As filed with the Securities
and Exchange Commission on January 23, 2023
Registration No. 333-________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
THE SECURITIES ACT OF 1933
AULT ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of
||(Primary Standard Industrial
|incorporation or organization)
||Classification Code Number)
11411 Southern Highlands Parkway, Suite 240
Las Vegas, NV 89141
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Milton C. Ault III
BitNile Holdings, Inc.
11411 Southern Highlands Parkway, Suite 240
Las Vegas, NV 89141
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Henry Nisser, Esq.
President and General Counsel
Ault Alliance, Inc.
100 Park Ave., Suite 1658A
New York, NY 10017
Kenneth A. Schlesinger, Esq.
Spencer G. Feldman, Esq.
Olshan Frome Wolosky LLP
1325 Avenue of the Americas, 15th Floor
New York, NY 10019
Approximate date of commencement of proposed sale to the public: As
soon as practicable on or after the effective date of this registration statement.
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. x
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, a 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.
|Large accelerated filer ¨
||Accelerated filer ¨|
|Non-accelerated filer x
||Smaller reporting company x|
||Emerging growth company ¨|
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ¨
The Registrant hereby amends this Registration Statement
on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically
states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until
this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete
and may be changed. The selling stockholders may not sell these securities until the Securities and Exchange Commission declares our registration
statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 23, 2023
AULT ALLIANCE, INC.
11,605,913 Shares of Common Stock
This prospectus relates to the resale or
other disposition from time to time in one or more offerings of 11,605,913 shares of our common stock, to be offered by the selling stockholder.
“Selling stockholder” refers to the selling stockholder named in this prospectus, or certain transferees, assignees or other
successors-in-interest that may receive our securities from the selling stockholder.
On December 16, 2022, Ault Alliance, Inc.
(formerly known as BitNile Holdings, Inc.), a Delaware corporation (the “Company”) entered into a securities purchase agreement
with an accredited investor, which we refer to as the selling stockholder, providing for the issuance of a secured promissory note with
an aggregate principal face amount of $14,700,000 (the “Financing”). In connection with the Financing, we agreed to issue
11,605,913 shares of our common stock (the “Shares”) to the selling stockholder in exchange for the cancellation of all outstanding
warrants previously issued to the selling stockholder, which warrants were exercisable for 11,605,913 shares of our common stock.
The selling stockholder may, from time to
time, sell, transfer or otherwise dispose of any or all of its shares of our common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the
time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
See “Plan of Distribution” on page 70.
We are not offering any shares of our common
stock for sale under this prospectus. We will not receive any of the proceeds from the sale of common stock by the selling stockholder.
We will pay all the expenses, estimated to be approximately $36,169, in connection with this offering, other than counsel fees and expenses
of the selling stockholder. The shares of our common stock are being registered to satisfy contractual obligations owed by us to the selling
stockholder pursuant to its transaction documents.
Our common stock is traded on the NYSE American
under the symbol “AULT” (formerly “NILE”). The last reported sale price for the common stock on the NYSE American
on January 20, 2023 was $0.1358 per share.
We may amend or supplement this prospectus
from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements
carefully before you make your investment decision.
An investment in our common stock involves
a high degree of risk. You should review carefully the risks and uncertainties described under the heading “Risk Factors”
contained herein on page 29 and in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as our subsequently filed
current reports, which we file with the Securities and Exchange Commission, and which are incorporated by reference into the registration
statement of which this prospectus is a part. You should read the entire prospectus carefully before you make your investment decision.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
The date of this prospectus is _______ __, 2023.
TABLE OF CONTENTS
|About this Prospectus
|Disclosure Regarding Forward-Looking Statements
|About the Company
|Use of Proceeds
|Plan of Distribution
|Description of Our Securities
|Where You Can Find More Information
|Incorporation of Documents by Reference
ABOUT THIS PROSPECTUS
This prospectus is part of a registration
statement on Form S-3 that we filed with the Securities and Exchange Commission (the “SEC” or the “Commission”).
You should read this prospectus and the
information and documents incorporated by reference carefully. Such documents contain important information you should consider when making
your investment decision. See “Where You Can Find More Information” and “Incorporation of Documents by Reference”
in this prospectus.
This prospectus may be supplemented from
time to time to add, to update or change information in this prospectus. Any statement contained in this prospectus will be deemed to
be modified or superseded for purposes of this prospectus to the extent that a statement contained in such prospectus supplement modifies
or supersedes such statement. Any statement so modified will be deemed to constitute a part of this prospectus only as so modified, and
any statement so superseded will be deemed not to constitute a part of this prospectus. You should rely only on the information contained
or incorporated by reference in this prospectus, any applicable prospectus supplement or any related free writing prospectus. We have
not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information,
you should not rely on it. No dealer, salesperson or other person is authorized to give any information or to represent anything not contained
in this prospectus, any applicable prospectus supplement or any related free writing prospectus. This prospectus is not an offer to sell
securities, and it is not soliciting an offer to buy securities, in any jurisdiction where the offer or sale is not permitted. You should
assume that the information appearing in this prospectus or any prospectus supplement, as well as information we have filed with the SEC
that is incorporated by reference, is accurate as of the date on the front of those documents only, regardless of the time of delivery
of this prospectus or any applicable prospectus supplement, or any sale of a security. Our business, financial condition, results of operations
and prospects may have changed since those dates.
This prospectus contains summaries of certain
provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information.
All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have
been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a
part, and you may obtain copies of those documents as described below under “Where You Can Find More Information.”
For investors outside the United States:
Neither we nor any underwriter has done anything that would permit this offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and
to observe any restrictions relating to this offering and the distribution of this prospectus.
Unless otherwise stated or the context requires
otherwise, references to “Ault Alliance,” the “Company,” “we,” “us” or “our”
are to Ault Alliance, Inc., a Delaware corporation, and its subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated
by reference in it contain forward-looking statements regarding future events and our future results that are subject to the safe harbors
created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts
are statements that could be deemed forward-looking statements. These statements are based on our expectations, beliefs, forecasts, intentions
and future strategies and are signified by the words “expects,” “anticipates,” “intends,” “believes”
or similar language. In addition, any statements that refer to projections of our future financial performance, our anticipated growth,
trends in our business and other characterizations of future events or circumstances are forward-looking statements. These forward-looking
statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those
identified above, under “Risk Factors” and elsewhere in this prospectus. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. All forward-looking statements included in this prospectus are based
on information available to us on the date of this prospectus and speak only as of the date hereof.
We disclaim any current intention to update
our “forward-looking statements,” and the estimates and assumptions within them, at any time or for any reason, except as
required by U.S. federal securities laws.
ABOUT THE COMPANY
This summary highlights selected information
contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider
in making your investment decision. Before investing in our securities, you should read the entire prospectus carefully, including the
information set forth under the heading “Risk Factors.”
Ault Alliance, Inc., a Delaware corporation
formerly known as BitNile Holdings, Inc., was incorporated in September 2017 (sometimes referred to as “AAI,” the “Company,”
“we” or “us”). We are a diversified holding company owning subsidiaries engaged in, among others, the following
operating businesses: commercial and defense solutions, commercial lending, data center operations, Bitcoin mining and advanced textile
technology. Our direct and indirect wholly owned subsidiaries include (i) Ault Lending, LLC (“Ault Lending,” formerly known
as Digital Power Lending, LLC), (ii) Ault Global Real Estate Equities, Inc. (“AGREE”), (iii) Ault Disruptive Technologies
Company, LLC (“ADTC”), (iv) BitNile, Inc. (“BNI”) which wholly owns Alliance Cloud Services, LLC (“ACS”)
and (v) Circle 8 Holdco LLC, a Delaware limited liability company (“Circle 8 Holdco”). We have a direct controlling interest
in (i) Imperalis Holding Corp. (“IMHC”), which wholly owns TOG Technologies, Inc. (“TOG Technologies” and Digital
Power Corporation (“Digital Power”), (ii) Giga-tronics Incorporated (“GIGA”), which wholly owns Gresham Worldwide,
Inc. (“GWW”), which in turn wholly owns Gresham Power Electronics Ltd. (“Gresham Power”), Enertec Systems 2001
Ltd. (“Enertec”), Relec Electronics Ltd. (“Relec”) and has a controlling interest in Microphase Corporation (“Microphase”)
and (iii) in Avalanche International Corp. (“Avalanche” or “AVLP”). Ault Lending has a controlling interest in
The Singing Machine Company, Inc. (“SMC”), Circle 8 Holdco has a controlling interest in Circle 8 Newco LLC, a newly formed
Delaware limited liability company (“Circle 8 Newco”), and ADTC is the sponsor of Ault Disruptive Technologies Corporation
AAI was founded by Milton C. (Todd) Ault,
III, its Executive Chairman, and is led by Mr. Ault, William B. Horne, its Chief Executive Officer and Vice Chairman, and Henry Nisser,
its President and General Counsel. Together, they constitute the Executive Committee, which manages the day-to-day operations of the holding
company. The Company’s long-term objective is to maximize per share intrinsic value. All major investment and capital allocation
decisions are made for us by Mr. Ault and the Executive Committee. We have the following reportable segments:
|·||Our former subsidiary then known as Ault Alliance, Inc.: AAI directly conducts digital learning, commercial
lending and trading through Ault Lending;|
|·||BNI: Bitcoin mining operation and data center operations through ACS;|
|·||GIGA: defense solutions with operations conducted by GWW’s subsidiaries Microphase, Enertec, Gresham
Power and Relec as well as the business previously conducted by GIGA prior to the closing of the share exchange agreement entered into
by BitNile, GWW and GIGA;|
|·||IMHC: commercial electronics solutions with operations conducted by Digital Power, and EV charging solutions
through TOG Technologies;|
|·||SMC: karaoke audio equipment;|
|·||AVLP: advanced textiles processing technology;|
|·||AGREE: hotel operations, real estate investing and other commercial real estate holdings;|
|·||Circle 8 Newco: crane rental and lifting solutions provider for oilfield, construction, commercial and
infrastructure markets; and|
|·||Ault Disruptive: a special purpose acquisition company (“SPAC”).|
We operate as a holding company with operations
conducted primarily through our subsidiaries. We conduct our activities in a manner so as not to be deemed an investment company under
the Investment Company Act of 1940, as amended (the “Investment Company Act”). Generally, this means that we do not invest
or intend to invest in securities as our primary business and that no more than 40% of our total assets will be invested in investment
securities, as that term is defined in the Investment Company Act. Pursuant to the Investment Company Act, companies such as our subsidiary
Ault Lending are excluded from the definition of an investment company. We also maintain a controlling interest in Avalanche, a textile
company, which does business as MTIX International (“MTIX”).
Originally, we were primarily a solution-driven
organization that designed, developed, manufactured and sold high-grade customized and flexible power system solutions for the medical,
military, telecom and industrial markets. Currently, this business is conducted by Digital Power. Although we actively seek growth through
acquisitions, we will also continue to focus on high-grade and custom product designs for the commercial, medical and military/defense
markets, where customers demand high density, high efficiency and ruggedized products to meet the harshest and/or military mission critical
We have operations located in Europe through
our majority owned subsidiaries, Gresham Power and Relec, each of which is located in England. Gresham Power designs, manufactures and
sells power products and system solutions mainly for the European marketplace, including power conversion, power distribution equipment,
DC/AC (Direct Current/Active Current) inverters and UPS (Uninterrupted Power Supply) products. Our European defense business is specialized
in the field of naval power distribution products. On November 30, 2020, we acquired Relec pursuant to a stock purchase, under which we
paid approximately $4,000,000 with additional contingent cash payments up to approximately $665,000 based on Relec’s future financial
performance. Relec specializes in AC/DC power supplies, DC-DC converters, displays and electromagnetic compatibility (“EMC”)
We have operations based in Israel through
our majority owned subsidiary Enertec, which designs, develops, manufactures and maintains advanced end-to-end high technology electronic
solutions for military, medical, telecommunications and industrial markets.
On November 30, 2016, we formed Digital
Power Lending, a wholly owned subsidiary. On September 21, 2022, Digital Power Lending changed its name to Ault Lending. Ault Lending
provides commercial loans to companies throughout the U.S. to provide them with operating capital to finance the growth of their businesses.
The loans range in duration from six months to three years. Ault Lending loans are made or arranged pursuant to a California Financing
Law license (Lic.no. 60 DBO77905).
On June 2, 2017, we purchased 56.4% of the
outstanding equity interests of Microphase. Microphase is a design-to-manufacture original equipment manufacturer (“OEM”)
industry leader delivering world-class radio frequency (“RF”) and microwave filters, diplexers, multiplexers, detectors, switch
filters, integrated assemblies and detector logarithmic video amplifiers (“DLVAs”) to the military, aerospace and telecommunications
industries. Microphase is headquartered in Shelton, Connecticut.
On January 7, 2020, we formed TurnOnGreen,
Inc., formerly known as Coolisys Technologies Corp. (“TOGI”), a wholly owned subsidiary. Until recently, TOGI operated its
existing businesses in the customized and flexible power system solutions for the automotive, medical, military, telecom, commercial and
industrial markets, other than the European markets, which are primarily served by Gresham Power. In April 2021, TOGI formed TOG Technologies
as a Nevada corporation to provide flexible and scalable EV charging solutions with a portfolio of residential, commercial and ultra-fast
charging products, and comprehensive charging management software and network services. See below for further information regarding TOGI.
On December 31,
2017, Coolisys Technologies, Inc., a Delaware corporation (“CTI”), entered into a share purchase agreement with Micronet Enertec
Technologies, Inc. (“MICT”), a Delaware corporation, Enertec Management Ltd., an Israeli corporation and wholly owned subsidiary
of MICT (“EML”), and Enertec, an Israeli corporation and wholly owned subsidiary of EML, pursuant to which CTI acquired Enertec.
Enertec is Israel’s largest private manufacturer of specialized electronic systems for the military market. On May 23, 2018, CTI
completed its acquisition of Enertec. Effective as of December 30, 2021, CTI was merged with and into GWW and, as a result of the upstream
merger, CTI ceased to exist.
GWW was incorporated
under the laws of the State of Delaware on November 21, 2018 as DPW Technologies Group, Inc. and effected a name change on December 6,
Recent Events and Developments
On January 22, 2021, we entered into an
At-The-Market Issuance Sales Agreement (the “2021 Sales Agreement”) with Ascendiant Capital Markets, LLC (“Ascendiant”)
to sell shares of common stock having an aggregate offering price of up to $50 million from time to time, through an “at the market
offering” program (the “2021 ATM Offering”). On February 16, 2021, we filed an amendment to the prospectus supplement
with the SEC to increase the amount of common stock that may be offered and sold in the 2021 ATM Offering, as amended under the 2021 Sales
Agreement to $125 million in the aggregate, inclusive of the up to $50 million in shares of common stock previously sold in the 2021 ATM
Offering. On March 5, 2021, we filed a second amendment to the prospectus supplement with the SEC to further increase the amount of common
stock that may be offered and sold in the 2021 ATM Offering, as amended under the 2021 Sales Agreement to $200 million in the aggregate,
inclusive of the up to $125 million in shares of common stock previously sold in the 2021 ATM Offering. The offer and sale of shares of
common stock from the 2021 ATM Offering was made pursuant to our effective “shelf” registration statement on Form S-3 and
an accompanying base prospectus contained therein (Registration Statement No. 333-251995) which became effective on January 20, 2021.
During the year ended December 31, 2021, we had received gross proceeds of $200 million through the sale of 52,552,353 shares of common
stock from the 2021 ATM Offering. The 2021 ATM Offering was terminated in December 2021.
On January 29,
2021, ACS closed on the acquisition of a 617,000 square foot energy-efficient facility located on a 34.5 acre site in southern Michigan
for a purchase price of $3,991,497 (the “Facility”). The purchase price was paid by our own working capital. Ownership of
the Facility was subsequently assigned to BNI.
On March 9, 2021, Ault Lending entered into
a securities purchase agreement with Alzamend Neuro, Inc. (“Alzamend”), a related party, to invest $10 million in Alzamend
common stock and warrants, subject to the achievement of certain milestones. We agreed to fund $4 million upon execution of the securities
purchase agreement and to fund the balance upon Alzamend achieving certain milestones related to the U.S. Food and Drug Administration’s
approval of Alzamend’s Investigational New Drug application and Phase 1a human clinical trials for Alzamend’s lithium based
ionic cocrystal therapy, known as AL001. Under the securities purchase agreement, Alzamend agreed to sell up to 6,666,667 shares of its
common stock to Ault Lending in consideration for the $10 million, or $1.50 per share, and issue to Ault Lending warrants to acquire up
to 3,333,334 shares of Alzamend common stock with an exercise price of $3.00 per share. The transaction was approved by our independent
directors after receiving a third-party valuation report of Alzamend. As of the date of this prospectus, we have funded an aggregate of
$10 million pursuant to the securities purchase agreement and have thus acquired all of the shares and warrants issuable by Alzamend to
us under the agreement. We retain the right to acquire an additional 6,666,667 shares and 3,333,334 warrants at an exercise price of $3.00
per share until October 26, 2023 for an aggregate payment to Alzamend of $10 million.
On May 12, 2021, we issued 275,862 shares
of common stock to Ault & Company, Inc. (“A&C”), a related party, upon the conversion of $400,000 of principal on
an 8% Convertible Promissory Note dated February 5, 2020.
On June 11, 2021, we entered into a securities
purchase agreement with A&C, pursuant to which A&C is entitled to purchase 1,000,000 shares of our common stock for a total purchase
price of $2,990,000, at a purchase price per share of $2.99, which was $0.05 per share above the closing stock price on June 10, 2021.
On June 15, 2021, Alzamend closed an initial
public offering at a price to the public of $5.00 per share. Ault Lending purchased 2,000,000 shares of Alzamend’s common stock
in the initial public offering for an aggregate of $10,000,000. Alzamend’s common stock is listed on The Nasdaq Capital Market under
the ticker symbol “ALZN.”
During the quarter
ended September 30, 2021, we executed contracts to purchase 4,000 Antminer S-19 Pro Bitcoin miners. The gross purchase price was $23 million.
In November 2021, we executed contracts to purchase an aggregate of 16,600 Bitcoin miners for $128 million. Between September and November
2022, we entered into two additional contracts to purchase an aggregate of 2,645 Bitcoin miners for $10 million. The purchases include
both the environmentally friendly S19 XP Antminers that feature a processing power of 140 terahashes per second (“TH/s”) with
an energy consumption of 3.01 kilowatt-hours (“kWh”), the S19j Pro Antminers that feature a processing power of 100 TH/s with
an energy consumption of 2.95 kWh, and the S19 XP HYD Antminers that feature a processing power of 250 TH/s with an energy consumption
of 5.2 kWh. As of January 15, 2022, 16,017 S19j Pro Antminers and 4,424 S19 XP Antminers were in our possession, 204 S19 XP Antminers
were in transit, and the remaining miners are expected to be shipped between January 2023 and December 2023. Of the aggregate purchase
price, inclusive of discounts, of approximately $121 million, there is an outstanding balance of approximately $1 million that is due
between July and December 2023.
On December 13, 2021, BNI closed an investment
of Series A preferred stock of Earnity Inc. (“Earnity”), a decentralized finance (“DeFi”) marketplace based in
San Mateo, California. BNI paid approximately $11.5 million for the shares of Earnity’s Series A preferred stock. Following the
investment, BNI beneficially owned approximately 19.99% of Earnity’s common stock. The transaction we entered into with Earnity
is an investment only, not the precursor to an acquisition. We have no present intention of incorporating Earnity’s business or
operations, or that of any other DeFi platform, with our own.
On December 15, 2021, Ault Lending entered
into an exchange agreement with Imperalis Holding Corp. (“IMHC”) pursuant to which IMHC issued us a convertible promissory
note (the “IMHC Note”) in the principal amount of $101,529, in exchange for those certain promissory notes dated August 18,
2021 and November 5, 2021 previously issued by IMHC to Ault Lending in the aggregate principal amount of $100,000, which prior notes had
accrued interest of $1,529 as of December 15, 2021. The IMHC Note accrued interest at 10% per annum, was due on December 15, 2023, and
the principal, together with any accrued but unpaid interest on the amount of principal, is convertible into shares of IMHC’s common
stock at Ault Lending’s option at a conversion price of $0.01 per share. The IMHC Note was converted into 10,990,142 shares of IMHC’s
common stock on October 12, 2022.
On December 16, 2021, we entered into a
stock purchase agreement (the “Agreement”) with the majority stockholders of IMHC. Pursuant to the Agreement, we purchased
129,363,756 shares of IMHC’s common stock from the sellers in exchange for $200,000. Upon the closing of the Agreement, we owned
a majority of IMHC’s common stock, resulting in a change in control of IMHC.
On December 22, 2021 (the “Closing
Date”), AGREE Madison, LLC, a wholly owned subsidiary of AGREE (“AGREE Madison”), through various wholly owned subsidiaries
(the “Property Owners”), entered into construction loan agreements (the “Loan Agreements”) in the aggregate amount
of $68,750,000 (the “Loans”) in connection with the acquisition of four hotel properties (the “Properties”). The
Properties were acquired on the Closing Date for an aggregate purchase price of $69,200,000, of which $2,500,000 was previously funded
on deposit, $21,378,000 was paid by the Company on the Closing Date, and the remaining amounts were funded from the Loans. The remaining
$23,428,000 of the Loans are available to be drawn upon by the Property Owners towards the completion of the $13,700,000 in property improvement
plans (“PIPs”) the Property Owners agreed to undertake, as well as to fund working capital, interest reserves, franchise fees
and other costs and expenses related to the acquisition. The Loans are due on January 1, 2025 (the “Maturity Date”), but may
be extended by the Property Owners for two additional 12-month terms, subject to certain terms and conditions as set forth in the Loan
Agreements. The Loans accrue interest at a rate equal to the greater of (i) the LIBOR Rate plus 675 basis points or (ii) 7% per annum.
The Property Owners will make monthly installment payments of interest only, starting January 1, 2022.
On December 27,
2021, the Company and GWW entered into a Share Exchange Agreement (the “Exchange Agreement”) with Giga-tronics Incorporated,
a California corporation (“GIGA”). Pursuant to the Exchange Agreement, which closed on September 8, 2022, GIGA acquired all
of the outstanding shares of capital stock of GWW in exchange for (i) issuing to the Company 2,920,085 shares of GIGA’s common stock
(“GIGA Common Stock”) and 514.8 shares of a new series of preferred stock (“GIGA Preferred Stock”) which are convertible
into an aggregate of 3,960,043 shares of GIGA Common Stock, subject to adjustment, and (ii) the assumption of GWW’s equity awards
representing, on an as-assumed basis, 249,875 shares of GIGA Common Stock (the “Exchange Transaction”).
As a result of
the consummation of the Exchange Transaction, GWW has become a wholly owned subsidiary of GIGA. In accordance with the Exchange Agreement,
we loaned GIGA $4.25 million pursuant to a convertible promissory note (“Closing Date Loan”) upon the closing of the Exchange
Transaction (the “Closing”). Following the Closing, GIGA repurchased all of its shares of Series B, Series C, Series D and
Series E preferred stock that were outstanding prior to the Closing (the “Outstanding Preferred”). Based upon 2,725,010 shares
of GIGA Common Stock outstanding at the Closing, and following the issuance to the Company of the shares of GIGA Common Stock and GIGA
Preferred Stock pursuant to the Exchange Transaction, the Company holds approximately 68% of the outstanding voting power and capital
stock of GIGA, and existing holders of GIGA Common Stock hold approximately 32%. On December 31, 2022, the Closing Date Loan was exchanged
for a new convertible promissory note with a maturity date of December 31, 2024. In addition, Ault Lending also entered into a Securities
Purchase Agreement with GIGA, whereby GIGA issued Ault Lending a 10% Senior Secured Convertible Promissory Note in the principal amount
of $6,750,000 and five-year warrants to purchase 2,000,000 shares of GIGA’s common stock.
On December 30,
2021, Third Avenue Apartments LLC (“Third Avenue Apartments”), which is a wholly owned subsidiary of AGREE Madison, closed
upon the acquisition of certain real property located in St. Petersburg, Florida (the “Real Property”) together with all improvements
on the Real Property and all singular rights and appurtenances pertaining thereto, including, but not limited to, (i) all entitlements,
easements, rights, mineral rights, oil and gas rights, water, water rights, air rights, development rights and privileges appurtenant
to the Real Property, (ii) all tangible personal property, owned and assignable by Seller, located on or used in connection with
the Real Property, including, without limitation, engineering studies, soils reports, (iii) all warranties, guaranties, indemnities
and other similar rights relating to the Real Property and/or the assets transferred hereby, (iv) all permits, licenses, consents,
approvals and entitlements related to the Real Property, (v) any rights of way, appendages appurtenances, easements, sidewalks, alleys,
gores or strips of land adjoining or appurtenant to the Real Property or any portion thereof, if any, and used in conjunction therewith,
and (vi) all intangible rights directly relating to the Real Property (collectively, with the Real Property, the “Property”).
The Property was
acquired from Third Avenue at St Petersburg LLC (the “Seller”) pursuant to a contract entered into by Third Avenue Apartments
and the Seller. The purchase price for the Property was $15,500,000, of which $1,500,000 was previously funded on deposit and the remaining
$14,000,000 was paid by the Company on the closing date. We had initially planned to use the Property for the development of a high-rise
multi-family project. However, we are now evaluating selling the Property.
On December 30,
2021, we issued (i) secured promissory notes (individually, a “Note” and collectively, the “Notes”) with an aggregate
principal face amount of approximately $66,000,000; (ii) five-year Class A warrants to purchase an aggregate of 14,095,350 shares of our
common stock at an exercise price of $2.50, subject to adjustment; and (iii) five-year Class B warrants to purchase an aggregate of 1,942,508
shares of our common stock at an exercise price of $2.50 per share, subject to adjustment. We agreed to file a registration statement
to register the shares of common stock underlying the foregoing warrants, of which 6,344,100 remain outstanding, and certain other shares
underlying 44,119 previously issued warrants to the selling stockholders named in another prospectus. Subsequently, in connection
with the Financing, we agreed to file this prospectus to register the 11,605,913 shares recently issued to the selling stockholder in
exchange for its surrender for cancellation for all its outstanding warrants to purchase 11,605,913 shares of our common stock.
We, certain of
our subsidiaries and Esousa, as the collateral agent on behalf of the investors (the “Agent”) entered into a security agreement,
pursuant to which we (i) pledged the equity interests in substantially all of our U.S. based subsidiaries and (ii) granted to the investors
a security interest in substantially all of our deposit accounts, securities accounts, chattel paper, documents, equipment, general intangibles,
instruments and inventory, and all proceeds therefrom. The entirety of the loan, including the original issue discount and accrued but
unpaid interest, was fully paid off on March 30, 2022.
On February 4,
2022, we and Ault Alliance entered into a securities purchase agreement providing for our purchase of BNI from Ault Alliance. As a result
of this transaction, both BNI and Ault Alliance are each stand-alone wholly owned subsidiaries of ours.
On February 10,
2022, consistent with our objective to have BNI operate the entirety of our business that relates to cryptocurrencies, Ault Alliance assigned
the entirety of its interest in ACS to BNI.
On February 25, 2022, we entered into an
At-The-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with Ascendiant to sell shares of common stock having
an aggregate offering price of up to $200 million from time to time, through an “at the market offering” program (the “2022
ATM Offering”). The offer and sale of shares of common stock from the 2022 ATM Offering was made pursuant to our effective “shelf”
registration statement on Form S-3 and an accompanying base prospectus contained therein (Registration Statement No. 333-260618) which
became effective on November 12, 2021. Through January 20, 2023, we have received gross proceeds of approximately $174 million through
the sale of 296,812,912 shares of common stock from the 2022 ATM Offering.
On March 20, 2022,
we and IMHC entered into a securities purchase agreement (the “Acquisition Agreement”) with TOGI, which closed on September
6, 2022 (the “Closing Date”). According to the Acquisition Agreement, we (i) delivered to IMHC all of the outstanding shares
of common stock of TOGI that we owned, and (ii) forgave and eliminated the intracompany accounts between us and TOGI evidencing historical
equity investments made by us in TOGI, in the approximate amount of $36,000,000, in consideration for the issuance by IMHC to us (the
“Transaction”) of an aggregate of 25,000 newly designated shares of Series A Preferred Stock (the “IMHC Preferred Stock”),
with each such share having a stated value of $1,000. Immediately following the Closing Date, TOGI became a wholly owned subsidiary of
IMHC. The parties to the Agreement have agreed that, upon completion of the Transaction but subject to IMHC’s compliance with the
federal securities laws, IMHC will change its name to TurnOnGreen, Inc. Further, through an upstream merger whereby the current TOGI ceased
to exist, which was consummated on September 8, 2022, IMHC owns the former TOGI’s two operating subsidiaries, TOG Technologies and
Digital Power. IMHC intends to dissolve its dormant subsidiary.
On September 5,
2022, we, IMHC and TOGI entered into an amendment to the Acquisition Agreement (the “Amendment”), pursuant to which IMHC agreed
to (i) use commercially reasonable efforts to effectuate a distribution by us of approximately 140 million shares of Common Stock that
we beneficially own (the “Distribution”), including the filing of a registration statement (the “Distribution Registration
Statement”) with the SEC, (ii) to issue to us warrants to purchase an equivalent number of shares of Common Stock to be issued in
the Distribution (the “Warrants”), and (iii) to register the Warrants and the shares of Common Stock issuable upon exercise
of the Warrants on the Distribution Registration Statement.
On June 1, 2022, the Company converted the
principal amount under the convertible promissory notes issued to it by AVLP and accrued but unpaid interest into common stock of AVLP.
The Company converted $20.0 million in principal and $5.9 million of accrued interest receivable at a conversion price of $0.50 per share
and received 51,889,168 shares of common stock increasing its common stock ownership of AVLP from less than 20% to approximately 92%.
On June 8, 2022,
Ault Lending entered into a securities purchase agreement with Ecoark Holdings, Inc. (“Ecoark”) whereby Ault Lending agreed
to purchase $12,000,000 of a new series of convertible preferred stock of Ecoark, which transaction closed on June 29, 2022. As part of
the transaction we were issued 102,881 shares of Ecoark’s common stock and a warrant to purchase forty-nine percent (49%) of Ecoark’s
common stock calculated on a fully diluted basis, subject to certain terms and conditions. Pursuant to a mutually agreed upon use of proceeds,
Ecoark intends to deploy significant proceeds via its subsidiary White River Holdings Corp. (“White River”) towards an oil
drilling program across its cumulative 30,000 acres of active mineral leases at both shallow, intermediate, and deep levels. Ecoark will
also deploy additional proceeds via its subsidiary Agora Digital Holdings, Inc. (“Agora Digital”) to provide us with up to
78 megawatts (“MW”) of power within the State of Texas for digital asset mining capacity, subject to our election to proceed
with this facility after having conducted the requisite due diligence.
On December 6,
2022, BNI entered into a hosting agreement with Agora Digital securing up to 78 MW of power. Agora Digital will initially provide up to
12 MW of electricity for our use, which we believe will enable us to initially power 3,750 S19j Pro miners in the first quarter of 2023.
The Agora Digital power capacity would, if the project proceeds as presently anticipated, expedite our recently announced plans to significantly
expand our Bitcoin mining production capacity, including growing our number of deployed Bitcoin miners to approximately 23,065, representing
an expected mining production capacity of approximately 2.67 exahashes per second.
On June 10, 2022, we entered into an At-The-Market
Issuance Sales Agreement (the “2022 Preferred Sales Agreement”) with Ascendiant to sell shares of our 13.00% Series D Cumulative
Redeemable Preferred Stock (the “Preferred Shares”) having an aggregate offering price of up to $46.4 million from time to
time, through an “at the market offering” program (the “2022 ATM Preferred Offering”). The offer and sale of Preferred
Shares from the 2022 ATM Preferred Offering was made pursuant to our effective “shelf” registration statement on Form S-3
and an accompanying base prospectus contained therein (Registration Statement No. 333-260618) which became effective on November 12, 2021.
Through January 20, 2023, we had received gross proceeds of approximately $643,000 through the sale of 41,992 Preferred Shares in the
2022 ATM Preferred Offering.
In June 2022, Ault Lending purchased a majority
of the issued and outstanding shares of SMC in open market transactions. SMC is a Nasdaq-listed company that is
a worldwide leader in consumer karaoke products. The first to provide karaoke systems for home entertainment in the United
States, SMC sells its products world-wide through major mass merchandisers and online retailers. SMC
products incorporate the latest technology for singing practice, music listening, entertainment and social sharing and provides access
to over 100,000 songs for streaming and download.
On July 11, 2022, we announced the formation
of Ault Energy, LLC (“Ault Energy”), a wholly owned subsidiary of Ault Alliance. Ault Energy will partner with White River
Holdings Corp. (“White River”), a wholly owned subsidiary of Ecoark Holdings, Inc. (“Ecoark”), on drilling projects
across 30,000 acres in Texas, Louisiana and Mississippi. Ault Energy, as Ault Lending’s designee, has the right to purchase up to
25%, or such higher percentages at the discretion of White River, in various drilling projects of White River. In August 2022, Ault Energy
committed to purchasing 40% of the first drilling project offered, at a cost to Ault Energy of approximately $1 million.
On August 10, 2022, we, through our BNI
and Ault Lending subsidiaries, entered into a note purchase agreement providing for the issuance of secured promissory notes with an aggregate
principal face amount of $11,000,000 and an interest rate of 10%. The purchase price for the secured promissory notes was $10.0 million.
The secured promissory notes have a security interest in marketable securities, investments and certain Bitcoin mining equipment. The
secured promissory notes are further secured by a guaranty provided by us, as well as by Milton C. Ault, our Executive Chairman. The maturity
date of the secured promissory notes is August 10, 2023. BNI is required to make monthly payments (principal and interest) of $1,000,000
on the tenth calendar day of each month, starting in September 2022. After six months, BNI may elect to pay a forbearance fee of $250,000
in lieu of a monthly payment, which would extend the maturity date of the related secured promissory notes.
On August 15, 2022,
BNI entered into a hosting agreement with Compute North LLC (“Compute North”) to host 6,500 S19j Pro Antminers owned by BNI
for a period of five years. BNI granted Compute North a continuing first-position security interest in the hosted miners, as collateral
for BNI’s obligations under the hosting agreement. On September 22, 2022, Compute North filed for bankruptcy protection, effectively
rendering this hosting agreement null and void. As of the date of this prospectus, we are attempting to ascertain how to best remediate
On November 7, 2022, we and certain of our
subsidiaries borrowed $18.9 million of principal amount of term loans (the “Loans”) from a group of institutional investors
(the “Financing”). The Loans mature in 18 months, which may be extended to 24 months, accrue interest at the rate of 8.5%
per annum and are secured by certain of our and certain of our subsidiaries’ assets. Starting in January 2023, the lenders have
the right to require us to make monthly payments of $0.6 million, which will increase to $1.1 million in November 2023. The Loans were
issued with an original issue discount of $1.89 million.
The lenders received warrants to purchase
approximately 4.5 million shares of our common stock, exercisable for four years at $0.45 per share and warrants to purchase another approximately
4.5 million shares of our common stock, exercisable for four years at $0.75 per share, subject to adjustment.
On November 7, 2022, Ault Aviation, LLC,
a wholly owned subsidiary of the Company (“Ault Aviation”), used proceeds from the Loans to purchase a private aircraft for
a total purchase price of $15.8 million. In addition, the Company and certain of its subsidiaries entered into various agreements
as collateral for the repayment of the Loans, including (i) a security interest in certain Bitcoin mining equipment, (ii) a pledge of
the membership interests of Third Avenue Apartments, (iii) a pledge of the membership interests of ACS, (iv) a pledge of the membership
interests of Ault Aviation, (v) a pledge in a segregated deposit account of $1.5 million of cash, (vi) a mortgage and security agreement
by Third Avenue Apartments on the real estate property owned by Third Avenue Apartments in St. Petersburg, Florida, (vii) a future advance
mortgage by ACS on the real estate property owned by ACS in Dowagiac, Michigan, and (viii) an aircraft mortgage and security agreement
by Ault Aviation on the private aircraft purchased by Ault Aviation on November 7, 2022. The Loans are guaranteed by Ault Lending, LLC,
Ault & Company, Inc., an affiliate of the Company, as well as Milton C. Ault, III, our Executive Chairman and the Chief Executive
Officer of Ault & Company, Inc.
On November 18, 2022, Circle 8 Newco LLC,
a newly formed Delaware limited liability company (“Circle 8 Newco”), entered into an Asset Purchase Agreement (the “Asset
Purchase Agreement”) with Circle 8 Crane Services LLC, a Delaware limited liability company (“Circle 8 Crane Services”)
pursuant to which Circle 8 Newco agreed to purchase substantially all of the assets (the “Acquired Assets”) and assume certain
specified liabilities of Circle 8 Crane Services (the “Circle 8 Transaction”). Circle 8 Newco is a wholly owned subsidiary
of Circle 8 Holdco LLC, a Delaware limited liability company (“Circle 8 Holdco”). Circle 8 Holdco is a subsidiary of our former
subsidiary Ault Alliance, Inc., a Delaware corporation and is presently directly owned by us. We own a controlling interest in Circle
On December 16,
2022 we entered into a Securities Purchase Agreement (the “SPA”) with an accredited investor (the “Investor”)
providing for the issuance of a secured promissory note (the “Note”) with an aggregate principal face amount of $14,700,000
(the “Financing”). On December 29, 2022, the Company and the accredited investor entered into an amended and restated amendment
to the SPA, pursuant to which the total amount of the financing was increased to $17,456,245 and the Company sold an additional note to
a second accredited investor.
Under the SPA, we are obligated to repay,
while the Note remains outstanding, (i) eighty percent (80%) of the proceeds we may receive from any financing conducted, other than at-the-market
offerings and (ii) one hundred percent (100%) of the proceeds we may receive from the sale of marketable securities by Ault Lending. In
addition, if Third Avenue Apartments, LLC (“Third Avenue”), our wholly owned subsidiary, sells the property it owns in St.
Peterburg, Florida, then we will use the net proceeds from the sale of such property in excess of $10 million, to repay the Note. In addition,
we agreed to issue 11,605,913 shares of our common stock to the Investor in exchange for the cancellation of all outstanding warrants
previously issued to the Investor, which warrants were exercisable for 11,605,913 shares of our common stock.
On December 19,
2022, the Asset Purchase Agreement referred to above closed and Circle 8 Newco purchased the Acquired Assets. As consideration for the
acquisition of the Acquired Assets, Circle 8 Crane Services received Class D equity interests in Circle 8 Holdco and is eligible to receive
cash earnout payments in an aggregate maximum amount of up to $2,100,000 based on the achievement by Circle 8 Newco of certain EBITDA
targets over the three year period following the completion of the acquisition of the Acquired Assets by Circle 8 Newco. We contributed
$12 million to Circle 8 Newco, and an independent third party contributed $4 million, of which approximately $11,650,000 was used to pay
down a portion of the Circle 8 Crane Services’ senior debt facility at the closing, $3,000,000 of which was used to pay off Circle
8 Crane Services’ subordinated debt facility in full at the closing and $1,350,000 was used to pay the expenses of Circle 8 Newco
and Circle 8 Crane Services. In addition, Circle 8 Newco assumed a new line of credit issued by Circle 8 Crane Services’ current
We are a Delaware corporation, initially
formed in California in 1969 and reincorporated in Delaware in 2017. We are located at 11411 Southern Highlands Parkway, Suite 240, Las
Vegas, NV 89141. Our phone number is (949) 444-5464 and our website address is www.ault.com.
Our Corporate Structure
On January 19, 2021, we changed our name
from DPW Holdings, Inc. to Ault Global Holdings, Inc., on December 13, 2021, we changed our corporate name from Ault Global Holdings,
Inc. to BitNile Holdings, Inc. and on January 3, 2023, we changed our name from BitNile Holdings, Inc. to Ault Alliance, Inc (together,
the “Name Changes”). The Name Changes were each effected through a parent/subsidiary short form merger pursuant to an Agreement
and Plan of Merger dated January 7, 2021, December 1, 2021 and December 20, 2022, respectively. None of the mergers or the corresponding
Name Change affected the rights of our security holders. Our common stock is traded on the NYSE American under the symbol “AULT.”
Existing stock certificates that reflect our prior corporate names continue to be valid. Certificates reflecting the new corporate name
are issued as old stock certificates are tendered for exchange or transfer to our transfer agent. Concurrent with the change in our name
to Ault Global Holdings, Inc., Milton C. Ault III was appointed as our Executive Chairman, William B. Horne was appointed as our Chief
Executive Officer and remains as Vice Chairman of our board of directors (the “Board”), and Henry Nisser was appointed as
our President and remains as our General Counsel.
Commencing in October 2019 and continuing
through January 3, 2023, we reorganized our corporate structure pursuant to a series of transactions by and among BitNile and its directly
and indirectly owned subsidiaries. The purpose of the reorganization was to align our various businesses by the products and services
that constitute the majority of each subsidiaries’ revenues. As a result of the foregoing transactions, our streamlined corporate
structure is currently as follows:
Our Business Strategy
As principally a holding company, our business
strategy is designed to increase stockholder value. Under this strategy, we are focused on managing and financially supporting our existing
subsidiaries and partner companies, with the goal of pursuing monetization opportunities and maximizing the value returned to stockholders.
We have, are and will consider initiatives including, among others: public offerings, the sale of individual partner companies, the sale
of certain or all partner company interests in secondary market transactions, or a combination thereof, as well as other opportunities
to maximize stockholder value, such as activist trading. We anticipate returning value to stockholders after satisfying our debt obligations
and working capital needs.
On October 7, 2019, we created an Executive
Committee which is comprised of our Executive Chairman, Chief Executive Officer and President. The Executive Committee meets on a daily
basis to address the Company’s critical needs and provides a forum to approve transactions which are communicated to our Chief Financial
Officer and Senior Vice President of Finance on a bi-weekly basis by our Chief Executive Officer.
Our Executive Committee approves and manages
our investment and trading strategy. The Executive Committee has decades of experience in financial, investing and securities transactions.
Led by our Founder and Executive Chairman, Milton C. (Todd) Ault, III, we seek to find undervalued companies and disruptive technologies
with a global impact. We use a traditional methodology for valuing securities that primarily looks for deeply depressed prices. Upon making
an investment, we often become actively involved in the companies we seek to acquire. That activity may involve a broad range of approaches,
from influencing the management of a target to take steps to improve stockholder value, to acquiring a controlling or sizable but non-controlling
interest or outright ownership of the target company in order to implement changes that we believe are required to improve its business,
and then operating and expanding that business. Mr. Ault relies heavily on William B. Horne, our Vice Chairman and Chief Executive Officer,
and Henry Nisser, our President and General Counsel, to provide analysis and guidance on all acquisition targets and throughout the acquisition
From time to time, we engage in discussions
with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process we initiate.
To the extent we believe that a subsidiary partner company’s further growth and development can best be supported by a different
ownership structure or if we otherwise believe it is in our stockholders’ best interests, we will seek to sell some or all of our
position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers
and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly traded partner
companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies public
through rights offerings, mergers or spin-offs and directed share subscription programs. We will continue to consider these and functionally
equivalent programs and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value
for our stockholders.
Our Executive Committee acts as the underwriting
committee for Ault Lending and approves all lending transactions. Under its business model, Ault Lending generates revenue through origination
fees charged to borrowers and interest generated from each loan. Ault Lending may also generate income from appreciation of investments
in marketable securities as well as any shares of common stock underlying convertible notes or warrants issued to Ault Lending in any
Over the recent past, we have provided capital
and relevant expertise to fuel the growth of businesses in cryptocurrency mining, DeFi, defense/aerospace, industrial, telecommunications,
medical and textiles. We have provided capital to subsidiaries as well as partner companies in which we have an equity interest or may
be actively involved, influencing development through board representation and management support.
Our Principal Subsidiaries and their Businesses
The following is a brief summary of
the businesses in which we own a controlling interest at September 30, 2022:
BNI conducts data center operations and
Bitcoin mining through ACS.
BNI is a blockchain technology company focused
on mining of Bitcoin, among other activities. We mine using purpose-built computers (or “miners”) to solve complex cryptographic
algorithms (or “verify” or “solve” blocks) in the blockchain in exchange for rewards and fees denominated in the
native token of that blockchain network. Our miners provide computing power to a Bitcoin mining pool operator, in which all the participants’
machines mine Bitcoin as a collective group, and we get paid the expected value of both the block reward and transaction fees for doing
so, rather than mine directly for our own account. The mine pool operators receive block rewards and transaction fees paid in Bitcoin
by the blockchain when the mine pool finds new blocks. The reward and transaction fees are then shared by the pool participants based
on their hash rate contributions to the pool, less a small amount of fees.
We will evaluate each digital asset in our
portfolio, or that we propose to acquire in the future (including by mining), to determine whether it would likely be considered a security
under U.S. federal securities laws, in consultation with outside counsel, as applicable. We will base our analysis on relevant case law,
applying the frameworks established by the U.S. Supreme Court and taking into consideration relevant guidance by the SEC and its staff.
See “Risk Factors — Risks Related to Our Bitcoin Operations – Legal and Regulatory —
A particular digital asset’s status as a ‘security’ in any relevant jurisdiction is subject to a high degree of uncertainty
and if a regulator disagrees with our characterization of a digital asset, we may be subject to regulatory scrutiny, investigations, fines
and penalties, which may adversely affect our business, operating results and financial condition. A determination that Bitcoin that we
own or mine is a ‘security’ may adversely affect the value of Bitcoin and our business.”
Since commencement of our mining operations
in 2021 at the Facility, we have received 437.7 Bitcoin for providing computing power to a Bitcoin mining pool operator through September
30, 2022. While the Bitcoin received is available for sale in the ordinary course of business, we believe that cryptocurrency represents
an attractive, appreciating investment opportunity, and as such we have historically held cryptocurrency assets that we do not otherwise
sell to fund our operating expenses. For example we have in the recent past determined it to be in the Company’s best interest to
sell, and have sold, 328.2 Bitcoin, or the equivalent of $8.8 million, in order to pay expenses associated with operating our business.
We do not, however, acquire crypto currencies for investment purposes. On September 30, 2022, we held 100.44 Bitcoin valued at $1.9 million
based on prices as of such date. Our total revenue from mining operation was $11.4 million during the nine months ended September
30, 2022. Our mining operations generated a net loss of $5.3 million and revenue of $11.4 million during the nine months ended September
30, 2022. As of September 30, 2022, the $1.9 million carrying value of our 100.44 Bitcoins represented 0.3% of our total assets of $612.9
million as of such date.
Traditional finance has historically had
poor customer service and a less than desirable user experience in mobile and web-based platforms, which opens the door to massive disruption
through digital technologies. Additionally, central bank intervention in the financial markets has increasingly turned to money printing
through quantitative easing, which increasingly dilutes the buying power of the global fiat currency market and leads the world to seek
more scarce alternatives. The first phase of the digital transformation has been through the creation of blockchain-based digital assets.
We believe the second phase of this transition will be take form in bridges being built between DeFi and traditional finance to help improve
customer service and user experience in traditional finance.
We foresee a time when traditional banking
is done in the palm of our hands in community-based, peer-to-peer transactions as opposed through financial intermediaries. This community-based,
peer-to-peer network is otherwise known as DeFi. Although we do not believe DeFi will replace traditional finance in the near- to medium-term,
we believe this transition will happen rapidly over the next 20 years as Millennials and Gen-Xers become the power class and the Baby
Boomers retire. DeFi is a concept whereby traditional financial intermediaries are not required to process transactions. The proliferation
of blockchain-based protocols will enable participants to offer novel financial products to banking customers. For instance, in a world
where traditional finance provides savings account rates less than 1%, DeFi protocols can provide savings accounts with significantly
higher yields. Traditional financial platforms are not currently designed to distribute these products to its customers. We believe that
in the near-term integrating a traditional broker dealer could help facilitate the distribution of these decentralized finance protocols
to a broad base of customers. While we recognize DeFi is in its infancy stage, we believe blockchain will be integral to its advancement.
We recognize the uncertainties in DeFi and its effect on our economy both in the U.S. and globally, and acknowledge that this is a new
evolving area that may not evolve as we anticipate and in which we may never be a material participant.
We have no present intention of incorporating
Earnity’s business or operations, or that of any other DeFi platform, with our own.
Cryptocurrency and Cryptocurrency Mining Overview
Blockchain and Cryptocurrencies Overview
Cryptocurrencies are a type of digital asset
that function as a medium of exchange, a unit of account and/or a store of value (i.e. a new form of digital money). Cryptocurrencies
operate by means of blockchain technology, which generally uses open-source, peer-to-peer software to create a decentralized digital ledger
that enables the secure use and transfer of digital assets. We believe cryptocurrencies and associated blockchain technologies have potential
advantages over traditional payment systems, including: the tamper-resistant nature of blockchain networks; rapid-to-immediate settlement
of transactions; lower fees; elimination of counterparty risk; protection from identify theft; broad accessibility; and a decentralized
nature that enhances network security by reducing the likelihood of a “single point of failure.” Recently, cryptocurrencies
have gained widespread mainstream attention and have begun to experience greater adoption by both retail and institutional investors and
the broader financial markets. For example, Bitcoin’s aggregate market value had appreciated to $1 trillion in February 2021
compared to $160 billion in February 2020, exceeded $800 billion in February 2022 and has recently seen a reduction to approximately
$325 billion as of November 9, 2022. All figures are derived from Yahoo Finance and data furnished by Messari.io, an independent entity
with which we have no relationship and that, in its own words, “brings transparency to the crypto economy.” As cryptocurrencies,
and blockchain technologies more generally, have entered the mainstream, prices of digital assets have reached all-time highs and the
broader ecosystem has continued to develop. While we expect the value of Bitcoin to remain volatile, we believe this increase in aggregate
market value signals institutionalization and wider adoption of cryptocurrency.
Cryptocurrencies are decentralized currencies
that enable near instantaneous transfers. Transactions occur via an open source, cryptographic protocol platform which uses peer-to-peer technology
to operate with no central authority. The online network hosts the public transaction ledger, known as the blockchain, and each cryptocurrency
is associated with a source code that comprises the basis for the cryptographic and algorithmic protocols governing the blockchain. In
a cryptocurrency network, every peer has its own copy of the blockchain, which contains records of every historical transaction — effectively
containing records of all account balances. Each account is identified solely by its unique public key (making it effectively anonymous)
and is secured with its associated private key (kept secret, like a password). The combination of private and public cryptographic keys
constitutes a secure digital identity in the form of a digital signature, providing strong control of ownership.
No single entity owns or operates the network.
The infrastructure is collectively maintained by a decentralized public user base. As the network is decentralized, it does not rely on
either governmental authorities or financial institutions to create, transmit or determine the value of the currency units. Rather, the
value is determined by market factors, supply and demand for the units, the prices being set in transfers by mutual agreement or barter
among transacting parties, as well as the number of merchants that may accept the cryptocurrency. Since transfers do not require involvement
of intermediaries or third parties, there are only nominal transaction costs in direct peer-to-peer transactions. For example:
|●||In terms of conventional peer-to-peer transactions, there either are no fees or they are de minimis (Source:
|●||For purposes of traditional networks, there are nominal fees associated with any transaction (Source:
|●||As of November 13, 2022, the average Bitcoin network fee is $1.19 per transaction, which is still very
low compared to conventional transaction fees charged by banks and other more traditional financial institutions (https://bitinfocharts.com/bitcoin).|
The network fee is separate and distinct
from the pool fee we pay Antpool for its services in acting as a pool operator, discussed below. The network fee is applicable to anyone
who transacts on the blockchain.
Given that block space is limited, mining
fees can and often do fluctuate significantly from transaction to transaction as a result of “congestion.” However, this congestion
does not negate any of the statements made immediately above.
Units of cryptocurrency can be converted
to fiat currencies, such as the U.S. dollar, at rates determined on various exchanges, such as Binance, Coinbase, FTX, Kraken, Gemini
and others. Cryptocurrency prices are quoted on various exchanges and fluctuate with extreme volatility.
We believe cryptocurrencies, particularly
Bitcoin, the only cryptocurrency we receive for providing computing power to a mining pool operator, offer many advantages over traditional,
fiat currencies, although many of these factors also present potential disadvantages and may introduce additional risks, including:
|●||Acting as a fraud deterrent, as cryptocurrencies are digital and cannot be counterfeited or reversed arbitrarily
by a sender;|
|●||Elimination of counterparty risk;|
|●||No trusted intermediary required;|
|●||Identity theft prevention;|
|●||Transactions are verified and protected through a confirmation process, which prevents the problem of
|●||Decentralized — no central authority (government or financial institution); and|
|●||Not recognized universally and not bound by government imposed or market exchange rates.|
However, cryptocurrencies may not provide all of the benefits
they purport to offer.
Limitations on Bitcoin Mining
In addition to competition, there are two
factors that may affect all digital asset mining companies and Bitcoin in particular: (i) limitations on the supply of the cryptocurrency
being mined; and (ii) the market price of the cryptocurrency.
The blockchain’s method for creating
new Bitcoins is mathematically determined in a manner so that the supply of Bitcoins grows at a limited rate pursuant to a pre-set schedule.
Specifically, the number of Bitcoins awarded for solving a new block is automatically halved for every 210,000 blocks that are solved.
The current fixed reward for solving a new block is 6.25 Bitcoins per block, which was reduced from 12.5 Bitcoins in May 2020. This deliberately
controlled rate of Bitcoin creation means that the number of Bitcoins in existence will never exceed 21 million and that Bitcoins
cannot be devalued through excessive production unless the Bitcoin network’s source code and the underlying protocol for Bitcoin
issuance is altered. This also means, however, that our revenue prospects will decline unless the price of a Bitcoin increases commensurately
or we acquire more miners.
We currently only participate in mining
pools that mine Bitcoin. Our ability to generate revenue from these mining operations will be dependent on the price of Bitcoin. On September 24,
2021, the Bank of China announced that all cryptocurrency trading and mining are illegal in China. Bitcoin and Ethereum, the second largest
digital currency, fell 5% and 7%, respectively. The prices of cryptocurrencies, specifically Bitcoin, have experienced substantial volatility,
including fluctuation patterns which may reflect “bubble” type volatility, meaning that high or low prices at a given time
may not be indicative of the current or future value of Bitcoin. The price of a Bitcoin may be subject to rapidly changing investor and
market sentiment, and may be influenced by factors such as technology, regulatory developments and media coverage. Further, Bitcoin’s
value, like that of other cryptocurrencies, may be based on various factors, including their acceptance as a means of exchange or purchasing
power by consumers and vendors, volume, liquidity and transferability and market demand. Bitcoin’s current price reflects, in part,
the belief by some that Bitcoin could become a widely accepted form of currency; however, if this prediction turns out to be incorrect
its price could decrease dramatically, as would our prospects for future revenue and profits. See “Risk Factors – Risks Related
to Our Bitcoin Operations” for more information on the risks we face due to our mining of Bitcoin and its speculative and volatile
Cryptocurrency Mining and Mining Pools
As a participant in a cryptocurrency mining
pool, we use specialized miners to solve cryptographic math problems necessary to record and “publish” cryptocurrency transactions
to blockchain ledgers. Generally, each cryptocurrency has its own blockchain, which consists of software code (also known as a protocol),
which is run by all the computers on the network for such blockchain. Within this code, transactions are collated into blocks, and these
blocks must meet certain requirements to be verified by the blockchain software, added to the blockchain or ledger of all transactions
and published to all participants on the network that are running the blockchain software. After a transaction is verified, it is combined
with other transactions to create a new block of data for the blockchain. For proof-of-work blockchains, the process of verifying valid
blocks requires computational effort to solve a cryptographic equation, and this computational effort protects the integrity of the blockchain
ledger. This process is referred to as “mining.” As a reward for verifying a new block, miners receive payment in the form
of the native cryptocurrency of the network (e.g., Bitcoin). This payment is comprised of a block reward (i.e., the automatic issue of
new cryptocurrency tokens) and the aggregated transaction fees for the transactions included in the block (paid in existing cryptocurrency
tokens by the participants to the transactions). The block reward payments and the aggregated transaction fees are what provide the incentive
for miners to contribute hash rate to the network.
A “hash” is the actual cryptographic
function run by the miners, and is a unique set of numbers and letters derived from the content of the block. The protocol governing the
relevant blockchain sets certain requirements for the hash. Miners compete to be the first to generate a valid hash meeting these requirements
and, thereby, secure payment for solving the block. Hash rate is the speed at which miners can complete the calculation, and therefore
is a critical measure of performance and computational power. A high rate means a miner may complete more calculations over a given period
and has a greater chance to solve a block. An individual miner has a hash rate total of its miners seeking to mine a specific cryptocurrency,
and the blockchain-wide hash rate for a specific cryptocurrency can be understood as the aggregate of the hash rates of all of the miners
actively trying to solve a block on that blockchain at a given time.
The protocols governing Bitcoin and other
cryptocurrencies are coded to regulate the frequency at which new blocks are verified by automatically adjusting what is known as the
“mining difficulty,” which is the level of computational activity required before a new block is solved and verified. For
example, on the Bitcoin blockchain the protocol is coded such that a new block is solved and verified approximately every ten minutes,
while on Ethereum blocks are designed to be solved approximately every twelve to fifteen seconds. As such, to the extent the hash power
on the network is increased or decreased due to, for example, fluctuations in the number of active miners online, mining difficulty is
correspondingly increased or decreased to maintain the preset interval for the verification of new blocks.
On certain cryptocurrency networks, including
Bitcoin, the rewards for solving a block are also subject to periodic incremental halving. Halving is a process designed to control the
overall supply and reduce the risk of inflation in cryptocurrencies using a proof-of-work consensus algorithm. After a predetermined number
of blocks are added to the blockchain, the mining reward is cut in half, hence the term “halving.” The last halving for Bitcoin
occurred on May 11, 2020. The next halving for Bitcoin is expected to occur in 2024, and as such, absent any changes to the Bitcoin
protocols, the block reward will remain stable until then. By contrast, Ethereum does not have a maximum supply limit or pre-determined
reduction in reward amounts. Rather, Ethereum currently has a fixed issuance schedule of 2.0 Ether per block mined. However, Ethereum
has on two separate occasions reduced the quantity of ETH rewarded per block and may make additional changes in the future, as it did
when it recently transitioned to a proof-of-stake consensus mechanism. Transaction fees are variable and depend on the level of activity
on the network. Generally, transaction fees increase during times of network congestion, as miners will prefer transactions with higher
fees, and therefore a higher fee can reduce the time to process a transaction, and decrease when there are fewer transactions on the network.
As the total amount of available hash rate
has increased (particularly on the Bitcoin network), it has become increasingly difficult for any individual miner to independently solve
a block and as a result “mining pools” have emerged as an efficient way for miners to pool resources. Mining pools aggregate
the hash rate of various miners participating in the mining pool. In this way the mining pool operator, rather than an individual miner,
validates the block and receives the block reward and related transaction fees. The mining pool is organized by a third party, in our
case Antpool.com. In consideration for receiving a percentage of the earned block rewards and transaction fees, Antpool.com administers
the pool and ensures that the participants in the pool receive their share of the block reward and related transaction fees, generally
pro-rata to their contributed hash rate. Mining pools offer miners more predictable and consistent revenue compared to mining individually.
We participate in mining pools by providing what the industry refers to as “hashrate” to the pool. Hashrate is defined as
the computing power that our mining equipment produces when helping to validate a block that the mining pool is trying to solve. We use
the FPPS, or Full Pay-Per-Share, method when mining with Antpool.com. Pursuant to the “Full Pay Per Share” model, both the
block reward and the mining service charge are settled according to the theoretical profit. It includes the calculation of a standard
transaction fee within a certain period and distributes it to mining pool participants according to their hash power contributions in
the pool. It increases the mining pool participants’ earnings by sharing transaction fees. Standard transaction fees are calculated
using a certain period which are then distributed to miners according to their hash power contributions in the pool. Antpool.com currently
charges us a 1% mining fee.
We provide computing power to the mining
pool, which is run by the mining pool operator with whom we contract, who in turn provides transaction verification services. Based on
the terms of the agreement, in our judgment, the mining pool operator is considered the principal in providing mining pool services. We
recognize revenue, net of certain transaction fees from the mining pool operator, which are not considered material. To date, we have
only used one mining pool operator. Our current mining pool agreement is cancelable at any time by either party without penalty. Revenue
received from for providing computing power would be directly impacted positively or negatively should we start and stop providing computing
power to the mining pool operator within a given reporting period.
We aim to optimize our mining by identifying
and purchasing the most profitable miners with industry-leading returns on investment and actively monitoring and adjusting the operation
of those machines to enhance their performance. When planning our short- and long-term operating strategies and capital expenditures,
we carefully monitor fluctuations and longer-term trends in the value of certain cryptocurrencies, which impacts the return on investment
of machines. We also regularly evaluate potential innovations in geography, physical footprint, computing technology and similar areas
to improve our operations and productivity. We believe this smart-growth strategy, including our commitment to mining efficiency and return
on investment in miners, will enable us to build value over the long term.
Own and Operate Our Mining Facilities
We are investing heavily in purchasing,
building and operating our mining facilities. By owning and operating our miners at facilities that offer competitive advantages, including
access to reliable, low-cost, renewable power and room for expansion, we expect to have greater control over the timing of the purchase
and deployment of our miners. We also may enhance our ability to intelligently and quickly adapt our operating model and reap savings
compared to paying for outsourced operations and infrastructure. We anticipate that we will continue to consider other opportunities to
integrate our operations, including with respect to both the software utilized by our fleet and the associated hardware.
Reliable, Low-Cost, Renewable Power
Power represents our highest variable direct
cost for our mining operations, with electrical power required to operate the miners. We believe the combination of increased mining difficulty,
driven by greater hash rates, and the periodic adjustment of reward rates, such as the halving of Bitcoin rewards, will drive the increasing
importance of power efficiency in cryptocurrency mining over the long term. As a result, we are focused on deploying our miners at locations
with access to reliable, renewable power sources, as successfully doing so should enable us to reduce our power costs.
Miners require considerable amounts of electrical
energy to perform their functions and mine Bitcoin; consequently, a critical aspect of operating in the cryptocurrency mining industry
is obtaining a reliable supply of electricity at a relatively low and stable cost. To this end, in January 2021, ACS purchased the Facility,
which currently has access to 28 megawatts of power in preparation for the planned purchase of Bitcoin mining equipment. Since the purchase
of the Facility, we have invested in infrastructure improvements and began both ramping up the sites power capacity and installing S19j
Pro miners. To date, we have increased power load from 1.5 megawatts to 28 megawatts. In addition, we have received a commitment by the
utility company that currently provides our power to expand the site’s capacity up to 297 megawatts, for which we are currently
working on setting forth in a formal agreement. Our relationship with the utility company has grown as we have demonstrated our ability
to upgrade and use power at our site effectively. We are in the midst of finalizing those expansion details with the utility company,
engineers, and Economic Development Agency. This planned expansion would allow the operation of up to as many as 90,000 Bitcoin miners
at the Facility.
We continue to evaluate other sites, locations,
and partnerships for additional and alternative support of future mining operations. While we have not at present entered into any other
agreements, we will continue to explore and evaluate additional facilities that that would enable us to expand our mining operations as
We expect to enter into power agreements
that will allow us to have one of the highest carbon-free energy footprints at a price equal to or less than the current cost of fossil
fuel energy in other locations, based on current market power costs as of the date of this prospectus.
Our Mining Operations
On January 29, 2021, ACS closed on the acquisition
of the 617,000 square foot energy-efficient Facility for a purchase price of $4.0 million. The purchase price was paid by our own working
capital. The Facility has been remodeled and converted over the past year into a site focused on three types of business (commercial real
estate, enterprise data center, and high-density computing).
The buildout of the initial 30,000 square
feet will be used primarily for our bitcoin mining operations. While we believe the Facility and its anticipated future operations will
be successful, there is a risk that its expectations will not materialize in a timely manner, if at all.
During the fiscal year ended December 31,
2021, we executed contracts to purchase 4,000 Antminer S-19 Pro Bitcoin miners. The aggregate purchase price was $23 million. In November
2021, we executed contracts to purchase 16,600 Bitcoin miners for $128 million. In aggregate, we have received discounts of approximately
$31 million on these contracts. The purchase includes both the environmentally friendly S19 XP Antminers that feature a processing power
of 140 terahashes per second (TH/s) with an energy consumption of 3.01 kilowatt-hours (kWh) and the S19j Pro Antminers that feature a
processing power of approximately 100 TH/s with an energy consumption of 2.95 kWh. As of January 15, 2023, we have received all such miners
from Bitmain Technologies Limited (“Bitmain”) and we have paid the total purchase price of approximately $120 million, inclusive
of discounts. The supplier, Bitmain, does not disclose when the miners are manufactured. We had a futures purchase contract and Bitmain
supplied equipment according to the scheduled delivery as outlined in these agreements. All dollar amounts provided in this paragraph
exclude fees payable in connection with obtaining the ability to enter into the contracts, shipping of the Bitcoin miners and third-party
commissions. As of the date of this prospectus, these costs amounted to approximately $24.3 million.
Our strategy includes identifying less expensive,
clean power for our Bitcoin mining operations. Management of the company has considered the issues surrounding the environmental impact
of our Bitcoin mining operations. Based on this review, we have concluded that the environmental impact of our mining operations is not
material given that approximately 85% of the energy we use is “green,” meaning it is sourced from nuclear, wind or solar power.
In addition to our continued expansion investments at the Facility, we also seek out new locations to support our bitcoin mining business.
We consider sites with a variety of offerings, including purchasing the site (as we have done in Michigan), but also leasing buildings
and facilities, hosting relationships and strategic partnerships. At this time, we have not entered into any new mining agreements at
locations other than the Facility. We currently mine Bitcoin only.
Coins that are mined are held in a custodial
account as digital assets. We securely store our digital assets at Gemini Trust Company, LLC (“Gemini”), a regulated, audited
and insured cryptocurrency custodian. The custody arrangements require that we mine to a custodial wallet address where the private key
is held by the custodian and all keys for the wallet are held in cold storage. This provides a layer of protection in both the transaction
and liquidation phases of the operations by using multi-factor and multi-person approval processes, to include Know Your Customer and
Anti-Money Laundering procedures of the receiving party. We will either hold the digital assets or may choose to convert those assets
into fiat currency depending on financial needs and plans. When we opt to convert the digital assets we sell or exchange our Bitcoin through
Gemini, the custodian of our digital wallet. When we elect to make a sale or exchange our Senior Vice President - Finance submits a request
to Gemini’s execution department to exchange Bitcoin for U.S. dollars. Gemini sends an approval email to our CEO to approve. Once
approved by our CEO, Gemini executes the sale/exchange on its trading platform at current market prices, less commissions, and deposits
the U.S. dollars into our bank account.
Beyond the foregoing, our custody agreement
with Gemini provides that:
|●||Gemini provides a unique custody account in which all our blockchain assets are held, which are segregated
from all others’ assets and are verifiable through the blockchain; and|
|●||Gemini charges us fees in bitcoin, which is deducted from our digital assets on the last business day
of every month.|
Currently, we are converting bitcoin received
from our mining activities into fiat currency on a bimonthly basis, on average, to pay for operating costs and purchase commitments for
new mining equipment. We are not currently holding any digital assets for investment.
Our Contracts with Bitmain
Between July and November 2021, we entered
into five separate Non-Fixed Price Sales and Purchase Agreements (collectively, the “Bitmain Agreements”) with Bitmain, as
|●||Pursuant to the Bitmain Agreement dated July 23, 2021, Bitmain agreed to sell 1,000 Antminer S19j Pro
miners for the estimated total purchase price of $2,550,000, which miners have been delivered;|
|●||Pursuant to the Bitmain Agreement, dated September 12, 2021, Bitmain agreed to sell 3,000 Antminer S19j
Pro miners for the estimated total purchase price of $20,509,500, which miners have been delivered;|
|●||Pursuant to the Bitmain Agreement dated November 10, 2021, Bitmain agreed
to sell 4,000 S19 XP miners for the estimated total purchase price of $45,360,000, which miners have been delivered;|
|●||Pursuant to the Bitmain Agreement dated November 17, 2021, Bitmain agreed
to sell 12,000 S19j Pro miners for the estimated total purchase price of $76,000,000, of which all 12,000 have been received;|
|●||Pursuant to the Bitmain Agreement dated November 17, 2021, Bitmain agreed
to sell 600 S19XP miners for the estimated total purchase price of $6,510,000, of which 424 have been delivered and the balance
of the miners shipped during January 2023.|
Between September and November 2022, we
entered into two separate Non-Fixed Price Sales and Purchase Agreements with Bitmain, as follows:
|●||Pursuant to the Bitmain Agreement dated September 3, 2022, Bitmain agreed
to sell 1,325 S19j Pro miners for the estimated total purchase price of $3,776,250, which miners are expected to be shipped during
|●||Pursuant to the Bitmain Agreement dated November 15, 2022, Bitmain agreed
to sell 1,140 S19XP HYD miners and 6 AntSpace HK3 Units for the estimated total purchase price of $5,932,500, which miners are
expected to be shipped monthly between July and December 2023.|
The delays in the delivery of the miners
by Bitmain had a measurable effect on our mining operations in May 2022. We had an approximate two week delay in deployment of 2,000 miners
to our Michigan facility. In addition, we experienced another delay when 2,004 S19j Pro Antminers were held up by approximately two weeks
by the U.S. Customs and Border Patrol. We estimate that we could have mined approximately 18 more Bitcoin over those approximately 14
days, or the equivalent of approximately $540,000 as of the date of this prospectus, had we not been impacted by these delays.
Within seven days after the signing of each
Bitmain Agreement, we paid Bitmain a down payment within the range of 25% and 31.86% of the estimated total purchase price, and an additional
prepayment within the range of 28.14% and 35% of the actual purchase price for each monthly batch scheduled for shipment, which is due
six months prior to shipment. The actual purchase price for such batch to be shipped six months later is provided by Bitmain one month
prior to the shipment of the current batch, provided that the actual purchase price will not be higher than the total purchase price set
forth in the payment schedules in the Bitmain Agreements.
Bitmain reserves the right to adjust the
number of miners delivered in order to fulfill the contract based on the availability of machines with various hash rates at the time
of fulfillment. For example: if 1,000 S19J Pros at a 100TH rate was contracted for but Bitmain doesn’t have 1,000 100 TH such miners
available, then Bitmain can ship miners that hash at various rates (92TH, 96TH, 100TH, or 110TH) to deliver the hashing power contracted.
This will affect the actual number of machines delivered to fulfill the contract which can and will vary either up or down.
All of the miners we are purchasing are
newly manufactured and not pre-owned. We are not aware if Bitmain is experiencing any supply side constraints in its ability to fulfill
the Bitmain Agreements; to date, Bitmain has timely delivered all miners pursuant to the delivery schedule in such agreements.
The laws and regulations applicable to cryptocurrency
are evolving and subject to interpretation and change. Governments around the world have reacted differently to cryptocurrencies; certain
governments, such as the People’s Republic of China, have deemed them illegal, and others have allowed their use and trade without
restriction, while in some jurisdictions, such as in the U.S., cryptocurrencies are subject to extensive, and in some cases overlapping,
unclear and evolving regulatory requirements. As cryptocurrencies have grown in both popularity and market value, the U.S. Congress and
a number of U.S. federal and state agencies, including the Financial Crimes Enforcement Network (the “FinCEN”), the SEC, the
Commodity Futures Trading Commission (the “CFTC”), the Financial Industry Regulatory Authority (the “FINRA”),
the Consumer Financial Protection Bureau (the “CFTC”), the Department of Justice (the “DOJ”), the Department of
Homeland Security, the Federal Bureau of Investigation, the Internal Revenue Service and state financial regulators, have been examining
the operations of cryptocurrency networks, cryptocurrency users and cryptocurrency exchange markets, with particular focus on the extent
to which cryptocurrencies can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the
safety and soundness and consumer-protective safeguards of exchanges or other service-providers that hold, transfer, trade or exchange
digital assets for users. For instance, the Cyber-Digital Task Force of the DOJ published a report entitled “Cryptocurrency: An
Enforcement Framework” in October 2020. This report provides a comprehensive overview of the possible threats and enforcement challenges
the DOJ views as associated with the use and prevalence of cryptocurrency, as well as the regulatory and investigatory means the DOJ has
at its disposal to deal with these possible threats and challenges.
Many of these federal and state agencies
have issued consumer advisories regarding the risks posed by cryptocurrencies to investors. In addition, federal and state agencies, and
other countries have issued rules or guidance about the treatment of cryptocurrency transactions or requirements for businesses engaged
in activities related to cryptocurrencies. Depending on the regulatory characterization of the cryptocurrencies we mine, the markets for
those cryptocurrencies in general, and our activities in particular, may be subject to one or more regulators in the U.S. and globally.
Ongoing and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of cryptocurrency markets and our
cryptocurrency operations. Additionally, U.S. state and federal, and foreign regulators and legislatures have taken action against cryptocurrency
businesses or enacted restrictive regimes in response to adverse publicity arising from hacks, consumer harm, or criminal activity stemming
from cryptocurrency activity. There is also increasing attention being paid by U.S. federal and state energy regulatory authorities as
the total load of crypto-mining grows and potentially alters the supply and dispatch functionality of the wholesale grid and retail distribution
systems. Many state legislative bodies are also actively reviewing the impact of crypto-mining in their respective states.
We are unable to predict the effect that
any future regulatory change, or any overlapping or unclear regulations, may have on us, but such change, overlap or lack of clarity could
be substantial and make it difficult for us to operate our business or materially impact the market for cryptocurrencies that we mine
or may mine in the future. FinCEN has issued guidance stating its position that it does not differentiate between fiat currency (which
FinCEN calls “real currency”) and cryptocurrencies that are convertible into fiat currency or other forms of convertible virtual
currencies (which FinCEN calls “virtual currency”) for purposes of determining whether a person or entity is engaging in “money
transmission services.” Persons and entities engaging in virtual currency activities that amount to “money transmission services,”
or otherwise cause them to be deemed a “money services business” under FinCEN’s regulations, must register as a money
services business, implement an “effective” anti-money laundering program and comply with FinCEN’s reporting and recordkeeping
In May 2019, FinCEN issued guidance
relating to how the U.S. Bank Secrecy Act (“BSA”) and its implementing regulations relating to money services businesses apply
to certain businesses that transact in convertible virtual currencies. Although the guidance generally indicates that certain mining and
mining pool operations will not be treated as money transmission, the guidance also addresses when certain activities, including certain
services offered in connection with operating mining pools such as hosting convertible virtual currency wallets on behalf of pool members
or purchasers of computer mining power, may be subject to regulation. Although we believe that our mining activities do not presently
trigger FinCEN registration requirements under the BSA, if our activities cause us to be deemed a “money transmitter,” “money
services business” or equivalent designation, under federal law, we may be required to register at the federal level and comply
with laws that may include the implementation of anti-money laundering programs, reporting and recordkeeping regimes, and other operational
requirements. In that event, to the extent we decide to proceed with some or all of our operations, the required registration and regulatory
compliance steps may result in extraordinary, non-recurring expenses to us, as well as on-going recurring compliance costs, possibly affecting
operating results or financial condition in a material and adverse manner. Failure to comply with these requirements may expose us to
fines, penalties and/or interruptions in our operations that could have a material adverse effect on our financial position, results of
operations and cash flows.
According to the CFTC, at least some cryptocurrencies,
including Bitcoin, fall within the definition of a “commodity” under the U.S. Commodities Exchange Act of 1936, as amended
(the “CEA”). Under the CEA, the CFTC has broad enforcement authority to police market manipulation and fraud in spot cryptocurrency
markets in which we may transact. Beyond instances of fraud or manipulation, the CFTC generally does not oversee cash or spot market exchanges
or transactions involving cryptocurrencies that do not utilize margin, leverage, or financing. The National Futures Association (“NFA”)
is the self-regulatory agency for the U.S. futures industry, and as such has jurisdiction over Bitcoin futures contracts and certain other
cryptocurrency derivatives. However, the NFA does not have regulatory oversight authority for the cash or spot market for cryptocurrency
trading or transactions. In addition, CFTC regulations and CFTC oversight and enforcement authority apply with respect to futures, swaps,
other derivative products, and certain retail leveraged commodity transactions involving cryptocurrencies, including the markets on which
these products trade.
The SEC has taken the position that many
cryptocurrencies may be securities under U.S. federal securities laws. Some senior members of the staff of the SEC have expressed the
view that Bitcoin and Ethereum are not securities under U.S. federal securities laws. However, such statements are not official policy
statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot
be generalized to any other cryptocurrency. The SEC’s Strategic Hub for Innovation and Financial Technology published a framework
for analyzing whether any given cryptocurrency is a security in April 2019. However, this framework is also not a rule, regulation
or statement of the SEC and is similarly not binding on the SEC. Notwithstanding that the SEC has not asserted regulatory authority over
Bitcoin or trading or ownership of Bitcoin and has not expressed the view that Bitcoin should be classified or treated as a security for
purposes of U.S. federal securities laws, the SEC has commented on Bitcoin and Bitcoin-related market developments and has taken action
against investment schemes involving Bitcoin. For example, the SEC has charged at least three Bitcoin mining companies in connection with
a Ponzi scheme to defraud investors in their mining operation. The SEC has also repeatedly denied proposed rule changes by exchanges to
list and trade shares of certain Bitcoin-related investment vehicles on public markets, citing significant investor protection concerns
regarding the markets for cryptocurrencies, including the potential for market manipulation and fraud. Although the SEC has not stated
that mining Bitcoin is itself a regulated activity, to the extent any cryptocurrencies we mine are deemed to be securities, the offer,
sale, and trading of those cryptocurrencies would be subject to the U.S. federal securities laws.
In addition to the SEC, state securities
regulators and several foreign governments have also issued warnings that certain cryptocurrencies may be classified as securities in
their jurisdictions, and that transactions in such cryptocurrencies may be subject to applicable securities regulations. Furthermore,
certain state securities regulators have taken the position that certain cryptocurrency mining operations may involve the offer of securities.
For example, the Texas State Securities Board has taken enforcement action against the operator of a cloud mining company, whereby customers
could purchase hash rate managed by the cloud mining company in exchange for a share of the mining reward, for offering unregistered securities.
State financial regulators, such as the
New York State Department of Financial Services (“NYDFS”), have also implemented licensure regimes, or repurposed pre-existing
fiat money transmission licensure regimes, for the supervision, examination and regulation companies that engage in certain cryptocurrency
activities. The NYDFS requires that businesses apply for and receive a license, known as the “BitLicense,” to participate
in a “virtual currency business activity” in New York or with New York customers, and prohibits any person or entity involved
in such activity from conducting activities without a license. Louisiana also has enacted a licensure regime for companies engaging in
a “virtual currency business activity,” and other states are considering proposed laws to establish licensure regimes for
certain cryptocurrency businesses as well. Some state legislatures have amended their money transmitter statutes to require businesses
engaging in certain cryptocurrency activities to seek licensure as a money transmitter, and some state financial regulators have issued
guidance applying existing money transmitter licensure requirements to certain cryptocurrency businesses. The Conference of State Bank
Supervisors also has proposed a model statute for state level cryptocurrency regulation. Although we believe that our mining activities
do not presently trigger these state licensing requirements in any state in which we operate or plan to operate, if our activities cause
us to be deemed a “money transmitter,” “money services business” or equivalent designation under the law of any
state in which we operate or plan to operate, we may be required to seek a license or register at the state level and comply with laws
that may include the implementation of anti-money laundering programs, reporting and recordkeeping regimes, consumer protective safeguards,
and other operational requirements. In such an event, to the extent we decide to proceed with some or all of our operations, the required
registrations, licensure and regulatory compliance steps may result in extraordinary, non-recurring expenses to us, as well as on-going
recurring compliance costs, possibly affecting our net income in a material and adverse manner. Failure to comply with these requirements
may expose us to fines, penalties and/or interruptions in our operations that could have a material adverse effect on our financial position,
results of operations and cash flows.
Our business environment is constantly evolving,
and cryptocurrency miners can range from individual enthusiasts to professional mining operations with dedicated data centers. We compete
with other companies that focus all or a portion of their activities on cryptocurrency mining activities at scale. We face significant
competition in every aspect of our business, including, but not limited to, the acquisition of new miners, the ability to raise capital,
obtaining the lowest cost of electricity, obtaining access to energy sites with reliable sources of power, and evaluating new technology
developments in the industry.
At present, the information concerning the
activities of these enterprises may not be readily available as the vast majority of the participants in this sector do not publish information
publicly or the information may be unreliable. Published sources of information include “bitcoin.org” and “blockchain.info”;
however, the reliability of that information and its continued availability cannot be assured and the contents of these sites are not
incorporated into this prospectus.
A number of public companies (traded in
the U.S. and internationally) and private companies may be considered to compete with us, including the following companies which we have
identified as our competitors:
|●||Bitcoin Investment Trust;|
|●||Bitfarms Technologies Ltd. (formerly Blockchain Mining Ltd);|
|●||Blockchain Industries, Inc. (formerly Omni Global Technologies, Inc.);|
|●||Digihost International, Inc.;|
|●||DMG Blockchain Solutions Inc.;|
|●||Galaxy Digital Holdings Ltd.;|
|●||Greenidge Generation Holdings Inc.;|
|●||HashChain Technology, Inc.;|
|●||Hive Blockchain Technologies Inc.;|
|●||Layer1 Technologies, Inc.;|
|●||Marathon Digital Holdings, Inc.;|
|●||MGT Capital Investments, Inc.;|
|●||Stronghold Digital Mining, Inc.|
We plan to use specific hardware and software
for our cryptocurrency mining operations. In certain cases, source code and other software assets may be subject to an open source license,
as much technology development underway in this sector is open source. For these works, we intend to adhere to the terms of any license
agreements that may be in place.
We do not currently own, and do not have
any current plans to seek, any patents in connection with our existing and planned blockchain and cryptocurrency related operations. We
do expect to rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights and expect
to license the use of intellectual property rights owned and controlled by others.
Accounting for Digital Currencies
Digital currencies are included in current
assets in the combined balance sheet. Digital currencies are recorded at cost less any impairment. An intangible asset with an indefinite
useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating
that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair
value. In testing for impairment, we have the option to first perform a qualitative assessment to determine whether it is more likely
than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative
impairment test is not necessary. If we conclude otherwise, we will be required to perform a quantitative impairment test. To the extent
an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not
permitted. We account for our mining-related gains or losses in accordance with the first-in, first-out method of accounting.
Blockchain technology first came to public
attention in 2008 as the database technology that underpins Bitcoin, the world’s first cryptocurrency. Blockchains are generally
open-source, peer-to-peer software programs that act as decentralized digital ledgers, each comprising a series of data “blocks”
that are linked and secured using cryptography in a “chain.” The blockchain program consists of a software protocol with several
functions. The software protocol is run by multiple computer systems or “nodes.” For many blockchain networks, each node has
its own copy of the blockchain ledger, which contains a historical record of every transaction. The digital ledger continuously grows
as new blocks are added to it to record the most recent transactions in a linear, chronological order. The same information is stored
across a network of computers all over the world, and this record makes it possible to track the ownership and transfer of cryptocurrency
from the creation of the blockchain to its current state, and effectively, records of all account balances (as you can identify what account
holds what value through the decentralized ledger).
We do not operate a complete node; rather,
as noted above under the heading “Cryptocurrency Mining and Mining Pools,” we provide computing power to a pool operator.
The blockchain protocol allows users to
submit transactions to the network for confirmation. However, a transaction will not be accepted by the protocol if the inputs to the
transaction have previously been used in another transaction. This prevention of “double spending” is a key security feature
of blockchain networks.
Another key function of the blockchain that
protects the integrity of the network is the hashing process, which acts as a tamper-evident seal that confirms the validity of the new
block and all earlier blocks. Hashing is the process of a block being posted to the network. Hashing results from miners, who are responsible
for receiving broadcast transactions, processing those transactions into new blocks and updating the blockchain with the new blocks through
hashing. The hashing process ties every new block to the existing block on the blockchain to ensure each is a continuous record of verified
The hashing algorithm on a proof-of-work
blockchain network is a mathematical transformation function with two key properties. The first important function of hashing is that
the algorithm accepts any alphanumeric dataset as an input and produces a unique output code. The smallest change in the dataset results
in a significant change in the unique code. Any tampering of the dataset can be detected by re-hashing the data and checking for a change
in the unique code. Any user that runs the hash algorithm on the same data will derive the same unique code. Consequently, the data on
the distributed ledger can be run through a series of hash algorithms to create a unique code, which would reveal if any changes to the
ledger have been made.
Second, whenever a new set or “block”
of transactions is added to the ledger, it is appended with the code from the prior state of the ledger before it is hashed. Thus, the
hash created from the new block will incorporate the hash from the previous block. An alteration made to an earlier block would make the
hashes of all subsequent blocks invalid, as the discrepancy would be easily detected by future miners through the protocols governing
the blockchain. If a hacker were to attempt to make a change to an earlier block and broadcast it along with following blocks to the other
nodes on the network, that broadcast would be discarded in favor of one from a different node which complied with the requirements of
Thus, in addition to creating new block,
miners “vote” with their computer power, expressing their acceptance of valid blocks by working on adding them to the blockchain,
and rejecting invalid blocks by refusing to work on them. If a miner’s proposed block is added to the blockchain by a majority of
the nodes on the network, it is considered part of the blockchain. The nodes on the network synchronize with each other to ensure that
once a block is accepted by the majority, the new block will eventually be added to all the nodes. Thus the historical state of the ledger
can be changed if control of more than 50% of the network is obtained; however, in the case of widely held cryptocurrencies with non-trivial
valuations, it may be economically prohibitive for any actor or group of actors acting in concert to obtain computing power that consists
of more than 50% of the network.
Unlike proof-of-work networks, in which
miners expend computational resources to compete to validate transactions and are rewarded cryptocurrency in proportion to the amount
of computational resources expended, in a proof-of-stake network, miners (sometimes called validators) risk or “stake” assets
to compete to be randomly selected to validate transactions and are rewarded cryptocurrency in proportion to the amount of assets staked.
Any malicious activity, such as mining multiple blocks, disagreeing with the eventual consensus or otherwise violating protocol rules,
results in the forfeiture or “slashing” of a portion of the staked assets. Proof-of-stake is viewed by some as more energy
efficient and scalable than proof-of-work.
Blockchain technology enables the secure
use and transfer of digital assets. “Digital asset” is a broad term that encompasses additional applications, including ownership,
transaction tracking, identity management, and smart contracts. A digital asset can represent physical or virtual assets, a value, or
a use right/service (e.g., computer storage space).
Whereas digital assets can take many forms
and be used for a variety of functions, cryptocurrencies are a type of digital asset that primarily function as a medium of exchange,
a unit of account, and/or a store of value. Cryptocurrencies allow anyone who holds a compatible wallet, anywhere in the world, to hold
and transfer that cryptocurrency without the need for an intermediary or trusted third party. Units of a cryptocurrency may exist only
as data on the internet, and often are not issued or controlled by any single institution, authority or government. Whereas most of the
world’s money currently exists in the form of electronic records managed by central authorities such as banks, units of a non-government
cryptocurrency exist as electronic records in a decentralized blockchain database. Because cryptocurrencies have no inherent intrinsic
value, the value of cryptocurrencies is determined by the value that various market participants place on them through their transactions.
Bitcoin, Ethereum and other cryptocurrencies have historically exhibited high price volatility relative to more traditional asset classes.
Private entities also issue digital assets
called “stablecoins” whose prices are pegged to those of an underlying fiat currency, a commodity or other financial instrument
or other physical asset and therefore less susceptible to volatility. Stablecoins can be backed by fiat money, physical assets, or other
crypto assets. Government institutions are also reportedly testing and considering issuing Central Bank Digital Currencies (“CBDC’s”).
While stablecoins or CBDC’s may exhibit less price volatility than other cryptocurrencies, both rely on a central authority to establish
the value of the asset, and therefore represent an exception to the general discussion of the design of cryptocurrencies herein.
Each cryptocurrency has a source code that
comprises the basis for the cryptographic and algorithmic protocols, which govern the blockchain. The source code is commonly open source
and therefore can be inspected by anyone, and is maintained on an ongoing basis through contributors proposing amendments to the protocol,
which are peer reviewed and adopted by consensus among participants on the blockchain network. These protocols govern the functioning
of the network, including the ownership and transfer of the cryptocurrency, and are executed on the decentralized peer-to-peer blockchain
infrastructure. The peer-to-peer infrastructure on which a blockchain operates is not owned or operated by a single entity. Instead, the
infrastructure is collectively maintained by a decentralized user base. Each peer user is generally known as a “node” or “miner,”
and each miner processes transactions on the network in accordance with the protocols of the relevant cryptocurrency.
As a result, these cryptocurrencies do not
rely on either governmental authorities or financial institutions to create, transmit or determine the value of units of cryptocurrency.
|●||the creation of units of cryptocurrency generally is governed by the source code, not a central entity;|
|●||the transmission of a cryptocurrency is governed by the source code and processed by the decentralized
peer-to-peer network of nodes or miners; and|
|●||the value of a cryptocurrency is generally determined by the market supply of and demand for the cryptocurrency,
with prices set in transfers by mutual agreement or barter, as well as through acceptance directly by merchants in exchange for goods
Cryptocurrencies may be open source projects
with no official developer or group of developers that control the network. However, certain networks’ development may be overseen
informally by a core group of developers that may propose quasi-official releases of updates and other changes to the network’s
source code. The release of updates to a blockchain network’s source code does not guarantee that the updates will be automatically
adopted. Users and miners must accept any changes made to the source code by downloading the proposed modification of the network’s
source code. A modification of the network’s source code is effective only with respect to the users and miners that download it.
If a modification is accepted by only a percentage of users and miners, a division in the network will occur such that one network
will run the pre-modification source code and the other network will run the modified source code. Such a division is known as a “fork.”
Consequently, a modification to the source code becomes part of a blockchain network only if accepted by participants collectively having
most of the processing power on the network.
Each “account” on a blockchain
network is identified by its unique public key, and is secured with its associated private key (which the account holder must keep secret,
like a password). Cryptocurrencies are treated as bearer assets, because possession of the private key generally determines who controls
or owns a cryptocurrency. Protecting private keys from unwarranted access and theft is critically important, as once the private key is
taken, in most circumstances, control over the related cryptocurrency is gone. The combination of private and public cryptographic keys
constitutes a secure digital identity in the form of a digital signature. As long as the private key is kept private (i.e., confidential
to the owner of the account) it provides strong control of ownership.
Ault Lending acquires
controlling or non-controlling interests in and actively manage businesses that we generally believe (i) are undervalued and have disruptive
technologies with a global impact, (ii) operate in industries with long-term macroeconomic growth opportunities, (iii) have
positive and stable cash flows, (iv) face minimal threats of technological or competitive obsolescence, and (v) have strong
management teams largely in place. We offer investors a unique opportunity to own a diverse group of leading middle-market businesses
in the niche-industrial and branded-consumer sectors.
Ault Lending uses
a traditional methodology for valuing securities that primarily looks for deeply depressed prices. Upon making an investment, we often
become actively involved in the companies we seek to acquire. That activity may involve a broad range of approaches, from influencing
the management of a target to take steps to improve stockholder value, to acquiring a controlling or non-controlling interest or outright
ownership of the target company in order to implement changes that we believe are required to improve its business, and then operating
and expanding that business.
Ault Lending believes
that private company operators and corporate parents looking to sell their business units may consider us an attractive purchaser because
of our ability to:
|●||provide ongoing strategic and financial support for their businesses, including professionalization of
our subsidiaries at scale;|
|●||maintain a long-term outlook as to the ownership of those businesses;|
|●||sustainably invest in growth capital and/or add-on acquisitions where appropriate; and|
|●||consummate transactions efficiently without being dependent on third-party transaction financing.|
we believe that our outlook on length of ownership and active management on our part may alleviate the concern that many private company
operators and parent companies may have with regard to their businesses going through multiple sale processes in a short period of time.
We believe this outlook enhances our ability to develop a comprehensive strategy to grow the earnings and cash flows of each of our businesses.
Finally, it has
been our experience that our ability to acquire businesses without the cumbersome delays and conditions typical of third party transactional
financing is appealing to sellers of businesses who are interested in confidentiality, speed and certainty to close.
We believe our
management team’s strong relationships with industry executives, accountants, attorneys, business brokers, commercial and investment
bankers, and other potential sources of acquisition opportunities offer us substantial opportunities to assess small businesses available
for acquisition. In addition, the flexibility, creativity, experience and expertise of our management team in structuring transactions
allows us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.
In terms of the
businesses in which we have a controlling interest as of September 30, 2022, we believe that these businesses have strong management teams,
operate in strong markets with defensible market niches, and maintain long-standing customer relationships.
Ault Lending provides funding to businesses
through loans and investments. Ault Lending offers a variety of loan types including commercial loans, convertible notes and revolving
lines of credit. Ault Lending is engaged in providing commercial loans to companies throughout the U.S. to provide them with operating
capital to finance the growth of their businesses. The loans are primarily short-term, ranging from six to twelve months, but may be of
longer duration. These terms are subject to change as market needs dictate, and Ault Lending anticipates offering additional products
in the future.
Ault Lending uses its considerable financial
experience, data analytics, and a credit scoring model to assess the creditworthiness of each small business borrower applicant. If the
business meets Ault Lending’s criteria, Ault Lending sets the initial interest rate according to its credit and financial models.
The final interest rate offered to the borrower will be determined by Ault Lending’s interpretation of the marketplace. In order
to borrow from Ault Lending, borrowers must display characteristics indicative of durable business and financial situations. These include
factors such as revenue, time in business, number of employees, and financial and credit variables. In order to qualify, business borrower
applicants must be approved through Ault Lending’s underwriting process, which analyzes credit and financial data of both the business
and the business owner. Ault Lending takes into account several business factors (including revenue, age of business, cash flows, and
other variables). The underwriting process determines the loan amount to approve, how loans will be priced, and whether to include a blanket
lien is based on the above analysis, as well as additional factors (including length of loan, estimated default rates by type and grade,
and general economic environment).
Our Executive Committee, which is comprised
of our Executive Chairman, Chief Executive Officer and President, acts as the underwriting committee for Ault Lending and approves all
lending transactions. The Executive Committee has decades of experience in financial, investing and securities transactions. Under its
business model, Ault Lending generates revenue through origination fees charged to borrowers and interest generated from each loan. Ault
Lending may also generate income from appreciation of investments in marketable securities as well as any shares of common stock underlying
convertible notes or warrants issued to Ault Lending in any particular financing.
As noted above, we will from time to time,
through Ault Lending, engage in discussions with other companies interested in our subsidiaries or partner companies, either in response
to inquiries or as part of a process we initiate. To the extent we believe that a subsidiary partner company’s further growth and
development can best be supported by a different ownership structure or if we otherwise believe it is in our stockholders’ best
interests, we will seek to sell some or all of our position in the subsidiary or partner company. These sales may take the form of privately
negotiated sales of stock or assets, mergers and acquisitions, public offerings of the subsidiary or partner company’s securities
and, in the case of publicly traded partner companies, transactions in their securities in the open market. Our plans may include taking
subsidiaries or partner companies public through rights offerings, mergers or spin-offs and directed share subscription programs. We will
continue to consider these and functionally equivalent programs and the sale of certain subsidiary or partner company interests in secondary
market transactions to maximize value for our stockholders.
During 2022, we anticipate providing significant
new funding to expand Ault Lending’s loan and investment portfolio. Ault Lending loans made or arranged pursuant to a California
Financing Law license (Lic.no. 60 DBO77905).
Ault Lending is the principal owner of Ault
Alpha, a term we use that comprises an investment fund, a general partner and an investment manager all formed on July 15, 2021. Ault
Alpha generally seeks to invest in public companies or private companies with public debt that have strong relative value metrics but
poor Wall Street recognition; such companies can often experience valuation inefficiencies. Ault Alpha seeks to identify and invest in
these undervalued companies. In certain companies, Ault Alpha will actively intervene to assist management to maximize stockholder value.
Ault Alpha believes that an activist role can result in the creation of significant value and larger than average returns on investment.
Ault Alpha will own a concentrated portfolio, and typically invest with a long-term perspective. Further, Ault Alpha will employ a systematic
process, developed over decades of collective experience in the capital and credit markets, to seek specific value-creating events and/or
special situations, to provide compelling return potential and generate competitive capital appreciation and total return by making investments
in three key categories: (i) undervalued or overvalued assets; (ii) activist trading; and (iii) volatility trading and arbitrage. Ault
Alpha has purchased the Company’s common stock in open-market transactions.
AGREE seeks to invest in various classes
of commercial and residential real estate including hospitality, multifamily, and industrial properties targeting the middle market segment
in locations demonstrating relative value. AGREE’s objective is to generate risk adjusted returns through development, capital investment
and operational improvement, leveraging the management team’s expertise and well-established relationships with real estate investment
professionals, brokers, lenders and developers. The focus will be in U.S. tertiary markets with growing populations, income growth and
access to highly populated metropolitan areas as primary demand drivers. AGREE is one of BitNile’s strategies to invest in inflation-resistant
undervalued assets and realize capital appreciation through cap rate compression over time. AGREE owns and operates both Third Avenue
Apartments and AGREE Madison.
Circle 8 Newco
December 19, 2022, Circle 8 Newco closed on the asset purchase agreement with Circle 8 Crane Services pursuant to which Circle 8 Newco
agreed to purchase substantially all of the assets and assume certain specified liabilities of Circle 8 Crane Services. Circle
8 Crane Services was a crane rental and lifting solutions provider founded in 2007 and headquartered in Corpus Christi, TX with multiple
locations throughout the South-Central region of the U.S. It maintains a large modern fleet of mobile cranes for its customers’
heavy lifting needs. Specifically, Circle 8 Newco provides crane operators, engineering, custom rigging and transportation services for
oilfield, construction, commercial and infrastructure markets. Circle 8 Newco maintains an industry leading safety record.
Ault Media Group
Ault Media Group
(“AMG”) is comprised of a diverse team of media professionals with expertise in creating all forms of media, communications,
and content including web development, corporate communications, social media, scripted, and unscripted television. Our online virtual
training courses (via the LightSpeedVT platform) also offer in-depth business learning. AMG’s specialized team of producers brings
years of university-proven training methods and a history of developing educational materials up to a Master's degree level. AMG’s
first course, relating to initial public offerings, is currently in the final stages of production, with more courses soon to follow.
Along with training
and communications strategies, AMG also offers comprehensive consulting for the development and execution of large and small scale conferences
and event planning. From event space acquisition to digital ticketing, keynote speakers, lighting, stage crews, and advertising media
buys, AMG will provide the necessary contacts and guidance to assure a successful and smooth-running event.
Our business strategy is designed to increase
shareholder value. Under this strategy, we are focused on managing and financially supporting our existing subsidiaries and partner companies,
with the goal of pursuing monetization opportunities and maximizing the value returned to shareholders. We have, are and will consider
initiatives including, among others: public offerings, the sale of individual partner companies, the sale of certain or all partner company
interests in secondary market transactions, or a combination thereof, as well as other opportunities to maximize shareholder value, such
as activist trading. We anticipate returning value to shareholders after satisfying our debt obligations and working capital needs.
Our Executive Committee approves and manages
our investment strategy. Upon making an investment, we often become actively involved in the companies we seek to acquire. That activity
may involve a broad range of approaches, from influencing the management of a target to take steps to improve stockholder value, to acquiring
a controlling or sizable but non-controlling interest or outright ownership of the target company in order to implement changes that we
believe are required to improve its business, and then operating and expanding that business.
From time to time, we engage in discussions
with other companies interested in our subsidiaries or partner companies, either in response to inquiries or as part of a process we initiate.
To the extent we believe that a subsidiary partner company’s further growth and development can best be supported by a different
ownership structure or if we otherwise believe it is in our shareholders’ best interests, we will seek to sell some or all of our
position in the subsidiary or partner company. These sales may take the form of privately negotiated sales of stock or assets, mergers
and acquisitions, public offerings of the subsidiary or partner company’s securities and, in the case of publicly traded partner
companies, transactions in their securities in the open market. Our plans may include taking subsidiaries or partner companies public
through rights offerings and directed share subscription programs. We will continue to consider these and functionally equivalent programs
and the sale of certain subsidiary or partner company interests in secondary market transactions to maximize value for our shareholders.
strategy involves the proactive financial and operational management of the businesses we own in order to increase cash flows and stockholder
value. Ault Alliance actively oversees and supports the management teams of each of our businesses by, among other things:
|●||recruiting and retaining talented managers to operate our businesses using structured incentive compensation
programs, including non-controlling equity ownership, tailored to each business;|
|●||regularly monitoring financial and operational performance, instilling consistent financial discipline,
and supporting management in the development and implementation of information systems to effectively achieve these goals;|
|●||identifying and aligning with external policy and performance tailwinds such as those influenced by growing
climate, health, and social justice concerns (and similar environmental, social and governance (“ESG”) drivers);|
|●||assisting management in their analysis and pursuit of prudent organic growth strategies;|
|●||identifying and working with management to execute attractive external growth and acquisition opportunities;|
|●||assisting management in controlling and right-sizing overhead costs;|
|●||nurturing an internal culture of transparency, alignment, accountability and governance, including regular
|●||professionalizing our subsidiaries at scale; and|
|●||forming strong subsidiary level boards of directors to supplement management in their development and
implementation of strategic goals and objectives.|
our businesses have different growth opportunities and potential rates of growth, we expect Ault Alliance to work with the management
teams of each of our businesses to increase the value of, and cash generated by, each business through various initiatives, including:
|●||making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing
costs of our businesses;|
|●||investing in product research and development for new products, processes or services for customers;|
|●||improving and expanding existing sales and marketing programs;|
|●||pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain
processes and products; and|
|●||consolidating or improving management of certain overhead functions.|
typically acquire and integrate complementary businesses. We believe that complementary add-on acquisitions improve our overall financial
and operational performance by allowing us to:
|●||leverage manufacturing and distribution operations;|
|●||leverage branding and marketing programs, as well as customer relationships;|
|●||add experienced management or management expertise;|
|●||increase market share and penetrate new markets; and|
|●||realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger
number of businesses and by implementing and coordinating improved management practices.|
strategy is to acquire businesses that we believe to be to undervalued and have disruptive technologies with a global impact that we expect
to produce stable and growing earnings and cash flow. In this respect, we expect to make acquisitions in industries other than those in
which our businesses currently operate if we believe an acquisition presents an attractive opportunity. We believe that attractive opportunities
will continue to present themselves, as private sector owners seek to monetize their interests in long-standing and privately-held businesses
and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition
candidate has the following characteristics:
|●||is a leading branded consumer or niche industrial company headquartered in North America;|
|●||maintains highly defensible position in the markets it serves and with customers;|
|●||operates in an industry with favorable long-term macroeconomic trends;|
|●||has a strong management team, either currently in place or previously identified, and meaningful incentives;|
|●||has low technological and/or product obsolescence risk; and|
|●||maintains a diversified customer and supplier base.|
We benefit from
Ault Alliance’s ability to identify potential diverse acquisition opportunities in a variety of industries. In addition, we rely
upon our Executive Committee and other members of our management team’s experience and expertise in researching and valuing prospective
target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack
of information available about these target businesses, which may make it more difficult to understand or appropriately value such target
businesses, Ault Alliance:
|●||engages in a substantial level of internal and third-party due diligence;|
|●||critically evaluates the target management team; |
|●||identifies and assesses any financial and operational strengths and weaknesses of the target business;|
|●||analyzes comparable businesses to assess financial and operational performances relative to industry competitors;|
|●||actively researches and evaluates information on the relevant industry; and|
|●||thoroughly negotiates appropriate terms and conditions of any acquisition.|
The process of
acquiring new businesses is both time-consuming and complex. Our management team historically has taken from two to
six months to perform due diligence, negotiate and close acquisitions. Although our management team is at various stages of evaluating
several transactions at any given time, there may be periods of time during which our management team does not recommend any new acquisitions.
Even if an acquisition is recommended by our management team, our Board may not approve it.
A component of
our acquisition financing strategy that we utilize in acquiring the businesses we own and manage is to provide both equity capital and
debt capital. We believe, and it has been our experience, that having the ability to finance our acquisitions with capital resources raised
by us, rather than negotiating separate third-party financing, provides us with an advantage in successfully acquiring attractive businesses
by minimizing delay and closing conditions that are often related to acquisition-specific financings. In addition, our strategy of providing
this intercompany debt financing within the capital structure of the businesses we acquire and manage allows us the ability to distribute
cash to the parent company through monthly interest payments and amortization of principle on these intercompany loans.
of a new business, we rely on our management team’s experience and expertise to work efficiently and effectively with the management
of the new business to jointly develop and execute a successful business plan.
Based on the experience
of our management team and its ability to identify and negotiate acquisitions, we believe we are well-positioned to acquire additional
businesses. Our management team has strong relationships with business brokers, investment and commercial bankers, accountants, attorneys
and other potential sources of acquisition opportunities. In addition, our management team has a successful track record of acquiring
and managing businesses in various industries. In negotiating these acquisitions, we believe our management team has been able to successfully
navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management
buy-outs and reorganizations.
Our management team has a large network
of deal intermediaries whom we expect to expose us to potential acquisitions. Through this network, as well as our management team’s
proprietary transaction sourcing efforts, we have a substantial pipeline of potential acquisition targets. Our management team also has
a well-established network of contacts, including professional managers, attorneys, accountants and other third-party consultants and
advisors, who may be available to assist us in the performance of due diligence and the negotiation of acquisitions, as well as the management
and operation of our acquired businesses.
Valuation and Due Diligence
businesses or assets for acquisition, our management team performs rigorous due diligence and a financial evaluations process including
an evaluation of the operations of the target business and the outlook for its industry. While valuation of a business is a subjective
process, we define valuations under a variety of analyses, including:
|●||discounted cash flow analyses;|
|●||evaluation of trading values of comparable companies;|
|●||expected value matrices; and|
|●||examination of comparable recent transactions.|
One outcome of
this process is a projection of the expected cash flows from the target business. A further outcome is an understanding of the types and
levels of risk associated with those projections. While future performance and projections are always uncertain, we believe that with
detailed due diligence, future cash flows will be better estimated and the prospects for operating the business in the future better evaluated.
To assist us in identifying material risks and validating key assumptions in our financial and operational analysis, in addition to our
own analysis, we engage, as necessary, third-party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance
and environmental. We also engage technical, operational or industry consultants, as necessary.
A further critical component of the evaluation of potential
target businesses is the assessment of the capability of the existing management team, including recent performance, expertise, experience,
culture and incentives to perform. Where necessary, and consistent with our management strategy, we actively seek to augment, supplement
or replace existing members of management who we believe are not likely to execute our business plan for the target business. Similarly,
we analyze and evaluate the financial and operational information systems of target businesses and, where necessary, we enhance and improve
those existing systems that are deemed to be inadequate or insufficient to support our business plan for the target business.
We incur third
party debt financing almost entirely at the parent company level, which we use, in combination with our equity capital, to provide debt
financing to each of our businesses and to acquire additional businesses. We believe this financing structure is beneficial to the financial
and operational activities of each of our businesses by aligning our interests as both equity holders of, and lenders to, our businesses,
in a manner that we believe is more efficient than each of our businesses borrowing from third-party lenders.
Risk Factor Summary
Below is a summary
of the principal factors that make an investment in our common stock speculative. This summary does not address all of the risks that
we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under
the heading “Risk Factors” and should be carefully considered, together with other information in this prospectus and our
other filings with the SEC before making investment decisions regarding our common stock.
|●||We will need to raise additional capital to fund our operations in furtherance of our business plan.|
|●||We have an evolving business model, which increases the complexity of our business.|
|●||We received a subpoena from the Commission in the investigation now known as “In the Matter of DPW
Holdings, Inc.,” the consequences of which are unknown.|
|●||Our Bitcoin mining operations present a number of risks, which are delineated in the Risk factors section.|
|●||Our holding company model presents certain additional risks, which are delineated in the Risk factors
|●||Our growth strategy is subject to a significant degree of risk.|
|●||We are heavily dependent on our senior management, and a loss of a member of our senior management team
could cause our stock price to suffer.|
|●||If we fail to anticipate and adequately respond to rapid technological changes in our industry, including
evolving industry-wide standards, in a timely and cost-effective manner, our business, financial condition and results of operations would
be materially and adversely affected.|
|●||If we do not continue to satisfy the NYSE American continued listing requirements, our common stock could
be delisted from NYSE American.|
|●||Our common stock price is volatile.|
The following summary is provided
solely for your convenience and is not intended to be complete. You should read the full text and more specific details contained elsewhere
in this prospectus. For a more detailed description of our common stock, see “Description of Our Securities.”
|Securities Offered by the selling stockholders:
||11,605,913 shares of our common stock|
|Common Stock outstanding before this
|Common Stock to be outstanding after this
|Use of Proceeds:
||We will not receive any of the proceeds from the sale of common stock by the selling stockholders. See “Use of Proceeds.”|
|Plan of Distribution:
||The shares may be offered and sold from time to time by the selling stockholder named herein through public or private transactions at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. See “Plan of Distribution.”|
|NYSE American Symbol
||Investing in our securities is highly speculative and involves a significant degree of risk. See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities.|
The number of shares of common stock that
will be outstanding after this offering set forth above is based on 394,697,811 shares of common stock outstanding as of January 20, 2023,
and excludes the following:
| ·||165,000 shares of common stock issuable upon the conversion of an outstanding convertible debt instruments
at a conversion price of $4.00 per share;|
| ·||15,529,034 shares of common stock issuable upon the exercise of outstanding warrants at exercise prices
of between $0.45 per share and $2,000 per share, or, alternatively, a weighted average exercise price of $2.24 per share;|
| ·||5,810,844 shares of common stock issuable upon the exercise of stock options at a weighted average exercise
price of $2.40 per share, of which 3,160,000 were issued under the Amended and Restated 2021 Stock Incentive Plan, 2,650,000 were issued
to our officers and directors outside of a stock incentive plan and 844 were issued under various prior stock incentive plans;|
| ·||3,269,456 shares of common stock reserved for issuance under our Amended and Restated 2021 Stock Incentive
|·||75,000,000 shares of common stock reserved for issuance under our 2022 Stock Incentive Plan.|
Unless otherwise specifically stated, all
information in this prospectus assumes no exercise or conversion of the outstanding convertible debt instruments, warrants or stock options
An investment in our securities
is speculative and involves a high degree of risk. Our business, financial condition or results of operations could be adversely affected
by any of these risks. You should carefully consider the risks described below and those risks set forth in the reports that we file with
the SEC and that we incorporate by reference into this prospectus, before deciding to invest in our securities. The risks and uncertainties
we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our operations. Past financial performance may not be a reliable indicator of future performance, and historical
trends should not be used to anticipate results or trends in future periods. If any of these risks actually occurs, our business, business
prospects, financial condition or results of operations could be seriously harmed. This could cause the trading price of our shares of
common stock to decline, resulting in a loss of all or part of your investment. Please also read carefully the section above entitled
“Disclosure Regarding Forward-Looking Statements.”
Risks Related to Our Company
We will need to raise additional capital to fund our operations
in furtherance of our business plan.
Until we are profitable,
we will need to quickly raise additional capital in order to fund our operations in furtherance of our business plan. The proposed financing
may include shares of common stock, shares of preferred stock, warrants to purchase shares of common stock or preferred stock, debt securities,
units consisting of the foregoing securities, equity investments from strategic development partners or some combination of each. Any
additional equity financings may be financially dilutive to, and will be dilutive from an ownership perspective to, our stockholders,
and such dilution may be significant based upon the size of such financing. Additionally, we cannot assure that such funding will be available
on a timely basis, in needed quantities, or on terms favorable to us, if at all.
We have an evolving business model, which increases the complexity of our business.
Our business model has evolved in the past
and continues to do so. In prior years we have added additional types of services and product offerings and in some cases, we have modified
or discontinued those offerings. We intend to continue to try to offer additional types of products or services, and we do not know whether
any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix. We
do not know whether these or any other modifications will be successful. The additions and modifications to our business have increased
the complexity of our business and placed significant strain on our management, personnel, operations, systems, technical performance,
financial resources, and internal financial control and reporting functions. Future additions to or modifications of our business are
likely to have similar effects. Further, any new business or website we launch that is not favorably received by the market could damage
our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our business.
We received a subpoena from the Commission in the investigation
now known as “In the Matter of DPW Holdings, Inc.,” the consequences of which are unknown.
We received a subpoena in November of 2019
from the Commission that stated that the staff of the Commission is conducting an investigation now known as “In the Matter
of DPW Holdings, Inc.” We understand that the subpoena was issued as part of an investigation as to whether we and certain of
our officers, directors, employees, partners, subsidiaries and/or affiliates, and/or other persons or entities, directly or indirectly,
violated certain provisions of the Securities Act and the Exchange Act, in connection with the offer and sale of our securities. Certain
affiliates and related parties of ours have also been subpoenaed. Although the order states that the Commission may have information relating
to such alleged violations, the subpoena expressly provides that the inquiry is not to be construed as an indication by the Commission
or its staff that any violations of the federal securities laws have occurred. We have produced documents in response to the subpoena.
Since the original subpoena was issued, we have received further subpoenas seeking additional documents and testimony from certain members
of our management team.
We do not know when the Commission’s
investigation will be concluded or what action, if any, might be taken in the future by the Commission or its staff as a result of the
matters that are the subject to its investigation or what impact, if any, the cost of continuing to respond to subpoenas might have on
our financial position or results of operations. We have not established any provision for losses in respect of this matter. In addition,
complying with any such future requests by the Commission for documents or testimony would distract the time and attention of our officers
and directors or divert our resources away from ongoing business matters. This investigation has resulted in, and may continue to result
in, significant legal expenses, the diversion of management’s attention from our business, could cause damage to our business and
reputation, and could subject us to a wide range of remedies, including enforcement actions by the Commission. There can be no assurance
that any final resolution of this or any similar matters will not have a material adverse effect on our financial condition or results
We are heavily dependent on our senior management, and a
loss of a member of our senior management team could cause our stock price to suffer.
If we lose the services of Milton C. Ault,
III, our Executive Chairman, William B. Horne, our Chief Executive Officer, Henry Nisser, our President and General Counsel, or Ken Cragun,
our Chief Financial Officer and/or certain key employees, we may not be able to find appropriate replacements on a timely basis, and our
business could be adversely affected. Our existing operations and continued future development depend to a significant extent upon the
performance and active participation of these individuals and certain key employees. Although we have entered into employment agreements
with Messrs. Ault, Horne and Nisser, and we may enter into employment agreements with additional key employees in the future, we cannot
guarantee that we will be successful in retaining the services of these individuals. If we were to lose any of these individuals, we may
not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially
We rely on highly skilled personnel and the continuing efforts
of our executive officers and, if we are unable to retain, motivate or hire qualified personnel, our business may be severely disrupted.
Our performance largely depends on the talents,
knowledge, skills, know-how and efforts of highly skilled individuals and in particular, the expertise held by our Executive Chairman,
Milton C. Ault, III. His absence, were it to occur, would materially and adversely impact development and implementation of our projects
and businesses. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel
for all areas of our organization. Our continued ability to compete effectively depends on our ability to attract, among others, new technology
developers and to retain and motivate our existing contractors. If one or more of our executive officers are unable or unwilling to continue
in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted,
and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms
a competing company, we may lose some customers.
We may be classified as an inadvertent investment company.
We are not engaged in the business of investing,
reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. Under the Investment Company
Act, however, a company may be deemed an investment company under section 3(a)(1)(C) of the Investment Company Act if the value of its
investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on a consolidated basis.
Our lending subsidiary, Ault Lending, operates
under California Finance Lending License #60DBO-77905. Per the Investment Company Act of 1940 companies with substantially all their business
confined to making small loans, industrial banking or similar business, such as Ault Lending, are excluded from the definition of an investment
We have commenced digital asset mining,
the output of which is Bitcoin, which the Commission has not indicated it deems a security. In the event that securities we hold, including
any digital assets that may in the future be deemed securities, exceed 40% of our total assets, exclusive of cash, we would inadvertently
become an investment company. An inadvertent investment company can avoid being classified as an investment company if it can rely on
one of the exclusions under the Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows an inadvertent
investment company a grace period of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a
value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer
owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive
of government securities and cash items) on an unconsolidated basis. We are putting in place policies that we expect will work to keep
the investment securities held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating
our investment securities or seeking a no-action letter from the Commission if we are unable to acquire sufficient assets or liquidate
sufficient investment securities in a timely manner.
As Rule 3a-2 is available to a company no
more than once every three years, and assuming no other exclusion were available to us, we would have to keep within the 40% limit for
at least three years after we cease being an inadvertent investment company. This may limit our ability to make certain investments or
enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment
company engaged in the business of investing and trading securities.
Classification as an investment company
under the Investment Company Act requires registration with the Commission. If an investment company fails to register, it would have
to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive and would require
a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered investment company.
Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and
portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result
in our incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact to conduct
We will not be able to successfully execute our business
strategy if we are deemed to be an investment company under the Investment Company Act.
U.S. companies that have more than 100 stockholders
or are publicly traded in the U.S. and are, or hold themselves out as being, engaged primarily in the business of investing, reinvesting
or trading in securities are subject to regulation under the Investment Company Act. Unless a substantial part of our assets consists
of, and a substantial part of our income is derived from, interests in majority-owned subsidiaries and companies that we primarily control,
we may be required to register and become subject to regulation under the Investment Company Act. If Bitcoin and other virtual currencies
were to be deemed securities for purposes of the Investment Company Act, or if we were deemed to own but not operate one or more of our
other subsidiaries, we would have difficulty avoiding classification and regulation as an investment company.
If we were deemed to be, and were required
to register as, an investment company, we would be forced to comply with substantive requirements under the Investment Company Act, including
limitations on our ability to borrow, limitations on our capital structure; restrictions on acquisitions of interests in associated companies,
prohibitions on transactions with affiliates, restrictions on specific investments, and compliance with reporting, record keeping, voting,
proxy disclosure and other rules and regulations. If we were forced to comply with the rules and regulations of the Investment Company
Act, our operations would significantly change, and we would be prevented from successfully executing our business strategy. To
avoid regulation under the Investment Company Act and related rules promulgated by the Commission, we could need to sell Bitcoin and other
assets which we would otherwise want to retain and could be unable to sell assets which we would otherwise want to sell. In addition,
we could be forced to acquire additional, or retain existing, income-generating or loss-generating assets which we would not otherwise
have acquired or retained and could need to forgo opportunities to acquire Bitcoin and other assets that would benefit our business.
If we were forced to sell, buy or retain assets in this manner, we could be prevented from successfully executing our business strategy.
Securitization of our assets subjects us to various risks.
We may securitize assets to generate cash
for funding new investments. We refer to the term securitize to describe a form of leverage under which a company (sometimes referred
to as an “originator” or “sponsor”) transfers income producing assets to a single-purpose, bankruptcy-remote subsidiary
(also referred to as a “special purpose entity” or “SPE”), which is established solely for the purpose of holding
such assets and entering into a structured finance transaction. The SPE would then issue notes secured by such assets. The special purpose
entity may issue the notes in the capital markets either publicly or privately to a variety of investors, including banks, non-bank financial
institutions and other investors. There may be a single class of notes or multiple classes of notes, the most senior of which carries
less credit risk and the most junior of which may carry substantially the same credit risk as the equity of the SPE.
An important aspect of most debt securitization
transactions is that the sale and/or contribution of assets into the SPE be considered a true sale and/or contribution for accounting
purposes and that a reviewing court would not consolidate the SPE with the operations of the originator in the event of the originator's
bankruptcy based on equitable principles. Viewed as a whole, a debt securitization seeks to lower risk to the note purchasers by isolating
the assets collateralizing the securitization in an SPE that is not subject to the credit and bankruptcy risks of the originator. As a
result of this perceived reduction of risk, debt securitization transactions frequently achieve lower overall leverage costs for originators
as compared to traditional secured lending transactions.
In accordance with the above description,
to securitize loans, we may create a wholly owned subsidiary and contribute a pool of our assets to such subsidiary. The SPE may be funded
with, among other things, whole loans or interests from other pools and such loans may or may not be rated. The SPE would then sell its
notes to purchasers whom we would expect to be willing to accept a lower interest rate and the absence of any recourse against us to invest
in a pool of income producing assets to which none of our creditors would have access. We would retain all or a portion of the equity
in the SPE. An inability to successfully securitize portions of our portfolio or otherwise leverage our portfolio through secured and
unsecured borrowings could limit our ability to grow our business and fully execute our business strategy, and could decrease our earnings,
if any. However, the successful securitization of portions of our portfolio exposes us to a risk of loss for the equity we retain in the
SPE and might expose us to greater risk on our remaining portfolio because the assets we retain may tend to be those that are riskier
and more likely to generate losses. A successful securitization may also impose financial and operating covenants that restrict our business
activities and may include limitations that could hinder our ability to finance additional loans and investments. The Investment Company
Act may also impose restrictions on the structure of any securitizations.
Interests we hold in the SPE, if any, will
be subordinated to the other interests issued by the SPE. As such, we will only receive cash distributions on such interests if the SPE
has made all cash interest and other required payments on all other interests it has issued. In addition, our subordinated interests will
likely be unsecured and rank behind all of the secured creditors, known or unknown, of the SPE, including the holders of the senior interests
it has issued. Consequently, to the extent that the value of the SPE's portfolio of assets has been reduced as a result of conditions
in the credit markets, or as a result of defaults, the value of the subordinated interests we retain would be reduced. Securitization
imposes on us the same risks as borrowing except that our risk in a securitization is limited to the amount of subordinated interests
we retain, whereas in a borrowing or debt issuance by us directly we would be at risk for the entire amount of the borrowing or debt issuance.
We may also engage in transactions utilizing
SPEs and securitization techniques where the assets sold or contributed to the SPE remain on our balance sheet for accounting purposes.
If, for example, we sell the assets to the SPE with recourse or provide a guarantee or other credit support to the SPE, its assets will
remain on our balance sheet. Consolidation would also generally result if we, in consultation with our auditors, determine that consolidation
would result in a more accurate reflection of our assets, liabilities and results of operations. In these structures, the risks will be
essentially the same as in other securitization transactions but the assets will remain our assets for purposes of the limitations described
above on investing in assets that are not qualifying assets and the leverage incurred by the SPE will be treated as borrowings incurred
by us for purposes of our limitation on the issuance of senior securities.
We may not be able to utilize our net operating loss carry forwards.
At September, 2022, we had federal and state
net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $25.3 million and $19.2 million after
application of limitation set forth in Section 382 of the Internal Revenue Code (“§382”). In accordance with §382,
future utilization of our NOLs is subject to an annual limitation as a result of ownership changes that occurred previously. We also maintain
NOLs in various foreign jurisdictions.
Our corporate structure and intercompany arrangements are
subject to the tax laws of various jurisdictions, and we could face greater than anticipated tax liabilities, which would harm our results
We are subject to tax laws in the U.S. and
certain foreign jurisdictions, including Israel and the U.K. Our income tax obligations are based
in part on our corporate structure and intercompany arrangements. The tax laws applicable to our business are increasingly complex, are
subject to interpretation and their application can be uncertain. The amount of taxes we pay in the jurisdictions in which we operate
could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised
interpretations of existing tax laws and precedents.
We are subject to the examination of our
income tax returns by the Internal Revenue Service and foreign tax authorities in the jurisdictions in which we operate, and we may be
subject to assessments or audits in the future in any such jurisdictions. The tax authorities in these jurisdictions may aggressively
interpret their laws in an effort to raise additional tax revenue and may claim that various withholding requirements apply to us or our
subsidiaries, challenge the availability to us or our subsidiaries of certain benefits under tax treaties, and challenge our methodologies
for valuing developed technology or intercompany arrangements or our revenue recognition policies, which could result in an increase of
our worldwide effective tax rate and have a material adverse effect on our financial condition and operating results.
Risks Related to Our Bitcoin Operations
Risks Related to Our Bitcoin Operations – General
Acceptance and/or widespread use of Bitcoin is uncertain.
Currently, there is a limited use of any
Bitcoin in the retail and commercial marketplace, thus contributing to price volatility that could adversely affect an investment in our
securities. Banks and other established financial institutions may refuse to process funds for Bitcoin transactions or process wire transfers
to or from Bitcoin exchanges, Bitcoin-related companies or service providers, which we have experienced, or maintain accounts for persons
or entities transacting in Bitcoin. Conversely, a significant portion of Bitcoin demand is generated by investors seeking a long-term
store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines any Bitcoin’s
role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Market capitalization for a Bitcoin
as a medium of exchange and payment method may always be low.
The relative lack of acceptance of Bitcoins
in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to use them to pay for goods and
services. Such lack of acceptance or decline in acceptances could have a material adverse effect on our ability to continue as a going
concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations
and potentially the value of Bitcoins we mine or otherwise acquire or hold for our own account.
The development and acceptance of cryptographic and algorithmic
protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of special economic, geopolitical and
regulatory factors, which could slow the growth of the industry in general and our company as a result.
The use of cryptocurrencies, including Bitcoin,
to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that
employs cryptocurrency assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance
of cryptocurrencies as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of Bitcoin
in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing
protocols may occur unpredictably. The factors include, but are not limited to:
|●||the progress of worldwide growth in the adoption and use of Bitcoin and other cryptocurrencies as a medium
|●||the experience of businesses in using Bitcoin;|
|●||the impact from prominent business leaders in criticizing Bitcoin’s potential harm to the environment
and the effect of announcements critical of Bitcoin, such as those that occurred with Elon Musk of Tesla;|
|●||governmental and organizational regulation of Bitcoin and other cryptocurrencies and their use, or restrictions
on or regulation of access to and operation of the network or similar cryptocurrency systems (such as the recent ban in China);|
|●||changes in consumer demographics and public tastes and preferences, including as may result from coverage
of Bitcoin or other cryptocurrencies by journalists and other sources of information and media;|
|●||the maintenance and development of the open-source software protocol of the network;|
|●||the increased consolidation of contributors to the Bitcoin blockchain through mining pools and scaling
of mining equipment by well-capitalized market participants;|
|●||the availability and popularity of other forms or methods of buying and selling goods and services, including
new means of using fiat currencies;|
|●||the use of the networks supporting Bitcoin or other cryptocurrencies for developing smart contracts and
|●||general economic conditions and the regulatory environment relating to Bitcoin and other cryptocurrencies;|
|●||the impact of regulators focusing on cryptocurrencies and the costs, financial and otherwise, associated
with such regulatory oversight; and|
|●||a decline in the popularity or acceptance of Bitcoin could adversely affect an investment in us.|
The outcome of these factors could have
negative effects on our ability to continue as a going concern or to pursue our business strategy, which could have a material adverse
effect on our business, prospects or operations as well as potentially negative effects on the value of any Bitcoin or other cryptocurrencies
we mine or otherwise acquire, which would harm investors in our securities. If Bitcoin or other cryptocurrencies we mine do not gain widespread
market acceptance or accrete in value over time, our prospects and your investment in us would diminish.
We rely on a sole supplier for our Bitcoin mining machines,
and may not be able to find replacements or immediately transition to alternative suppliers. If we were to lose Bitmain as a supplier,
or if Bitmain were unable or unwilling to fulfill our orders, any delay or interruption in planned delivery could seriously interrupt
We rely on Bitmain as the sole supplier
for our Bitcoin miners. According to Bitmain, it supplies approximately 80% of the global market for ASIC miners, which are used to mine
Bitcoin. Currently, we have contracts with Bitmain for the delivery of 20,600 miners, of which approximately 16,017 S19j Pro Antminers
and 4,424 S19 XP Antminers have been delivered to date with another 204 S19
XP Antminers in the hands of our carrier and in route to our Facility, which brings us to a total of 20,645 S19j Pro and S19 XP Antminers
in our possession. The remaining miners scheduled to be delivered monthly through December 2023. The market price and availability of
new mining machines fluctuates with the price of Bitcoin and can be volatile. Higher Bitcoin prices increase the demand for mining equipment
and increases the cost. In addition, as more companies seek to enter the mining industry, the demand for machines may outpace supply and
create mining machine equipment shortages. Any future purchase orders with Bitmain for additional miners are subject to availability and
price considerations. If we were to lose Bitmain as a supplier, or if Bitmain were unable or unwilling to fulfill our orders or make miners
available to use in the future on terms acceptable to us, there can be no assurance that we will be able to identify or enter into agreements
with alternative suppliers on a timely basis or on acceptable terms, if at all. Any delay or interruption in the planned delivery of our
contracted miners, whether due to supply shortages, foreign country hostilities, extended national holidays or otherwise, could significantly
affect our business, financial condition and results of operations.
Political or economic crises may motivate large-scale sales
of cryptocurrencies, which could result in a reduction in values of cryptocurrencies such as Bitcoin and adversely affect an investment
Geopolitical crises, in particular major
ones such as Russia’s invasion of Ukraine, may motivate large-scale purchases of Bitcoin and other cryptocurrencies, which could
increase the price of Bitcoin and other cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven
purchasing behavior dissipates, adversely affecting the value of our Bitcoin following such downward adjustment. Such risks are similar
to the risks of purchasing commodities in general uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively,
as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage
investment in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment
As an alternative to fiat currencies that
are backed by central governments, cryptocurrencies, which are relatively new, are subject to supply and demand forces. How such supply
and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us and investors in our common stock.
Political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies either globally or locally. Such events
could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have
a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin or any other cryptocurrencies
we mine or otherwise acquire or hold for our own account.
Negative media attention and public perception surrounding
energy consumption by cryptocurrency mining may adversely affect our reputation and, consequently, our stock price; particularly in the
eyes of some of our investors who may be more interested in our non-crypto operations as a holding company.
Cryptocurrency mining has experienced negative
media attention surrounding its perceived high electricity use and environmental impact, which has adversely influenced public perception
of the industry as a whole. We believe these factors are overstated for the cryptocurrency mining industry because of the informational
disparity between cryptocurrency mining and other energy intensive industries. Cryptocurrency miners (particularly Bitcoin miners) have
freely and publicly disclosed their energy consumption statistics because electricity usage, and the associated utility fees, is a cost
of production. As increasing numbers of publicly traded cryptocurrency miners enter the market, more data, reliably disclosed in compliance
with GAAP, has become available; however, such data has not been made as readily available for competitive payment systems and fiat currencies.
Nevertheless, this negative media attention
and public perception may materially and adversely affect our reputation and, consequently, our stock price, particularly in the eyes
of our investors who are more interested in our non-crypto operations as a holding company. As a single company within the broader cryptocurrency
industry, we are likely incapable of effectively countering this negative media attention and affecting public perception. Therefore,
we may not be able to adequately respond to these external pressures, which may cause a significant decline in the price of our common
Banks and financial institutions may not provide banking
services, or may cut off services, to businesses like us that engage in cryptocurrency-related activities.
A number of companies that engage in Bitcoin
and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide
them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies
may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response
to government action. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities
have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness
of cryptocurrencies as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness and harm
their public perception in the future.
The usefulness of cryptocurrencies as a
payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts
of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk,
cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national securities
exchanges and derivatives on commodities exchanges, the over-the-counter market, and the Depository Trust Company (“DTC”),
which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships
with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material
adverse effect on our ability to continue as a going concern or to monetize our mining efforts, which could have a material adverse effect
on our business, prospects or operations and harm investors.
The price of cryptocurrencies may be affected by the sale
of such cryptocurrencies by other vehicles investing in cryptocurrencies or tracking cryptocurrency markets. Such events could have a
material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine.
The global market for cryptocurrency is
characterized by supply constraints that differ from those present in the markets for commodities or other assets such as gold and silver.
The mathematical protocols under which certain cryptocurrencies are mined permit the creation of a limited, predetermined amount of digital
currency, while others have no limit established on total supply. Increased numbers of miners and deployed mining power globally will
likely continue to increase the available supply of Bitcoin and other cryptocurrencies, which may depress their market price. Further,
large “block sales” involving significant numbers of Bitcoin following appreciation in the market price of Bitcoin may also
increase the supply of Bitcoin available on the market, which, without a corresponding increase in demand, may cause its price to fall.
Additionally, to the extent that other vehicles investing in cryptocurrencies or tracking cryptocurrency markets form and come to represent
a significant proportion of the demand for cryptocurrencies, large redemptions of the securities of those vehicles and the subsequent
sale of cryptocurrencies by such vehicles could negatively affect cryptocurrency prices and therefore affect the value of the cryptocurrency
inventory we hold. Such events could have a material adverse effect on our business, prospects or operations and potentially the value
of any Bitcoin or other cryptocurrencies we may in the future mine.
Tariffs have increased costs of digital asset mining equipment,
and new or additional tariffs or other restrictions on the import of equipment necessary for digital asset mining could have a material
adverse effect on our business, financial condition and results of operations.
Equipment necessary for digital asset mining
is almost entirely manufactured outside of the U.S. There is currently significant uncertainty about the future relationship between the
U.S. and various other countries, including Russia, China, the European Union, Canada, and Mexico, with respect to trade policies, treaties,
tariffs and customs duties, and taxes. For example, since 2019, the U.S. Government has implemented significant changes to U.S. trade
policy with respect to China. These tariffs have subjected certain digital asset mining equipment manufactured overseas to additional
import duties of up to 25%. The amount of the additional tariffs and the number of products subject to them has changed numerous times
based on action by the U.S. Government. These tariffs have increased costs of digital asset mining equipment, and new or additional tariffs
or other restrictions on the import of equipment necessary for digital asset mining could have a material adverse effect on our business,
financial condition and results of operations.
Because there has been limited precedent set for financial
accounting for Bitcoin and other digital assets, the determinations that we have made for how to account for digital assets transactions
may be subject to change.
Because there has been limited precedent
set for the financial accounting for Bitcoin and other digital assets and related revenue recognition and no official guidance has yet
been provided by the Financial Accounting Standards Board or the SEC, it is unclear how companies may in the future be required to account
for digital asset transactions and assets and related revenue recognition. A change in regulatory or financial accounting standards could
result in the necessity to change the accounting methods we currently intend to employ in respect of our anticipated revenues and assets
and restate any financial statements produced based on those methods. Such a restatement could adversely affect our business, prospects,
financial condition and results of operations.
Risks Related to Our Bitcoin Operations – Operational and Financial
Our results of operations are expected to be impacted by
fluctuations in the price of Bitcoin because a significant portion of our revenue is expected to come from Bitcoin mining production.
The price of Bitcoin has experienced significant
fluctuations over its relatively short existence and may continue to fluctuate significantly in the future. Bitcoin prices ranged from
approximately $29,002 per coin as of December 31, 2020 and $46,306 per coin as of December 31, 2021 to $16,548 per coin as of December
31, 2022, with a high of $68,790 per coin and a low of $28,804 per coin during 2021, according to Coin Market Cap. The fluctuation during
2022 ranges between a high of $48,087 to a low of $15,683, according to Coin Market Cap.
We expect our results of operations to continue
to be affected by the Bitcoin price as a significant portion of our revenue is expected to come from Bitcoin mining production. Any future
significant reductions in the price of Bitcoin will likely have a material and adverse effect on our results of operations and financial
condition. We cannot assure you that the Bitcoin price will remain high enough to sustain our operations or that the price of Bitcoin
will not decline significantly in the future. Further, fluctuations in the Bitcoin price can have an immediate impact on the trading price
of our shares even before our financial performance is affected, if at all.
Various factors, mostly beyond our control,
could impact the Bitcoin price. For example, the usage of Bitcoins in the retail and commercial marketplace is relatively low in comparison
with the usage for speculation, which contributes to Bitcoin’s price volatility. Additionally, the reward for Bitcoin mining will
decline over time, with the most recent halving event having occurred in May 2020 and the next one expected to occur in 2024, which may
further contribute to Bitcoin price volatility.
Because of our focus on Bitcoin mining, the trading price
of shares of our common stock may increase or decrease with the trading price of Bitcoin, which subjects investors to pricing risks, including
“bubble” type risks, and volatility.
The trading prices of our common stock may
at times be tied to the trading prices of Bitcoin. Specifically, we may experience adverse effects on our stock price when the value of
Bitcoin drops. Furthermore, if the market for Bitcoin mine operators’ shares or the stock market in general experiences a loss of
investor confidence, the trading price of our stock could decline for reasons unrelated to our business, operating results or financial
condition. The trading price of our common stock could be subject to arbitrary pricing factors that are not necessarily associated with
traditional factors that influence stock prices or the value of non-cryptocurrency assets such as revenue, cash flows, profitability,
growth prospects or business activity since the value and price, as determined by the investing public, may be influenced by uncertain
contingencies such as future anticipated adoption or appreciation in value of cryptocurrencies or blockchains generally, and other factors
over which we have little or no influence or control.
Bitcoin and other cryptocurrency market
prices, which have historically been volatile and are impacted by a variety of factors, are determined primarily using data from various
exchanges, over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that
impact commodities, more so than business activities, which could be affected by additional influence from fraudulent or illegitimate
actors, real or perceived scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue
to result in, speculation regarding future appreciation in the value of cryptocurrencies, or our share price, making their market prices
more volatile or creating “bubble” type risks for the trading price of Bitcoin.
The price of Bitcoin has experienced significant
fluctuations over its relatively short existence and may continue to fluctuate significantly in the future. Bitcoin prices ranged from
approximately $29,002 per coin as of December 31, 2020 and $46,306 per coin as of December 31, 2021 to $16,548 per coin as of December
31, 2022, with a high of $68,790 per coin and a low of $28,804 per coin during 2021, according to Coin Market Cap. The fluctuation during
2022 ranges between a high of $48,087 to a low of $15,683, according to Coin Market Cap. There can be no assurance that similar fluctuations
in the trading price of Bitcoin will not occur in the future. Accordingly, since our revenue will depend in part on the price of Bitcoin,
and the trading price of our securities may therefore at times be connected to the trading price of Bitcoin, if the trading price of Bitcoin
again experiences a significant decline, we could experience a similar decline in revenue and/or in the trading price for shares of our
common stock. If this occurs, you may lose some or all of your investment.
Our future success will depend in large part upon the value
of Bitcoin. The value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings.
Our operating results from this sector will
depend in large part upon the value of Bitcoin because it is the sole digital asset we currently mine. Specifically, our revenues from
our Bitcoin mining operations are principally based upon two factors: the number of Bitcoin rewards we successfully mine and the value
of Bitcoin. We also receive transaction fees paid in Bitcoin by participants who initiated transactions associated with new blocks that
we mine. In addition, our operating results are directly impacted by changes in the value of Bitcoin. Digital currencies are recorded
at cost less any impairment. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually,
or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived
asset is impaired. Impairment exists when the carrying amount exceeds its fair value. Our operating results are subject to volatility
based upon changes in the value of Bitcoin. Our strategy currently focuses primarily on Bitcoin (as opposed to other digital assets).
Further, our miners are principally utilized for mining Bitcoin and cannot mine other digital assets, such as ETH, that are not mined
utilizing the “SHA-256 algorithm.” If other digital assets were to achieve acceptance at the expense of Bitcoin, causing the
value of Bitcoin to decline, or if Bitcoin were to switch its proof of work algorithm from SHA-256 to another algorithm for which our
miners are not specialized, or the value of Bitcoin were to decline for other reasons, particularly if such decline were significant or
over an extended period of time, our operating results would be adversely affected, and there could be a material adverse effect on our
ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business,
prospects or operations, and harm investors.
Bitcoin and other cryptocurrency market
prices, which have historically been volatile and are impacted by a variety of factors are determined primarily using data from various
exchanges, over-the-counter markets and derivative platforms. Such prices may be subject to factors such as those that impact commodities,
more so than business activities, which could be subject to additional influence from fraudulent or illegitimate actors, real or perceived
scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation
regarding future appreciation in the value of digital assets, or our share price, inflating and making their market prices more volatile
or creating “bubble” type risks for both Bitcoin and our shares of common stock.
We lack a significant operating history in the cryptocurrency
mining space, and our focus on this relatively new business is subject to a number of significant risks and uncertainties that could affect
our future viability.
We recently transferred all our mining activity
from Ault Alliance to BNI, both of which are wholly owned subsidiaries of our company. As of the date of this prospectus, excluding the
investment in our data center in Michigan, we have invested approximately $145 million towards the development of our new Bitcoin
mining business. These investments include the price of the Bitcoin miners, fees payable in connection with obtaining the ability to enter
into the Bitcoin miner purchase contracts, shipping of the Bitcoin miners and third-party commissions. BNI was formed to conduct our Bitcoin
operations, and has assumed the agreements for the acquisition of miners from Bitmain and other agreements for the acquisition of equipment
and services originally entered into by Ault Alliance, but has only recently commenced Bitcoin mining operations. In order to proceed,
we have installed miners and mining infrastructure at our mining facility in Michigan, as well as entered into a long-term contract
to purchase electric power from the power grid in our data center in Michigan and use the power to mine cryptocurrencies. Among the risks
and uncertainties are:
|●||We are currently in discussions with a number of key players in this industry, but have not yet executed
any agreements to purchase the power needed over the 28 megawatts (“MW”) we currently possess. While we are in negotiations
with one entity in particular that we believe would increase our available power to approximately 300 MW’s at our Michigan facility,
we cannot assure you that we will reach an agreement satisfactory to us with this provider on a timely basis, if at all. Even if we do
obtain that level of energy at our Michigan facility, we will need to obtain more capacity at a different location to be able to install
and power the total of 23,065 miners purchased from Bitmain. If we are able to enter into agreements for additional power, the terms may
not be as attractive as we currently expect, which may inhibit the profitability of this venture;|
|●||There is a limited number of available miners and the demand from competitors is fierce;|
|●||Because of supply chain disruptions including those relating to computer chips, we could in the future
encounter delivery delays or other difficulties with the purchase, installing and operating of our mining equipment at our facility, which
would adversely affect our ability to generate material revenue from our operations;|
|●||There are a growing number of well capitalized cryptocurrency mining companies including some that have
agreed to merge with special purpose acquisition companies, which competitors have significant capital resources, a large supply of miners
and operators with experience in cryptocurrency mining. For example, in 2021 Cipher Mining Inc. and Core Scientific, Inc., large cryptocurrency
mining companies, entered into business combinations with Nasdaq-listed special purpose acquisition vehicles;|
|●||Bans from governments such as China, together with pending legislation in Congress and other regulatory
initiatives threaten the ability to use cryptocurrencies as a medium of exchange; and|
|●||We may not be able to liquidate our holdings of cryptocurrencies at our desired prices if a precipitous
decline in market prices occurs and this could negatively impact our future operations.|
For all of these reasons, our cryptocurrency
mining business may not be successful.
The emergence of competing blockchain platforms or technologies
may harm our business as presently conducted by preventing us from realizing the anticipated profits from our investments and forcing
us to expend additional capital in an effort to adapt.
If blockchain platforms or technologies
which compete with Bitcoin and its blockchain, including competing cryptocurrencies which our miners may not be able to mine, such as
cryptocurrencies being developed or that may be developed by popular social media platforms, online retailers, or government sponsored
cryptocurrencies, consumers may use such alternative platforms or technologies. If that were to occur, we would face difficulty adapting
to such emergent digital ledgers, blockchains, or alternative platforms, cryptocurrencies or other digital assets. This may adversely
affect us by preventing us from realizing the anticipated profits from our investments and forcing us to expend additional capital in
an effort to adapt. Further, to the extent we cannot adapt, be it due to our specialized miners or otherwise, we could be forced to cease
our mining or other cryptocurrency-related operations. Such circumstances would have a material adverse effect on our business, and
in turn your investment in our securities.
There is a risk that some or all of the Bitcoin we hold could
be lost or stolen.
There is a risk that some or all of the
Bitcoin we hold could be lost or stolen. In general, cryptocurrencies are stored in cryptocurrency sites commonly referred to as “wallets”
by holders of cryptocurrencies which may be accessed to exchange a holder’s cryptocurrency assets. Access to our Bitcoin could also
be restricted by cybercrime (such as a denial of service attack). While we plan to take steps to attempt to secure the Bitcoin we hold,
there can be no assurance our efforts to protect our cryptocurrencies will be successful.
Hackers or malicious actors may launch attacks
to steal, compromise or secure cryptocurrencies, such as by attacking the cryptocurrency network source code, exchange miners, third-party platforms,
cold and hot storage locations or software, or by other means. Any of these events may adversely affect our operations and, consequently,
our ability to generate revenue and become profitable. The loss or destruction of a private key required to access our digital wallets
may be irreversible and we may be denied access for all time to our Bitcoin holdings. Our loss of access to our private keys or our experience
of a data loss relating to our digital wallets could adversely affect our business.
Cryptocurrencies are controllable only by
the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which
wallet’s public key or address is reflected in the network’s public blockchain. We will be required to publish the public
key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information into the network, but
we will need to safeguard the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise
compromised, we will be unable to access our Bitcoin rewards and such private keys may not be capable of being restored by any network.
Any loss of private keys relating to digital wallets used to store our mined Bitcoin could have a material adverse effect on our results
of operations and ability to continue as a going concern, which could have a material adverse effect on our business, prospects or operations
and potentially the value of any Bitcoin we mine. For example, the New York Times reported in January 2021 that about 20% of
existing Bitcoin appears to be “lost” due to password issues.
We rely on one or more third parties for depositing, storing
and withdrawing the Bitcoin we receive, which could result in a loss of assets, disputes and other liabilities or risks which could adversely
impact our business.
We currently use a custodial wallet to store
the Bitcoin we receive. In order to own, transfer and use Bitcoin on the blockchain network, we must have a private and public key pair
associated with a network address, commonly referred to as a “wallet.” Each wallet is associated with a unique “public
key” and “private key” pair, each of which is a string of alphanumerical characters. To deposit Bitcoin into our digital
wallet, we must direct the transaction to the public key of a wallet that our Gemini custodial account controls and provides to us, and
broadcast the deposit transaction onto the underlying blockchain network. To withdraw Bitcoin from our custodial account, an assigned
account representative must initiate the transaction from our custodial account, then an approver must approve the transaction. Once the
custodian has verified that the request is valid and who the recipient is through Know Your Customer/Anti-Money Laundering protocols,
the custodian then “signs” a transaction authorizing the transfer. In addition, some cryptocurrency networks require additional
information to be provided in connection with any transfer of cryptocurrency such as Bitcoin.
A number of errors or other adverse events
can occur in the process of depositing, storing or withdrawing Bitcoin into or from our custodial account, such as typos, mistakes or
the failure to include the information required by the blockchain network. For instance, a user may incorrectly enter our wallet’s
public key or the desired recipient’s public key when depositing and withdrawing Bitcoin. Additionally, our reliance on third parties
such as Gemini and the maintenance of keys to access and utilize our digital wallet will expose us to enhanced cybersecurity risks from
unauthorized third parties employing illicit operations such as hacking, phishing and social engineering, notwithstanding the security
systems and safeguards employed by us and others. Cyberattacks upon systems across a variety of industries, including the cryptocurrency
industry, are increasing in frequency, persistence and sophistication and, in many cases, are being conducted by sophisticated, well-funded,
and organized groups and individuals. For example, attacks may be designed to deceive employees and service providers into releasing control
of the systems on which we depend to a hacker, while others may aim to introduce computer viruses or malware into such systems with a
view to stealing confidential or proprietary data. These attacks may occur on our digital wallet or the systems of our third-party service
providers or partners, which could result in asset losses and other adverse consequences. Alternatively, we may inadvertently transfer
Bitcoin to a wallet address that we do not own, control or hold the private keys to. In addition, a Bitcoin wallet address can only be
used to send and receive Bitcoin, and if the Bitcoin is inadvertently sent to an Ethereum or other cryptocurrency wallet address, or if
any of the foregoing errors occur, all of the Bitcoin will be permanently and irretrievably lost with no means of recovery. Such incidents
could result in asset loss or disputes, any of which could materially and adversely affect our business.
If a malicious actor or botnet obtains control of more than
50% of the processing power on a cryptocurrency network, such actor or botnet could manipulate blockchains to adversely affect us, which
would adversely affect an investment in our company and our ability to operate.
If a malicious actor or botnet (a volunteer
or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the
processing power dedicated to mining a cryptocurrency, it may be able to alter blockchains on which transactions of cryptocurrency reside
and rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious
actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new units or transactions
using such control. The malicious actor could “double-spend” its own cryptocurrency (i.e., spend the same Bitcoin in more
than one transaction) and prevent the confirmation of other users’ transactions for as long as it maintained control. To the extent
that such malicious actor or botnet does not yield its control of the processing power on the network or the cryptocurrency community
does not reject the fraudulent blocks as malicious, reversing any changes made to blockchains may not be possible. The foregoing description
is not the only means by which the entirety of blockchains or cryptocurrencies may be compromised but is only an example.
Although we are unaware of any reports of
malicious activity or control of blockchains achieved through controlling over 50% of the processing power on the network, it is believed
that certain mining pools may have exceeded the 50% threshold in Bitcoin. The possible crossing of the 50% threshold indicates a greater
risk that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin community,
and the administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power, the feasibility
of a botnet or malicious actor obtaining control of the blockchain’s processing power will increase, because such botnet or malicious
actor could more readily infiltrate and seize control over the blockchain by compromising a single mining pool, if the mining pool compromises
more than 50% of the mining power on the blockchain, than it could if the mining pool had a smaller share of the blockchain’s total
hashing power. Conversely, if the blockchain remains decentralized it is inherently more difficult for the botnet or malicious actor to
aggregate enough processing power to gain control of the blockchain. If this were to occur, the public may lose confidence in the Bitcoin
blockchain, and blockchain technology more generally. This would likely have a material and adverse effect on the price of Bitcoin, which
could have a material adverse effect on our business, financial results and operations, and harm investors.
Risks Related to Our Bitcoin Operations – Legal and Regulatory
A particular digital asset’s status as a “security”
in any relevant jurisdiction is subject to a high degree of uncertainty and if a regulator disagrees with our characterization of a digital
asset, we may be subject to regulatory scrutiny, investigations, fines and penalties, which may adversely affect our business, operating
results and financial condition. A determination that Bitcoin is a “security” may adversely affect the value of Bitcoin and
The SEC and its staff have taken the position
that certain digital assets fall within the definition of a “security” under U.S. federal securities laws. The legal test
for determining whether any given digital asset is a security is a highly complex, fact-driven analysis that may evolve over time, and
the outcome is difficult to predict. Our determination that the digital assets we hold are not securities is a risk-based assessment and
not a legal standard or one binding on regulators. The SEC generally does not provide advance guidance or confirmation on the status of
any particular digital asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult
to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the
appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. Public statements made by senior officials
at the SEC indicate that the SEC does not intend to take the position that Bitcoin is a security (as currently offered and sold; in this
context, it should be noted that we have no intention of conducting any initial coin offerings). However, such statements are not official
policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court
and cannot be generalized to any other digital asset. As of the date of this prospectus, with the exception of certain centrally issued
digital assets that have received “no-action” letters from the SEC staff, Bitcoin and Ethereum’s ether are the only
digital assets which senior officials at the SEC have publicly stated are unlikely to be considered securities. As a Bitcoin mining company,
we do not believe we are an issuer of any “securities” as defined under the federal securities laws. Our internal process
for determining whether the digital assets we hold or plan to hold is based upon the public statements of the SEC and existing case law.
Similarly, though the SEC’s Strategic Hub for Innovation and Financial Technology published a framework for analyzing whether any
given digital asset is a security in April 2019, this framework is also not a rule, regulation or statement of the SEC and is not binding
on the SEC.
The classification of a digital asset as
a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading,
and clearing of such assets. For example, a digital asset that is a security may generally only be offered or sold pursuant to a registration
statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in
digital assets that are securities may be subject to registration with the SEC as a “broker” or “dealer.” Platforms
that bring together purchasers and sellers to trade digital assets that are securities are generally subject to registration as national
securities exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading
system (“ATS”), in compliance with rules for ATS’s. Persons facilitating clearing and settlement of securities may be
subject to registration with the SEC as a clearing agency.
We analyze whether the digital assets that we
mine, hold and sell for our own account could be deemed to be a “security” under applicable laws. Our procedures
do not constitute a legal standard, but rather represent our management’s assessment regarding the likelihood that a particular
digital asset could be deemed a “security” under applicable laws. Regardless of our conclusions, we could be subject to legal
or regulatory action in the event the SEC, a foreign regulatory authority, or a court were to determine that a digital asset currently
held by us is a “security” under applicable laws. If the digital assets mined and held by us are deemed securities, it could
limit distributions, transfers, or other actions involving such digital assets, including mining.
There can be no assurances that we will
properly characterize any given digital asset as a security or non-security for purposes of determining which digital assets to mine,
hold and trade, or that the SEC, or a court, if the question was presented to it, would agree with our assessment. We could be subject
to judicial or administrative sanctions for failing to offer or sell digital assets in compliance with the registration requirements,
or for acting as a broker or dealer without appropriate registration. Such an action could result in injunctions, cease and desist orders,
as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. For instance, all transactions
in such supported digital asset would have to be registered with the SEC, or conducted in accordance with an exemption from registration,
which could severely limit its liquidity, usability and transactability. Further, it could draw negative publicity and a decline in the
general acceptance of the digital asset. Also, it may make it difficult for such digital asset to be traded, cleared, and custodied as
compared to other digital assets that are not considered to be securities.
Current interpretations require the regulation of Bitcoin
under the Commodity Exchange Act by the Commodity Futures Trading Commission, and we may be required to register and comply with
such regulations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous
to our investors.
Current and future legislation, regulation
by the Commodity Futures Trading Commission (the “CFTC”) and other regulatory developments, including interpretations released
by a regulatory authority, may impact the manner in which Bitcoin and other cryptocurrencies are treated for classification and clearing
purposes. In particular, derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We
cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin and other cryptocurrencies under the law.
Bitcoin has been deemed to fall within the
definition of a commodity and, we may be required to register and comply with additional regulation under the Commodity Exchange Act,
including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity
pool operator and to register as a commodity pool with the CFTC through the National Futures Association. Such additional registrations
may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine
not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such
action may adversely affect an investment in us.
Additionally, governments may develop and
deploy their own blockchain-based digital assets, which may have a material adverse impact on Bitcoin’s price and utility.
Governmental action against digital assets and Bitcoin mining
may have a materially adverse effect on the industry, and could affect us if widely adopted.
We and the cryptocurrencies on which our
operations will depend are and could become subject to bans and other regulations aimed at preventing what are perceived as some of the
negative attributes of Bitcoin and Bitcoin mining. For example, on September 24, 2021, China declared all transactions in and mining
of cryptocurrencies, including Bitcoin, illegal. While the ultimate long-term effect of this ban remains uncertain, it could significantly
hinder our prospects by limiting a large market for cryptocurrencies within a growing economy. In the hours following China’s
announcement of the ban, the price of Bitcoin, which is tied to some extent to public perception of its future value as a form of currency,
dropped by nearly $4,000. The ban followed piecemeal regulatory action within China against cryptocurrencies, which was due in part to
concerns about the potential for manipulative practices and excessive energy consumption. This could demonstrate the beginning of a regional
or global regulatory trend in response to these or other concerns surrounding cryptocurrencies, and similar action in a jurisdiction in
which we operate or in general could have devastating effects to our operations. If further regulation follows, it is possible that our
industry may not be able to adjust to a sudden and dramatic overhaul to our ability to deploy energy towards the operation of mining equipment.
Because we are unable to influence or predict
future regulatory actions taken by governments, we may face difficulty monitoring and responding to rapid regulatory developments affecting
Bitcoin mining, which may have a materially adverse effect on our industry and, therefore, our business and results of operations. If
further regulatory action is taken by governments in the U.S., our business may be materially harmed, and you could lose some or all of
The markets for Bitcoin and other cryptocurrencies and the
existing markets may be under-regulated and, as a result, the market price of Bitcoin may be subject to significant volatility or manipulation,
which could decrease consumer confidence in cryptocurrencies and have a materially adverse effect on our business and results of operations.
Cryptocurrencies that are represented and
trade on a ledger-based platform and those who hold them may not enjoy the same benefits as traditional securities available on trading
markets and their investors. Stock exchanges have listing requirements and vet issuers, requiring them to be subjected to rigorous listing
standards and rules, and monitor investors transacting on such platform for fraud and other improprieties. These conditions may not necessarily
be replicated on a distributed ledger platform, depending on the platform’s controls and other policies. The more lax a distributed
ledger platform is about vetting issuers of cryptocurrency assets or users that transact on the platform, the higher the potential risk
for fraud or the manipulation of the ledger due to a control event. We believe that Bitcoin is not a security under federal and state
Bitcoin and other cryptocurrency market
prices have historically been volatile, are impacted by a variety of factors, and are determined primarily using data from various exchanges,
over-the-counter markets and derivative platforms. Furthermore, such prices may be subject to factors such as those that impact commodities,
more so than business activities, which could be subjected to additional influence from fraudulent or illegitimate actors, real or perceived
scarcity, and political, economic, regulatory or other conditions. Pricing may be the result of, and may continue to result in, speculation
regarding future appreciation in the value of cryptocurrencies, or our share price, making their market prices more volatile or creating
“bubble” type risks for both Bitcoin and shares of our common stock.
These factors may inhibit consumer trust
in and market acceptance of cryptocurrencies as a means of exchange which could have a material adverse effect on our business, prospects,
or operations and potentially the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire.
We are subject to risks associated with our need for significant
electrical power. Government regulators may potentially restrict the ability of electricity suppliers to provide electricity to mining
operations, such as ours.
The operation of a Bitcoin or other Bitcoin
mine can require massive amounts of electrical power. We presently have access to 28 megawatt capacity at our Facility, but require an
additional 37 megawatt capacity to operate the miners that we expect to receive from Bitmain during 2022. Our mining operations can only
be successful and ultimately profitable if the costs, including electrical power costs, associated with mining a Bitcoin are lower than
the price of a Bitcoin. As a result, any mine we establish can only be successful if we can obtain sufficient electrical power for that
mine on a cost-effective basis, and our establishment of new mines requires us to find locations where that is the case. There may be
significant competition for suitable mine locations, and government regulators may potentially restrict the ability of electricity suppliers
to provide electricity to mining operations in times of electricity shortage or may otherwise potentially restrict or prohibit the provision
or electricity to mining operations. Any shortage of electricity supply or increase in electricity cost in a jurisdiction may negatively
impact the viability and the expected economic return for Bitcoin mining activities in that jurisdiction.
Our interactions with a blockchain may expose us to SDN or
blocked persons or cause us to violate provisions of law that did not contemplate distributed ledger technology.
The Office of Financial Assets Control of
the U.S. Department of Treasury (“OFAC”) requires us to comply with its sanction program and not conduct business with persons
named on its specially designated nationals (“SDN”) list. However, because of the pseudonymous nature of blockchain transactions,
we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list. Our internal policies
prohibit any transactions with such SDN individuals, but we may not be adequately capable of determining the ultimate identity of the
individual with whom we transact with respect to selling digital assets. In addition, in the future OFAC or another regulator may require
us to screen transactions for OFAC addresses or other bad actors before including such transactions in a block, which may increase our
compliance costs, decrease our anticipated transaction fees and lead to decreased traffic on our network. Any of these factors, consequently,
could have a material adverse effect on our business, prospects, financial condition, and operating results.
Moreover, federal law prohibits any U.S.
person from knowingly or unknowingly possessing any visual depiction commonly known as child pornography. Recent media reports have suggested
that persons have imbedded such depictions on one or more blockchains. Because our business requires us to download and retain one or
more blockchains to effectuate our ongoing business, it is possible that such digital ledgers contain prohibited depictions without our
knowledge or consent. To the extent government enforcement authorities literally enforce these and other laws and regulations that are
impacted by decentralized distributed ledger technology, we may be subject to investigation, administrative or court proceedings, and
civil or criminal monetary fines and penalties, all of which could harm our reputation and could have a material adverse effect on our
business, prospects, financial condition, and operating results.
Risks Related to Our Bitcoin Operations – Technological
Cryptocurrencies face significant scaling
obstacles that can lead to high fees or slow transaction settlement times and attempts to increase the volume of transactions may not
be effective, which could adversely affect an investment in our securities.
Cryptocurrencies face significant scaling
obstacles that can lead to high fees or slow transaction settlement times and attempts to increase the volume of transactions may not
be effective. Scaling cryptocurrencies is essential to the widespread acceptance of cryptocurrencies as a means of payment, which widespread
acceptance is necessary to the continued growth and development of our business. Many Bitcoin networks face significant scaling challenges.
For example, cryptocurrencies are limited with respect to how many transactions can occur per second. Participants in the Bitcoin ecosystem
debate potential approaches to increasing the average number of transactions per second that the network can handle and have implemented
mechanisms or are researching ways to increase scale, such as increasing the allowable sizes of blocks, and therefore the number of transactions
per block, and sharding (a horizontal partition of data in a database or search engine), which would not require every single transaction
to be included in every single miner’s or validator’s block. However, there is no guarantee that any of the mechanisms in
place or being explored for increasing the scale of settlement of Bitcoin transactions will be effective, or how long they will take to
become effective, which could adversely affect an investment in our securities.
There is a possibility of Bitcoin mining algorithms transitioning
to proof of stake validation and other mining related risks, which could make us less competitive and ultimately adversely affect our
business and the value of our shares.
The protocol pursuant to which transactions
are confirmed automatically on the Bitcoin blockchain through mining is known as proof of work. Proof of stake is an alternative method
in validating digital asset transactions. Should the Bitcoin algorithm shift from a proof of work validation method to a proof of stake
method, mining would require less energy and may render any company that maintains advantages in the current climate (for example, from
lower priced electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to optimize and improve
the efficiency of our Bitcoin mining operations, may be exposed to the risk in the future of losing the benefit of our capital investments
and the competitive advantage we hope to gain from this as a result, and may be negatively impacted if a switch to proof of stake validation
were to occur. This may additionally have an impact on other various investments of ours. Such events could have a material adverse effect
on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on
our business, prospects or operations and potentially the value of any Bitcoin or other digital assets we mine or otherwise acquire or
hold for our own account.
Bitcoin is subject to halving, meaning that the Bitcoin rewarded
for solving a block will be reduced in the future and its value may not commensurately adjust to compensate us for such reductions, and
the overall supply of Bitcoin is finite.
Bitcoin is subject to “halving,”
which is the process by which the Bitcoin reward for solving a block is reduced by 50% for every 210,000 blocks that are solved. This
means that the amount of Bitcoin we (or any other mining company) are rewarded for solving a block in the blockchain is permanently cut
in half. For example, the latest halving having occurred in May 2020, with a revised payout of 6.25 Bitcoin per block solved, down
from the previous reward rate of 12.5 Bitcoin per block solved. There can be no assurance that the price of Bitcoin will sufficiently
increase to justify the increasingly high costs of mining for Bitcoin given the halving feature. If a corresponding and proportionate
increase in the trading price of these cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our
mining operations would see a corresponding decrease, which would have a material adverse effect on our business and operations. To illustrate,
even if the price of Bitcoin remains at its current price, all other factors being equal (including the same number of miners and a stable
hash rate), our revenue would decrease substantially upon the next halving.
Further, due to the halving process, unless
the underlying code of the Bitcoin blockchain is altered (which may be unlikely given its decentralized nature), the supply of Bitcoin
is finite. Once 21 million Bitcoin have been generated by virtue of solving blocks in the blockchain, the network will stop producing
more which is anticipated to occur in approximately 2140. Currently, there are approximately 19 million Bitcoin in circulation representing
about 90% of the total supply of Bitcoin under the current source code. For the foregoing reasons, the halving feature exposes us to inherent
uncertainty and reliance upon the historically volatile price of Bitcoin, rendering an investment in us particularly speculative, especially
in the long-term. If the price of Bitcoin does not significantly increase in value, your investment in our common stock could decline
Bitcoin has forked multiple times and additional forks may
occur in the future which may affect the value of Bitcoin that we hold or mine.
To the extent that a significant majority
of users and mining companies on a cryptocurrency network install software that changes the cryptocurrency network or properties of a
cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency
network would be subject to new protocols and software. However, if less than a significant majority of users and mining companies on
the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the software prior to its
modification, the consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software
and the other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running
in parallel yet lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks.
Additionally, it may be unclear following a fork which fork represents the original cryptocurrency and which is the new cryptocurrency.
Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core
developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains
with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an investment in our securities or
our ability to operate.
Since August 1, 2017, Bitcoin’s
blockchain was forked multiple times creating alternative versions of the cryptocurrency such as Bitcoin Cash, Bitcoin Gold and Bitcoin
SV. The forks resulted in a new blockchain being created with a shared history, and a new path forward. The value of the newly created
versions including Bitcoin Cash, Bitcoin Gold and Bitcoin SV may or may not have value in the long run and may affect the price of Bitcoin
if interest is shifted away from Bitcoin to the newly created cryptocurrencies. The value of Bitcoin after the creation of a fork is subject
to many factors including the value of the fork product, market reaction to the creation of the fork product, and the occurrence of forks
in the future. As such, the value of Bitcoin could be materially reduced if existing and future forks have a negative effect on Bitcoin’s
Incorrect or fraudulent cryptocurrency transactions may be
irreversible and it is possible that, through computer or human error, or through theft or criminal action, our cryptocurrency rewards
could be transferred in incorrect amounts or to unauthorized third parties.
Cryptocurrency transactions are irrevocable
and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed or fraudulent cryptocurrency
transactions, such as a result of a cybersecurity breach against our Bitcoin holdings, could adversely affect our investments and assets.
This is because cryptocurrency transactions are not, from an administrative perspective, reversible without the consent and active participation
of the recipient of the cryptocurrencies from the transaction. Once a transaction has been verified and recorded in a block that is added
to a blockchain, an incorrect transfer of a cryptocurrency or a theft thereof generally will not be reversible and we may not have sufficient
recourse to recover our losses from any such transfer or theft. Further, it is possible that, through computer or human error, or through
theft or criminal action, our cryptocurrency rewards could be transferred in incorrect amounts or to unauthorized third parties, or to
uncontrolled accounts. If an errant or fraudulent transaction in our Bitcoin were to occur, we would have very limited means of seeking
to reverse the transaction or seek recourse. To the extent that we are unable to recover our losses from such action, error or theft,
such events could have a material adverse effect on our business.
Because many of our digital assets may in the future be held
by digital asset exchanges, we could face heightened risks from cybersecurity attacks and financial stability of digital asset exchanges.
We may transfer our digital assets from
our wallet to digital asset exchanges prior to selling them. Digital assets not held in our wallet are subject to the risks encountered
by digital asset exchanges including a DDoS Attack or other malicious hacking, a sale of the digital asset exchange, loss of the digital
assets by the digital asset exchange and other risks similar to those described herein. We do not expect to maintain a custodian agreement
with any of the digital asset exchanges that may in the future hold our digital assets. These digital asset exchanges do not provide insurance
and may lack the resources to protect against hacking and theft. If this were to occur, we may be materially and adversely affected.
Our use of third-party mining pools
exposes us to additional risks.
We receive Bitcoin
rewards from our mining activity through third-party mining pool operators. Mining pools allow miners to combine their processing power,
increasing their chances of solving a block and getting paid by the network. The rewards are distributed by the pool operator, proportionally
to our contribution to the pool’s overall mining power, used to solve a block on the Bitcoin blockchain. Should the pool operator’s
system suffer downtime due to a cyber-attack, software malfunction or other issue, it will negatively impact our ability to mine and receive
revenue. Furthermore, we are dependent on the accuracy of the mining pool operator’s record keeping to accurately record the total
processing power provided to the pool for a given Bitcoin mining application in order to assess the proportion of that total processing
power we provided. While we have internal methods of tracking both the hash rate we provide and the total used by the pool, the mining
pool operator uses its own record-keeping to determine our proportion of a given reward, which may not match our own. If we are unable
to consistently obtain accurate proportionate rewards from our mining pool operators, we may experience reduced reward for our efforts,
which would have an adverse effect on our business and operations.
Risks Related to Our Status as a Holding Company
Our inability to successfully integrate new acquisitions
could adversely affect our combined business; our operations are widely disbursed.
Our growth strategy
through acquisitions is fraught with risk. On June 2, 2017, we acquired a majority interest in Microphase, on May 23, 2018 we acquired
Enertec, on November 30, 2020 we acquired Relec, on January 29, 2021 we acquired the Facility in Michigan, on December 16, 2021, we acquired
a majority interest in IMHC, on December 22, 2021 we acquired the four Properties in and around Madison, on December 30, 2021, we acquired
certain real property located in St. Petersburg, Florida and in June 2022, we acquired a majority interest in SMC. On December 19, 2022,
we acquired substantially all the assets and certain specified liabilities of Circle 8 Crane Service. Our strategy and business plan are
dependent on our ability to successfully integrate Microphase’s, Enertec’s and our other acquisition’s operations, particularly
those of Relec and Gresham Power. In addition, while we are based in Las Vegas, NV, our finance department is in Newport Beach, CA, Microphase’s
operations are located in Shelton, Connecticut, Enertec’s operations are located in Karmiel, Israel, Gresham Power’s operations
are located in Salisbury, England, Madison is located in or near Wisconsin and the St. Petersburg property is located in Florida. These
distant locations and others that we may become involved with in the future will stretch our resources and management time. Further, failure
to quickly and adequately integrate all of these operations and personnel could adversely affect our combined business and our ability
to achieve our objectives and strategy. No assurance can be given that we will realize synergies in the areas we currently operate.
If we make any additional acquisitions, they may disrupt or have a negative impact
on our business.
We have plans to eventually make additional
acquisitions beyond Microphase, Enertec, Relec, the Facility, IMHC, the Madison Properties, the St. Petersburg property, SMC and Circle
8 Crane Services. Whenever we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and
operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict
the effect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations
could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described
above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
|●||If senior management and/or management of future acquired companies terminate their employment prior to
our completion of integration;|
|●||difficulty of integrating acquired products, services or operations;|
|●||integration of new employees and management into our culture while maintaining focus on operating efficiently
and providing consistent, high-quality goods and services;|
|●||potential disruption of the ongoing businesses and distraction of our management and the management of
|●||unanticipated issues with transferring customer relationships;|
|●||complexity associated with managing our combined company;|
|●||difficulty of incorporating acquired rights or products into our existing business;|
|●||difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses
in maintaining such facilities;|
|●||difficulties in maintaining uniform standards, controls, procedures and policies;|
|●||potential impairment of relationships with employees and customers as a result of any integration of new
|●||potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing
of the products to new and existing customers;|
|●||effect of any government regulations which relate to the business acquired; and |
|●||potential unknown liabilities associated with acquired businesses or product lines, or the need to spend
significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether
or not successful, resulting from actions of the acquired company prior to our acquisition. |
Our business could be severely impaired
if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these
acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results of operations.
We may not be able to successfully identify suitable acquisition
targets and complete acquisitions to meet our growth strategy, and even if we are able to do so, we may not realize the full anticipated
benefits of such acquisitions, and our business, financial conditions and results of operations may suffer.
Increasing revenues through acquisitions
is one of the key components of our growth strategy. Identifying suitable acquisition candidates can be difficult, time-consuming and
costly, and we may not be able to identify suitable candidates or complete acquisitions in a timely manner, on a cost-effective basis
or at all.
We will have to pay cash, incur debt, or
issue equity as consideration in any future acquisitions, each of which could adversely affect our financial condition or the market price
of our common stock. The sale of equity or issuance of equity-linked debt to finance any future acquisitions could result in dilution
to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could limit our flexibility in managing
our business due to covenants or other restrictions contained in debt instruments.
Further, we may not be able to realize the
anticipated benefits of completed acquisitions. Some acquisition targets may not have a developed business or are experiencing inefficiencies
and incur losses. Additionally, small defense contractors which we consider suitable acquisition targets may be uniquely dependent on
their prior owners and the loss of such owners’ services following the completion of acquisitions may adversely affect their business.
Therefore, we may lose our investment in the event that the acquired businesses do not develop as planned, we cannot retain key employees
or that we are unable to achieve the anticipated cost efficiencies or reduction of losses.
Additionally, our acquisitions have previously
required, and any similar future transactions may also require, significant management efforts and expenditures. Regardless of whether
we are successful in making an acquisition, the negotiations could disrupt our ongoing business, divert the attention of our management
and key employees and increase our expenses.
We face risks with respect to the evaluation and management of future platform
or add-on acquisitions.
A component of our strategy is to continue
to acquire additional add-on businesses for our existing businesses. Generally, because such acquisition targets are held privately, we
may experience difficulty in evaluating potential target businesses as the information concerning these businesses is not publicly available.
In addition, we and our subsidiary companies may have difficulty effectively managing or integrating acquisitions. We may experience greater
than expected costs or difficulties relating to such acquisition, in which case we might not achieve the anticipated returns from any
particular acquisition, which may have a material adverse effect on our financial condition, business and results of operations.
We may not be able to successfully fund future acquisitions
of new businesses due to the lack of availability of debt or equity financing at the parent company level on acceptable terms, which could
impede the implementation of our acquisition strategy and materially adversely impact our financial condition, business and results of
In order to make future acquisitions, we
intend to raise capital primarily through debt financing, additional equity offerings, the sale of stock or assets of our businesses,
or by undertaking a combination of any of the above. Since the timing and size of acquisitions cannot be readily predicted, we may need
to be able to obtain funding on short notice to benefit fully from attractive acquisition opportunities. Such funding may not be available
on acceptable terms, if at all. In addition, the level of our indebtedness that we may incur may impact our ability to borrow. Another
source of capital for us may be the sale of additional shares, subject to market conditions and investor demand for the shares at prices
that we consider to be in the interests of our stockholders. These risks may materially adversely affect our ability to pursue our acquisition
strategy successfully and materially adversely affect our financial condition, business and results of operations.
To service any future indebtedness and other obligations,
we will require a significant amount of cash.
Our ability to generate cash depends on
many factors beyond our control, and any failure to meet our debt service obligations, of which we currently have very few but may in
the future incur, including our obligations under our indebtedness or future outstanding shares of preferred stock, could harm our business,
financial condition and results of operations. Our ability to make payments on and to refinance any indebtedness and outstanding preferred
stock and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This,
to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that
are beyond our control.
If our business does not generate sufficient
cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us and our subsidiaries to
pay our indebtedness or make dividend payments with respect to our any shares of preferred stock that we may issue, or to fund our other
liquidity needs, we may need to refinance all or a portion of our indebtedness or redeem the preferred stock, on or before the maturity
thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse
effect on us.
In addition, we may not be able to effect
any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness
or redeem the preferred stock will depend on the condition of the capital markets and our financial condition at such time. Any refinancing
of our debt or financings related to the redemption of any shares of preferred stock that we may issue could be at higher interest rates
and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of future debt
instruments or preferred stock may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments
of interest and principal on any future outstanding indebtedness or dividend payments on any shares of preferred stock that we may issue
could harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable terms or at all. Our inability
to generate sufficient cash flow to satisfy any future debt service and other obligations, or to refinance or restructure our obligations
on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition
and results of operations.
Because we face significant competition for acquisition and
business opportunities, including from numerous companies with a business plan similar to ours, it may be difficult for us to fully execute
our business strategy. Additionally, our subsidiaries also operate in highly competitive industries, limiting their ability to gain or
maintain their positions in their respective industries.
We expect to encounter intense competition
for acquisition and business opportunities from both strategic investors and other entities having a business objective similar to ours,
such as private investors (which may be individuals or investment partnerships), blank check companies including special purpose acquisition
companies, and other entities, domestic and international, competing for the type of businesses that we may acquire. Many of these competitors
possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital, than we do, and
our financial resources may be relatively limited when contrasted with those of many of these competitors. These factors may place us
at a competitive disadvantage in successfully completing future acquisitions and investments.
In addition, while we believe that there
are numerous target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition
of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing
in order to consummate future acquisitions and investment opportunities and cannot assure you that any additional financing will be available
to us on acceptable terms, or at all, or that the terms of our existing financing arrangements will not limit our ability to do so. This
inherent competitive limitation gives others an advantage in pursuing acquisition and investment opportunities.
Furthermore, our subsidiaries also face
competition from both traditional and new market entrants that may adversely affect them as well, as discussed elsewhere in these risk
We may be required to expend substantial sums in order to
bring the companies we have acquired or may acquire in the future, into compliance with the various reporting requirements applicable
to public companies and/or to prepare required financial statements, and such efforts may harm our operating results or be unsuccessful
The Sarbanes-Oxley Act requires our management
to assess the effectiveness of the internal control over financial reporting for the companies we acquire and our external auditor to
audit these companies. In order to comply with the Sarbanes-Oxley Act, we will need to implement or enhance internal control over financial
reporting at acquired companies and evaluate the internal controls. We do not conduct a formal evaluation of companies’ internal
control over financial reporting prior to an acquisition. We may be required to hire additional staff and incur substantial costs to implement
the necessary new internal controls at the companies we acquire. Any failure to implement required internal controls, or difficulties
encountered in their implementation, could harm our operating results or increase the risk of material weaknesses in internal controls,
which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and
Future acquisitions or business opportunities could involve
unknown risks that could harm our business and adversely affect our financial condition and results of operations.
We are a diversified holding company that
owns interests in a number of different businesses across several industries. We have in the past, and intend in the future, to acquire
businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular
to the industry in which the investment or acquisition targets operate, including risks in industries with which we are not familiar or
experienced. There can be no assurance our due diligence investigations will identify every matter that could have a material adverse
effect on us or the entities that we may acquire. We may be unable to adequately address the financial, legal and operational risks raised
by such investments or acquisitions, especially if we are unfamiliar with the relevant industry, which can lead to significant losses
on material investments. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit
us from realizing the projected benefits of the investments or acquisitions, which could adversely affect our financial condition and
liquidity. In addition, our financial condition, results of operations and the ability to service our debt may be adversely impacted depending
on the specific risks applicable to any business we invest in or acquire and our ability to address those risks.
We face certain risks associated with the acquisition or
disposition of businesses and lack of control over certain of our investments.
In pursuing our corporate strategy, we may
acquire, dispose of or exit businesses or reorganize existing investments. The success of this strategy is dependent upon our ability
to identify appropriate opportunities, negotiate transactions on favorable terms and ultimately complete such transactions.
In the course of our acquisitions, we may
not acquire 100% ownership of certain of our operating subsidiaries or we may face delays in completing certain acquisitions, including
in acquiring full ownership of certain of our operating companies. Once we complete acquisitions or reorganizations there can be no assurance
that we will realize the anticipated benefits of any transaction, including revenue growth, operational efficiencies or expected synergies.
If we fail to recognize some or all of the strategic benefits and synergies expected from a transaction, goodwill and intangible assets
may be impaired in future periods. The negotiations associated with the acquisition and disposition of businesses could also disrupt our
ongoing business, distract management and employees or increase our expenses.
In addition, we may not be able to integrate
acquisitions successfully and we could incur or assume unknown or unanticipated liabilities or contingencies, which may impact our results
of operations. If we dispose of or otherwise exit certain businesses, there can be no assurance that we will not incur certain disposition
related charges, or that we will be able to reduce overhead related to the divested assets.
In the ordinary course of our business,
we evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives or that no longer fit with
our broader strategy, such as the planned merger between TOGI and IMHC. When we decide to sell assets or a business, we may encounter
difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment
of our strategic objectives, or we may dispose of a business at a price or on terms which are less than we had anticipated. In addition,
there is a risk that we sell a business whose subsequent performance exceeds our expectations, in which case our decision would have potentially
sacrificed enterprise value.
Our development stage companies may never produce revenues
We have made investments in and own stakes,
either majority or minority, in a certain development stage companies. Each of these companies is at an early stage of development and
is subject to all business risks associated with a new enterprise, including constraints on their financial and personnel resources, lack
of established credit, the need to establish meaningful and beneficial vendor and customer relationships and uncertainties regarding product
development and future revenues. We anticipate that many of these companies will continue to incur substantial additional operating losses
for at least the next several years and expect their losses to increase as research and development efforts expand. There can be no assurance
as to when or whether any of these companies will be able to develop significant sources of revenue or that any of their respective operations
will become profitable, even if any of them is able to commercialize any products. As a result, we may not realize any returns on our
investments in these companies for a significant period of time, if at all, which could adversely affect our business, results of operations,
financial condition or liquidity.
Divestitures and contingent liabilities from divested businesses
could adversely affect our business and financial results.
We continually evaluate the performance
and strategic fit of all of our businesses and may sell businesses or product lines. Divestitures involve risks, including difficulties
in the separation of operations, services, products and personnel, the diversion of management's attention from other business concerns,
the disruption of our business, the potential loss of key employees and the retention of uncertain contingent liabilities, including environmental
liabilities, related to the divested business. When we decide to sell assets or a business, we may encounter difficulty in finding buyers
or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives.
We may also dispose of a business at a price or on terms that are less desirable than we had anticipated, which could result in significant
asset impairment charges, including those related to goodwill and other intangible assets, that could have a material adverse effect on
our financial condition and results of operations. In addition, we may experience greater dis-synergies than expected, the impact of the
divestiture on our revenue growth may be larger than projected, and some divestitures may be dilutive to earnings. There can be no assurance
whether the strategic benefits and expected financial impact of the divestiture will be achieved. We cannot assure you that we will be
successful in managing these or any other significant risks that we encounter in divesting a business or product line, and any divestiture
we undertake could materially and adversely affect our business, financial condition, results of operations and cash flows.
Risks Related to Related Party Transactions
There may be conflicts of interest between
our company and certain of our related parties and their respective directors and officers which might not be resolved in our favor. More
importantly, there may be conflicts between certain of our related parties and their respective directors and officers which might not
be resolved in our favor. These risks are set forth below appurtenant to the relevant related party.
Ault & Company
Our relationship with Ault & Company may enhance the
difficulty inherent in obtaining financing for us as well as expose us to certain conflicts of interest.
At January 20, 2023, Ault & Company,
of which Milton C. Ault is the chief executive officer, beneficially owned 52,666,882 shares of our common stock, consisting of (i) 1,658,916
shares of common stock owned, (ii) warrants to purchase 94 shares of common stock that are currently exercisable, (iii) 1,000,000 shares
of common stock purchasable by Ault & Company pursuant to a securities purchase agreement entered into on June 11, 2021 between Ault
& Company and BitNile, (iv) 50,000,000 shares owned by Ault Alpha, of which Ault & Company is the sole member of Ault Alpha GP
LLC, the general partner of Ault Alpha, and (v) 7,872 shares owned by Philou Ventures, LLC (“Philou”), of which Ault &
Company is the Manager, consisting of: (A) 125,000 shares of Series B Preferred Stock that are convertible into 2,232 shares of common
stock, (B) warrants to purchase 2,232 shares of common stock that are currently exercisable and (C) 3,408 shares of common stock. As of
January 20, 2023, Ault & Company beneficially owns 13.31% of our common stock.
Given the close relationship between Ault
& Company on the one hand, and our company on the other, it is not inconceivable that we could enter into additional securities purchase
agreements with Ault & Company.
Although we have relied on Philou, which
no longer beneficially owns a meaningful number of our shares of common stock, to finance us in the past, we cannot assure you that either
Philou or Ault & Company will assist us in the future. We would far prefer to rely on these entities’ assistance compared to
other sources of financing as the terms they provide us are in general more favorable to us than we could obtain elsewhere. However, Messrs.
Ault, Horne and Nisser could face a conflict of interest in that they serve on the board of directors of each of Ault & Company and
our company. If they determine that an investment in our company is not in Ault & Company’s best interest, we could be forced
to seek financing from other sources that would not necessarily be likely to provide us with equally favorable terms.
Other conflicts of interest between us,
on the one hand, and Ault & Company, on the other hand, may arise relating to commercial or strategic opportunities or initiatives.
Mr. Ault, as the controlling stockholder of Ault & Company, may not resolve such conflicts in our favor. For example, we cannot assure
you that Ault & Company would not pursue opportunities to provide financing to other entities whether or not it currently has a relationship
with such other entities. Furthermore, our ability to explore alternative sources of financing other than Ault & Company may be constrained
due to Mr. Ault’s vision for us and he may not wish for us to receive any financing at all other than from entities that he controls.
Our relationship with Alzamend may expose us to certain conflicts
In August 2020, Alzamend entered into
a securities purchase agreement with our company to sell a convertible promissory note of Alzamend, in the aggregate principal amount
of $50,000 and issue a 5-year warrant to purchase 16,667 of shares of its common stock. The convertible promissory note bears interest
at 8% per annum, which principal and all accrued and unpaid interest was due six months after the date of issuance. The principal and
interest earned on the convertible promissory note was convertible into shares of Alzamend’s common stock at $1.50 per share. The
exercise price of the warrant is $3.00 per share.
In December 2020, we provided Alzamend
$750,000 in short-term advances and in March of 2021 we entered into an agreement with Alzamend under which we agreed to purchase $10
million worth of shares of Alzamend’s common stock. We paid for the last tranche of $4 million on April 26, 2022. Consequently,
as of the date of this prospectus, we have funded an aggregate of $10 million pursuant to the securities purchase agreement and have thus
acquired all of the shares and warrants issuable by Alzamend to us under the agreement
Messrs. Horne and Nisser could face a conflict
of interest in that they serve on the board of directors of each of Alzamend and our company.
We have lent a substantial amount of funds to Avalanche,
a related party, whose ability to repay us is subject to significant doubt; in addition, we currently beneficially own a significant percentage
of Avalanche’s issued and outstanding shares of common stock, for which there is presently no market.
On September 6, 2017, we entered into a
Loan and Security Agreement with Avalanche (as amended, the “AVLP Loan Agreement”) with an effective date of August 21, 2017
pursuant to which we provided Avalanche a non-revolving credit facility. The AVLP Loan Agreement was increased to up to $20.0 million
in June of 2021 and extended to December 31, 2023. Until recently, we held a convertible note issued to us by AVLP in the amount of $20.0
million (the “Prior AVLP Note”).
While Avalanche received funds from a third
party in the amount of $2.75 million in early April of 2019 in consideration for its issuance of a convertible promissory note to such
third party (the “Third Party Note”), $2.7 million was used to pay an outstanding receivable due us and no amount was used
to repay the debt Avalanche owes us pursuant to the AVLP Loan Agreement. On October 12, 2021, Ault Alpha, an affiliate of ours, repaid
the Third Party Note in full and also acquired a warrant to purchase 1.6 million shares of AVLP common stock. In consideration therefor,
AVLP issued Ault Alpha a term note in the principal amount of $3.6 million, which term note had a maturity date of June 30, 2022.
On June 27, 2022, AVLP exchanged the term
note it had issued to Ault Alpha for a 10% senior secured convertible note in the principal face amount of $3,797,260 due June 15, 2024
(the “Ault Alpha Note”). The Ault Alpha Note is convertible, subject to adjustment, at $0.50 per share. AVLP also issued Ault
Alpha a warrant to purchase an aggregate of 1,617,647 shares of Avalanche common stock at an exercise price of $0.50. Pursuant to a security
agreement entered into by Avalanche and Ault Alpha, as amended by an intercreditor agreement entered into by and among the foregoing parties,
our company and certain other persons, Ault Alpha has a second priority interest in AVLP’s assets securing the repayment of the
Ault Alpha Note.
On July 11, 2022, AVLP issued us a 10% senior
secured convertible note in the principal face amount of $3,000,000 due July 10, 2024 (the “AVLP Note”). The AVLP Note is
convertible, subject to adjustment, at $0.50 per share. AVLP also issued us warrants to purchase an aggregate of 40,998,272 shares of
Avalanche common stock at an exercise price of $0.50. Pursuant to a security agreement entered into by Avalanche and Ault Alpha, as amended
by an intercreditor agreement entered into by and among the foregoing parties, our company and certain other persons, we have a first
priority interest in AVLP’s assets securing the repayment of the AVLP Note.
On June 1, 2022, we converted the entire
principal and accrued interest on the Prior AVLP Note into an aggregate of 51,889,168 shares of common stock of Avalanche, representing
approximately 90.2% of Avalanche’s issued and outstanding shares of common stock. There is currently no liquid market for the Avalanche
common stock. Consequently, even if we were inclined to sell such shares of common stock on the open market, our ability to do so would
be severely limited. Avalanche is not current in its filings with the Commission and is not required to register the shares of its common
stock underlying the Prior AVLP Note or any other loan arrangement we have made with Avalanche described above.
There is some doubt as to whether Avalanche
will ever have the ability to repay its debt to us, as well as our ability to sell the shares we beneficially own since at present there
is no market for these shares. If we are unable to recoup our investment in Avalanche in the foreseeable future or at all, such failure
would have a materially adverse effect on our financial condition and future prospects.
Milton C. Ault, III and William Horne, our Executive Chairman
and Chief Executive Officer, respectively, and two of our directors are directors of Avalanche.
Milton C. Ault, III and William Horne, our
Executive Chairman and Chief Executive Officer, respectively, and two of our directors, are also directors of Avalanche. Certain conflicts
of interest between us, on the one hand, and Avalanche, on the other hand, may arise relating to commercial or strategic opportunities
or initiatives, in addition to the conflicts related to the debt that Avalanche owes us. For example, Messrs. Ault and Horne may find
it difficult to determine how to meet their fiduciary duties to us as well as Avalanche, which could result in a less favorable result
for us than would be the case if they were solely directors of our company. Further, even if Messrs. Ault and Horne were able to successfully
meet their fiduciary obligations to us and Avalanche, the fact that they are members of the board of directors of both companies could
attenuate their ability to focus on our business and best interests, possibly to the detriment of both companies.
Risks Related to Our Business and Industry – Hotel Properties
We operate in a highly competitive
The lodging industry
is highly competitive. Our principal competitors are other owners and investors in full-service hotels as well as major hospitality chains
with well-established and recognized brands. Our hotels face competition for individual guests, group reservations and conference business.
We also compete against smaller hotel chains and independent and local hotel owners and operators. Additionally, we face competition from
peer-to-peer inventory sources that allow travelers to stay at homes and apartments booked from owners. New hotels may be constructed,
and these additions create new competitors, in some cases without corresponding increases in demand for hotel rooms. Our competitors may
have greater commercial, financial and marketing resources and more efficient technology platforms, which could allow them to improve
their properties and expand and improve their marketing efforts in ways that could affect our ability to compete for guests effectively
and adversely affect our revenues and profitability as well as limit or slow our future growth.
The growth of internet
reservation channels is another source of competition that could adversely affect our business. A significant percentage of hotel rooms
for individual customers are booked through internet travel intermediaries. As intermediary bookings increase, they may be able to obtain
higher commissions, reduced room rates or other significant contract concessions from our hotels. While internet travel intermediaries
traditionally have competed to attract transient business rather than group and convention business, in recent years they have expanded
their business to include marketing to large group and convention business. If that expansion continues, it could both divert group and
convention business away from our hotels and increase our cost of sales for group and convention business and materially adversely affect
our revenues and profitability.
Our franchisors and brand managers
require us to make capital expenditures pursuant to property improvement plans (“PIPs”), and any failure on our part to make
the expenditures required under the PIPs or to comply with brand standards could cause the franchisors or hotel brands to terminate the
franchise, management or operating lease agreements.
In connection with
our acquisition of the Properties in December 2021, our franchisors and brand managers required us to agree to undertake PIPs in the amount
of $13.7 million. If we do not satisfy the PIP renovation requirements, the franchisor or hotel brand may have the right to terminate
the applicable agreement. In addition, in the event that we are in default under any franchise agreement as a result of our failure to
comply with the PIP requirements, in general, we will be required to pay the franchisor liquidated damages, generally equal to a percentage
of gross room revenue for the preceding two-, three- or five-year period for the hotel or a percentage of gross revenue for the preceding
twelve-month period for all hotels operated under the franchised brand if the hotel has not been operating for at least two years. In
addition, our franchisors and brand managers may require that we make renovations to certain of our hotels in connection with revisions
to our franchise, management or operating lease agreements. In addition, upon regular inspection of our hotels, our franchisors and hotel
brands may determine that additional renovations are required to bring the physical condition of our hotels into compliance with the specifications
and standards each franchisor or hotel brand has developed.
All of our hotels operate under
a brand owned by Marriott or Hilton. Should either of these brands experience a negative event, or receive negative publicity, our operating
results may be harmed.
All of our hotels
are operated under nationally recognized brands, either Marriott or Hilton, which are among the most respected and widely recognized brands
in the lodging industry. As a result, a significant concentration of our success is dependent in part on the success of Marriott and Hilton.
Consequently, if market recognition or the positive perception of Marriott and/or Hilton is reduced or compromised, the goodwill associated
with our Marriott and/or Hilton branded hotels may be adversely affected, which may have an adverse effect on our results of operations.
Additionally, any negative perceptions or negative impact to operating results from any proposed or future consolidations between nationally
recognized brands could have an adverse effect on our results of operations.
Our franchisors and brand managers
may change certain policies or cost allocations that could negatively impact our hotels.
and brand managers incur certain costs that are allocated to our hotels subject to our franchise, management, or operating lease agreements.
Those costs may increase over time or our franchisors and brand managers may elect to introduce new programs that could increase costs
allocated to our hotels. In addition, certain policies, such as our third-party managers’ frequent guest programs, may be altered
resulting in reduced revenue or increased costs to our hotels.
Because our hotels are operated
under franchise agreements or are brand managed, termination of these franchise, management or operating lease agreements could cause
us to lose business at our hotels or lead to a default or acceleration of our obligations under certain of our debt instruments.
All of our hotels
are operated under franchise, management or operating lease agreements with franchisors or hotel management companies, such as Marriott
and Hilton. In general, under these arrangements, the franchisor or brand manager provides marketing services and room reservations and
certain other operating assistance, but requires us to pay significant fees to it and to maintain the hotel in a required condition. If
we fail to maintain these required standards, then the franchisor or hotel brand may terminate its agreement with us and obtain damages
for any liability we may have caused. Moreover, from time to time, we may receive notices from franchisors or the hotel brands regarding
our alleged non-compliance with the franchise agreements or brand standards, and we may disagree with these claims that we are not in
compliance. Any disputes arising under these agreements could also lead to a termination of a franchise, management or operating lease
agreement and a payment of liquidated damages. Such a termination may trigger a default or acceleration of our obligations under some
of our debt instruments. In addition, as our franchise, management or operating lease agreements expire, we may not be able to renew them
on favorable terms or at all. If we were to lose a franchise or hotel brand for a particular hotel, it could harm the operation, financing
or value of that hotel due to the loss of the franchise or hotel brand name, marketing support and centralized reservation system. Furthermore,
the loss of a franchise license at a particular hotel could harm our relationship with the franchisor or brand manager and cause us to
incur significant costs to obtain a new franchise license or brand management agreement for the particular hotel. Accordingly, if we lose
one or more franchise licenses or brand management agreements, it could materially and adversely affect our results of operations and
profitability as well as limit or slow our future growth.
Our hotels are geographically concentrated
and, accordingly, we could be disproportionately harmed by adverse changes to these markets, natural disasters, regulations, or terrorist
Our hotels are
located in a single geographic market, which exposes us to greater risk to local economic or business conditions, changes in hotel supply
in this market, and other conditions than more geographically diversified hotel owners. An economic downturn, an increase in hotel supply,
a force majeure event, a natural disaster, changing weather patterns, a terrorist attack or similar event in this market likely would
cause a decline in the hotel market and adversely affect occupancy rates, the financial performance of our hotels and our overall results
of operations, which could be material, and could significantly increase our costs.
The need for business-related travel, and, therefore, demand
for rooms in our hotels may be adversely affected by the increased use of business-related technology.
During 2020 and 2021, the COVID-19 pandemic
caused a significant decrease in business-related travel as companies turned to virtual meetings in order to protect the health and safety
of their employees. While business transient demand improved in 2021 as compared to 2020, it remains well below pre-pandemic levels. The
increased use of teleconferencing and video-conference technology by businesses may continue in the future, which could result in further
decreases in business travel as companies become accustomed to the use of technologies that allow multiple parties from different locations
to participate in meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies,
or new technologies, play an increased role in day-to-day business interactions and the necessity for business-related travel decreases,
demand for hotel rooms may decrease and our hotels could be adversely affected.
Rising operating expenses or low occupancy rates could reduce
Our hotels, and any hotels we may buy in
the future, are and will be subject to operating risks common to the lodging industry in general. If any hotel is not occupied at a level
sufficient to cover our operating expenses, then we could be required to spend additional funds for that hotel’s operating expenses.
For example, during 2020 and 2021, operations at many hotels were either temporarily suspended or reduced due to the COVID-19 pandemic,
and hotel owners were required to fund hotel payroll expenses, maintenance expenses, fixed hotel costs such as ground rent, insurance
expenses, property taxes and scheduled debt payments. Hotels may be subject to increases in real estate and other tax rates, utility costs,
operating expenses including labor and employee-related benefits, insurance costs, repairs and maintenance and administrative expenses,
which could reduce cash flow.
Laws and governmental regulations may restrict the ways in
which we use our hotel properties and increase the cost of compliance with such regulations. Noncompliance with such regulations could
subject us to penalties, loss of value of our properties or civil damages.
Our hotel properties are subject to various
federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts
and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even
if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time
it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore,
an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts
and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill
or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have
established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos
while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws
restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such
as swimming pool chemicals at our hotels) to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for the types of
costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws
could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material
environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the
properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to
Our hotel properties are also subject to
the Americans with Disabilities Act (“ADA”). Under the ADA, all public accommodations must meet various federal requirements
related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and
non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are required to
make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations,
our financial condition and results of operations could be harmed. In addition, we are required to operate our hotel properties in compliance
with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become
applicable to our properties.
Risks Related to Our Business and Industry - Overview
If we fail to anticipate and adequately respond to rapid
technological changes in our industry, including evolving industry-wide standards, in a timely and cost-effective manner, our business,
financial condition and results of operations would be materially and adversely affected.
The markets in which we operate are characterized
by technological changes. Such changes, including evolving industry standards, changes in customer requirements and new product introductions
and enhancements, could render our products obsolete. Accordingly, we are required to constantly monitor and anticipate technological
changes in our industry and develop new product offerings and technologies or adapt or modify our existing offerings and technologies
to keep pace with technological advances in our industry and remain competitive.
Our ability to implement our business strategy
and continue to grow our revenues will depend on a number of factors, including our continuing ability to:
|●||identify emerging technological trends in our current and target markets;|
|●||identify additional uses for our existing technology to address customer needs in our current and future
|●||enhance our offerings by adding innovative features that differentiate our offerings from those of our
|●||design, develop, manufacture, assemble, test, market and support new products and enhancements in a timely
and cost-effective manner.|
We believe that, to remain competitive in
the future, we will need to continue to invest significant financial resources in developing new offerings and technologies or to adapt
or modify our existing offerings and technologies, including through internal research and development, strategic acquisitions and joint
ventures or other arrangements. However, these efforts may be more costly than we anticipate and there can be no assurance that they will
If we are unable to identify, attract, train and retain qualified
personnel, especially our design and technical personnel, our business and results of operations would be materially and adversely affected
and we may not be able to effectively execute our business strategy.
Our performance and future success largely
depends on our continuing ability to identify, attract, train, retain and motivate qualified personnel, including our management, sales
and marketing, finance and in particular our engineering, design and technical personnel. For example, we currently have limited number
of qualified personnel for the assembling and testing processes. We do not know whether we will be able to retain all these personnel
as we continue to pursue our business strategy. Our engineering, design and technical personnel represent a significant asset. The competition
for qualified personnel in our industries is intense and constrains our ability to attract qualified personnel. The loss of the services
of one or more of our key employees, especially of our key engineering, design and technical personnel, or our inability to attract, retain
and motivate qualified personnel could have a material adverse effect on our business, financial condition and operating results.
Our future results will depend on our ability to maintain
and expand our existing sales channels and to build out marketing, business development and sales functions for the operating subsidiaries.
To grow our legacy businesses, we must add
new customers for our products in addition to retaining and increasing sales to our current customers. Currently, only Relec, the operating
subsidiary that we acquired in November 2020, has an effective sales force focused on establishing relationships with customers that we
expect to endure over time. In other subsidiaries, we have historically relied on key executives to drive growth through return business
with existing customers. Building out marketing, business development and sales functions in all operating subsidiaries is critical to
drive significant growth in line with our strategic plans. While we perform certain of these activities ourselves, we may contract for
marketing services to improve our websites, manage public relations and optimize our social media presence. Failure to recruit and retain
the business development and sale personnel to execute on outreach and capture of new business, or the failure of those new hires or marketing
services to perform as expected, will limit our ability to achieve our growth targets.
We are dependent upon our ability, and our contract manufacturers’
ability, to timely procure electronic components.
Because of the global economy, many raw
material vendors have reduced capacities, closed production lines and, in some cases, even discontinued their operations. As a result,
there is a global shortage of certain electronic or mineral components, which may extend our production lead-time and our production costs.
Some materials are no longer available to support some of our products, thereby requiring us to search for cross materials or, even worse,
redesign some of our products to support currently-available materials. Such redesign efforts may require certain regulatory and safety
agency re-submittals, which may cause further production delays. While we have initiated actions that we believe will limit our exposure
to such problems, the dynamic business conditions in many of our markets may challenge the solutions that have been put in place, and
issues may recur in the future.
In addition, some of our products are manufactured,
assembled and tested by third party subcontractors and contract manufacturers located in Asia. While we have had relationships with many
of these third parties in the past, we cannot predict how or whether these relationships will continue in the future. In addition, changes
in management, financial viability, manufacturing demand or capacity, or other factors, at these third parties could hurt our ability
to manufacture our products.
We depend upon a few
major customers for a majority of our revenues, and the loss of any of these customers, or the substantial reduction in the quantity of
products that they purchase from us, would significantly reduce our revenues and net income.
We currently depend upon a few major OEMs
and other customers for a significant portion of our revenues. If our major OEM customers will reduce or cancel their orders scaling back
some of their activities, our revenues and net income would be significantly reduced. Furthermore, diversions in the capital spending
of certain of these customers to new network elements have and could continue to lead to their reduced demand for our products, which
could, in turn, have a material adverse effect on our business and results of operations. If the financial condition of one or more of
our major customers should deteriorate, or if they have difficulty acquiring investment capital due to any of these or other factors,
a substantial decrease in our revenues would likely result. We are dependent on the electronic equipment industry, and accordingly will
be affected by the impact on that industry of current economic conditions.
Substantially all of our existing customers
are in the electronic equipment industry, and they manufacture products that are subject to rapid technological change, obsolescence,
and large fluctuations in demand. This industry is further characterized by intense competition and volatility. The OEMs serving this
industry are pressured for increased product performance and lower product prices. OEMs, in turn, make similar demands on their suppliers,
such as us, for increased product performance and lower prices. Such demands may adversely affect our ability to successfully compete
in certain markets or our ability to sustain our gross margins.
Our reliance on subcontract manufacturers to manufacture
certain aspects of our products involves risks, including delays in product shipments and reduced control over product quality.
Since we do not own significant manufacturing
facilities, we must rely on, and will continue to rely on, a limited number of subcontract manufacturers to manufacture our power supply
products. Our reliance upon such subcontract manufacturers involves several risks, including reduced control over manufacturing costs,
delivery times, reliability and quality of components, unfavorable currency exchange fluctuations, and continued inflationary pressures
on many of the raw materials used in the manufacturing of our power supply products. If we were to encounter a shortage of key manufacturing
components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, inability of our
subcontract manufacturers to procure raw materials, the loss of key assembly subcontractors, difficulties associated with the transition
to our new subcontract manufacturers or other factors, we could experience lost revenues, increased costs, and delays in, or cancellations
or rescheduling of, orders or shipments, any of which would materially harm our business.
We outsource, and are dependent upon developer partners for,
the development of some of our custom design products.
We made an operational decision to outsource
some of our custom design products to numerous developer partners. This business structure will remain in place until the custom design
volume justifies expanding our in house capabilities. Incomplete product designs that do not fully comply with the customer specifications
and requirements might affect our ability to transition to a volume production stage of the custom designed product where the revenue
goals are dependent on the high volume of custom product production. Furthermore, we rely on the design partners’ ability to provide
high quality prototypes of the designed product for our customer approval as a critical stage to approve production.
We face intense industry competition, price erosion and product
obsolescence, which, in turn, could reduce our profitability.
We operate in an industry that is generally
characterized by intense competition. We believe that the principal bases of competition in our markets are breadth of product line, quality
of products, stability, reliability and reputation of the provider, along with cost. Quantity discounts, price erosion, and rapid product
obsolescence due to technological improvements are therefore common in our industry as competitors strive to retain or expand market share.
Product obsolescence can lead to increases in unsaleable inventory that may need to be written off and, therefore, could reduce our profitability.
Similarly, price erosion can reduce our profitability by decreasing our revenues and our gross margins. In fact, we have seen price erosion
over the last several years on most of the products we sell, and we expect additional price erosion in the future.
Our future results are dependent on our ability to establish,
maintain and expand our manufacturers’ representative OEM relationships and our other relationships.
We market and sell our products through
domestic and international OEM relationships and other distribution channels, such as manufacturers’ representatives and distributors.
Our future results are dependent on our ability to establish, maintain and expand our relationships with OEMs as well as with manufacturers’
representatives and distributors to sell our products. If, however, the third parties with whom we have entered into such OEM and other
arrangements should fail to meet their contractual obligations, cease doing, or reduce the amount of their, business with us or otherwise
fail to meet their own performance objectives, customer demand for our products could be adversely affected, which would have an adverse
effect on our revenues.
We may not be able to procure necessary key components for
our products, or we may purchase too much inventory or the wrong inventory.
The power supply industry, and the electronics
industry as a whole, can be subject to business cycles. During periods of growth and high demand for our products, we may not have adequate
supplies of inventory on hand to satisfy our customers' needs. Furthermore, during these periods of growth, our suppliers may also experience
high demand and, therefore, may not have adequate levels of the components and other materials that we require to build products so that
we can meet our customers' needs. Our inability to secure sufficient components to build products for our customers could negatively impact
our sales and operating results. We may choose to mitigate this risk by increasing the levels of inventory for certain key components.
Increased inventory levels can increase the potential risk for excess and obsolescence should our forecasts fail to materialize or if
there are negative factors impacting our customers’ end markets. If we purchase too much inventory or the wrong inventory, we may
have to record additional inventory reserves or write-off the inventory, which could have a material adverse effect on our gross margins
and on our results of operations.
Although we depend on sales of our legacy products for a
meaningful portion of our revenues, these products are mature and their sales will decline.
A relatively large portion of our sales
have historically been attributable to our legacy products. However, these sales are declining. Although we are unable to predict future
prices for our legacy products, we expect that prices for these products will continue to be subject to significant downward pressure
in certain markets for the reasons described above. Accordingly, our ability to maintain or increase revenues will be dependent on our
ability to expand our customer base, to increase unit sales volumes of these products and to successfully, develop, introduce and sell
new products such as custom design and value-added products. We cannot assure you that we will be able to expand our customer base, increase
unit sales volumes of existing products or develop, introduce and/or sell new products.
Failure of our information technology infrastructure to operate
effectively could adversely affect our business.
We depend heavily on information technology
infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could
impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal
course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.
We are subject to certain governmental regulatory restrictions
relating to our international sales.
Some of our products are subject to International
Traffic In Arms Regulation (“ITAR”), which are interpreted, enforced and administered by the U.S. Department of State. ITAR
regulation controls not only the export, import and trade of certain products specifically designed, modified, configured or adapted for
military systems, but also the export of related technical data and defense services as well as foreign production. Any delays in obtaining
the required export, import or trade licenses for products subject to ITAR regulation and rules could have a material adverse effect on
our business, financial condition, and/or operating results. In addition, changes in U.S. export and import laws that require us to obtain
additional export and import licenses or delays in obtaining export or import licenses currently being sought could cause significant
shipment delays and, if such delays are too great, could result in the cancellation of orders. Any future restrictions or charges imposed
by the U.S. or any other country on our international sales or foreign subsidiary could have a materially adverse effect on our business,
financial condition, and/or operating results. In addition, from time to time, we have entered into contracts with the Israeli Ministry
of Defense which were governed by the U.S. Foreign Military Financing program (“FMF”). Any such future sales would be subject
to these regulations. Failure to comply with ITAR or FMF rules could have a material adverse effect on our financial condition, and/or
We depend on international operations for a substantial majority
of our components and products.
We purchase a substantial majority of our
components from foreign manufacturers and have a substantial majority of our commercial products assembled, packaged, and tested by subcontractors
located outside the U.S. These activities are subject to the uncertainties associated with international business operations, including
trade barriers and other restrictions, changes in trade policies, governmental regulations, currency exchange fluctuations, reduced protection
for intellectual property, war and other military activities, terrorism, changes in social, political, or economic conditions, and other
disruptions or delays in production or shipments, any of which could have a materially adverse effect on our business, financial condition,
and/or operating results.
We depend on international sales for a portion of our revenues.
Sales to customers outside of North America
accounted for 37% and 52% of net revenues for the years ended December 31, 2021 and 2020, respectively, and we expect that international
sales will continue to represent a material portion of our total revenues. International sales are subject to the risks of international
business operations as described above, as well as generally longer payment cycles, greater difficulty collecting accounts receivable,
and currency restrictions. In addition, GWW supports our European and other international customers, distributors, and sales representatives,
and therefore is also subject to local regulation. International sales are also subject to the export laws and regulations of the U.S.
and other countries.
Because a significant portion of our revenues and expenses
is denominated in foreign currencies, fluctuations in exchange rates could have a material adverse effect on our operating results.
We face foreign exchange risks because a
significant portion of our revenue and expenses is denominated in foreign currencies. Further, some suppliers to Enertec and Relec require
payment in U.S. dollars, which exposes us to risk. Generally, U.S. dollar strength adversely impacts the translation of the portion of
our revenue that is generated in foreign currencies into the U.S. dollar. For the years ended December 31, 2021 and 2020, approximately
35.9% and 46.9% of our revenue, respectively, was denominated in currencies other than U.S. dollars. Our results of operations could also
be negatively impacted by a strengthening of the U.S. dollar as a large portion of our costs are U.S. dollar denominated. We also have
foreign exchange risk exposure with respect to certain of our assets, that are denominated in currencies other than the functional currency
of our subsidiaries, and our financial results are affected by the re-measurement and translation of these non-U.S. currencies into U.S.
dollars, which is reflected in the effect of exchange rate changes on cash, cash equivalents, and restricted cash on the consolidated
statements of cash flows. For the years ended December 31, 2021 and 2020, the effects of exchange rates on our cash, cash equivalents,
and restricted cash totaled $266,000 and $123,000, respectively, due to fluctuations in exchange rates and the strengthening of the U.S.
dollar. While we may choose to enter into transactions to hedge portions of our foreign currency translation and balance sheet exposure
in the future, it is impossible to predict or eliminate the effects of foreign exchange rate exposure. Strengthening of the U.S. dollar
could materially adversely affect our results of operations and financial condition.
Our insurance coverage and indemnity may be insufficient
to cover potential liabilities we may face due to the risks inherent in the products and services we provide.
We are exposed to liabilities that are unique
to the products and services we provide. A significant portion of our business relates to designing, developing and manufacturing, components,
integrated assemblies and subsystems for advanced defense, medical, transportation, industrial, technology and communications systems
and products. New technologies associated with these systems and products may be untested or unproven. Components of certain of the defense
systems and products we develop are inherently dangerous. Failures of satellites, missile systems, air traffic control systems, homeland
security applications and aircraft have the potential to cause loss of life and extensive property damage. In most circumstances, we may
receive indemnification from the government end users of our defense offerings in the U.S., the U.K. and
Israel. In addition, failures of products and systems that we manufacture or distribute for medical devices, transportation controls or
industrial systems also have the potential to result in loss of life, personal injury and/or extensive property damage.
While we maintain insurance for certain
risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial
costs from an accident or incident. It also is not possible for us to obtain insurance to protect against all operational risks and liabilities.
Substantial claims resulting from an incident in excess of government indemnity and our insurance coverage would harm our financial condition,
results of operations and cash flows. Moreover, any accident or incident for which we are liable, even if fully insured, could negatively
affect our standing with our customers and the public, thereby making it more difficult for us to compete effectively, and could significantly
impact the cost and availability of adequate insurance in the future.
If we are unable to satisfy our customers’ specific
product quality, certification or network requirements, our business could be disrupted and our financial condition could be harmed.
Our customers demand that our products meet
stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying such standards.
Defects or failures have occurred in the past, and may in the future occur, relating to our product quality, performance and reliability.
From time to time, our customers also require us to implement specific changes to our products to allow these products to operate within
their specific network configurations. If we are unable to remedy these failures or defects or if we cannot effect such required product
modifications, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and costs associated
with customer support, delays in, or cancellations or rescheduling of, orders or shipments and product returns or discounts, any of which
would harm our business.
Some of our business
is subject to U.S. Government procurement laws and regulations.
must comply with certain laws and regulations relating to the formation, administration and performance of federal government contracts.
These laws and regulations affect how we conduct business with our federal government contracts, including the business that we do as
a subcontractor. In complying with these laws and regulations, we may incur additional costs, and non-compliance may lead to the assessment
of fines and penalties, including contractual damages, or the loss of business.
Failure to comply with anti-bribery, anti-corruption, anti-money
laundering laws, and similar laws, or allegations of such failure, could have a material adverse effect on our business, financial condition
and operating results.
We are subject to various anti-bribery,
anti-corruption, anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”),
the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, Chapter 9 (sub-chapter
5) of the Israeli Penal Law, 1977, the Israeli Prohibition on Money Laundering Law–2000, and possibly other similar laws in countries
outside of the U.S. in which we conduct our business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent
years and are interpreted broadly to generally prohibit companies, their employees, agents, representatives, business partners, and third-party
intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public
or private sector.
We, our employees, agents, representatives,
business partners and third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies
or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these employees, agents, representatives,
business partners or third-party intermediaries even if we do not explicitly authorize such activities.
These laws also require that we keep accurate
records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures
to address compliance with such laws, we cannot assure you that none of our employees, agents, representatives, business partners or third-party
intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. In
addition, we may be held liable for violations committed of the FCPA or similar foreign laws by companies that we acquire.
Any alleged or actual violation of the FCPA
or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, investigations,
enforcement actions, fines and other criminal or civil sanctions, adverse media coverage, loss of export privileges, or suspension or
termination of government contracts. Responding to any investigation or enforcement action would require significant attention of our
management and resources, including significant defense costs and other professional fees. Failure to comply with anti-bribery, anti-corruption,
anti-money laundering laws, and similar laws, or allegations of such failure, could therefore have a material adverse effect on our business,
results of operations, financial condition and future prospects.
Compliance with the regulations, standards, and contractual
obligations promulgated by the European Union related to privacy, data protection, and data security, may cause Gresham Power and Relec
to incur additional expenses and failure to comply with such obligations could harm our business and future results of operations.
The European Union General Data Protection
Regulation (“GDPR”) contains robust obligations on data “controllers” and data “processors” with heavy
documentation requirements for data protection compliance programs that apply to both Gresham Power and Relec. Among other requirements,
the GDPR regulates the transfer of personal data subject to the GDPR to third countries that have not been found to provide adequate protection
to such personal data, including the U.S. In the U.K., the GDPR requires informed consent for disclosure of names, transfer of email addresses,
data that Gresham Power or Relec collect or process. Failure to comply with the GDPR could result in penalties for noncompliance (including
possible fines of up to the greater of £8.7 million and 2% of our global annual revenue for the preceding financial year for the
violations, as well as the right to compensation for financial or non-financial damages claimed by individuals under Article 82 of the
The U.K. has enacted a Data Protection Act
substantially implementing the GDPR, effective in May 2018, which was further amended to align more substantially with the GDPR following
Brexit. The latest revisions of the GDPR in the U.K. post-Brexit have resulted in even more stringent restrictions on the transfer of
data about a person. Data considered in the public domain in the U.S. now falls within the protections of GDPR, which complicates documenting
business, marketing, sales outreach, securing infrastructure, audit and business management.
Compliance with the regulations, standards,
and contractual obligations promulgated by the U.K. related to privacy, data protection, and data security, may cause Gresham Power and
Relec to incur additional expenses and failure to comply with such obligations could harm our business and future results of operations.
Risks Related to Our Business and Industry - Microphase
Microphase has a history of losses and our future profitability
on a quarterly or annual basis is uncertain, which could have a harmful effect on our business and the value of our company.
Microphase has incurred losses from operations
during 2019. These losses are attributable to lower volumes of its products sold to major defense contractors partially as a result of
the overall reduction in defense spending and sequestration by the U.S. Congress. While Microphase has been profitable, to a certain extent,
during 2020 and 2021, there is always the possibility that its results of operations could worsen in the future, whether as a result of
new outbreaks of COVID-19, supply chain issues or any of a number of other factors. Since the financial crisis of 2008, Microphase has
been significantly short of capital needed to acquire parts for production of its products to complete orders for such products. At times,
Microphase has not had the cash available to make advance payments for the purchase of parts, and then, as a consequence, Microphase would
not receive the parts from its vendors required to finish a customer order. This would then delay the delivery of products to customers,
and would also delay recognition of the resulting revenues and the receipt of cash from the customer. Sometimes after experiencing a delay
in delivery of an order from Microphase, the customer would not place its next order with Microphase, resulting in a loss of business.
Microphase’s future profitability
depends upon many factors, including several that are beyond its control. These factors include, without limitation:
|●||economic dislocation, supply chain disruption or mandated shutdowns attributable to the COVID-19 pandemic;|
|●||changes in the demand for its products and services;|
|●||loss of key customers or contracts;|
|●||the introduction of competitive products;|
|●||the failure to gain market acceptance of its new and existing products; and|
|●||the failure to successfully and cost effectively develop, introduce and market new products, services
and product enhancements in a timely manner.|
A large percentage of Microphase’s current revenue
is derived from prime defense contractors to the U.S. Government and its allies, and the loss of these relationships, a reduction in U.S.
Government funding or a change in U.S. Government spending priorities or bidding processes could have an adverse impact on its business,
financial condition, results of operations and cash flows.
Microphase is highly dependent on sales
to major defense contractors of the U.S. military and its allies, including Lockheed Martin, Raytheon, BAE Systems and SAAB. The percentages
of its revenue that were derived from sales to these named major defense contractors and directly to the U.S. Government were 78.1% in
fiscal 2021 and 50.7% in fiscal 2020. Therefore, any significant disruption or deterioration of Microphase’s relationship with any
such major defense contractors or the U.S. Government could materially reduce its revenue. During the year ended December 31, 2020 there
were five customers that accounted for more than 10% of Microphase’s sales: BAE Systems; Boeing/Argonist, Inc.; DFAS Columbus
Center; Raytheon Company and Sierra Nevada Corporation. During the year ended December 31, 2021 there were two customers that accounted
for more than 10% of Microphase’s sales: BAE Systems and Lockheed Martin. Microphase’s competitors continuously engage in
efforts to expand their business relationships with the same major defense contractors and the U.S. Government and will continue these
efforts in the future, and the U.S. Government may choose to use other contractors. Microphase expects that a majority of the business
that it seeks will be awarded through competitive bidding. Microphase operates in highly competitive markets and its competitors have
more extensive or more specialized engineering, manufacturing and marketing capabilities than Microphase does in many areas, and Microphase
may not be able to continue to win competitively awarded contracts or to obtain task orders under multi-award contracts. Further, the
competitive bidding process involves significant cost and managerial time to prepare bids and proposals for contracts that may not be
awarded to Microphase, as well as the risk that Microphase may fail to accurately estimate the resources and costs required to fulfill
any contract awarded to us. Following any contract award, Microphase may experience significant expense or delay, contract modification
or contract rescission as a result of its competitors protesting or challenging contracts awarded to it in competitive bidding. Major
defense contractors to whom Microphase supplies components for systems must compete with other major defense contractors (to which Microphase
may not supply components) for military orders from the U.S. Government.
In addition, Microphase competes with other
policy needs, which may be viewed as more necessary, for limited resources and an ever-changing amount of available funding in the budget
and appropriations process. Budget and appropriations decisions made by the U.S. Government are outside of Microphase control and have
long-term consequences for its business. U.S. Government spending priorities and levels remain uncertain and difficult to predict and
are affected by numerous factors, including until recently sequestration (automatic, across-the-board U.S. Government budgetary spending
cuts), and the purchase of our products could be superseded by alternate arrangements. While the US defense budget was recently increased,
there can be no assurance that this increase will be maintained for the foreseeable future, particularly in light of the recent federal
expenditures the federal government has made with a view to ameliorating the economic damage suffered as a result of COVID-19. A change
in U.S. Government spending priorities or an increase in non-procurement spending at the expense of our programs, or a reduction in total
U.S. Government spending, could have material adverse consequences on Microphase’s future business.
Microphase’s U.S. Government contracts may be terminated
by the federal government at any time prior to their completion, which could lead to unexpected loss of sales and reduction in Microphase’s
Under the terms of Microphase’s U.S.
Government contracts, the U.S. Government may unilaterally:
|●||terminate or modify existing contracts;|
|●||reduce the value of existing contracts through partial termination; and|
|●||delay the payment of Microphase’s invoices by government payment offices.|
The federal government can terminate or
modify any of its contracts with Microphase or its prime contractors either for the federal government’s convenience, or if Microphase
or its prime contractors default, by failing to perform under the terms of the applicable contract. A termination arising out of Microphase’s
default could expose it to liability and have a material adverse effect on its ability to compete for future federal government contracts
and subcontracts. If the federal government or its prime contractors terminate and/or materially modify any of Microphase’s contracts
or if any applicable options are not exercised, Microphase’s failure to replace sales generated from such contracts would result
in lower sales and would adversely affect its earnings, which could have a material adverse effect on Microphase’s business, results
of operations and financial condition. Microphase’s backlog as of December 31, 2021 was approximately $9.6 million. Microphase’s
backlog could be adversely affected if contracts are modified or terminated.
Microphase’s products with military applications are
subject to export regulations, and compliance with these regulations may be costly.
Microphase is required to obtain export
licenses before filling foreign orders for many of its products that have military or other governmental applications. U.S. Export Administration
regulations control technology exports like its products for reasons of national security and compliance with foreign policy, to guarantee
domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Thus, any foreign
sales of its products requiring export licenses must comply with these general policies. Compliance with these regulations is costly,
and these regulations are subject to change, and any such change may require Microphase to improve its technologies, incur expenses or
both in order to comply with such regulations.
Microphase depends on U.S. Government contracts issued to
major defense contractors, which often are only partially funded, subject to immediate termination, and heavily regulated and audited.
The termination or failure to fund, or negative audit findings for, one or more of these contracts could have an adverse impact on Microphase’s
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
In addition, U.S. Government contracts generally
contain provisions permitting termination, in whole or in part, without prior notice at the U.S. Government’s convenience upon the
payment only for work done and commitments made at the time of termination. Microphase can give no assurance that one or more of the U.S.
Government contracts with a major defense contractor under which Microphase provides component products will not be terminated under these
circumstances. Also, Microphase can give no assurance that it will be able to procure new contracts to offset the revenue or backlog lost
as a result of any termination of its U.S. Government contracts. Because a significant portion of Microphase’s revenue is dependent
on its performance and payment under its U.S. Government contracts, the loss of one or more large contracts could have a material adverse
impact on its business, financial condition, results of operations and cash flows.
Microphase’s government business also
is subject to specific procurement regulations and other requirements. These requirements, though customary in U.S. Government contracts,
increase its performance and compliance costs. In addition, these costs might increase in the future, thereby reducing Microphase’s
margins, which could have an adverse effect on its business, financial condition, results of operations and cash flows. Failure to comply
with these regulations and requirements could lead to fines, penalties, repayments, or compensatory or treble damages, or suspension or
debarment from U.S. Government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various
laws, including those related to procurement integrity, export control, U.S. Government security regulations, employment practices, protection
of the environment, accuracy of records, proper recording of costs and foreign corruption. The termination of a U.S. Government contract
or relationship as a result of any of these acts would have an adverse impact on Microphase’s operations and could have an adverse
effect on its standing and eligibility for future U.S. Government contracts.
Microphase’s business could be negatively impacted
by cybersecurity threats and other security threats and disruptions.
As a U.S. Government defense contractor,
Microphase faces certain security threats, including threats to its information technology infrastructure, attempts to gain access to
its proprietary or classified information, threats to physical security, and domestic terrorism events. Microphase’s information
technology networks and related systems are critical to the operation of its business and essential to its ability to successfully perform
day-to-day operations. Microphase is also involved with information technology systems for certain customers and other third parties,
which generally face similar security threats. Cybersecurity threats in particular, are persistent, evolve quickly and include, but are
not limited to, computer viruses, attempts to access information, denial of service and other electronic security breaches. Microphase
believes that it has implemented appropriate measures and controls and has invested in skilled information technology resources to appropriately
identify threats and mitigate potential risks, but there can be no assurance that such actions will be sufficient to prevent disruptions
to mission critical systems, the unauthorized release of confidential information or corruption of data. A security breach or other significant
disruption involving these types of information and information technology networks and related systems could:
|●||disrupt the proper functioning of these networks and systems and therefore its operations and/or those
of certain of its customers;|
|●||result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary,
confidential, sensitive or otherwise valuable information of Microphase or its customers, including trade secrets, which others could
use to compete against Microphase or for disruptive, destructive or otherwise harmful purposes and outcomes;|
|●||compromise national security and other sensitive government functions;|
|●||require significant management attention and resources to remedy the damages that result;|
|●||subject Microphase to claims for breach of contract, damages, credits, penalties or termination; and|
|●||damage Microphase’s reputation with its customers (particularly agencies of the U.S. Government)
and the public generally.|
Any or all of the foregoing could have a negative impact on its
business, financial condition, results of operations and cash flows. Compliance with Defense Department requirements for information security
require Microphase to invest significant resources to implement and maintain cyber defenses against compromise of information technology
architecture, malicious attacks and data breaches.
Microphase enters into fixed-price contracts that could subject
it to losses in the event of cost overruns or a significant increase in inflation.
Microphase has a number of fixed-price contracts
which allow it to benefit from cost savings but subject it to the risk of potential cost overruns, particularly for firm fixed-price contracts,
because Microphase assumes the entire cost burden. If its initial estimates are incorrect, Microphase can lose money on these contracts.
U.S. Government contracts can expose Microphase to potentially large losses because the U.S. Government can hold Microphase responsible
for completing a project or, in certain circumstances, paying the entire cost of its replacement by another provider regardless of the
size or foreseeability of any cost overruns that occur over the life of the contract. Because many of these contracts involve new technologies
and applications, unforeseen events such as technological difficulties, fluctuations in the price of raw materials, problems with its
suppliers and cost overruns, can result in the contractual price becoming less favorable or even unprofitable to Microphase. The U.S.
and other countries also may experience a significant increase in inflation. A significant increase in inflation rates could have a significant
adverse impact on the profitability of these contracts. Furthermore, if Microphase does not meet contract deadlines or specifications,
Microphase may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer major
losses if the customer exercises its right to terminate. In addition, some of its contracts have provisions relating to cost controls
and audit rights, and if Microphase fails to meet the terms specified in those contracts Microphase may not realize their full benefits.
Microphase’s results of operations are dependent on its ability to maximize its earnings from its contracts. Cost overruns could
have an adverse impact on its financial results.
Compliance with the regulations, standards, and contractual
obligations related to privacy, data protection, and data security, may cause us to incur additional expenses and failure to comply with
such obligations could harm our business and future results of operations.
We expect that the regulatory framework
for privacy, data protection and data security will continue to evolve, which may result in additional operating costs for internal compliance
and risks to our business. Nearly all of Microphase’s current contracts include provisions that require compliance with detailed
cyber security standards laid out in NIST 800-171, which mandates implementation of security controls to protect Microphase’s information
systems from compromise, malicious attacks and/or data breaches. Microphase must maintain a System Security Plan with a Plan of Action
& Milestones for any controls not yet implemented. To continue doing business with the DoD or major prime contractors working with
DoD, Microphase must ultimately achieve Cybersecurity Model Maturity Certification not later than 2026. In addition, Microphase maintains
a certified restricted area and must obtain and maintain authority to operate equipment to perform work on classified projects. Compliance
with all of these mandates will require Microphase to invest substantial resources to implement, maintain and monitor information systems
security controls, facility clearances, personnel clearance and authorities to operate classified systems, which adds to the costs of
operating the business.
Risks Related to Our Business and Industry - Enertec
Potential political, economic and military instability in Israel could adversely
affect our operations.
A significant portion of our business is
conducted through Enertec, our Israeli subsidiary. Accordingly, political, economic and military conditions in Israel and the surrounding
region may directly affect our Israeli operations. In recent years, Israel has been involved in sporadic armed conflicts with Hamas, an
Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of Southern
Lebanon, and with Iranian-backed military forces in Syria. Some of these hostilities were accompanied by missile strikes from the Gaza
Strip against civilian targets in various parts of Israel, including areas in which our facilities are located, and negatively affected
business conditions in Israel. The change in the U.S. Presidency may continue to change the dynamics in the Middle East as forces hostile
to the existence of Israel seek to reverse the recent stability and commercial opportunities created by the Abraham Accords. For example,
there have been increasing concerns related to a potential attack by Iran. The tension between Israel and Iran and/or these groups may
escalate in the future and turn even more violent, which could affect the Israeli economy in general and us in particular.
Our commercial insurance does not cover
losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement
value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be
maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse
effect on our business.
In addition, Israel-based companies and
companies doing business with Israel have been the subject of an economic boycott by members of the Arab League and certain other predominantly
Muslim countries since Israel’s establishment. Although Israel has entered into various agreements with certain Arab countries and
the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political
problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved. Wars and acts of terrorism have
resulted in significant damage to the Israeli economy, including reducing the level of foreign and local investment.
Many of our Enertec employees are obligated to perform military
reserve duty in Israel, which could have a disruptive impact on our business.
Generally, Israeli adult male and certain
female citizens and permanent residents are obligated to perform annual military reserve duty in the Israel Defense Forces up to a specified
age. They also may be called to active military duty at any time under emergency circumstances. These military service obligations could
have a disruptive impact on our business, if hostilities develop in the future.
Enertec may become subject to claims for remuneration or
royalties for assigned service invention rights by its employees, which could result in litigation and harm our business.
A significant portion of the intellectual
property covered by Enertec’s products has been developed by Enertec’s employees in the course of their employment for Enertec.
Under the Israeli Patent Law, 5727-1967, or the Patent Law, and recent decisions by the Israeli Supreme Court and the Israeli Compensation
and Royalties Committee, a body constituted under the Patent Law, Israeli employees may be entitled to remuneration for intellectual property
that they develop for us unless they explicitly waive any such rights. To the extent that Enertec is unable to enter into agreements with
its future employees pursuant to which they agree that any inventions created in the scope of their employment or engagement are owned
exclusively by Enertec (as it has done in the past), Enertec may face claims demanding remuneration. As a consequence of such claims,
Enertec could be required to pay additional remuneration or royalties to its current and former employees, or be forced to litigate such
claims, which could negatively affect its business.
Risks Related to Our Business and Industry – Relec
The third parties on which we rely to supply certain products
are located outside the United States.
Relec distributes products from foreign
manufacturers located in Europe, Asia and North America. Our future operating results will depend, among other things, on our ability
to continue to rely on these arrangements. If we are no longer able to rely on these or other similar arrangements for the supply of certain
products, or if our cost of relying on such arrangements materially increases, as the result of the imposition of or changes in customs,
tariffs, quotas, trade barriers, or other trade protection measures, or otherwise, it could have a materially adverse effect on our business,
financial condition, and operating results.
Our strategic focus on our custom power supply and display
solution competencies and concurrent cost reduction plans may be ineffective or may limit our ability to compete.
As a result of our strategic focus on custom
power supply solutions, we will continue to devote significant resources to developing and manufacturing custom power supply solutions
for a large number of customers, where each product represents a uniquely tailored solution for a specific customer’s requirements.
Failure to meet these customer product requirements or a failure to meet production schedules and/or product quality standards may put
us at risk with one or more of these customers. Moreover, changes in market conditions and strategic changes at the direction of our customers
may affect their decision to continue to purchase from us. The loss of one or more of our significant custom power supply solution customers
could have a material adverse impact on our revenues, business or financial condition.
We have also implemented a series of initiatives
designed to increase efficiency and reduce costs. While we believe that these actions will reduce costs, they may not be sufficient to
achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market or result in the improvements
in our business that we anticipate. In such event, we may be forced to take additional cost-reducing initiatives, including those involving
our personnel, which may negatively impact quarterly earnings and profitability as we account for severance and other related costs. In
addition, there is the risk that such measures could have long-term adverse effects on our business by reducing our pool of talent, decreasing
or slowing improvements in our products or services, making it more difficult for us to respond to customers, limiting our ability to
increase production quickly if and when the demand for our solutions increases and limiting our ability to hire and retain key personnel.
These circumstances could cause our earnings to be lower than they otherwise might be.
Risks Related to Ownership of Our Common Stock and
If we do not continue to satisfy
the NYSE American continued listing requirements, our common stock could be delisted from NYSE American.
The listing of
our common stock on the NYSE American is contingent on our compliance with the NYSE American’s conditions for continued listing.
While we are presently in compliance with all such conditions, it is possible that we will fail to meet one or more of these conditions
in the future.
If we were to fail
to meet a NYSE American listing requirement, we may be subject to delisting by the NYSE American. In the event our common stock is no
longer listed for trading on the NYSE American, our trading volume and share price may decrease and we may experience further difficulties
in raising capital which could materially affect our operations and financial results. Further, delisting from the NYSE American could
also have other negative effects, including potential loss of confidence by partners, lenders, suppliers and employees and could also
trigger various defaults under our lending agreements and other outstanding agreements. Finally, delisting could make it harder for us
to raise capital and sell securities. You may experience future dilution as a result of future equity offerings. In order to raise additional
capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our
common stock at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any
other offering at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing
shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional
shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower
than the price per share paid by investors in this offering.
You may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we
may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock
at prices that may not be the same as the price per share in this offering. We may sell shares or other securities in any other offering
at a price per share that is less than the price per share paid by investors in this offering, and investors purchasing shares or other
securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of
our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the
price per share paid by investors in this offering.
Our common stock price is volatile.
Our common stock is listed on the NYSE American.
In the past, our trading price has fluctuated widely, depending on many factors that may have little to do with our operations or business
prospects. During the past 52-week period (through January 20, 2023), our stock closed at prices between $1.74 per share and $0.09 per
share, as reported on Nasdaq.com. On January 20, 2023, the price of our common stock closed at $0.1358 per share.
Stock markets, in general, have experienced,
and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be subject
to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility, coupled with depressed
economic conditions, could continue to have a depressive effect on the market price of our common stock. The following factors, many of
which are beyond our control, may influence our stock price:
|·||the status of our growth strategy including the development of new products with any proceeds we may be
able to raise in the future;|
|·||announcements of technological or competitive developments;|
|·||announcements or expectations of additional financing efforts;|
|·||our ability to market new and enhanced products on a timely basis;|
|·||changes in laws and regulations affecting our business;|
|·||commencement of, or involvement in, litigation involving us;|
|·||regulatory developments affecting us, our customers or our competitors;|
|·||announcements regarding patent or other intellectual property litigation or the issuance of patents to
us or our competitors or updates with respect to the enforceability of patents or other intellectual property rights generally in the
US or internationally;|
|·||actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results
of companies perceived to be similar to us;|
|·||changes in the market’s expectations about our operating results;|
|·||our operating results failing to meet the expectations of securities analysts or investors in a particular
|·||changes in the economic performance or market valuations of our competitors;|
|·||additions or departures of our executive officers;|
|·||sales or perceived sales of our common stock by us, our insiders or our other stockholders;|
|·||share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
|·||general economic, industry, political and market conditions and overall fluctuations in the financial
markets in the United States and abroad, including as a result of ongoing COVID-19 pandemic.|
In addition, the securities markets have,
from time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. Any of these factors could result in large and sudden changes in the volume and trading price of our common stock and could
cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted securities class action litigation against that company. If we were involved in a class
action suit or other securities litigation, it would divert the attention of our senior management, require us to incur significant expense
and, whether or not adversely determined, have a material adverse effect on our business, financial condition, results of operations and
Volatility in our common stock price may subject us to securities litigation.
Stock markets, in general, have experienced,
and continue to experience, significant price and volume volatility, and the market price of our common stock may continue to be subject
to similar market fluctuations unrelated to our operating performance or prospects. This increased volatility, coupled with depressed
economic conditions, could have a depressing effect on the market price of our common stock.
In addition, the securities markets have,
from time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. Any of these factors could result in large and sudden changes in the volume and trading price of our common stock and could
cause our stockholders to incur substantial losses. In the past, following periods of volatility in the market price of a company’s
securities, stockholders have often instituted securities class action litigation against that company. If we were involved in a class
action suit or other securities litigation, it would divert the attention of our senior management, require us to incur significant expense
and, whether or not adversely determined, have a material adverse effect on our business, financial condition, results of operations and
There could be a potential depressive
effect on our market price from sales of our shares.
shares being offered hereby for the account of the selling stockholders equals approximately 2.9% of the 394,697,811 shares of our common
stock outstanding as of January 20, 2023. Sales of the shares offered hereby could have a depressive effect on the market price of our
common stock and such sales could also affect our ability to raise additional capital in the equity markets in the future.
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 $0.45 to $2,000 per share of common stock. As of the date of this
prospectus, the number of shares of common stock subject to convertible notes, warrants, options and preferred stock were 165,000, 15,529,0034,
5,810,844 and 2,232, respectively. The issuance of common stock pursuant to convertible notes, warrants, options and preferred stock at
conversion or exercise prices less than market prices may have the effect of limiting an increase in market price of our common stock
until all of these underling shares have been issued.
A possible “short squeeze” due to a sudden increase in demand of our
common stock that largely exceeds supply may lead to price volatility in our common stock.
Investors may purchase our common stock
to hedge existing exposure in our common stock or to speculate on the price of our common stock. Speculation on the price of our common
stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available
for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock for delivery to
lenders of our common stock. Those repurchases may in turn, dramatically increase the price of our common stock until investors with short
exposure are able to purchase additional common shares to cover their short position. This is often referred to as a “short squeeze.”
A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects
of our company and once investors purchase the shares of common stock necessary to cover their short position the price of our common
stock may decline.
The issuance of shares of our Class B common stock to our
management or others could provide such persons with voting control leaving our other stockholders unable to elect our directors and the
holders of our shares of common stock will have little influence over our management.
Although there are currently no shares of
our Class B common stock issued and outstanding, our certificate of incorporation authorizes the issuance of 25,000,000 shares of Class
B common stock. Each share of Class B common stock provides the holder thereof with ten votes on all matters submitted to a stockholder
vote. Our certificate of incorporation does not provide for cumulative voting for the election of directors. Any person or group who controls
or can obtain more than 50% of the votes cast for the election of each director will control the election of directors and the other stockholders
will not be able to elect any directors or exert any influence over management decisions. As a result of the super-voting rights of our
shares of Class B common stock, the issuance of such shares to our management or others could provide such persons with voting control
and our other stockholders will not be able to elect our directors and will have little influence over our management. While we are listed
on the NYSE American or any other national securities exchange it is highly unlikely that we would issue any shares of Class B common
stock as doing so would jeopardize our continued listing on any such exchange. However, if were to be delisted for some other reason and
our shares of Class A common stock trade on an over-the-counter market, then we would face no restriction on issuing shares of Class B
General Risk Factors
Our limited operating history makes it difficult to evaluate
our future business prospects and to make decisions based on our historical performance.
Although our executive officers have been
engaged in the industries in which we operate for varying degrees of time, we did not begin operations of our current business until recently.
We have a very limited operating history in our current form, which makes it difficult to evaluate our business on the basis of historical
operations. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical data. Reliance
on our historical results may not be representative of the results we will achieve, and for certain areas in which we operate, principally
those unrelated to defense contracting, will not be indicative at all. Because of the uncertainties related to our lack of historical
operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in sales, product costs or expenses.
If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may
result in a decline in our stock price.
Deterioration of global economic conditions could adversely
affect our business.
The global economy and capital and credit
markets have experienced exceptional turmoil and upheaval over the past several years. Ongoing concerns about the systemic impact of potential
long-term and widespread recession and potentially prolonged economic recovery, volatile energy costs, fluctuating commodity prices and
interest rates, volatile exchange rates, geopolitical issues, including the recent outbreak of armed conflict in Ukraine, natural disasters
and pandemic illness, instability in credit markets, cost and terms of credit, consumer and business confidence and demand, a changing
financial, regulatory and political environment, and substantially increased unemployment rates have all contributed to increased market
volatility and diminished expectations for many established and emerging economies, including those in which we operate. Furthermore,
austerity measures that certain countries may agree to as part of any debt crisis or disruptions to major financial trading markets may
adversely affect world economic conditions and have an adverse impact on our business. These general economic conditions could have a
material adverse effect on our cash flow from operations, results of operations and overall financial condition.
The availability, cost and terms of credit
also have been and may continue to be adversely affected by illiquid markets and wider credit spreads. Concern about the stability of
the markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors to reduce credit
to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers over the past several years,
and a corresponding slowdown in global infrastructure spending.
Continued uncertainty in the U.S. and international
markets and economies and prolonged stagnation in business and consumer spending may adversely affect our liquidity and financial condition,
and the liquidity and financial condition of our customers, including our ability to access capital markets and obtain capital lease financing
to meet liquidity needs.
No assurance of successful expansion of operations.
Our significant increase in the scope and
the scale of our operations, including the hiring of additional personnel, has resulted in significantly higher operating expenses. We
anticipate that our operating expenses will continue to increase. Expansion of our operations may also make significant demands on our
management, finances and other resources. Our ability to manage the anticipated future growth, should it occur, will depend upon a significant
expansion of our accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems,
procedures and controls. We cannot assure that significant problems in these areas will not occur. Failure to expand these areas and implement
and improve such systems, procedures and controls in an efficient manner at a pace consistent with our business could have a material
adverse effect on our business, financial condition and results of operations. We cannot assure that attempts to expand our marketing,
sales, manufacturing and customer support efforts will succeed or generate additional sales or profits in any future period. As a result
of the expansion of our operations and the anticipated increase in our operating expenses, along with the difficulty in forecasting revenue
levels, we expect to continue to experience significant fluctuations in its results of operations.
If we fail to establish and maintain an effective system
of internal control over financial reporting, we may not be able to report our financial results accurately or prevent fraud. Any inability
to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our
Effective internal control over financial
reporting is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports
or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and
our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may
adversely affect our financial condition, results of operations and access to capital. We have carried out an evaluation under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of the end of the most recent period covered by this report.
Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures
were not effective at the reasonable assurance level due to the material weakness described below.
A material weakness is a deficiency, or
a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Audit Standard No.
5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material
weakness which has caused management to conclude that as of December 31, 2021 our internal control over financial reporting (“ICFR”)
was not effective at the reasonable assurance level:
We do not have sufficient resources in our
accounting function, which restricts our ability to gather, analyze and properly review information related to financial reporting, including
fair value estimates, in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always
be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets
and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have
segregation of duties during our assessment of our disclosure controls and procedures and concluded that the resulting control deficiency
represented a material weakness.
We are currently working to improve and
simplify our internal processes and implement enhanced controls to address the material weakness in our internal control over financial
reporting and to remedy the ineffectiveness of our disclosure controls and procedures. This material weakness will not be considered to
be remediated until the applicable remediated controls are operating for a sufficient period of time and management has concluded, through
testing, that these controls are operating effectively.
If our accounting controls and procedures
are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.
We evaluate our
disclosure controls and procedures as of the end of each fiscal quarter, and annually review and evaluate our internal control over financial
reporting in order to comply with the Commission’s rules relating to internal control over financial reporting adopted pursuant
to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail
to maintain effective internal control over financial reporting or our management does not timely assess the adequacy of such internal
control, we may be subject to regulatory sanctions, and our reputation may decline.
Our internal computer systems may
fail or suffer security breaches, which could result in a material disruption of our operations.
Like any other
business, we rely on e-mail and other digital communications methods as part of our normal operations. As such, our internal computer
systems and servers could fail or suffer security breaches, possibly resulting in a material disruption to our operations. The secure
operation of our IT networks and systems as well as the secure processing and maintenance of information is critical to our operations
and business strategy. Notwithstanding these priorities, we have experienced attempts at cybercrime such as phishing and other electronic
fraud, including efforts to misdirect payments to imposter vendors and service providers. After experiencing a financial loss due to e-mail
fraud in November 2021, we have instituted greater internal controls and procedures, both electronic and non-electronic, to combat such
fraudulent conduct. We also maintain an insurance policy to cover any losses or injuries suffered from cybercrime of this nature; however,
it may not be sufficient to cover all damages. Despite our efforts, attempts at fraud such as spoofed e-mails, requests for payment and
similar deceptions have become commonplace in the world of e-commerce and are expected to continue. If we are unable to prevent such security
breaches in the future, these events or circumstances could materially and adversely affect our operations, financial condition and operating
results and impair our ability to execute our business strategy.
We face significant competition, including changes in pricing.
The markets for our products are both competitive
and price sensitive. Many competitors have significant financial, operations, sales and marketing resources, plus experience in research
and development, and compete with us by offering lower prices. Competitors could develop new technologies that compete with our products
to achieve a lower unit price. If a competitor develops lower cost and/or superior technology or cost-effective alternatives to our products
and services, our business could be seriously harmed.
The markets for some of our products are
also subject to specific competitive risks because these markets are highly price sensitive. Our competitors have competed in the past
by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices. This would reduce sales
revenues and increase losses. Failure to anticipate and respond to price competition may also impact sales and aggravate losses.
Many of our competitors are larger and have greater financial
and other resources than we do.
Our products compete and will compete with
similar if not identical products produced by our competitors. These competitive products could be marketed by well-established, successful
companies that possess greater financial, marketing, distribution personnel, and other resources than we do. Using said resources, these
companies can implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts
by competitors. They can introduce new products to new markets more rapidly. In certain instances, competitors with greater financial
resources may be able to enter a market in direct competition with us, offering attractive marketing tools to encourage the sale of products
that compete with our products or present cost features that consumers may find attractive.
Our growth strategy is subject to a significant degree
Our growth strategy
through acquisitions involves a significant degree of risk. Some of the companies that we have identified as acquisition targets or made
a significant investment in may not have a developed business or are experiencing inefficiencies and incur losses. Therefore, we may lose
our investment in the event that these companies’ businesses do not develop as planned or that they are unable to achieve the anticipated
cost efficiencies or reduction of losses.
Further, in order
to implement our growth plan, we have hired additional staff and consultants to review potential investments and implement our plan. As
a result, we have substantially increased our infrastructure and costs. If we fail to quickly find new companies that provide revenue
to offset our costs, we will continue to experience losses. No assurance can be given that our product development and investments will
produce sufficient revenues to offset these increases in expenditures.
Our business and operations are growing rapidly. If we fail
to effectively manage our growth, our business and operating results could be harmed.
We have experienced, and may continue to
experience, rapid growth in our operations. This has placed, and may continue to place, significant demands on our management, operational
and financial infrastructure. If we do not manage our growth effectively, the quality of our products and services could suffer, which
could negatively affect our operating results. To effectively manage our growth, we must continue to improve our operational, financial
and management controls and reporting systems and procedures. These systems improvements may require significant capital expenditures
and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial position.
Our operating results may vary from quarter to quarter.
Our operating results have in the past been
subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in magnitude, in future
periods. Demand for our products is driven by many factors, including the availability of funding for our products in our customers’
capital budgets. There is a trend for some of our customers to place large orders near the end of a quarter or fiscal year, in part to
spend remaining available capital budget funds. Seasonal fluctuations in customer demand for our products driven by budgetary and other
concerns can create corresponding fluctuations in period-to-period revenues, and we therefore cannot assure you that our results in one
period are necessarily indicative of our revenues in any future period. In addition, the number and timing of large individual sales and
the ability to obtain acceptances of those sales, where applicable, have been difficult for us to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one
or more significant sales in a quarter could harm our operating results for such quarter. It is possible that, in some quarters, our operating
results will be below the expectations of public market analysts or investors. In such events, or in the event adverse conditions prevail,
the market price of our common stock may decline significantly.
Changes in the U.S. tax and other laws and regulations may adversely affect our
The U.S. Government may revise tax laws,
regulations or official interpretations in ways that could have a significant adverse effect on our business, including modifications
that could reduce the profits that we can effectively realize from our international operations, or that could require costly changes
to those operations, or the way in which they are structured. For example, the effective tax rates for most U.S. companies reflect the
fact that income earned and reinvested outside the U.S. is generally taxed at local rates, which may be much lower than U.S. tax rates.
If we expand abroad and there are changes in tax laws, regulations or interpretations that significantly increase the tax rates on non-U.S.
income, our effective tax rate could increase and our profits could be reduced. If such increases resulted from our status as a U.S. company,
those changes could place us at a disadvantage to our non-U.S. competitors if those competitors remain subject to lower local tax rates.
Our sales and profitability may be affected by changes in economic, business
and industry conditions.
If the economic climate in the U.S. or abroad
deteriorates, customers or potential customers could reduce or delay their technology investments. Reduced or delayed technology and entertainment
investments could decrease our sales and profitability. In this environment, our customers may experience financial difficulty, cease
operations and fail to budget or reduce budgets for the purchase of our products and professional services. This may lead to longer sales
cycles, delays in purchase decisions, payment and collection, and can also result in downward price pressures, causing our sales and profitability
to decline. In addition, general economic uncertainty and general declines in capital spending in the information technology sector make
it difficult to predict changes in the purchasing requirements of our customers and the markets we serve. There are many other factors
which could affect our business, including:
|·||The introduction and market acceptance of new technologies, products and services;|
|·||New competitors and new forms of competition;|
|·||The size and timing of customer orders (for retail distributed physical product); |
|·||The size and timing of capital expenditures by our customers; |
|·||Adverse changes in the credit quality of our customers and suppliers; |
|·||Changes in the pricing policies of, or the introduction of, new products and services by us or our competitors;|
|·||Changes in the terms of our contracts with our customers or suppliers;|
|·||The availability of products from our suppliers; and |
|·||Variations in product costs and the mix of products sold. |
These trends and factors could adversely affect our business,
profitability and financial condition and diminish our ability to achieve our strategic objectives.
The sale of our products is dependent upon our ability to
satisfy the proprietary requirements of our customers.
We depend upon a relatively narrow range
of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our
customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy
such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed.
The sale of our products is dependent on our ability to respond
to rapid technological change, including evolving industry-wide standards, and may be adversely affected by the development, and acceptance
by our customers, of new technologies which may compete with, or reduce the demand for, our products.
Rapid technological change, including evolving
industry standards, could render our products obsolete. To the extent our customers adopt such new technology in place of our products,
the sales of our products may be adversely affected. Such competition may also increase pricing pressure for our products and adversely
affect the revenues from such products.
Our limited ability to protect our proprietary information
and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others,
resulting in claims against us, the results of which could be costly.
Many of our products consist entirely or
partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret
laws and contractual obligations, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual property,
nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our
proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the
laws of the U.S. In order to defend our proprietary rights in the technology utilized in our products from third party infringement, we
may be required to institute legal proceedings, which would be costly and would divert our resources from the development of our business.
If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results
could be adversely affected.
Although we attempt to avoid infringing
known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for
alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer
or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition,
parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the U.S. or abroad.
If we ship products that contain defects, the market acceptance
of our products and our reputation will be harmed and our customers could seek to recover their damages from us.
Our products are complex, and despite extensive
testing, may contain defects or undetected errors or failures that may become apparent only after our products have been shipped to our
customers and installed in their network or after product features or new versions are released. Any such defect, error or failure could
result in failure of market acceptance of our products or damage to our reputation or relations with our customers, resulting in substantial
costs for us and our customers as well as the cancellation of orders, warranty costs and product returns. In addition, any defects, errors,
misuse of our products or other potential problems within or out of our control that may arise from the use of our products could result
in financial or other damages to our customers. Our customers could seek to have us pay for these losses. Although we maintain product
liability insurance, it may not be adequate.
The rights of the holders of common stock may be impaired
by the potential issuance of preferred stock.
Our certificate of incorporation gives our
Board the right to create new series of preferred stock. As a result, the Board may, without stockholder approval, issue preferred stock
with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the
holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a
method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the
price of our common stock. We may issue shares of preferred stock in the future.
The requirements of being a public company may strain our
resources, divert management’s attention and affect our ability to attract and retain qualified board members.
We are a public company and subject to the
reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act of 2002. The Exchange Act requires, among other things, that we
file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. For example,
Section 404 of the Sarbanes-Oxley Act requires that our management report on the effectiveness of our internal controls structure
and procedures for financial reporting. Section 404 compliance may divert internal resources and will take a significant amount of
time and effort to complete. If we fail to maintain compliance under Section 404, or if our internal control over financial reporting
continues to not be effective as defined under Section 404, we could be subject to sanctions or investigations by the NYSE American,
the Commission, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer, and this could cause a decline
in the market price of our common stock. Any failure of our internal controls could have a material adverse effect on our stated results
of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations,
financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. We
may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations
as a public company, particularly if we become fully subject to Section 404 and its auditor attestation requirements, which will increase
costs. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and to meeting
the obligations that are associated with being a public company, which may divert attention from other business concerns, which could
have a material adverse effect on our business, financial condition and results of operations.
We have identified material weaknesses in our internal control
over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system
of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic
We are required to comply with certain provisions
of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). Section 404 requires that we document and test our
internal control over financial reporting and issue management’s assessment of our internal control over financial reporting. Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Based on our assessment, as of December 31, 2021, we concluded that our internal control over financial reporting
contained material weaknesses.
The weakness will not be considered remediated,
however, until the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that
these controls are operating effectively. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy
and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose
confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition,
a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud
and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements,
each of which could have a material adverse effect on our business, results of operations and financial condition.
If we fail to comply with the rules under the Sarbanes-Oxley
Act of 2002 related to accounting controls and procedures, or if we discover material weaknesses and deficiencies in our internal control
and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
If we fail to comply with the rules under
the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies
in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial
reporting. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain the adequacy
of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls
over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary
for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial
reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial
information, and the trading price of our common stock could drop significantly.
If securities or industry analysts do not publish research
or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume
The trading market for our common stock
will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage
by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts who cover
us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to
regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline.
The elimination of monetary liability against our directors,
officers and employees under law and the existence of indemnification rights for or obligations to our directors, officers and employees
may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our certificate of incorporation contains
a provision permitting us to eliminate the personal liability of our directors to us and our stockholders for damages for the breach of
a fiduciary duty as a director or officer to the extent provided by Delaware law. We may also have contractual indemnification obligations
under any future employment agreements with our officers. The foregoing indemnification obligations could result in us incurring substantial
expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These
provisions and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their
fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers
even though such actions, if successful, might otherwise benefit us and our stockholders.
We do not anticipate paying dividends on our common stock
and, accordingly, stockholders must rely on stock appreciation for any return on their investment.
We have never declared or paid cash dividends
on our common stock and do not expect to do so in the foreseeable future. The declaration of dividends is subject to the discretion of
our Board and will depend on various factors, including our operating results, financial condition, future prospects and any other factors
deemed relevant by our Board. You should not rely on an investment in our company if you require dividend income from your investment
in our company. The success of your investment will likely depend entirely upon any future appreciation of the market price of our common
stock, which is uncertain and unpredictable. There is no guarantee that our common stock will appreciate in value.
USE OF PROCEEDS
We are not offering any shares of our common
stock for sale under this prospectus. We will not receive any of the proceeds from the sale of our common stock by the selling stockholders.
Expenses expected to be incurred by us in
connection with this registration statement are estimated at approximately $36,169. The selling stockholder will pay all brokerage commissions
and discounts and their counsel fees and expenses. See “Plan of Distribution.”
We are registering the shares of our
common stock in order to permit the selling stockholder to offer its shares of common stock for resale from time to time. The selling
stockholder has not held a position with our company or our affiliates or had any material relationship with us or our affiliates within
the past three years.
The table below lists the selling stockholder
and other information regarding the beneficial ownership of the shares of common stock by the selling stockholder. The second column lists
the number of shares of common stock beneficially owned by the selling stockholder, based on its ownership of the shares of common stock,
as of January 20, 2023.
The third column lists the shares of
common stock being offered by this prospectus by the selling stockholder. This prospectus covers the resale of the number of shares of
common held by the selling stockholder. Although we ultimately expect that all 11,605,913 shares of our common stock may be sold, the
actual number of shares that will be sold cannot be determined. The fourth column assumes the sale of all of the shares offered by the
selling stockholders pursuant to this prospectus.
When we refer to “selling stockholder”
in this prospectus, we mean the person listed in the table below, as well as its transferees, pledgees or donees or its successors. The
selling stockholders may sell all, a portion or none of its shares at any time. The information regarding shares beneficially owned after
the offering assumes the sale of all shares offered by the selling stockholder. Except as otherwise indicated, the selling stockholder
has sole voting and dispositive power with respect to such shares of common stock.
Each selling stockholder that is a broker-dealer
or an affiliate of a broker-dealer acquired its shares of common stock in the ordinary course of its business and, at the time of acquisition,
had no agreements or understandings, directly or indirectly, with any person to distribute the shares.
|| || ||
||Beneficially Owned|| ||
||Shares to|| ||
||Beneficially Owned|| |
||Prior to Offering|| ||
||be Offered (1)|| ||
||After Offering (2)|| |
|Name of Selling Stockholders||
|Esousa Group Holdings LLC (3)||
|| ||11,605,913|| ||
|| ||11,605,913|| ||
|| ||11,605,913|| ||
* Less than one percent
|(1)||Represents the number of shares of common stock owned by the selling stockholder.|
|(2)||Assumes that the selling stockholder has sold all of the shares of our common stock being registered by
this prospectus, which may or may not occur.|
|(3)||Consists of 11,605,913 shares of our common stock held by the selling stockholder. Michael Wachs is the
Managing Member of Esousa Group Holdings LLC, and exercises sole voting and investment power on behalf thereof.|
PLAN OF DISTRIBUTION
This prospectus relates to the sale by the
selling stockholder of 11,605,913 shares of our common stock. All of the shares being offered are beneficially owned by the selling stockholder.
The selling stockholder of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell
any or all of their shares of common stock on the NYSE American, LLC or any other stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any
one or more of the following methods when selling shares:
|•||ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;|
|•||block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;|
|•||purchases by a broker-dealer as principal and resale by the broker-dealer for its account;|
|•||an exchange distribution in accordance with the rules of the applicable exchange;|
|•||privately negotiated transactions;|
|•||settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;|
|•||broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;|
|•||through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;|
|•||a combination of any such methods of sale; or|
|•||any other method permitted pursuant to applicable law.|
The selling stockholders may also sell shares
under Rule 144 under the Securities Act of 1933, as amended, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholder
may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholder
(or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set
forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance
with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.
In connection with the sale of the common
stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the common stock in the course of hedging the positions it assumes. The selling stockholders
may also sell shares of the common stock short and deliver these securities to close out its short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling stockholder may also enter into options or other transactions
with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to
such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders and any broker-dealers
or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities
Act of 1933, as amended, in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under Section 2(11) of
the Securities Act of 1933, as amended. The selling stockholders have informed us that they do not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the common stock.
We will pay all the expenses, estimated
to be approximately $36,169, in connection with this offering, other than underwriting commissions and discounts and counsel fees and
expenses of the selling stockholders. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act of 1933, as amended.
Because the selling stockholder
may be deemed to be an “underwriter” within the meaning of the Securities Act of 1933, as amended, it will be subject to the
prospectus delivery requirements of the Securities Act of 1933, as amended, including Rule 172 thereunder. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act of 1933, as amended may be sold under
Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale
of the resale shares by the selling stockholder.
We agreed to keep this prospectus effective
until the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without the requirement
to be in compliance with Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule 144 or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares
will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under
the Securities Exchange Act of 1934, as amended, any person engaged in the distribution of the resale shares may not simultaneously engage
in market-making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to
the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases
and sales of shares of the common stock by the selling stockholders or any other person. We will make copies of this prospectus available
to the selling stockholder and have informed it of the need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale (including by compliance with Rule 172 under the Securities Act of 1933, as amended).
DESCRIPTION OF OUR SECURITIES
summary does not purport to be complete and is qualified in its entirety by reference to our certificate of incorporation and bylaws,
and to the provisions of the General Corporation Law of the State of Delaware, as amended.
We are authorized to issue 500,000,000 shares
of Class A common stock and 25,000,000 shares of Class B common stock, par value $0.001 per share. As of January 20, 2023, there
were 394,697,811 shares of our Class A common stock issued and outstanding and no shares of Class B common stock issued or outstanding.
The outstanding shares of our common stock are validly issued, fully paid and nonassessable. In this prospectus, all references solely
to “common stock” refer to the Class A common stock, except where otherwise indicated.
We are authorized to issue up to 25,000,000
shares of preferred stock, par value $0.001 per share. Of these shares of preferred stock, 1,000,000 shares are designated as Series
A convertible preferred stock, 500,000 shares are designated as Series B convertible preferred stock, 2,500 shares are designated as Series
C convertible redeemable preferred stock and 2,000,000 shares are designated as 13.00% Series D Cumulative Redeemable Perpetual Preferred
Stock. As of January 20, 2023, there were 7,040 shares of Series A convertible preferred stock outstanding, 125,000 shares of Series B
convertible preferred stock, no shares of Series C convertible redeemable preferred stock outstanding and 185,992 shares of 13.00% Series
D Cumulative Redeemable Perpetual Preferred Stock outstanding.
Holders of our shares of Class A common
stock are entitled to one vote for each share on all matters submitted to a shareholder vote. Holders of our shares Class B common stock
are entitled to ten votes for each share on all matters submitted to a shareholder vote. Holders of our common stock do not have cumulative
voting rights. Therefore, holders of a majority of the shares of our common stock voting for the election of directors can elect all of
the directors. Holders of our common stock representing a majority of the voting power of our capital stock issued, outstanding and entitled
to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of shareholders. A vote by the holders
of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or
an amendment to our certificate of incorporation.
Holders of our common stock are entitled
to share in all dividends that our board of directors, in its discretion, declares from legally available funds. In the event of a liquidation,
dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment
of liabilities and after providing for each class of stock, if any, having preference over our common stock. Our common stock has no preemptive,
subscription or conversion rights and there are no redemption provisions applicable to our common stock.
Shares Offered in this Prospectus
We are offering 11,605,913 shares of our
Transfer Agent and Registrar
The Transfer Agent and Registrar for our
common stock is Computershare, 8742 Lucent Blvd., Suite 225, Highlands Ranch, CO 80129.
The validity of the common stock offered
by this prospectus is being passed upon for us by our counsel, Olshan Frome Wolosky LLP, New York, New York.
The consolidated balance sheets of Ault
Alliance, Inc. (f/k/a BitNile Holdings, Inc.) as of December 31, 2021 and 2020, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the years then ended, included in the 2021 Annual Report on Form 10-K, and related
notes, have been audited by Marcum, LLP, an independent registered public accounting firm, as set forth in their report thereon which
is incorporated herein by reference, are based in part on the report of Ziv Haft,
independent registered public accounting firm. Such consolidated financial statements have been incorporated by reference in reliance
upon the reports pertaining to such consolidated financial statements of such firms given upon their authority as experts in auditing
The report of Ziv Haft on
the financial statements of ENERTEC SYSTEMS 2001 LTD, as of December 31, 2021 and 2020, and for each of the two years in the period ended
December 31, 2021, not included herein, incorporated by reference in this Prospectus and in the Registration Statement have been so incorporated
in reliance on the report of Ziv Haft, a member firm of BDO, an independent registered public accounting firm, incorporated herein by
reference, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
filed with the Commission a registration statement on Form S-3 under the Securities Act, with respect to the securities covered by this
prospectus. This prospectus and any prospectus supplement which form a part of the registration statement, does not contain all of the
information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect
to us and the securities covered by this prospectus, please see the registration statement and the exhibits filed with the registration
statement. Any statements made in this prospectus or any prospectus supplement concerning legal documents are not necessarily complete
and you should read the documents that are filed as exhibits to the registration statement or otherwise filed with the Commission for
a more complete understanding of the document or matter. A copy of the registration statement and the exhibits filed with the registration
statement may be inspected without charge at the Public Reference Room maintained by the Commission, located at 100 F Street, N.E., Washington,
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information about the operation of the Public Reference Room. The Commission
also maintains an internet website that contains reports, proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the website is http://www.sec.gov.
We file annual,
quarterly and current reports, proxy statements and other information with the Commission. You may read, without charge, and copy the
documents we file at the Commission’s public reference room in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549. You
can request copies of these documents by writing to the Commission and paying a fee for the copying cost. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Our filings with the Commission are available to the public at no
cost from the SEC’s website at http://www.sec.gov.
The reports and
other information filed by us with the Commission are also available at our website, www.bitnile.com. Information contained on our website
or that can be accessed through our website is not incorporated by reference into this prospectus or any prospectus supplement and should
not be considered to be part of this prospectus or any prospectus supplement.
INCORPORATION OF DOCUMENTS BY REFERENCE
We have filed a registration statement on
Form S-3 with the Commission under the Securities Act. This prospectus is part of the registration statement but the registration statement
includes and incorporates by reference additional information and exhibits. The Commission permits us to “incorporate by reference”
the information contained in documents we file with the Commission, which means that we can disclose important information to you by referring
you to those documents rather than by including them in this prospectus. Information that is incorporated by reference is considered to
be part of this prospectus and you should read it with the same care that you read this prospectus. Information that we file later with
the Commission will automatically update and supersede the information that is either contained, or incorporated by reference, in this
prospectus, and will be considered to be a part of this prospectus from the date those documents are filed. We have filed with the Commission,
and incorporate by reference in this prospectus:
|•||Our Annual Report on Form 10-K for the period ended December 31, 2021, filed with the SEC on April 15,
|•||Our Quarterly Report on Form 10-Q for the period ended March 31, 2022, filed with the SEC on May 23, 2022,
our Quarterly Report on Form 10-Q for the period ended June 30, 2022, filed with the SEC on August 22, 2022 and our Quarterly Report on
Form 10-Q for the period ended September 30, 2022, filed with the SEC on November 21, 2022;|
|•||Both Current Reports filed on January 3, 2022; an amendment to Current Report originally filed on January
3, 2022 filed on January 21, 2022; an amendment to a Current Report originally filed on January 21, 2022 filed on January 24, 2022; a
Current Report filed on February 23, 2022; a Current Report filed on February 25, 2022; an amendment to a Current Report originally filed
on December 23, 2021 filed on March 9, 2022, a Current Report filed on March 21, 2022; a Current Report filed on April 25, 2022; a Current
Report filed on June 1, 2022; a Current Report filed on June 2, 2022; a Current Report filed on June 14, 2022; a Current Report filed
on June 17, 2022; a Current Report filed on August 11, 2022; a Current Report filed on August 16, 2022; a Current Report filed on September
9, 2022; a Current Report filed on September 12, 2022; a Current Report filed on November 8, 2022; a Current Report filed on November
18, 2022; a Current Report filed on November 22, 2022; a Current Report filed on November 23, 2022; a Current Report filed on November
30, 2022; a Current Report filed on December 6, 2022; a Current Report filed on December 7, 2022; a Current Report filed on December 19,
2022; a Current Report filed on December 21, 2022; and a Current Report filed on January 3, 2023|
|•||Our Definitive Proxy Statement filed with the SEC on September 23, 2022; and|
|•||The description of our common stock contained in our Annual Report on Form 10-K as Exhibit 4.29 with the
SEC on April 15, 2022.|
We also incorporate by reference all additional
documents that we file with the Securities and Exchange Commission under the terms of Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act that are made after the initial filing date of the registration statement of which this prospectus is a part until the offering of
the particular securities covered by a prospectus supplement or term sheet has been completed. We are not, however, incorporating, in
each case, any documents or information that we are deemed to furnish and not file in accordance with Securities and Exchange Commission
We will provide you, without charge upon
written or oral request, a copy of any and all of the information that has been incorporated by reference in this prospectus and that
has not been delivered with this prospectus. Requests should be directed to Ault Alliance, Inc., 11411 Southern Highlands Parkway, Suite
240, Las Vegas, NV 89141; Tel.: (949) 444-5464; Attention: Mr. Milton C. (Todd) Ault III, Executive Chairman.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
expenses in connection with the issuance and distribution of the securities being registered are estimated below:
|SEC registration fee||
|Legal fees and expenses||
|| ||5,000|| |
|Accounting fees and expenses||
|| ||30,000|| |
|| ||1,000|| |
All expenses incurred in connection with this registration will be borne by the registrant.
The selling stockholders shall be responsible for their underwriting commissions and discounts and counsel fees and expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware
General Corporation Law (the “DGCL”) empowers a Delaware corporation to indemnify any persons who are, or are threatened to
be made, parties to any threatened, pending, or completed legal action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer
or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee, or agent of
another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by such person in connection with such action, suit, or proceeding, provided that
such officer or director acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation’s
best interests, and, for criminal proceedings, had no reasonable cause to believe his conduct was illegal. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification
is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation in the performance of his
duty. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation
must indemnify him against the expenses which such officer or director actually and reasonably incurred.
Our bylaws provide that we
will indemnify our directors and officers to the fullest extent permitted by Delaware law, except that no indemnification will be provided
to a director, officer, employee, or agent if the indemnification sought is in connection with a proceeding initiated by such person without
the authorization of our board of directors. The bylaws also provide that the right of directors and officers to indemnification shall
be a contract right and shall not be exclusive of any other right now possessed or hereafter acquired under any statute, provision of
the certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The bylaws also permit
us to secure insurance on behalf of any officer, director, employee, or other agent for any liability arising out of his or her actions
in such capacity, regardless of whether the bylaws would permit indemnification of any such liability.
In accordance with Section
102(b)(7) of the DGCL, our certificate of incorporation provides that directors shall not be personally liable for monetary damages for
breaches of their fiduciary duty as directors except for (i) breaches of their duty of loyalty to us or our stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing violations of law, (iii) certain transactions under Section
174 of the DGCL (unlawful payment of dividends or unlawful stock purchases or redemptions), or (iv) transactions from which a director
derives an improper personal benefit. The effect of this provision is to eliminate the personal liability of directors for monetary damages
or actions involving a breach of their fiduciary duty of care, including any actions involving gross negligence.
In addition, we have entered
into indemnification agreements with our directors and officers that require us, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service, so long as the indemnitee acted in good faith and in a manner the indemnitee
reasonably believed to be in or not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding,
the indemnitee had no reasonable cause to believe his or her conduct was unlawful. We also maintain director and officer liability insurance
to insure our directors and officers against the cost of defense, settlement or payment of a judgment under specified circumstances.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to
the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS
Item 16. Exhibits.
The exhibits listed in the following Exhibit Index are filed as part of this Registration
(1) Previously filed with the SEC on Form S-3 on
September 1, 2022.
* Filed herewith
ITEM 17. UNDERTAKINGS.
|(a)||The undersigned registrant hereby undertakes:|
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|(i)||To include any prospectus required by Section 10(a)(3) of the Securities Act;|
|(ii)||To reflect in the prospectus any facts or events arising after the effective date of this registration
statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of
securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
|(iii)||To include any material information with respect to the plan of distribution not previously disclosed
in this registration statement or any material change to such information in this registration statement;|
provided, however, that the undertakings set forth
in paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) above do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are incorporated by
reference in this registration statement or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part
of this registration statement;
for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination
of the offering.
for the purpose of determining liability under the Securities Act to any purchaser:
|(i)||If the registrant is relying on Rule 430B;|
|(A)||Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part
of this registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and|
|(B)||Each prospectus required to be filed pursuant to Rule 424 (b)(2), (b)(5), or (b)(7) as part
of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or
(x) for the purpose of providing the information required by Section 10(a) of the Securities Act shall be deemed to be
part of and included in the registration statement as of the earlier of the date of the Securities Act prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B,
for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective
date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the
offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or|
|(ii)||If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as
part of a registration statement relating to an offering, other than registration statements relying on Rule 430B, shall be deemed
to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that
no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated
or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as
to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first
|(b)||The undersigned registrant hereby undertakes that, for purposes of determining any liability under the
Securities Act, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.|
|(c)||Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.|
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3
and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Las Vegas, State of Nevada, on this 23rd day of January, 2023.
||BITNILE HOLDINGS, INC.|
||/s/ William B. Horne|
||William B. Horne|
||Chief Executive Officer (principal executive officer)|
||/s/ Kenneth S. Cragun|
||Kenneth S. Cragun|
||Chief Financial Officer (principal financial officer)|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, each
director and officer whose signature appears below constitutes and appoints each of William B. Horne and Kenneth S. Cragun, his true and
lawful attorney-in-fact and agent, with full power of substitution and re-substitution, to sign in any and all capacities any and all
amendments or post-effective amendments to this registration statement on Form S-3, and to sign any and all additional registration statements
relating to the same offering of securities of the Registration Statement that are filed pursuant to Rule 462(b) of the Securities Act,
and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission,
granting such attorney-in-fact and agent full power and authority to do all such other acts and execute all such other documents as he
may deem necessary or desirable in connection with the foregoing, as fully as the undersigned may or could do in person, hereby ratifying
and confirming all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Act of 1933, this Registrant Statement has been signed by the following persons in the capacities and on the dates indicated.
By: /s/ Milton C. Ault III
Milton C. Ault III
||January 23, 2023|
By: /s/ William B. Horne
William B. Horne
||Chief Executive Officer and Vice Chairman (Principal Executive Officer)
||January 23, 2023|
By: /s/ Henry C. W. Nisser
Henry C. W. Nisser
||President, General Counsel and Director
||January 23, 2023|
By: /s/ Jeffrey A. Bentz
Jeffrey A. Bentz
||January 23, 2023|
By: /s/ Robert O. Smith
Robert O. Smith
||January 23, 2023|
By: /s/ Howard Ash
||January 23, 2023|
By: /s/ Mordechai Rosenberg
||January 23, 2023|
Graphique Historique de l'Action
De Nov 2023 à Déc 2023
Graphique Historique de l'Action
De Déc 2022 à Déc 2023