UNITED STATES
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FORM
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MAWSON INFRASTRUCTURE GROUP INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Trade and other receivables | ||||||||
| Cryptocurrencies | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Derivative asset | - | |||||||
| Equipment deposits | ||||||||
| Financial assets | ||||||||
| Security deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade and other payables | $ | $ | ||||||
| Current portion of operating lease liability | ||||||||
| Current portion of finance lease liability | ||||||||
| Borrowings | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Finance lease liability, net of current portion | ||||||||
| Long-term borrowings | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (note 10) | ||||||||
| Shareholders’ equity: | ||||||||
| Additional paid-in capital; Common stock ( | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements.
1
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Cryptocurrency mining revenue | ||||||||||||||||
| Hosting Co Location revenue | ||||||||||||||||
| Sale of crypto currency mining equipment | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Less: Cost of revenues (excluding depreciation) | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| LO2A write backs | ||||||||||||||||
| Share based payments | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Change in fair value of derivative asset | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-operating income/(expense): | ||||||||||||||||
| Gain / (loss) on foreign currency transactions | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of financial assets | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | - | - | ||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to non-controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss attributed to Mawson Infrastructure Group shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
2
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three Months Ended June 30, 2022
| Common Stock (#) | Common Stock ($) | Additional Paid-in- Capital | Reserves | Accumulated | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non- controlling interest | Total Equity | ||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of common stock, stock based compensation | ||||||||||||||||||||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||||||||||||||||||
| Issuance of RSU’s and stock options | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Other comprehensive income | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Non-controlling interest | - | ( | ) | |||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
3
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three Months Ended June 30, 2021
| Series A Preferred Stock (#) | Series A Preferred Stock ($) | Common Shares (#) | Common Stock* (#) | Common Stock ($) | Share Subscription Receivable | Additional Paid-in- Capital | Reserves | Accumulated Other Comprehensive Income/(Loss) | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non- controlling interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Late acceptance of Exchange of common stock of Cosmos Capital Limited for common stock of Wize Pharma Inc., adjusted to reflect the Exchange Ratio | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share based payments W Capital | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock at the price of $ | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Share based payment - Issuance of BIA | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Six Months Ended June 30, 2022
| Common Stock (#) | Common Stock ($) | Additional Paid-in- Capital | Reserves | Accumulated Other Comprehensive Income/ (Loss) | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non- controlling interest | Total Equity | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common stock, stock based compensation | ||||||||||||||||||||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||||||||||||||||||
| Issuance of RSU’s and stock options | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Other comprehensive income | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Non-controlling interest | - | ( | ) | |||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
5
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Six Months Ended June 30, 2021
| Series A Preferred Stock (#) | Series A Preferred Stock ($) | Common Shares (#) | Common Stock (#) | Common Stock ($) | Share Subscription Receivable | Additional Paid-in- Capital | Reserves | Accumulated Other Comprehensive Income/(Loss) | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non- controlling interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange of stock and Reverse recapitalization of Wize Pharma Inc | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offer costs, PIPE transaction | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of convertible notes, net of offer costs | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, exercise of warrants | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of IPR&D acquired, net of Business Combination transaction costs | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of RSU’s and stock options | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment of LO2A intellectual property revenue sharing obligation | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Late acceptance of Exchange of common stock of Cosmos Capital Limited for common stock of Wize Pharma Inc., adjusted to reflect the Exchange Ratio | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
6
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| LO2A write offs | ||||||||
| Lease expense | ||||||||
| Foreign exchange gain | ||||||||
| Change in fair value of derivative asset | ( | ) | ||||||
| Sale of intellectual property | ( | ) | ||||||
| Share based payments | ||||||||
| Loss on disposal of fixed assets | ||||||||
| Interest expense | ||||||||
| Investment expense | ||||||||
| Non-controlling interest | ||||||||
| Trade and other receivables | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Trade and other payables | ||||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net payment for the purchase of property and equipment | ( | ) | ( | ) | ||||
| Investment in financial assets | ( | ) | ||||||
| Payment of fixed asset deposits | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from common share issuances | ||||||||
| Proceeds from convertible notes | ||||||||
| Payments of capital issuance costs | ( | ) | ||||||
| Proceeds from borrowings | ||||||||
| Advances made to external companies | ( | ) | ||||||
| Repayment of lease liabilities | ( | ) | ||||||
| Repayments of borrowings | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net (decrease)/increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Interim Consolidated Financial Statements
7
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
General
Mawson Infrastructure Group, Inc. (the “Company” or “Mawson” or “we”), formerly known as Wize Pharma, Inc, and before that, known as OphthaliX Inc., was incorporated in the State of Delaware on February 10, 2012.
The accompanying consolidated financial statements, including the results of the Company’s subsidiaries: Mawson Infrastructure Group Pty Ltd (“Mawson AU”, previously known as Cosmos Capital Limited), Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, MIG No.1 Pty Ltd, Mawson AU Limited (incorporated June 8, 2022), Luna Squares LLC, Luna Squares Texas LLC (formed January 27, 2022), Luna Squares Repairs LLC, Luna Squares Property LLC and Mawson Mining LLC (collectively referred to as the “Group”), have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd are additional subsidiaries of Mawson, however these companies have not been consolidated into the financial statements as these companies are subject to contingent value rights (“CVR”), further described in NOTE 10.
These consolidated, condensed unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements of the Group as of December 31, 2021, and the notes thereto, included in the Company’s Annual Report on Form 10-K filed with SEC on March 21, 2022. Accordingly, they do not include all the information and footnotes required by U.S GAAP for complete financial statements. The results of the interim period are not necessarily indicative of the results to be expected for the full year ended December 31, 2022. These consolidated, condensed interim financial statements reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented.
Mawson, through its subsidiaries, is a ‘Digital Asset Infrastructure’
business, which owns and operates modular data centers (“MDCs”) based in the United States and Australia. As at June 30, 2022
Mawson owned and had ordered
Going Concern
For the six-month period ending June 30, 2022, the Company incurred
a loss after tax of $
Management of the Company believes that there are reasonable grounds to conclude that the Company will continue as a going concern after having regard for the following factors.
The Company’s plans include improving profitability and generating sufficient cash flow from operations.
Management of the Company is of the opinion that the Company can
continue to access adequate debt and equity funding to meet its working capital requirements. In July 2022, the Company raised $
Based on internally prepared forecast cash flows which take into consideration what management considers to be reasonable scenarios given the inherent risks and uncertainties, combined with existing cash balances, management believes that the Company will be able to meet its obligations as they fall due for at least one year from the date of approval of these unaudited consolidated financial statements.
Accordingly, management of the Company believe that it is appropriate to prepare the Group’s financial statements on a going concern basis. However, should the Company be unable to source sufficient funding through the factors noted above, the Company may not be able to realize assets at their recognized values and extinguish its liabilities in the normal course of business at the amounts stated in these unaudited consolidated financial statements.
These unaudited consolidated financial statements do not include any adjustments relating to the recoverability and carrying amounts of assets and the amounts of liabilities should the Company be unable to continue as a going concern and meet its obligations and debts as and when they fall due.
8
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and basis of preparation
The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly or majority owned and controlled subsidiaries, other than those subsidiaries subject to the CVR described more in NOTE 10. Intercompany investments, balances and transactions have been eliminated in consolidation. Non–controlling interests represent the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.
Any changes in the Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized as an equity transaction, with appropriate adjustments to both the Company’s additional paid-in capital and the corresponding non-controlling interest.
On March 9, 2021, Mawson AU was acquired by the Company. For accounting purposes, this was accounted for as a reverse asset acquisition with Mawson AU as the accounting acquirer (refer to significant accounting policies below). The result of which is that these financial statements are taken to be a continuation of Mawson AU’s financial statements, with the Company incorporated within the acquisition and therefore the historical financial information of Mawson AU (then known as Cosmos Capital Limited) prior to March 9, 2021, became the historical financial information of Mawson AU, which have been consolidated into the financial statements of the Company.
Use of Estimates and Assumptions
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made.
9
These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. The Company has considered the following to be significant estimates made by management, including but not limited to, going concern assumptions, estimating the useful lives of fixed assets, realization of long-lived assets, unrealized tax positions and the realization of digital currencies, valuing the derivative asset classified under Level 3 fair value hierarchy, business combinations, reverse asset acquisition, and the contingent obligation with respect to future revenues.
Critical Accounting Policies
Critical accounting policies are described in the consolidated financial statements for Mawson included in the Company’s Annual Report on Form10-K filed with SEC on March 21, 2022. There have been some changes to critical accounting policies in the six months period ended June 30, 2022. The reverse asset acquisition accounting policy which is no longer considered to be a critical accounting policy and has therefore been included in significant accounting policies and the fair value of financial instruments has been moved from significant accounting policies to critical accounting policies.
Revenue Recognition – Digital asset mining revenue
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Five steps are required to be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
There is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting of managing digital currencies and management has exercised significant judgement in determining appropriate accounting treatment for the recognition of revenue for such operations.
The Company has entered into a contract with mining pools and has undertaken the performance obligation of providing computing power in exchange for non-cash consideration in the form of cryptocurrency. The provision of computing power is the only performance obligation in the Group’s contract with its pool operators. In certain pools the amount of reward for computing power depends on the pool’s success in mining blocks. In other pools, the amount of reward includes no such contingency, although the fees payable to such pools are typically higher as a result. Where the consideration received is variable (for example, due to payment only being made upon successful mining), it is recognized when it is highly probable that the variability is resolved, which is generally when the cryptocurrency is received.
The Company measures the non-cash consideration received at the fair market value of the cryptocurrency received. Management estimates fair value on a daily basis, as the quantity of cryptocurrency received multiplied by the price quoted on the crypto exchanges that the Company uses to dispose of cryptocurrency on the day it was received.
10
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. The cost includes any cost of replacing part of the property and equipment with the original cost of the replaced part being derecognized. All other repair and maintenance costs are recognized in profit or loss incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Property, plant and equipment transferred from customers is initially measured at the fair value at the date on which control is obtained.
The depreciable amount of fixed assets is depreciated on a straight-line or declining balance basis based on the asset classification, over their useful lives to the economic entity commencing from the time the assets arrive at their destination where they are ready for use. Depreciation is calculated over the following estimated useful lives:
| Asset class | Useful life | Depreciation Method | ||
| Fixtures and Fittings | ||||
| Plant and equipment | ||||
| Modular data center | ||||
| Motor Vehicles | ||||
| Computer equipment | ||||
| Processing Machinery (Miners) | ||||
| Transformers | ||||
| Leasehold improvements |
An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized.
The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.
The Company changed its policy in relation
to freight costs in relation to processing machines with effect from October 1, 2021. Prior to this date these costs were expensed to
the statement of operations and profit and loss, and afterwards these costs are capitalized into processing machinery. This change resulted
in an increase in processing machines in the balance sheet of $
The Company’s long-lived assets are reviewed for impairment in accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the six month periods ended June 30, 2022, and 2021, no impairment losses have been identified.
11
Fair value of financial instruments:
The Company accounts for financial instruments under FASB Accounting Standards Codification Topic (“ASC”) 820, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 — assets and liabilities whose significant value drivers are unobservable. Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
| Fair value measured at June 30, 2022 | ||||||||||||||||
Total carrying June 30, | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Derivative asset | $ | $ | $ | $ | ||||||||||||
| Financial assets | $ | $ | $ | $ | ||||||||||||
| Fair value measured at December, 2021 | ||||||||||||||||
| Total carrying value at December, 2021 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Derivative asset | $ | $ | $ | $ | ||||||||||||
| Financial assets | $ | $ | $ | $ | ||||||||||||
Level 3 Assets:
Power Supply Agreement
During the quarter ended June 30, 2022, the Company recorded a derivative
asset related to its Power Supply Agreement with Energy Harbor LLC, the energy supplier to the Company’s Pennsylvania Facility.
The Power Supply Agreement was classified as a derivative asset and measured at fair value on the date of Power Supply Agreement, with
changes in fair value recognized in the accompanying unaudited condensed consolidated statements of operations. The estimated fair value
of the Company’s derivate asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs
utilized in the valuation. Specifically, our discounted cash flow estimation models contain quoted commodity exchange spot and forward
prices and are adjusted for basis spreads for load zone-to-hub differentials through the term of the Power Supply Agreement, which ends
in December 2026. In addition, the Group adopted a further discount rate utilized of approximately
Tasmania Data Infrastructure Pty Ltd (“TDI”)
During June 2022 Mawson AU Limited entered into
a License and Services Agreement with TDI in exchange for
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Level 1 Assets:
The company holds
Accounting for Power Supply Contract
In June 2022, the company entered into a Power Supply Agreement with Energy Harbor LLC to provide the delivery of a fixed portion of the total amount of electricity for a fixed price through to December 2026. If the Pennsylvania site uses more electricity than contracted, the cost of the excess is incurred at a new price quoted by Energy Harbor.
While the Company manages operating costs at the Pennsylvania Facility in part by periodically selling unused or uneconomical power back to the market, we do not consider such actions trading activities. That is, the Company does not engage in speculation in the power market as part of our ordinary activities. Because the sale of any electricity under a curtailment program allows for net settlement, we have determined the Power Supply Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). However, because the Company has the ability to sell the power back to the grid rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, we do not believe the normal purchases and normal sales scope exception applies to the Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging derivative contract) is recorded at estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations (refer to fair value of financial instruments policy).
Share based payments
The Company follows FASB Codification Topic ASC 718-10 Compensation-Stock Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company determines the grant date fair value of the restricted stock units (“RSUs”) and options using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility computes stock price volatility over expected terms based on its historical common stock trading prices. Risk–free interest rates are calculated based on the implied yield available on U. S. 10-year Treasury bond.
Significant Accounting Policies
Revenue Recognition - Hosting Co-location revenue
The Company provides power for our co-location hosting customers on a variable basis which is received monthly from the customer based on the power usage at the rate outlined in each customer contract.
We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of the Company’s performance).
The customer contracts contain performance obligations, variable consideration in such contracts to be allocated to and recognized in the period to which the consideration relates. Usually this is when it is invoiced, rather than obtaining an estimation of variable consideration at the beginning of the customer contracts.
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Customers also are invoiced a fixed monthly fee for maintenance services which include, cleaning, cabling and other services to maintain the customers’ equipment.
Revenue Recognition - Sale of crypto currency mining equipment
Crypto currency mining equipment sales revenue includes revenues related to the sale of Miners. This is recognized as revenue upon delivery to the customer, which is when the control of the Miner transfers. Payments are typically received at the point control transfers or in accordance with payment terms customary to the business.
Revenue recognition – equipment sales
The Company earned revenues from the sale of earlier generation cryptocurrency mining units and modular data centers that have been assembled or refurbished for resale (collectively “Hardware”). Revenue from the sale of Hardware is recognized when all of the following conditions are satisfied: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed or determinable, (iii) title and risk of loss have transferred, and (iv) payment is received. At the date of sale, the net book value is expensed in cost of revenues.
Cost of revenues:
Cost of revenue consists primarily of expenses that are directly related to providing the Company’s service to its paying customers. These primarily consist of costs associated with operating our co-location facilities such as direct power costs, energy costs (including any carbon offset acquired during the year), freight costs and material costs related to cryptocurrency mining.
Research and development expenses:
Research and development expenses are charged to the statement of comprehensive loss as incurred.
Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance may be established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryback or carryforward periods.
The Company recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained upon review by the taxing authority. Recognized income tax positions are measured
at the largest amount that is greater than
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Functional currency:
All subsidiaries of Company have a functional currency of United States dollar (“USD”) with the exceptions of Mawson Infrastructure Group Pty Ltd, MIG No.1 Pty Ltd, Cosmos Trading Pty Ltd and Mawson AU Limited whose functional currency is the Australian Dollar (“AUD”). The financial statements of foreign businesses have been translated into USD at current exchange rates for balance sheet items and at the average rate for income statement items. Translation of all the consolidated companies’ financial records into USD is required due to the reporting currency for these consolidated financial statements presented as USD and the functional currency of the parent company being that of AUD. Translation adjustments are accumulated in other comprehensive loss. Revenue and expense accounts are converted at prevailing rates throughout the year. Gains or losses on foreign currency transactions and translation adjustments in highly inflationary economies are recorded in income in the period in which they are incurred.
Segment Reporting:
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group is composed of the chief executive officer. We currently operate in one segment surrounding our cryptocurrency mining operation.
Cash and cash equivalents:
Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, cash held with digital currency exchanges, and other short-term and highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.
Digital Currencies
Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are classified as indefinite-lived intangible assets in accordance with ASC 350, Intangibles - Goodwill and Other, and are accounted for in connection with the Company’s revenue recognition policy detailed above.
The following table presents the Company’s digital currency (Bitcoin) activities for the three months and six months ended June 30, 2022:
| Three months to June 30, 2022 | Six months to June 30, 2022 | |||||||
| Opening number of Bitcoin held as at March 31, 2022 and December 31, 2021 | ||||||||
| Number of Bitcoin added | ||||||||
| Number of Bitcoin sold | ( | ) | ( | ) | ||||
| Closing number of Bitcoin held as at June 30, 2022 | ||||||||
Digital currency 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, the Company has 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 the Company concludes otherwise, it is 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.
The Company’s policy is to dispose of production at the earliest opportunity, therefore the holding period is minimal, usually no more than a few days. Due to the short period which Bitcoin are held prior to sale and the consequent small numbers held, the risk of impairment is not material.
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Equipment deposits:
The Company records a prepaid expense for costs paid but not yet incurred. Those expected to be incurred within one year are recognized and shown as equipment deposits. Equipment deposits result from advance payments to suppliers for goods to be received in the future. Equipment deposits are initially recognized as assets at the date the amount is paid, and are subsequently recorded as equipment as the Company takes delivery and control of the equipment from the supplier. Amounts are recognized initially at the amount of the unconditional consideration. They are subsequently measured at cost, less loss allowance.
Reverse Asset Acquisition:
On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd and referred to herein as Mawson AU) in a stock for stock exchange. This transaction has been accounted for as a reverse asset acquisition. This transaction reverse asset acquisition and the associated impact is referred to as the “Cosmos Transaction”.
Under the terms of the Cosmos Transaction Bid Implementation Agreement,
the Company was required to make share-based payments consisting of up to
Concentrations of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities. Cash and cash equivalents and restricted bank deposits are invested in banks in Australia and the U.S. If the counterparty completely failed to perform in accordance with the terms of the contract, is the maximum amount of loss the Company would be the balance. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
Legal and other contingencies:
The Company accounts for its contingent liabilities in accordance with ASC 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of June 30, 2022, the Company is not a party to any litigation that would reasonably be expected to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
Leases:
The Company accounts for its leases under ASC 842, Leases which was effective January 1, 2019. The Company determines if an arrangement is a lease at inception. Using ASC 842 leases are classified as operating or finance leases on the Balance Sheet as a right of use (“ROU”) assets and lease liabilities within current liabilities and long-term liabilities on our consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company’s lease does not provide an implicit rate and therefore the Company measured the ROU asset and lease obligation based upon the present value of future minimum lease payments. The Company’s incremental borrowing rate is estimated based on risk-free discount rate for the lease, determined using a period comparable with that of the lease term and in a similar economic environment. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. The Company does not record leases on the consolidated balance sheets with a term of one year or less. The Company does not separate lease and non-lease components but rather account for each separate component as a single lease component for all underlying classes of assets. Where leases contain escalation clauses, rent abatements, or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them in the determination of straight-line operating lease cost over the lease term.
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Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. For information with respect to recent accounting pronouncements, see Note 2 to the consolidated financial statements for Mawson as of December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with SEC on March 21, 2022, recent accounting pronouncements since that date include:
In March 2022, the FSAB issued ASU update 2022-01—Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The adoption of ASU 2021-01 did not have a material impact on the Company’s financial statements or disclosures.
In March 2022, the FSAB issued ASU 2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The adoption of ASU 2022-02 did not have a material impact on the Company’s financial statements or disclosures.
In June 2022, the FSAB issued ASU 2022-03—Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The adoption of ASU 2022-03 did not have a material impact on the Company’s financial statements or disclosures.
NOTE 3 – BASIC AND DILUTED NET LOSS PER SHARE
Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share as at June 30, 2022 and 2021 are as follows:
| As at June 30, | ||||||||
| 2022 | 2021 | |||||||
| Warrants to purchase common stock | ||||||||
| Options to purchase common stock | - | |||||||
| Mandatory convertible notes to exchange common stock | ||||||||
| Restricted Stock-Units (“RSUs”) issued under a management equity plan | ||||||||
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The following table sets forth the computation of basic and diluted loss per share:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Comparative weighted average common shares have been revised by the
ratio of Mawson AU to the Company shares exchanged in the reverse asset acquisition in March 2021. Pursuant to that certain Certificate
of Amendment to the Certificate of Incorporation of the Company dated August 11, 2021, Mawson executed a 10-for-1 reverse stock split
of its outstanding common stock and reduced its authorized common stock to
NOTE 4 – DEPOSIT, PROPERTY AND EQUIPMENT
On August 9, 2021, Cosmos Infrastructure LLC entered into a second Long-Term Purchase Contract with Canaan for the purchase of 15,000 next generation Avalon A1246 ASIC Miners. The average purchase price per unit is $4,908 for a total purchase price of $73,620,000. The final shipment for contract was received during May 2022, in total there were 11,000 Miners delivered, there was a final adjustment to the purchase price based on the actual tera hash and number of Miners delivered based on the agreed price per tera hash under the terms of the contract. The purchase price adjustment resulted in a $0.3 million reduction in the purchase price, this is due to be received in cash from Canaan.
During the six months ended June 30, 2022, $
NOTE 5 – LEASES
Luna Squares LLC leases a 16.35-acre lot in Georgia from the Development
Authority of Washington County.
The Company leases the headquarters of its business operations at Level
5, 97 Pacific Highway, North Sydney NSW 2060 Australia, being
The Company leases
On March 16, 2022, Luna Squares LLC entered into a lease with respect
to a property in the City of Sharon, Mercer County, Pennsylvania with Vertua Property, Inc. (a related entity – refer to note 12
for details).
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During May 2022, Luna Square Texas LLC entered into four lease agreements to lease 11 acres of land in Texas for a period of five years.
Other than the foregoing leases, the Company does not lease any material assets. The Company believes that these offices and facilities are suitable and adequate for its operations as currently conducted and as currently foreseen. In the event additional or substitute offices and facilities are required, the Company believes that it could obtain such offices and facilities at commercially reasonable rates.
The Company’s lease costs recognized in the Consolidated Statements of Income and Comprehensive Loss consist of the following:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease charges (1) | $ | $ | $ | $ | ||||||||||||
| Finance lease charges: | ||||||||||||||||
| Amortization of right-of-use assets | ||||||||||||||||
| Interest on lease obligations | $ | $ | $ | $ | ||||||||||||
| (1) |
The following is a schedule of the Company’s lease liabilities by contractual maturity as of June 30, 2022:
| Operating leases | Finance Leases | |||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Total undiscounted lease obligations | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total present value of lease liabilities | ||||||||
| Less current portion of lease liabilities | ||||||||
| Non-current lease liabilities | $ | $ | ||||||
Other lease information as of June 30,2022:
| Operating leases | Finance Leases | |||||||
| Operating cash flows from operating and finance leases | $ | $ | ||||||
| Weighted-average remaining lease term – operating and finance leases (years) | ||||||||
| Weighted-average discount rate – operating and leases (%) | % | % | ||||||
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NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following:
| June
30, 2022 | December 31, 2021 | |||||||
| Plant and equipment | ||||||||
| Computer equipment | ||||||||
| Furniture & fixtures | ||||||||
| Processing machines (Miners) | ||||||||
| Modular data center | ||||||||
| Motor Vehicles | ||||||||
| Transformers | ||||||||
| Low-cost assets | ||||||||
| Assets under construction | ||||||||
| Leasehold improvements | ||||||||
| Total | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
Depreciation and amortization expense for the three month period ended
June 30, 2022 and 2021 was $
NOTE 7 – FINANCIAL ASSETS
During June 2022 Mawson AU Limited entered into a License and Services
Agreement with TDI in exchange for
NOTE 8 – INCOME TAXES
The following table summarizes our effective tax rate based on the tax expense/(benefit) for income taxes attributable to pretax income:
| For the three months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Income/(Loss) before income taxes | ( | ) | ( | ) | ||||
| Tax Expense/(Benefit) for income taxes | ||||||||
| Effective income tax rate | ( | )% | % | |||||
| For the six months ended June 30, |
||||||||
| 2022 | 2021 | |||||||
| Income/(Loss) before income taxes | ( |
) | ( |
) | ||||
| Tax Expense/(Benefit) for income taxes | ||||||||
| Effective income tax rate | ( |
)% | % | |||||
The Company’s effective tax rate is calculated by dividing total income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The Company has maintained a full valuation allowance for federal and the majority of its state jurisdictions.
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NOTE 9 – STOCKHOLDERS EQUITY
Common Stock
TraDigital Marketing Group LLC was issued
Under the terms of the Cosmos Transaction Bid Implementation Agreement
the Company made share-based awards under an Incentive Compensation Program during September 2021 (refer to reverse acquisition accounting
policy). During the three-month period ending June 30, 2022, two employees converted certain of these awards into
Restricted Stock
As of June 30, 2022, there was no restricted stock.
Common Stock Warrants
A summary of the status of the Company’s outstanding stock warrants and changes during the six months ended June 30, 2022, is as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of December 31, 2021 | ||||||||||||
| Issued | $ | |||||||||||
| Exercised | ( | ) | ||||||||||
| Expired | ||||||||||||
| Outstanding as of June 30, 2022 | $ | |||||||||||
| Warrants exercisable as of June 30, 2022. | $ | |||||||||||
On February 23, 2022, Mawson issued to Celsius Mining warrants with
an expiry date of
Under the terms of the Cosmos Transaction Bid Implementation Agreement
the Company made share-based awards in the form of warrants, options and RSUs under an Incentive Compensation Program during September
2021 (refer to reverse acquisition accounting policy). During the six months ended June 30, 2022, four employees exercised
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Agreements
| 1. | In connection with the Cosmos Transaction, we issued one CVR to each of our securityholders for each outstanding share of common stock of Mawson, and for each share of common stock of Mawson underlying other convertible securities and warrants, held immediately before the closing of the Cosmos Transaction. Each CVR represents the right to receive a pro rata share of any consideration that we may receive in connection with any successful monetization of our LO2A business, less transaction expenses and customary deductions as detailed in the CVR agreement, including a deduction of up to $ |
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| 2. | During June 2022 Mawson AU Limited entered into a share subscription and equipment sale with Tasmania Data Infrastructure Pty Ltd (“TDI”). TDI has a |
NOTE 11 – BORROWINGS
Short-term Borrowings
Whatsminers
On October 15, 2021, the Company acquired 2,000 Whatsminers M30’s for delivery in October 2021 from Foundry Digital LLC for a total consideration of $16,481,328. The Company paid a deposit of $3,202,766 and entered into an extension of the original Foundry finance agreement with Foundry for the balance of the consideration over a 12-month term, of which $4,914,329 is outstanding at June 30, 2022.
Marshall loan
The amount classified as a current liability is $
Celsius loan
On February 23, 2022, Luna Squares LLC entered into the Co-Location
Agreement with Celsius Mining LLC, in connection with this agreement, Celsius Mining loaned Luna Squares LLC a principal amount of US$
The amount classified as a current liability is $
Long-term Borrowings
Marshall loan
The total classified as payable after more than one year under this
arrangement is $
Celsius loan
The total classified as payable after more than one year under this
arrangement is $
NOTE 12 – RELATED PARTY TRANSACTIONS
On March 16, 2022, Luna Squares LLC entered into a lease with respect
to a property in the City of Sharon, Mercer County, Pennsylvania with Vertua Property, Inc, a subsidiary entity in which Vertua Ltd has
a
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NOTE 13 – SUBSEQUENT EVENTS
On July 8, 2022, the
Company issued secured convertible promissory notes to investors in the aggregate principal amount of $
On July 17, 2022, the Company entered into a Securities Purchase Agreement
with an institutional investor providing for the issuance and sale by the Company of
On August 12, 2022, Mawson AU entered into a non-binding Memorandum
of Understanding to, amongst other things, discuss the possibility of selling certain assets to its supplier, Faith Technologies Inc.
(“FTI”) in return for FTI reducing amounts outstanding to FTI by Mawson AU by $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets, statements of comprehensive income (loss) and cash flows. The following discussion and analysis of our financial condition and results of operations should be read together with the interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. All amounts are in U.S. dollars.
Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” the “Company,” “Mawson,” “our company” and the “combined company” refer to Mawson Infrastructure Group Inc., a Delaware corporation, and its direct and indirect subsidiaries, including Mawson Infrastructure Group Pty Ltd, an Australian company (“Mawson AU”), Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, Cosmos MIG No.1 Pty Ltd, Mawson AU Limited, Luna Squares LLC, Luna Squares Texas, Luna Squares Repairs LLC, Luna Squares Property LLC and Mawson Mining LLC . Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd are subsidiaries of Mawson however these companies have not been consolidated into the financial statements are not included when referring to we, us, our or the Company or Mawson as these are subject to contingent value rights (“CVR”), refer to NOT 10 of the financial statements.
Pursuant to that certain Certificate of Amendment to the Certificate of Incorporation of the Company dated August 11, 2021, Mawson executed a 10-for-1 reverse stock split of its outstanding common stock and reduced its authorized common stock to 120,000,000 shares, as set forth in the Company’s Current Report on Form 8-K filed with SEC on August 16, 2021. Unless otherwise specified, all Mawson share numbers in this Quarterly Report on Form 10-Q reflect post-reverse stock split numbers.
Forward-Looking Statement Notice
This Quarterly Report on Form 10-Q contains forward-looking statements about our expectations, beliefs or intentions regarding, among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects. In addition, from time to time, our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part II – Item 1A of this report.
This report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under Item 1A. “Risk Factors” as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part II – Item 1A of this report.
Such risk factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
| ● | that we have incurred operating losses and may continue to do so for the foreseeable future; |
| ● | our ability to raise additional capital, under favorable terms or at all, and continue as a going concern; | |
| ● | that we may never become profitable; | |
| ● | competition and technological challenges we may face; | |
| ● | the slowing or stopping of the development or acceptance of digital asset systems; | |
| ● | changes the Bitcoin network’s protocols and software; | |
| ● | any decrease in the incentive for Bitcoin mining; | |
| ● | increases in Bitcoin network difficulty (which typically leads to lower Bitcoin rewards for the same effort); | |
| ● | growth challenges we may face; |
| ● | our ability to obtain and maintain adequate insurance; |
| ● | we may become subject to existing or future government regulations which increase the cost of doing business, or which cause us to cease some or all of our operations; | |
| ● | our exposure to fluctuations in the market value of digital assets, in particular Bitcoin, and the relative attractiveness of those digital assets to investors, speculators, and users payment network services over other solutions; | |
| ● | our reliance on third party manufacturers for Miners and other infrastructure and hardware and the anticipated delivery dates of new miners; | |
| ● | counter-party and customer default risks due to cryptocurrency market fluctuations and disruptions; | |
| ● | increased input costs, such as increased energy prices or hardware and infrastructure costs; | |
| ● | risks relating to the supply chain disruptions due to pandemic (e.g. COVID-19), shortages (computer chips), and geo-political tensions (e.g. China trade bans, war in Ukraine); | |
| ● | climate and climate change risks, including direct risks from storms and floods, but also the implementation of policies which may lead to higher energy costs; |
| ● | political or economic crises motivating large-scale sales of digital assets; | |
| ● | regulatory risks, including local and global governments regulating, or even banning, Bitcoin or Bitcoin mining; | |
| ● | the impact of our business successes or failures on the value of our common stock; | |
| ● | the impact of future stock sales on our stock price; | |
| ● | the potential lack of liquidity, or volatility, of our common stock and warrants; | |
| ● | the potential failure to maintain effective internal controls over financial reporting; | |
| ● | the existence of anti-takeover provisions in our charter documents and Delaware law; | |
| ● | that we do not intend to pay dividends on our common stock; and | |
| ● | competitive companies and technologies within our industry, and outside it (such as central bank digital currencies and quantum computing). |
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All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by applicable law, we undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.
Overview
Mawson is a ‘Digital Asset Infrastructure’ business, which owns and operates (through its subsidiaries) modular data centers (“MDCs”) in the United States and Australia. We are focused on developing the technology to enable us to own and operate MDCs that are both air-cooled and liquid immersion cooled.
Our primary business is the ownership and operation of Application-Specific Integrated Circuit (“ASIC”) computers known as Miners. We currently operate three sites, with two locations in USA, and a location in Australia, from which we operate our combined business. The Miners are predominately focused on the process of digital mining, specifically for Bitcoin.
We offer ‘hosting’ or ‘co-location’ facilities to other businesses in the digital asset infrastructure industry to have their Miners located within our MDCs, who pay us a fee for the use of our facilities and related services (often based on consumption).
We also sell used crypto currency mining equipment on a periodic basis, subject to prevailing market conditions for used equipment.
As of June 30, 2022
| Existing Operations Online | Order and Purchase Agreements | Cumulative Fleet Fully Deployed | ||||||||||
| Total miners online | 24,419 | - | 24,419 | |||||||||
| Total miners in Transit | 1,008 | - | 1,008 | |||||||||
| Total miners on order | - | - | - | |||||||||
| Total miners in storage | 9,902 | - | 9,902 | |||||||||
| Total miners | 35,329 | - | 35,329 | |||||||||
We continue to conduct research and development in relation to our MDCs which we are actively testing in several configurations and locations to determine the best configuration for both ASIC and alternate computing uses.
Prior LO2A Business
On March 9, 2021, the Company acquired the shares of Mawson AU in a stock for stock exchange (the “Cosmos Transaction”).
Prior to the Cosmos Transaction our main business undertaking was as a clinical-stage biopharmaceutical company focused on the treatment of ophthalmic disorders, including dry eye syndrome (our “LO2A business”). However, as part of the Cosmos Transaction, substantially all of the economic benefits of any successful monetization of our LO2A business, if any, will benefit only the holders of CVR and any contingent right holders. Accordingly, we assessed that the fair value of this asset at the acquisition date was $nil. The asset was therefore assessed as impaired and the prior carrying amount of $23.96 million has been fully expensed in the consolidated statements of operations for the year ended December 31, 2021.
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Recent Developments.
On May 12, 2022, Luna Squares Texas LLC (our wholly owned subsidiary) entered into an Option Agreement and Gross Profit Agreement with JAI TX, LLC and then signed or took and assignment of 4 leases for properties in Texas (all in close proximity) with the intent to develop MDC facilities for mining Bitcoin. Luna Squares Texas LLC will seek to execute relevant power agreements, however the expectation is that the four locations can provide a combined 120MW of power. Rent under the leases ranges from $1,500 to $5,227.20 per acre per annum. The lessors include a substantial listed holder of land in Texas, and family groups. Under the Option Agreement, JAI TX, LLC has the option to receive an issue of up to 20% of the membership interests in Luna Squares Texas LLC. The purchase prices will be a share of capital costs equal to the membership interest acquired by JAI TX, LLC, and an amount of Luna Squares Texas LLC’s debt financing in proportion to JAI TX, LLC’s shareholding. In return for certain services provided by JAI TX, LLC, JAI TX, LLC will be entitled to a share of all Electric Reliability Council of Texas program payments paid to Luna Squares Texas LLC (“ERCOT Payment”), as well as a share of the Bitcoin profit from the Texas locations less certain costs, including depreciation. Capital costs for Luna Squares Texas LLC are expected to exceed $4.19m .
On May 27, 2022, Mawson entered into an ATM Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), to sell shares of our common stock, par value $0.001 per share, (the “Shares”) having an aggregate sales price of up to $100 million, from time to time, through an “at the market offering” program under which Wainwright will act as sales agent. We will pay Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide Wainwright with customary indemnification and contribution rights. We will also reimburse Wainwright for certain specified expenses in connection with entering into the ATM Agreement. The ATM Agreement contains customary representations and warranties and conditions to the sale of the Shares pursuant thereto.
During June 2022 Mawson AU Limited entered into a share subscription and equipment sale deed with Tasmania Data Infrastructure Pty Ltd (“TDI”). TDI has a 100% renewable energy Bitcoin Mining facility at the Que River Mine Site in Tasmania, Australia. Mawson AU Limited has agreed to exchange approximately 1975 ASIC Bitcoin Miners for 107,042,254 fully paid issued shares in TDI. This transaction is expected to finalize later this year.
COVID-19.
The COVID-19 global pandemic has been unpredictable and unprecedented and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. The Company relies on equipment supplied by third parties which, like many manufacturing businesses globally, are at risk of supply chain issues. We currently do not expect any material impact on our long-term development, operations, or liquidity due to the COVID-19 pandemic. However, we are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.
Regulation of Digital Assets
Digital assets and cryptocurrencies have been the source of much regulatory consternation, resulting in differing definitional outcomes without a single unifying statement. We do not believe our mining activities require registration to conduct such activities and accumulate digital assets. Nevertheless it is likely that regulation in the digital asset industry will increase. On March 9, 2022, President Biden issued an executive order that identified the following objectives for future regulation of digital assets in the United States: (1) protect consumers, investors, and businesses, (2) protect financial stability, (3) mitigate the illicit finance and national security risks posed by misuse of digital assets, (4) reinforce United States leadership in the global financial system and in technological and economic competitiveness, (5) promote access to safe and affordable financial services, and (6) support technological advances that promote responsible development and use of digital assets. The executive order was generally received as a positive for the digital asset industry, especially in the United States, as it appears to seek to foster an environment of innovation for digital assets within some reasonable bounds. This can be seen as similar to moves in the Australian government context, where the government has declared that it is seeking to better understand digital assets in order to craft and promulgate better designed regulation, and can be seen as contrasting to the reactions in some jurisdictions, where outright bans and other barriers have been erected against digital assets and cryptocurrencies.
In the past it has also been noted that the SEC, the Commodity Futures Trading Commission (“CFTC”), Nasdaq or other governmental or quasi-governmental agency or organization (including similar authorities in other jurisdictions such as Australia) may conclude that our digital asset mining activities involve the offer or sale of “securities”, or ownership of “investment securities”, and we may face regulation under the Securities Act of 1933, as amended (the “Securities Act”) or the Investment Company Act of 1940. Such regulation or the inability to meet the requirements to continue operations, would have a material adverse effect on business, financial condition, results of operations and prospects of our business. Currently in Australia, Bitcoin itself is not considered a financial product nor are digital assets regarded as money or currency for the purpose of Australian law. The effect of any future regulatory change on digital assets or an entity dealing in or holding digital assets is impossible to predict, but such change could be substantial and adverse to our financial returns.
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Results of Operations – Three months Ended June 30, 2022 compared to the three months ended June 30, 2021
| For the three months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Cryptocurrency mining revenue | 16,212,525 | 5,664,629 | ||||||
| Hosting Co Location revenue | 3,567,912 | - | ||||||
| Sale of crypto currency mining equipment | - | 280,038 | ||||||
| Total revenues | 19,780,437 | 5,944,667 | ||||||
| Less: Cost of revenues (excluding depreciation) | 14,359,072 | 294,140 | ||||||
| Gross profit | 5,421,365 | 5,650,527 | ||||||
| Selling, general and administrative | 9,431,088 | 3,697,217 | ||||||
| Share based payments | 936,235 | 5,559,495 | ||||||
| Depreciation and amortization | 16,023,817 | 2,533,242 | ||||||
| Total operating expenses | 26,391,140 | 11,789,954 | ||||||
| Change in fair value of derivative | 17,714,357 | - | ||||||
| Loss from operations | (3,255,418 | ) | (6,139,427 | ) | ||||
| Non-operating income/(expense): | ||||||||
| Gains / (losses) on foreign currency transactions | 1,657,055 | (60,747 | ) | |||||
| Interest expense | (1,565,040 | ) | (464,039 | ) | ||||
| Impairment of financial assets | (1,107,197 | ) | - | |||||
| Other income | 1,864,968 | 315,353 | ||||||
| Loss before income taxes | (2,405,632 | ) | (6,348,860 | ) | ||||
| Income tax expense | - | - | ||||||
| Net Loss | (2,405,632 | ) | (6,348,860 | ) | ||||
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Revenues
Cryptocurrency mining revenues from production for the three months ended June 30, 2022 and 2021 were $16.21 million and $5.66 million respectively. This represented an increase of $10.55 million or 186% over the period. The increase in mining revenue for the period was primarily attributable to an increase in the total Bitcoin produced. Bitcoin produced totaled 489.60 in 2022 compared with 127.0 in the 2021 period, or an increase of 286% of Bitcoin produced over the respective period.
Hosting co-location revenue for the three months ended June 30, 2022 and 2021 were $3.57 million and $nil respectively. This increase is due to there being no co-location revenue in the prior period because this service was not offered at that time.
Sales of crypto currency mining equipment for the three months ended June 30, 2022, were $nil million and $0.28 million respectively.
Operating Cost and Expenses
Our operating costs and expenses include cost of revenues; selling, general and administrative expenses; share based payments; and depreciation and amortization.
Cost of revenues.
Our cost of revenue consists primarily of: direct power costs related to cryptocurrency mining, and cost of mining equipment sold.
Cost of revenues for the three months ended June 30, 2022 and 2021 were $14.36 million and $0.29 million, respectively. The increase in cost of revenue was primarily attributable to: an increase in power costs, and increased deployment of cryptocurrency mining hardware. Included in our cost of revenues is any costs associated with offsetting carbon emissions.
Selling, general and administrative.
Our selling, general and administrative expenses consist primarily of professional and management fees relating to: accounting, payroll, audit, and legal; equipment repairs; marketing; consultant fees and general office expenses.
Selling, general and administrative expenses for the three months ended June 30, 2022 and 2021 were $9.43 million and $3.70 million respectively. The increase in selling, general and administrative expenses were attributable to a number of factors; payroll expenses increased by $3.34 million due to an increase in employee numbers during the year; property tax increase of $1.29 million, equipment repair costs increased by $0.80 million; marketing costs increased by $0.50 million and operating lease expense increased by $0.43 million due to the new lease agreements entered into during the period.
Share based payments.
Share based payments expenses for the three months ended June 30, 2022 and 2021 were $0.94 million and $5.56 million respectively. In the three months ended June 30, 2022, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $0.50 million and $0.4 million in relation to long-term incentives for the Company’s leadership team. The prior period contained a $5.53 million fair value modification to warrants issued.
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Depreciation and amortization.
Depreciation consists primarily of depreciation of cryptocurrency mining hardware and MDC equipment.
Depreciation and amortization for the three months ended June 30, 2022 and 2021 were $16.02 million and $2.53 million, respectively. The increase is primarily attributable to new machines and MDCs which are being procured and have come into the ownership of the Company and the application of the diminishing value method, resulting in a higher depreciation expense in the initial months of mining equipment operation.
Change in fair value of derivative
During the three months ended June 30, 2022, a derivative asset of $17.71 million was recorded for our Power Supply Agreement with Energy Harbor LLC, this is measured at fair value.
Non-operating expense
Non-operating expenses consist primarily of interest expense and impairment of equity accounted investment.
Interest expense increased by $1.10 million attributable to the interest costs charged on the loans taken out with Foundry Digital LLC, and Marshall Investments MIG Pty Ltd during the year ended December 2021 and Celsius Mining LLC during the 6 month period ending June 30, 2022.
There was an impairment of financial assets in relation to the equity accounted investment Cosmos Asset Management Pty Ltd of $1.11 million during the three months ended June 30, 2022.
Non-operating income
Non-operating income consists primarily of changes in fair value of derivative assets, unrealized losses on foreign currency remeasurement and other income.
During the three months ended June 30, 2022, the realized and unrealized gain on foreign currency transactions was $1.66 million, and for the three months ended June 30, 2021 there was a loss of $0.06 million.
During the three months ended June 30, 2022, there was other income recognized which mainly consisted of the license of our intellectual property of $1.15 million and $0.53 million for curtailment income. The license of our intellectual property relates to the future sale of equipment to TDI, combined with consulting and advisory services to enable TDI to build a facility in Tasmania, Australia.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss of $2.12 million for the three months ended June 30, 2022, compared to a net loss of $6.24 million for the three months ended June 30, 2021.
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Results of Operations – Six months Ended June 30, 2022 compared to the six months ended June 30, 2021
| For the six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Cryptocurrency mining revenue | 34,996,368 | 10,878,255 | ||||||
| Hosting Co Location revenue | 4,116,860 | - | ||||||
| Sale of crypto currency mining equipment | 91,545 | 2,157,651 | ||||||
| Total revenues | 39,204,773 | 13,035,906 | ||||||
| Less: Cost of revenues (excluding depreciation) | 22,771,433 | 2,666,921 | ||||||
| Gross profit | 16,433,340 | 10,368,985 | ||||||
| Selling, general and administrative | 15,908,034 | 6,329,180 | ||||||
| LO2A write backs | - | 23,963,050 | ||||||
| Share based payments | 1,326,844 | 20,354,897 | ||||||
| Depreciation and amortization | 29,826,849 | 3,848,142 | ||||||
| Total operating expenses | 47,061,727 | 54,495,269 | ||||||
| Change in fair value of derivative | 17,714,357 | - | ||||||
| Loss from operations | (12,914,030 | ) | (44,126,284 | ) | ||||
| Non-operating income/(expense): | ||||||||
| Gains on foreign currency transactions | 957,818 | (722,425 | ) | |||||
| Interest expense | (2,801,713 | ) | (714,701 | ) | ||||
| Impairment of financial assets | (1,107,197 | ) | - | |||||
| Other income | 1,889,415 | 694,480 | ||||||
| Loss before income taxes | (13,975,707 | ) | (44,868,930 | ) | ||||
| Income tax expense | - | - | ||||||
| Net Loss | (13,975,707 | ) | (44,868,930 | ) | ||||
Revenues
Cryptocurrency mining revenues from production for the six months ended June 30, 2022 and 2021 were $35.0 million and $10.88 million respectively. This represented an increase of $24.12 million or 222% over the period. The increase in mining revenue for the period was primarily attributable to an increase in the total Bitcoin produced. Bitcoin produced totaled 948.27 in the six months ended June 30, 2022 compared with 250.22 in the six months ended June 30, 2021, or an increase of 279% of Bitcoin produced over the respective period.
Hosting co-location revenue for the six months ended June 30, 2022 and 2021 were $4.12 million and $nil respectively. This increase is due to there being no co-location revenue in the prior period because this service was not offered at that time.
Sales of crypto currency mining equipment for the six months ended June 30, 2022, were $0.09 million and $2.16 million respectively.
Operating Cost and Expenses
Our operating costs and expenses include cost of revenues; selling, general and administrative expenses; share based payments; and depreciation and amortization.
Cost of revenues.
Our cost of revenue consists primarily of: direct power costs related to cryptocurrency mining, and cost of mining equipment sold.
Cost of revenues for the six months ended June 30, 2022 and 2021 were $22.77 million and $2.67 million, respectively. The increase in cost of revenue was primarily attributable to: an increase in power costs, increase in the deployed operations of cryptocurrency mining hardware. Included in our cost of revenues is any costs associated with offsetting carbon emissions.
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Selling, general and administrative.
Our selling, general and administrative expenses consist primarily of professional and management fees relating to: accounting, payroll, audit, and legal; equipment repairs; marketing; consultant fees and general office expenses.
Selling, general and administrative expenses for the six months ended June 30, 2022 and 2021 were $15.91 million and $6.33 million respectively. The increase in selling, general and administrative expenses were attributable to a number of factors; payroll expenses increased by $5.12 million due to an increase in employee numbers during the year; equipment repair costs increased by $1.90 million; property tax increased by $1.33 million; consultant costs increased by $0.50 million; marketing costs increased by $0.91 million and operating lease expense increased by $0.80 million due to the new lease agreements entered into during the period.
Share based payments.
Share based payments expenses for the six months ended June 30, 2022 and 2021 were $1.32 million and $20.35 respectively. In the six months ended June 30, 2022, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $0.67 million and $0.57 million in relation to long-term incentives for the Company’s leadership team. The prior period contained a $5.53 million fair value modification to warrants issued, another $6.18 million warrants were issued, and $8.58 million share-based payments were made under an Incentive Compensation Program in relation to the Bid Implementation Agreement.
Depreciation and amortization.
Depreciation consists primarily of depreciation of cryptocurrency mining hardware and MDC equipment.
Depreciation and amortization for the six months ended June 30, 2022 and 2021 were $29.83 million and $3.85 million, respectively. The increase is primarily attributable to new machines and MDCs which are being procured and have come into the ownership of the Company and the application of the diminishing value method, resulting in a higher depreciation expense in the initial months of mining equipment operation.
Change in fair value of derivative
During the six months ended June 30, 2022, a derivative asset of $17.71 million was recorded for our Power Supply Agreement with Energy Harbor LLC, this is measured at fair value.
Non-operating expense
Non-operating expenses consist primarily of interest expense and impairment of equity accounted investment.
Interest expense increased by $2.09 million attributable to the interest costs charged on the loans taken out with Foundry Digital LLC, Marshall Investments MIG Pty Ltd during the year ended December 2021, and Celsius Mining LLC during the 6 month period ending June 30, 2022.
There was an impairment of financial assets in relation to the equity accounted investment Cosmos Asset Management Pty Ltd of $1.11 million during the six months to June 30, 2022.
Non-operating income
Non-operating income consist primarily of unrealized losses on foreign currency remeasurement and other income.
During the six months ended June 30, 2022, the realized and unrealized gain on foreign currency transactions were $0.96 million, and for the six months ended June 30, 2021 there was a loss of $0.72 million.
During the three months ended June 30, 2022, there was other income recognized which mainly consisted of the sale of our intellectual property of $1.15 million and $0.53 million for curtailment income.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss of $13.45 million for the six months ended June 30, 2022, compared to a net loss of $44.80 million for the six months ended June 30, 2021.
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Liquidity and Capital Resources
General
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. For the six month period ended June 30, 2022, we financed our operations primarily through:
| 1. | Net cash provided by operating activities of $33.15 million; | |
| 2. | On October 15, 2021, an expansion of the Equipment Finance and Security Agreement was entered into with Foundry Digital LLC (“Foundry”) to purchase an additional 2000 Whatsminers M30’s delivered in October 2021. In total $13,185,062 was borrowed from Foundry, of which $4,914,329 is owed at June 30, 2022; | |
| 3. | On December 9, 2021, MIG No.1 Pty Ltd entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd (“Marshall”) with a total loan facility of AUD$20 million. Principal repayments will begin in January 2023. | |
| 4. | On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement with Celsius Mining LLC, in connection with this agreement, Celsius Mining loaned Luna Squares LLC a principal amount of US$20,000,000, for the purpose of funding the infrastructure required to meet the obligations of the Co-Location Agreement. The Secured Promissory Note evidencing this loan accrues interest daily at rate of 12% per annum. Luna Squares LLC is required to amortize the loan at a rate of 15% per quarter, with principal repayments starting in the third quarter following the closing. This Secured Promissory Note has a maturity date of August 23, 2023. |
During the six months ending June 30, 2022 we repaid $6.2 million of payments against the historical facilities provided by Foundry.
We believe our working capital requirements will continue to be funded through a combination of the cash we expect to generate from future operations, our existing funds, external debt facilities available to us and further issuances of shares. These are expected to be adequate to fund our operations over the next twelve months. In addition, the Company has access to equity financing through the ATM offering facility entered in May 2022. For our business to grow it is expected we will continue investing in mining equipment, we are likely to require additional capital in either the short-term or long-term.
Working Capital and Cash Flows
As of June 30, 2022, and December 31, 2021, we had cash and cash equivalents balance of $2.49 million and $5.47 million in cash and cash equivalents, respectively.
As of June 30, 2022, and December 31, 2021, our trade receivables balance was $4.21 million and $5.61 million respectively.
As of June 30, 2022, we had $19.47 million of outstanding short-term borrowings, and as of December 31, 2021, we had $11.10 million of short-term borrowings. The short-term borrowings as of June 30, 2022, relate to the acquisition of cryptocurrency mining equipment under the Foundry agreements, and also to the secured loan facilities with Celsius Mining LLC and Marshall Investments MIG Pty Ltd. As of June 30, 2022, and as of December 31, 2021, we had $19.40 million and $7.64 million respectively of outstanding long-term borrowings. The long-term borrowings as of June 30, 2022, primarily relate to the secured loan facilities with Celsius Mining LLC and Marshall Investments MIG Pty Ltd.
As of June 30, 2022, we had negative working capital of $55.96 million and as at December 31, 2021, we had negative working capital of $8.63 million. The decrease in working capital was primarily attributable to an increase in the Company’s short term and long-term borrowings during 2022, as compared to 2021.
The following table presents the major components of net cash flows (used in) provided by operating, investing and financing activities for the six months ending June 30, 2022 and 2021:
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by operating activities | $ | 33,146,960 | $ | 7,664,467 | ||||
| Net cash used in investing activities | $ | (53,155,193 | ) | $ | (26,065,630 | ) | ||
| Net cash provided by financing activities | $ | 19,513,738 | $ | (21,250,788 | ) | |||
For the six months ended June 30, 2022, net cash provided by operating activities was $33,146,960 and for the six months ended June 30, 2021, net cash provided by operating activities was $7,664,467. The increase in net cash provided by operating activities was primarily attributable to timing differences in trade and other receivables and trade and other payables.
For the six months ended June 30, 2022 and 2021, net cash used in investing activities was $53,155,193 and $26,065,630, respectively. The increase in net cash used in investing activities was primarily attributable to the increase in the acquisition of cryptocurrency mining equipment.
For the six months ended June 30, 2022 and 2021, net cash provided by financing activities was $19,513,738 and $21,250,788, respectively. The cash provided by financing activities during June 30, 2022 was primarily attributable to proceeds from borrowings.
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Financial condition
As at June 30, 2022 had net current liabilities of $55.96 million and had an accumulated deficit of $82.95 million. The Company’s cash position at June 30, 2022, was $2.49 million. For the six month period ending June 30, 2022, the Company incurred a loss after tax of $13.98 million.
Our primary requirements for liquidity and capital are working capital, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we further develop and grow our business. Our principal sources of liquidity have been and are expected to be our cash and cash equivalents, external debt facilities available to us and further issuances of shares. In addition, Mawson has an active At The Market (ATM) available for sale of shares of Common Stock having an aggregate offering price of up to $100.0 million. These are expected to be adequate to fund our operations over the next twelve months.
In the event that we require additional capital to respond to competitive pressure, market dynamics, new technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances in either the short-term or long-term, we may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business model and to respond to business challenges could be significantly limited. In particular, the widespread COVID-19 pandemic, including rising inflation and interest rates, and the conflict between Russia and Ukraine have resulted in, and may continue to result in, significant disruption and volatility in the global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
Non-GAAP Financial Measures
The Company utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing its overall business performance, for making operating decisions and for forecasting and planning future periods. The Company considers the use of non-GAAP financial measures helpful in assessing its current financial performance, ongoing operations and prospects for the future. While the Company uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance, the Company does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures. Consistent with this approach, the Company believes that disclosing non-GAAP financial measures to the readers of its financial information provides such readers with useful supplemental data that, while not a substitute for GAAP financial measures, allows for greater transparency in the review of its financial and operational performance. Investors are cautioned that there are inherent limitations associated with the use non-GAAP financial measures as an analytical tool. In particular, non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and many of the adjustments to the GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the company’s financial results for the foreseeable future. In addition, other companies, including other companies in the Company’s industry, may calculate non-GAAP financial measures differently than the Company does, limiting their usefulness as a comparative tool.
The Company is providing supplemental financial measures for (i) non-GAAP adjusted earnings before interest, taxes, depreciation and amortization, or (“adjusted EBITDA”) that excludes the impact of interest, taxes, depreciation, amortization, share-based compensation expense, LO2A write-back, unrealized gains/losses on share of associates, and certain non-recurring expenses. We believe that adjusted EBITDA is useful to investors in comparing our performance across reporting periods on a consistent basis.
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Reconciliation of non-GAAP adjusted EBITDA: | ||||||||||||||||
| Net loss: | (2,405,632 | ) | (6,348,860 | ) | (13,975,707 | ) | (44,868,930 | ) | ||||||||
| Impairment of financial assets | 1,107,197 | - | 1,107,197 | - | ||||||||||||
| Depreciation and amortization | 16,023,817 | 2,533,242 | 29,826,849 | 3,848,142 | ||||||||||||
| Share based payments | 936,235 | 5,559,495 | 1,326,844 | 20,354,897 | ||||||||||||
| Unrealized and realized losses/(gain) | (1,657,055 | ) | 60,747 | (957,818 | ) | 722,425 | ||||||||||
| Other non-operating revenue | (1,864,968 | ) | (315,353 | ) | (1,889,415 | ) | (694,480 | ) | ||||||||
| Other non-operating expenses | 1,565,040 | 464,039 | 2,801,713 | 714,701 | ||||||||||||
| LO2A write-back | - | - | - | 23,963,050 | ||||||||||||
| EBITDA (non-GAAP) | 13,704,634 | 1,953,310 | 18,239,663 | 4,039,805 | ||||||||||||
Critical accounting estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. The Company has considered the following to be significant estimates made by management, including but not limited to:
Going concern assumption- Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Please see NOTE 1-GENERAL to the consolidated condensed financial statements in Item 1 of PART I of this Quarterly Report on Form 10-Q for more information about this assumption.
Long-lived assets- Management reviews long-lived assets for impairment whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include property and equipment and operating lease right-of-use assets. A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the estimated fair value of the asset.
Stock based compensation- Management used Black-Scholes to evaluate our awards and will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks
As a smaller reporting company, the Company has elected not to provide the disclosure required by this item.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e)) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2022, due to the material weaknesses in our internal control over financial reporting described below. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at a level of reasonable assurance because management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.
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.
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.
Significant Reliance on Key Individuals. There is inadequate segregation of duties in place related to our financial reporting and other management review and oversight procedures due to the lack of sufficient accounting personnel. This is not inconsistent with similar small fast-growing organizations. This gives rise to the risk of lack of ability to react in a timely manner to operations issues and meet increased US GAAP/PCAOB/SOX/SEC registrant requirements. In addition, this poses the risk that compliance and other reporting obligations are not adequately dealt with.
Controls over the financial statement close and reporting process. Controls were not adequately designed in the financial statement close and reporting process. This includes controls related to complex and judgmental accounting transactions including business acquisitions, manual journal entries, account reconciliations and financial statement disclosures.
Information and Technology Controls. There are control deficiencies related to information technology (“IT”) general controls that aggregate into a material weakness. The inadequate design of these IT general and application controls prevent the system from providing complete and accurate information consistent with financial reporting objectives. Deficiencies identified include lack of controls over access to programs and data, program changes, program development, program changes and general IT controls.
Data from third parties. The Company did not properly design or implement controls to ensure that data received from third parties is complete and accurate. Such data is relied on by the Company in determining amounts pertaining to revenue and cryptocurrency assets is complete and accurate.
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Fixed asset verification. The Company did not properly execute its designed controls around physical asset verification at US mining sites. Together with system limitations, restricting tracking of fixed asset movements, there is a risk around the existence of fixed assets. The root cause is the lack of sufficient capable personnel to perform physical asset inspections, combined with system limitations.
Notwithstanding the identified material weaknesses and management’s assessment that our internal control over financial reporting was not effective as of June 30, 2022, management believes that the consolidated financial statements included in this quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles. We rely on the assistance of outside advisors with expertise in these matters in preparing the financial statements.
Remediation
Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. Our management continues to work to improve its controls related to our material weaknesses. With the oversight of senior management and our audit committee, we have begun taking steps to remediate the underlying causes of the identified material weaknesses, primarily through the performance of a risk assessment process; the development and implementation of formal, documented policies and procedures, improved processes and control activities (including an assessment of the segregation of duties); as well as the hiring of additional finance personnel for specific roles such as financial reporting. During the first and second quarter of 2022, we made the following changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
| ● | We have performed a risk assessment and designed controls for all significant business processes. We have continued implementation of entity level and process level controls with respect to the preparation and review of our consolidated financial statements as well as transactional level controls over all significant business processes and IT. We have developed process level controls relating to the review of manually prepared analyses and supporting information used to prepare our consolidated financial statements. We are in the process of implementing and validating these controls. At this time, we cannot state whether these controls will prove to be effective. Using criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control, we have developed a plan to assess the effectiveness of the internal control structure and procedures as at the end of the fiscal year. |
The material weaknesses in our internal control over financial reporting will not be considered remediated until other information technology general controls and process-level controls operate for a sufficient period of time and can be tested and concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the identified material weaknesses, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.
Changes in internal control over financial reporting
Except for the remedial measures described above, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not, and have not been in the recent past, a party to any legal proceedings which may have or have had in the recent past significant effects on our financial position or profitability. However, we have been in the past, and may be from time to time in the future, named as a defendant in certain routine litigation incidental to our business.
Item 1A. Risk Factors
The Company’s risk factors were disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. In addition, the Company wishes to disclose the following risk factors.
Listing on The Nasdaq Capital Market (“Nasdaq”)
Although our common stock is currently listed on Nasdaq, we may not be able to continue to meet Nasdaq’s minimum listing requirements or those of any other national exchange. If we are unable to maintain listing on Nasdaq or if a liquid market for our common stock does not develop or is not sustained, our common stock may remain thinly traded. The Listing Rules of Nasdaq require listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, we should fail to maintain compliance with these listing standards and Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur, each of which could have a material adverse effect on our shareholders:
| ● | The liquidity of our common stock; | |
| ● | The market price of our common stock; | |
| ● | Our ability to obtain financing for the continuation of our operations; | |
| ● | The number of investors that will consider investing in our common stock; | |
| ● | The number of market makers in our common stock; | |
| ● | The availability of information concerning the trading prices and volume of our common stock; and | |
| ● | The number of broker-dealers willing to execute trades in our common stock. |
The Cryptocurrency Industry has recently experienced a downturn
As of June 30, 2022, the price of Bitcoin was down by over 50% from the beginning of the year and many businesses in this industry have been impacted by this downturn. The fall in the Bitcoin price directly affects our ability to generate revenue. Further, volatility in energy prices has meant that the major input cost to generate Bitcoin has increased. In July of 2022, Celsius Networks, LLC and Celsius Mining LLC, filed for Chapter 11 bankruptcy. Celsius Mining LLC is one of our significant hosting customers and its failure to pay (or pay timely) amounts it owes to us when due could have a material adverse effect on our financial situation.
Inflation in the global economy could negatively impact our business and results of operations.
General inflation in the United States and around the world has risen to levels not experienced in recent decades. General inflation, including rising prices for energy, metals, components, and other inputs as well as rising wages negatively impact our business by increasing our operating costs. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations, and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.
Our business could be harmed by prolonged power and internet outages, shortages, or capacity constraints.
Our operations require a significant amount of electrical power and access to high-speed internet to be successful. If we are unable to secure sufficient electrical power, or if we lose internet access for a prolonged period, we may be required to reduce our operations or cease them altogether. If this occurs, our business and results of operations may be materially and adversely affected.
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We are subject to risks associated with our need for significant electrical power.
Our operations have required significant amounts of electrical power, and, as we continue to expand our mining fleet, we anticipate our demand for electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments.
Additionally, our operations could be materially adversely affected by prolonged power outages. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected.
We may need to raise additional capital to continue our operations and execute our business strategy.
We expect that we may incur net losses for the foreseeable future. Accordingly, our ability to continue as a going concern and execute our business strategy depends on our ability to raise additional capital through equity, debt or structured financings, collaborations and strategic alliances or other similar types of arrangements.
Our capital needs have depended on, and will continue to depend on, many factors that are highly variable and difficult to predict, including:
| ● | the rate of growth we choose to pursue; | |
| ● | the cost of energy; | |
| ● | the cost of key supplies, materials and equipment; and | |
| ● | the price of Bitcoin; |
At June 30, 2022, our cash and cash equivalents were approximately $2.50 million and our accumulated deficit was approximately $82.95 million. We incurred a net loss of approximately $13.98 million for the six-month period ended June 30, 2022. We may never become profitable. Based on some of our current operating plan estimates, we have sufficient cash to satisfy our working capital needs and other liquidity requirements over the next 12 months from the date of issuance of the accompanying consolidated financial statements. We may need to raise additional capital or significantly curtail our planned operations to remain a going concern.
Additional capital may not be available to us, or even if it is, the cost of such capital may be high. We may be forced to obtain additional capital when our stock price or trading volume or both are low, or when the general market for cryptocurrency companies is weak. Raising capital under any of these or similar scenarios, if we can raise any at all, may lead to significant dilution to our existing stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period ended June 30, 2022, in addition to those sales previously disclosed in our filings with the SEC, we have issued and sold the following securities without registration under the Securities Act:
On May 3, 2022, the Company issued 5,000 shares of its common stock to a service provider in exchange for $27,150 of services. The issuance of the common stock was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder because, among other things, the transaction did not involve a public offering, the investor was an accredited investor, the investor took the securities for investment and not resale and the Company took appropriate measures to restrict the transfer of the securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
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Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Mawson Infrastructure Group Inc. | ||
| Date: August 22, 2022 | By: | /s/ James Manning |
| James Manning, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 22, 2022 | By: | /s/ Ariel Sivikofsky |
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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