Big Digital Energy, Inc 10-K for FY2021
Big Digital Energy, Inc. (BGDE)
About this 10-K
Big Digital Energy, Inc filed this 10-K on March 21, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $43.86M
- up 885.9% from $4.45M a year earlier
- Net loss
- $45.46M
- compared with a net loss of $5.06M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ended:
For the transition period from _____________ to _____________
Commission File No.
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip code) | |
Registrant’s telephone number, including
area code:
Securities Registered pursuant to Section 12(b) of the Act:
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Securities Registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer: ☐ | Accelerated filer: ☐ |
| Smaller reporting company: | |
| Emerging growth company: |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
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has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $ million computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter.
As of March 15, 2022, there were
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with its Annual Stockholders’ Meeting to be held in 2022 are incorporated by reference into Part III of this Annual Report on Form 10-K. Only those portions of the definitive proxy statement that are specifically incorporated by reference herein shall constitute a part of this Annual Report on Form 10-K. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2021.
TABLE OF CONTENTS
i
INTRODUCTION
Throughout this Annual Report, unless otherwise designated, the terms “we”, “us”, “our”, the “Company”, “Mawson” and “our company” refer to Mawson Infrastructure Group, Inc., a Delaware corporation, and its consolidated subsidiaries (unless otherwise indicated).
All dollar amounts refer to U.S. dollars unless otherwise indicated.
On August 11, 2021, we effected a reverse stock split of our Common Stock at a ratio of one for ten (1:10) (the “Reverse Stock Split”). Unless otherwise indicated, all share and per share amounts included in this Annual Report reflect the effects of the Reverse Stock Split.
Statements made in this Annual Report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this Annual Report or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms, and the summary included herein is qualified by reference to the full text of the document which is incorporated by reference into this Annual Report.
Unless otherwise indicated, information contained in this Annual Report concerning our industry and the markets in which we operate, including our competitive position and market opportunity, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Item 1A “Risk Factors” below.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) 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. 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 United States Securities and Exchange Commission (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 factors summarized below.
This Annual 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” below. The risk factors included in this Annual Report 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, you are cautioned not to place undue reliance on such forward-looking statements. 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:
| ● | the fact that we have incurred operating losses and may continue to do so for the foreseeable future; |
| ● | that we may need to raise additional capital, to meet unexpected liabilities or accelerate growth in a competitive environment, and such capital raising may be costly or difficult to obtain and will dilute current stockholders’ ownership interests; | |
| ● | 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 to any digital asset network’s protocols and software; | |
| ● | any decrease in the incentive for Bitcoin mining; | |
| ● | 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 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; | |
| ● | 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; |
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| ● | 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. | |
| ● | competitive companies and technologies within our industry, and outside it (such as central bank digital currencies and quantum computing); and |
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Annual Report and are expressly qualified in their entirety by the cautionary statements included in this Annual Report. 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.
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PART I
ITEM 1. BUSINESS.
Overview
General
On December 30, 2020, Mawson (formerly known as Wize Pharma, Inc.) entered into the Bid Agreement (as amended) with Mawson AU. Under the Bid Agreement Mawson acquired all of the Shares of Mawson AU. This transaction closed on March 9, 2021. Shares of our common stock have been listed on The Nasdaq Capital Market since September 29, 2021.
Mawson is a ‘Digital Asset Infrastructure’ business. We own and operate facilities with modular data centers (MDCs).
Within the MDCs Mawson operates Application-Specific Integrated Circuit (“ASIC”) computers known as Miners. The Miners are focused on the process of digital mining, specifically for Bitcoin.
As of December 31, 2021
| Existing Operations Online | Order and Purchase Agreements | Cumulative Fleet Fully Deployed | ||||||||||
| Total miners online | 10,302 | - | 10,302 | |||||||||
| Total miners in Transit | - | 4,704 | 4,704 | |||||||||
| Total miners on order | - | 18,528 | 18,528 | |||||||||
| Total miners in storage | 5,691 | - | 5,691 | |||||||||
| Total miners | 15,993 | 23,232 | 39,225 | |||||||||
We continue to conduct research and development into our MDCs that we are actively testing in several configurations and locations to determine the best configuration for both ASICs and alternate computing uses, including both for use in Graphics Processing Units (GPU) systems and traditional central processing unit (CPU) based computing systems.
Our Products and Services
Digital Processing and Hosting Solutions (Mining)
Digital processing and mining of Bitcoins requires computing hardware and servers specific to the computing problem that a person is seeking to solve, referred to as a “Miner”. Each Miner or component thereof can be specifically specialized to perform a function better than other hardware for the purpose of maximizing the return from any specific processing task.
Mining hardware performs computational operations in support of the blockchain measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations. The original equipment used for mining Bitcoin utilized the Central Processing Unit (“CPU”) of a computer to mine various forms of cryptocurrency. Due to performance limitations, CPU mining was rapidly replaced by the Graphics Processing Unit (GPU), which offers significant performance advantages over CPUs. General purpose chipsets like CPUs and GPUs have since been replaced in the mining industry by ASIC chips. These ASIC chips are designed specifically to maximize the rate of hashing operations. Mawson only operates ASIC miners.
As Mawson increases its hashing power it increases its chance of solving a block and earning a cryptocurrency reward. As the global network has modernized and become more efficient, the hash rate required for solving a block (that is, the difficulty of solving a block) has increased, and therefore generally requires more electrical power. Increased use of electrical power increases the cost of solving a block and, therefore, the relative cost of mining a cryptocurrency. This increase in difficulty means that individual mining operations can go for periods of time without finding a block and earning any reward for their mining efforts.
For that reason, we have joined ‘mining pools’ (that is groups of other miners) to increase our chance of more regularly receiving Bitcoin rewards. A large group of miners with greater hashing power is more likely to earn a cryptocurrency reward. We then receive Bitcoin rewards on a pro rata basis based on total hashing capacity we contributed to the mining pool. This reduces the variance of our revenue generation.
Due to our strategy of investing in digital asset infrastructure, including entering into site leases, power purchase agreements and acquiring MDCs and other equipment necessary for facilities designed for mining Bitcoin, we are able to offer other businesses in the digital asset infrastructure industry the opportunity 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 power consumption). This kind of arrangement is known as ‘hosting’ or ‘co-location’.
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Mawson operate its own MDCs in two mining facilities in the U.S (Georgia and Pennsylvania) and one in Australia (New South Wales) on land that we have leased on long-term arrangements.
Mawson no longer focusses on its clinical stage biopharmaceutical business which was the focus when the Company was known as Wize Pharma, Inc.
Hash Rate and Network Hash Rate
Hash rate is a measure of the processing speed by a Miner for a specific cryptocurrency. Mawson’s hash rate is the sum total of its Miners’ hashrates. Similarly, the sum total of all Miners actively trying to solve a block in the Bitcoin network is known as the “Network Hashrate”. If Mawson’s proportion of the Network Hash Rate grows, then Mawson’s chance of solving a block on the Bitcoin’s blockchain should increase and, therefore, Mawson’s chance of earning a Bitcoin reward should increase, as compared to other mining competitors with relatively lower total hash rates.
If more competitors add hash rate to the Network Hash Rate, then Mawson must also increase its own hash rate if it wants to ensure that the amount of rewards it receives over time remains generally same. Mawson can increase its hash rate in a number of ways, including by acquiring more Miners, ensuring that as many of its Miners are online and operational at all times, and by increasing the hashing capability of its Miners (for example, by providing optimal operating conditions). By operating more Miners, Mawson will increase the amount of power it requires to operate the Miners, thus increasing its cost base. Mawson and its competitors have deployed increasingly sophisticated and efficient Miners in greater numbers, which has meant that older, less efficient Miners have become too inefficient to economically deploy, and have become redundant. The Network Hash Rate can also decline from time to time, which means that Mawson’s hash rate relative to the Network Hash Rate would increase, increasing the chance that Mawson will be rewarded with Bitcoin.
Mining Results
Our core revenue generating operation is the mining of Bitcoin. During the year we mined 808.88 Bitcoin giving rise to revenues totaling $38.45 million.
Liquidation policy
Mawson’s policy is to liquidate any mined Bitcoin within a reasonable time after receipt. Mawson does not hold any material amount of Bitcoin on its balance sheet. Mawson’s strategy is to operate as a mining operation, rather than a cryptocurrency investment company. This means that Mawson regularly liquidates its Bitcoin holdings for traditional fiat currency. Mawson has established relationships with several digital currency exchanges through which Mawson sells Bitcoin on a regular basis.
Factors Affecting Profitability
The main factors affecting Mawson’s profitability are (in no particular order):
| ● | The market price of Bitcoin; | |
| ● | The reward Mawson earns for its mining operations; | |
| ● | Changes in the Network Hash Rate (as described above); | |
| ● | Changes in the cost of hardware, such as Miners, containers, transformers; | |
| ● | The cost of land, or leases; and | |
| ● | The cost of power. |
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While Mawson takes steps to mitigate these risks, they cannot be avoided altogether. In particular, the market price of Bitcoin can be volatile, sometimes being subject to major changes in value in short time periods. It should also be noted that the reward for Bitcoin mining is scheduled to halve approximately every 4 years. This phenomenon, which is a feature of the Bitcoin protocol, is known as ‘halving’. The Bitcoin blockchain has undergone halving three times since its inception on November 28, 2012, July 9, 2016, and May 11, 2020. The original reward was 50 Bitcoin per block, but after the last halving the reward was reduced to its current level of 6.25 Bitcoin per block. The next halving for the Bitcoin blockchain is anticipated to occur in or around March 2024. This process will reoccur until the total amount of Bitcoin currency rewards issued reaches 21 million and the theoretical supply of new Bitcoin is exhausted, which is expected to occur in or around 2140. The value of Bitcoin has historically risen after each halving event, on a halving to halving basis.
Environment
Digital asset mining requires a large amount of computing power, which in turn requires a large amount of electricity. At Mawson we recognize the important role digital asset mining can play in supporting the growth of renewable or sustainable energy sources. We seek to power our operations with renewable or sustainable power and enter into arrangements where we may be paid in certain circumstances to reduce or cease our energy usage. In this way we can provide stability to the energy grid by reducing demand on renewable or sustainable energy at times of peak usage, or low supply.
To the extent we are unable to source renewable or sustainable sources of energy then Mawson seeks to offset its carbon footprint with the acquisition of carbon credits. Mawson is currently in the process of assessing its 2021 carbon footprint. Mawson offset its 2020 carbon footprint.
Other products and services
Mawson is a digital asset infrastructure specialist and provides that infrastructure to other cryptocurrency miners, along with maintenance services to operate other miners’ equipment in our facilities. As at December 31, 2021, Mawson had 5 hosting customers. Hosting customers installed capacity as at December 31, 2021 was 2MW.
We have an interest in Cosmos Asset Management Pty Ltd (“Cosmos Asset Management “), an Australia based crypto investment manager. Cosmos Asset Management has listed one unlisted crypto related fund and one listed crypto related exchange traded fund on an Australian exchange (Cosmos Global Digital Miners Access ETF), and it is seeking to list more in the future.
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As of December 31, 2021, Cosmos Asset Management’s funds under management were approximately AUD$8.65 million.
We have a circa 20.06% interest in an Australian filecoin mining business, Distributed Storage Solutions Pty Ltd (“DSS”). Filecoin is an open-source, public cryptocurrency and digital payment system. Filecoins may be used to rent unused hard drive space.
Research and Development
Our research and development, or R&D, program is focused on researching and exploring opportunities to improve the efficiency of hardware and software and MDC’s, including the development of technology to enable us to operate liquid immersion cooled MDCs. We have also begun research into the software element of computing and are in the initial stages of researching a range of programs to improve efficiency.
We are conducting research in both Australia and the United States. By conducting research in different countries, we are able to research improvements in efficiencies across varying climates. We have partnered with leading design firms in both Australia and the United States to ensure our MDCs can be efficiently deployed in different climates. Using global designers and vendors provides us the opportunity to seek to enhance the design to ensure success of the technology in multiple jurisdictions, climates and scenarios.
Suppliers
Mawson engages a range of suppliers for access to hardware and software required to mine Bitcoin. This includes the manufacturers of the Miners, MDCs and transformers. Mawson has several power suppliers with which it has Power Purchase Agreements (“PPA”) that set out the terms and duration of the supply or power.
Government Regulation
Government regulation of blockchain and cryptocurrency is being actively considered by the United States (federal and state) and international governments, and their agencies and regulatory bodies.
Regulations may substantially change in the future and it is presently not possible to know how regulations will apply to our businesses, or when they will be effective. As the regulatory and legal environment evolves, we may become subject to new laws, further regulation by the SEC and other agencies, which may affect our mining and other activities. For instance, various bills have also been proposed in Congress related to our business, which may be adopted and have an impact on us. For additional discussion regarding the potential risks existing and future regulation pose to our business, see the Section entitled “Risk Factors” herein.
Competition
The cryptocurrency industry, in particulate Bitcoin mining, is dynamic and global. The Bitcoin mining network is made up of a variety of competitors, from individual ’sub-scale’ hobbyists to large, listed mining operations. We compete with them directly for the acquisition of new Miners, and raising capital. Bitcoin miners, including Mawson, also compete with more traditional industries, for example, when obtaining the lowest cost of sustainable electricity, or access to sites with reliable sources of power. Many mining operations are not publicly operated, and therefore data is not readily available.
Listed companies operating comparable businesses include:
| ● | Core Scientific, Inc. | |
| ● | Marathon Digital Holdings, Inc. | |
| ● | Riot Blockchain, Inc. | |
| ● | Hut 8 Mining Corp. | |
| ● | TeraWulf Inc. | |
| ● | HIVE Blockchain Technologies Ltd | |
| ● | Bitfarms Ltd | |
| ● | Iris Energy Limited |
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| ● | Cipher Mining Inc. | |
| ● | Stronghold Digital Mining, Inc. | |
| ● | Argo Blockchain plc | |
| ● | Greenidge Generation Holdings Inc |
Human Capital
Our employees are critical to our success. As of February 28, 2022, we had 40 employees and contractors based in the U.S. and Australia. We further rely on the extensive expertise of our external advisers, including legal, audit, financial and compliance consultants, who may be engaged on an hourly basis, or on a project basis.
We want to attract a committed and talented workforce. We believe that our ability to attract and retain such a workforce is dependent on our ability to foster an environment that is sustainably safe, respectful, fair and inclusive of everyone and promotes diversity, equity and inclusion.
We are committed to providing a safe workplace for our employees. The Company identifies potential risks associated with workplace activities in order to develop measures to mitigate possible hazards. The Company has taken additional measures during the COVID-19 pandemic, including providing information resources, testing, and personal protective equipment.
ESG
There has been recent commentary about cryptocurrency mining and its impact on the environment. Governments and related government bodies around the world are introducing or contemplating legislative and regulatory changes related to cryptocurrency mining in response to a variety of pressures.
Any legislative changes regarding climate change could add significant burden and costs to our business, including costs related to making our energy consumption more efficient and lower impact on the environment, environmental monitoring and reporting, and other costs to comply with such changes. Further, there could be reputational damage to our business caused by increased negative publicity surrounding cryptocurrency and the apparent effects on the environment.
Corporate Information
On March 17, 2021, we changed our name to Mawson Infrastructure Group Inc. from Wize Pharma, Inc in connection with our acquisition of Mawson Infrastructure Group Pty Ltd (then known as Cosmos Capital Limited), a digital infrastructure provider based in Sydney, Australia.
Our head office is located at Level 5, 97 Pacific Highway, North Sydney New South Wales 2060. Our contact email is info@mawsoninc.com, and our website is www.mawsoninc.com.
Shares of our common stock have been listed on The Nasdaq Capital Market since September 29, 2021.
Available Information
Our investor relations website is available at mawsoninc.com. The information on, or that may be accessed from, our website is not a part of this Annual Report. Investors can find a range of information about us there. Available on this website, free of charge, are the reports that we file or furnish with the Securities and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics), and select press releases and other relevant information.
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ITEM 1A. RISK FACTORS.
RISK FACTORS
An investment in our securities involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this Annual Report, including the matters addressed in the section entitled “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS” beginning on page iii of this Annual Report, before making an investment decision. Our business, prospects, financial condition, and results of operations may be materially and adversely affected as a result of any of the following risks. The value of our securities could decline as a result of any of these risks. You could lose all or part of your investment in our securities. Some of the statements in “RISK FACTORS” are forward-looking statements. The following risk factors are not the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business, prospects, financial condition, and results of operations and it is not possible to predict all risk factors, nor can we assess the impact of all factors on us or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in or implied by any forward-looking statements.
Risks Relating to Our Business and Management
We have incurred operating losses since inception.
During the time we have operated we have incurred net losses. We expect to continue to incur losses for the near future, and these losses will likely increase as we pursue our growth strategy. Even with the change of our primary business away from our historical clinical-stage biopharmaceutical business to the digital asset infrastructure business, no certainty exists that we will become profitable and, even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. The future expansion of our business likely requires substantial capital costs and expenses and there can be no assurance that subsequent operational objectives will be achieved. If we do not achieve our operational objectives, and if we do not generate cash flow and income, our financial performance and long-term viability may be materially and adversely affected. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.
We may be unable to raise additional capital needed to grow our business.
We will likely continue to operate at a loss, at least until our business strategy is implemented, or if cryptocurrency prices decline, and there may be a need to raise additional capital to expand our operations and pursue our growth strategies, including potential acquisitions of complementary businesses, and to respond to competitive pressures or unanticipated working capital requirements. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations. If we raise additional funds through one or more equity financings, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. Furthermore, if we engage in additional debt financing, the holders of debt likely would have priority over the holders of common stock on order of payment preference. We may be required to accept terms that restrict our ability to incur additional indebtedness or take other actions including terms that require us to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders.
We or our suppliers may not be able to procure or repair hardware that is required in our operations.
COVID-19 and other geo-political events, including the closing of the Suez Canal, in recent times have caused multiple supply chain disruptions for companies globally. Our business relies on certain hardware such as the Miners, containers in which to store the Miners, transformers for electricity supply, and cooling technologies. If we are unable to procure such hardware, or replacement parts (at commercial prices or at all), or they are delayed, our operations may be adversely affected which would likely have a material adverse effect on our business, financial condition, results of operations and prospects. If the manufacturers of such hardware are unable to obtain materials or components themselves, they may experience manufacturing delays or have to cease manufacturing altogether. Supply chain disruptions may also occur from time to time due to a range of factors beyond our control, including, but not limited to, increased costs of labor, freight costs and raw material prices along with a shortage of qualified workers.
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There are a small number of major suppliers of Miners globally, and Miner manufacturing is located primarily in China. If we were unable to source Miners from those suppliers (for example due to overwhelming global demand for Miners) at a commercial price, or at all, this would have a materially adverse impact on our business, financial condition, results of operations and prospects. Even if the suppliers have agreed to supply us with miners, they may fail to supply the Miners due to their inability to manufacture sufficient Miners due to a shortage of components or resources such as semiconductors, a default, insolvency, a change in control, or change of laws (including export/import restrictions, quotas or tariffs). In addition, the terms of sale with the Miner suppliers are often in favor of the suppliers and may leave us with few or no commercial remedies.
The trade policies of the U.S. and China in particular are dynamic at the moment, and trade policies such as export/import restrictions, quotas or tariffs, by either of these countries, or others, may reduce the ability of our suppliers to supply use with Miners, or create a shortage or lack of components necessary for their manufacture. The government of the People’s Republic of China in particular exerts a high level of influence and control over its economy and businesses (private and state owned). There have been numerous examples of government decisions, laws and intervention into particular industries in recent times, including a ban on Bitcoin mining in China itself, which has been enforced. Uncertainties due to evolving laws and regulations could also impede the ability of a China-based company, to obtain or maintain permits or licenses required to conduct business in China. Changes in any of these policies, laws and regulations, or the interpretations thereof, as they relate to the mining hardware suppliers, could have a negative impact on our business.
Additionally, if our electricity suppliers are negatively affected by the international supply chain issues they may not be able to maintain or grow their facilities, and may breach their commitments to supply us with the contracted power, or we may be unable to source extra power in the future to enable our growth. This would likely have a material adverse effect on our business, financial condition, results of operations and prospects.
Such supply chain disruptions have the potential to cause material impacts to our operating performance and financial position if the delivery of equipment for our facilities is delayed.
Mining equipment is prone to breakdown or fail.
Miners and related mining equipment used to mine digital assets are prone to breakdown and may not function at any given time. Any downtime of a significant number of our Miners and mining equipment will have a direct impact on us as they would not be performing their role, that is, solving hashes and earning a block reward. This could occur during an accident on site, or during transportation of a large number of Miners. In addition, a failure of any critical single piece of equipment may represent a single point of failure which could have widespread impacts. An example of this would be a fire within a substation resulting in a total power outage for a mining facility for a period until the substation was rebuilt. Such widespread mechanical issues or critical failure for any material duration would therefore decrease our revenue.
Any long-term outage or limitation of the internet connection at our sites could materially impact our operations and financial performance.
A secure, reliable and fast internet connection is required for our Miners to validate and verify Bitcoin transactions, secure transaction blocks and add those transaction blocks to the Bitcoin blockchain. Any extended downtime, bandwidth limitations or other constraints may reduce our ability to use our Miners support transactions on the Bitcoin network, and therefore reduce our ability to earn block rewards. The effects of any such events could have a material adverse effect on our operating results and financial condition.
Access to reliable electricity sources at reasonable prices is critical to our growth and profitability.
Digital mining consumes electricity to power Miners, therefore electricity costs are a major factor which will determine whether our digital mining activities are profitable and viable. If we are unable to source and enter into agreements for the supply and purchase of electricity, or if we are unable to continue to receive the electricity supplies we have already secured (for example we are unable to re-contract an expiring arrangement), this will reduce our capacity to conduct and grow the number of Miners we can operate, and therefore the amount of revenue we can generate.
Certain economic, environmental, and regulatory events or changes beyond our control, including acts of God such as natural disasters, climate change, wars, sabotage, epidemics, riots, loss or malfunctions of utilities, labor disputes, which may be transitory or chronic, could occur to restrict our access to electricity, or drive up the costs of electricity to a point that some or all of our planned, future or existing operations are uncommercial, which may lead to us being unable to grow our operations, or reducing, suspending or ceasing our Mining operations. The price of electricity available in the market more generally is dependent on numerous factors such as the types of generation, regulatory environment, electricity market structure, supply/demand balances. A recent example is the risk that war in Ukraine and sanctions against Russia may increase the global energy prices due to a reduction in the supply of oil and gas from Russia.
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Our Modular Data Centers require developed land, preferably close to sustainable and reasonably priced electricity sources. If we are unable to acquire rights to use such land, or lose the rights to land we currently occupy, this would likely mean that we would lose access to the relevant supply of electricity. A lack of access to the electricity would significantly impact the profitability and viability of our business.
Cyber-security threats pose a challenge to the safekeeping of our digital assets, and a risk of reputational damage.
The history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change in order to secure and safeguard their digital assets. To the extent that we are unable to identify and mitigate or stop new security threats, our digital assets may be subject to theft, loss, destruction or other attack, which could adversely affect our business, financial condition, results of operations and prospects. We believe that, as our business and assets grow, we may become a more appealing target for security threats such as hackers and malware.
We promptly and frequently liquidate cryptocurrencies that we mine and keep a minimum number of cryptocurrencies in our possession so as to minimize our risks against theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless, this security system may still be penetrated and may not be free from defect or immune to acts of God, and any loss due to a security breach, software defect or act of God will be borne by us.
Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the digital asset exchange markets. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm, limit or halt our business operations or result in loss of our digital assets, or damage to our hardware and physical assets.
Any breach of our infrastructure, or potentially the infrastructure of trusted third parties, could result in damage to our reputation which could adversely affect our business, financial condition, results of operations and prospects.
The security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee, or otherwise, and, as a result, an unauthorized party may obtain access to our private keys, data or Bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security system occurs, the market perception of the effectiveness of its security system could be harmed, which could adversely affect our business, financial condition, results of operations and prospects. In the event of a security breach, we may also be forced to cease operations, or suffer a reduction in assets, the occurrence of each of which could adversely affect us.
A loss of confidence in our security system, or a breach of our security system, may adversely affect our business.
We will take measures to protect our self and our digital and physical assets from unauthorized access, damage or theft; however, it is possible that the security system may not prevent the improper access to, or damage or theft of our assets. A security breach could harm our reputation or result in the loss of some or all of our assets. A resulting perception that our measures do not adequately protect our assets could adversely affect our business, financial condition, results of operations and prospects.
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Digital asset transactions are irrevocable and stolen or incorrectly transferred digital assets may be irretrievable. As a result, any incorrectly executed digital asset transactions could adversely affect our business.
Digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on the respective digital asset network. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of digital assets or a theft of digital assets generally will not be reversible, and we may not be capable of seeking compensation for any such transfer or theft. Although our transfers of digital assets will regularly be made to or from vendors, consultants, services providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our digital assets could be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective transaction with such third party or are incapable of identifying the third party which has received its digital assets through error or theft, we will be unable to revert or otherwise recover incorrectly transferred digital assets. To the extent that we are unable to seek redress for such error or theft, such loss could adversely affect our business, financial condition, results of operations and prospects.
We may not have, or be able to obtain or maintain, relevant business insurance.
Due to the industry in which we operate, we may not be able to obtain or maintain some types of insurance that operators of similar businesses would usually obtain, on commercially viable premiums, or at all.
Any digital assets we hold are not insured. Therefore, a loss may be suffered with respect to our digital assets which is not covered by insurance and for which no person is liable in damages which could adversely affect our business, financial condition, results of operations and prospects.
We do not hold our digital assets with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, our digital assets are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
If our digital assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the only source of recovery we have might be limited to the extent identifiable, other responsible third parties (e.g., a thief or terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim by us.
The sale of our digital assets to pay expenses at a time of low digital asset prices could adversely affect our business.
We promptly and frequently liquidate cryptocurrencies. This may mean that we sell digital assets at a time when the prices on the respective digital asset exchange market are low, which could adversely affect our business, financial condition, results of operations and prospects.
We rely on a small number of key people, the loss of which could have a significant impact on us.
The responsibility of the direction and operation of our business relies heavily on a small number of key people, including CEO James Manning and COO Liam Wilson. If any of our key employees or service providers cease their involvement in our business or, in the unfortunate situations one or more of them are seriously injured or dies, this loss would have a significant and likely adverse impact on us.
Our results of operations may be negatively impacted by the pandemic outbreak.
In December 2019, the novel coronavirus, or COVID-19, surfaced globally. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak. The impacts of the outbreak are unknown and rapidly evolving. Multiple variants (including Delta and Omicron) have become prominent since the initial outbreak, and despite global vaccination programs, COVID-19 was unpredictable in 2021 and the outlook remains uncertain in 2022 and beyond. Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. In the United States and Australia, federal, state and local governments have enacted restrictions on travel, gatherings, and workplaces, with exceptions made for essential workers and businesses. Although these types of restrictions have been lifted in the United States and Australia, there can be no assurance that governments will not re-introduce such restrictions if the pandemic worsens. If such restrictions are re-introduced, we may be required to substantially reduce or cease operations in response as a result of COVID-19 or any other future pandemic which may emerge.
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Failure to effectively manage our growth could place strains on its managerial, operational and financial resources and could adversely affect its business and operating results.
As our digital asset infrastructure operations grow, the administrative demands upon us will grow, and our success will depend upon our ability to meet those demands. We are organized as a holding company, with numerous subsidiaries. Both the parent company and each of our subsidiaries require certain financial, managerial and other resources, which could create challenges to our ability to successfully manage our subsidiaries and operations and impact our ability to assure compliance with our policies, practices and procedures. These demands include, but are not limited to, increased executive, accounting, management, legal services, staff support and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating results.
We have potential risks in connection with growth and acquisitions.
Our future growth may depend in part on our ability to acquire patented technologies or potential target companies that have synergies with our business activities. Such acquisitions are subject to numerous risks, including, but not limited to the following:
| ● | our inability to enter into a definitive agreement with respect to any potential acquisition, or if we are able to enter into such agreement, our inability to consummate the potential acquisition; |
| ● | difficulty integrating the operations, technology and personnel of the acquired entity including achieving anticipated synergies; |
| ● | our inability to achieve the anticipated financial and other benefits of the specific acquisition; |
| ● | difficulty in maintaining controls, procedures and policies during the transition and monetization process; |
| ● | diversion of our management’s attention from other business concerns; and |
| ● | failure of our due diligence process to identify significant issues, including issues with respect to patented technologies and other legal, tax and financial contingencies. |
If we are unable to manage these risks effectively as part of any acquisition, our business could be adversely affected.
Cryptocurrency mining is a highly competitive industry.
The cryptocurrency mining industry is highly competitive, especially for Bitcoin, and there are several competitors who are considerably larger than Mawson, and who have operated for longer in the industry. With this size and operating history likely comes greater resources (financial, human, and technical), greater brand recognition and reputation, stronger business relationships, and economies of scale. We expect existing competitors will expand their operations, new competitors will enter the industry, and some competitors will merge to create even stronger competitors. The digital asset mining industry is global. Barriers to entry are relatively low in the sense that there is no requirement to obtain a license or permit to mine for Bitcoin (potential barriers to entry include the need to acquire, install and operate the capital intensive equipment, access to reasonably priced electricity, and other relevant technical knowledge). If the amount of competing computational power in the Bitcoin network increases, then the difficulty of the mining process increases, which may lead to lower Bitcoin rewards for Mawson.
If we are unable to compete successfully, or if competing successfully requires us to take costly actions in response to the actions of our competitors, our business, operating results and financial condition could be adversely affected.
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Global climate change and related environmental regulations may have an adverse effect on our business operations and financial position.
Changes in climate and its effect on the environment such as changes in rainfall, weather patterns, water supplies and shortages, sea level and changing temperatures could have an adverse effect on our operations and financial performance. We operate in a variety of environments, and the potential physical effects of climate change on our operations, if any, are highly uncertain.
Extreme weather events may:
| ● | cause damage to one or more of our modular data centers (that house our Miners) and therefore reduce our ability to maximize the performance of the Miners; |
| ● | affect the delivery times of equipment ordered from our manufacturers and therefore impact our financial forecasts which were scheduled for a certain period of time; or
| |
| ● | cause power disruptions or cuts to our Miners, reducing operating times and the performance of the Miners. |
There has been recent commentary about cryptocurrency mining and its impact on the environment. Governments and related government bodies around the world are introducing or contemplating legislative and regulatory changes related to cryptocurrency mining in response to a variety of pressures.
Any legislative changes regarding climate change could add significant burden and costs to our business, including costs related to making our energy consumption more efficient and lower impact on the environment, environmental monitoring and reporting, and other costs to comply with such changes. Further, there could be reputational damage to our business caused by increased negative publicity surrounding cryptocurrency and the apparent effects on the environment.
Cancellation or withdrawal of required operating and other permits and license.
We must obtain various permits, approvals and/or licenses in order to construct and operate our facilities. If such permits, approvals and/or licenses are not granted, or if they are lost, suspended, terminated or revoked, it may result in delays in construction of our facilities, require us to halt all or part of our operations, or cause us to be exposed to financial or other penalties at the affected locations. Such circumstances could have a material adverse effect on our business, financial condition and operating results.
We are subject to the construction risks.
Each Modular Data Center facility we construct is subject to the usual risks associated with building infrastructure assets. Particular risks include slow or delayed planning approval processes and permitting and licensing requirements, issues with site condition or hazards, availability and cost of materials and labor, contractor and sub-contractor default, inability to enter into agreements with the design and build of the facilities, and inclement weather.
Banks and financial institutions may cease to provide financial services to persons involved in cryptocurrency transactions.
Banks and other financial institutions can and have made legal and risk-based decisions to not accept customers such as digital assets investors or businesses that engage in Bitcoin-related activities or that accept Bitcoin as payment. This may be because it would be illegal for them to do so, or in situations where the legal position is unsure, but subject to material risk. If we, or our major business partners (e.g. exchanges, mining pools, or ASIC suppliers) are unable to obtain banking services, this will cause material business disruption and loss and damage to our business. If it occurs to a significant number of Bitcoin users, investors and traders, this may lead to a loss of confidence in Bitcoin and its value, leading to a fall in the Bitcoin price.
Achieving a sale of the clinical-stage biopharmaceutical business may take longer than expected.
Our main business, when Mawson was known as Wize Pharma Inc, was as a clinical-stage biopharmaceutical business. It is intended that this business will be sold, because Mawson is focusing on its digital infrastructure and cryptocurrency related business. If achieving a sale of the clinical-stage biopharmaceutical business takes longer or is more complicated than expected, there is a risk that management time and Company resources are diverted away from developing and managing Mawson’s core business.
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Risks Relating to Cryptocurrency Mining, Bitcoin Price and Technology
Our future success will depend significantly on the price of Bitcoin, which is subject to risk and has historically been subject to wide swings and significant volatility.
Given that most of our revenue is generated from the mining of Bitcoin (as a result of rewards and transaction fees received for validating transactions on the Bitcoin blockchain), our operating cash flow is substantially dependent on the price of Bitcoin. The prices that we receive for our Bitcoin depend on numerous market factors beyond our control. Due to the highly volatile nature of the price of Bitcoin, our historical operating results have fluctuated, and may continue to fluctuate, significantly from period to period. Mawson does not have any formal hedging strategy in place. The price of Bitcoin can fluctuate due to investment and trading sentiment amongst users, speculators, and investors for a range of reasons, including changes in interest rate settings, or negative or positive publicity (for example due to legal proceedings or losses to Bitcoin investors due to fraud or cyber attacks a cryptocurrency exchange or online wallet). Large holders of Bitcoin may be able to effect large price swings, especially if they were to liquidate their holdings, which would likely cause the price of Bitcoin to fall. Further, the Bitcoin market is highly unregulated and could be subject to market manipulation, especially by large holders. In addition, we operate in the U.S. and Australia and are exposed to fluctuations in in fiat currency exchange rates. A fall in the price of Bitcoin will have a negative impact on our revenues.
Significant contributors to all or any digital asset network could propose amendments to the respective network’s protocols and software that, if accepted and authorized by such network, could adversely affect us.
Significant contributors to all or any digital asset network could propose amendments to the respective network’s protocols and software that, if accepted and authorized by such network, could adversely affect us. For example, with respect to Bitcoins networks, a small group of individuals contribute to the Bitcoin Core project on GitHub.com. These individuals can propose refinements or improvements to the Bitcoin network’s source code through one or more software upgrades that alter the protocols and software that govern the Bitcoin network and the properties of Bitcoin, including the irreversibility of transactions and limitations on the mining of new Bitcoin. Proposals for upgrades and discussions relating thereto take place on online forums. For example, there is an ongoing debate regarding altering the blockchain by increasing the size of blocks to accommodate a larger volume of transactions. Although some proponents support an increase, other market participants oppose an increase to the block size as it may deter miners from confirming transactions and concentrate power into a smaller group of miners.
To the extent that a significant majority of the users and miners on the Bitcoin network install such software upgrade(s), the Bitcoin network would be subject to new protocols and software that could materially adversely affect our business, financial condition, results of operations and prospects. In the event a developer or group of developers proposes a modification to the Bitcoin network that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of miners and users, two or more competing and incompatible blockchain implementations could result. This is known as a “hard fork.” In such a case, the “hard fork” in the blockchain could materially and adversely affect the perceived value of digital assets as reflected on one or both incompatible blockchains, which may materially adversely affect our business, financial condition, results of operations and prospects.
If a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including the Bitcoin network, it is possible that such actor or botnet could manipulate the blockchain in a manner that adversely affects us.
If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on any digital asset network, including the Bitcoin network, it may be able to alter the blockchain by constructing alternate blocks if it is able to solve for such blocks faster than the remainder of the miners on the blockchain can add valid blocks. In such alternate blocks, the malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new digital assets or transactions using such control. Using alternate blocks, the malicious actor could “double-spend” its own digital assets (i.e., spend the same digital assets in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the processing power or the digital asset community does not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Such changes could materially adversely affect our business, financial condition, results of operations and prospects.
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A failure to properly monitor and upgrade the Bitcoin network protocol could damage the Bitcoin network and adversely affect us.
The open-source structure of the cryptocurrencies network protocols means that the contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the protocol. The Bitcoin network, for example, operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub. As an open-source project, Bitcoin is not represented by an official organization or authority. As the Bitcoin network protocol is not sold and its use does not generate revenues for contributors, contributors are generally not compensated for maintaining and updating the Bitcoin network protocol. The lack of guaranteed financial incentive for contributors to maintain or develop the Bitcoin network and the lack of guaranteed resources to adequately address emerging or latent issues with the Bitcoin network may reduce incentives to address the issues adequately or in a timely manner. Modification or changes to the Bitcoin protocol by a sufficient number of users (known as a “fork”) may lead to unforeseen bugs or other negative outcomes for Mawson and miners in general. Changes to or latent issues in a digital asset network which we are mining could materially adversely affect our business, financial condition, results of operations and prospects.
The incentive for Bitcoin mining may decrease over time as the reward decreases.
A Bitcoin halving occurs when block rewards, or the number of Bitcoins entering circulation whenever a block is produced (approximately every 10 minutes), is reduced by half. This means a new Bitcoin will be subsequently issued half as fast as before. This occurs on a schedule built into Bitcoin’s programming and happens every 210,000 blocks with the purpose being to issue the total supply into the market less frequently over time. This supply effect increases Bitcoin’s scarcity, which has, historically, increased its price. When Bitcoin first started, 50 Bitcoins were rewarded to miners per block produced. The reward was decreased over the years and, to date, following the last halving event in May 2020, the block reward is 6.25 Bitcoins per block. Halving events will continue until the block reward reaches zero. The process will end with a predetermined total of 21 million Bitcoins, estimated to be around the year 2140. Although, at each prior halving event, the short-term subsequent effect on the Bitcoin price has been an increase in price, this trend may not continue in the future and may have a reverse effect on the Bitcoin price, in which case, our business, financial condition, results of operations and prospects may be materially adversely affected.
If the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may cease operations, leading to slower confirmations of transactions on the blockchain leading to lower confidence in Bitcoin, and therefore a potentially lower Bitcoin price.
Bitcoin miners record transactions when they solve for and add blocks of information to the blockchain. When a miner solves for a block, it creates that block, which includes data relating to (i) the solution to the block, (ii) a reference to the prior block in the blockchain to which the new block is being added and (iii) all transactions that have occurred but have not yet been added to the blockchain. The miner becomes aware of outstanding, unrecorded transactions through the data packet transmission and propagation discussed above. Typically, Bitcoin transactions will be recorded in the next chronological block if the spending party has an internet connection and at least one minute has passed between the transaction’s data packet transmission and the solution of the next block. If a transaction is not recorded in the next chronological block, it is usually recorded in the next block thereafter.
As the award of new digital assets for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an adequate incentive to continue mining and may cease their mining operations. For example, the current fixed reward on the Bitcoin network for solving a new block is six and a quarter (6.25) Bitcoins per block (the reward decreased from twelve and a half (12.5) Bitcoin in May 2020). It is estimated that it will halve again in about 2024. This reduction may result in a reduction in the aggregate hashrate of the Bitcoin network as the incentive for miners will decrease. Moreover, miners ceasing operations would reduce the aggregate hashrate on the Bitcoin network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block solutions) and make the Bitcoin network more vulnerable to a malicious actor obtaining control in excess of fifty percent (50%) of the aggregate hashrate on the Bitcoin network. Periodically, the Bitcoin network has adjusted the difficulty for block solutions so that solution speeds remain in the vicinity of the expected ten (10) minute confirmation time targeted by the Bitcoin network protocol.
More significant reductions in aggregate hashrate on digital asset networks could result in material, though temporary, delays in block solution confirmation time. Any reduction in confidence in the confirmation process or aggregate hashrate of any digital asset network may negatively impact the value of digital assets, which will adversely impact our business, financial condition, results of operations and prospects.
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An increase in transaction fees could reduce the price of digital assets.
If fees increase for recording transactions on the Bitcoin network, demand for cryptocurrencies may decrease and prevent the expansion of the network to retail merchants and commercial businesses, resulting in a reduction in the price of digital assets that could adversely affect our business, financial condition, results of operations and prospects.
To the extent that the profit margins of digital asset mining operations are not high, operators of digital asset mining operations are more likely to immediately sell their digital assets earned by mining in the digital asset exchange market, resulting in a reduction in the price of digital assets that could adversely impact our business.
Over the past two years, digital asset mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation servers. Currently, new processing power brought onto the digital asset networks is predominantly added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations may use proprietary hardware or sophisticated machines. They require the investment of significant capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale than prior miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to more immediately sell digital assets earned from mining operations on the digital asset exchange market, whereas it is believed that individual miners in past years were more likely to hold newly mined digital assets for more extended periods. The immediate selling of newly mined digital assets greatly increases the supply of digital assets on the digital asset exchange market, creating downward pressure on the price of each digital asset.
The extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital and operating costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher percentage of its newly mined digital assets rapidly if it is operating at a low profit margin—and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into the digital asset exchange market more rapidly, thereby potentially reducing digital asset prices. Lower digital asset prices could result in further tightening of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating a network effect that may further reduce the price of digital assets until mining operations with higher operating costs become unprofitable and remove mining power from the respective digital asset network. The network effect of reduced profit margins resulting in greater sales of newly mined digital assets could result in a reduction in the price of digital assets that could adversely impact our business, financial condition, results of operations and prospects.
Political or economic crises may motivate large-scale sales of digital assets, which could result in a reduction in some or all digital assets’ values and adversely affect us.
As an alternative to fiat currencies that are backed by central governments, digital assets such as Bitcoins, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized asset that can act as a store of value, means of speculation or a payments system for buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of digital assets either globally or locally. Large-scale sales of digital assets would result in a reduction in their value and could adversely affect our business, financial condition, results of operations and prospects.
To the extent that the digital asset exchanges representing a substantial portion of the volume in digital asset trading are involved in fraud or experience security failures or other operational issues, such digital asset exchanges’ failures may result in a reduction in the price of some or all digital assets and can adversely affect us.
The digital asset exchanges on which the digital assets trade are new and, in most cases, largely unregulated. Furthermore, many digital asset exchanges (including several of the most prominent USD denominated digital asset exchanges) do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading.
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A lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in the digital asset networks and result in greater volatility in digital asset values. These potential consequences of a digital asset exchange’s failure could materially adversely affect our business, financial condition, results of operations and prospects.
The further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of digital asset systems may adversely affect us.
Currently, there is relatively small use of Bitcoins and other cryptocurrencies in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in us. Cryptocurrencies are a relatively new concept and asset class, so there is still some degree of uncertainty and skepticism about their use. Whether their popularity will gain further traction is difficult to predict. If the popularity and use of cryptocurrencies diminish and leads to their value decreasing, our business, financial condition, results of operations and prospects may be materially adversely affected.
Future digital asset and digital currency development may lessen the usage of Bitcoin.
Digital asset technology is a rapidly advancing and changing and new digital assets are created regularly. New digital assets competing with the digital assets we specialize in (such as Bitcoin) may increase in popularity and in turn cause a decline in the value of Bitcoin, which may in turn lead to a decline in the Bitcoin network and our ability to generate revenue from our current mining activities. This may include the development of so-called central bank digital currencies (CBCDs). Many governments around the world, and central banks are reportedly considering or studying the potential for CBCDs, including the Australian federal government and the Reserve Bank of Australia and the United States Federal Reserve.
The Bitcoin protocol currently relies on a proof-of-work verification for validating digital asset transactions. This type of validation consumes large amounts of computing power and electricity. Proof-of-stake validation is a more recent development, which involves the validator losing part of its cryptocurrency holdings if it fails to correctly validate a block. While there are some drawbacks to proof-of-stake, it requires far less energy than proof-of-work. Cryptocurrencies whose transactions are validated on a proof-of-stake basis do not require Miners. Future cryptocurrencies may utilize proof-of-stake rather than proof-of work, meaning that there will be less opportunity for miners to earn rewards.
The development of quantum computing threatens the cryptographic protections of blockchain protocols.
Governments and corporations around the world are conducting research and development to produce quantum computers which will be much more powerful than modern computers. The potential capability of quantum computers poses a potential threat to the underlying cryptographic protections that the Bitcoin blockchain protocol relies on, and therefore to the reliability of the blockchain, and may therefore undermine users’ trust in Bitcoin and digital currencies in general. For example, a quantum computer may provide the possibility of decrypting user private keys and forge transaction signatures, undermining the integrity of the blockchain. A loss of trust in the digital currencies due to the ability of quantum computing to undermine security protocols will likely have a material adverse effect on our business, results of operations and financial condition.
Risks Relating to Laws, Regulatory Frameworks, and Legal Action
Digital assets such as Bitcoin are likely to be more highly regulated.
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. 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 the returns sought by us.
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Bitcoin is presently legal in Australia and the U.S., however it may become illegal in the future, to acquire, own, hold, sell, exchange, advise on or use Bitcoins in Australia and the U.S. or one or more other countries, and may currently be illegal in some countries.
Regulatory changes or interpretations could cause us (or any of our related entities) to register and comply with new regulations, resulting in potentially extraordinary, recurring or non-recurring expenses to continuing our digital assets business, or entering into new business ventures.
Regulatory changes or interpretations of our activities require us or any of our affiliates to register as a money services business (“MSB”) under the regulations promulgated by FinCEN
The U.S. Bank Secrecy Act may require us to register and comply with it and its regulations. If regulatory changes or interpretations of our activities require the licensing or other registration as a money transmitter (or equivalent designation) under state law in any state in which we operate, we may be required to seek license or otherwise register and comply with such state law. In the event of any such requirement, to the extent we decide to continue, the required registrations, licenses and regulatory compliance steps may result in extraordinary, non-recurring expenses to us and even in a decision to cease our digital asset infrastructure operations.
To the extent that our activities cause us to be deemed a MSB under the regulations promulgated by the Financial Crimes Enforcement Network (“FinCEN”), a unit of the U.S. Treasury Department focused on money laundering under the authority of the U.S. Bank Secrecy Act, we may be required to comply with FinCEN regulations, including those that would mandate we implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records. In addition, to the extent that our activities cause us to be deemed a “money transmitter” (“MT”) or equivalent designation, under state law in any state in which we operate, we may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the New York State Department of Financial Services has finalized its “BitLicense” framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors has proposed a model form of state level “virtual currency” regulation and additional state regulators including those from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define “virtual currency” and the activities that trigger licensure in a business-friendly approach that encourages companies to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial wallets. Starting January 1, 2016, New Hampshire requires anyone who exchanges a digital currency for another currency to become a licensed and bonded money transmitter. In numerous other states, including Connecticut and New Jersey, legislation is being proposed or has been introduced regarding the treatment of Bitcoin and other digital assets. We will continue to monitor for developments in such legislation, guidance or regulations.
Such additional federal or state regulatory obligations may cause us to incur extraordinary expenses, possibly adversely affecting our business, financial condition, results of operations and prospects. Furthermore, we and our service providers may not be capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. If we are deemed to be subject to and determine not to comply with such additional regulatory and registration requirements, we may act to dissolve and liquidate our business. Any such action may materially adversely impact our business, financial condition, results of operations and prospects.
Interpretations may require the regulation of Bitcoins under the Commodity Exchange Act (“CEA”) by the CFTC.
We may be required to register and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
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Current and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which Bitcoins are treated for classification and clearing purposes. In particular, Bitcoin derivatives are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoins under the law.
Bitcoins have been deemed to fall within the definition of a commodity and we may be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator and to register as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting our business, financial condition, results of operations and prospects. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect our business, financial condition, results of operations and prospects.
If regulatory changes or interpretations require the regulation of Bitcoins under the Securities Act and Investment Company Act by the SEC, we may be required to register and comply with such regulations.
Current and future legislation and the SEC rulemaking and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which Bitcoins are treated for classification and clearing purposes. The SEC’s July 25, 2017 Report expressed its view that digital assets may be securities depending on the facts and circumstances. As of the date of this report/information statement, we are not aware of any rules that have been proposed to regulate Bitcoins as securities. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoins under the law. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting our business, financial condition, results of operations and prospects. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect our business, financial condition, results of operations and prospects.
To the extent that digital assets, including Bitcoins and other digital assets we may own, are deemed by the SEC to fall within the definition of a security, we may be required to register and comply with additional regulation under the Investment Company Act, including additional periodic reporting and disclosure standards and requirements and the registration of the combined company as an investment company. Additionally, one or more states may conclude Bitcoins and other digital assets we may own as a security under state securities laws which would require registration under state laws including merit review laws which would adversely impact us since we would likely not be able to comply. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting our business, financial condition, results of operations and prospects. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease all or certain parts of its operations. Any such action would likely adversely affect our business, financial condition, results of operations and prospects and investors may suffer a complete loss of their investment.
We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). Section 404 requires that our management maintain a system of internal control over financial reporting that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It also requires that our management annually evaluate whether our internal control over financial reporting is effective at providing reasonable assurance and to disclose its assessment to investors. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified a material weakness in internal control over financial reporting. As a result of the material weakness in internal control over financial reporting described above, the Company’s management has concluded that, as December 31, 2021, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework issued by COSO.
Mawson may not be able to implement adequate controls and procedures in time that adequately respond to the regulatory compliance and reporting requirements that are applicable to us. If Mawson is not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, we may not be able to assess whether our internal control over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and the market price of our stock.
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In addition, as a smaller reporting company and non-accelerated filer, we are not subject to the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. However, as we grow, we may become subject to the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. In addition, we identified a material weakness in the effectiveness of our internal control over financial reporting which could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.
Future developments regarding the treatment of digital assets for U.S. federal income and foreign tax purposes could adversely impact our business.
Globally, many taxation laws, rules and guidelines have not been developed with digital assets or cryptocurrencies in focus. For example, many significant aspects of the U.S. federal income and foreign tax treatment of transactions involving digital assets are uncertain, and it is unclear what guidance may be issued in the future on the treatment of digital asset transactions for U.S. federal income and foreign tax purposes.
There can be no assurance that the IRS or other foreign tax authorities will not alter their position or introduce new laws, regulations or guidance with respect to digital assets. Any such alteration of existing IRS and other foreign tax authority positions or additional guidance regarding digital asset products and transactions could result in adverse tax consequences for our business and could have an adverse effect on the value of digital asset and the broader digital assets markets. In addition, the IRS and other foreign tax authorities may disagree with tax positions that we have taken, which could result in increased tax liabilities. Future technological and operational developments that may arise with respect to digital currencies may increase the uncertainty with respect to the treatment of digital currencies for U.S. federal income and foreign tax purposes.
Another example of an adverse ruling would be if we were classified as a passive foreign investment company (a “PFIC”) for any taxable year. Based on the current and anticipated composition of our income, assets and operations, and our business generally, we do not expect to be treated as a PFIC for the current taxable year or in the foreseeable future. The application of the PFIC rules to digital assets and transactions related thereto is subject to uncertainty. There can be no assurance that Mawson will not be classified as a PFIC for the current taxable year or for any future taxable year. If Mawson is considered a PFIC then there may be negative tax consequences for U.S. holders of our ordinary shares, as well as being subject to annual information reporting requirements. U.S. holders may wish to consult their tax advisors about the potential application of the PFIC rules to an investment in our ordinary shares.
Regulatory intervention by governments could affect the right to acquire, own, hold, sell, exchange or use Bitcoin or other cryptocurrencies.
Governments have and may take regulatory actions to restrict the right to acquire, own, hold, sell, exchange or use Bitcoin or other cryptocurrencies. For example, it may be, or may become, illegal to accept payment in Bitcoin for consumer transactions and banking institutions could be barred from accepting deposits of cryptocurrencies. Such restrictions would have a negative effect on the value and price of Bitcoin. On the other hand, some governments could decide to subsidize or support certain Bitcoin mining projects, thus adding hashrate to the overall network, and having a material adverse effect on the amount of Bitcoin we may be able to mine, the value of Bitcoin and, consequently, our business, prospects, financial condition and operating results.
We may be subject to material litigation, investigations or enforcement actions by regulators and governmental authorities.
We may become subject to certain claims, legal proceedings (including individual and class actions) and government investigations or enforcement actions, including in the ordinary course of business. Agreements entered into by Mawson sometimes include indemnification provisions which can subject Mawson to costs and damages in the event of a claim against an indemnified third party. Regardless of the merit of particular claims, defending against litigation or responding to government investigations can be expensive, time-consuming, disruptive to operations and distracting to management. If Mawson is unable to successfully defend itself against such claims then it may become liable to make substantial payments to satisfy judgments, fines or penalties, or alter, delay, limit or cease some or all its business practices. Mawson may suffer damage to our brand and reputation.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our principal executive offices are located at 97 Pacific Highway North Sydney NSW Australia where we license approximately 710 square feet of office space. We are currently considering our future options should the number of employees required in the head office grow.
We have long term leases for each of our 3 mining facilities. Our mining facilities are located in Georgia USA, Pennsylvania USA and New South Wales, Australia.
We do not own or lease any other land or buildings. We believe that our existing facilities are suitable and adequate to meet our current business requirements. However, Mawson is growing and, should we require additional or alternative facilities, we believe that such facilities can be obtained in reasonable time frames at commercial rates.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Price for our Common Stock
Our Common Stock trades on The Nasdaq Stock Market LLC under the symbol “MIGI”.
Holders
As of March 15, 2022, there were approximately 271 stockholders of record. The actual number of beneficial owners of our stock is greater than this number of record holders because there are beneficial owners whose shares are held in street name by brokers and other nominees.
Dividend Policy
We have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as our Board deems relevant. Our ability to pay cash dividends is subject to limitations imposed by state law.
Unregistered Sales of Equity Securities and Use of Proceeds
Other than as set forth elsewhere in this Annual Report or as previously disclosed in our filings with the SEC, we did not sell any equity securities during the year ended December 31, 2021 in transactions that were not registered under the Securities Act. The issuance of such securities were made in transactions exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 and/or Regulation S promulgated thereunder.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any securities in the fourth quarter of the fiscal year covered by this report.
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited annual consolidated financial statements as of December 31, 2021 and December 31, 2020 and accompanying notes appearing elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this Annual Report. All amounts are in U.S. dollars.
Overview
Mawson is a ‘Digital Asset Infrastructure’ business, which owns and operates (through its majority-owned subsidiary Mawson AU) 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’ arrangements to other businesses in the digital asset infrastructure industry the opportunity 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.
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As of December 31, 2021
| Existing Operations Online | Order and Purchase Agreements | Cumulative Fleet Fully Deployed | ||||||||||
| Total miners online | 10,302 | - | 10,302 | |||||||||
| Total miners in Transit | - | 4,704 | 4,704 | |||||||||
| Total miners on order | - | 18,528 | 18,528 | |||||||||
| Total miners in storage | 5,691 | - | 5,691 | |||||||||
| Total miners | 15,993 | 23,232 | 39,225 | |||||||||
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.
In addition, our indirect subsidiary, Cosmos Asset Management Pty Ltd (“Cosmos Asset Management”), is the investment manager of the Bitcoin Wholesale Access Fund, a wholesale, unregistered managed investment scheme Bitcoin Wholesale Access Fund invests in and holds Bitcoin for third party investors and is the manager of the Cosmos Global Digital Miners Access ETF, listed on Cboe in Australia under the code DIGA.
Prior LO2A Business
On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) in a scrip for scrip exchange (“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. 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 contingent value rights (“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.
Recent Developments.
Mawson owns 20.06% equity in Distributed Storage Solutions Pty Ltd, an Australian private company operating a blockchain based decentralized storage business, based on the IPFS protocol. The business utilizes Filcoin as part of its operations to generate revenue. Mawson subscribed for 500,000 shares at AUD$1.00 per share. On April 22, 2021, Distributed Storage Solutions Pty Ltd undertook a capital raise to third party investors in Australia at AUD$11.60 per share.
In May 2021, the Company, through its subsidiary Luna Squares LLC (“Luna”), had its first hosting contracts at its facilities in Georgia. The hosting contracts were for an initial single MDC.
On July 5, 2021, the Company consummated the acquisition (the “Acquisition”) of all the outstanding Luna shares, a Delaware limited liability company pursuant to the terms of a (i) Membership Interest Purchase Agreement with Kyle Hoffman (the “Hoffman MIPA”) and (ii) Membership Interest Purchase Agreement with TRS Ventures LLC (the “TRS MIPA”). Under the terms of the Hoffman MIPA, the Company purchased Mr. Hoffman’s membership interests in Luna, which represented 25% of total membership interest in Luna, for a total purchase price of $200,000 paid over two tranches made up of:
(A) $100,000 which was paid in cash; and
(B) $100,000 which was paid in shares of the Company’s common stock.
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Under the terms of the TRS MIPA, the Company purchased TRS’s membership interests in Luna, which represented 25% of the outstanding membership interests in Luna, for a purchase price of $300,000 paid over three tranches made up of:
(A) $100,000 which was paid in cash; and
(B) $200,000 which was paid in shares of the Company’s common stock.
Luna leases a 16.35-acre lot in Georgia from the Development Authority of Washington County. The lease term was originally for 1 acre from May 1, 2020, until April 30, 2023. There have been two amendments to the lease to lease an additional 15.35 acres, signed on February 23, 2021 and August 24, 2021. It also includes 5, 3-year extension options bringing the total lease period to run until 2038.
On August 10, 2021, we issued 46,139,019 shares pre stock split of our common stock at a purchase price of $0.80 per shares for aggregate gross proceeds of $36,911,215 in a private placement to certain accredited investors pursuant to entered into Securities Purchase Agreements dated August 6, 2021.
Mawson listed its common stock on The Nasdaq Stock Market LLC (“Nasdaq”) on September 29, 2021.
On October 22, 2021, MIG No. 1 Pty Ltd (“MIG”), an Australian subsidiary of the Company, entered into an electricity supply and sale agreement (“Electricity Supply Agreement”) with Cape Byron Management Pty Ltd (“CBM”) to enable the Company to operate its first Australian Bitcoin mining site (“Australian Site”). CBM is a subsidiary of Quinbrook Infrastructure Partners Pty Ltd.
On November 1, 2021, the Company listed its first product by its Cosmos Asset Management business on the Cboe market in Australia, under the code ‘DIGA.CXA’.
On February 23, 2022, Luna Squares entered into the Co-Location Agreement with Celsius Mining LLC (“Celsius Mining”), pursuant to which Luna Squares will provide a hosting facility, electrical power and internet access to Celsius Mining for the purposes of installing, maintaining and operating Celsius Mining’s ASIC machines (cryptocurrency mining equipment) for a monthly services fee based on power consumption, plus an infrastructure fee, plus a market margin. In addition, Celsius Mining loaned Luna Squares a principal amount of US$20,000,000 (“Principal”), for the purpose of funding the infrastructure required to meet the obligations of the Co-Location Agreement, for which Luna Squares issued a Secured Promissory Note (the “Promissory Note”) in the principal amount equal to the Principal. The Promissory Note accrues interest daily at rate of 12% per annum. Luna Squares is required to amortize the loan at a rate of 15% per quarter, with principal repayments starting in the third quarter following the closing. The Promissory Note has a maturity date of August 23, 2023. In the event Luna Squares receives cash proceeds from certain sales of assets, Luna Squares would be required to direct such cash proceeds to Celsius Mining, which will applied to the outstanding principal and interest under the Promissory Note. The Promissory Note includes customary events of default and remedies. In connection with the transaction, Mawson issued to Celsius Mining, warrants to purchase up to 3,850,000 shares of common stock, par value $0.001 per share, of Mawson at an exercise price of US$6.50 per share. The warrant may be exercised at any time after issuance and until the later to occur of the eighteen (18) month anniversary of issuance and the date on which the Promissory Note has been completely repaid.
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 100% ownership interest. James Manning, CEO a director and a significant shareholder of the Company is also a director of Vertua Ltd and has a material interest in the Sharon lease as a large shareholder of Vertua Ltd. The lease contains market standard legal terms, and will be for a term of 5 years, and Luna Squares LLC has 2 options to extend for 5 years each. The Audit Committee has compared the rent and terms to other arms’ length leases the Company has entered into and formed the view the rent is in line with the market for similar properties. Rent is subject to annual increases of CPI for the Northeast Region, or 4%, whichever is higher. The base rental amount in the first year is $0.24 million. Depending on power energization and usage, variable additional rent may be payable per annum, with charges ranging from $500 to $10,000 per month, depending on power energized and whether it is available. Upon the recommendation from the Audit Committee, the directors of the Company other than James Manning were made aware of the material facts as to Mr. Manning’s interest in the lease and authorized the Company in good faith to enter the lease after determining the lease to be fair to the Company.
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. Ownership of Bitcoin is presently legal in Australia and the U.S., however it may become illegal in the future, to acquire, own, hold, sell, exchange, advise on or use Bitcoins in Australia and the U.S. or one or more other countries, and may currently be illegal in some countries. Regulatory changes or interpretations could cause us (or any of our related entities) to register and comply with new regulations, resulting in potentially extraordinary, recurring or non-recurring expenses to continuing our digital assets business, or entering into new business ventures.
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Results of Operations
Revenue
Cryptocurrency mining revenues from production for the year ended December 31, 2021 and 2020 were $38.45 million and $4.45 million respectively. This represented an increase of $34.00 million or 764% over the year. The increase in mining revenue for the year was primarily attributable to higher Bitcoin values in the 2021 period combined with an increase in the total Bitcoin produced. Bitcoin produced totaled 808.88 in 2021 compared with 417.32 in the 2020 period, or an increase of 94% of Bitcoin produced over the respective period. During the year our maximum hash rate reached 0.83 EH verses 0.16 EH in 2020.
Hosting co-location revenue for the year ended December 31, 2021 and 2020 were $0.85 million and $nil respectively. This increase is due there being no co-location revenue in the prior year.
Sales of crypto currency mining equipment for the year ended December 31, 2021, were $2.16 million and no sales were recorded in 2020.
Other revenue for the year ended December 31, 2021 and 2020 were $2.41 million and $nil respectively. This revenue is in relation to research and development tax refund.
Operating costs 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 year ended December 31, 2021 and 2020 were $9.90 million and $3.16 million, respectively. The increase in cost of revenue was primarily attributable to: an increase in power costs related to the increase in the deployment and operation 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; research and development; and general office expenses.
Selling, general and administrative expenses for the year ended December 31, 2021 and 2020 were $16.06 million and $2.48 million respectively. The increase in selling, general and administrative expenses were attributable to a number of factors; payroll expenses increased by $2.74 million due to an increase in employee numbers during the year; legal and consultant fees increased year on year by $2.30 million which is primarily due to one-off professional fees relating to the Cosmos Transaction, IPO and scale up of operations; freight expense increased by $1.35 million representing the increase in property and equipment purchases during the year. The remaining increase in expenses relates to the increase in the scale of business operations during the year.
Share based payments
Share based payments consist of: the value of shares required to be issued to Incentive Compensation Program participants under the Cosmos Transaction Bid Implementation Agreement; and the value of warrants issued to HC Wainwright and W Capital as a fee related to the acquisition by Mawson of Mawson AU. The initial expense was recognized in the financial statements for Mawson AU for the period ended December 31, 2021, however as a result of the conversion from options to warrants as part of the Cosmos Transaction, the Company was required to recognize the incremental expense of the W Capital warrants.
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Share based payments expenses for the year ended December 31, 2021 and 2020 were $22.49 million and $nil respectively. In the year to December 31, 2021, share based payments were largely attributable to HC Wainwright Warrants $6.18 million, W Capital Warrants of $5.78 million, $10.00 million for amounts related to the obligation of Mawson to issue RSU’s pursuant to the terms of the Bid Implementation Agreement for the Cosmos Transaction and $0.33 million costs recognized in relation long-term incentives for the leadership team.
Depreciation and amortization
Depreciation consists primarily of depreciation of cryptocurrency mining hardware and modular data center (MDC) equipment.
Depreciation and amortization for the year ended December 31, 2021 and 2020 were $14.11 million and $4.62 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.
Non-operating income/(expense)
Non-operating expenses consist primarily of interest expense, net realized and unrealized losses on foreign currency remeasurement, loss on write-off of property, plant and equipment and share of net loss of associates accounted for using the equity method.
During 2021, the realized and unrealized losses on foreign currency remeasurement were $0.93 million whereas in prior year there was a gain of $0.83 million causing a $1.76 million increased expense in the period. Interest expense increased by $1.64 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.
Non-operating income consists primarily of net realized gains on foreign currency transactions and fair value of investments.
Realized gain (losses) on foreign currency transactions increased by $0.84 million in the year and there was a fair value gain on the investment in Bonus Bio Group of $0.59 million.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss for the year ended December 31, 2021 and 2020 of $44.96 million and $5.03 million, respectively.
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.
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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 Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Reconciliation of non-GAAP adjusted EBITDA: | ||||||||
| Net loss: | (45,461,664 | ) | (5,061,314 | ) | ||||
| Share of net loss of associates accounted for using the equity method | 368,426 | - | ||||||
| Depreciation and amortization | 14,113,730 | 4,620,725 | ||||||
| Share based payments | 22,491,100 | - | ||||||
| Unrealized and realized losses/(gain) | 932,866 | (797,464 | ) | |||||
| Other non-operating revenue | (902,629 | ) | (108,812 | ) | ||||
| Other non-operating expenses | 2,114,699 | 28,102 | ||||||
| Tax | 277,717 | 128,659 | ||||||
| LO2A write-back | 23,963,050 | - | ||||||
| EBITDA (non-GAAP) | $ | 17,897,295 | $ | (1,190,104 | ) | |||
| For the Quarter Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 19,647,771 | $ | 1,598,790 | ||||
| Cost of revenues (excluding depreciation) | (3,686,578 | ) | (945,488 | ) | ||||
| Gross Profit | 15,961,193 | 653,302 | ||||||
| Reconciliation of non-GAAP adjusted EBITDA: | ||||||||
| Net Profit/(loss): | 1,804,928 | (646,977 | ) | |||||
| Share of net loss of associates accounted for using the equity method | 90,630 | - | ||||||
| Depreciation and amortization | 6,186,396 | (427,191 | ) | |||||
| Share based payments | 711,203 | - | ||||||
| Unrealized and realized losses/(gain) | 204,309 | (866,951 | ) | |||||
| Other non-operating revenue | (322,924 | ) | 83 | |||||
| Other non-operating expenses | 1,040,202 | - | ||||||
| Tax | 276,216 | 128,659 | ||||||
| EBITDA (non-GAAP) | $ | 9,990,960 | $ | (1,812,377 | ) | |||
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 year ended December 31, 2021, we financed our operations primarily through:
| 1. | Net cash provided by operating activities of $22.95 million; | |
| 2. | On December 31, 2020, entering into Securities Purchase Agreements, with certain accredited investors (the “2020 PIPE Investors”), whereby we agreed to sell to the 2020 PIPE Investors, in a private placement, an aggregate of 2.5 million (25 million pre stock split) shares of common stock for aggregate gross proceeds of $3.00 million; | |
| 3. | On February 5, 2021, entering into an Equipment Finance and Security Agreement with Foundry Digital LLC (“Foundry”) to purchase 500 Whatsminer M30S mining machines, $1,056,000 was borrowed; | |
| 4. | On March 9, 2021, the issuance of convertible notes with an aggregate principal amount of $21.56 million; | |
| 5. | On August 5, 2021, entering into Securities Purchase Agreements (the “2021 PIPE Agreements”) with certain accredited investors (the “2021 PIPE Investors”). Pursuant to the 2021 PIPE Agreements, the Company agreed to sell to the 2021 PIPE Investors, and the 2021 PIPE Investors agreed to purchase from the Company, in a private placement, an aggregate of 46,789,019 shares pre stock split of common stock for a purchase price of $0.80 per share giving rise to gross proceeds of $37.43 million; |
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| 6. | On September 28, 2021, entering into an underwriting agreement with H.C. Wainwright & Co. LLC as representative (the “Representative”), of the several underwriters (the “Underwriters”), in connection with the Company’s public offering (the “Offering”) of 3,913,044 shares (the “Firm Shares”) of the Company’s common stock, $0.001 par value per share (the “Common Stock”) and accompanying 3-year warrants to purchase up to 1,956,522 shares of Common Stock with an exercise price of $13.80 (the “Firm Warrants”), at a public offering price of $11.50 per share. The net proceeds to the Company from the Offering (including the sale of additional Option Warrants), excluding any exercise by the Underwriters of their option to purchase any of the Option Shares, were approximately $41.23 million, after deducting underwriter fees and estimated offering expenses payable by us. Under the terms of the Underwriting Agreement, the Company granted the Underwriters an option, exercisable for 30 days, to purchase up to an additional 586,956 shares of Common Stock at the public offering price, less the underwriting discount and commissions (the “Option Shares,” and together with the Firm Shares, the “Shares”) and 293,478 accompanying warrants (the “Option Warrants,” and together with the Firm Warrants, the “Warrants”). On September 28, 2021, the Representative gave us notice of its exercise of its option to purchase 293,478 Option Warrants for approximately an additional $5,870. The closing of the Offering occurred on October 1, 2021; | |
| 7. | On October 15, 2021, an expansion of the Equipment Finance and Security Agreement was entered into with Foundry to purchase an additional 2000 Whatsminers M30’s delivered in October 2021, $13,185,062 was borrowed; | |
| 8. | On December 9, 2021, entering into an Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd (“Marshall”) on December 9, 2021 with a total loan facility of AUD$20 million comprising of three traches:
Tranche 1- AUD$10.5 million (received in December 2021) Tranche 2- AUD$4.8 million (received in January 2022) Tranche 3- AUD$4.8 million (received in February 2022) and; | |
| 9. | Net cash from the proceeds of the sale of shares in Bonus Bio Group of $1.022 million, being part of the realization of the original reverse asset acquisition and accounting for the combination of Wize Pharma Inc. |
Working Capital and Cash Flows
As of December 31, 2021, and December 31, 2020, we had cash and cash equivalent balance of $5.47 million and $1.11 million in cash and cash equivalents, respectively.
As of December 31, 2021, and December 31, 2020, the trade receivables balance was $5.61 million and $0.62 million respectively.
As of December 31, 2021, we had $11.10 million of outstanding short-term loans, and as of December 31, 2020, we had $0.29 million of short-term borrowings. The short-term borrowings as of December 31, 2021, relate to the acquisition of cryptocurrency mining equipment, under the Foundry agreements. As of December 31, 2021, and as of December 31, 2020, we had $7.64 million and $14,000 respectively of outstanding long-term borrowings. The long-term borrowings as of December 31, 2021, primarily relate to the secured Loan Facility with Marshall Investments MIG Pty Ltd.
As of December 31, 2021, we had negative working capital of $8.63 million and as at December 31, 2020, we had negative working capital of $0.46 million. The decrease in working capital was primarily attributable to an increase in the Company’s short term and long-term borrowings during 2021, as compared to 2020.
The following table presents the major components of net cash flows (used in)/provided by operating, investing and financing activities for the year ending December 31, 2021 and 2020:
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by/(used in) operating activities | $ | 22,953,792 | $ | (185,097 | ) | |||
| Net cash used in investing activities | $ | (128,247,751 | ) | $ | (5,536,836 | ) | ||
| Net cash provided by financing activities | $ | 109,854,460 | $ | 6,229,882 | ||||
For the year ended December 31, 2021, net cash provided by operating activities was $22,953,792 and for the year ended December 31, 2020, net cash used in operating activities was $185,097. 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.
26
For the year ended December 31, 2021, and 2020, net cash used in investing activities was $128,247,751 and $5,536,836, 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 year ended December 31, 2021, and 2020, net cash provided by financing activities was $109,854,460 and $6,229,882, respectively. The increase in net cash provided by financing activities was primarily attributable to proceeds from the capital raises which occurred in the period.
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2s to our audited consolidated financial statements for the year ended December 31, 2021.
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 various 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.
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 all 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.
27
Depreciation is calculated over the estimated useful lives of the assets as follows:
| Financial Asset class | Useful life | Depreciation Method | ||
| Fixtures and Fittings | 5 years | Straight-Line | ||
| Plant and equipment | 10 years | Straight-Line | ||
| Modular data center | 5 years | Declining | ||
| Motor Vehicles | 5 years | Straight-Line | ||
| Computer equipment | 3 years | Straight-Line | ||
| Processing Machinery (Miners) | 2 years | Declining | ||
| Transformers | 15 years | Straight-Line |
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 afterwards these costs are capitalized into processing machinery. This change resulted in an increase in processing machines on the balance sheet of $2.59 million at 31 December 2021, and an increase in the depreciation charge to the consolidated statement of operations of $0.14 million over the prior treatment.
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 years ended December 31, 2021, and 2020, no impairment losses have been identified.
Reverse Asset Acquisition
On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) in a scrip for scrip 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. Refer to note 4.
Under the terms of the Cosmos Transaction Bid Implementation Agreement, the Company was required to make share based payments consisting of up to 40,000,000 shares under an Incentive Compensation Program and warrants issued to HC Wainwright as a fee related to the acquisition by Mawson of Mawson AU. In addition, Mawson AU had an outstanding obligation to W Capital Advisors Pty Ltd (“W Capital”) for options over the equity of Mawson AU which was terminated for consideration of warrants over the Company’s shares being issued to W Capital.
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 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 bond.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we have elected not to provide the disclosure required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All information required by this item is included in Item 15 of Part IV of this Annual Report and is incorporated into this item by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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- 1I) and 15d- 15I 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 December 31, 2021 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.
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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
29
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.
Management assessed our internal control over financial reporting as of December 31, 2021, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate our material weakness or if we fail to establish and maintain an effective system of internal control over financial reporting, we may not be able to report our financial results accurately or to prevent fraud. Failing to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
The material weaknesses identified described below.
Significant Reliance on Key Individuals. There is inadequate segregation of duties in place related to its 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. Due to insufficient accounting personnel and insufficient resources with U.S. GAAP technical accounting knowledge, controls were not adequately designed in the financial statement close and reporting process. This includes controls related to complex and judgmental accounting transactions, account reconciliations and financial statement disclosures. Notwithstanding the identified material weaknesses and management’s assessment that our internal control over financial reporting was not effective as of December 31,2021, management believes that the consolidated financial statements included in this Annual Report on Form 10-K 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.
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.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting as we are a smaller reporting company under the rules of the SEC for the year ended December 31, 2021.
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Remediation
Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. Management continues to work to improve its controls related to our material weaknesses. Since March 9, 2021, with the oversight of senior management and our audit committee, we have begun taking steps and plan to take additional measures 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 fourth quarter of the year, 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 developed 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 business processes and IT controls. 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. |
However, the material weaknesses in our internal control over financial reporting will not be considered remediated until other ITGCs 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
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.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information required to be disclosed by this Item with respect to our executive officers is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Directors, Named Executive Officers and Corporate Governance” contained in our definitive proxy statement for our 2022 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION.
Information required to be disclosed by this Item with respect to our executive officers is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Executive Compensation” contained in our definitive proxy statement for our 2022 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information required to be disclosed by this Item with respect to our executive officers is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” contained in our definitive proxy statement for our 2022 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE.
Information required to be disclosed by this Item with respect to our executive officers is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Certain Relationships and Related Transactions, and Director Independence” contained in our definitive proxy statement for our 2022 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information required to be disclosed by this Item with respect to our executive officers is incorporated into this Annual Report on Form 10-K by reference from the section entitled “Principal Accountant Fees and Services” contained in our definitive proxy statement for our 2022 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2021.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Index to Exhibit and Financial Statement Schedules
(1) Financial Statements.
The following consolidated financial statements are filed as part of this Annual Report:
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021
U.S. DOLLARS
INDEX
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 6714)
To the Board of Directors and Stockholders of Mawson Infrastructure Group Inc.
Opinions on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mawson Infrastructure Group Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and December 31, 2020 and the related consolidated statements of operations and comprehensive loss, of stockholders equity and of cash flows for each of the two years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for property and equipment in 2021 and the manner in which it accounts for revenue and leases in 2020.
Basis for Opinions
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinions.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of the Recognition and Disclosure of Digital Currency Mining Revenue.
F-2
As disclosed in Note 2, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company has entered into a contract with various 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. During the year ended December 31, 2021, the Company recognized net digital currency mining revenue of approximately $38.4 million.
We identified the recognition and disclosure of digital currency mining revenue recognized as a critical audit matter because, there is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for mining of digital currencies and the Company has exercised significant judgement in determining appropriate accounting treatment for the recognition and disclosure of revenue from digital currency mining operations.
The primary procedures we performed to address this critical audit matter included the following:
| ● | Performed site visits to facilities where the Company’s mining equipment is located. The visits included observations of the physical and environmental controls, and of mining equipment asset observation procedures; | |
| ● | Evaluated the design and effectiveness of the IT general controls and key financially relevant systems. | |
| ● | Independently confirmed certain data and records of digital currency rewarded directly with mining pools; | |
| ● | Independently confirmed certain data and records of digital currency disposed of directly with digital currency exchanges; | |
| ● | Compared the Company’s records of digital currency rewarded from mining activities to publicly available blockchain records; | |
| ● | Evaluated management’s rationale for the application of ASC 606 to account for digital currency awards earned; | |
| ● | Evaluated and tested management’s rationale and documentation associated with the valuation of digital currency awards earned; and | |
| ● | Evaluated management’s disclosures of its digital currency activities in the financial statements and footnotes. |
LNP Audit and Assurance International Pty Ltd
| /s/ |
Anthony Rose
March 21, 2022
We have served as the Company’s auditor since 2021.
F-3
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Trade and other receivables | ||||||||
| Cryptocurrencies | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Equipment deposits | ||||||||
| Marketable securities | ||||||||
| Security deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Trademarks | ||||||||
| 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 | ||||||||
| Paycheck protection program loan | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (note 15) | ||||||||
| Shareholders’ equity: | ||||||||
| Additional paid-in capital; Common stock ( | ||||||||
| Share subscription receivable | ( | ) | ||||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-4
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Cryptocurrency mining revenue | ||||||||
Hosting Co-Location revenue | ||||||||
| Sale of crypto currency mining equipment | ||||||||
| Other revenue | ||||||||
| Total revenues | ||||||||
| Less: Cost of revenues (excluding depreciation) | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative | ||||||||
| LO2A write off | ||||||||
| Share based payments | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Non-operating income/(expense): | ||||||||
| (Losses)/gains on foreign currency transactions | ( | ) | ||||||
| Loss on acquisition of IPM | ( | ) | ||||||
| Loss on sale of digital currencies | ( | ) | ||||||
| Share of net loss of associates accounted for using the equity method | ( | ) | ||||||
| Other income | ||||||||
| Interest expense | ( | ) | ||||||
| Loss on write off property, plant and equipment | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax expenses | ( | ) | ( | ) | ||||
| Net Loss | ( | ) | ( | ) | ||||
| Less: Net loss attributable to non-controlling interests | ( | ) | ( | ) | ||||
| Net Loss attributed to Mawson Infrastructure Group shareholders | ( | ) | ( | ) | ||||
| Net Loss per share, basic & diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares outstanding | ||||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| For the Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net Loss | ( | ) | ( | ) | ||||
| Other comprehensive income/(loss) | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Comprehensive loss | ( | ) | ( | ) | ||||
| Less: Comprehensive loss attributable to non-controlling interests | ( | ) | ( | ) | ||||
| Comprehensive loss attributable to common stockholders | ( | ) | ( | ) | ||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-6
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Year Ended December, 31 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 warrants | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs / at-the market offerings | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of IPR&D acquired, net of Business Combination transaction costs | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment of LO2A intellectual property revenue sharing obligation | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, stock based compensation | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, settlement of convertible note interest | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of RSU’s and stock options | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, conversion of Series A preferred stock | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, on conversion of convertible notes | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, exercise of warrants | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock by subsidiary to non-controlling interest | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase remaining non-controlling interest of Luna Squares LLC | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of RSU’s | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-7
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Year Ended December, 2020
| Series
A Preferred Stock (#) | Series
A Preferred Stock ($) | Common Shares (#) | Common Shares ($) | 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, 2019 | - | - | - | ( | ) | - | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock options | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares, exercise of warrants | - | - | - | - | - | | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Receipt of share subscriptions proceeds | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-8
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, |
||||||||
| 2021 | 2020 | |||||||
| 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 | ||||||||
| Operating lease expense | ||||||||
| Share of loss of equity accounted investments | ||||||||
| Interest on convertible notes satisfied by issue of notes | ||||||||
| Loss on purchase in Innovation Property Management, LLC | ||||||||
| Foreign exchange loss/(gain) | ( |
) | ||||||
| Loss on sale of shares | ||||||||
| Share based payments | |
|||||||
| Gain on disposal of fixed assets | ( |
|||||||
| Acquisition of Wize Pharma Inc | ||||||||
| Buyout of non-controlling interest | ( |
) | ||||||
| Change in assets and liabilities | ||||||||
| Trade and other receivables | ( |
) | ||||||
| Other current assets | ( |
) | ||||||
| Trade and other payables | ||||||||
| Net cash provided by operating activities | |
( |
) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Payments for trademarks | ( |
) | ||||||
| Purchase of investment shares | ( |
) | ||||||
| Proceeds from sales of property and equipment | |
|||||||
| Payment of fixed asset deposits | ( |
) | - | |||||
| Acquisition of Luna Squares LLC, net of cash acquired | ( |
) | ||||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITES | ||||||||
| Proceeds from common share issuances | |
|||||||
| Proceeds from convertible notes | ||||||||
| Payments of capital issuance costs | ( |
) | ( |
) | ||||
| Proceeds from borrowings | |
|||||||
| Proceeds from shareholder loans | ||||||||
| Repayment of lease liabilities | ( |
) | ( |
) | ||||
| Payments of borrowings | ( |
) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( |
) | ||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | ||||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-9
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1:- | GENERAL |
| a. | Mawson Infrastructure Group, Inc. (the “Company” or “Mawson” or “the Group”), formerly known as Wize Pharma, Inc was incorporated in the State of Delaware on April 2, 2012. Prior to that, we were originally incorporated under the name Bridge Capital.com, Inc on December 10, 1999.
The accompanying consolidated financial statements, including the results of the Company’s subsidiaries, Mawson Infrastructure Group Pty Ltd (formerly known as Cosmos Capital Limited) (“Mawson AU”)) and its subsidiaries: Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, MIG No.1 Pty Ltd (formerly known as Cosmos Grid Tech Pty Ltd), Cosmos Asset Management Pty Ltd, Luna Squares LLC, BITTD Pty Ltd, Luna Squares Repairs LLC (incorporated October 29, 2021), Luna Squares Property LLC (incorporated July 9, 2021) and Mawson Mining LLC (incorporated October 29, 2021) (collectively referred to as the “Group”), have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Since the acquisition of Mawson AU, Mawson has been treated as the acquiree, with Mawson AU being the acquirer. The result of which is that these financial statements are taken to be a continuation of the Mawson AU financial statements, with Mawson incorporated within the acquisition. For discussion regarding this acquisition and treatment (also referred to as either the “Mawson AU Transaction” or the “Cosmos Transaction”) please refer to Note 4: Acquisitions.
Mawson, through its subsidiary Mawson AU, is a ‘Digital Asset Infrastructure’ business, which owns and operates modular data centers (MDCs) based in the United States and Australia. As at December 31, 2021 Mawson AU currently owns and has ordered |
| b. | Going concern: |
The Company reports conditions which
raise substantial doubt about the Company’s ability to continue as a going concern. These conditions are an operating loss of $
Management’s plan to alleviate the substantial doubt regarding the Company’s ability to continue as a going concern and meet it’s obligations for at least one year from the date of approval of the consolidated financial statements include, raising new capital, improving profitability and generating sufficient cash flow from operations.
| c. | Initial Public Offering: |
On September 28, 2021, the Company completed an initial public offering
(“IPO”) in which it issued common stock for net proceeds of $
F-10
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES |
The consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
| a. | Use of estimates in preparation of Financial Statements: |
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.
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 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, Business Combinations, Reverse Asset Acquisition, and the Contingent obligation with respect to future revenues.
| b. | Principles of consolidation: |
The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly or majority owned and controlled subsidiaries. Intercompany investments, balances and transactions have been eliminated in consolidation. Non–controlling interests represents 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.
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
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, Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) was acquired by the Company. For accounting purposes, this was accounted for as a reverse asset acquisition with Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) as the accounting acquirer (refer to significant accounting policies below) and therefore the historical financial information of Cosmos Capital Limited prior to March 9, 2021 became the historical financial information of Mawson Infrastructure Group Pty Ltd, which have been consolidated into the financial statements of the Company.
F-11
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| c. | Revenue recognition: |
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).
The accounting policies for recognition by type of revenue are as follows.
Cryptocurrency mining revenue
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 various 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.
F-12
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
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.
Customers also are invoiced a fixed monthly fee for maintenance services which include, cleaning, cabling and other services to maintain the customers’ equipment.
The customer contracts contain Service Level Agreement clauses, which guarantee a certain percentage of time the power will be available to our customer. If the Company were to receive a penalty under these clauses, these are accounted for in accordance with ASC 606-10-32- 25, Consideration Payable to a Customer, which requires the payment be recognized as variable consideration and a reduction of the transaction price and, therefore, of revenue, when not in exchange for a good or service from the customer.
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.
Other revenues
Other revenues are recognized on the accruals basis when the Company is entitled to it.
| d. | 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.
| e. | Research and development expenses: |
Research and development expenses are charged to the statement of comprehensive loss as incurred.
F-13
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| f. | 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
| g. | 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, BITTD Pty Ltd and Cosmos Asset Management Pty Ltd 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.
F-14
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The following table presents data regarding the dollar exchange rate of relevant currencies:
| As of December 31, | % of change | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Year-end AUD 1 = USD | ( | %) | % | |||||||||||||
| Average AUD 1 = USD | % | ( | %) | |||||||||||||
| h. | 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.
| i. | 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.
| j. | Digital Currency: |
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 year ended December 31, 2021, and 2020:
Number of Bitcoin Held
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Opening number of Bitcoin held | ||||||||
| Number of Bitcoin added | ||||||||
| Number of Bitcoin sold | ( | ) | ( | ) | ||||
| Closing number of Bitcoin held | ||||||||
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.
F-15
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company’s policy is to dispose of production at the earliest opportunity, 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.
| k. | 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.
| l. | 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.
Of the Company’s financial instruments
that are measured and recorded at fair value on the Company’s balance sheet on a recurring basis, as at December 31, 2021 the only
Balance Sheet item categorized under Level 1 are the Marketable Securities of $
| m. | 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.
F-16
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| n. | 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 all 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 estimated useful lives of the assets as follows:
| Financial Asset class | Useful life | Depreciation Method | ||
| Fixtures and Fittings | ||||
| Plant and equipment | ||||
| Modular data center | ||||
| Motor Vehicles | ||||
| Computer equipment | ||||
| Processing Machinery (Miners) | ||||
| Transformers |
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 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 years ended December 31, 2021, and 2020, no impairment losses have been identified.
| o. | 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 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 bond.
F-17
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|
p. |
Convertible loans: |
On February 12, 2021,
The Mawson AU Notes automatically converted
into convertible notes of Mawson (“Mawson Notes”) upon close of the Cosmos Transaction on March 9, 2021. The Mawson Notes
have substantially the same terms as the Mawson AU notes and mandatorily convert into shares of Common Stock of Mawson the earlier of
6 months from February 12, 2021, or upon the occurrence of certain events at an issue price of $
On August 13, 2021, all
| q. | 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. As of December 31, 2021, the Company is not a party to any litigation that could have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
Legal costs incurred in connection with loss contingencies are expensed as incurred.
| r. | 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.
| s. | 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. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.
F-18
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of current expected credit losses (CECL) is based on historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. ASU 2016-13 also eliminates the concept of “other-than-temporary” impairment when evaluating available-for-sale debt securities and instead focuses on determining whether any impairment is a result of a credit loss or other factors. An entity will recognize an allowance for credit losses on available-for-sale debt securities rather than an other-than-temporary impairment that reduces the cost basis of the investment. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted. The Company has adopted this and it did not have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. The Company has adopted this and it did not have a material impact on the Company’s consolidated financial statements.
In October 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-10, Codification Improvements. The guidance contains improvements to the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. The guidance also contains Codifications that are varied in nature and may affect the application of the guidance in cases in which the original guidance may have been unclear. The adoption did not have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815–40). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. It aims to reduce unnecessary complexity in U.S. GAAP. ASU No 2020-06 is effective for fiscal years beginning after December 15, 2021. The Company does not expect the adoption of ASU No. 2020-06 to have a material impact on its consolidated financial statements.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, this was to increase transparency about assistance provided to businesses by a government, that has been accounted for by analogizing to a grant or contribution accounting model. ASU No. 2021-10 requires business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements. The Company has adopted this and it did not have a material impact on the Company’s consolidated financial statements.
In May 2021 the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU No. 2021-04 is to clarify the accounting by issuers for modifications or exchanges of equity-classified warrants. The framework applies to freestanding written call options, such as warrants, that were and remain equity classified by the issuer after the modification and are not in the scope of another Codification Topic. It is Effective for all entities in fiscal years starting after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures
F-19
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2:- |
SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| NOTE 3:- | BASIC AND DILUTED 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 at December 31, 2021 and 2020 are as follows:
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Warrants to purchase common stock | ||||||||
| Options to purchase common stock | ||||||||
| Restricted Stock-Units (“RSUs”) issued under a management equity plan | ||||||||
The following table sets forth the computation of basic and diluted loss per share:
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Numerator: | ||||||||
| Net loss | ||||||||
| Denominator: | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares - basic and diluted | ||||||||
| Net loss per share of Common Stock, basic and diluted | $ | ( | ) | $ | ( | ) | ||
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
F-20
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 4:- | ACQUISITIONS |
| a. | Mawson subscribed for |
| b. | On March 9, 2021, the Company acquired the shares of Mawson Infrastructure Group Pty Ltd (“ Mawson AU”) in a scrip for scrip exchange. This transaction has been accounted for as a reverse asset acquisition. Under the guidance in ASC 805, Cosmos Capital Limited was determined to be the accounting acquirer based on evaluation of the following facts and circumstances: |
| ● | The Mawson AU shareholders have the largest voting interest in the post-combination company; |
| ● | Mawson AU management holds executive management roles for the post-combination company and is responsible for the day-to-day operations; |
| ● | Mawson AU was significantly larger than the Company by assets, revenue, and employees; and |
| ● | The purpose and intent of combining the groups was to create an operating public company through the Company, with management continuing to use Cosmos Capital’s assets to grow the business; |
The application of the initial screen test in ASC 805 determined that the LO2A IPR&D in Mawson International was a single asset and represented substantially all of the fair value of the gross assets acquired. As such, the acquisition is treated as a reverse asset acquisition.
Acquired assets and liabilities of the legal parent entity are therefore measured and recognized at their relative fair values as of the date of the transaction.
After a reverse asset acquisition, despite that the legal acquirer (the legal parent entity) survives as the legal parent entity and continues to issue financial statements, the financial statements reflect the accounting from the perspective of the accounting acquirer (the legal subsidiary) in that the consolidated entity reflects the accounting acquirer as the accounting parent entity, and the financial statements represent a continuation of those of the accounting acquirer, except for the legal capital, which is retroactively adjusted to reflect the capital of the legal acquirer (legal parent entity) in accordance with ASC 805-40-45-1.
The fair value of the consideration given for the acquisition is as follows.
| Number of shares issued | ||||
| Multiplied by the fair value per share of Mawson common stock (1) | ||||
| Total | $ |
| (1) | Based on the closing share price of Mawson common stock on the day immediately prior to the close of the transaction. |
The fair values of the net tangible assets acquired at the date of acquisition are as follows:
| Cash and cash equivalents | ||||
| Marketable securities | ||||
| Accounts Payable | ( | ) | ||
| $ |
F-21
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 4:- | ACQUISITIONS (Cont.) |
The difference between the consideration
given and the fair values of the net tangible assets acquired of $
| c. | On July 5, 2021, the Company consummated the acquisition of all the outstanding membership interests of Luna pursuant to the terms of a (i) Membership Interest Purchase Agreement with Kyle Hoffman and (ii) Membership Interest Purchase Agreement with TRS Ventures LLC. Under the terms of the Hoffman MIPA, the Company purchased Mr. Hoffman’s membership interests in Luna, which represented |
(A) $
(B) $
Under the terms of the TRS MIPA, the
Company purchased TRS’s membership interests the Luna, which represented
(A) $
(B) $
| NOTE 5:- | TRADE AND OTHER RECEIVABLES |
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Trade receivables | $ | $ | ||||||
| Research and development tax credit | ||||||||
| Goods and service tax refund | ||||||||
| $ | $ | |||||||
F-22
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 6:- | PROPERTY AND EQUIPMENT |
Property and equipment, net, consisted of the following as of 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 | Total | |||||||||||||||||||||||||||||||
| Cost as of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| Disposals | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||||||||||||||
| Accumulated depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Closing balance as of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Property and equipment, net, consisted of the following as of December 31, 2020:
| Plant and equipment | Computer equipment | Furniture & fixtures | Processing machines (Miners) | Modular data center | Total | |||||||||||||||||||
| Cost as of December 31, 2019 | $ | |||||||||||||||||||||||
| Accumulated depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Closing balance as of December 31, 2020 | $ | |||||||||||||||||||||||
The Company incurred depreciation and amortization
expense in the amounts of $
| NOTE 7:- | DEPOSIT, PROPERTY AND EQUIPMENT |
F-23
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 7:- | DEPOSIT, PROPERTY AND EQUIPMENT (Cont.) |
On August 9, 2021,
As of December 31, 2021, $
| NOTE 8:- | SECURITY DEPOSITS |
The Company’s security deposits consist
of amounts paid by the Company to location providers in any event of default. The security deposits are refundable to the Company when
location provider services cease or are cancelled. Security deposits are included in non-current assets on the consolidated balance sheets
as such amounts are not expected to be refunded for at least twelve months after the December 31, 2021 reporting year. As at December
31, 2021 and 2020, the Company had $
| NOTE 9:- | LEASES |
As of December 31, 2021,
The Company leases the headquarters of its business
operations at Level 5, 97 Pacific Highway, North Sydney NSW 2060 Australia, being
On September 20, 2021, the Company signed a new
lease for
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.
F-24
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 9:- | LEASES (Cont.) |
The Company’s lease costs recognized in the Consolidated Statements of Income and Comprehensive Loss consist of the following:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating lease charges (1) | $ | $ | ||||||
| Finance lease charges: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease obligations | ||||||||
| $ | $ | |||||||
| (1) | Included in Selling, General & Administrative Expenses. |
| Operating leases | Finance Leases | |||||||
| 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Total undiscounted lease obligations | ||||||||
| Less imputed interest | ( |
) | ( |
) | ||||
| Total present value of lease liabilities | ||||||||
| Less current portion of lease liabilities | ( |
) | ( |
) | ||||
| Non-current lease liabilities | $ | $ | ||||||
| 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 (%) | % | % | ||||||
F-25
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10:- | TRADE AND OTHER PAYABLES |
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Trade payables | $ | $ | ||||||
| Accrued expenses | ||||||||
| Employee payables | ||||||||
| Tax payables | ||||||||
| $ | $ | |||||||
| NOTE 11:- | SHORT-TERM BORROWINGS |
| a. | On January 27, 2021, Cosmos Infrastructure LLC (“Cosmos Infrastructure”) entered into an Equipment Purchase and Finance and Security Agreement with Foundry Digital LLC (“Foundry”) to purchase machinery that will be located at a facility hosted by Compute North LLC (“Compute North”). On February 5, 2021, the term of the agreement was further amended to have a final payment due January 27, 2022. Under the terms of the agreement, Cosmos Infrastructure purchased 500 Whatsminer M30S mining machines, paid a deposit of $ | |
| b. | On October 15, 2021, |
| NOTE 12:- | LONG-TERM BORROWINGS |
Marshall loan
In December 2021 the Company entered
into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd. The total loan received prior to year-end was $
Paycheck protection program (“PPP”) loan
During 2020, the Company was granted
a PPP loan in the amount of $
F-26
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 13:- | SIGNIFICANT TRANSACTIONS |
| 1. | On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) in a scrip for scrip exchange. This transaction has been accounted for as a reverse asset acquisition. This reverse asset acquisition and the associated impact including the write off of LO2A is referred to as the Cosmos Transaction. Refer note 4b. | |
| 2. | On August 6, 2021, | |
| 3. | On September 28, 2021, the Company completed an initial public offering (“IPO”) in which it issued common stock for net proceeds of $ | |
| 4. | In December 2021, the Company entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd. The total loan received prior to year-end was $ |
| 5. | Cosmos Infrastructure LLC (“Infrastructure”) entered into two Long-Term Purchase Contracts with Canaan Convey Co Ltd (“Canaan”) as set out in note 7. |
| NOTE 14:- | TAXES ON INCOME |
Income/(loss) before income taxes consisted
of income from domestic operations of ($
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Current | ||||||||
| Federal | $ | $ | ||||||
| Foreign | ( | ) | ||||||
| State | ||||||||
| Deferred | ||||||||
| Federal | ||||||||
| Foreign | ||||||||
| State | ||||||||
| Total | $ | ( | ) | $ | ||||
F-27
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 14:- | TAXES ON INCOME (Cont.) |
Income tax expense differed from the
amount computed by applying the Federal statutory income tax rate of
| December 31, 2021 | ||||||||
| Amount | Rate | |||||||
| Federal tax at statutory rate | ||||||||
| State income taxes, net of federal tax benefit | $ | ( | ) | % | ||||
| Foreign Taxes | % | |||||||
| Stock Option Compensation | % | |||||||
| R&D Credit | % | |||||||
| Change in Valuation Allowance | % | |||||||
| Tax Return to Tax Provision Adjustment | ( | %) | ||||||
| Non-Controlling Interest | % | |||||||
| Other | % | |||||||
| Total | $ | ( | ) | % | ||||
The tax effects of temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities related to the following:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Net operating loss carryforwards | $ | |||||||
| Operating Lease Liability | ||||||||
| Accrued Liabilities | ||||||||
| Unrealized Loss | ||||||||
| Research and Development Credits | ||||||||
| Stock based compensation | ||||||||
| Disallowed Interest Expense | ||||||||
| Amortization | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Liabilities | ||||||||
| Right of Use Asset | ||||||||
| Depreciation | ( | ) | ||||||
| Other | ||||||||
| Total deferred tax liabilities | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | ||||||||
Management believes that, based on available
evidence, both positive and negative, it is more likely than not that the deferred tax assets will not be utilized. The valuation allowance
increased by $
As of December 31, 2021, the Company had approximately $
F-28
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 14:- | TAXES ON INCOME (Cont.) |
If recognized, all of the unrecognized tax benefits would not impact
the effective tax rate due to the valuation allowance against certain deferred tax assets. As of December 31, 2021, the Company had no
unrecognized income tax benefits. The Company does not anticipate any significant increases or decreases to unrecognized tax benefit during
the next
The Company files income tax returns in the U.S. Federal and foreign
jurisdictions. As of yet, the company does not have much of a state footprint and does not have any state filings for the tax year ending
December 31, 2021. The Company is not currently under examination by income tax authorities in federal or state jurisdictions.
The Company has made no provision for U.S. income taxes on cumulative undistributed non-U.S. earnings that are indefinitely reinvested at December 31, 2021 . Determination of the potential amount of unrecognized deferred U.S. income tax liability related to such reinvested non-U.S. earnings is not practicable because of the numerous assumptions associated with this hypothetical calculation. However, foreign tax credits would be available to reduce some portion of this amount. Changes to the Company’s policy of reinvestment or repatriation of non-U.S. earnings may have a significant effect on its financial condition and results of operations.
| NOTE 15:- | 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 $ |
| 2. | On February 5, 2021, Infrastructure entered into a Long-Term Purchase
Contract with Canaan for the purchase of |
| 3. | On August 9, 2021, Infrastructure entered into a second Long-Term Purchase
Contract with Canaan for the purchase of |
F-29
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 16:- | STOCKHOLDERS’ EQUITY |
On March 9, 2021, as a part of closing the Cosmos
Transaction, Mawson issued a total of
On June 2, 2021, the Company issued
On June 15, 2021, the final
On August 6, 2021, the Company finalized the
2021 PIPE Agreements with the 2021 PIPE Investors. Pursuant to the 2021 PIPE Agreements, the Company agreed to sell to the 2021 PIPE
Investors, and the 2021 PIPE Investors agreed to purchase from the Company, in a private placement, an aggregate of
On August 13, 2021, Mawson executed a 10-for-1
reverse stock split of its outstanding common stock and reduced its authorized common stock to
On August 18, 2021, Mawson performed a share
conversion of the outstanding
On August 30, 2021, Mawson issued an additional
On September 28, 2021,
On October 12, 2021, H.C Wainwright exercised their
On November 5, 2021, W Capital exercised their
Restricted Stock
As of December 31, 2021,
The agreements ended with each shareholder on December 31, 2021, but the stock remains restricted on December 31 and will be converted to common stock during quarter one of 2022.
Series A Preferred Stock
As of December 31, 2021, there are no shares of Series A Preferred Stock outstanding.
F-30
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 16:- | STOCKHOLDERS’ EQUITY (Cont.) |
Common Stock Warrants
A summary of the status of the Company’s outstanding stock warrants and changes during the year ended December 31, 2021, is as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of December 31, 2020 | ||||||||||||
| Issued | $ | |||||||||||
| Exercised | ( | ) | ||||||||||
| Expired | ||||||||||||
| Outstanding as of December 31, 2021 | $ | |||||||||||
| Warrants exercisable as of December 31, 2021 | $ | |||||||||||
On September 30, 2021, the Company entered into
an underwritten capital raise with the Representative, which resulted in the issuance of
On October 12, 2021, H.C Wainwright exercised their
On November 5, 2021, W Capital exercised their
| NOTE 17:- | RELATED PARTY TRANSACTIONS |
During the years ended December 31, 2021, and
2020 the Company received a loan from Georgina Manning Pty Ltd, an entity controlled by Georgina Manning, an immediate family member of
James Manning, director and CEO, of the Company of $
The Sharon lease, as described in Note 18, is a related party transaction that occurred after the year ended December 31, 2021.
| NOTE 18:- | SUBSEQUENT EVENTS |
On February 23, 2022, Luna Squares entered into
the Co-Location Agreement with Celsius Mining LLC, pursuant to which Luna Squares will provide a hosting facility, electrical power and
internet access to Celsius Mining for the purposes of installing, maintaining and operating Celsius Mining’s ASIC machines (cryptocurrency
mining equipment) for a monthly services fee based on power consumption, plus an infrastructure fee, plus a market margin. In addition,
Celsius Mining loaned Luna Squares a principal amount of US$
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 100% ownership interest. James Manning, CEO a director and a significant shareholder of the Company is also a director of Vertua Ltd and has a material interest in the Sharon lease as a large shareholder of Vertua Ltd. The lease contains market standard legal terms, and will be for a term of 5 years, and Luna Squares LLC has 2 options to extend for 5 years each. The Audit Committee has compared the rent and terms to other arms’ length leases the Company has entered into and formed the view the rent is in line with the market for similar properties. Rent is subject to annual increases of CPI for the Northeast Region, or 4%, whichever is higher. The base rental amount in the first year is $0.24 million. Depending on power energization and usage, variable additional rent may be payable per annum, with charges ranging from $500 to $10,000 per month, depending on power energized and whether it is available. Upon the recommendation from the Audit Committee, the directors of the Company other than James Manning were made aware of the material facts as to Mr. Manning’s interest in the lease and authorized the Company in good faith to enter the lease after determining the lease to be fair to the Company.
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(2) Financial Statement Schedules. All financial statement schedules have been omitted since the information is either not applicable or required or is included in the financial statements or notes thereof.
(3) Exhibits. Please see (b) below.
(b) Exhibits
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| 101# | The following materials from Mawson Infrastructure Group Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Comprehensive Loss, (iii) Statement of Changes in Shareholders’ Equity (Deficiency), (iv) the Statements of Cash Flow, and (iv) Notes to Financial Statements. | |
| 104# | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
| # | Filed herewith |
| † | Exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We will furnish the omitted exhibits and schedules to the Securities and Exchange Commission upon request by the Securities and Exchange Commission. |
| + | Management compensatory plan. |
(c) Financial Statement Schedules. Please see Item 15(a)(2) above.
ITEM 16. FORM 10-K SUMMARY.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Mawson Infrastructure Group, Inc. | ||
| Date: March 21, 2022 | By: | /s/ James Manning |
|
James Manning Executive Officer) | ||
| Date: March 21, 2022 | By: | /s/ Hetal Majithia |
|
Hetal Majithia Officer) | ||
POWERS OF ATTORNEY
Each of the undersigned officers and directors of Mawson Infrastructure Group Inc., a Delaware corporation, hereby constitutes and appoints James Manning and Hetal Majithia and each of them, severally, as his or her attorney-in-fact and agent, with full power of substitution and re-substitution, in his or her name and on his or her behalf, to sign in any and all capacities this Annual Report and any and all amendments and exhibits to this Annual Report and any and all applications and other documents relating thereto, with the Securities and Exchange Commission, with full power and authority to perform and do any and all acts and things whatsoever which any such attorney or substitute may deem necessary or advisable to be performed or done in connection with any or all of the above described matters, as fully as each of the undersigned could do if personally present and acting, hereby ratifying and approving all acts of any such attorney or substitute.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | TITLE | DATE | ||
| /s/ James Manning | Chief Executive Officer (Principal Executive Officer) | March 21, 2022 | ||
| James Manning | ||||
| /s/ Hetal Majithia | Chief Financial Officer and Treasurer | March 21, 2022 | ||
| Hetal Majithia | (Principal Financial and Accounting Officer) | |||
| /s/ Greg Martin | Chairman of the Board/Director | March 21, 2022 | ||
| Greg Martin | ||||
| /s/ Yossi Keret | Director | March 21, 2022 | ||
| Yossi Keret | ||||
| /s/ Michael Hughes | Director | March 21, 2022 | ||
| Michael Hughes |
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