(Address, including zip code, and telephone
number, including area code, of registrant’s principal executive offices)
(Name, address including zip code, and telephone
number, including area code, of agent for service)
Marc J. Ross, Esq.
If the only securities being registered
on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.
☐
If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest reinvestment plans, check the following box.
☒
If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
☐
If this Form is a post-effective amendment
filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
☐
If this Form is a registration statement
pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission
pursuant to Rule 462(e) under the Securities Act, check the following box.
☐
If this Form is a post-effective amendment
to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes
of securities pursuant to Rule 413(b) under the Securities Act, check the following box.
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 7(a)(2)(B) of the Exchange Act.
☐
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 report. 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 report and speak only as of the date hereof.
We disclaim any current
intention to update its “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:” (a) our continued operating and net losses in the future; (b) our
need for additional capital for our operations and to fulfill our business plans, (c) dependency on our ability, and the ability
of our contract manufacturers, to timely procure electronic components; (d) the potential ineffectiveness of our strategic focus
on power supply solution competencies; (e) dependency on developer partners for the development of some of our custom design products;
(f) dependency on sales of our legacy products for a meaningful portion of our revenues; (g) 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; (h) our ability to attract, retain and motivate key personnel; (i) dependence on a few major customers; (j)
dependence on the electronic equipment industry; (k) reliance on third-party subcontract manufacturers to manufacture certain aspects
of the products sold by us; (l) reduced profitability as a result of increased competition, price erosion and product obsolescence
within the industry; (m) our ability to establish, maintain and expand its OEM relationships and other distribution channels; (n)
our inability to procure necessary key components for its products, or the purchase of excess or the wrong inventory; (o) variations
in operating results from quarter to quarter; (p) dependence on international sales and the impact of certain governmental regulatory
restrictions on such international sales and operations; and other 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.dpwholdings.com
.
ABOUT THE COMPANY
Company Overview
We are a growth company
seeking to increase our revenues through acquisitions. Our strategy reflects our management and Board’s current philosophy
which we began implementing upon the change in control that was completed in September 2016. Our acquisition and development target
strategy includes companies that have developed a “new way of doing business” in mature, well-developed industries
experiencing changes due to new technology; companies that may become profitable or more profitable through efficiency and reduction
of costs; companies whose business is related to our core business in the commercial and defense industries; and companies that
will enhance our overall revenues. It is our goal to substantially increase our gross revenues in the near future.
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 such term is defined in the Investment Company Act.
We
are a diversified holding company owning subsidiaries engaged in the following operating businesses: commercial and defense solutions,
commercial lending, cryptocurrency blockchain mining and advanced textile technology.
We also maintain a large investment
in Avalanche International, Corp. (“Avalanche”),
which is doing 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 are actively seeking growth through
acquisitions, we will 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, Digital Power Limited (“DP Limited”), Salisbury, England, which
operates under the brand name of “Gresham Power Electronics” (“Gresham”). DP Limited 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 Digital Power Lending, LLC (“DP Lending”), a wholly-owned subsidiary. DP Lending is engaged in providing
commercial loans to companies throughout the United States to provide them with operating capital to finance the growth of their
businesses. The loans will primarily range in duration from six months to three years. DP Lending operates under California
Finance Lending License #60DBO-77905.
On April 25, 2017,
we formed Coolisys Technologies, Inc. (“Coolisys”), a wholly-owned subsidiary. We intend to operate our existing businesses
in the customized and flexible power system solutions in Coolisys and as such we plan to reorganize Digital Power North American
operations, Digital Power Ltd. (“Gresham Power”), and Microphase Corporation into subsidiaries of Coolisys. DP Limited
will continue to primarily serve the European markets.
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.
Further, on September
1, 2017, Coolisys 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 will
serve as an extended sales organization for our overall flexible power system solutions. As a result of the acquisition, Power
Plus Technical Distributors has become a subsidiary of Coolisys.
On December 28, 2017,
at the Annual Meeting of Shareholders of DPW Holdings, Inc., then known as Digital Power Corporation, our shareholders approved
a number of proposals, including our reincorporation from California to Delaware (“Reincorporation”). The effective
date of the Reincorporation was December 29, 2017. Upon consummation of the Reincorporation, we continued our daily business
operations as they were conducted by our predecessor, Digital Power Corporation, immediately prior to the Reincorporation and the
officers and directors of our predecessor became our officers and directors, except that Milton C. Ault III became our Chief Executive
Officer but Amos Kohn remained as our President. The Reincorporation did not affect any of our material contracts with any third
parties, and our rights and obligations under such material contractual arrangements continue to be our rights and obligations
after the Reincorporation. The Reincorporation did not result in any change in our headquarters, business, jobs, management, location
of any of our offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs
incident to the Reincorporation).
On December 31, 2017,
Coolisys entered into a Share Purchase Agreement (the “Enertec Agreement”) with Micronet Enertec Technologies, Inc.
(“MICT”), a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary of MICT
(“EML” and, together with MICT, the “Seller Parties”), and Enertec Systems 2001 Ltd. (“Enertec”),
an Israeli corporation and wholly owned subsidiary of EML, pursuant to which Coolisys would acquire Enertec, subject to the terms
and conditions set forth in the Enertec Agreement. We believe that Enertec is Israel’s largest private manufacturer of specialized
electronic systems for the military market. The purchase price consisted of a cash payment of $5,250,000 and the assumption of
$4,000,000 in Enertec’s liabilities, with the cash portion to be adjusted for any increase or decrease of the $4,000,000
in liabilities. The acquisition was completed on May 23, 2018. On May 23, 2018, Coolisys acquired Enertec subject to the terms
and conditions set forth in the Enertec Agreement (the “Acquisition”) for an aggregate purchase price of $5,250,000,
which includes a deduction of (i) a closing debt of $288,439 in excess of the Allowed Company Debt to be assumed by us (as defined
in the Enertec Agreement) of $4,000,000 and (ii) $189,041 in Intercompany Accounts (as defined in the Enertec Agreement) for a
total cash payment of $4,772,520.
On
January 23, 2018, we reached preliminary agreement on the terms to govern the acceptance of delivery of the purchase order conveying
to us the right to acquire 1,000 Antminer S9s (the “Bitmain Miners”) manufactured by Bitmain Technologies, Inc. (the
“Bitmain”), in connection with our cryptocurrency mining operations, or crypto mining. Pursuant to a purchase order
delivered on behalf of Bitmain to us, on January 31, 2018 we paid approximately $5,000,000 to Bitmain for the Bitmain Miners.
We received delivery of the Bitmain Miners on February 1, 2018.
On
January 23, 2018, we entered into a securities purchase agreement with an institutional investor to sell, for an aggregate purchase
price of $1,000,000, a 10% senior convertible promissory note (the “Note”) with an aggregate principal face amount
of $1,250,000, a warrant to purchase an aggregate of 625,000 shares of our common stock and 543,478 shares of our common stock.
The transactions contemplated by the Securities Purchase Agreement closed on February 8, 2018. The Note is convertible into
625,000 shares of our common stock, a conversion price of $2.00 per share, subject to adjustment. The exercise price of the warrant
to purchase 625,000 shares of our common stock is $2.20 per share, subject to adjustment. On February 9, 2018, in addition to the
543,478 shares of common stock provided for pursuant to the Securities Purchase Agreement, we issued to the investor an aggregate
of 691,942 shares of our common stock upon the conversion of the entire outstanding principal and accrued interest on the Note
of $1,383,884.
On
January 25, 2018, we issued two 5% promissory notes (collectively, the “Notes”), each in the principal face amount
of $2,500,000 for an aggregate debt of $5,000,000 to two institutional investors. The entire unpaid balance of the principal
and accrued interest on each of the Notes was due and payable on February 23, 2018, subject to a 30-day extension available to
us.
The proceeds from these two
promissory notes were used to purchase
1,000
Antminer S9s (“Miners”) manufactured by Bitmain Technologies, Inc. in connection with our crypto mining operations.
Between March 23 and March 27, 2018, we paid the entire outstanding principal and accrued interest on the Notes of $5,101,127.
On
January 30, 2018, we formed Super Crypto Mining, Inc. (“SC Mining”), a wholly-owned subsidiary. SC Mining was established
to operate our newly formed cryptocurrency business, which is pursuing a variety of digital currency. We mine the top three cryptocurrencies,
Bitcoin, Litecoin and Ethereum, for our own account.
On
February 20, 2018, we issued a promissory note in the principal face amount of $900,000 to an accredited investor. This promissory
note
included an original issue discount (“OID”) of $150,000 resulting in net proceeds of $750,000.
The
principal and OID on this note was due and payable on March 22, 2018. On March 23, 2018, we entered into a new promissory note
in the principal amount of $1,750,000 for a term of two months, subject to our ability to prepay within one month.
The interest
rate payable on this new promissory note shall be twenty percent per thirty calendar days, payable in a lump sum on the maturity
date.
We also issued to the lender a warrant to purchase 1,250,000 shares of our common stock
at an exercise price of $1.15 per share, pursuant to a consulting agreement.
The principal amount of the new promissory
note consisted of net proceeds of $1,000,000 and the cancellation of the principal of $750,000 from the February 20, 2018 promissory
note. The interest on the February 20, 2018 note in the amount of $150,000 was paid to the lender prior to entering into the new
promissory note. On April 23, 2018, we paid
the entire outstanding principal and accrued
interest on the new promissory note of $2,100,000
.
On
February 26, 2018, we issued a 10% promissory note in the principal face amount of $330,000 to an accredited investor. This promissory
note
included an OID of $30,000 resulting in net proceeds to us of $300,000.
The principal
and accrued interest on this note is due and payable on April 12, 2018, subject to a 30-day extension available to us. This
10% promissory note, including accrued interest, was paid on April 27, 2018.
On February 27, 2018,
we entered into a Sales Agreement with H.C. Wainwright & Co., LLC (“HCW”) to sell shares of common stock having
an aggregate offering price of up to $50,000,000 (the “Shares”) from time to time, through an “at the market
offering” program (the “HCW ATM Offering”) under which HCW will act as sales agent. The offer and sale
of the Shares were made pursuant to our effective “shelf” registration statement on Form S-3 and an accompanying
base prospectus contained therein (Registration Statement No. 333-222132) filed with the SEC on December 18, 2017, amended
on January 8, 2018, and declared effective by the SEC on January 11, 2018, and a prospectus supplement related to the HCW ATM Offering,
dated February 27, 2018. We paid to HCW a commission in an amount equal to 5.0% of the gross sales price per Share sold through
the HCW ATM Offering as sales agent under the Sales Agreement. In addition, we reimbursed $60,000 to HCW for certain expenses it
incurred in the performance of its obligations under the Sales Agreement and had agreed to reimburse HCW up to a maximum of $5,000
each calendar quarter. We sent HCW a notice terminating the Sales Agreement on September 13, 2018, which termination took effect
on September 23, 2018.
In connection with
the termination of the HCW ATM Offering, HCW released us from the right of first refusal provisions set forth in the Sales Agreement.
In consideration for the release, we agreed to issue HCW 500,000 shares of common stock and to pay HCW a fee of three percent of
the aggregate gross proceeds that we receive on future financings and a one percent fee of the aggregate gross proceeds received
on future financings by our subsidiaries, in each case until February 28, 2020.
On March 8, 2018,
SC Mining, entered into an Asset Purchase Agreement (the “APA”) with Blockchain Mining Supply & Services Ltd. (“BMSS”).
Pursuant to the APA, SC Mining has agreed to acquire 1,100 Antminer S9s (the “BMSS Miners”) manufactured by Bitmain,
in connection with SC Mining’s mining operations, from BMSS. Pursuant to the APA, SC Mining will pay an aggregate of $3,272,500
to BMSS for the BMSS Miners, of which we have paid $1,918,125. We intend to fund the remaining balance of $1,354,375, or approximately
41% of the aggregate purchase price, through the proceeds derived from future debt and equity financings.
On March 22, 2018,
SC Mining entered into a Master Services Agreement with a U.S. based entity, whereby SC Mining secured the right to 25 megawatts
of power in support of SC Mining’s operations.
On March 23, 2018, we entered into a securities purchase agreement to sell and issue a 12% promissory
note and a warrant to purchase 300,000 shares of common stock to an accredited investor
if
the promissory note is paid in full on or before May 23, 2018, or up to 450,000 shares of common stock, if the promissory note
is paid by June 22, 2018.
The promissory note was issued with a 10% OID. The promissory note is in the principal amount
of $1,000,000 and was sold for $900,000, bears interest at 12% simple interest on the principal amount, and was due on June 22,
2018. We are in discussions to extend the maturity date of the promissory note to December 22, 2018,
however,
since payment was not made on the specified maturity date this unsecured 12% promissory note is currently in default. Interest
only payments are due, in arrears, on a monthly basis commencing on April 23, 2018. The exercise price of the warrant is $1.15
per share. The promissory note is unsecured by any of our assets but is personally guaranteed by our Chief Executive Officer.
On
March 27, 2018, we issued a 10% promissory note in the principal face amount of $200,000 to an accredited investor
.
The
principal and accrued interest on this note was due and payable on March 29, 2018. Between March 29 and April 24, 2018, we paid
the entire outstanding principal on this 10% promissory note of $200,000.
On April 16, 2018,
we entered into three securities purchase agreements with certain institutional investors to sell, for an aggregate purchase price
of $1,550,000, 12% convertible notes with an aggregate principal face amount of $1,722,222, warrants to purchase an aggregate of
993,588 shares of our common stock, and an aggregate of 200,926 commitment shares. The 12% convertible notes bore simple interest
at 12% on the principal amount with a guarantee of interest during the initial six months in the amount of $103,333. Subject to
certain beneficial ownership limitations and an event of default having occurred and not been cured, the investors could convert
the principal amount of the 12% convertible notes and accrued interest earned thereon into shares of our common stock at $0.70
per share, subject to adjustment for customary stock splits, stock dividends, combinations or similar events. Beginning on May
16, 2018, we were required to make six monthly cash payments in the aggregate amount of $304,259 until the 12% convertible notes
were satisfied in full, which was to occur on October 16, 2018. The entire amount of principal and interest on these 12% convertible
notes has been paid. The warrants entitle the holders to purchase, in the aggregate, up to 993,588 shares of our common stock at
an exercise price of $1.30 per share for a period of five years from April 16, 2018 subject to certain beneficial ownership limitations.
In connection with these three securities purchase agreements, we entered into security agreements pursuant to which we granted
to each investor a security interest in, among others, SC Mining’s accounts, chattel paper, documents, equipment, general
intangibles, instruments and inventory, and all proceeds, as set forth in the security agreements.
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 owns
and operates the Prep Kitchen brand restaurants located in the San Diego area. I.AM owed DP Lending $1,715,330 in outstanding principal,
pursuant to a loan and security agreement, between I. AM and DP Lending, which I. AM used to acquire the restaurants. 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.
On July 13, 2018, we issued a 15% promissory note in the principal amount of $176,000 to an accredited
investor. This promissory note
included an OID of
$16,000 and allows for legal fees of $5,000 resulting in net proceeds of $155,000.
The
principal and accrued interest on this note was due and payable on October 11, 2018
. This 15% promissory note was not paid
on the maturity date and is currently in default.
On September 21, 2018,
we issued to an institutional investor a 12% term promissory note in the principal face amount of $526,316, with an interest rate
of 12% for a purchase price of $500,000. The outstanding principal face amount, plus any accrued and unpaid interest, is due by
December 31, 2018, or as otherwise provided in accordance with the terms set forth therein. In accordance with the Note, we also
agreed to issue 300,000 shares of our common stock to the investor. The note contains standard and customary events of default.
We may prepay in cash the full outstanding principal face amount and any accrued and unpaid interest at any time without penalty.
On September 27, 2018,
we issued to each of three institutional investors a 5% OID term promissory note, dated September 26, 2018, for an aggregate purchase
price of $250,000 with an interest rate of 12%. The outstanding principal face amount, plus any accrued and unpaid interest on
the note is due by December 31, 2018, or as otherwise provided in accordance with the terms set forth in the note. In connection
therewith, we agreed to issue 50,000 shares of our common stock to each investor.
On December 3, 2018,
we issued 1,434 shares of our 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”),
for an aggregate purchase price of $33,699. Dividends on the Series A Preferred Stock accrue daily and are cumulative from, and
including, the date of issuance and are payable monthly. Dividends accrue at the annual rate of 10%, which is equivalent to $2.50
per annum per share, based on the $25.00 liquidation preference from, and including, the date of original issuance to, but not
including, September 30, 2023, or such other date fixed for redemption. There is no mandatory redemption of the Series A Preferred
Stock and the holders of the Series A Preferred Stock generally have no voting rights except for limited voting rights if dividends
payable on the outstanding Series A Preferred Stock are in arrears for eighteen or more consecutive or non-consecutive monthly
dividend periods. The shares of Series A Preferred Stock are only convertible under very limited circumstances.
On October 11, 2018,
we entered into a Securities Purchase Agreement with a certain institutional investor providing for the issuance of (i) an OID
promissory note in the principal face amount of $565,000 due December 8, 2018, for a purchase price of $510,000, and (ii) 400,000
shares of common stock.
Convertible
Notes Issued to an Institutional Investor
On May 15, 2018 (the
“May Closing Date”), we entered into a securities purchase agreement with an institutional investor (the “Investor”)
providing for the issuance of (i) a Senior Secured Convertible Promissory Note (the “May Convertible Note”) with a
principal face amount of $6,000,000 which May Convertible Note was, subject to adjustment, convertible into 8,000,000 shares (the
“May Conversion Shares”) of our common stock at $0.75 per share; (ii) a five-year warrant to purchase 1,111,111 shares
of our common stock (the “Series A Warrant Shares”) at an exercise price of $1.35 (the “Series A Warrant”);
(iii) a five-year warrant to purchase 1,724,138 shares of our Class B common stock (the “Series B Warrant Shares” and
with the Series A Warrant Shares, the “Warrant Shares”) at an exercise price of $0.87 per share (the “Series
B Warrant” and together with the Series A Warrant, the “Warrants”); and (iv) 344,828 shares of our common stock
(the “Commitment Shares”). We may prepay the full outstanding principal and accrued and unpaid interest at any time
without penalty. Pursuant to an amendment dated as of the August Closing Date to the May Convertible Note issued to the Investor
on the May Closing Date, we reduced the conversion price to $0.40 from $0.75 (resulting in the number of May Conversion Shares
increasing to 15,000,000), extended the maturity date from November 15, 2018 to October 31, 2019 and amended the amortization schedule
to provide for 14 monthly payments until the maturity date. On November 16, 2018, we further amended the amortization schedule
of the May Note. The November 16, 2018 amendment requires an initial payment of $877,793 on December 17, 2018, and commencing on
January 2, 2019, and continuing every month thereafter, a payment of $351,117 on the first business day of such month for a period
of eleven (11) months, and a final payment of $1,053,351 on December 31, 2019. As of December 4, 2018, the balance of the principal
amount, plus interest, of the May Convertible Note was $5,617,874, which may be convertible, subject to the terms and conditions
set forth therein, into 14,044,685 shares of our common stock.
On July 2, 2018 (the
“July Closing Date”), we entered into a securities purchase agreement with the Investor providing for the issuance
of (i) a Senior Secured Convertible Promissory Note (the “July Convertible Note” and with the May Convertible Note,
the “Convertible Notes”) with a principal face amount of $1,000,000 which July Convertible Note was, subject to adjustment,
convertible into 1,333,333 shares (the “July Conversion Shares”) of our common stock at $0.75 per share, (ii) an additional
400,000 Commitment Shares to be issued in connection with the May Convertible Note. The July Convertible Note matures on January
1, 2019 (the “Maturity Date”). Pursuant to a registration rights agreement entered into with the Investor on the July
Closing Date, we agreed to file a registration statement on Form S-3 to register the July Conversion Shares within twenty-one (21)
days of the Closing Date. We may prepay the full outstanding principal and accrued and unpaid interest at any time by paying additional
amounts on the principal and interest then outstanding. Pursuant to an amendment dated as of the August Closing Date to the July
Convertible Note issued to the Investor on the July Closing Date, we reduced the conversion price to $0.40 from $0.75 (resulting
in the number of July Conversion Shares increasing to 2,500,000). The July Conversion Shares will not be issued to the Investor
until we shall have obtained approval of the NYSE American and our stockholders for the foregoing transactions.
On August 31, 2018
(the “August Closing Date”), we entered into a securities purchase agreement with the Investor providing for the issuance
of a Senior Secured Convertible Promissory Note (the “August Convertible Note”) with a principal face amount of $2,000,000,
which August Convertible Note is, subject to adjustment, convertible into 5,000,000 shares (the “July Conversion Shares”)
of our common stock at $0.40 per share. Pursuant to a registration rights agreement entered into with the Investor on the Closing
Date, we agreed to file a registration statement on Form S-3 to register the August Conversion Shares within twenty-one (21) days
of the Closing Date, which date was amended on August 31, 2018 to state that the filing date for such registration statement is
21 days after the above referenced registration statement relating to the Convertible Notes has been declared effective. The August
Conversion Shares will not be issued to the Investor until we shall have obtained approval of the NYSE American and our stockholders
for the foregoing transactions. We may prepay the full outstanding principal and accrued and unpaid interest at any time by paying
additional amounts on the principal and interest then outstanding.
On September 25, 2018,
we entered into an agreement to amend the Convertible Notes, which provides for a mandatory prepayment in the event we receive
gross proceeds in the aggregate amount equal to or greater than $2,000,000 or in the event we receive funds pursuant to a repayment
from a related party of promissory notes issued to such entity. The amendment was conditional upon our using commercially reasonable
best efforts to cause the registration of the foregoing shares underlying the Convertible Notes, and the 400,000 shares of common
stock, to be declared effective within thirty (30) days of the effective date of the amendment.
Advances on
Future Receipts
During
the quarter ended March 31, 2018, we entered into a total of nine Agreements for the Purchase and Sale of Future Receipts (collectively,
the “Agreements on Future Receipts”) pursuant to which we sold up to $5,632,400 in our “future receipts”
for a purchase price in the amount of $4,100,000. The term “future receipts” means cash, check, ACH, credit card, debit
card, bank card, charge card or other form of monetary payment. The Agreements on Future Receipts have been personally guaranteed
by our Chief Executive Officer and in one instance has also been guaranteed by Philou Ventures, LLC (“Philou”). The
terms of the Agreements on Future Receipts are reflected below.
On January 10, 2018,
we entered into two Agreements for the Purchase and Sale of Future Receipts (together, the “Agreements”) with TVT Capital
LLC (“TVT”), pursuant to which Agreements we sold up to (i) $476,000 in our future receipts for a purchase price of
$350,000 (“Agreement No. 1”) and (ii) $1,700,000 in our future receipts for a purchase price of $1,250,000 (“Agreement
No. 2”). Under the terms of Agreement No. 1, we are obligated to pay $9,445 on a weekly basis until the purchase price of
$350,000 has been paid in full. In connection with entering into Agreement No. 1, we paid a $10,500 origination fee. Under the
terms of Agreement No. 2, we are obligated to pay $33,730 on a weekly basis until the purchase price of $1,250,000 has been paid
in full. In connection with entering into Agreement No. 2, we paid a $37,500 origination fee.
On January 18,
2018, we entered into a Future Receivables Sale Agreement with Libertas Funding LLC (“Libertas”), pursuant to which
we sold the rights of up to $488,000 in our future receivables for a purchase price of $400,000 (“Agreement No. 3”).
In connection with entering into Agreement No. 3, we paid a $12,000 origination fee. Under the terms of Agreement No. 3, beginning
in April 2018, we are obligated to pay $56,191 on a weekly basis until the purchase price of $488,000 has been paid in full.
On
January 25, 2018, we entered into two agreements for the Purchase and Sale of Future Receipts with TVT, pursuant to which we sold
up to (i) $562,125 in future receipts of our company to TVT for a purchase price of $375,000 (“Agreement No. 4”) and
(ii) $337,275 in our future receipts for a purchase price of $225,000 (“Agreement No. 5”). Under the terms of Agreement
No. 4, we are obligated to pay $22,310 on a weekly basis until the purchase amount of $562,125 has been paid in full. In connection
with entering into Agreement No. 4, we paid an origination fee in the amount of $13,545. Agreement No. 4 also includes
a warrant to purchase 56,250 shares of our common stock at an exercise price of $2.25 per share and a warrant to purchase 37,500
shares of our common stock at an exercise price of $2.50 per share. Under the terms of Agreement No. 5, we are obligated to pay
$13,385 on a weekly basis until the purchase amount of $337,275 has been paid in full. In connection with entering into Agreement
No.5, we paid an origination fee in the amount of $6,750. Agreement No. 5 also includes warrants to purchase 56,250 shares of our
common stock at an exercise price of $2.25 per share.
On
January 25, 2018, we entered into a Future Receivables Sale Agreement with Libertas, pursuant to which we sold up to $118,000 in
our future receivables to Libertas for a purchase price of $100,000 (“Agreement No. 6”). We are obligated to pay $14,048
on a weekly basis until the purchase amount of $118000 has been paid in full. In connection with entering into Agreement No. 6,
Libertas received an additional discount for due diligence in the amount of $3,000. Agreement No. 6 also includes warrants to purchase
125,000 shares of our common stock at an exercise price of $2.50 per share. Agreement No. 6 has been guaranteed by Philou.
On
March 23, 2018, we entered into two agreements for the purchase and sale of future receipts with C6 Capital, LLC (“C6”),
pursuant to which we sold up to (i) $979,300 in future receipts of our company to TVT for a purchase price of $700,000 (“Agreement
No. 7”) and (ii) $419,700 in future receipts of our company for a purchase price of $300,000 (“Agreement No. 8”).
Under the terms of Agreement No. 7, we are obligated to pay $25,770 on a weekly basis until the purchase amount of $979,300 has
been paid in full. In connection with entering into Agreement No.7, we paid an origination fee in the amount of $14,000. Under
the terms of Agreement No. 8, we are obligated to pay $11,045 on a weekly basis until the purchase amount of $419,700 has been
paid in full. In connection with entering into Agreement No. 8, we paid an origination fee in the amount of $6,000.
On
March 27, 2018, we entered into a future receivables sale agreement with Libertas, pursuant to which we sold up to $552,000 in
future receivables to Libertas for a purchase price of $400,000 (“Agreement No. 9”). In connection with the entrance
into Agreement No. 9 we paid an origination fee in the amount of $12,000. Under the terms of Agreement No. 9, we are obligated
to pay $13,143 on a weekly basis until the purchase amount of $552,000 has been paid in full. As additional consideration, we also
issued to Libertas 150,000 shares of our common stock.
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
under the section captioned “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December
31, 2017, which is incorporated by reference in this prospectus, and in the other 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 below entitled “Forward-Looking Statements.”
Risks Related to Our Company
We have historically incurred significant
losses and our financial situation creates doubt whether we will continue as a going concern
.
We have historically
experienced operating and net losses and anticipate continuing to experience such losses in the future. For the years ended December
31, 2017 and 2016, we had an operating loss of approximately $5,983,000 and $1,219,000 and net losses of approximately $10,895,000
and $1,122,000, respectively. As of December 31, 2017, we had a working capital deficiency of approximately $2,235,000 and as of
September 30, 2018, we had a working capital deficiency of approximately $9,744,000. There are no assurances that we will be able
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 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. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working
capital is not available we may be forced to discontinue operations, which would cause investors to lose their entire investment.
We
expect to continue to incur losses for the foreseeable future and need to raise additional capital to continue business development
initiatives and to support our working capital requirements. For example, in March 2017, we were awarded a 3-year, $50 million
purchase order by MTIX Ltd. (“MTIX”) to manufacture, install and service the Multiplex Laser Surface Enhancement (“MLSE”)
plasma-laser system. We believe that the MLSE purchase order will be a source of revenue and generate significant cash flows for
us. 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. As a result of these financing uncertainties, during
the third quarter ended September 30, 2017, we recognized that our dependence on ongoing capital requirements to fund our operations
raise substantial doubt about our ability to continue as a going concern. Our ongoing capital requirements have only increased
since then, meaning that substantial doubt about our ability to continue as a going concern remains and will likely do so for the
foreseeable future.
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.
Our limited operating history makes
it difficult to evaluate our future business prospects and to make decisions based on of 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.
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 are a holding company whose subsidiaries
are given 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.
Our independent auditors have expressed doubt about our ability
to continue as a going concern. If we do not continue as a going concern, investors will lose their entire investment
.
In its report on our
financial statements included in this prospectus, our independent auditors have expressed doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is an issue raised as a result of ongoing operating losses and a lack
of financing commitments then in place to meet expected cash requirements. Our ability to continue as a going concern is subject
to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding
from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible.
If we do not continue as a going concern, investors will lose their entire investment.
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 Corp.
(“Microphase”) and on May 23, 2018 we acquired Enertec Systems 2001 Ltd. (“Enertec”). Our strategy and
business plan is dependent on our ability to successfully integrate Microphase’s, Enertec’s and our other acquisition’s
operations. In addition, while we are based in Fremont, CA, Microphase’s operations are located in Shelton, Connecticut,
Enertec’s operations are located in Karmiel, Israel and Digital Power Limited’s (doing business as Gresham Power) 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.
If we make any additional acquisitions, they may disrupt
or have a negative impact on our business.
We have plans to make
additional acquisitions beyond Microphase. For instance, we announced the pending acquisition of Enertec. on January 2, 2018, which
closed on May 23, 2018. 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:
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difficulty of integrating acquired products, services or operations;
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potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
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difficulty of incorporating acquired rights or products into our existing business;
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difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such
facilities;
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difficulties in maintaining uniform standards, controls, procedures and policies;
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potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
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potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products
to new and existing customers;
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effect of any government regulations which relate to the business acquired; and
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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.
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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.
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 also experienced complications reporting as a result of material weaknesses which resulted in the restatement
of our Form 10-Q for the quarterly period ended June 30, 2017, which was filed with the Securities and Exchange Commission (“Commission”)
on August 21, 2017, and amended on November 14, 2017. 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 weaknesses which have caused management to conclude that as of March 31,
2018 our internal controls over financial reporting (“ICFR”) were not effective at the reasonable assurance level:
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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 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.
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We have inadequate controls to ensure that information necessary to properly record transactions
is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting. Management
evaluated the impact of the lack of timely communication between non–financial and financial personnel on our assessment
of our reporting controls and procedures and has concluded that the control deficiency represented a material weakness.
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Planned Remediation
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.
During
January 2018 we hired a new Chief Financial Officer and engaged the services of a financial accounting advisory firm. During September
2018 we hired a Chief Accounting Officer to 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. Further, until we 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,
• 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 improve and simplify our internal processes and implement enhanced controls, as discussed above, to address
the material weaknesses in our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls
and procedures.
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 are annually reviewing and evaluating
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 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 competitive. 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 make 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 we
are unable to achieve the cost efficiencies or reduction of losses as anticipated.
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.
A principal stockholder has significant influence over us.
Philou beneficially owns
approximately 7.99% of our currently outstanding Common Stock as of December 4, 2018. As a result, it will be able to
exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including
the election of directors, any merger, consolidation or sale of all or substantially all of our assets, and any other significant
corporate transaction. Its interests may not always coincide with those of our other stockholders. Ault & Company, the manager
of Philou, beneficially owns an additional approximate 0.23% of our currently outstanding Common Stock as of December 4, 2018.
Philou has certain rights to maintain its ownership interest
in us
In connection with
entering into a Series B Preferred Stock purchase agreement with Philou, we granted the right to Philou to participate in future
offering under substantially the same term of such offerings in order to allow Philou to maintain its ownership interest. If exercised
by Philou, this contractual right granted to it has the effect of allowing Philou to maintain its interest in us and dilute existing
shareholders’ ownership interests.
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 Chief Executive Officer, William B. Horne, our Chief Financial Officer, Amos Kohn, our President and
the Chief Executive Officer of Coolisys, one of our principal subsidiaries 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. Horne and Kohn, we have only entered into an independent
contractor agreement with Mr. Ault. Although we may enter into employment agreements with Mr. Ault and 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 Chief Executive Officer, 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.
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.
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 of 1940, as amended (the “1940 Act”), however, a company may be deemed
an investment company under section 3(a)(1)(C) of the 1940 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.
We have commenced digital
asset mining, the output of which is cryptocurrencies, which the Commission 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 1940 Act. One such exclusion, Rule 3a-2 under the 1940 Act, allows an inadvertent investment company a grace period of one
year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s
total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes to acquire investment
securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and
cash items) on an unconsolidated basis. We are putting in place policies that we expect will work to keep the investment securities
held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our investment securities
or seeking a no-action letter from the Commission if we are unable to acquire sufficient assets or liquidate sufficient investment
securities in a timely manner.
As Rule 3a-2 is available
to a company no more than once every three years, and assuming no other exclusion were available to us, we would have to keep within
the 40% limit for at least three years after we cease being an inadvertent investment company. This may limit our ability to make
certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we
do not intend to become an investment company engaged in the business of investing and trading securities.
Classification as an
investment company under the 1940 Act requires registration with the Commission. If an investment company fails to register, it
would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive
and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a
registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions
with affiliated persons and portfolio composition, and would need to file reports under the 1940 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 1940 Act.
U.S. companies that
have more than 100 shareholders 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 1940 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 1940 Act.
If bitcoin and other virtual currencies were to be deemed securities for purposes of the 1940 Act, or if we were deemed to own
but not operate one or more of our other subsidiaries, we would have difficulty avoiding classification and regulation as an investment
company.
If we were deemed to
be, and were required to register as, an investment company, we would be forced to comply with substantive requirements under the
1940 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 1940 Act, our operations would significantly change, and we would be prevented from successfully
executing our business strategy. To avoid regulation under the 1940 Act and related rules promulgated by the Commission,
we could need to sell bitcoin and other assets which we would otherwise want to retain and could be unable to sell assets which
we would otherwise want to sell. In addition, we could be forced to acquire additional, or retain existing, income-generating
or loss-generating assets which we would not otherwise have acquired or retained and could need to forgo opportunities to acquire
bitcoin and other assets that would benefit our business. If we were forced to sell, buy or retain assets in this manner,
we could be prevented from successfully executing our business strategy.
Securitization of our assets subjects us to various risks
.
We may securitize assets
to generate cash for funding new investments. We refer to the term securitize to describe a form of leverage under which a company
(sometimes referred to as an “originator” or “sponsor”) transfers income producing assets to a single-purpose,
bankruptcy-remote subsidiary (also referred to as a “special purpose entity” or SPE), which is established solely for
the purpose of holding such assets and entering into a structured finance transaction. The SPE would then issue notes secured by
such assets. The special purpose entity may issue the notes in the capital markets either publicly or privately to a variety of
investors, including banks, non-bank financial institutions and other investors. There may be a single class of notes or multiple
classes of notes, the most senior of which carries less credit risk and the most junior of which may carry substantially the same
credit risk as the equity of the SPE.
An important aspect
of most debt securitization transactions is that the sale and/or contribution of assets into the SPE be considered a true sale
and/or contribution for accounting purposes and that a reviewing court would not consolidate the SPE with the operations of the
originator in the event of the originator's bankruptcy based on equitable principles. Viewed as a whole, a debt securitization
seeks to lower risk to the note purchasers by isolating the assets collateralizing the securitization in an SPE that is not subject
to the credit and bankruptcy risks of the originator. As a result of this perceived reduction of risk, debt securitization transactions
frequently achieve lower overall leverage costs for originators as compared to traditional secured lending transactions.
In accordance with
the above description, to securitize loans, we may create a wholly owned subsidiary and contribute a pool of our assets to such
subsidiary. The SPE may be funded with, among other things, whole loans or interests from other pools and such loans may or may
not be rated. The SPE would then sell its notes to purchasers whom we would expect to be willing to accept a lower interest rate
and the absence of any recourse against us to invest in a pool of income producing assets to which none of our creditors would
have access. We would retain all or a portion of the equity in the SPE. An inability to successfully securitize portions of our
portfolio or otherwise leverage our portfolio through secured and unsecured borrowings could limit our ability to grow our business
and fully execute our business strategy, and could decrease our earnings, if any. However, the successful securitization of portions
of our portfolio exposes us to a risk of loss for the equity we retain in the SPE and might expose us to greater risk on our remaining
portfolio because the assets we retain may tend to be those that are riskier and more likely to generate losses. A successful securitization
may also impose financial and operating covenants that restrict our business activities and may include limitations that could
hinder our ability to finance additional loans and investments. The 1940 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, 2017,
we had Federal net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $12.0 million, expiring
through 2037. 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.
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.
Recently enacted U.S.
tax reform legislation known colloquially as the “Tax Cuts and Jobs Act,” among other things, makes significant changes
to the rules applicable to the taxation of corporations, such as changing the corporate tax rate to a flat 21% rate, modifying
the rules regarding limitations on certain deductions for executive compensation, introducing a capital investment deduction in
certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain
net operating losses, implementing a minimum tax on the “global intangible low-taxed income” of a “United States
shareholder” of a “controlled foreign corporation,” modifying certain rules applicable to United States shareholders
of controlled foreign corporations, imposing a deemed repatriation tax on certain earnings and adding certain anti-base erosion
rules. We are currently in the process of analyzing the effects of this new legislation on us and at this time the ultimate
outcome of the new legislation on our business and financial condition is uncertain. It is possible that the application
of these new rules may have a material and adverse impact on our operating results, cash flows and financial condition.
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.
Failure of our information technology
infrastructure to operate effectively could adversely affect our business.
We depend heavily on
information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure,
the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise
carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur
significant expense to remediate.
We are subject to certain governmental
regulatory restrictions relating to our international sales.
Some of our products
are subject to International Traffic In Arms Regulation (“ITAR”), which are interpreted, enforced and administered
by the U.S. Department of State. ITAR regulation controls not only the export, import and trade of certain products specifically
designed, modified, configured or adapted for military systems, but also the export of related technical data and defense services
as well as foreign production. Any delays in obtaining the required export, import or trade licenses for products subject to ITAR
regulation and rules could have a material adverse effect on our business, financial condition, and/or operating results. In addition,
changes in 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 34.8% and 40.2% of net revenues for the years ended December 31, 2017 and 2016, 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, DPL, 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.
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 and entertainment
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:
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The introduction and market acceptance of new technologies, products and services;
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New competitors and new forms of competition;
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The size and timing of customer orders (for retail distributed physical product);
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The size and timing of capital expenditures by our customers;
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Adverse changes in the credit quality of our customers and suppliers;
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Changes in the pricing policies of, or the introduction of, new products and services by us or our competitors;
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Changes in the terms of our contracts with our customers or suppliers;
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The availability of products from our suppliers; and
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Variations in product costs and the mix of products sold.
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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 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.
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.
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 – Super
Crypto Mining
We intend to develop an online cloud
mining platform which may subject us to additional liabilities from our customers.
We intend to develop
and offer a cloud mining platform to customers who prefer not to directly acquire and maintain crypto mining hardware. To date,
we have offered the cloud mining platform to selected customers prior to offering the platform to the general public. The success
of this business will be largely dependent on achieving sustainable revenues that are dependent on prices of the various currencies
and controlling costs, which are primarily power and computer hardware. In addition, through our management and administration
of crypto mining equipment on behalf of our customers, we may become subject to actions from our customers seeking to recover for
liabilities arising from, among other matters:
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erroneously accounting for proceeds from crypto mining activities;
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power, network or technology failures which prevent our miners from operating efficiently;
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delays in processing payments at times when there are significant fluctuations in the price of the cryptocurrencies; and
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hackers or other malicious groups or organizations targeting and attempting to interfere with our miners which could negatively
affect the operations of such miners.
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We may lose access to digital tokens
and any cryptocurrency due to loss of private key(s), custodial error, or purchaser error.
A private key, or a
combination of private keys, is necessary to control and dispose of cryptocurrency stored in a digital wallet or vault. Accordingly,
loss of requisite private key(s) associated with a digital wallet or vault storing cryptocurrency will result in loss of such cryptocurrency.
Moreover, any third party that gains access to such private key(s), including by gaining access to login credentials of a digital
wallet or secure services that we use, may be able to misappropriate any digital token or cryptocurrency held by us. Any errors
or malfunctions caused by or otherwise related to the digital wallet that we choose to receive and store cryptocurrency, including
our failure to properly maintain or use such digital wallet or secure service, may also result in the loss of any cryptocurrency
that we hold. Additionally, any failure on our part to follow precisely the procedures for buying and receiving cryptocurrency,
including, for instance, if it provides the wrong address for receiving cryptocurrency, may result in the loss of any cryptocurrency
held or purchased by us.
Hackers or other malicious groups or
organizations may attempt to interfere with end users of digital tokens, or cryptocurrency, in a variety of ways.
Hackers or other malicious
groups or organizations may target and attempt to interfere with end users of digital tokens, or cryptocurrency, in a variety of
ways, including, but not limited to, end user attacks such as malware attacks, denial of service attacks, consensus-based attacks,
Sybil attacks, smurfing and spoofing. Furthermore, although we utilize a closed system to mine cryptocurrency, there is a risk
that a third party or one of our employees may intentionally or unintentionally introduce weaknesses into the core infrastructure,
which could negatively affect us and any cryptocurrency with which we are involved.
We have discretion over the maintenance,
storage and transmission of its cryptocurrency holdings. Currently investments and holdings in cryptocurrencies by our company
are uninsured and, as a result, we may lose all of our money invested in cryptocurrencies without any recourse.
Unlike bank accounts
or accounts at some other financial institutions, cryptocurrencies are generally uninsured unless an investor purchases private
insurance to insure them or holds them with a vendor which provides insurance. Thus, in the event of loss or loss of utility value,
there is no public insurer, such as the Securities Investor Protection Corporation (“SIPC”) or the Federal Deposit
Insurance Corporation (“FDIC”), to offer recourse to any investor, including our company, unless covered independently
by private insurance arranged by us. Further, we have wide discretion over the storage of its cryptocurrency holdings. We intend
to use various third party wallet providers, trust companies or others to hold its cryptocurrency holdings. We may have a high
concentration of its cryptocurrency holdings in one location or with one third party wallet provider, which may be prone to losses
arising out of hacking, loss of passwords, compromised access credentials, malware, cyber-attacks or other factors. We may not
do detailed diligence on third party wallet providers and, as a result, may not be aware of all security vulnerabilities and risks.
Certain third party wallet providers may not indemnify us against any losses thereby hurting our ability to recover losses from
third party wallet providers. The systems in place to ensure the security of our company’s cryptocurrency holdings may not
prevent the improper access to, damage or theft of our company’s holdings in cryptocurrencies. Further, a loss due to the
storage of our company’s cryptocurrencies could harm our reputation or result in the loss of some or all of our company’s
cryptocurrencies, including those assets held on behalf of customers for our online cloud mining platform.
The regulatory status of cryptocurrency
and distributed ledger technology is unclear or unsettled in many jurisdictions and it is difficult to predict the impact future
regulation may have on either.
The regulatory status
of cryptocurrency and distributed ledger technology is unclear or unsettled in many jurisdictions. It is difficult to predict how
or whether regulatory agencies may apply existing regulation with respect to such technology and its applications. It is likewise
difficult to predict how or whether legislatures or regulatory agencies may implement changes to law and regulation affecting distributed
ledger technology and its applications, including applicable cryptocurrency protocols. Regulatory actions could negatively
impact any cryptocurrency in various ways, including, for purposes of illustration only, through a determination that cryptocurrency
are a regulated financial instrument that requires registration or licensing.
The tax characterization of cryptocurrency is uncertain.
Cryptocurrency holders
may be required to pay taxes associated with the transactions contemplated herein, whether in the United States or in their home
countries. It is the sole responsibility of cryptocurrency holders to comply with the tax laws of the United States and other jurisdictions
applicable to them and pay all relevant taxes. The sale or other exchange of cryptocurrency, or the use of cryptocurrency to pay
for goods or services, or holding cryptocurrency as an investment, generally has tax consequences that could result in tax liability.
In 2014, the Internal Revenue Service issued guidance on the tax treatment of transactions using cryptocurrency, such as Bitcoins
or other similar currencies.
The transfer of any cryptocurrency may
be restricted, which may adversely affect its liquidity and the price at which it may be sold.
Cryptocurrency has
not been, and will not be, registered under the Securities Act or the securities laws of any other jurisdiction and, unless so
registered, may not be offered or sold except pursuant to an exemption from, or a transaction not subject to, the registration
requirements of the Securities Act and any other applicable laws and regulations. These restrictions may limit the ability of investors
to resell cryptocurrency. It is the responsibility of any holder of a digital token or a cryptocurrency to ensure that all offers
and sales of cryptocurrency within the United States and other jurisdictions comply with all applicable laws and regulations.
Cryptocurrency confers no governance rights in any entity.
Because cryptocurrencies
confer no governance rights of any kind with respect to any entity with which such digital token or cryptocurrency may be associated,
all decisions involving a related company will be made by the management and/or stockholders of such company at their sole discretion.
These decisions could adversely affect the utility or value of any applicable digital token or cryptocurrency.
There are unanticipated and unknown
risks in buying and holding cryptocurrency and/or cryptographic tokens.
Digital tokens and
various cryptocurrencies are a relatively new and untested technology. In addition to the risks specified in these risk factors,
there are other risks associated with either our company’s or a holder’s purchase, holding and use of digital tokens
and cryptocurrency cannot be anticipated. Such risks may further materialize as unanticipated variations or combinations of the
risks discussed in this prospectus supplement.
Our decision to deal in cryptocurrencies,
such as bitcoins, may subject us to exchange risk and additional tax and regulatory requirements.
Bitcoin is not considered
legal tender or backed by any government, and it has experienced price volatility, technological glitches and various law enforcement
and regulatory interventions. The use of cryptocurrencies such as bitcoin has been prohibited or effectively prohibited in some
countries. If we fail to comply with regulations or prohibitions applicable to us, we could face regulatory or other enforcement
actions and potential fines and other consequences. From time to time, we may hold bitcoin and other cryptocurrencies directly,
and we have exchange rate risk on the amounts we hold as well as the risks that regulatory or other developments may adversely
affect the value of the cryptocurrencies we hold. The uncertainties regarding legal and regulatory requirements relating to cryptocurrencies
or transactions utilizing cryptocurrencies, as well as potential accounting and tax issues, or other requirements relating to cryptocurrencies
could have a material adverse effect on our business.
Various cryptocurrencies facilitate
the use of anonymous transactions which could adversely affect us.
Although bitcoin and
other cryptocurrency transaction details are logged on the blockchain, a buyer or seller of bitcoin may never know to whom the
public key belongs or the true identity of the party with whom it is transacting. Some public key addresses are randomized sequences
of alphanumeric characters that, standing alone, do not provide sufficient information to identify users. Transacting with a counterparty
that is unknown to us, such as a party making illicit use of cryptocurrencies, could have an adverse effect on us or our reputation.
Our investment in Super Crypto Mining,
Inc. may expose us to risks under laws and regulations with which we do not have significant experience.
In 2017, we established
our cryptocurrency business, which is pursuing a variety of digital currency. We anticipate mining the top ten cryptocurrencies
for our own account. These include Bitcoin, Bitcoin Cash, Litecoin and Ethereum, along with other currencies that we consider to
be in the top ten by market capitalization. Virtually every state in the U.S. regulates money transmitters and money services businesses.
In some states the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in
other states it is not clear whether or how the existing laws and regulations apply to digital currency activities. Further, U.S.
federal law requires registration of most such businesses with the Financial Crimes Enforcement Network (“FinCEN”).
These licenses and registrations subject companies to various anti-money laundering, know-your-customer, record-keeping, reporting
and capital and bonding requirements, limitations on the investment of customer funds, and inspection by state and federal regulatory
agencies. Under U.S. federal law, it is a crime for a person, entity or business that is required to be registered with FinCEN
or licensed in any state to fail to do so, even if the person, entity or business was unaware of the licensing requirement. Further,
under U.S. federal law, anyone who owns all or part of an unlicensed money transmitting business is subject to civil and criminal
penalties. The business in which we have invested has represented to us that it has not taken any action that could subject it
to registration with FinCEN or to the licensing requirements in any state and has agreed that it will not do so until it has become
properly licensed in all required states and registered with FinCEN. However, if the business makes an error, even inadvertently,
we could be subject to potential civil and criminal penalties as a result. Any such penalties, or even the allegation of criminal
activities, could have a material adverse effect on us and our business. Further, all of our foreign business activities expose
us to a variety of risks, including risks under the Foreign Corrupt Practices Act.
U.S. and international regulatory changes
or actions may restrict the use of or impose heightened regulatory burdens on cryptocurrency or the operation of cryptocurrency
network based on currency, securities, or commodities regulations in a manner that adversely affects an investment in us.
Until recently, little
or no regulatory attention has been directed toward cryptocurrency and the cryptocurrency networks by U.S. federal and state governments,
foreign governments, and self-regulatory agencies. As cryptocurrency has grown in popularity and in market size, the Federal Reserve
Board, U.S. Congress, and certain U.S. agencies (e.g., FinCEN and the Federal Bureau of Investigation) have begun to examine the
operations of cryptocurrency networks, cryptocurrency users, and cryptocurrency exchange markets. Local state regulators such as
the California Department of Financial Institutions and the New York State Department of Financial Services have also initiated
examinations of Bitcoins, the Bitcoin Network, and the regulation thereof. Additionally, a U.S. federal magistrate judge in the
U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is a currency or form of money,” two
CFTC commissioners publicly expressed a belief that derivatives based on Bitcoins are subject to the same regulation as those based
on commodities, and the IRS released guidance treating cryptocurrency as property that is not currency for U.S. federal income
tax purposes, although there is no indication yet whether other courts or federal or state regulators will follow these asset classifications.
There is a possibility of future regulatory change altering, perhaps to a material extent, the nature of an investment in us or
our ability to continue to operate.
Currently, neither
the SEC nor the CFTC has formally asserted regulatory authority over cryptocurrency, cryptocurrency networks, or cryptocurrency
trading and ownership, though in testimony before the U.S. Senate Committee on Agriculture, Nutrition and Forestry on December
10, 2014, CFTC Chairman Timothy Massad stated that the CFTC believed it had jurisdiction over derivative instruments such as futures
and swaps based on digital currencies. On July 25, 2017, the SEC issued an investigative report, stating that offers and sales
of digital assets by “virtual” organizations using distributed ledger or cryptocurrency technology (i.e., Initial
Coin Offerings or Token Sales) are subject to the requirements of the federal securities laws. Furthermore, the SEC has raised
concerns with instances of public companies changing their business models to reflect a focus on cryptocurrency or blockchain technology
and is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise
of distributed ledger technology and whether the disclosures comply with the federal securities laws, particularly in the context
of a securities offering, and in a few instances halted the trading of companies. To the extent that Bitcoins, Ethereum, or Litecoins,
themselves are determined to be a security, commodity future or other regulated asset, or to the extent that a US or foreign government
or quasi-governmental agency exerts regulatory authority over the Bitcoin, Ethereum, or Litecoin Networks, or cryptocurrency trading
and ownership, trading or ownership in cryptocurrency may be adversely affected, which could adversely affect an investment in
our company.
To the extent that
future regulatory actions or policies limit the ability to exchange cryptocurrency or utilize them for payments, the demand for
cryptocurrency will be reduced. Furthermore, regulatory actions may limit the ability of end-users to convert cryptocurrency into
fiat currency (e.g., U.S. Dollars) or use cryptocurrency to pay for goods and services. Such regulatory actions or policies could
adversely affect an investment in us.
Cryptocurrency currently
faces an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as the European
Union, China and Russia. While certain governments such as Germany—where the Ministry of Finance has declared Bitcoins to
be “Rechnungseinheiten” (a form of private money that is recognized as a unit of account, but not recognized in the
same manner as fiat currency) — have issued guidance as to how to treat bitcoins and/or other cryptocurrencies, most regulatory
bodies have not yet issued official statements regarding intention to regulate or determinations on regulation of cryptocurrency,
the cryptocurrency networks, and cryptocurrency users. Among those for which preliminary guidance has been issued in some form,
Canada and Taiwan have labeled cryptocurrency as a digital or virtual currency, distinct from fiat currency, while Sweden and Norway
are among those to categorize cryptocurrency as a form of virtual asset or commodity. In China, authorities have recently banned
use of bitcoins and/or other cryptocurrencies and ordered Beijing-based cryptocurrency exchanges to cease trading and immediately
notify users of their closures. Similarly, Russia has indicated an intention to ban use of bitcoins and/or other cryptocurrencies
and Russia’s Central Bank stated that at this stage they will not approve any cryptocurrency trading on any official exchange,
nor will it approve the use of the technology for infrastructure purposes. In May 2014, the Central Bank of Bolivia banned the
use of Bitcoins as a means of payment. In the summer and fall of 2014, Ecuador announced plans for its own state-backed electronic
money, while passing legislation that reportedly prohibits the use of decentralized digital currencies. Conversely, regulatory
bodies in some countries such as India and Switzerland have declined to exercise regulatory authority when afforded the opportunity.
Various foreign jurisdictions may, in the near future, adopt laws, regulations, or directives that affect cryptocurrency networks
and its users, particularly cryptocurrency exchanges and service providers that fall within such jurisdictions’ regulatory
scope. Other countries such as Malaysia and Australia have been considering regulation, classification, and potential bans. Such
laws, regulations, or directives may conflict with those of the United States and may negatively impact the acceptance of cryptocurrency
by users, merchants, and service providers outside of the United States and may, therefore, impede the growth of the cryptocurrency
economy.
The effect of any future regulatory change
on our company or cryptocurrency is impossible to predict, but such change could be substantial and adverse to us and could adversely
affect an investment in us.
It may be illegal now, or in the future,
to acquire, own, hold, sell or use cryptocurrency in one or more countries, and ownership of, holding or trading in or company’s
securities may also be considered illegal and subject to sanction.
Although currently
cryptocurrency is not regulated or are lightly regulated in most countries, including the United States, one or more countries
may take regulatory actions in the future that severely restricts the right to acquire, own, hold, sell or use cryptocurrency or
to exchange cryptocurrency for fiat currency. Such restrictions may adversely affect an investment in our company.
Cryptocurrency transactions are irrevocable
and stolen or incorrectly transferred cryptocurrency may be irretrievable. As a result, any incorrectly executed cryptocurrency
transactions could render company liable to lawsuits or criminal charges to the extent company facilitates bad transactions, and
thus, adversely affect an investment in us.
Cryptocurrency transactions
are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction
or, in theory, control or consent of a majority of the processing power on the cryptocurrency network. Once a transaction has been
verified and recorded in a block that is added to the blockchain, an incorrect transfer of cryptocurrency or a theft of cryptocurrency
generally will not be reversible and we may not be capable of seeking compensation for any such transfer or theft. Although our
transfers of cryptocurrency will regularly be made to or from vendors, consultants, services providers, etc. it is possible that,
through computer or human error, or through theft or criminal action, our cryptocurrency could be transferred from us in incorrect
amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective transaction with such third-party
or are incapable of identifying the third-party that has received our cryptocurrency through error or theft, we will be unable
to revert or otherwise recover incorrectly transferred company cryptocurrency. To the extent that we are unable to seek redress
for such error or theft, such loss could adversely affect an investment in us. In addition, incorrectly executed cryptocurrency
transactions could render company liable to lawsuits or criminal charges to the extent company facilitates bad transactions, and
thus, adversely affect an investment in us.
The cryptocurrency exchanges on which
cryptocurrencies trade are relatively new and, in most cases, largely unregulated and may therefore be more exposed to fraud and
failure than established, regulated exchanges for other products. To the extent that the cryptocurrency exchanges representing
a substantial portion of the volume in cryptocurrency trading are involved in fraud or experience security failures or other operational
issues, such cryptocurrency exchanges’ failures may result in a reduction in the price of cryptocurrency and can adversely
affect an investment in us.
The cryptocurrency
exchanges on which cryptocurrency trade are new and, in most cases, largely unregulated. Furthermore, many cryptocurrency 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 may lose confidence in, or may experience problems relating to, cryptocurrency
exchanges, including prominent exchanges handling a significant portion of the volume of cryptocurrency trading. These potential
consequences of a cryptocurrency exchange’s failure could reduce the demand and use of cryptocurrency, reduce the value of
cryptocurrency, and/or adversely affect an investment in us.
In the past, many cryptocurrency
exchanges have been closed due to fraud, failure, or security breaches. In many of these instances, the customers of such cryptocurrency
exchanges were not compensated or made whole for the partial or complete losses of their account balances in such cryptocurrency
exchanges. While smaller cryptocurrency exchanges are less likely to have the infrastructure and capitalization that make larger
cryptocurrency exchanges more stable, larger cryptocurrency exchanges are more likely to be appealing targets for hackers and “malware”
(i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information, or gain access to
private computer systems).
If the awards of cryptocurrency for
solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may respond
in a way that reduces confidence in the cryptocurrency networks, which could adversely affect an investment in our company.
If the award of new
cryptocurrency for solving blocks declines and transaction fees are not sufficiently high, miners may not have an adequate incentive
to continue mining cryptocurrency and may cease their crypto mining operations. Miners ceasing operations would reduce the
collective processing power on the cryptocurrency networks, which would adversely affect the confirmation process for transactions
(i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty
for block solutions) and make the cryptocurrency networks more vulnerable to a malicious actor or botnet obtaining control in excess
of 50 percent of the processing power on the cryptocurrency networks. Any reduction in confidence in the confirmation process or
processing power of cryptocurrency networks may adversely impact Super Crypto Mining, Inc., as well as an investment in us.
In addition, to the
extent to which the value of cryptocurrency mined by a professionalized crypto mining operation exceeds the allocable capital and
operating costs determines the profit margin of such operation. A professionalized crypto mining operation may be more likely to
sell a higher percentage of its newly mined cryptocurrency rapidly if it is operating at a low profit margin—and it may partially
or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage of the
new cryptocurrency mined each day will be sold into the cryptocurrency exchange markets more rapidly, thereby reducing cryptocurrency
prices. Lower cryptocurrency prices will result in further tightening of profit margins, particularly for professionalized crypto
mining operations with higher costs and more limited capital reserves, creating a network effect that may further reduce the price
of cryptocurrency until crypto mining operations with higher operating costs become unprofitable and remove mining power from the
cryptocurrency networks. The network effect of reduced profit margins resulting in greater sales of newly mined cryptocurrency
could result in a reduction in the price of cryptocurrency that could adversely impact Super Crypto Mining, Inc., as well as an
investment in our company.
To the extent that any miners cease
to record transactions in solved blocks, transactions that do not include the payment of a transaction fee will not be recorded
on the blockchain until a block is solved by a miner who does not require the payment of transaction fees. Any widespread delays
in the recording of transactions could result in a loss of confidence in the cryptocurrency networks, which could adversely impact
an investment in us.
To the extent that
any miners cease to record transactions in solved blocks, such transactions will not be recorded on the blockchain. Currently,
there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however, to the extent
that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing cryptocurrency users
to pay transaction fees as a substitute for or in addition to the award of new cryptocurrency upon the solving of a block), actions
of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the blockchain.
Any systemic delays in the recording and confirmation of transactions on the blockchain could result in greater exposure to double-spending
transactions and a loss of confidence in cryptocurrency networks, which could adversely impact an investment in our company.
Intellectual property rights claims may adversely affect
the operation of cryptocurrency networks.
Third parties may assert
intellectual property claims relating to the holding and transfer of digital currencies and their source code. Regardless of the
merit of any intellectual property or other legal action, any threatened action that reduces confidence in cryptocurrency networks’
long-term viability or the ability of end-users to hold and transfer cryptocurrency may adversely affect an investment in us. Additionally,
a meritorious intellectual property claim could prevent us and other end-users from accessing cryptocurrency networks or holding
or transferring their cryptocurrency. As a result, an intellectual property claim against us or other large cryptocurrency network
participants could adversely affect an investment in us.
Currently, there is relatively small
use of cryptocurrency in the marketplace in comparison to relatively large use by speculators, thus contributing to price volatility
that could adversely affect an investment in us.
As relatively new products
and technologies, cryptocurrency has only recently become widely accepted as a means of payment for goods and services, and use
of cryptocurrency by remains limited. Conversely, a significant portion of cryptocurrency demand is generated by speculators and
investors seeking to profit from the short- or long-term holding of cryptocurrency. A lack of expansion by cryptocurrency into
our markets, or a contraction of such use, may result in increased volatility or a reduction in the price of cryptocurrencies,
either of which could adversely impact an investment in us.
The acceptance of Bitcoin Network, Ethereum
Network, or Litecoin Network software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners
in the respective networks could result in a “fork” in the blockchain, resulting in the operation of two separate networks
until such time as the forked blockchains are merged. The temporary or permanent existence of forked blockchains could adversely
impact Super Crypto Mining, Inc. as well as an investment in our company.
Bitcoin, Ethereum,
and Litecoin are open source projects and, although there is an influential group of leaders in the cryptocurrency community, there
is no official developer or group of developers that formally controls the Bitcoin, Ethereum, or Litecoin Networks. Any individual
can download the particular cryptocurrency network software and make any desired modifications, which are proposed to users and
miners on the respective network through software downloads and upgrades. A substantial majority of miners and the particular cryptocurrency
users must consent to those software modifications by downloading the altered software or upgrade that implements the changes;
otherwise, the changes do not become a part of the cryptocurrency network. Generally, changes to various cryptocurrency networks
have been accepted by the vast majority of users and miners, ensuring that the cryptocurrency networks remain coherent economic
systems; however, a developer or group of developers could potentially propose a modification to a cryptocurrency network that
is not accepted by a vast majority of miners and users, but that is nonetheless accepted by a substantial population of participants
in the respective cryptocurrency network. In such a case, and if the modification is material and/or not backwards compatible with
the prior version of the respective cryptocurrency network software, a “fork” in the blockchain could develop and two
separate networks of the same cryptocurrency could result, one running the pre-modification software program and the other running
the modified version (e.g., a second bitcoin network). Such a fork in the blockchain typically would be addressed by community-led
efforts to merge the forked blockchains, and several prior forks have been so merged without any material impact on the price of
Bitcoin, although there can be no assurance that this will always be the case upon a fork. This kind of split in a Bitcoin, Ethereum,
or Litecoin Network could materially and adversely impact an investment in us and, in the worst case scenario, harm the sustainability
of the respective network’s economy.
The open-source structure of cryptocurrency
network protocol means that the developers and other contributors to the protocol are generally not directly compensated for their
contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage the
cryptocurrency network and an investment in us.
The Bitcoin, Ethereum,
and Litecoin Networks operate based on an open-source protocol maintained by certain core developers and other contributors. The
core developers are those developers employed by MIT Media Lab’s Digital Currency Initiative who oversee the Bitcoin Network.
As these network protocols are not sold and the networks’ use does not generate revenues for its development team, the core
developers and contributors are generally not compensated for maintaining and updating the respective cryptocurrency network protocol.
To the extent that material issues arise with the Bitcoin, Ethereum, or Litecoin Network protocols, and the core developers and
open-source contributor community are unable to address the issues adequately or in a timely manner, the respective cryptocurrency
network, Super Crypto Mining, Inc. and an investment in us may be adversely affected.
The further development and acceptance
of cryptocurrency networks, which represents a new and rapidly changing industry, are subject to a variety of factors that are
difficult to evaluate. The slowing or stopping of the development or acceptance of digital currency systems may adversely affect
our business.
Digital currencies
may be used, among other things, to buy and sell goods and services are a new and rapidly evolving industry. The growth of the
digital currency industry in general, and in particular the Bitcoin industry, Ethereum industry, and Litecoin industry, are subject
to a high degree of uncertainty. The factors affecting the further development of the digital currencies industry, as well as the
Bitcoin, Ethereum and Litecoin industries, include:
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Continued worldwide growth in the adoption and use of Bitcoins, Ethereum, and Litecoins, and other
cryptocurrency;
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Government and quasi-government regulation of Bitcoin, Ethereum, and Litecoin, and other cryptocurrency
and their use, or restrictions on or regulation of access to and operation of cryptocurrency networks and system;
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The maintenance and development of the open-source software protocol of various cryptocurrency
networks;
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The availability and popularity of other forms or methods of buying and selling goods and services,
including new means of using fiat currencies; and
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General economic conditions and the regulatory environment relating to digital currencies; and
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A decline in the popularity or acceptance of the top cryptocurrencies or their networks could adversely
affect an investment in us.
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The value of cryptocurrency and fluctuations
in the price of cryptocurrency could materially and adversely affect the business of Super Crypto Mining, Inc.
Several factors may
affect the value of cryptocurrency, including, but not limited to:
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Total cryptocurrency in existence;
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Global cryptocurrency demand, which is influenced by the growth of retail merchants’ and
commercial businesses’ acceptance of cryptocurrency as payment for goods and services, the security of online cryptocurrency
exchanges and digital wallets that hold cryptocurrency, the perception that the use and holding of cryptocurrency is safe and secure,
the lack of regulatory restrictions on their use and the reputation of cryptocurrency for illicit use;
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Global cryptocurrency supply, which is influenced by similar factors as global cryptocurrency demand,
in addition to fiat currency needs by miners (for example, to invest in equipment or pay electricity bills) and taxpayers who may
liquidate cryptocurrency holdings around tax deadlines to meet tax obligations;
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Investors’ expectations with respect to the rate of inflation or deflation of fiat currencies
or cryptocurrency;
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Currency exchange rates, including the rates at which cryptocurrency may be exchanged for fiat
currencies;
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Fiat currency withdrawal and deposit policies of cryptocurrency exchanges and liquidity of such
cryptocurrency exchanges;
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Interruptions in service from or failures of major cryptocurrency exchanges;
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Cyber theft of cryptocurrency from online cryptocurrency wallet providers, or news of such theft
from such providers, or from individuals’ cryptocurrency wallets;
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Investment and trading activities of large investors, including private and registered funds, that
may directly or indirectly invest in cryptocurrency;
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Monetary policies of governments, trade restrictions, currency devaluations and revaluations;
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Regulatory measures, if any, that restrict the use of cryptocurrency as a form of payment or the
purchase of cryptocurrency on the cryptocurrency market;
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The availability and popularity of businesses that provide cryptocurrency -related services;
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The maintenance and development of the open source software protocol of certain cryptocurrency
networks;
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Increased competition from other forms of cryptocurrency or payments services;
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Global or regional political, economic, or financial events and situations;
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Expectations among cryptocurrency economy participants that the value of cryptocurrency will soon
change; and
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Fees associated with processing a cryptocurrency transaction.
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Banks and financial
institutions may not provide banking services, or may cut off services, to businesses that provide cryptocurrency-related services
or that accept cryptocurrencies as payment, including financial institutions of investors in our securities.
A
number of companies that provide bitcoin and/or other cryptocurrency-related services 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. We also may be unable to obtain or maintain these services for our business. The difficulty
that many businesses that provide bitcoin and/or other cryptocurrency-related services 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 its usefulness and harm its public perception in the
future. Similarly, 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 providing bitcoin and/or other cryptocurrency-related
services. 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 and commodities exchanges, the over the counter market
and the Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations, could
result in the inability of our investors to open or maintain stock or commodities accounts, including the ability to deposit, maintain
or trade our securities. Such factors would have a material adverse effect on the ability of our to continue as a going concern
or to pursue its cryptocurrency business segment at all, which would have a material adverse effect on our business, prospects
or operations and harm investors.
Possibility of cryptocurrency algorithms
or protocols changing, such as a transition by some networks to proof of stake validation, and other crypto mining related risks
could have an adverse impact on our business prospects.
The
underlying cryptocurrency algorithms, protocols and other important factors are constantly changing. It is possible that these
changes could negatively impact our business and business plans. Should the top cryptocurrencies that we intend to focus on shift
their underlying protocols, algorithms, validation methods or other material factors (for instance from a proof of work validation
method to a proof of stake method, which is an alternative method to proof of work for validating cryptocurrency transactions),
it could adversely impact our business prospects. A shift from proof of work validation method to a proof of stake method could
render any company that maintains advantages in the current climate (for example from lower priced electric, processing, real estate,
or hosting) less competitive Any major changes related to the top cryptocurrencies could have an adverse impact on the ability
of Super Crypto Mining, Inc. and Super Crypto Power to continue as going concerns or to pursue this segment at all, which would
have a material adverse effect on our business, prospects or operations of and potentially the value of any cryptocurrencies that
we hold or expect to acquire for our own account.
The profitability
and success of crypto mining is constantly changing due to various factors. These changes and our choices related to which cryptocurrencies
to focus on for their own account or for customers could adversely affect our business results.
The
miners that we have purchased allow us to decide which cryptocurrency to mine. The factors that affect the success of mining an
individual cryptocurrency change rapidly. Should we choose the wrong cryptocurrency to focus our crypto mining operations on, it
could adversely impact our business prospects.
To the extent
that the profit margins of cryptocurrency mining operations are not high, operators of cryptocurrency mining operations are more
likely to immediately sell cryptocurrency earned by mining in the market, resulting in a reduction in the price of cryptocurrencies
that could adversely impact us and similar actions could affect other cryptocurrencies.
Over
the years, crypto mining operations have evolved from individual users mining with computer processors, graphics processing units
and first generation application-specific integrated circuit (“ASIC”) servers. Currently, new processing power is predominantly
added by incorporated and unincorporated “professionalized” crypto mining operations. Professionalized crypto mining
operations may use proprietary hardware or sophisticated ASIC machines acquired from ASIC manufacturers. They require the investment
of significant capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing
facilities), incurring of electricity costs and the employment of technicians to operate the cryptocurrency mining farms.
As
a result, professionalized crypto mining operations are of a greater scale than prior miners and have more defined, regular expenses
and liabilities. These regular expenses and liabilities require professionalized crypto mining operations to more immediately sell
cryptocurrencies earned from crypto mining operations, whereas it is believed that individual miners in past years were more likely
to hold newly mined bitcoins and/or other cryptocurrencies for more extended periods. The immediate selling of newly mined bitcoins
and/or other cryptocurrencies greatly increases the supply of bitcoins and/or other cryptocurrencies for sale, creating downward
pressure on the price of bitcoins and/or other cryptocurrencies.
The
extent to which the value of bitcoins and/or other cryptocurrencies mined by a professionalized crypto mining operation exceeds
the allocable capital and operating costs determines the profit margin of such operation. A professionalized crypto mining operation
may be more likely to sell a higher percentage of its newly mined bitcoins and/or other cryptocurrencies rapidly if it is operating
at a low profit margin—and it may partially or completely cease operations if its profit margin is negative. In a low profit
margin environment, a higher percentage could be sold more rapidly, thereby potentially reducing bitcoin and/or other cryptocurrencies
prices. Lower bitcoin and/or other cryptocurrencies prices could result in further tightening of profit margins, particularly for
professionalized crypto mining operations with higher costs and more limited capital reserves, creating a network effect that may
further reduce the price of bitcoin until crypto mining operations with higher operating costs become unprofitable and remove mining
power. The network effect of reduced profit margins resulting in greater sales of newly mined bitcoins and/or other cryptocurrencies
could result in a reduction in the price of bitcoins and/or other cryptocurrencies that could adversely impact business of Super
Crypto Mining, Inc. and our company.
The
foregoing risks associated with bitcoin could be equally applicable to other cryptocurrencies, existing now or introduced in the
future. Such circumstances would have a material adverse effect on our ability to continue as a going concern or to pursue
this segment at all, which would have a material adverse effect on our business, prospects or operations and potentially the value
of any cryptocurrencies that we may hold or acquire for our own account and harm investors.
Should new
services/software embodying new technologies emerge, our or our investments’ ability to recognize the value of the use of
existing hardware and equipment and its underlying technology, may become obsolete and require substantial capital to replace such
equipment.
The
increase in interest and demand for cryptocurrencies has led to a shortage of crypto mining hardware as individuals purchase equipment
for mining at home and large scale mining evolved. Equipment in Super Crypto Mining, Inc.’s crypto mining facilities will
require replacement from time to time and new technological innovations could render our current equipment obsolete at any time.
Shortages of graphics processing units may lead to unnecessary downtime for miners and limit the availability or accessibility
of cryptocurrency mining processing capabilities in the industry. Such events would have a material adverse effect on our ability
to continue as a going concern or to pursue this segment at all, which would have a material adverse effect on our business, prospects
or operations and potentially the value of any cryptocurrencies that we may hold or expect to acquire for our own account.
We have an evolving business model.
As Digital Assets and
blockchain technologies become more widely available, we expect the services and products associated with them to evolve. Very
recently, the Commission issued a report that promoters that use initial coin offerings or token sales to raise capital may be
engaged in the offer and sale of securities in violation of the Securities Act and the Securities Exchange Act of 1934 (the “Exchange
Act”). This may cause us to potentially change our future business in order to comply fully with the federal securities laws
as well as applicable state securities laws. As a result, to stay current with the industry, our business model may need to evolve
as well. From time to time we may modify aspects of our business model relating to our product mix and service offerings. We cannot
offer any assurance that these or any other modifications will be successful or will not result in harm to the business. We may
not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating
results.
“Digital Asset”
— Collectively, all digital assets based upon a computer-generated math-based and/or cryptographic protocol that may, among
other things, be used to buy and sell goods or pay for services. Bitcoins represent one type of Digital Asset.
“Digital Security”
— A type of Digital Asset that is offered by a promoter as an investment contract, which is a type of security defined by
Section 2(a)(1) of the Securities Act.
Since there
has been limited precedence set for financial accounting of Bitcoin, Ethereum, and other digital assets, it is unclear how we will
be required to account for digital assets transactions in the future.
Since
there has been limited precedence set for the financial accounting of digital assets, it is unclear how we will be required to
account for digital asset transactions or assets. Furthermore, a change in regulatory or financial accounting standards could result
in the necessity to restate our financial statements. Such a restatement could negatively impact our business, prospects, financial
condition and results of operation. Such circumstances would have a material adverse effect on our ability to continue as a going
concern or to pursue this segment at all, which would have a material adverse effect on our business, prospects or operations and
potentially the value of any cryptocurrencies that we hold or acquire for our own account and harm investors.
Demand for
bitcoins is driven, in part, by its status as the most prominent and secure digital asset. It is possible that a digital asset
other than bitcoins could have features that make it more desirable to a material portion of the digital asset user base, resulting
in a reduction in demand for bitcoins, which could have a negative impact on the price of bitcoins and adversely affect an investment
in our securities.
The
Bitcoin Network and bitcoins, as an asset, hold a “first-to-market” advantage over other digital assets. This first-to-market
advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in use
to secure the blockchain and transaction verification system. Having a large crypto mining network results in greater
user confidence regarding the security and long-term stability of a digital asset’s network and its blockchain; as a result,
the advantage of more users and miners makes a digital asset more secure, which makes it more attractive to new users and miners,
resulting in a network effect that strengthens the first-to-market advantage.
There
are thousands of alternate digital assets (or altcoins). Bitcoin enjoys significantly greater acceptance and usage than other altcoin
networks in the retail and commercial marketplace, due in large part to the relatively well-funded efforts of payment processing
companies including BitPay and Coinbase.
Despite
the marked first-mover advantage of the Bitcoin Network over other digital assets, it is possible that an altcoin could become
materially popular due to either a perceived or exposed shortcoming of the Bitcoin Network protocol that is not immediately addressed
by the core developers of Bitcoin or a perceived advantage of an altcoin that includes features not incorporated into Bitcoin.
If an altcoin obtains significant market share (either in market capitalization, mining power or use as a payment technology),
this could reduce Bitcoin’s market share and have a negative impact on the demand for, and price of, bitcoins, which in turn,
may materially and adversely affect the business, prospects or operations of the Super Crypto Mining, Inc. and our company.
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.
During the past three
fiscal years Microphase has 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.
As of June 30, 2017, Microphase had an accumulated deficit of approximately $18 million. Since the financial crisis of 2008,
Microphase has been significantly short of capital needed to acquire parts for production of its products to complete orders for
such products. At times, Microphase has not had the cash available to make advance payments for the purchase of parts, and then,
as a consequence, Microphase would not receive the parts from its vendors required to finish a customer order. This would then
delay the delivery of products to customers, and would also delay recognition of the resulting revenues and the receipt of cash
from the customer. Sometimes after experiencing a delay in delivery of an order from Microphase, the customer would not place its
next order with Microphase, resulting in a loss of business.
Microphase’s
future profitability depends upon many factors, including several that are beyond its control. These factors include, without limitation:
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changes in the demand for ITS products and services;
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loss of key customers or contracts;
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the introduction of competitive products;
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the failure to gain market acceptance of ITS new and existing products; and
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the failure to successfully and cost effectively develop, introduce and market new products, services and product enhancements
in a timely manner.
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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 61.9% in fiscal 2017, 66.8% in fiscal 2016, 65.8% in fiscal 2015, 56.1% in fiscal 2014 and 48.4% in fiscal
2013. 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. In the twelve months ended June 30, 2017 there were three customers
that accounted for more than 10% of sales: BAE Systems, Saab and Aselsan. In the twelve months ended June 30, 2016
there were two customers that accounted for more than 10% of sales: Lockheed Martin and BAE Systems. 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. 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:
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terminate or modify existing contracts;
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reduce the value of existing contracts through partial termination; and
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delay the payment of Microphase’s invoices by government payment offices.
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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 June 30, 2017 was approximately $4.0 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:
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disrupt the proper functioning of these networks and systems and therefore its operations and/or
those of certain of its customers;
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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;
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compromise national security and other sensitive government functions;
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require significant management attention and resources to remedy the damages that result;
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subject Microphase to claims for breach of contract, damages, credits, penalties or termination;
and
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damage Microphase’s reputation with its customers (particularly agencies of the U.S. Government)
and the public generally.
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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 Ownership of Our Common Stock
If we
do not continue to satisfy the NYSE American continued listing requirements, our common stock could be delisted from NYSE American.
The
listing of our common stock on the NYSE American is contingent on our compliance with the NYSE American’s conditions for
continued listing. On December 18, 2015, we were notified by the NYSE American that we were no longer in compliance with the NYSE
American continued listing standards because our reported stockholders' equity was below continued listing standards. The NYSE
American requires that a listed company's stockholders' equity be $4.0 million or more if it has reported losses from continuing
operations and/or net losses in three of its four most recent fiscal years. Subsequently, the NYSE American informed us that we
are required to attain stockholders’ equity of $6.0 million or more because we experienced a loss for the year ended December
31, 2016.
Following
submission of our compliance plan demonstrating how we intend to regain compliance with the continued listing standards, we were
notified on March 9, 2016, that the NYSE American granted us a listing extension on the basis of our plan until June 19, 2017.
We are subject to periodic review by NYSE American staff during the extension period. Failure to make progress consistent with
the plan or to regain compliance with the continued listing standards by the end of the extension period could result in our common
stock being delisted from the NYSE American.
On
June 19, 2017, we filed a Form 8-K report with the Commission announcing that our Stockholders' Equity was approximately $6,409,000
on a pro-forma basis. In a letter dated June 20, 2017, the NYSE American notified us that we had successfully regained compliance
with the NYSE American continued listing standards. Notwithstanding the foregoing, in light of our continue losses, there is no
assurance that we will be able to continue to meet the NYSE American continued listing standard. Failure to meet the 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.
On
November 20, 2017, we received a letter from NYSE Regulation indicating that the NYSE American had concluded that we failed to
comply with Section 401(a) of the NYSE American’s Company Guide, which section requires that a listed company “make
immediate public disclosure of all material information concerning its affairs” The letter, which relates to our disclosure
of certain personnel changes to our board of directors and officers, provided that such letter constituted a warning letter issued
to us pursuant to Section 1009(a)(i) of the NYSE American Company Guide. On October 12, 2017, we filed a Form 8-K that disclosed
that certain personnel changes to our board of directors and executive officers were effective October 6, 2017. On November 6,
2017, we filed an amendment to the above referenced Form 8-K that disclosed that the personnel changes had not in fact occurred.
After discussion with the NYSE American, on November 8, 2017, we filed a subsequent Form 8-K that further clarified that we had
determined to rescind the personnel changes as of October 23, 2017. In that Form 8-K, we provided additional disclosure explaining
why the personnel changes were not undertaken.
On
November 29, 2017, we notified the NYSE American, LLC that we were no longer in compliance with Rule 801(h) of the NYSE American
Company Guide because, as a smaller reporting company, our Board of Directors was not comprised of at least 50% independent directors.
On November 28, 2017, our Board of Directors approved the issuance of cash compensation, and 200,000 shares of common stock and
warrants to purchase 1,000,000 shares of common stock subject to vesting and shareholder approval, to Mr. William Horne, a director
of our company, for services. As a result of this compensation, Mr. Horne may not be deemed independent within the meaning of Section
803A(2) of the NYSE American Company Guide. Mr. Horne has resigned from the audit committee of the Board of Directors. Robert Smith
has been appointed as chair of the audit committee. On December 8, 2017, our board of directors rescinded the equity compensation
granted to Mr. Horne. We believe that we are therefore presently in compliance with Rule 801(h) of the NYSE American Company
Guide.
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. The exercise of outstanding options and warrants may adversely affect our stock
price and a shareholder’s percentage of ownership. As of December 4, 2018, we had outstanding options to purchase an aggregate
of 7,570,000 shares of common stock, with a weighted average exercise price of $1.03 per share, exercisable at prices ranging from
$0.57 to $2.32 per share and warrants to purchase up to 18,727,620 shares of common stock, with a weighted average exercise price
of $1.01 per share, at exercise prices ranging from $0.01 to $2.50 per share.
In addition, we have
previously agreed to register shares of common stock, and common stock underlying outstanding warrants and convertible debt in
connection with private placement of our securities that are not being registered in this prospectus. Our shares of common stock
are thinly traded. Therefore, the resale of a large number of shares of common stock and common stock underlying warrants and convertible
debt by the selling stockholders may adversely affect the market price of our common stock.
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.
The following factors, many of which are beyond our control, may influence our stock price:
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the status of our growth strategy including the development of new products with any proceeds we
may be able to raise in the future;
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announcements of technological or competitive developments;
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regulatory developments affecting us, our customers or our competitors;
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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;
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts;
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changes in the economic performance or market valuations of our competitors;
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additions or departures of our executive officers; and
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sales or perceived sales of additional shares of our common stock.
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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 $0.01 to $2.50 per share of common stock. As
of December 4, 2018, the number of shares of common stock subject to convertible notes, warrants, options and preferred stock
were 20,077,330, 18,727,620, 7,570,000 and 1,785,714, 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.
We have a number
of shares of common stock subject to registration rights.
Due
to a number of financings, we have contractually agreed to register with the Commission shares of common stock, and common stock
underlying outstanding warrants and convertible debt in connection with private placements of our securities. The potential resale
at the same time of a large number of shares of common stock and common stock underlying warrants and convertible debt by the selling
stockholders may adversely affect the market price of our common stock.
Sales of additional
shares of our common stock could cause the price of our common stock to decline.
Sales
of substantial amounts of our common stock in the public market, or the availability of such shares for sale, by us or others,
including the issuance of common stock upon exercise of outstanding options and warrants, could adversely affect the price of our
common stock. We and our directors and officers may sell shares into the market, which could adversely affect the market price
of shares of our common stock.
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, shareholders 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.
Risks Related to this Offering
A substantial number of shares of our
common stock may be sold in this offering, which could cause the price of our ordinary shares to decline.
In this offering the
selling stockholders may sell up to 6,017,632 shares of our common stock, including the shares of our common stock issuable upon
exercise of warrants. As of the date of this prospectus, such 6,017,632 shares represent approximately 7.37% of our outstanding
ordinary shares after giving effect to the issuance of the common stock offered hereby. This offering could adversely affect the
price of our common stock. We cannot predict the effect, if any, that this offering will have on the market price of our common
stock.
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.
If we default on secured debt instruments,
we may be required to repay the principal and accrued and unpaid interest due thereon, together with additional penalties.
If we do not timely
cure an event of default under the secured debt instruments, whether or not convertible, the holder(s) may accelerate all of our
repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate the secured debt instruments
on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the holders’ rights to repayment
would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. Any declaration
by the holders of an event of default could significantly harm our business and prospects and could cause the price of our common
stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating
and financial flexibility.