposure are able to purchase additional common shares to cover their short position. This is often referred to as
a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated
to the performance or prospects of our company and once investors purchase the shares of common stock necessary to cover their short position
the price of our common stock may decline.
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 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 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, 2022,] 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, 2022. 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, 2022, 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.
USE OF PROCEEDS
We may issue and sell shares
of our common stock having aggregate sales proceeds of up to $10,000,000 from time to time. Because there is no minimum offering amount
required as a condition to close this offering, the actual total public offering amount, commissions, expenses, and proceeds to us, if
any, are not determinable at this time but will be reported in our periodic reports.
We intend to use the net proceeds,
if any, from this offering for working capital and general corporate purposes, which may include the repayment, refinancing, redemption
or repurchase of future indebtedness or capital stock. We do not have agreements or commitments for any specific acquisitions at this
time.
The timing and amount of our
actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. As
of the date of this prospectus supplement, we cannot specify with certainty all of the particular uses for the net proceeds to us from
this offering. As a result, our management will have broad discretion regarding the timing and application of the net proceeds from this
offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing
securities.
Any portion of the $10,000,000
included in this prospectus supplement not previously sold or included in an active placement notice pursuant to the sales agreement,
may be later made available for sale in other offerings pursuant to the accompanying base prospectus, and if no shares have been sold
under the sales agreement, the full $10,000,000 of shares of common stock may be later made available for sale in other offerings pursuant
to the accompanying base prospectus.
PLAN OF DISTRIBUTION
We have entered into a sales
agreement with ACM, under which we may issue and sell over a period of time, and from time to time, shares of our common stock having
an aggregate gross sales price of up to $10,000,000 from time to time through ACM acting as a sales agent or directly to ACM acting as
principal. Sales of our common stock, if any, under this prospectus may be made in sales deemed to be “at the market offerings”
as defined in Rule 415 under the Securities Act, including sales made directly on or through the Nasdaq Capital Market (“Nasdaq”),
the trading market for our common stock, or any other trading market in the Unites States for our common stock, sales made to or through
a market maker other than on an exchange, directly to the Sales Agent as principal for its account in negotiated transactions at market
prices prevailing at the time of sale or at prices related to such prevailing market prices, in privately negotiated transactions, in
block trades, or through a combination of any such methods of sale. To the extent required by Regulation M, ACM acting as our sales agent
will not engage in any transactions that stabilize our common stock while the offering is ongoing under this prospectus supplement. The
sales agreement has been filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 9, 2023, which is incorporated
by reference in this prospectus supplement.
Each time we wish to issue
and sell common stock, we will notify ACM of the number of shares to be issued, the dates on which such sales are anticipated to be made,
any minimum price below which sales may not be made and other sales parameters as we deem appropriate, subject to certain limitations
set forth by the SEC. Once we have so instructed ACM, unless ACM declines to accept the terms of the notice, ACM has agreed, subject to
the terms and conditions of the sales agreement, to use its commercially reasonable efforts consistent with its normal trading and sales
practices to sell such shares up to the amount specified on such terms. We may instruct ACM not to sell shares of common stock if the
sales cannot be effected at or above the price designated by us in any such instruction. ACM may also sell our common stock in negotiated
transactions with our prior approval. We or ACM may suspend the offering of shares of common stock being made through ACM under the sales
agreement upon proper notice to the other party.
We will pay ACM commissions
for its services in acting as agent in the sale of our common stock. ACM will be entitled to compensation at a commission rate equal to
3.5% of the aggregate gross sales price of the shares sold. The remaining sales proceeds, after deducting any expenses payable by us and
any transaction fees imposed by any governmental, regulatory or self-regulatory organization in connection with the sales, will equal
our net proceeds for the sale of such shares. Because there is no minimum offering amount in this offering, the actual total public offering
amount, commissions and proceeds to us, if any, are not determinable at this time. We have also agreed to reimburse ACM for certain specified
expenses, including the fees and disbursements of its legal counsel in an amount not to exceed $10,000 and, thereafter, the reasonable
fees and expenses of ACM’s legal counsel up to $5,000 incurred in connection with quarterly and annual bring-downs required thereunder,
as provided in the sales agreement.
Settlement for sales of common
stock will occur, unless the parties agree otherwise, on the second business day following the date on which any sales are made, or on
some other date that is agreed upon by us and ACM in connection with a particular transaction, in return for payment of the net proceeds
to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.
In connection with the sale
of the common stock on our behalf, ACM will be deemed to be an “underwriter” within the meaning of the Securities Act and
the compensation of ACM will be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution
to ACM against certain civil liabilities, including liabilities under the Securities Act. The offering of our common stock pursuant to
the sales agreement will terminate upon the earlier of (1) the sale of all shares of our common stock subject to the sales agreement
having an aggregate offering price of $10,000,000 (unless the parties agree to extend the sales agreement) or (2) termination
of the sales agreement as permitted therein. We may terminate the sales agreement at any time upon five days’ prior notice and ACM may
terminate the sales agreement at any time upon ten days’ prior notice.
Our common stock is traded
on the NYSE American under the symbol “AULT.” The transfer agent of our common stock is Computershare Trust Company, N.A.,
8742 Lucent Blvd., Suite 225, Highlands Ranch, CO 80129.
Any portion of the $10,000,000
included in this prospectus supplement not previously sold or included in an active placement notice pursuant to the sales agreement,
may be later made available for sale in other offerings pursuant to the accompanying base prospectus, and if no shares have been sold
under the sales agreement, the full $10,000,000 of shares of common stock may be later made available for sale in other offerings pursuant
to the accompanying base prospectus.
ACM acted as our sales agent
under our prior At-The-Market Issuance Sales Agreements during 2021 and 2022. ACM and/or its affiliates may also in the future provide
various investment banking and other financial services for us for which services they may in the future receive customary fees. We may
agree with ACM in the future agree to add one or more additional sales agents to the offering, in which case we will file a further prospectus
supplement providing the name of such additional sales agents and any other required information.
This summary of the material
provisions of the sales agreement does not purport to be a complete statement of its terms and conditions.
DESCRIPTION OF OUR SECURITIES
The
summary does not purport to be complete and is qualified in its entirety by reference to our certificate of incorporation and bylaws,
and to the provisions of the General Corporation Law of the State of Delaware, as amended.
We are authorized to issue
500,000,000 shares of Class A common stock and 25,000,000 shares of Class B common stock, par value $0.001 per share. As of June
9, 2023, there were 1,385,822 shares of our Class A common stock issued and outstanding and no shares of Class B common stock issued or
outstanding. The outstanding shares of our common stock are validly issued, fully paid and nonassessable. In this prospectus supplement,
all references solely to “common stock” refer to the Class A common stock, except where otherwise indicated.
We are authorized to issue
up to 25,000,000 shares of preferred stock, par value $0.001 per share. Of these shares of preferred stock, 1,000,000 shares are
designated as Series A convertible preferred stock, 500,000 shares are designated as Series B convertible preferred stock, 2,000,000 shares
are designated as 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock, 83,000 shares are designated as Series E Convertible
Preferred Stock, 1,000 shares are designated as Series F Convertible Preferred Stock, and 16,000 shares are designated as Series G Convertible
Preferred Stock. As of June 9, 2023, there were 7,040 shares of Series A convertible preferred stock outstanding, 125,000 shares of Series
B convertible preferred stock, and 399,495 shares of 13.00% Series D Cumulative Redeemable Perpetual Preferred Stock outstanding, 83,000
shares of Series E Convertible Preferred Stock outstanding, 1,000 shares of Series F Convertible Preferred Stock outstanding and 16,000
shares of Series G Convertible Preferred Stock outstanding.
Common Stock
Holders of our shares of Class
A common stock are entitled to one vote for each share on all matters submitted to a shareholder vote. Holders of our shares Class B common
stock are entitled to ten votes for each share on all matters submitted to a shareholder vote. Holders of our common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of our common stock voting for the election of directors can
elect all of the directors. Holders of our common stock representing a majority of the voting power of our capital stock issued, outstanding
and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of shareholders. A vote by
the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation,
merger or an amendment to our certificate of incorporation.
Holders of our common stock
are entitled to share in all dividends that our board of directors, in its discretion, declares from legally available funds. In the event
of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain
after payment of liabilities and after providing for each class of stock, if any, having preference over our common stock. Our common
stock has no preemptive, subscription or conversion rights and there are no redemption provisions applicable to our common stock.
Shares Offered in this
Prospectus Supplement
We are offering up to $10
million in shares of our common stock pursuant to this prospectus supplement.
Transfer Agent and Registrar
The Transfer Agent and Registrar
for our common stock is Computershare, 8742 Lucent Blvd., Suite 225, Highlands Ranch, CO 80129.
LEGAL MATTERS
Olshan Frome Wolosky LLP,
New York, New York, as our counsel, will pass upon the validity of the common stock offered by this prospectus supplement and accompanying
prospectus. Clyde Snow & Sessions, P.C., Salt Lake City, Utah, is acting as counsel to the sales agent in connection with certain
legal matters relating to this offering.
EXPERTS
The consolidated balance sheets
of Ault Alliance, Inc. (f/k/a BitNile Holdings, Inc.) as of December 31, 2022 and 2021, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the years then ended, included in the 2022 Annual Report on Form 10-K, and related
notes, have been audited by Marcum, LLP, an independent registered public accounting firm, as set forth in their report thereon which
is incorporated herein by reference, are based in part on the report of Ziv Haft,
independent registered public accounting firm. Such consolidated financial statements have been incorporated by reference in reliance
upon the reports pertaining to such consolidated financial statements of such firms given upon their authority as experts in auditing
and accounting.
The report of Ziv Haft on
the financial statements of ENERTEC SYSTEMS 2001 LTD, as of December 31, 2022 and 2021, and for each of the two years in the period ended
December 31, 2022, not included herein, incorporated by reference in this Prospectus and in the Registration Statement have been so incorporated
in reliance on the report of Ziv Haft, a member firm of BDO, an independent registered public accounting firm, incorporated herein by
reference, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus supplement
and the accompanying prospectus are part of the registration statement on Form S-3 we filed with the SEC under the Securities Act,
and do not contain all the information set forth in the registration statement. Whenever a reference is made in this prospectus supplement
or the accompanying prospectus to any of our contracts, agreements or other documents, the reference may not be complete, and you should
refer to the exhibits that are a part of the registration statement or the exhibits to the reports or other documents incorporated by
reference into this prospectus supplement and the accompanying prospectus for a copy of such contract, agreement or other document. You
may inspect a copy of the registration statement, including the exhibits and schedules, without charge, at the SEC's public reference
room mentioned below, or obtain a copy from the SEC upon payment of the fees prescribed by the SEC.
We file annual, quarterly
and current reports, proxy statements and other information with the SEC. You may read, without charge, and copy the documents we file
at the SEC’s public reference rooms in Washington, D.C. at 100 F Street, NE, Room 1580, Washington, DC 20549. You can request
copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our SEC filings are also available to the public at no cost from the SEC’s
website at http://www.sec.gov.
INCORPORATION OF DOCUMENTS BY REFERENCE
We have filed a registration
statement on Form S-3 with the Commission under the Securities Act. This prospectus is part of the registration statement but the registration
statement includes and incorporates by reference additional information and exhibits. The Commission permits us to “incorporate
by reference” the information contained in documents we file with the Commission, which means that we can disclose important information
to you by referring you to those documents rather than by including them in this prospectus. Information that is incorporated by reference
is considered to be part of this prospectus and you should read it with the same care that you read this prospectus. Information that
we file later with the Commission will automatically update and supersede the information that is either contained, or incorporated by
reference, in this prospectus, and will be considered to be a part of this prospectus from the date those documents are filed. We have
filed with the Commission, and incorporate by reference in this prospectus:
| • | Our Annual Report on Form 10-K for the period ended December 31, 2022, filed with the SEC on April 17,
2023; |
| • | Our Current Reports filed on January 3, 2023, January 27, 2023, February 10, 2023, March 6, 2023, March
7, 2023, March 13, 2023, March 30, 2023, April 14, 2023, May 2, 2023, May 15, 2023, May 16, 2023, May 17, 2023, May 22, 2023 and June
9, 2023. |
| • | The description of our common stock contained in our Annual Report on Form 10-K as Exhibit 4.41 with the
SEC on April 17, 2023. |
We also incorporate by reference
all additional documents that we file with the Securities and Exchange Commission under the terms of Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act that are made after the initial filing date of the registration statement of which this prospectus is a part until
the offering of the particular securities covered by a prospectus supplement or term sheet has been completed. We are not, however, incorporating,
in each case, any documents or information that we are deemed to furnish and not file in accordance with Commission rules.
We will provide you, without
charge upon written or oral request, a copy of any and all of the information that has been incorporated by reference in this prospectus
and that has not been delivered with this prospectus. Requests should be directed to Ault Alliance, Inc., 11411 Southern Highlands Parkway,
Suite 240, Las Vegas, NV 89141; Tel.: (949) 444-5464; Attention: Mr. Milton C. (Todd) Ault III, Executive Chairman.
Filed pursuant to Rule 424(b)(1)
Registration No. 333-260618
$350,000,000
Common Stock
Preferred Stock
Debt Securities
Warrants
Rights
Units
We may offer and sell, from
time to time in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, rights or units having
an aggregate initial offering price not exceeding $350,000,000. The preferred stock, debt securities, warrants, rights and units may be
convertible, exercisable or exchangeable for common stock or preferred stock or other securities of ours.
Each time we sell a particular
class or series of securities, we will provide specific terms of the securities offered in a supplement to this prospectus. The
prospectus supplement may also add, update or change information in this prospectus. You should read this prospectus and any prospectus
supplement, as well as the documents incorporated by reference or deemed to be incorporated by reference into this prospectus, carefully
before you invest in any securities.
This prospectus may not
be used to offer or sell our securities unless accompanied by a prospectus supplement relating to the offered securities.
Our common stock is presently
listed on the NYSE American under the symbol “DPW.” On October 22, 2021, the last reported sale price of our common
stock was $2.29.
These securities may be sold
directly by us, through dealers or agents designated from time to time, to or through underwriters or dealers or through a combination
of these methods on a continuous or delayed basis. See “Plan of Distribution” in this prospectus. We may also
describe the plan of distribution for any particular offering of our securities in a prospectus supplement. If any agents, underwriters
or dealers are involved in the sale of any securities in respect of which this prospectus is being delivered, we will disclose their names
and the nature of our arrangements with them in a prospectus supplement. The net proceeds we expect to receive from any such sale will
also be included in a prospectus supplement.
An
investment in our common stock involves a high degree of risk. You should review carefully the risks and uncertainties described under
the heading “Risk Factors” contained on page 9 of this prospectus and in our Annual Report on Form 10-K for the year ended
December 31, 2020, as well as our subsequently filed periodic and current reports that we file with the Securities and Exchange Commission
and which are incorporated by reference into the registration statement of which this prospectus is a part. We may also include additional
risk factors in a prospectus supplement under the heading “Risk Factors.” You should read this prospectus and the applicable
prospectus supplement carefully before you make your investment decision.
Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy
or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
This prospectus is dated November 12, 2021
TABLE OF CONTENTS
|
|
Page
|
About this Prospectus |
|
1 |
Disclosure Regarding Forward-Looking Statements |
|
1 |
About the Company |
|
2 |
Risk Factors |
|
10 |
Use of Proceeds |
|
33 |
The Securities We May Offer |
|
33 |
Description of Capital Stock |
|
34 |
Description of Debt Securities |
|
34 |
Description of Warrants |
|
42 |
Description of Rights |
|
44 |
Description of Units |
|
44 |
Plan of Distribution |
|
45 |
Legal Matters |
|
47 |
Experts |
|
47 |
Where you can find more Information |
|
47 |
Incorporation of Documents by Reference |
|
48 |
ABOUT THIS PROSPECTUS
This prospectus is part of
a shelf registration statement that we filed with the Securities and Exchange Commission (the “Commission”) using a “shelf”
registration process. Under this shelf registration process, we may sell any combination of the securities described in this prospectus
in one or more offerings from time to time having an aggregate initial offering price of $350,000,000. This prospectus provides you with
a general description of the securities we may offer. Each time we offer securities, we will provide you with a prospectus supplement
that describes the specific amounts, prices and terms of the securities we offer. The prospectus supplement also may add, update or change
information contained in this prospectus. You should read carefully both this prospectus and any prospectus supplement together with additional
information described below under the caption “Where You Can Find More Information.”
This prospectus does not contain
all the information provided in the registration statement we filed with the Commission. You should read both this prospectus, including
the section titled “Risk Factors,” and the accompanying prospectus supplement, together with the additional information described
under the heading “Where You Can Find More Information.”
This prospectus may be supplemented
from time to time to add, to update or change information in this prospectus. Any statement contained in this prospectus will be deemed
to be modified or superseded for purposes of this prospectus to the extent that a statement contained in such prospectus supplement modifies
or supersedes such statement. Any statement so modified will be deemed to constitute a part of this prospectus only as so modified, and
any statement so superseded will be deemed not to constitute a part of this prospectus. You should rely only on the information contained
or incorporated by reference in this prospectus, any applicable prospectus supplement or any related free writing prospectus. We have
not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information,
you should not rely on it. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained
in this prospectus, any applicable prospectus supplement or any related free writing prospectus. This prospectus is not an offer to sell
securities, and it is not soliciting an offer to buy securities, in any jurisdiction where the offer or sale is not permitted. You should
assume that the information appearing in this prospectus or any prospectus supplement, as well as information we have filed with the SEC
that is incorporated by reference, is accurate as of the date on the front of those documents only, regardless of the time of delivery
of this prospectus or any applicable prospectus supplement, or any sale of a security. Our business, financial condition, results of operations
and prospects may have changed since those dates.
No person is authorized in
connection with this prospectus to give any information or to make any representations about us, the securities offered hereby or any
matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information
or representation is given or made, such information or representation may not be relied upon as having been authorized by us.
This prospectus contains summaries
of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete
information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to
herein have been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus
is a part, and you may obtain copies of those documents as described below under “Where You Can Find More Information.”
For investors outside the
United States: Neither we nor any Underwriter has done anything that would permit this offering or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
Unless otherwise stated or
the context requires otherwise, references to “AGH,” the “Company,” “we,” “us” or “our”
are to Ault Global Holdings, Inc., a Delaware corporation, and its subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents
incorporated by reference in it contain forward-looking statements regarding future events and our future results that are subject to
the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements
of historical facts are statements that could be deemed forward-looking statements. These statements are based on our expectations, beliefs,
forecasts, intentions and future strategies and are signified by the words “expects,” “anticipates,” “intends,”
“believes” or similar language. In addition, any statements that refer to projections of our future financial performance,
our anticipated growth, trends in our business and other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict,
including those identified above, under “Risk Factors” and elsewhere in this prospectus. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking statements. All forward-looking statements included in this prospectus
are based on information available to us on the date of this prospectus and speak only as of the date hereof.
We disclaim any current intention
to update our “forward-looking statements,” and the estimates and assumptions within them, at any time or for any reason.
In particular, the following factors, among others, could cause actual results to differ materially from those described in the “forward-looking
statements”:
| • | our continued operating and net losses in the future; |
| • | our need for additional capital for our operations and to fulfill our business plans; |
| • | dependency on our ability, and the ability of our contract manufacturers, to timely procure electronic
components; |
| • | the potential ineffectiveness of our strategic focus on power supply solution competencies; |
| • | dependency on developer partners for the development of some of our custom design products; |
| • | dependency on sales of our legacy products for a meaningful portion of our revenues; |
| • | the possible failure of our custom product development efforts to result in products which meet customers’
needs or such customers’ failure to accept such new products; |
| • | our ability to attract, retain and motivate key personnel; |
| • | dependence on a few major customers; |
| • | dependence on the electronic equipment industry; |
| • | reliance on third-party subcontract manufacturers to manufacture certain aspects of the products sold
by us; |
| • | reduced profitability as a result of increased competition, price erosion and product obsolescence within
the industry; |
| • | our ability to establish, maintain and expand our OEM relationships and other distribution channels; |
| • | our inability to procure necessary key components for our products, or the purchase of excess or the wrong
inventory; |
| • | variations in operating results from quarter to quarter; |
| • | dependence on international sales and the impact of certain governmental regulatory restrictions on such
international sales and operations; and |
| • | the risk factors included in our most recent filings with the SEC, including, but not limited to, our
Forms 10-K and 10-Q. All filings are also available on our website at www.aultglobal.com. |
ABOUT THE COMPANY
This summary highlights
selected information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information
that you should consider in making your investment decision. Before investing in our securities, you should read the entire prospectus
carefully, including the information set forth under the heading “Risk Factors.”
Company Overview
Ault Global Holdings, Inc.,
a Delaware corporation formerly known as DPW Holdings, was incorporated in September 2017. 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, cryptocurrency mining and advanced textile technology. Our direct and indirect wholly-owned subsidiaries include Gresham
Worldwide, Inc. (“GWW”), TurnOnGreen, Corp., formerly known as Coolisys Technologies Corp. (“TOGI”), Digital Power
Corporation, 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”) and
Tansocial LLC (“Tansocial”). We also have a controlling interest in Microphase Corporation (“Microphase”) and
Ault Alliance has a controlling interest in Alliance Cloud Services, LLC (“ACS”) as well as Avalanche International Corp.
(“Avalanche”).
Ault Global Holdings was founded
by Milton “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 the Company by Mr. Ault and the Executive Committee. The Company has three reportable
segments:
· GWW
– defense solutions with operations conducted by Microphase, Enertec, Gresham Power and Relec,
· TOGI
– commercial electronics solutions with operations conducted by Digital Power Corporation and EV charging solutions, and
| · | Ault Alliance – commercial lending through DP Lending, data center operations through ACS, textile
treatment through Avalanche, digital marketing through Tansocial, digital learning and cryptocurrency mining operations. |
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.
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. 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 subsidiary, Gresham Power Electronics (f/k/a Digital Power Limited) (“Gresham Power”),
located in Salisbury, 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, 2016, we formed
DP Lending, a wholly-owned subsidiary. DP Lending provides commercial loans to companies throughout the United States 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 Corporation (“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 (“DLVA”)
to the military, aerospace and telecommunications industries. Microphase is headquartered in Shelton, Connecticut.
On January 7, 2020, we formed
Coolisys Technologies Corp. (“Coolisys”), a wholly-owned subsidiary. Coolisys 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 August 2021, Coolisys changed its name from Coolisys Technologies Corp.
to TurnOnGreen, Inc. In April 2021, Coolisys formed TOG Technologies as a Nevada corporation (initially under the name TurnOnGreen, Inc.)
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 September 1, 2017, Digital
Power Corporation, a Delaware corporation (“DPC”), a subsidiary of Coolisys since January 20, 2020, acquired all of the outstanding
membership interests in Power-Plus Technical Distributors, LLC, a California limited liability company (“Power-Plus”). Power-Plus
is an industrial distributor of value added power supply solutions, UPS systems, fans, filters, line cords, and other power-related components.
In addition to its current business, Power-Plus serves as an extended sales organization for our overall flexible power system solutions.
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 Systems 2001 Ltd. (“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.
In
January 2018, we formed Super Crypto Mining, Inc., a wholly-owned subsidiary, which changed its name to Digital Farms, Inc. (“DFI”)
on January 18, 2019. DFI was established to operate our newly formed cryptocurrency business, which pursued a variety of digital currency.
Through DFI, we used to mine the top three cryptocurrencies for our own account. These cryptocurrencies included Bitcoin, Litecoin and
Ethereum. DFI’s operations were discontinued in the first quarter of 2020.
On
May 23, 2018, DP Lending entered into and closed a securities purchase agreement with I. AM, Inc. (“I. AM”), David J. Krause
and Deborah J. Krause. Pursuant to the securities purchase agreement, I. AM sold to DP Lending, 981 shares of common stock for a purchase
price of $981, representing, upon the closing, 98.1% of I. AM’s outstanding common stock. I.AM owed DP Lending $1,715,330 in outstanding
principal, pursuant to a loan and security agreement, between I. AM and DP Lending. The purchase agreement provides that, as I. AM repays
the outstanding loan to DP Lending in accordance with the loan agreement, DP Lending will on a pro rata basis transfer shares of common
stock of I. AM to David J. Krause, up to an aggregate of 471 shares. I. AM’s operations
were discontinued in the first quarter of 2020.
Gresham
Worldwide, Inc. 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.
On
November 30, 2020, we acquired Relec, a privately held company based in Wareham, the United Kingdom. The transaction was structured as
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. The acquisition of Relec has enhanced our presence in industrial and transportation markets
in the United Kingdom and Europe and considerably broadened our product portfolio, including high-quality power conversion and display
product offerings. Relec specializes in AC-DC power supplies, DC-DC converters, displays and EMC filters.
On
January 29, 2021, Alliance Cloud Services, LLC, a majority-owned subsidiary of its wholly-owned subsidiary, Ault Alliance, 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 purchase price was paid by the Company using its own working capital.
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.aultglobal.com.
Recent Events and Developments
Our Corporate Structure
On January 19, 2021, we changed
our corporate name from DPW Holdings, Inc., to Ault Global Holdings, Inc. (the “Name Change”). The Name Change was effected
through a parent/subsidiary short form merger pursuant to an Agreement and Plan of Merger dated January 7, 2021. Neither the merger nor
resulting Name Change affected the rights of our security holders. Our common stock continues to be quoted on the NYSE American under
the symbol “DPW.” Existing stock certificates that reflect our prior corporate name will continue to be valid. Certificates
reflecting the new corporate name will be issued in due course as old stock certificates are tendered for exchange or transfer to our
transfer agent. Concurrently with the change in our name, 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, and Henry Nisser was appointed as
our President and remains as our General Counsel.
Commencing in October of 2019
and continuing through August 2021, we reorganized our corporate structure pursuant to a series of transactions by and among AGH and our
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 as follows:
On June 11, 2021, we entered
into a securities purchase agreement with Ault & Company, Inc., a Delaware corporation and a stockholder of ours (“A&C”).
Pursuant to the terms of the agreement, 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 May 12, 2021, we issued
275,862 shares of common stock to A&C upon the conversion of $400,000 of principal on an 8% Convertible Promissory Note dated February
5, 2020.
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 Exchange
Agreement, Esousa has 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 have issued
to Esousa a total of 8,332,904 Exchange Shares.
On June 26, 2020, we issued
to several institutional investors unsecured 12% short-term promissory notes in the aggregate principal amount of $800,000 and seventeen
month warrants to purchase an aggregate of 361,991 shares of our common stock at an exercise price of $2.43 per share.
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 “Sales Agreement”) with Ascendiant Capital Markets, LLC 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 ATM Offering, as amended under the 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 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, as amended on February 17, 2021 and thereafter on March 5, 2021 (the “2021 Sales
Agreement”) with Ascendiant Capital Markets, LLC, or the sales agent, relating to the sale of shares of common stock offered by
a prospectus supplement and the accompanying prospectus, as amended by the amendments to the sales agreement dated February 16, 2021 and
March 5, 2021. In accordance with the terms of the 2021 Sales Agreement, we may offer and sell shares of common stock having an aggregate
offering price of up to $200 million from time to time through the sales agent. As of the date of this prospectus, we had sold an aggregate
of 38,171,760 shares of common stock pursuant to the sales agreement for gross proceeds of $168,709,204.
On March 9, 2021, our wholly
owned subsidiary, DP Lending, entered into a securities purchase agreement with Alzamend Neuro, Inc., or 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 prospectus, 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 DPL for $10 million, or $1.50 per share, and issue to DPL 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 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.”
On July 28, 2021, Alzamend
received from the U.S. Food and Drug Administration a “Study May Proceed” letter for a Phase 1 study under the Alzamend’s
Investigational New Drug application for AL001, a lithium-based ionic cocrystal oral therapy for patients with dementia related to mild,
moderate, and severe cognitive impairment associated with Alzheimer’s disease.
On
October 26, 2020, we announced that we had successfully converted all of our secured debt, totaling just under $5 million, to equity thus
improving our net equity.
On
November 2, 2020, I.AM, Inc. filed a voluntary petition for bankruptcy under Chapter 7 in the United States Bankruptcy Court in the Central
District of California, Santa Ana Division, case number 8:20-bk-13076.
Settlement of Derivative Litigation
On February 24, 2020, we entered
into a definitive settlement agreement (the “Settlement Agreement”) intended to settle the previously disclosed derivative
litigation captioned Ethan Young and Greg Young, Derivatively on Behalf of Nominal Defendant, DPW Holdings, Inc. v. Milton C. Ault,
III, Amos Kohn, William B. Horne, Jeff Bentz, Mordechai Rosenberg, Robert O. Smith, and Kristine Ault and DPW Holdings, Inc., as the nominal
defendant (Case No. 18-cv-6587) (as amended on March 11, 2019, the “Amended Complaint”) against the Company and certain
of its officers and directors pending in the United States District Court for the Central District of California (the “Court”).
As previously disclosed, the Amended Complaint alleges violations including breaches of fiduciary duties and unjust enrichment claims
based on the previously pled transactions.
On April 15, 2020, the Court
issued an Order (the “Order”) approving a Motion for Preliminary Approval of Settlement in the Derivative Action. On July
16, 2020, the Court issued an Order (the “Final Order”) approving a Motion for Final Approval of Settlement in the Derivative
Action filed against AGH as a Nominal Defendant and its directors who served on its board of directors on July 31, 2018 who were not dismissed
from the action as a result of the Court’s partial grant of the Motion.
On July 16, 2020, the Court
entered a Judgement based upon the Final Order.
Under the terms of the Final
Order approving the Agreement, the Board shall adopt and/or maintain resolutions and amendments to committee charters and/or the Company’s
bylaws to ensure adherence to certain corporate governance policies (collectively, the “Reforms”), which shall remain in effect
for no less than five (5) years, subject to any of the following: (a) a determination by a majority of the independent directors that
the Reform is no longer in the best interest of the Company, including, but not limited to, due to circumstances making the Reform no
longer applicable, feasible, or available on commercially reasonable terms, or (b) modifications which the Company reasonably believes
are required by applicable law or regulation.
In connection with the Settlement
Agreement, the parties agreed upon a payment of attorneys’ fees in the amount of $600,000 payable by the Company’s Director
& Officer liability insurance, which sum was paid. The Settlement Agreement contains no admission of wrongdoing. The Company has always
maintained and continues to believe that it did not engage in any wrongdoing or otherwise commit any violation of federal or state securities
laws or other laws.
Our Current Business
Strategy
As a holding company, 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.
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 also 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
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 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.
Our Executive Committee acts
as the underwriting committee for our subsidiary 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.
As a holding company, 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. We anticipate returning value to shareholders after satisfying our debt obligations
and working capital needs.
Over the recent past we have
provided capital and relevant expertise to fuel the growth of businesses in 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.
Impact of Coronavirus
on Our Operations
On
March 16, 2020, to try and mitigate the spread of the novel coronavirus, San Diego County health officials issued orders mandating that
all restaurants must end dine-in services. As a result of these temporary closures by the San Diego County health officials and the deteriorating
business conditions at both our cryptocurrency mining and restaurant businesses, management concluded that discontinuing these operations
was ultimately in our best interest. Although we have ceased operations at Digital Farms, since the assets and operations have not yet
been abandoned, sold or distributed, these assets do not yet meet the requirement for presentation as discontinued operations. However,
management determined that the permanent closing of the restaurant operations met the criteria for presentation as discontinued operations.
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues
to spread throughout the United States and the World. We are monitoring the outbreak of COVID-19 and the related business and travel restrictions
and changes to behavior intended to reduce its spread, and its impact on operations, financial position, cash flows, inventory, supply
chains, customer purchasing trends, customer payments, and the industry in general, in addition to the impact on our employees. Due to
the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on our operations and
liquidity is uncertain as of the date of this prospectus.
However,
our business has been disrupted and materially adversely affected by the outbreak of COVID-19. We continue to assess our business operations
and system supports and the impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis
will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment
generally or in our sectors in particular.
Our
operations are located in Alameda County, CA, Orange County, CA, Fairfield County, CT, the United Kingdom, Israel and members of our senior
management work in Seattle, WA and New York, NY. We have been following the recommendations of local health authorities to minimize exposure
risk for our employees, including the temporary closures of our offices and having employees work remotely to the extent possible, which
has to an extent adversely affected their efficiency. California and the UK recently reinstituted a second round of stay-at-home orders
and lockdowns, respectively. For more information, see “Risk Factors – We face business disruption and related risks resulting
from the recent outbreak of the novel coronavirus . . . .”
Risks Affecting Our Business
Our business is subject to
numerous risks and uncertainties that you should consider before investing in our company. These risks are described more fully in the
section titled “Risk Factors” in this prospectus. Below are the principal factors that make an investment in our company speculative
or risky:
• |
We will need to raise additional capital to fund
our operations in furtherance of our business plan.
|
• |
We face business disruption and related risks
resulting from the outbreak of COVID-19, which could have a material adverse effect on our business and results of operations and curtail
our ability to raise financing.
|
• |
We have an evolving business model, which increases
the complexity of our business.
|
• |
We received an order and a subpoena from the Commission
in the investigation now known as “In the Matter of DPW Holdings, Inc.,” the consequences of which are unknown.
|
• |
If we make any additional acquisitions, they may
disrupt or have a negative impact on our business.
|
• |
Our growth strategy is subject to a significant
degree of risk.
|
• |
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 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. |
• |
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.
|
• |
If we do not continue to satisfy the NYSE American
continued listing requirements, our common stock could be delisted from NYSE American.
|
• |
Our common stock price is volatile. |
The Offering
We
may offer and sell, from time to time, in one or more offerings, any combination of debt and equity securities that we describe in this
prospectus having a total initial offering price not exceeding $350,000,000 at prices and on terms to be determined by market conditions
at the time of any offering. This prospectus provides you with a general description of the securities we may offer. Each time we offer
a type or series of securities under this prospectus, we will provide a prospectus supplement that will describe the specific amounts,
prices and other important terms of the securities.
The
prospectus supplement also may add, update or change information contained in this prospectus or in documents we have incorporated by
reference into this prospectus. However, no prospectus supplement will fundamentally change the terms that are set forth in this prospectus
or offer a security that is not registered and described in this prospectus at the time of its effectiveness.
RISK FACTORS
An investment
in our securities is speculative and involves a high degree of risk. Our business, financial condition or results of operations could
be adversely affected by any of these risks. You should carefully consider the risks described below and those risks set forth in the
reports that we file with the SEC and that we incorporate by reference into this prospectus, before deciding to invest in our securities.
The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our operations. Past financial performance may not be a reliable indicator of
future performance, and historical trends should not be used to anticipate results or trends in future periods. If any of these risks
actually occurs, our business, business prospects, financial condition or results of operations could be seriously harmed. This could
cause the trading price of our shares of common stock to decline, resulting in a loss of all or part of your investment. Please also read
carefully the section above entitled “Disclosure Regarding Forward-Looking Statements.”
Risks Related to Our Company
We have historically incurred annual operating
and net losses, which may continue.
We have historically experienced
annual operating and net losses. For the years ended December 31, 2020 and 2019, we had an operating loss of $6,033,473 and $24,697,918
and net losses of $32,728,629 and $32,913,412, respectively. As of December 31, 2020 and 2019, we had working capital of $12,466,673 and
a working capital deficiency of $19,150,075, respectively. For the six months ended June 30, 2021, we had operating income of $47,025,000
and a net income of $44,215,000. As of June 30, 2021, we had working capital of $127,863,000. There are no assurances that we will be
able to continue to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing
through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent
that funds generated internally and from any private placements, public offerings and/or bank financing are insufficient, we will have
to raise additional working capital. No assurance can be given that additional financing will be available or, if available, will be on
acceptable terms.
If
we incur annual losses, we will need to raise additional capital to continue business development initiatives and to support our working
capital requirements. However, if we are unable to raise additional capital, we may be required to curtail operations and take additional
measures to reduce costs, including reducing our workforce, eliminating outside consultants and reducing legal fees in order to conserve
cash in amounts sufficient to sustain operations and meet our obligations.
We will need to raise
additional capital to fund our operations in furtherance of our business strategy.
Until
we are profitable, we will need to raise additional capital in order to fund our operations in furtherance of our business strategy. Any
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 face business disruption
and related risks resulting from the continuing impact of COVID-19, which could have a material adverse effect on our business and results
of operations and curtail our ability to raise financing.
Our business has been disrupted
and materially adversely affected by the outbreak of COVID-19. As a result of measures imposed by the governments in affected regions,
businesses and schools have been suspended due to quarantines intended to contain this outbreak and many people have been forced to work
from home in those areas. The spread of COVID-19 from China to other countries has resulted in the Director General of the World Health
Organization declaring the outbreak of COVID-19 as a Public Health Emergency of International Concern, based on the advice of the Emergency
Committee under the International Health Regulations (2005), and the Centers for Disease Control and Prevention in the U.S. issued a warning
on February 25, 2020 regarding the likely spread of COVID-19 to the U.S. While COVID-19 persists on a global basis, international stock
markets currently likely reflect the uncertainty associated with the slow-down in the American, Israeli and UK economies, the reduced
levels of international travel experienced since the beginning of January 2020 and the impact COVID-19 has had on the availability of
labor, particularly in the case of international shipping. We continue to assess our business operations and system supports and the impact
COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part
or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally or in our sectors
in particular.
Our
operations are located in Las Vegas, NV, Orange County, CA, Alameda County, CA, Fairfield County, CT, the United Kingdom, Israel and members
of our senior management work in Seattle, WA and New York, NY, which is also the location of the offices of the Company’s
independent auditor. We have been following the recommendations of local health authorities to minimize
exposure risk for its employees for the past several weeks, including the temporary closures of our offices and having employees work
remotely to the extent possible, which has to an extent adversely affected their efficiency.
Updates by business unit are
as follows:
| • | Our corporate headquarters are located in Las Vegas, NV. Most of our
staff in Las Vegas no longer works remotely, but some employees may do so from time to time on as as-needed basis. The headquarters staff
has tested the secure remote access systems and technology infrastructure to adjust working arrangements for its employees and believes
it has adequate internal communications system and can remain operational with a remote staff. |
| • | Our finance department is located in Orange County, CA. Most of our staff in Orange County no longer works
remotely, but some employees may do so from time to time on as as-needed basis or as required by the occupancy and social distancing order
from the Orange County Health Officer (http://www.ochealthinfo.com/phs/about/epidasmt/epi/dip/prevention/novel_coronavirus). The finance
staff has tested the secure remote access systems and technology infrastructure to adjust working arrangements for its employees and believes
it has adequate internal communications system and can remain operational with a remote staff. |
| • | TurnOnGreen (formerly Coolisys Technologies Corp.), located in Milpitas, CA, presently operates at normal
capacity; however, in order to maintain social distancing, certain employees work remotely. |
| • | Microphase operates a production facility in Connecticut. In March 2020, the Defense Department designated
Microphase an “essential” operation of critical infrastructure workers as part of the defense industrial base. To limit the
impact of the COVID-19 pandemic, Microphase implemented a series of protocols to limit access to the facility, heighten sanitization,
facilitate social distancing and require face coverings. The company asked workers to travel only as necessary and limit exposure to others.
All employees, including management, that do not have to be in the facility work remotely whenever possible. Any employees who come in
contact or potential contact with anyone who has tested positive for COVID-19 or who traveled outside the immediate area went into quarantine
and must provide proof of negative tests before returning to work. Rigorous adherence to these protocols enabled Microphase to operate
without disruption for 10 months. |
In December 2020,
five employees tested positive for COVID-19. Microphase temporarily shut down the production facility in Connecticut for a week for deep
cleaning and to have all employees tested for COVID-19. Since the outbreak disproportionately affected assembly workers, Microphase’s
assembly operations remained shut down for three weeks until all assembly workers had at least 2 negative tests. Operations resumed as
workers gradually in late December and the workforce returned to full strength in mid-January 2021.
The disruption
to production operations deferred order completion and delayed shipments with a significant decrease in revenue from forecast for December
of 2020 and a lingering, but only partial and less substantial, effect on January 2021 and February 2021 revenue. Disruption of production
added costs from paying employees who could not work and deferred revenue from delayed shipments.
Microphase continues
to follow CDC guidelines for social distancing, face coverings and heightened sanitizing to keep the workforce safe and healthy. Microphase
has strictly limited access to its facility and mandated that all employees minimize exposure to the others. All Microphase employees
who can work from home will do so while COVID-19 levels remain high in the surrounding communities. However, some workers may still need
to work in proximity to others. Management is working with state and federal authorities to get all employees vaccinated on a priority
basis as “essential workers” whom the DoD has officially designated as “critical infrastructure workforce” as
part of the “defense industrial base.” Some employees have already received vaccinations. Microphase has implemented
a COVID-19 policy designed to protect its employees and minimize the impact on its operations. Further, microphase requires all employees
to be vaccinated or submit weekly negative tests and limits access to its facilities to vaccinated people only.
| • | Gresham Power suspended production operations in its Salisbury, UK facility from mid-March through June
2020 before resuming production until a subsequent shutdown in November 2020. Notwithstanding the current lockdown, production operations
have resumed to complete work on order for products critically needed for military operations. However, engineers, back office staff and
management have worked from home as much as possible throughout the pandemic period and continue to do so. The pandemic has disrupted
production at times and delayed contract actions as well as other customer decision making, which decreased revenue realized in 2020.
Gresham Power has also implemented a COVID-19 policy. All its employees must provide weekly negative tests before entering the facility. |
| • | Relec, which does not operate any manufacturing or assembly facilities, has not experienced any material
COVID-19 related disruptions to date and continues normal operations notwithstanding the lockdown in the United Kingdom. All employees
who can work from home do so. Others who must work at the Wareham site to move product or access systems continue to do so under strict
safety protocols with face coverings, social distancing and heightened attention to sanitization. The principal impact on Relec’s
operations has come from deferral of some orders and modest decrease in revenue year-over-year. We presently expect business to rebound
and resume a steady growth pattern in the third quarter of 2021, although the pandemic may impact this outlook. Relec has also implemented
a COVID-19 policy. |
| • | The Israeli government exempted Enertec from pandemic-related lockdown orders to keep production operations
open for key projects that impact national security. Approximately 50% of the Enertec’s workforce is working remotely. Enertec
incurred additional costs for increased sanitizing costs, personal protective equipment, increased virtual operations, measures to facilitate
social distancing and other precautions to avoid the spread of COVID-19. The pandemic also affected Enertec’s customers and supply
chain partners, slowing order processing, materials and parts delivery and service order completion. The principal impact on Enertec’s
business has come from deferral of customer decisions and order issuance. We presently expect business to rebound and resume substantial
growth in 2021 as orders increase to address deferred, pent up demand. Enertec has also implemented a COVID-19 policy. |
Due to the unprecedented market
conditions domestically and internationally, and the effect COVID-19 has had and will continue to have on our operations and financial
performance, the extent of which is not currently known, we have suspended guidance for 2021. We will monitor the situation rigorously
and provide business updates as circumstances warrant and resume providing guidance on our business when management believes that such
information would be both reliable and substantively informative.
The duration
and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such
as the severity and transmission rate of the virus or variants thereof, the extent and effectiveness of containment actions and the impact
of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of
such events effectively, our business will be harmed.
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 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 are a holding company whose subsidiaries
are given a certain degree of independence and our failure to integrate our subsidiaries may adversely affect our financial condition.
We have given our subsidiary
companies and their executives a certain degree of independence in decision-making. On the one hand, this independence may increase the
sense of ownership at all levels, on the other hand it has also increased the difficulty of the integration of operation and management,
which has resulted in increased difficulty of management integration. In the event we are not able to successfully manage our subsidiaries
this will result in operating difficulties and have a negative impact on our business.
We received an order and a subpoena from the
SEC in the investigation now known as “In the Matter of DPW Holdings, Inc.,” the consequences of which
are unknown.
We received an order and related
subpoena from the SEC that stated that the staff of the SEC is conducting an investigation now known as “In the Matter of
DPW Holdings, Inc.,” and 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. Although the order states
that the SEC 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 SEC or its staff that any violations of the federal securities laws have occurred. We have produced documents
in response to the subpoena and certain members of our management team have testified before the SEC. The SEC may in the future require
us to produce additional documents or information, or seek testimony from other members of our management team.
We are unaware of the scope
or timing of the SEC’s investigation. As a result, we do not know how the SEC’s investigation is proceeding or when the investigation
will be concluded. We also are unable to predict what action, if any, might be taken in the future by the SEC 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, results of operations, or cash flows. We have not established any provision for losses in respect of this
matter In addition, complying with any such future requests by the SEC for documents or testimony distracts the time and attention of
our officers and directors and diverts our resources away from ongoing business matters. This investigation has resulted in significant
legal expenses, the diversion of management’s attention from our business, and could damage our business and reputation. Finally,
results of the investigation could subject us to a wide range of remedies, including an enforcement action by the SEC. 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.
Our inability to successfully integrate new
acquisitions could adversely affect our combined business; our operations are widely dispersed.
Our
growth strategy through acquisitions is subject to various risks. On June 2, 2017, we acquired a majority interest in Microphase and on
May 23, 2018 we acquired Enertec Systems 2001 Ltd. (“Enertec”). Further, on November 30, 2020, Gresham Worldwide acquired
Relec Electronics Ltd. from its shareholders. Our strategy and business plan are dependent on our ability to successfully integrate Microphase’s,
Enertec’s and our other acquired entities’ operations. In addition, while we are based in Las Vegas, NV, our finance department
is situated in Newport Beach, CA, Microphase’s operations are located in Shelton, Connecticut, Enertec’s operations are located
in Karmiel, Israel and Gresham Power’s operations are located in Salisbury, England. 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.
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 Christopher Wu, our Executive Vice President of Alternative Investments and President of Ault Alliance, 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, Nisser and Wu, 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,
if at all, 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, Digital
Power Lending, LLC (“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 cryptocurrencies, which the SEC has indicated it deems a security. In the event that the digital
assets 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 SEC 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 SEC. 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
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 SEC, 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 the SEC, 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, 2020, we had
Federal net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $18,568,667 after taking into
consideration of the §382 limitation. The Coronavirus Aid, Relief, and Economic Security Act signed in to law on March 27, 2020 provided
that NOLs generated in a taxable year beginning in 2018, 2019, or 2020, may now be carried back five years and forward indefinitely. In
addition, the 80% taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable income. However, we do not
know if or when we will have any earnings and capital gains against which we could apply these carry forwards. Furthermore, as a result
of changes in the ownership of our common stock, our ability to use our federal NOLs will be limited under Internal Revenue Code Section
382. State NOLs are subject to similar limitations in many cases. As a result, our substantial NOLs may not have any value to us.
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.
As of the date of this prospectus,
Ault & Company, of which Milton C. Ault is the Chief Executive Officer, beneficially owned 5,316,882 shares of common stock, consisting
of (i) 1,658,916 shares of common stock, (ii) 94 shares of common stock underlying currently exercisable warrants, (iii) 1,000,000 shares
of common stock purchasable pursuant to a Securities Purchase Agreement entered into on June 11, 2021 with us, (iv) 2,650,000 shares of
common stock held by Ault Alpha, a recently formed hedge fund that is affiliated with us, (v) 3,408 shares of common stock held by Philou
Ventures, (vi) 2,232 shares of common stock underlying currently exercisable warrants held by Philou Ventures, and (vii) 2,232 shares
of common stock issuable upon the conversion of 125,000 shares of Series B Preferred Stock held by Philou Ventures.
Given the close relationship
between Ault & Company on the one hand, and our company on the other, it is far from inconceivable that we could enter into additional
securities purchase agreements with Ault & Company.
Although we have relied on
Philou, which no longer beneficially owns any 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. 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 shareholder 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 Neuro, Inc.
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 are due six months after the date of issuance. The principal and
interest earned on the convertible promissory note may be converted into shares of the 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 $1,000,000 in short-term advances.
In March 2021, Alzamend entered
into a securities purchase agreement with DP Lending, one of our wholly owned subsidiaries, pursuant to which Alzamend agreed to sell
DP Lending an aggregate of 6,666,667 shares of Alzamend common stock for an aggregate of $10 million, or $1.50 per share, which the purchase
agreement stated will be made in tranches. On March 9, 2021, DP Lending paid $4 million, less the $1.8 million in advances and the surrender
for cancellation of a $50,000 convertible promissory note held by us, for an aggregate of 2,666,667 shares of Alzamend common stock. Under
the terms of the purchase agreement, DP Lending purchased an additional (i) 1,333,333 shares of Alzamend common stock upon approval of
its IND for Phase Ia clinical trials for a purchase price of $2 million, and (ii) will purchase 2,666,667 shares of Alzamend Neuro common
stock upon the completion of these Phase Ia clinical trials for a purchase price of $4 million. Alzamend further agreed to issue to DP
Lending warrants to purchase a number of shares of Alzamend Neuro common stock equal to 50% of the shares of Alzamend common stock purchased
under the purchase agreement at an exercise price of $3.00 per share. Finally, Alzamend agreed that for a period of 18 months following
the date of the payment of the final tranche of $4 million, DP Lending will have the right, but not the obligation, to invest an additional
$10 million on the same terms, except that no specific milestones have been determined with respect to the additional $10 million as of
the date of this prospectus.
Alzamend conducted an IPO
on June 15, 2021, in which DP Lending purchased 2,000,000 of the IPO shares.
Messrs. Horne and Nisser could
face a conflict of interest in that they serve on the board of directors of each of Alzamend Neuro and our company. In connection with
Alzamend’s IPO, Mr. Ault resigned as one of its directors but remains involved with Alzamend on a limited basis as he presently
serves as one of its consultants.
Avalanche International Corp.
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 recently increased to
up to $20 million and extended to December 31, 2023. Avalanche currently owes us approximately $16 million under the note issued to us
under the credit facility (the “New Note”).
At December 31, 2020, we had
provided Avalanche with $11,269,136 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 of $0.50 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 $2,750,000 in early April of 2019 in consideration for its issuance of a convertible promissory note
to such third party (the “Third Party Note”), $2,676,220 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 paid the debt to the holder of the Third Party Note, including accrued but unpaid interest, and (i) received a term note from Avalanche
in the principal amount of $3,600,000 with a maturity date of January 8, 2022 (the “AA Note”), and (ii) acquired a warrant
previously issued by Avalanche to this holder, entitling Ault Alpha to purchase 1,617,647 shares of Avalanche common stock at an exercise
price of $0.85 per share.
There is doubt as to whether
Avalanche will be able to repay the AA Note 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 to Ault Alpha, an affiliate of our company. Ault Alpha anticipates
that it will negotiate the exchange of the AA Note for a convertible note that would have a longer term than the AA Note. It should be
noted that the members of our Executive Committee are all involved with Ault Alpha.
There is currently no 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 limited to private transactions. Avalanche is not current in its filings with the Commission
and is not required to register the shares of its common stock underlying the New Note or any other loan arrangement we or Ault Alpha
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 Ault Alpha, 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, which may revert to a third
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,
as has been previously disclosed, 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.
When Avalanche issued the Third Party Note referred to above, it granted the third party a first priority security interest in all its
assets, to include those comprised of MTIX. Both we and the former owners of MTIX consented to the subordination of our respective security
interests. Given that, as described above, Ault Alpha paid off the Third Party Note, our position has returned to a second priority interest.
Ault Alpha has not yet determined whether it will require that Avalanche provide it a first priority interest, and thereby require both
the former owners of MTIX and us to subordinate our security interest to Ault Alpha’s.
Since our security interests
have been reduced to a second, which could become a third, 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 one, or possibly two, other security interests are terminated,
which would not occur until Avalanche’s debts to the senior creditors have been repaid. We do not anticipate that Avalanche will
repay its debts to these creditors within the foreseeable future and 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 directors of Avalanche. In addition,
Philou is the controlling stockholder of Avalanche through its ownership of super-voting preferred stock. 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
Technology changes rapidly in our business,
and if we fail to anticipate new technologies, the quality, timeliness and competitiveness of our products will suffer.
Rapid technology changes in
our industry require us to anticipate, sometimes years in advance, which technologies and/or distribution platforms our products must
take advantage of in order to make them competitive in the market at the time they are released. Therefore, we usually start our product
development with a range of technical development goals that we hope to be able to achieve. We may not be able to achieve these goals,
or our competition may be able to achieve them more quickly than we can. In either case, our products may be technologically inferior
to competitive products, or less appealing to consumers, or both. If we cannot achieve our technology goals within the original development
schedule of our products, then we may delay products until these technology goals can be achieved, which may delay or reduce revenue and
increase our development expenses. Alternatively, we may increase the resources employed in research and development in an attempt to
accelerate our development of new technologies, either to preserve our product launch schedule or to keep up with our competition, which
would increase our development expenses and adversely affect our operations and financial condition.
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.
Our strategic focus on our custom power supply
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.
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. We expect that these products may continue to account for a meaningful
percentage of our revenues for the foreseeable future. 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.
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 United States 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 United States 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 United States. 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 52% and 56.9% of net revenues for the years ended December 31, 2020 and 2019, 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, Gresham Power, our wholly-owned subsidiary in the United Kingdom, 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 United States and other countries.
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.
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.
While Microphase was marginally
profitable during the past fiscal year, during the previous three fiscal years Microphase incurred losses from operations. 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. 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. There can be no assurance
that Microphase will not operate at a loss during the current or future discal years.
Microphase’s future
profitability depends upon many factors, including several that are beyond its control. These factors include, without limitation:
| • | 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. |
In addition, Microphase is
incurring significant legal, accounting, and other expenses related to being a reporting company without there being a trading market
for any of its securities. As a result of these expenditures, Microphase will have to generate and sustain increased revenue to achieve
and maintain future profitability.
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 50.7% in fiscal 2020 and 51.5% in fiscal 2019. 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, 2019 there were two customers
that accounted for more than 10% of Microphase’s sales: BAE Systems and DFAS Columbus Center. 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 appropriation 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, 2020 was
approximately $5.5 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. United
States 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.
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.
Risks Related to Our Business and Industry - Enertec
Potential political, economic and military instability in
Israel could adversely affect our operations.
Enertec’s
operating facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect Enertec’s
operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October
2000, there has been an increase in hostilities between Israel and the Palestinian Arabs, which has adversely affected the peace process
and has negatively influenced Israel’s relationship with its Arab citizens and several Arab countries, including the Israel-Gaza
conflict. Such ongoing hostilities may hinder Israel’s international trade relations and may limit the geographic markets where
Enertec can sell its products and solutions. Hostilities involving or threatening Israel, or the interruption or curtailment of trade
between Israel and its present trading partners, could materially and adversely affect Enertec’s operations.
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.
Furthermore, certain of our
officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called up
for active military duty at any time. All Israeli male citizens who have served in the army are subject to an obligation to perform reserve
duty until they are between 40 and 49 years old, depending upon the nature of their military service.
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 Ownership of Our
Common Stock and Future Offerings
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 at prices that may not be the same as the price per share in this offering. We may sell shares or other securities
in any other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower
than the price per share paid by investors in this offering.
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 at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any
other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower
than the price per share paid by investors in this offering.
Our common stock price is volatile.
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 year, through October 22, 2021, our stock price traded between $1.49 per share and
$7.19 per share as reported on Nasdaq.com. Further, during the first quarter of 2018, our common stock closed at a high of $2,880 per
share as reported on Nasdaq.com. On October 22, 2021, our common stock closed at $2.29.
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
US 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 United States 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.
Volatility in our common stock price may subject us to securities
litigation.
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 depressing effect on the market price of our common stock.
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 prospectus, the number of shares of common stock subject to convertible notes, warrants, options and preferred stock were 165,000,
5,936,454, 4,760,919 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 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.
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 and the Facility. 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 Relec 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 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.
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.
We may be unable to successfully expand our
production capacity, which could result in material delays, quality issues, increased costs and loss of business opportunities, which
may negatively impact our product margins and profitability.
Part of our future growth
strategy is to increase our production capacity to meet increasing demand for our goods. Assuming we obtain sufficient funding to increase
our production capacity, any projects to increase such capacity may not be constructed on the anticipated timetable or within budget.
We may also experience quality control issues as we implement any production upgrades. Any material delay in completing these projects,
or any substantial cost increases or quality issues in connection with these projects could materially delay our ability to bring our
products to market and adversely affect our business, reduce our revenue, income and available cash, all of which could harm our financial
condition.
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 weaknesses 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, 2020 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 control
deficiency that resulted represented a material weakness.
Management, in coordination
with the input, oversight and support of our Board of Directors, has identified the measures below to strengthen our control environment
and internal control over financial reporting.
On
August 19, 2020, Mr. Horne resigned as our Chief Financial Officer and was appointed our President, and later became our Chief Executive
Officer. Mr. Cragun, who had served as the Company’s Chief Accounting Officer since October 1, 2018, succeeded Mr. Horne as the
Chief Financial Officer of the Company. In January 2018, we engaged the services of a financial accounting advisory firm. In January 2019,
we hired a Senior Vice President of Finance. In May 2019, we hired an Executive Vice President and General Counsel, who later became our
President and General Counsel. Finally, in January 2021, we hired a Director of Reporting. These individuals were tasked with expanding
and monitoring the Company’s internal controls, to provide an additional level of review of complex financial issues and to assist
with financial reporting. On October 7, 2019, we created an Executive Committee which is currently 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 the Company’s Chief Financial Officer and Senior Vice President
of Finance on a bi-weekly basis by our Chief Executive Officer, who also reviews all of the Company’s material transactions and
reviews the financial performance of each of our subsidiaries. On December 16, 2020, in consultation with the Chairman of the Audit Committee,
we engaged a professional services firm to review management’s assessment of compliance with Section 404 of the Sarbanes-Oxley Act
of 2002 and to identify internal control process improvement opportunities. While these changes have improved and simplified our internal
processes and resulted in enhanced controls, these enhancements have not been operating for a sufficient period of time for management
to conclude, through testing, that these controls are operating effectively. Further, as we continue to expand our internal accounting
department, the Chairman of the Audit Committee shall perform the following:
| · | assists with documentation and implementation of policies and procedures and monitoring of controls, and |
| · | reviews all anticipated transactions that are not considered in the ordinary course of business to assist
in the early identification of accounting issues and ensure that appropriate disclosures are made in the Company’s financial statements. |
We are currently working to
further improve and simplify our internal processes and implement enhanced controls, as discussed above, 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.
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 United States 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 United States. 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 United
States 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.
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.
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 of directors the right to create new series of preferred stock. As a result, the board of directors 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. Although we have no present intention to issue any shares of preferred
stock or to create a series of preferred stock, we may issue such shares 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 in the future management determines
that our internal control over financial reporting are not effective as defined under Section 404, we could be subject to sanctions
or investigations by the NYSE American should we in the future be listed on this market, 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.
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 of directors and will depend on various factors, including our operating results, financial condition,
future prospects and any other factors deemed relevant by our board of directors. 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.
USE OF PROCEEDS
Except as otherwise provided
in the applicable prospectus supplement, we intend to use the net proceeds from the sale of the securities offered by this prospectus
for general corporate purposes, which may include working capital, capital expenditures, research and development expenditures, regulatory
affairs expenditures, clinical trial expenditures, acquisitions of new technologies and investments, the financing of possible acquisitions
or business expansions, and the repayment, refinancing, redemption or repurchase of future indebtedness or capital stock.
The intended application of
proceeds from the sale of any particular offering of securities using this prospectus will be described in the accompanying prospectus
supplement relating to such offering. The precise amount and timing of the application of these proceeds will depend on our funding requirements
and the availability and costs of other funds.
THE SECURITIES WE MAY OFFER
The descriptions of the securities
contained in this prospectus, together with the applicable prospectus supplements, summarize all the material terms and provisions of
the various types of securities that we may offer. We will describe in the applicable prospectus supplement relating to any securities
the particular terms of the securities offered by that prospectus supplement. If we indicate in the applicable prospectus supplement,
the terms of the securities may differ from the terms we have summarized below. We will also include in the prospectus supplement information,
where applicable, about material United States federal income tax considerations relating to the securities, and the securities exchange,
if any, on which the securities will be listed.
We may sell from time to time,
in one or more offerings:
| • | shares of our common stock; |
| • | shares of our preferred stock; |
| • | warrants to purchase shares of our common stock or preferred stock; |
| • | rights to purchase shares of our common stock; and/or |
| • | units consisting of any of the securities listed above. |
The terms of any securities
we offer will be determined at the time of sale. We may issue securities that are exchangeable for or convertible into common stock or
any of the other securities that may be sold under this prospectus. When particular securities are offered, a supplement to this prospectus
will be filed with the Commission, which will describe the terms of the offering and sale of the offered securities.
DESCRIPTION OF CAPITAL STOCK
The
summary does not purport to be complete and is qualified in its entirety by reference to our certificate of incorporation and bylaws,
and to the provisions of the General Corporation Law of the State of Delaware, as amended.
We are authorized to issue
500,000,000 shares of Class A Common Stock and 25,000,000 shares of Class B Common Stock, par value $0.001 per share. As of the
date of this prospectus, there were 66,899,396 shares of our Class A Common Stock issued and outstanding but no shares of Class B common
stock issued or outstanding. The outstanding shares of our common stock are validly issued, fully paid and nonassessable. In this prospectus,
all references solely to “common stock” shall refer to the Class A Common Stock except where otherwise indicated. In
this prospectus, all references solely to “common stock” shall refer to both the Class A Common Stock and the Class B Common
Stock except where otherwise indicated. We are authorized to issue up to 25,000,000 shares of preferred stock, par value $0.001 per share.
Of these shares of preferred stock, 1,000,000 are designated as Series A Convertible Preferred Stock, 500,000 are designated as Series
B Convertible Preferred Stock, and 2,500 are designated as Series C Convertible Redeemable Preferred Stock. As of the date of this prospectus,
there were 7,040 shares of Series A Convertible Preferred Stock outstanding, 125,000 shares of Series B Convertible Preferred Stock and
no shares of Series C Convertible Redeemable Preferred Stock outstanding.
Common Stock
Holders of our shares of Class
A common stock are entitled to one vote for each share on all matters submitted to a shareholder vote. Holders of our shares Class B common
stock are entitled to ten votes for each share on all matters submitted to a shareholder vote. Holders of our common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of our common stock voting for the election of directors can
elect all of the directors. Holders of our common stock representing a majority of the voting power of our capital stock issued, outstanding
and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of shareholders. A vote by
the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation,
merger or an amendment to our certificate of incorporation.
Holders of our common stock
are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the event
of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain
after payment of liabilities and after providing for each class of stock, if any, having preference over our common stock. Our common
stock has no preemptive, subscription or conversion rights and there are no redemption provisions applicable to our common stock.
Preferred Stock
The shares of preferred stock
may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and
relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors.
The board of directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the
issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions
thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Delaware.
The authorized shares
of preferred stock will be available for issuance without further action by our stockholders unless such action is required by applicable
law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. The NYSE American
currently requires stockholder approval as a prerequisite to listing shares in several circumstances, including, in certain circumstances,
where the issuance of shares could result in an increase in the number of shares of common stock outstanding, or in the amount of voting
securities outstanding, of at least 20%.
Transfer Agent and Registrar
The Transfer Agent and Registrar
for our common stock is Computershare, 8742 Lucent Blvd., Suite 225, Highlands Ranch, CO 80129.
DESCRIPTION OF DEBT SECURITIES
As used in this
prospectus, debt securities means the debentures, notes, bonds and other evidences of indebtedness that AGH may issue from time to time.
Debt securities offered by this prospectus will be either senior debt securities or subordinated debt securities. Senior debt securities
will be issued under a “Senior Indenture” and subordinated debt securities will be issued under a “Subordinated Indenture.”
This prospectus sometimes refers to the Senior Indenture and the Subordinated Indenture collectively as the “Indentures.”
The form of Senior
Indenture and the form of the Subordinated Indenture are filed as exhibits to the registration statement. The statements and descriptions
in this prospectus or in any prospectus supplement regarding provisions of the Indentures and debt securities are summaries thereof, do
not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Indentures
and debt securities, including the definitions therein of certain terms.
General
Debt securities
will be direct unsecured obligations of AGH Senior debt securities will rank equally with all of AGH’s other senior and unsubordinated
debt. The subordinated debt securities will be subordinate and junior in right of payment to all of AGH’s present and future senior
indebtedness.
Because AGH is
principally a holding company, its right to participate in any distribution of assets of any subsidiary, upon the subsidiary’s liquidation
or reorganization or otherwise, is subject to the prior claims of creditors of the subsidiary, except to the extent AGH may be recognized
as a creditor of that subsidiary. Accordingly, AGH’s obligations under debt securities will be structurally subordinated to all
existing and future indebtedness and liabilities of its subsidiaries, and holders of debt securities should look only to AGH’s assets
for payment thereunder.
The Indentures
do not limit the aggregate principal amount of debt securities that AGH may issue and provide that AGH may issue debt securities from
time to time in one or more series, in each case with the same or various maturities, at par or at a discount. AGH may issue additional
debt securities of a particular series without the consent of the holders of debt securities of such series outstanding at the time of
the issuance. Any such additional debt securities, together with all other outstanding debt securities of that series, will constitute
a single series of debt securities under the applicable Indenture. The Indentures also do not limit our ability to incur other debt, except
as described under “Restrictive Covenants” herein.
Each prospectus
supplement will describe the terms relating to the specific series of debt securities being offered. These terms will include some or
all of the following:
| • | the title of debt securities and whether they are subordinated debt securities or senior debt securities; |
| • | any limit on the aggregate principal amount of such debt securities; |
| • | the price or prices at which AGH will sell such debt securities; |
| • | the maturity date or dates of such debt securities; |
| • | the rate or rates of interest, if any, which may be fixed or variable, at which such debt securities will
bear interest, or the method of determining such rate or rates, if any; |
| • | the date or dates from which any interest will accrue or the method by which such date or dates will be
determined; |
| • | the right, if any, to extend the interest payment periods and the duration of any such deferral period,
including the maximum consecutive period during which interest payment periods may be extended; |
| • | whether the amount of payments of principal of (and premium, if any) or interest on such debt securities
may be determined with reference to any index, formula or other method, such as one or more currencies, commodities, equity indices or
other indices, and the manner of determining the amount of such payments; |
| • | the dates on which AGH will pay interest on such debt securities and the regular record date for determining
who is entitled to the interest payable on any interest payment date; |
| • | whether the debt securities will be secured or unsecured; |
| • | the place or places where the principal of (and premium, if any) and interest on such debt securities
will be payable; |
| • | if AGH possesses the option to do so, the periods within which and the prices at which AGH may redeem
such debt securities, in whole or in part, pursuant to optional redemption provisions, and the other terms and conditions of any such
provisions; |
| • | AGH’s obligation, if any, to redeem, repay or purchase such debt securities by making periodic payments
to a sinking fund or through an analogous provision or at the option of holders of the debt securities, and the period or periods within
which and the price or prices at which AGH will redeem, repay or purchase such debt securities, in whole or in part, pursuant to such
obligation, and the other terms and conditions of such obligation; |
| • | the denominations in which such debt securities will be issued, if other than denominations of $1,000
and integral multiples of $1,000; |
| • | the portion, or methods of determining the portion, of the principal amount of such debt securities which
AGH must pay upon the acceleration of the maturity of the debt securities in connection with an Event of Default (as described below),
if other than the full principal amount; |
| • | the currency, currencies or currency unit in which AGH will pay the principal of (and premium, if any)
or interest, if any, on such debt securities, if not United States dollars; |
| • | provisions, if any, granting special rights to holders of such debt securities upon the occurrence of
specified events; |
| • | any deletions from, modifications of or additions to the Events of Default or AGH’s covenants with
respect to the applicable series of debt securities, and whether or not such Events of Default or covenants are consistent with those
contained in the applicable Indenture; |
| • | the application, if any, of the terms of the Indentures relating to defeasance and covenant defeasance
(which terms are described below) to such debt securities; |
| • | whether the subordination provisions summarized below or different subordination provisions will apply
to such debt securities; |
| • | the terms, if any, upon which the holders may convert or exchange such debt securities into or for AGH’s
common stock, preferred stock or other securities or property; |
| • | whether any of such debt securities will be issued in global form and, if so, the terms and conditions
upon which global debt securities may be exchanged for certificated debt securities; |
| • | any change in the right of the trustee or the requisite holders of such debt securities to declare the
principal amount thereof due and payable because of an Event of Default; |
| • | the depositary for global or certificated debt securities; |
| • | any special tax implications of such debt securities; |
| • | any trustees, authenticating or paying agents, transfer agents or registrars or other agents with respect
to such debt securities; and |
| • | any other terms of such debt securities. |
Unless otherwise
specified in the applicable prospectus supplement, debt securities will not be listed on any securities exchange.
Unless otherwise
specified in the applicable prospectus supplement, debt securities will be issued in fully-registered form without coupons.
Debt securities
may be sold at a substantial discount below their stated principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates. The applicable prospectus supplement will describe the federal income tax consequences and special
considerations applicable to any such debt securities. Debt securities may also be issued as indexed securities or securities denominated
in foreign currencies, currency units or composite currencies, as described in more detail in the prospectus supplement relating to any
of the particular debt securities. The prospectus supplement relating to specific debt securities will also describe any special considerations
and certain additional tax considerations applicable to such debt securities.
Subordination
The prospectus
supplement relating to any offering of subordinated debt securities will describe the specific subordination provisions. However, unless
otherwise noted in the prospectus supplement, subordinated debt securities will be subordinate and junior in right of payment to all of
AGH’s Senior Indebtedness, to the extent and in the manner set forth in the Subordinated Indenture.
Under the Subordinated
Indenture, “Senior Indebtedness” means all obligations of AGH in respect of any of the following, whether outstanding at the
date of execution of the Subordinated Indenture or thereafter incurred or created:
| • | the principal of (and premium, if any) and interest due on indebtedness of AGH for borrowed money; |
| • | all obligations guaranteed by AGH for the repayment of borrowed money, whether or not evidenced by bonds,
debentures, notes or other written instruments; |
| • | all obligations guaranteed by AGH evidenced by bonds, debentures, notes or similar written instruments,
including obligations assumed or incurred in connection with the acquisition of property, assets or businesses (provided, however, that
the deferred purchase price of any other business or property or assets shall not be considered indebtedness if the purchase price thereof
is payable in full within 90 days from the date on which such indebtedness was created); |
| • | any obligations of AGH as lessee under leases required to be capitalized on the balance sheet of the lessee
under generally accepted accounting principles; |
| • | all obligations of AGH for the reimbursement on any letter of credit, banker’s acceptance, security
purchase facility or similar credit transaction; |
| • | all obligations of AGH in respect of interest rate swap, cap or other agreements, interest rate future
or options contracts, currency swap agreements, currency future or option contracts and other similar agreements; |
| • | all obligations of the types referred to above of other persons for the payment of which AGH is responsible
or liable as obligor, guarantor or otherwise; and |
| • | all obligations of the types referred to above of other persons secured by any lien on any property or
asset of AGH (whether or not such obligation is assumed by AGH). |
Senior Indebtedness
does not include:
| • | indebtedness or monetary obligations to trade creditors created or assumed by AGH in the ordinary course
of business in connection with the obtaining of materials or services; |
| • | indebtedness that is by its terms subordinated to or ranks equal with the subordinated debt securities;
and |
| • | any indebtedness of AGH to its affiliates (including all debt securities and guarantees in respect of
those debt securities issued to any trust, partnership or other entity affiliated with AGH that is a financing vehicle of AGH in connection
with the issuance by such financing entity of preferred securities or other securities guaranteed by AGH) unless otherwise expressly provided
in the terms of any such indebtedness. |
Senior Indebtedness
shall continue to be Senior Indebtedness and be entitled to the benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of such Senior Indebtedness.
Unless otherwise
noted in the accompanying prospectus supplement, if AGH defaults in the payment of any principal of (or premium, if any) or interest on
any Senior Indebtedness when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise,
then, unless and until such default is cured or waived or ceases to exist, AGH will make no direct or indirect payment (in cash, property,
securities, by set-off or otherwise) in respect of the principal of or interest on the subordinated debt securities or in respect of any
redemption, retirement, purchase or other requisition of any of the subordinated debt securities.
In the event of
the acceleration of the maturity of any subordinated debt securities, the holders of all senior debt securities outstanding at the time
of such acceleration will first be entitled to receive payment in full of all amounts due on senior debt securities before the holders
of subordinated debt securities will be entitled to receive any payment of principal (and premium, if any) or interest on the subordinated
debt securities.
If any of the following
events occurs, AGH will pay in full all Senior Indebtedness before it makes any payment or distribution under subordinated debt securities,
whether in cash, securities or other property, to any holder of subordinated debt securities:
| • | any dissolution or winding-up or liquidation or reorganization of AGH, whether voluntary or involuntary
or in bankruptcy, insolvency or receivership; |
| • | any general assignment by AGH for the benefit of creditors; or |
| • | any other marshaling of AGH’s assets or liabilities. |
In such event,
any payment or distribution under subordinated debt securities, whether in cash, securities or other property, which would otherwise (but
for the subordination provisions) be payable or deliverable in respect of such subordinated debt securities, will be paid or delivered
directly to the holders of Senior Indebtedness in accordance with the priorities then existing among such holders until all Senior Indebtedness
has been paid in full. If any payment or distribution under subordinated debt securities is received by the trustee of any subordinated
debt securities in contravention of any of the terms of the Subordinated Indenture and before all the Senior Indebtedness has been paid
in full, such payment or distribution or security will be received in trust for the benefit of, and paid over or delivered and transferred
to, the holders of Senior Indebtedness at the time outstanding in accordance with the priorities then existing among such holders for
application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all such Senior Indebtedness in
full.
The Subordinated
Indenture does not limit the issuance of additional Senior Indebtedness.
If subordinated
debt securities are issued to a trust in connection with the issuance of trust preferred securities, such subordinated debt securities
may thereafter be distributed pro rata to the holders of such trust securities in connection with the dissolution of such trust upon the
occurrence of certain events described in the applicable prospectus supplement.
Restrictive Covenants
Unless an accompanying
prospectus supplement states otherwise, the following restrictive covenant shall apply to each series of senior debt securities:
Limitation on
Liens. So long as any senior debt securities are outstanding, neither AGH nor any of its subsidiaries will create, assume, incur or
guarantee any indebtedness for money borrowed which is secured by any pledge of, lien on or security interest in any capital stock of
its Designated Subsidiaries, other than specified types of permitted liens.
However, this restriction
will not apply if all debt securities then outstanding and, at our option, any other senior indebtedness ranking equally with such debt
securities, are secured at least equally and ratably with the otherwise prohibited secured debt so long as it is outstanding.
This limitation
shall not apply to debt secured by a pledge of, lien on or security interest in any shares of stock of any subsidiary at the time it becomes
a Designated Subsidiary, including any renewals or extensions of such secured debt. “Designated Subsidiary” means any subsidiary
of AGH, the consolidated net worth of which represents at least 10% of the consolidated net worth of AGH
The Subordinated
Indenture does not contain a similar limitation on liens.
Consolidation, Merger, Sale of Assets and Other
Transactions
AGH may not (i)
merge with or into or consolidate with another person or sell, assign, transfer, lease or convey all or substantially all of its properties
and assets to, any other person other than a direct or indirect wholly-owned subsidiary of AGH, and (ii) no person may merge with or into
or consolidate with AGH or, except for any direct or indirect wholly-owned subsidiary of AGH, sell, assign, transfer, lease or convey
all or substantially all of its properties and assets to AGH unless:
| • | AGH is the surviving corporation or the person formed by or surviving such merger or consolidation or
to which such sale, assignment, transfer, lease or conveyance has been made, if other than AGH, has expressly assumed by supplemental
indenture all the obligations of AGH under such debt securities, the Indentures and any guarantees of preferred securities or common securities
issued by certain trusts; |
| • | immediately after giving effect to such transaction, no default or Event of Default has occurred and is
continuing; and |
| • | AGH delivers to the trustee an officers’ certificate and an opinion of counsel, each stating that
the supplemental indenture complies with the applicable Indenture. |
Events of Default, Notice and Waiver
Unless an accompanying
prospectus supplement states otherwise, the following shall constitute “Events of Default” under the Indentures with respect
to each series of debt securities:
| • | AGH’s failure to pay any interest on any debt security of such series when due and payable, continued
for 30 days; |
| • | AGH’s failure to pay principal (or premium, if any) on any debt security of such series when due,
regardless of whether such payment became due because of maturity, redemption, acceleration or otherwise, or is required by any sinking
fund established with respect to such series; |
| • | AGH’s failure to observe or perform any other of its covenants or agreements with respect to such
debt securities for 90 days after it receives notice of such failure; |
| • | certain defaults with respect to AGH’s debt (other than such debt securities or non-recourse debt)
in any aggregate principal amount in excess of $25,000,000 consisting of the failure to make any payment at maturity or that results in
acceleration of the maturity of such debt; and |
| • | certain events of bankruptcy, insolvency or reorganization of AGH |
If an Event of
Default with respect to any debt securities of any series outstanding under either of the Indentures shall occur and be continuing, the
trustee under such Indenture or the holders of at least 25% in aggregate principal amount of the debt securities of that series outstanding
may declare, by notice as provided in the applicable Indenture, the principal amount (or such lesser amount as may be provided for in
the debt securities of that series) of the debt securities of that series outstanding to be due and payable immediately; provided that,
in the case of an Event of Default involving certain events in bankruptcy, insolvency or reorganization, acceleration is automatic; and,
provided further, that after such acceleration, but before a judgment or decree based on acceleration, the holders of a majority in aggregate
principal amount of the outstanding debt securities of that series may, under certain circumstances, rescind and annul such acceleration
if all Events of Default, other than the nonpayment of accelerated principal, have been cured or waived.
Upon the acceleration
of the maturity of original issue discount securities, an amount less than the principal amount thereof will become due and payable.
Reference is made
to the prospectus supplement relating to any original issue discount securities for the particular provisions relating to acceleration
of maturity thereof. Any past default under either Indenture with respect to debt securities of any series, and any Event of Default arising
therefrom, may be waived by the holders of a majority in principal amount of all debt securities of such series outstanding under such
Indenture, except in the case of (i) default in the payment of the principal of (or premium, if any) or interest on any debt securities
of such series or (ii) default in respect of a covenant or provision which may not be amended or modified without the consent of the holder
of each outstanding debt security of such series affected.
The trustee is
required, within 90 days after the occurrence of a default (which is known to the trustee and is continuing), with respect to the debt
securities of any series (without regard to any grace period or notice requirements), to give to the holders of debt securities of such
series notice of such default; provided, however, that, except in the case of a default in the payment of the principal of (and premium,
if any) or interest, or in the payment of any sinking fund installment, on any debt securities of such series, the trustee shall be protected
in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of the holders of debt
securities of such series.
The trustee, subject
to its duties during default to act with the required standard of care, may require indemnification by the holders of debt securities
of any series with respect to which a default has occurred before proceeding to exercise any right or power under the Indentures at the
request of the holders of debt securities of such series. Subject to such right of indemnification and to certain other limitations, the
holders of a majority in principal amount of the outstanding debt securities of any series under either Indenture may direct the time,
method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the
trustee with respect to debt securities of such series.
No holder of a
debt security of any series may institute any action against AGH under either of the Indentures (except actions for payment of overdue
principal of (and premium, if any) or interest on such debt security or for the conversion or exchange of such debt security in accordance
with its terms) unless (i) the holder has given to the trustee written notice of an Event of Default and of the continuance thereof with
respect to debt securities of such series specifying an Event of Default, as required under the applicable Indenture, (ii) the holders
of at least 25% in aggregate principal amount of debt securities of that series then outstanding under such Indenture shall have requested
the trustee to institute such action and offered to the trustee indemnity reasonably satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request and (iii) the trustee shall not have instituted such action within 60 days
of such request.
AGH is required
to furnish annually to the trustee statements as to its compliance with all conditions and covenants under each Indenture.
Discharge, Defeasance and Covenant Defeasance
If indicated in
the applicable prospectus supplement, AGH may discharge or defease its obligations under each Indenture as set forth below.
AGH may discharge
certain obligations to holders of any series of debt securities issued under either the Senior Indenture or the Subordinated Indenture
which have not already been delivered to the trustee for cancellation and which have either become due and payable or are by their terms
due and payable within one year (or scheduled for redemption within one year) by irrevocably depositing with the trustee cash or, in the
case of debt securities payable only in U.S. dollars, U.S. Government Obligations (as defined in either Indenture), as trust funds in
an amount certified to be sufficient to pay when due, whether at maturity, upon redemption or otherwise, the principal of (and premium,
if any) and interest on such debt securities.
If indicated in
the applicable prospectus supplement, AGH may elect either (i) to defease and be discharged from any and all obligations with respect
to debt securities of or within any series (except as otherwise provided in the relevant Indenture) (“defeasance”) or (ii)
to be released from its obligations with respect to certain covenants applicable to debt securities of or within any series (“covenant
defeasance”), upon the deposit with the relevant Indenture trustee, in trust for such purpose, of money and/or government obligations
which through the payment of principal and interest in accordance with their terms will provide money in an amount sufficient, without
reinvestment, to pay the principal of (and premium, if any) or interest on such debt securities to maturity or redemption, as the case
may be, and any mandatory sinking fund or analogous payments thereon. As a condition to defeasance or covenant defeasance, AGH must deliver
to the trustee an opinion of counsel to the effect that the holders of such debt securities will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to federal income tax on the same
amounts and in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred.
Such opinion of counsel, in the case of defeasance under clause (i) above, must refer to and be based upon a ruling of the Internal Revenue
Service or a change in applicable federal income tax law occurring after the date of the relevant Indenture. In addition, in the case
of either defeasance or covenant defeasance, AGH shall have delivered to the trustee (i) an officers’ certificate to the effect
that the relevant debt securities exchange(s) have informed it that neither such debt securities nor any other debt securities of the
same series, if then listed on any securities exchange, will be delisted as a result of such deposit and (ii) an officers’ certificate
and an opinion of counsel, each stating that all conditions precedent with respect to such defeasance or covenant defeasance have been
complied with. AGH may exercise its defeasance option with respect to such debt securities notwithstanding its prior exercise of its covenant
defeasance option.
Modification and Waiver
Under the Indentures,
AGH and the applicable trustee may supplement the Indentures for certain purposes which would not materially adversely affect the interests
or rights of the holders of debt securities of a series without the consent of those holders. AGH and the applicable trustee may also
modify the Indentures or any supplemental indenture in a manner that affects the interests or rights of the holders of debt securities
with the consent of the holders of at least a majority in aggregate principal amount of the outstanding debt securities of each affected
series issued under the Indenture. However, the Indentures require the consent of each holder of debt securities that would be affected
by any modification which would:
| • | extend the fixed maturity of any debt securities of any series, or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof; |
| • | reduce the amount of principal of an original issue discount debt security or any other debt security
payable upon acceleration of the maturity thereof; |
| • | change the currency in which any debt security or any premium or interest is payable; |
| • | impair the right to institute suit for any payment on or with respect to any debt security; |
| • | reduce the percentage in principal amount of outstanding debt securities of any series, the consent of
whose holders is required for modification or amendment of the Indentures or for waiver of compliance with certain provisions of the Indentures
or for waiver of certain defaults; |
| • | reduce the requirements contained in the Indentures for quorum or voting; or |
| • | modify any of the above provisions. |
If subordinated
debt securities are held by a trust or a trustee of a trust, a supplemental indenture that affects the interests or rights of the holders
of debt securities will not be effective until the holders of not less than a majority in liquidation preference of the preferred securities
and common securities of the applicable trust, collectively, have consented to the supplemental indenture; provided, further, that if
the consent of the holder of each outstanding debt security is required, the supplemental indenture will not be effective until each holder
of the preferred securities and the common securities of the applicable trust has consented to the supplemental indenture.
The Indentures
permit the holders of at least a majority in aggregate principal amount of the outstanding debt securities of any series issued under
the Indentures which is affected by the modification or amendment to waive AGH’s compliance with certain covenants contained in
the Indentures.
Payment and Paying Agents
Unless otherwise
indicated in the applicable prospectus supplement, payment of interest on a debt security on any interest payment date will be made to
the person in whose name a debt security is registered at the close of business on the record date for the interest.
Unless otherwise
indicated in the applicable prospectus supplement, principal, interest and premium on the debt securities of a particular series will
be payable at the office of such paying agent or paying agents as AGH may designate for such purpose from time to time.
Notwithstanding
the foregoing, at AGH’s option, payment of any interest may be made by check mailed to the address of the person entitled thereto
as such address appears in the security register.
Unless otherwise
indicated in the applicable prospectus supplement, a paying agent designated by AGH and located in the Borough of Manhattan, The City
of New York will act as paying agent for payments with respect to debt securities of each series. All paying agents initially designated
by AGH for debt securities of a particular series will be named in the applicable prospectus supplement. AGH may at any time designate
additional paying agents or rescind the designation of any paying agent or approve a change in the office through which any paying agent
acts, except that AGH will be required to maintain a paying agent in each place of payment for debt securities of a particular series.
All moneys paid
by AGH to a paying agent for the payment of the principal, interest or premium on any debt security which remain unclaimed at the end
of two years after such principal, interest or premium has become due and payable will be repaid to AGH upon request, and the holder of
such debt security thereafter may look only to AGH for payment thereof.
Denominations, Registrations and Transfer
Unless an accompanying
prospectus supplement states otherwise, debt securities will be represented by one or more global certificates registered in the name
of a nominee for The Depository Trust Company, or DTC. In such case, each holder’s beneficial interest in the global securities
will be shown on the records of DTC and transfers of beneficial interests will only be effected through DTC’s records.
A holder of debt
securities may only exchange a beneficial interest in a global security for certificated securities registered in the holder’s name
if:
| • | DTC notifies AGH that it is unwilling or unable to continue serving as the depositary for the relevant
global securities; |
| • | DTC ceases to maintain certain qualifications under the Exchange Act and no successor depositary has been
appointed for 90 days; or |
| • | AGH determines, in its sole discretion, that the global security shall be exchangeable. |
If debt securities
are issued in certificated form, they will only be issued in the minimum denomination specified in the accompanying prospectus supplement
and integral multiples of such denomination. Transfers and exchanges of such debt securities will only be permitted in such minimum denomination.
Transfers of debt securities in certificated form may be registered at the trustee’s corporate office or at the offices of any paying
agent or trustee appointed by AGH under the Indentures. Exchanges of debt securities for an equal aggregate principal amount of debt securities
in different denominations may also be made at such locations.
Governing Law
The Senior Indenture,
the Subordinated Indenture and debt securities will be governed by, and construed in accordance with, the internal laws of the State of
New York, without regard to its principles of conflicts of laws.
Conversion or Exchange Rights
The prospectus
supplement will describe the terms, if any, on which a series of debt securities may be convertible into or exchangeable for AGH’s
Class A Common Stock, preferred stock or other debt securities. These terms will include provisions as to whether conversion or exchange
is mandatory, at the option of the holder or at AGH’s option. These provisions may allow or require the number of shares of AGH’s
Class A Common Stock or other securities to be received by the holders of such series of debt securities to be adjusted.
DESCRIPTION OF WARRANTS
The following description,
together with the additional information we may include in any applicable prospectus supplements, summarizes the material terms and provisions
of the warrants that we may offer under this prospectus and the related warrant agreements and warrant certificates. While the terms summarized
below will apply generally to any warrants that we may offer, we will describe the particular terms of any series of warrants in more
detail in the applicable prospectus supplement. If we indicate in the prospectus supplement, the terms of any warrants offered under that
prospectus supplement may differ from the terms described below. If there are differences between that prospectus supplement and
this prospectus, the prospectus supplement will control. Thus, the statements we make in this section may not apply to a particular
series of warrants. Specific warrant agreements will contain additional important terms and provisions and will be incorporated
by reference as an exhibit to the registration statement which includes this prospectus.
General
We may issue warrants for
the purchase of common stock and/or preferred stock in one or more series. We may issue warrants independently or together with common
stock and/or preferred stock, and the warrants may be attached to or separate from these securities.
We will evidence each series
of warrants by warrant certificates that we may issue under a separate agreement. We may enter into the warrant agreement with a warrant
agent. Each warrant agent may be a bank that we select which has its principal office in the United States and a combined capital and
surplus of at least $50,000,000. We may also choose to act as our own warrant agent. We will indicate the name and address
of any such warrant agent in the applicable prospectus supplement relating to a particular series of warrants.
We will describe in the applicable
prospectus supplement the terms of the series of warrants, including:
| • | the offering price and aggregate number of warrants offered; |
| • | the currency for which the warrants may be purchased; |
| • | if applicable, the designation and terms of the securities with which the warrants are issued and the
number of warrants issued with each such security or each principal amount of such security; |
| • | if applicable, the date on and after which the warrants and the related securities will be separately
transferable; |
| • | in the case of warrants to purchase common stock or preferred stock, the number of shares of common stock
or preferred stock, as the case may be, purchasable upon the exercise of one warrant and the price at which these shares may be purchased
upon such exercise; |
| • | the warrant agreement under which the warrants will be issued; |
| • | the effect of any merger, consolidation, sale or other disposition of our business on the warrant agreement
and the warrants; |
| • | anti-dilution provisions of the warrants, if any; |
| • | the terms of any rights to redeem or call the warrants; |
| • | any provisions for changes to or adjustments in the exercise price or number of securities issuable upon
exercise of the warrants; |
| • | the dates on which the right to exercise the warrants will commence and expire or, if the warrants are
not continuously exercisable during that period, the specific date or dates on which the warrants will be exercisable; |
| • | the manner in which the warrant agreement and warrants may be modified; |
| • | the identities of the warrant agent and any calculation or other agent for the warrants; |
| • | federal income tax consequences of holding or exercising the warrants; |
| • | the terms of the securities issuable upon exercise of the warrants; |
| • | any securities exchange or quotation system on which the warrants or any securities deliverable upon exercise
of the warrants may be listed; and |
| • | any other specific terms, preferences, rights or limitations of or restrictions on the warrants. |
Before exercising their warrants,
holders of warrants will not have any of the rights of holders of the securities purchasable upon such exercise, including in the case
of warrants to purchase common stock or preferred stock, the right to receive dividends, if any, or, payments upon our liquidation, dissolution
or winding up or to exercise voting rights, if any.
Exercise of Warrants
Each warrant will entitle
the holder to purchase the securities that we specify in the applicable prospectus supplement at the exercise price that we describe in
the applicable prospectus supplement. Unless we otherwise specify in the applicable prospectus supplement, holders of the warrants may
exercise the warrants at any time up to 5:00 p.m. Eastern Time on the expiration date that we set forth in the applicable prospectus
supplement. After the close of business on the expiration date, unexercised warrants will become void.
Holders of the warrants may
exercise the warrants by delivering the warrant certificate representing the warrants to be exercised together with specified information,
and paying the required amount to the warrant agent in immediately available funds, as provided in the applicable prospectus supplement.
We will set forth on the reverse side of the warrant certificate, and in the applicable prospectus supplement, the information that the
holder of the warrant will be required to deliver to the warrant agent.
Until the warrant is properly
exercised, no holder of any warrant will be entitled to any rights of a holder of the securities purchasable upon exercise of the warrant.
Upon receipt of the required
payment and the warrant certificate properly completed and duly executed at the corporate trust office of the warrant agent or any other
office indicated in the applicable prospectus supplement, we will issue and deliver the securities purchasable upon such exercise. If
fewer than all of the warrants represented by the warrant certificate are exercised, then we will issue a new warrant certificate for
the remaining amount of warrants. If we so indicate in the applicable prospectus supplement, holders of the warrants may surrender securities
as all or part of the exercise price for warrants.
Enforceability of Rights by Holders of Warrants
Any warrant agent will act
solely as our agent under the applicable warrant agreement and will not assume any obligation or relationship of agency or trust with
any holder of any warrant. A single bank or trust company may act as warrant agent for more than one issue of warrants. A warrant agent
will have no duty or responsibility in case of any default by us under the applicable warrant agreement or warrant, including any duty
or responsibility to initiate any proceedings at law or otherwise, or to make any demand upon us. Any holder of a warrant may, without
the consent of the related warrant agent or the holder of any other warrant, enforce by appropriate legal action its right to exercise,
and receive the securities purchasable upon exercise of, its warrants in accordance with their terms.
Warrant Agreement Will Not Be Qualified Under
the Trust Indenture Act
No warrant agreement will
be qualified as an indenture, and no warrant agent will be required to qualify as a trustee, under the Trust Indenture Act. Therefore,
holders of warrants issued under a warrant agreement will not have the protection of the Trust Indenture Act with respect to their warrants.
Governing Law
Each warrant agreement and
any warrants issued under the warrant agreements will be governed by New York law.
Calculation Agent
Calculations relating to warrants
may be made by a calculation agent, an institution that we appoint as our agent for this purpose. The prospectus supplement for
a particular warrant will name the institution that we have appointed to act as the calculation agent for that warrant as of the original
issue date for that warrant. We may appoint a different institution to serve as calculation agent from time to time after the original
issue date without the consent or notification of the holders.
The calculation agent’s
determination of any amount of money payable or securities deliverable with respect to a warrant will be final and binding in the absence
of manifest error.
DESCRIPTION OF RIGHTS
This section
describes the general terms of the rights that we may offer and sell by this prospectus. This prospectus and any accompanying prospectus
supplement will contain the material terms and conditions for each right. The accompanying prospectus supplement may add, update or change
the terms and conditions of the rights as described in this prospectus.
The particular
terms of each issue of rights, the rights agreement relating to the rights and the rights certificates representing rights will be described
in the applicable prospectus supplement, including, as applicable:
| • | the title of the rights; |
| • | the date of determining the stockholders entitled to the rights distribution; |
| • | the title, aggregate number of shares of Class A common stock or preferred stock purchasable upon exercise
of the rights; |
| • | the aggregate number of rights issued; |
| • | the date, if any, on and after which the rights will be separately transferable; |
| • | the date on which the right to exercise the rights will commence and the date on which the right will
expire; and |
| • | any other terms of the rights, including terms, procedures and limitations relating to the distribution,
exchange and exercise of the rights. |
DESCRIPTION OF UNITS
We may issue units comprised
of one or more of the other securities described in this prospectus in any combination. Each unit will be issued so that the holder of
the unit is also the holder of each security included in the unit. Thus, the holder of a unit will have the rights and obligations of
a holder of each included security. The unit agreement under which a unit is issued may provide that the securities included in the unit
may not be held or transferred separately, at any time or at any time before a specified date.
The applicable prospectus
supplement will describe:
| • | the designation and terms of the units and of the securities comprising the units, including whether and
under what circumstances those securities may be held or transferred separately; |
| • | any unit agreement under which the units will be issued; |
| • | any provisions for the issuance, payment, settlement, transfer or exchange of the units or of the securities
comprising the units; and |
| • | whether the units will be issued in fully registered or global form. |
The applicable prospectus
supplement will describe the terms of any units. The preceding description and any description of units in the applicable prospectus supplement
does not purport to be complete and is subject to and is qualified in its entirety by reference to the unit agreement and, if applicable,
collateral arrangements and depositary arrangements relating to such units.
PLAN OF DISTRIBUTION
We may sell the securities
being offered pursuant to this prospectus through underwriters or dealers, through agents, or directly to one or more purchasers or through
a combination of these methods. The applicable prospectus supplement will describe the terms of the offering of the securities,
including:
| • | the name or names of any underwriters, if any, and if required, any dealers or agents; |
| • | the purchase price of the securities and the proceeds we will receive from the sale; |
| • | any underwriting discounts and other items constituting underwriters’ compensation; |
| • | any discounts or concessions allowed or reallowed or paid to dealers; and |
| • | any securities exchange or market on which the securities may be listed. |
We may distribute the securities
from time to time in one or more transactions at:
| • | a fixed price or prices, which may be changed; |
| • | market prices prevailing at the time of sale; |
| • | prices related to such prevailing market prices; or |
Only underwriters named in
the prospectus supplement are underwriters of the securities offered by the prospectus supplement.
If underwriters are used in
an offering, we will execute an underwriting agreement with such underwriters and will specify the name of each underwriter and the terms
of the transaction (including any underwriting discounts and other terms constituting compensation of the underwriters and any dealers)
in a prospectus supplement. The securities may be offered to the public either through underwriting syndicates represented by managing
underwriters or directly by one or more investment banking firms or others, as designated. If an underwriting syndicate is used, the managing
underwriter(s) will be specified on the cover of the prospectus supplement. If underwriters are used in the sale, the offered securities
will be acquired by the underwriters for their own accounts and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. Any public offering price
and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time. Unless otherwise set forth
in the prospectus supplement, the obligations of the underwriters to purchase the offered securities will be subject to conditions precedent
and the underwriters will be obligated to purchase all of the offered securities if any are purchased.
We may grant to the underwriters
options to purchase additional securities to cover over-allotments, if any, at the public offering price, with additional underwriting
commissions or discounts, as may be set forth in a related prospectus supplement. The terms of any over-allotment option will be set forth
in the prospectus supplement for those securities.
If we use a dealer in the
sale of the securities being offered pursuant to this prospectus or any prospectus supplement, we will sell the securities to the dealer,
as principal. The dealer may then resell the securities to the public at varying prices to be determined by the dealer at the time
of resale. The names of the dealers and the terms of the transaction will be specified in a prospectus supplement.
We may sell the securities
directly or through agents we designate from time to time. We will name any agent involved in the offering and sale of securities
and we will describe any commissions we will pay the agent in the prospectus supplement. Unless the prospectus supplement states otherwise,
any agent will act on a best-efforts basis for the period of its appointment.
We may authorize agents or
underwriters to solicit offers by institutional investors to purchase securities from us at the public offering price set forth in the
prospectus supplement pursuant to delayed delivery contracts providing for payment and delivery on a specified date in the future. We
will describe the conditions to these contracts and the commissions we must pay for solicitation of these contracts in the prospectus
supplement.
In connection with the sale
of the securities, underwriters, dealers or agents may receive compensation from us or from purchasers of the securities for whom they
act as agents in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers, and those
dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters or commissions from the purchasers
for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of the securities, and any institutional
investors or others that purchase securities directly and then resell the securities, may be deemed to be underwriters, and any discounts
or commissions received by them from us and any profit on the resale of the securities by them may be deemed to be underwriting discounts
and commissions under the Securities Act.
We may provide agents and
underwriters with indemnification against particular civil liabilities, including liabilities under the Securities Act, or contribution
with respect to payments that the agents or underwriters may make with respect to such liabilities. Agents and underwriters may engage
in transactions with, or perform services for, us in the ordinary course of business.
In addition, we may enter
into derivative transactions with third parties (including the writing of options), or sell securities not covered by this prospectus
to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with such a transaction,
the third parties may, pursuant to this prospectus and the applicable prospectus supplement, sell securities covered by this prospectus
and the applicable prospectus supplement. If so, the third party may use securities borrowed from us or others to settle such sales and
may use securities received from us to close out any related short positions. We may also loan or pledge securities covered by this prospectus
and the applicable prospectus supplement to third parties, who may sell the loaned securities or, in an event of default in the case of
a pledge, sell the pledged securities pursuant to this prospectus and the applicable prospectus supplement. The third party in such sale
transactions will be an underwriter and will be identified in the applicable prospectus supplement or in a post-effective amendment.
Stabilization Activities
To facilitate an offering
of a series of securities, persons participating in the offering may engage in transactions that stabilize, maintain, or otherwise affect
the market price of the securities. This may include over-allotments or short sales of the securities, which involves the sale by persons
participating in the offering of more securities than have been sold to them by us. In those circumstances, such persons would cover such
over-allotments or short positions by purchasing in the open market or by exercising the over-allotment option granted to those persons.
In addition, those persons may stabilize or maintain the price of the securities by bidding for or purchasing securities in the open market
or by imposing penalty bids, whereby selling concessions allowed to underwriters or dealers participating in any such offering may be
reclaimed if securities sold by them are repurchased in connection with stabilization transactions. The effect of these transactions may
be to stabilize or maintain the market price of the securities at a level above that which might otherwise prevail in the open market.
Such transactions, if commenced, may be discontinued at any time. We make no representation or prediction as to the direction or magnitude
of any effect that the transactions described above, if implemented, may have on the price of our securities.
Trading Markets and Listing of Securities
Any common stock sold pursuant
to a prospectus supplement will be eligible for quotation and trading on the NYSE American. Any underwriters to whom securities are sold
by us for public offering and sale may make a market in the securities, but such underwriters will not be obligated to do so and may discontinue
any market making at any time without notice.
In compliance with the guidelines
of the Financial Industry Regulatory Authority (which we refer to as “FINRA”), the aggregate maximum discount, commission,
agency fees or other items constituting underwriting compensation to be received by any FINRA member or independent broker-dealer will
not exceed 8% of the offering proceeds from any offering pursuant to this prospectus and any applicable prospectus supplement.
No FINRA member may participate
in any offering of securities made under this prospectus if such member has a conflict of interest under FINRA Rule 5121, including if
5% or more of the net proceeds, not including underwriting compensation, of any offering of securities made under this prospectus will
be received by a FINRA member participating in the offering or affiliates or associated persons of such FINRA members, unless a qualified
independent underwriter has participated in the offering or the offering otherwise complies with FINRA Rule 5121.
In order to comply with the
securities laws of some states, if applicable, the securities offered pursuant to this prospectus will be sold in those states only through
registered or licensed brokers or dealers. In addition, in some states securities may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and complied
with.
LEGAL MATTERS
The validity of the securities
offered by this prospectus is being passed upon for us by our counsel, Olshan Frome Wolosky LLP, New York, New York. If the securities
are distributed in an underwritten offering, certain legal matters will be passed upon for the underwriters by counsel identified in the
applicable prospectus supplement.
EXPERTS
The consolidated financial
statements incorporated in this prospectus by reference from our Annual Report on Form 10-K for the years ended December 31,
2020 and 2019, and for each of the years in the period ended December 31, 2020, have been so incorporated in reliance on the report of
Marcum, LLP, an independent registered public accounting firm, incorporated herein by reference, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial
statements of Enertec Systems 2001 LTD., as of December 31, 2020 and December 31, 2019, and for the year ended December 31, 2020 incorporated
by reference in this prospectus have been so incorporated in reliance on the report of BDO ZIV HAFT, an independent registered public
accounting firm, incorporated herein by reference, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We
have filed with the Commission a registration statement on Form S-3 under the Securities Act, with respect to the securities covered by
this prospectus. This prospectus and any prospectus supplement which form a part of the registration statement, does not contain all of
the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect
to us and the securities covered by this prospectus, please see the registration statement and the exhibits filed with the registration
statement. Any statements made in this prospectus or any prospectus supplement concerning legal documents are not necessarily complete
and you should read the documents that are filed as exhibits to the registration statement or otherwise filed with the Commission for
a more complete understanding of the document or matter. A copy of the registration statement and the exhibits filed with the registration
statement may be inspected without charge at the Public Reference Room maintained by the Commission, located at 100 F Street, N.E., Washington,
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information about the operation of the Public Reference Room. The Commission
also maintains an internet website that contains reports, proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the website is http://www.sec.gov.
We
file annual, quarterly and current reports, proxy statements and other information with the Commission. You may read, without charge,
and copy the documents we file at the Commission’s public reference room in Washington, D.C. at 100 F Street, N.E., Washington,
D.C. 20549. You can request copies of these documents by writing to the Commission and paying a fee for the copying cost. Please call
the Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our filings with the Commission are available
to the public at no cost from the SEC’s website at http://www.sec.gov.
The
reports and other information filed by us with the Commission are also available at our website, www.aultglobal.com. Information contained
on our website or that can be accessed through our website is not incorporated by reference into this prospectus or any prospectus supplement
and should not be considered to be part of this prospectus or any prospectus supplement.
INCORPORATION OF DOCUMENTS BY REFERENCE
We have filed a registration
statement on Form S-3 with the Commission under the Securities Act. This prospectus is part of the registration statement but the registration
statement includes and incorporates by reference additional information and exhibits. The Commission permits us to “incorporate
by reference” the information contained in documents we file with the Commission, which means that we can disclose important information
to you by referring you to those documents rather than by including them in this prospectus. Information that is incorporated by reference
is considered to be part of this prospectus and you should read it with the same care that you read this prospectus. Information that
we file later with the Commission will automatically update and supersede the information that is either contained, or incorporated by
reference, in this prospectus, and will be considered to be a part of this prospectus from the date those documents are filed. We have
filed with the Commission, and incorporate by reference in this prospectus:
| • | Our Annual Report on Form 10-K for the period ended December 31, 2020, filed with the SEC on April 15,
2021; |
| • | Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021; |
| • | Current Reports on Form 8-K filed with the SEC on January 4, 2021, January 19, 2021, January 25, 2021,
February 17, 2021, March 5, 2021, June 4, 2021, June 15, 2021, June 23, 2021, July 6, 2021, August 13, 2021 and September 15, 2021; |
| • | Our Definitive Proxy Statements filed with the SEC on each of June 7, 2021 and June 16, 2021, and |
| • | The description of our common stock contained in our Form 8-A filed with the SEC on January 30, 1997. |
We also incorporate by reference
all additional documents that we file with the Securities and Exchange Commission under the terms of Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act that are made after the initial filing date of the registration statement of which this prospectus is a part until
the offering of the particular securities covered by a prospectus supplement or term sheet has been completed. We are not, however, incorporating,
in each case, any documents or information that we are deemed to furnish and not file in accordance with Securities and Exchange Commission
rules.
We will provide you, without
charge upon written or oral request, a copy of any and all of the information that has been incorporated by reference in this prospectus
and that has not been delivered with this prospectus. Requests should be directed to Ault Global Holdings, Inc., 11411 Southern Highlands
Parkway, Suite 240, Las Vegas, NV 89141; Tel.: (949) 444-5464; Attention: Mr. Milton C. (Todd) Ault III, Executive Chairman.
Up to $10,000,000
Ault Alliance, Inc.
Shares of Common Stock
PROSPECTUS SUPPLEMENT
____________________
The date of this Prospectus Supplement is June
9, 2023
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