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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 001-40849
Mawson Infrastructure Group, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 88-0445167 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
| 201 Clark Street, Sharon, Pennsylvania | 16146 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: +61 2 8624 6130
Securities Registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | MIGI | The Nasdaq Stock Market LLC |
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 ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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. Yes ☒ No ☐
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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer: ☐ | Accelerated filer: ☐ |
| Non-accelerated filer: ☒ | 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 ☐
Indicate by check mark whether the registrant 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 $62.35 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 17, 2023, there were 14,131,110 shares of the registrant’s Common Stock outstanding.
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 2023 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, 2022.
TABLE OF CONTENTS
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 February 9, 2023, we effected a reverse stock split of our Common Stock at a ratio of one for six (1:6) (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.
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. The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those expressed or implied in our forward-looking statements:
| - | our need to, and difficulty in, raising additional capital; |
| - | downturns in the Cryptocurrency industry; |
| - | inflation; |
| - | increased interest rates; |
| - | the inability to procure needed hardware; |
| - | the failure or breakdown of mining equipment, or internet connection failure; |
| - | access to reliable and reasonably priced electricity sources; |
| - | Cyber-security threats; |
| - | our ability to obtain proper insurance; |
| - | construction risks; |
| - | banks and other financial institutions ceasing to provide services to our industry. |
| - | changes to the Bitcoin network’s protocols and software; |
| - | the decrease in the incentive to mine Bitcoin; |
| - | the increase of transaction fees related to digital assets: |
| - | the fraud or security failures of large digital asset exchanges; |
| - | future digital asset, technological and digital currency development; and |
| - | the regulation and taxation of digital assets like Bitcoin; |
| - | our ability to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002; |
| - | material litigation, investigations or enforcement actions by regulators and governmental authorities. |
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 obligation 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.
PART I
ITEM 1. BUSINESS.
Overview
General
Mawson Infrastructure Group Inc is a corporation incorporated in Delaware in 2012. Shares of Mawson’s common stock have been listed on The Nasdaq Capital Market since September 29, 2021. Mawson was previously known as Wize Pharma Inc, and changed its name on March 17, 2021, after the acquisition of Mawson Infrastructure Group Pty Ltd (then known as Cosmos Capital Limited), a digital infrastructure provider.
Mawson is a ‘Digital Asset Infrastructure’ business, which owns and operates (through its subsidiaries) data centers for the generation of Bitcoin cryptocurrency (also known as “Bitcoin mining”), predominately in the United States. Our data centers consist of our proprietary modular data centers (“MDCs”), and we continue to develop our MDC technology to improve their performance. Because Mawson takes part in Bitcoin mining, it is often referred to as a Bitcoin miner.
Our primary business is the operation of our own fleet of Application-Specific Integrated Circuit (“ASIC”) computers known as “Miners” within our data centers. The Miners are used for the ‘mining’ of Bitcoin. As at the date of this Annual Report, we operate one data center facility located in Pennsylvania, USA, and are constructing a second. We are actively seeking out future sites for additional data center facilities. The Miners we operate are focused on the process of digital mining, specifically for Bitcoin.
In exchange for powering down our systems and curtailing the power we draw from the grid in response to periods of high electricity demand on the local grid network, we may receive net energy benefits or compensation. In addition, in 2022 we entered into a new contract which allows us to trade our energy to achieve net energy benefits. We have recognized a derivative asset on our balance sheet for the contract, which has been measured at fair value with any changes in fair value recognized in our statement of operations. Both these arrangements have been particularly useful during periods of high energy prices, and low Bitcoin prices, when our Bitcoin mining business has been less profitable.
We offer ‘hosting’ or ‘co-location’ facilities to other businesses who wish to have their Miners located within our facilities and MDCs. These businesses pay us fees for the use of our facilities and related services. As at the date of this Annual Report Mawson’s major hosting customer is Celsius Mining LLC. Mawson successfully ended its hosting contracts with a number of sub-scale hosting customers during 2022.
We also sell new and used crypto currency mining and MDC equipment on a periodic basis, subject to prevailing market conditions and any surplus we may be experiencing.
As of December 31, 2022
| Existing Operations Online |
Order and Purchase Agreements |
Cumulative Fleet Fully Deployed |
||||||||||
| Total miners online | 8,792 | - | 8,792 | |||||||||
| Total miners on order | - | - | - | |||||||||
| Total miners in storage | 15,010 | - | 15,010 | |||||||||
| Total miners | 23,802 | - | 23,802 | |||||||||
Our Products and Services
Mawson’s business
Mawson has three main businesses through which it generates its revenue:
| ● | Self-mining; |
| ● | Hosting; and |
| ● | Energy Markets Program. |
Bitcoin Self-Mining
At the core of Mawson’s operations is ‘Bitcoin mining’. Put very simply, Bitcoin mining involves the use of specialized computers to solve algorithmic problems in order to update the distributed or decentralized ledger of Bitcoin transactions securely. In return for providing this security to the Bitcoin ledger, Bitcoin miners are rewarded with Bitcoin. The decentralized ledger is the key innovation of the Bitcoin protocol. It is a public ledger that can be viewed by anyone with specialist knowledge, and is typically kept by more than one entity. An example of a centralized ledger would be a ledger of bank account transactions kept by a financial institution.
Mining hardware performs computational operations to solve specific computing problems in support of the Bitcoin network. The computing power is called “hash rate” and is measured in “hashes per second.” A “hash” is the computation run by the mining hardware in support of the blockchain security; 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 and growing competition to mine Bitcoin, CPU mining was rapidly replaced by the Graphics Processing Unit (GPU), which was in turn replaced by Application-Specific Integrated Circuit (“ASIC”) Miners. These ASIC Miners are designed specifically for the task of solving computing problems in support of the Bitcoin network, which maximizes the rate of hashing operations. As with most current large scale mining operations, Mawson only operates ASIC Miners.
Hash rate is a measure of the processing speed of a Miner. 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.
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 the same or similar. Mawson can increase its hash rate in a number of ways, including by acquiring and operating 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 and maintenance). By operating more Miners, Mawson will increase the amount of power it requires to operate the Miners, thus increasing its costs. 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 (if Mawson continued to deploy the same amount of hash rate), increasing the chance that Mawson will be rewarded with Bitcoin.
As Mawson increases its hash rate it increases its chance of solving a particular problem and earning the right to place a block on the blockchain and at the same time earning a Bitcoin reward, as well as a potential transaction fee. As the global network has modernized and become more efficient, the hash rate required to regularly solve for a block (that is, the ‘network difficulty’) has increased significantly, leading to Bitcoin miners acquiring ever large fleets of more efficient ASIC Miners. The expanding fleets of ASIC Miners generally require more electrical power. Increased use of electrical power increases the cost of solving a block and, therefore, the relative cost of mining for Bitcoin. This increase in network difficulty also means that it can become harder for individual mining operations to find a block and earning any reward or transaction fees for their mining efforts. Individual Bitcoin Miners risk going for extended periods of time without earning any Bitcoin rewards.
To smooth the earning of Bitcoin rewards, most miners, including Mawson, will join a ‘mining pool’ (that is a group of other miners). A large group of miners with greater hashing power is more likely to earn a cryptocurrency reward. The members of the mining pool then receive Bitcoin rewards on a pro rata basis based on total hashing capacity they contributed to the mining pool. This is intended to reduce the variance of our Bitcoin rewards, and therefore revenue, generation.
As at the date of this Annual Report, Mawson operates its own MDCs in one data center facility in Midland Pennsylvania, USA, on land that we have leased on long-term arrangements. Midland has a 100MW capacity once fully developed. A second data center facility is being developed at Sharon Pennsylvania, USA. The Sharon facility is scheduled to come online incrementally through 2023/24 commencing in Q2, 2023 starting with 12MW of self-mining operations. Sharon has a 120MW capacity once fully developed. Together the facilities will have a capacity of 220MW once fully developed.
Part of Mawson’s strategy is to identify and secure new development sites for future data center facilities which meet our investment criteria. Before committing to a site, Mawson considers a range of investment criteria, including factors such as climate, community acceptance of Bitcoin mining operations, secure tenure through long term leases, or the ability to acquire sites, the existence of demand response programs which Mawson can participate in, the ability to secure low cost, stable, low carbon or carbon-neutral sustainable power, labor and skills availability, local taxation regimes, and proximity to Mawson’s existing supply chains and operations.
Our core revenue generating operation is the mining of Bitcoin. During the year ended December 31, 2022, we mined 1,342.59 Bitcoin resulting in revenues totaling $43.11 million.
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.
Customer Co-location and Hosting Services
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 ASIC Miners and other equipment located within our facilities. These customers who pay us a fee for the use of our facilities and related services The customer typically keeps all Bitcoin mined in this manner, while paying Mawson for the costs of mining, plus a margin. This kind of arrangement is known as ‘hosting’ or ‘co-location’. These arrangements can be customized for each customer’s situation and strategy, and allows Mawson to diversify its income streams, while adjusting its risk profile. For example, customers may agree to be charged upfront infrastructure fees, minimum fees, and maintenance fees. Such fees can provide upfront benefits, which de-risks the business, allows Mawson to expand more quickly. Minimum fees can help generate revenue during periods when our Bitcoin self-mining may not be profitable (for example, due to high energy prices, high difficulty, and low Bitcoin prices). Counter-party risk is a key issue when entering into hosting arrangements with customers, and Mawson employs a number of mitigation strategies including deposits and upfront charges.
Energy Markets Program
To power all the ASIC miners at its facilities, Mawson uses substantial amounts of energy. This means that energy is a material input cost for Mawson’s operations. If energy prices are too high, then the cost of mining may be too high to make Bitcoin mining economical. This is especially true at times when Bitcoin prices are low, and network difficulty is high. Mawson uses proprietary financial models, which it is constantly refining, which highlight to Mawson when participation in the Energy Markets Program will create greater value than Bitcoin mining. Mawson then decides whether to mine and whether to curtail its energy usage, by switching off its ASIC miners.
If Mawson decides to curtail its energy use, then during these periods Mawson’s Bitcoin revenue may be significantly reduced. In addition to hosting revenues that may be available, Mawson has developed an Energy Markets Program. In addition to energy hedges and derivatives that Mawson may be able to purchase, Mawson participates in demand response programs. Demand response programs compensate Mawson for periods of curtailment, and can generate additional revenues for Mawson.
Further, because Mawson can be flexible in the way it operates its Bitcoin mining data centers and how it uses energy, Mawson can increase electricity grid stability by providing demand for energy producers when aggregate power demand is low, and then lowering its own usage when aggregate power demand is high.
Factors Affecting Profitability
The main factors affecting Mawson’s Self-Mining 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. |
There is a risk that a change in any of these factors will have a detrimental effect on Mawson’s business. 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. For example, 2022 was a prolonged period of falling Bitcoin value. 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 in doing so we hope to support the introduction of further renewable or sustainable power into the grid. We also enter into arrangements where we may be compensated in certain circumstances if we curtail or reduce or cease our energy usage. Typically, this will occur when energy prices spike, and the mining of Bitcoin becomes unprofitable. In this way we can provide stability to the energy grid by reducing our demand on renewable or sustainable energy at times of peak usage, or low supply, potentially reducing prices for other users.
Other products and services and investments
Mawson will from time to time opportunistically sell hardware that it has acquired, whether used or unused, which is surplus to its requirements, or in order to fund newer and better equipment. Hardware that Mawson would typically sell includes ASIC miners, transformers and/or MDCs.
Mawson owns an interest in Cosmos Asset Management Pty Ltd (“Cosmos Asset Management”), an Australia based crypto investment manager. During the year ended December 31, 2022, Cosmos Asset Management was placed into voluntary administration, and is in the process of being wound up. Cosmos Asset Management successfully launched three cryptocurrency related exchange traded funds in Australia, which were amongst the first of their kind, however due to the falling cryptocurrency market, investor uptake of the investment products was not sufficient to ensure that Cosmos Asset Management could operate sustainably. Cosmos Asset Management had agreed a debt funding package and corporate restructuring with Purpose LP and its other shareholders (including Mawson), however Cosmos Asset Management was placed into voluntary administration before this package could be fully implemented.
We have a 20.63% interest in a Web 3 infrastructure business Distributed Storage Solutions Limited (“DSS”). DSS is a decentralized data storage and compute infrastructure business offering enterprise grade solutions servicing AI and HPC customers in the open science and medical research fields. DSS is a member of the Filecoin Network of storage providers whereby it generates the native token FIL in return for proving its capacity and integrity of data stored to the blockchain in a process known as proof-of-space. Decentralized data storage providers seek to provide an emerging alternative to the current large single company providers such as Amazon Web Services, Azure (Microsoft), and Google Cloud. Going forward, DSS’s large scale computing infrastructure enables it to handle large computing loads on demand, which will allow it to offer ‘compute-as-a-service’, including for the application of artificial intelligence.
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 enters into Power Purchase Agreements (“PPA”) with its power suppliers 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 example, the state of New York has instituted a partial ban on crypto-currency mining in that state. 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 the other listed mining companies 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, sustainable electricity, or access to sites with reliable sources of power. Many Bitcoin mining operations are not publicly operated, and therefore data is not readily available.
Listed companies operating comparable businesses include:
| ● | Core Scientific, Inc. (currently in Chapter 11 bankruptcy protection) |
| ● | Marathon Digital Holdings, Inc. |
| ● | Riot Platforms, Inc. |
| ● | Hut 8 Mining Corp. |
| ● | TeraWulf Inc. |
| ● | HIVE Blockchain Technologies Ltd |
| ● | Bitfarms Ltd |
| ● | Iris Energy Limited |
| ● | Cipher Mining Inc.-- |
| ● | Stronghold Digital Mining, Inc.-- |
| ● | Argo Blockchain plc |
| ● | Greenidge Generation Holdings Inc | |
| ● | Applied Digital Corp | |
| ● | Galaxy Digital Holdings Ltd |
Human Capital
Our employees are critical to our success. As of March 11, 2023, we had 40 full time and 3 part time employees based in the U.S. and Australia. We also use contractors where practical and further rely on the extensive expertise of our external advisers, including legal, audit, financial, IT 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 at least in part dependent on our ability to foster an environment that is sustainably safe, respectful, fair, and inclusive of everyone and their ideas, and promotes diversity, equity and inclusion. In our view these aims are congruent with Mawson’s overall objective to create a team dynamic where we are focused on the success of Mawson, and therefore by extension Mawson’s various stakeholders, including our stockholders, our suppliers, our customers, our employees, and the communities we operate in.
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.
ESG
Governments around the world have been introducing new energy policies and legislation in response to climate change and the effects on energy markets of the Ukraine war.
Any legislative changes regarding climate change or market interventions as a result of the Ukraine war 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. If power costs rise so high as to put certain industries at risk, legislators may intervene in energy markets to direct energy to certain industries. Price caps could be introduced which may have long-term effects on power prices. If fossil fuel projects are not allowed proceed, then this may have an effect on power prices if sustainable or renewable energy is insufficient.
Corporate Information
Our principal place of business is 201 Clark Street, Sharon, Pennsylvania 16146. Our Australian 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.
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.
Summary of Risk Factors
Our business is subject to a number of risks, including risks that may adversely affect our business, financial condition, and results of operations. These risks are discussed more fully below and include, but are not limited to, risks related to:
Risks Relating to Our Business and Management
| - | our history of incurring losses; |
| - | our need to, and difficulty in, raising additional capital; |
| - | the potential of being delisted from NASDAQ; |
| - | downturns in the Cryptocurrency industry; |
| - | inflation; |
| - | increased interest rates; |
| - | the inability to procure needed hardware; |
| - | the failure or breakdown of mining equipment; |
| - | outages and limitations of internet connectivity; |
| - | access to reliable and reasonably priced electricity sources; |
| - | Cyber-security threats; |
| - | our ability to obtain proper insurance; |
| - | the prices of digital assets; |
| - | our reliance on a small number of key employees; |
| - | the COVID-19 pandemic; |
| - | our failure to effectively manage our growth; |
| - | our growth and other acquisitions; |
| - | the competitiveness of the cryptocurrency industry; |
| - | global climate change and related environmental regulations; |
| - | the potential cancellation or withdrawal of required operating and other permits and licenses; |
| - | construction risks; and |
| - | banks and other financial institutions ceasing to provide services to people in our industry, whether through choice or due to their own insolvency or failure. |
Risks Relating to Cryptocurrency Mining, Bitcoin Price and Technology
| - | changes to the Bitcoin network’s protocols and software; |
| - | the manipulation of the blockchain by malicious actors; |
| - | failures of the Bitcoin network to be properly monitored and upgraded; |
| - | the decrease in the incentive to mine Bitcoin; |
| - | an increase in the network difficulty; |
| - | the increase of transaction fees related to digital assets: |
| - | the downward press on the price of Bitcoin created by firms selling their Bitcoin; |
| - | political or economic crises; |
| - | the fraud or security failures of large digital asset exchanges; |
| - | the further development and acceptance of digital asset networks and other digital assets; |
| - | future digital asset and digital currency development; and |
| - | the development of quantum computing. |
Risks Relating to Laws, Regulatory Frameworks, and Legal Action
| - | regulatory changes and changes in interpretations of existing regulations, including for digital assets like Bitcoin, or Bitcoin mining itself; |
| - | our ability to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002; |
| - | future developments regarding the treatment of digital assets for U.S. federal income and foreign tax purposes, or other taxes on Bitcoin mining; |
| - | regulatory intervention by governments impacting the right to acquire, own, hold, sell, exchange or use Bitcoin or other cryptocurrencies; and |
| - | material litigation, investigations or enforcement actions by regulators and governmental authorities. |
Risks Relating to the Ownership of Our Common Stock and Other Common Risks
| - | the volatility of our stock price; |
| - | the volatility and variation in our revenue and operating costs from period to period; and |
| - | our failure to meet our publicly announced guidance or other expectations. |
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. 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 need to raise additional capital to continue our operations and execute our business strategy.
We expect that we may incur net losses for the foreseeable future. Accordingly, our ability to continue as a going concern and execute our business strategy depends on our ability to raise additional capital through equity, debt or structured financings, collaborations and strategic alliances or other similar types of arrangements.
Our capital needs have depended on, and will continue to depend on, many factors that are highly variable and difficult to predict, including:
| 1. | the rate of growth we choose to pursue; |
| 2. | the cost of energy; |
| 3. | the cost of key supplies, materials and equipment; and |
| 4. | the price of Bitcoin; |
We may never become profitable. Based on some of our current operating plan estimates, we have sufficient cash to satisfy our working capital needs and other liquidity requirements over the next 12 months from the date of issuance of the accompanying consolidated financial statements. We may need to raise additional capital or significantly curtail our planned operations to remain a going concern.
Additional capital may not be available to us, or even if it is, the cost of such capital may be high. We may be forced to obtain additional capital when our stock price or trading volume or both are low, or when the general market for cryptocurrency companies is weak. Raising capital under any of these or similar scenarios, if we can raise any at all, may lead to significant dilution to our existing stockholders. We may be forced to sell assets to raise capital, and we may not be able to realize the full value of those assets at the time of sale.
Listing on The Nasdaq Capital Market (“Nasdaq”)
Although our common stock is currently listed on Nasdaq, we may not be able to continue to meet Nasdaq’s minimum listing requirements or those of any other national exchange. On August 31, 2022, we received written notice from Nasdaq that we were not in compliance with the minimum bid price requirements for continued listing. The Nasdaq Listing Rules allow a period of 180 calendar days to regain compliance. On November 23, 2022, our Board of Directors approved the execution of a reverse stock split of all of our outstanding shares of common stock at a ratio of 1-6, in order to enable the Company to regain compliance with the Nasdaq’s minimum listing requirements. That reverse stock split took effect on February 9, 2023. As of the date of this annual report, Mawson is compliant with the Nasdaq minimum bid price requirements for continued listing.
On October 24, 2022, we received written notice from Nasdaq that we were not in compliance with Nasdaq’s audit committee requirements for continued listing due to the resignation of one of our directors. The Nasdaq Listing Rules provide a cure period in order to regain compliance as follows: (a) until the earlier of our next annual stockholders’ meeting or September 13, 2023; or (b) if our next annual stockholders’ meeting is held before March 13, 2023, then until March 13, 2023. On January 31, 2022, Mawson appointed a new member to its Board, Mr. Rahul Mewawalla, and also appointed him to each of the Company’s committees, including the audit committee. As of the date of this annual report, Mawson is compliant with the Nasdaq audit committee requirements for continued listing.
If we are unable to maintain listing on Nasdaq or if a liquid market for our common stock does not develop or is not sustained, our common stock may remain thinly traded. If, for any reason, Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur, each of which could have a material adverse effect on our shareholders:
| 1. | The liquidity of our common stock; |
| 2. | The market price of our common stock; |
| 3. | Our ability to obtain financing for the continuation of our operations; |
| 4. | The number of investors that will consider investing in our common stock; |
| 5. | The number of market makers in our common stock; |
| 6. | The availability of information concerning the trading prices and volume of our common stock; and |
| 7. | The number of broker-dealers willing to execute trades in our common stock. |
The Cryptocurrency Industry has experienced multiple downturns
Bitcoin prices have fallen substantially over lengthy time periods multiple times in cryptocurrency’s history. Most recently the Bitcoin price fell from over $65,000 in late 2021 to prices below $17,000 in early 2023. A falling Bitcoin price directly affects our ability to generate revenue, which can affect our ability to meet our financial obligations. Further, volatility in energy prices has meant that the major input cost to generate Bitcoin has increased.
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 fiat currency exchange rates. A fall in the price of Bitcoin will have a negative impact on our revenues. 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 continue to fluctuate, significantly from period to period. Mawson does not use derivatives to hedge Bitcoin prices.
Corporate collapses of important companies in the Bitcoin ecosystem (other than Bitcoin miners) or other cryptocurrencies can also have an impact on confidence and the Bitcoin price. There have been a number of examples of this in the last year, such as the collapse of FTX.
We are also exposed to the effect a falling price can have on our counterparties, including the exchanges we use. In particular, in July of 2022, Celsius Networks, LLC and Celsius Mining LLC, filed for Chapter 11 bankruptcy. Celsius Mining LLC is our only hosting customer and its failure to pay (or pay timely) amounts it owes to us when due could have a material adverse effect on our financial situation. Through Chapter 11 bankruptcy protection, Celsius has avoided paying two pre-petition invoices to our subsidiary Luna Squares LLC totaling in excess of $1.8million.
Inflation in the global economy could negatively impact our business and results of operations.
General inflation in the United States and around the world has risen to levels not experienced in recent decades. General inflation, including rising prices for energy, metals, components, and other inputs as well as rising wages negatively impact our business by increasing our operating costs. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations, and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.
Increased Interest Rates
Central banks around the world (including the US Federal Reserves, and the Reserve Bank of Australia) have been increasing their interest rates. While our current borrowings are at fixed rates of interest, any future borrowings or refinancing may be at higher interest rates than the rates that we have obtained in the past.
We or our suppliers may not be able to procure or repair hardware that is required in our operations.
Supply chains were disrupted and being realigned in 2022, due to a variety of shocks including COVID-19, the war in Ukraine and broadening of trade restrictions, and onshoring efforts of the USA, such as the Chips Act. We expect this uncertainty to continue in 2023. 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.
Due to low Bitcoin prices, many Bitcoin mining companies have curtailed their mining operations, and have delayed expansion plans. This has meant that they are no longer acquiring new Miners and are selling unused miners. Miners (new and second hand) are, at the date of this annual report, easier to acquire already landed in the US and at lower prices than early 2022, however it can be expected that the price of Miners will rise, and they will become more difficult to source as the price of Bitcoin increases.
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, and crackdowns on the private sector, including large technology companies. 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 sophisticated machines, and may be operated for long periods of time. They are thus 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, the 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.
Our operations have required significant amounts of electrical power and, as we continue to expand, we anticipate our demand for electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power on a cost-effective basis we may not be able to realize the anticipated benefits of our significant capital investments. If power prices increase further this will likely materially impact whether we can generate Bitcoin profitably, and how much net energy benefits we will be entitled to.
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.
Additionally, our operations could be materially adversely affected by prolonged power outages. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected.
Cyber-security threats pose a challenge to our business including the safekeeping of our digital assets, and a risk of reputational damage.
Mawson, like almost all businesses around the world, is subject to continuous malicious attempts to penetrate its systems. We take measures to protect our operations and our digital and physical assets from unauthorized access, damage or theft; however, it is possible that the security system may not prevent 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, or an inability to operate. A resulting perception that our measures do not adequately protect our assets could adversely affect our business, financial condition, results of operations and prospects.
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. We have methods of monitoring and ensuring that our Miners are directing hashrate to the correct pools and that any Bitcoin produced is sent to the intended recipient. 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.
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.
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 in other industries would usually obtain, at 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 are 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 our CEO and COO. If any of our key employees or service providers cease their involvement in our business or, in the unfortunate situation 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 a 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. Multiple variants (including Delta and Omicron) have become prominent since the initial outbreak. Although these types of restrictions have been lifted in most places around the world, and vaccination rates have improved the situation, there can be no assurance that governments will not re-introduce such restrictions in the future for COVID-19 or some other pandemic. If such restrictions are re-introduced, we may be required to substantially reduce or cease operations in response.
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 operational demands upon us will grow, and our success will depend upon our ability to meet those demands. 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. Conversely, in times of contraction in the industry we will need to adjust our business and cut costs and sell or end unviable projects. 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.
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. 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 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.
Risks Relating to Cryptocurrency Mining, Bitcoin Price and Technology
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.
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 our 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 has 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.
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.
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.
Cryptocurrency firms may be forced to sell their Bitcoin or cryptocurrency holdings putting downward pressure on the Bitcoin price.
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. 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 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. This process was manifest in 2022, And may continue or occur again in the future.
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 / custodians 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 / custodians’ failures may result in a reduction in the price of some or all digital assets and can adversely affect us.
The digital asset exchanges / custodians on which the digital assets trade are relatively new (compared to actors in traditional financial services) and, in most cases, largely unregulated, or subject to little oversight. Furthermore, many digital asset exchanges / custodians (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 / custodians, including prominent exchanges / custodians handling a significant portion of the volume of digital asset trading.
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 assets and digital currency development may lessen the usage of Bitcoin.
Digital asset technology is 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 forging 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. We cannot be certain of future regulatory developments or interpretations, and it is difficult to list or describe all the risks that Mawson may be subject to in this space.
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 (“BSA”) 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 requires a “BitLicense” for businesses that conduct “virtual currency business activity,” and the Conference of State Bank Supervisors has proposed a model statute for state level “virtual currency” regulation, which may result in other states requiring virtual currency businesses to seek licenses as money transmitters. Several states have finalized, or are in the processes of finalizing, virtual currency regulatory regimes that require money transmitter licenses for virtual currency businesses. Licensed money transmitters are subject to, among other things, the BSA, restrictions and requirements with respect to the investment of customer funds and use and safeguarding of customer funds and crypto assets, and bonding, net worth, customer notice and disclosure, reporting and recordkeeping requirements applicable to the company, as well as control persons and inspection and examination by state regulatory agencies. 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 determined 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.
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. 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, but 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 December 31, 2022, 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 material weaknesses in internal control over financial reporting. As a result of the material weaknesses in internal control over financial reporting described above, the Company’s management has concluded that, as December 31, 2022, 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.
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.
Risks Relating to the Ownership of Our Common Stock and Other Common Risks
The trading price of our common stock is likely to continue to be volatile.
The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. Our common stock has experienced fluctuations due to market dynamics, the Bitcoin downturn, and a Reverse Stock Split. The stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Our common stock may be traded by short sellers which may put pressure on the supply and demand for our common stock, further influencing volatility in its market price. Public perception of our company or management and other factors outside of our control may additionally impact Mawson’s stock price
Our financial results may vary significantly from period to period due to fluctuations in our revenue, operating costs and other factors.
We expect our period-to-period financial results to vary based on a variety of factors, which we anticipate will fluctuate due to external factors such as the Bitcoin price and energy costs, may not be consistent or linear between periods. As a result of these factors, quarter-to-quarter comparisons of our financial results may not be useful, and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our financial results may not meet the expectations of equity research analysts, ratings agencies or investors, who may be focused only on short-term quarterly financial results. If any of this occurs, the trading price of our stock could fall substantially, either suddenly or over time.
We may fail to meet our publicly announced guidance or other expectations about our business, which could cause our stock price to decline.
We may provide from time to time guidance regarding our expected financial and business performance. Correctly identifying key factors affecting business conditions and predicting future events is inherently an uncertain process, and our guidance may not ultimately be accurate and has in the past been inaccurate in certain respects, such as the timing of new exahash. Our guidance is based on certain assumptions, and may vary from actual results, If our assumptions are not met or are impacted as a result of various risks and uncertainties, the market value of our common stock could decline significantly.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our principal place of business is located at 201 Clark Street, Sharon, Pennsylvania 16146 where we have approximately 2,000 feet of office space. The entire Sharon site is approximately 11,800 square feet. 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 have long term leases for each of our two mining facilities at two separate leased properties in Midland and Sharon Pennsylvania USA. Both are former regional industrial sites which Mawson is bringing back to life. The Midland site was formerly a large steelworks. The Sharon site is solely occupied by Mawson, and was formerly a [railway logistics yard].
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.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our Common Stock, par value $0.001, trades on The Nasdaq Stock Market LLC under the symbol “MIGI”.
Holders
As of March 17, 2023, there were approximately 136 stockholders on 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 not 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
On September 29, 2022, Mawson entered into a letter variation relating to some of its Secured Convertible Promissory Notes, with an aggregate principal amount of $3.1 million, which gave those holders the option to elect for pre-payment (including accrued interest to maturity) subject to certain conditions. Payments of the interest were permitted to be made partially in common stock of Mawson, at Mawson’s election. All of the investors included in this letter variation elected for the pre-payment option and therefore $3.1 million principal repayments made during November 2022, Mawson issued 104,178 unregistered shares of our common stock to the holders of the Secured Convertible Promissory Notes during January 2023. These shares issued were valued at $0.28 million on the date of issuance and represented a partial payment of the interest on the debt.
We believe that the foregoing sales qualified for exemption under Section 4(a)(2) of the Securities Act and/or Regulation D, as promulgated under the Securities Act, since the issuance of the securities by us did not involve a public offering. The offerings were not “public offerings” as defined in Section 4(a)(2) due to the type of investors, the insubstantial number of investors involved in the offering, the size of the offering, the manner of the offering and number of securities offered. In addition, these security holders represented as to the necessary investment intent as required by Section 4(a)(2) and/or Regulation D. We did not employ an underwriter in connection with the issuance of the securities described above.
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.
The following discussion of our financial condition and results of operations for the years ended December 31, 2022 and 2021 should be read in conjunction with our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. 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.
Pursuant to that certain Certificate of Amendment to the Certificate of Incorporation of the Company dated February 6, 2023 Mawson executed at a ratio of 1-6 reverse stock split of its outstanding common stock and reduced its authorized common stock to 90,000,000 shares, as set forth in the Company’s Current Report on Form 8-K filed February 9, 2023.
Overview
Mawson is a ‘Digital Asset Infrastructure’ business, which owns and operates (through its subsidiaries) modular data centers (“MDCs”) in the United States. We are also developing technology to enable us to own and better operate MDCs.
Our primary business is the ownership and operation of the digital infrastructure associated with the operation of blockchain applications. Application-Specific Integrated Circuit (“ASIC”) computers known as Miners enable the ‘mining’ of digital assets such as Bitcoin. We currently operate in one site located in Pennsylvania USA. The Miners we operate are predominately focused on the process of digital mining, specifically for Bitcoin.
In exchange for powering down our systems and curtailing the power we get from the grid in response to instances of high electricity demand, we receive net energy benefits. We also have a contract with our energy provider where we can trade our energy to achieve net energy benefits. We have recognized a derivative asset on our balance sheet for the contract we have with our energy provider, which has been measured at fair value with any changes in fair value recognized in our statement of operations.
We offer ‘hosting’ or ‘co-location’ facilities to other businesses in the digital asset infrastructure industry to have their Miners located within our MDCs. These businesses pay us a fee for the use of our facilities and related services (often based on power consumption).
We also sell new and used crypto currency mining, and MDC equipment on a periodic basis, subject to prevailing market conditions and our surplus production capacity.
As of December 31, 2022
| Existing Operations Online |
Order and Purchase Agreements |
Cumulative Fleet Fully Deployed |
||||||||||
| Total miners online | 8,792 | - | 8,792 | |||||||||
| Total miners on order | - | - | ||||||||||
| Total miners in storage | 15,010 | - | 15,010 | |||||||||
| Total miners | 23,802 | - | 23,802 | |||||||||
We continue to conduct research and development in relation to our MDCs which we are actively testing in several configurations and locations to determine the best configuration for both ASIC and alternate computing uses.
Prior LO2A Business
On March 9, 2021, the Company acquired the shares of Mawson AU in a stock for stock exchange (the “Cosmos Transaction”). Prior to the Cosmos Transaction our main business undertaking was as a clinical-stage biopharmaceutical company focused on the treatment of ophthalmic disorders, including dry eye syndrome (our “LO2A business”). However, as part of the Cosmos Transaction, substantially all of the economic benefits of any successful monetization of our LO2A business, if any, will benefit only the holders of the CVRs. Accordingly, we assessed that the fair value of this asset at the acquisition date was $0. 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.
On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement with Celsius Mining LLC (“Celsius Mining”), pursuant to which Luna Squares LLC provides 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 LLC 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 LLC issued a Secured Promissory Note (the “Promissory Note”) in the principal amount equal to the Principal. The Promissory Note accrues interest daily at a rate of 12% per annum. Luna Squares LLC is required to amortize the loan at a rate of 15% per quarter, with principal repayments starting in the third quarter following the closing. The Promissory Note has a maturity date of August 23, 2023. . 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. The outstanding loan balance as at December 31, 2022 is $14.0 million.
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 stockholder 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 has a 5 year term, and Luna Squares LLC has 2 options to extend the term for 5 years each. The Audit Committee of the Company 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 equal to the 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, 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.
On May 12, 2022, Luna Squares Texas LLC (our wholly owned subsidiary) entered into an Option Agreement and Gross Profit Agreement with JAI TX, LLC and then signed or took and assignment of 4 leases for properties in Texas (all in close proximity) with the intent to develop MDC facilities for mining Bitcoin. Luna Squares Texas LLC intended to execute relevant power agreements, with the expectation that the four locations could provide a combined 120MW of power. Rent under the leases ranges from $1,500 to $5,227.20 per acre per annum. The lessors include a substantial listed holder of land in Texas, and family groups. Under the Option Agreement, JAI TX, LLC has the option to receive an issue of up to 20% of the membership interests in Luna Squares Texas LLC. The purchase prices will be a share of capital costs equal to the membership interest acquired by JAI TX, LLC, and an amount of Luna Squares Texas LLC’s debt financing in proportion to JAI TX, LLC’s shareholding. In return for certain services provided by JAI TX, LLC, JAI TX, LLC will be entitled to a share of all Electric Reliability Council of Texas program payments paid to Luna Squares Texas LLC (“ERCOT Payment”), as well as a share of the Bitcoin profit from the Texas locations less certain costs, including depreciation. Capital costs for Luna Squares Texas LLC are expected to exceed $4.19m. See further details regarding the sale of Luna Squares Texas LLC below.
On May 27, 2022, Mawson entered into an ATM Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), to sell shares of our common stock, par value $0.001 per share, (the “Shares”) having an aggregate sales price of up to $100 million, from time to time, through an “at the market offering” program under which Wainwright will act as sales agent. We will pay Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide Wainwright with customary indemnification and contribution rights. We will also reimburse Wainwright for certain specified expenses in connection with entering into the ATM Agreement. The ATM Agreement contains customary representations and warranties and conditions to the sale of the Shares pursuant thereto.
During June 2022 Mawson AU Limited entered into a share subscription and equipment sale deed with Tasmania Data Infrastructure Pty Ltd (“TDI”). TDI has a proposed 100% renewable energy Bitcoin Mining facility at the Que River Mine Site in Tasmania, Australia. Mawson AU Limited has agreed to exchange approximately 2,144 ASIC Bitcoin Miners for 107,042,254 fully paid issued shares in TDI.
On September 8, 2022, we entered into a (i) Purchase and Sale Agreement with CleanSpark (as amended, “Purchase Agreement”), and (ii) an Equipment Purchase and Sale Agreement. Pursuant to the Purchase Agreement, CleanSpark assumed from us a lease for approximately 16.35 acres of real property located in Sandersville, Washington County, Georgia, and all personal property situated on the (“Georgia Property”). This transaction closed on October 8, 2022, CleanSpark paid the following consideration to the Company pursuant to the Purchase Agreement: (i) $13.50 million in cash; (ii) 1,590,175 shares of common stock, par value $0.001 per share of CleanSpark (valued at $4.8 million October 7, 2022), and (iii) $6.5 million in Seller financing in the form of promissory notes. The Promissory Note was paid down in full on December 16, 2022. Pursuant to the Equipment Purchase Agreement, CleanSpark purchased from the Company, application-specific integrated circuit miners, and this transaction closed on October 8, 2022 for $9.48 million in cash (which was later reduced to $9.02 million upon reduction in the number of miners). Additional consideration of 1,100,890 shares of CleanSpark Common Stock was paid to the Company pursuant to the Purchase and Sale Agreement after it successfully emptied all required modular data centers on the Georgia Property and made them available for use by CleanSpark. We achieved this on December 30, 2022 and received the shares on January 13, 2023. Further potential consideration of $2 million in cash if CleanSpark is able to utilize at least an additional 150 MW of power on the property by the six month anniversary of the Closing Date.
On March 8, 2023, the Company entered into a Member Interest Purchase Agreement (“MIPA”) as well as an Equipment Purchase and Sale Agreement (“EPSA”) with BMF Holding GP PTE. LTD. (“BMF”). Pursuant to the MIPA, the Company has agreed to sell all its member interests in Luna Squares Texas LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of Company, and holds 4 leases in Texas, and various related contracts. Under the EPSA the Company will sell 59 transformers. Total consideration for this sale was $8.5 million and 400 Ethereum. As part of this transaction Luna Squares Texas LLC acquired all the memberships’ interests in an entity known as JAI TX LLC, which is party to some relevant contracts related to the Texas leases.
Our legacy business was as a clinical-stage biopharmaceutical company focused on the treatment of ophthalmic disorders, including dry eye syndrome. All of the economic benefits of any successful monetization of our LO2A business, if any, would 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.On March 8, 2021, the Company entered into the Contingent Value Rights Agreement (“CVR Agreement”), pursuant to which certain holders of the CVRs had certain rights to any value created in respect of the LO2A business previously carried on by the Company. Despite the holders’ representative’s good faith endeavors, the holders’ representative was unable to procure a suitable transaction. On March 9, 2023, the CVR Agreement was terminated, and the rights of the CVR holders under that agreement expired at the same time. On February 7, 2023, the Company entered into a share purchase agreement with N.Danenberg Holding (2000) Ltd to sell the Company’s shares or interests in Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd (“Wize Entities”) effective December 31, 2022 in consideration for $10,000. This transaction closed on March 9, 2023. As a result of the sale transaction the Wize Entities were deconsolidated from the group effective December 31, 2022.
COVID-19.
The COVID-19 global pandemic has been unpredictable and unprecedented. The Company relies on equipment supplied by third parties which, like many manufacturing businesses globally, are at risk of supply chain issues. While the effects of the COVID-19 pandemic have continued to recede, and we currently do not expect any material impact on our long-term development, operations, or liquidity, we continue to monitor the situation.
Regulation of Digital Assets
Digital assets and cryptocurrencies are constantly the subject of proposed regulatory oversight. In the USA most proposals relate to the issue of cryptocurrencies, and consumer protections. Some laws have been enacted in North America to limit Bitcoin mining activities in certain regions where the Company is not active, and no such laws are proposed in the areas where the Company is active, or plans to be active. China [reportedly] banned Bitcoin mining within its borders, which forced many local miners to commence mining activities in neighboring Kazakhstan, taking advantage of that country’s subsidized power. Due to the influx of mining activity, Kazakhstan was forced to import power from neighboring countries at great cost, however rather than ban mining activities the government has sought to minimize the negative effects of mining by issuing mining licenses and conditioning mining activity. We do not believe our mining activities require licensing or registration or any kind, including to conduct mining activities and selling of digital assets produced. Mawson does not accumulate or hold large amounts of digital assets for prolonged periods. It is likely that regulation in the digital asset industry will increase.
In the past it has also been noted that the SEC, the Commodity Futures Trading Commission (“CFTC”), Nasdaq or other governmental or quasi-governmental agency or organization (including similar authorities in other jurisdictions such as Australia) may conclude that our digital asset mining activities involve the offer or sale of “securities”, or ownership of “investment securities”, and we may face regulation under the Securities Act of 1933, as amended (the “Securities Act”) or the Investment Company Act of 1940. Such regulation or the inability to meet the requirements to continue operations, would have a material adverse effect on business, financial condition, results of operations and prospects of our business. The effect of any future regulatory change, including tax treatment, on digital assets or an entity dealing in or holding digital assets is impossible to predict, but such change could be substantial and adverse to our financial returns.
Environment, Sustainability, Governance
Mawson has a strategy to source renewable or sustainable sources of energy, including carbon-neutral or low carbon emissions sources for the majority of its operations. This is a key criteria when analyzing a new site for acquisition, or selling an existing site. Mawson believes it can make a positive contribution towards lowering carbon emissions by supporting low-emissions power sources.
The Company can provide, and has provided, electricity grid stability by curtailing its power usage during times of high power prices through its Energy Markets Program, for example through its membership in the PJM Market, and various demand response programs where they are available.
The Company recognizes the challenges posed by climate change, including regulatory, increased costs, and adverse weather events, and seeks to mitigate these risks by for example ensuring that it is informed of regulatory changes, keeping involved with industry groups and thought leaders, and ensuring that physical mitigation steps are undertaken, such as during the process if selecting sites in lower risk climates and regions (i.e. cooler climates, less prone to flooding, cyclones or wildfires), and then ensuring that the construction of the sites takes into account potential climate or weather-related events.
Results of Operations
Revenue
Cryptocurrency mining revenues from production for the years ended December 31, 2022 and 2021 were $43.11 million and $38.45 million respectively. This represented an increase of $4.65 million or 12% over the year. The increase in mining revenue for the year was primarily attributable to the increase in the Bitcoin produced, in total 1,342.59 were produced in 2022 compared with 808.88 in the 2021 period, or an increase of 66% of Bitcoin produced over the respective period. This increase is offset by an decrease in the in average price of Bitcoin, in the 2022 period the average price was $28,205 whereas in the 2021 period the average price was $47,390, or a 40% decrease in the average Bitcoin price over the respective period.
Hosting co-location revenue for the year ended December 31, 2022 and 2021 were $13.34 million and $0.85 million respectively. This increase is due to an increase in the number of co-location customers that we hosted during the year ended December 31, 2022.
Sales of crypto currency mining equipment for the year ended December 31, 2022 and 2021 were $14.24 million and $2.16 million, respectively.
Net energy benefits (which comprises curtailment income and sale of excess energy to the grid) for the years ended December 31, 2022 and 2021, were $13.70 million and $0 respectively. This increase is due to there being no income from energy contracts in the 2021 period because we did not offer this service at that time.
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 hosting, and cost of mining equipment sold.
Cost of revenues for the year ended December 31, 2022 and 2021 were $47.72 million and $9.90 million, respectively. The increase in cost of revenue was primarily attributable to an increase in power costs related to energy costs to operate the mining equipment within our owned and hosting facilities.
Selling, general and administrative
Our selling, general and administrative expenses consist primarily of professional and management fees relating to: accounting, payroll, audit, and legal; equipment repairs; marketing; consultant fees; lease amortization and general office expenses.
Selling, general and administrative expenses for the years ended December 31, 2022 and 2021 were $25.85 million and $16.06 million respectively. The increase in selling, general and administrative expenses were attributable to a number of factors; payroll costs increased by $6.24 million due to an increase in employee numbers; equipment repairs increased by $2.11 million; lease amortization increased by $1.18 million due to new leases entered into during the year; marketing expense increased by $1.0 million and there was an increase in property business insurance by $0.8 million. These increases were partially offset by: a decrease in freight expenses by $1.37 million; a decrease in research and development expenses by $1.08 million; and a decrease in legal expenses by $0.8 million. The remaining increase in expenses relates to the increase in the scale of business operations during the year.
Share based payments
Share based payment expenses for the year ended December 31, 2022 and 2021 were $3.01 million and $22.49 million respectively. In the year to December 31, 2022, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $1.67 million and $1.26 million in relation to long-term incentives for the Company’s leadership team. Whereas in 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, 2022, and 2021 were $63.20 million and $14.11 million, respectively. The increase is primarily attributable to the new miners and MDCs which have been procured and have come into use by the Company in the year ended December 31, 2022 being greater than in the year ended December 31, 2021, and the application of a revised estimate of the of the useful life of miners with effect from December 1, 2022 to better reflect the pattern of consumption the change being effected by changing the method of depreciation from reducing balance to the straight line method from that date.
Change in fair value of derivative asset
During the year ended December 31, 2022, there was a change in the fair value of the derivative asset by $11.30 million in relation to our power pricing arrangements.
Non-operating expense
Non-operating expenses consist primarily of interest expense, losses on foreign currency transactions, impairment of financial assets, loss on write off of property and equipment, fair value loss on investments, and share of losses of equity accounted investments.
During the year ended December 31, 2022, the realized and unrealized loss on foreign currency transactions was $6.67 million, and for the year ended December 31, 2021, there was a loss of $0.93 million.
Interest expense for the year ended December 31, 2022 and 2021 were $6.06 million and $1.64 million, respectively. This was an increase of $4.42 million which was attributable to the interest costs charged on the new loans taken out with Celsius Mining LLC, W Capital Advisors Pty Ltd and the Secured Convertible Promissory Notes issued in July of 2022.
There was a loss from the write off of property and equipment for the years ended December 31, 2022 and 2021 of $1.56 million and $0.47 million respectively.
There was an impairment of financial assets during the year to December 31, 2022 of $3.38 million, $2.06 million related to the equity accounted investment TDI, $1.13 million is related to the equity accounted investment Cosmos Asset Management Pty Ltd and $0.19 million in relation to the deconsolidation of the Wize Entities.
There was fair value loss on investments of $1.69 million during the year to December 31, 2022, this was in relation to the decrease in the share price of the investment held in CleanSpark, a NASDAQ listed company.
There were losses recognized for the share of losses in relation to equity accounted investments of $1.25 million and $0.37 million for the year ended December 31, 2022 and 2021 respectively. The current year loss related to the equity accounted investment in TDI whereas the prior year loss related to the equity accounted investment Distributed Storage Solutions Pty Ltd (“DSS”).
Non-operating income
Non-operating expenses consist primarily of profit on the sale of our Georgia site and other income.
During the year ended December 31, 2022, there was profit of site of $8.28 million. This sale was in relation to the sale of our Georgia bitcoin mining site which was sold to CleanSpark on October 7, 2022.
During the year ended December 31, 2022, there was other income recognized which mainly consisted of the license of our intellectual property of $1.46 million and $0.53 million for curtailment income. The license of our intellectual property relates to consulting and advisory services to enable TDI to build a facility in Tasmania, Australia.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss for the years ended December 31, 2022 and 2021 of $52.76 million and $44.96 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 of non-GAAP financial measures as an analytical tool. In particular, non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and many of the adjustments to the GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the company’s financial results for the foreseeable future. In addition, other companies, including other companies in the Company’s industry, may calculate non-GAAP financial measures differently than the Company does, limiting their usefulness as a comparative tool.
The Company is providing supplemental financial measures for (i) non-GAAP adjusted earnings before interest, taxes, depreciation and amortization, or (“adjusted EBITDA”) that excludes the impact of interest, taxes, depreciation, amortization, share-based compensation expense, LO2A write-back, unrealized gains/losses on share of associates, and certain non-recurring expenses. We believe that adjusted EBITDA is useful to investors in comparing our performance across reporting periods on a consistent basis.
| For the Years Ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Reconciliation of non-GAAP adjusted EBITDA: | ||||||||
| Net loss: | (54,035,559 | ) | (45,461,664 | ) | ||||
| Share of net loss of associates accounted for using the equity method | 1,254,025 | 368,426 | ||||||
| Depreciation and amortization | 63,200,178 | 14,113,730 | ||||||
| Share based payments | 3,012,480 | 22,491,100 | ||||||
| Unrealized and realized losses | 6,673,124 | 932,866 | ||||||
| Other non-operating revenue | (2,401,555 | ) | (902,629 | ) | ||||
| Other non-operating expenses | 7,624,435 | 2,114,699 | ||||||
| Tax | - | 277,717 | ||||||
| LO2A write-back | - | 23,963,050 | ||||||
| Impairment of financial assets | 3,375,230 | - | ||||||
| Fair value loss on investments | 1,694,388 | - | ||||||
| EBITDA (non-GAAP) | $ | 30,396,746 | $ | 17,897,295 | ||||
| For the Quarters Ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 16,852,208 | $ | 19,647,771 | ||||
| Cost of revenues (excluding depreciation) | (6,759,938 | ) | (3,686,578 | ) | ||||
| Gross Profit | 10,092,270 | 15,961,193 | ||||||
| Reconciliation of non-GAAP adjusted EBITDA: | ||||||||
| Net Profit/(loss): | (18,808,069 | ) | 1,804,928 | |||||
| Share of net loss of associates accounted for using the equity method | 1,254,025 | 90,630 | ||||||
| Depreciation and amortization | 17,138,505 | 6,186,396 | ||||||
| Share based payments | 887,806 | 711,203 | ||||||
| Unrealized and realized losses | 310,530 | 204,309 | ||||||
| Other non-operating revenue | (469,603 | ) | (322,924 | ) | ||||
| Other non-operating expenses | 3,263,618 | 1,040,202 | ||||||
| Tax | - | 276,216 | ||||||
| Fair value loss on investments | 1,694,388 | - | ||||||
| Impairment of financial assets | 2,240,682 | - | ||||||
| EBITDA (non-GAAP) | $ | 7,511,882 | $ | 9,990,960 | ||||
Liquidity and Capital Resources
General
For the year ended December 31, 2022, we financed our operations primarily through:
| 1. | Net cash provided by operating activities of $14.26 million; | |
| 2. | On October 15, 2021, an expansion of the Equipment Finance and Security Agreement was entered into with Foundry Digital LLC (“Foundry”) to purchase an additional 2000 Whatsminers M30’s delivered in October 2021. In total $13,185,062 was borrowed from Foundry. The amounts due were repaid in full on October 17 2022; | |
| 3. | On December 9, 2021, MIG No.1 Pty Ltd entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd (“Marshall”) with a total loan facility of AUD$20 million (USD$12.98 million). Principal repayments began in November 2022. The outstanding balance as at December 31, 2022, is USD$10.21 million. |
| 4. | On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement with Celsius Mining LLC, in connection with this agreement, Celsius Mining loaned Luna Squares LLC a principal amount of US$20,000,000, for the purpose of funding the infrastructure required to meet part of the obligations of the Co-Location Agreement. The Secured Promissory Note evidencing this loan accrues interest daily at rate of 12% per annum. Luna Squares LLC is required to amortize the loan at a rate of 15% per quarter, with principal repayments starting in the third quarter following the closing. This Secured Promissory Note has a maturity date of August 23, 2023. The outstanding principal balance as at December 31, 2022, is $14.0 million. | |
| 5. | On July 8, 2022, the Company issued secured convertible promissory notes to investors in the aggregate principal amount of $3,600,000 in exchange for an aggregate of $3,600,000. The Secured Convertible Promissory Notes are convertible at the option of the holder at a price of $0.85 per share of our common stock. The Secured Convertible Promissory Notes bear interest of twenty percent (20%) per annum. One-half of the interest that accrues each month on the Secured Convertible Promissory Notes must be paid monthly. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Notes, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) one year after its issuance, or (ii) following an event of default. On September 29, 2022, the Company entered into a letter variation relating to some of the Secured Convertible Promissory Notes, with an aggregate principal amount of $3.1 million, which gave those holders the option to elect for pre-payment (including accrued interest to maturity) subject to certain conditions. Payments of the interest may be made partially in common stock of the Company, at the Company’s election. All of the investors included in this letter variation elected for the pre-payment option and therefore there were $3.1 million principal repayments made during November 2022. |
|
| 6. | On September 2, 2022, Mawson Infrastructure Group Pty Ltd entered into a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with a total loan facility of AUD$3 million (USD$1.9 million). This was amended on September 29, 2022, and the loan facility was increased to AUD$8 million (USD$5.2 million). As at December 31, 2022, AUD$4.9 million (USD$3.37 million) has been drawn down from this facility. The Secured Loan Facility accrues interest daily at a rate of 12% per annum and is paid monthly. Principal repayments due March 2023. |
During the year ended December 31, 2022 we repaid $28.0 million of principal payments against the historical facilities provided by Foundry, Celsius, Marshall, W Capital and the convertible notes.
We believe our working capital requirements will continue to be funded through a combination of the cash we expect to generate from future operations, our existing funds, external debt facilities available to us and further issuances of shares. These are expected to be adequate to fund our operations over the next twelve months. In addition, the Company has access to equity financing through the ATM offering facility entered in May 2022. For our business to grow it is expected we will continue investing in mining equipment, but we are likely to require additional capital in either the short-term or long-term.
Working Capital and Cash Flows
As of December 31, 2022, and December 31, 2021, we had cash and cash equivalent balance of $0.95 million and $5.47 million in cash and cash equivalents, respectively.
As of December 31, 2022, and December 31, 2021, the trade receivables balance was $10.46 million and $5.61 million respectively.
As of December 31, 2022, we had $23.61 million of outstanding short-term borrowings, and as of December 31, 2021, we had $11.10 million of short-term borrowings. The short-term borrowings as of December 31, 2022, relate to Celsius Mining LLC, W Capital Advisors Pty Ltd, the secured convertible promissory notes issued to investors and Marshall Investments MIG Pty Ltd. As of December 31, 2022, and as of December 31, 2021, we had $4.51 million and $7.64 million, respectively, of outstanding long-term borrowings. The long-term borrowings as of December 31, 2022, relate to the secured loan facility with Marshall Investments MIG Pty Ltd.
As of December 31, 2022, we had negative working capital of $15.17 million and as at December 31, 2021, we had negative working capital of $8.63 million. The decrease in working capital was primarily attributable to an increase in the Company’s short term and long-term borrowings during 2022, as compared to 2021.
The following table presents the major components of net cash flows (used in)/provided by operating, investing and financing activities for the year ending December 31, 2022 and 2021:
| Year Ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Net cash provided by operating activities | $ | 14,256,294 | $ | 22,953,792 | ||||
| Net cash used in investing activities | $ | (32,540,422 | ) | $ | (128,247,751 | ) | ||
| Net cash provided by financing activities | $ | 13,986,496 | $ | 109,854,460 | ||||
For the year ended December 31, 2022, net cash provided by operating activities was $14,256,294 and for the year ended December 31, 2021, net cash used in operating activities was $22,953,792. The decrease in net cash provided by operating activities was primarily attributable to timing differences in trade and other receivables and trade and other payables.
For the year ended December 31, 2022, and 2021, net cash used in investing activities was $32,540,422 and $128,247,751, respectively. The decrease in net cash used in investing activities was primarily attributable to the decrease in the acquisition of cryptocurrency mining equipment.
For the year ended December 31, 2022, and 2021, net cash provided by financing activities was $13,986,496 and $109,854,460, respectively. The decrease in net cash provided by financing activities was primarily attributable to proceeds from the capital raises which occurred in the prior period.
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2v to our audited consolidated financial statements for the year ended December 31, 2022.
Critical Accounting Policies
Revenue Recognition – Digital asset mining revenue
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Five steps are required to be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
There is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting of managing digital currencies and management has exercised significant judgement in determining appropriate accounting treatment for the recognition of revenue for such operations.
The Company has entered into a contract with mining pools and has undertaken the performance obligation of providing computing power in exchange for non-cash consideration in the form of cryptocurrency. The provision of computing power is the only performance obligation in the Company’s contract with its pool operators. 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 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. Low-cost assets are capitalized and immediately depreciated. Depreciation is calculated over the following estimated useful lives:
| 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 | Straight-Line | ||
| Transformers | 15 years | Straight-Line | ||
| Leasehold improvements | Lease term | 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 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 $3,130,638 as at December 31, 2022, and an increase in the depreciation charge to the year to December 31, 2022 statement of operations and profit and loss of $84,735 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 an 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.
Fair value of and recognition of revenue from financial instruments:
The Company accounts for financial instruments under FASB Accounting Standards Codification Topic (“ASC”) 820, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 — assets and liabilities whose significant value drivers are unobservable. Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
| Fair value measured at December 31, 2022 | ||||||||||||||||
|
Total carrying December 31, |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
| Derivative asset | $ | 11,299,971 | - | - | 11,299,971 | |||||||||||
| Marketable securities | $ | 3,243,957 | $ | 3,243,957 | $ | - | $ | - | ||||||||
| Fair value measured at December, 2021 | ||||||||||||||||
| Total carrying value at December 31, 2021 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
| Derivative asset | $ | - | $ | - | $ | - | $ | - | ||||||||
| Marketable securities | $ | 326,801 | $ | 326,801 | $ | - | $ | - | ||||||||
Level 1 Assets:
The Company held 50 million shares in DXN Limited (“DXN”), an Australian Securities Exchange (“ASX”) listed company as at December 31, 2021. This was recorded at fair value with changes in fair value recognized in the accompanying unaudited condensed consolidated statements of operations. The fair value of the DXN investment is classified in Level 1 of the fair value hierarchy as it is quoted on an active market, that being the ASX. During the year ended December 31, 2022, the Company sold all its shares in DXN.
The Company holds 1.59 million shares in CleanSpark, as at December 31, 2022. This was recorded at fair value with changes in fair value recognized in the accompanying consolidated statements of operations. The fair value of the CleanSpark investment is classified in Level 1 of the fair value hierarchy as it is quoted on an active market, that being the Nasdaq.
Level 3 Assets:
Power Supply Agreement
In June 2022, the Company entered into a Power Supply Agreement with Energy Harbor LLC, the energy supplier to the Company’s Pennsylvania facility, to provide the delivery of a fixed portion of the total amount of electricity for a fixed price through to December 2026. If the Pennsylvania facility uses more electricity than contracted, the cost of the excess is incurred at a new price quoted by Energy Harbor LLC.
While the Company manages operating costs at the Pennsylvania facility in part by periodically selling unused or uneconomical power back to the market, the Company does not consider such actions trading activities. That is, the Company does not engage in speculation in the power market as part of its ordinary activities. Because the sale of any electricity under a curtailment program allows for net settlement, the Company has determined the Power Supply Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). However, because the Company has the ability to sell the power back to the grid rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, the Company does not believe the normal purchases and normal sales scope exception applies to the Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging derivative contract) is recorded at estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations (refer to fair value of financial instruments policy).
The Power Supply Agreement was classified as a derivative asset from the quarter ended 30 June 2022 and measured at fair value on the date of Power Supply Agreement, with changes in fair value recognized in the accompanying unaudited condensed consolidated statements of operations. The estimated fair value of the Company’s derivate asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, the Company’s discounted cash flow estimation models contain quoted commodity exchange spot and forward prices and are adjusted for basis spreads for load zone-to-hub differentials through the term of the Power Supply Agreement, which ends in December 2026. In addition, the Company adopted a further discount rate of approximately 20% above the terminal value of the observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors. The terms of the Power Supply Agreement require pre-payment of collateral, calculated as forward cost based on the market cost rate of electricity versus the fixed price stated in the contract.
Share based payments
The Company follows FASB Codification Topic ASC 718-10 Compensation-Stock Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company determines the grant date fair value of the restricted stock units (“RSUs”) and options using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility computes stock price volatility over expected terms based on its historical common stock trading prices. Risk–free interest rates are calculated based on the implied yield available on U. S. 10-year Treasury bond.
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- 15(e)) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2022, due to the material weaknesses in our internal control over financial reporting described below. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at a level of reasonable assurance because management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.
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.
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, 2022, 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.
The material weaknesses identified are described below.
Significant Reliance on Key Individuals. There is inadequate segregation of duties in place related to our financial reporting and other management review and oversight procedures due to the lack of sufficient accounting personnel. This is not inconsistent with similar small fast-growing organizations. This gives rise to the risk of lack of ability to react in a timely manner to operations issues and meet increased US GAAP/PCAOB/SOX/SEC registrant requirements. In addition, this poses the risk that compliance and other reporting obligations are not dealt with in an adequate manner.
Controls over the financial statement close and reporting process. Controls were not adequately designed or implemented in the financial statement close and reporting process. This includes controls related to complex and judgmental accounting transactions including business acquisitions and divestures, derivatives, manual journal entries, account reconciliations and financial statement policies and disclosures.
Information and Technology Controls. There are control deficiencies related to information technology (“IT”) general controls that aggregate into a material weakness. 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 execute its designed 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 mining and hosting revenue, net energy benefits, and cryptocurrency assets.
Fixed asset verification. The Company did not properly execute its designed controls around physical asset verification at US mining sites. Together with system limitations, restricting tracking of fixed asset movements, there is a risk around the existence of fixed assets. The root cause is the lack of sufficient capable personnel to perform physical asset inspections, combined with system limitations.
Notwithstanding the identified material weaknesses and management’s assessment that our internal control over financial reporting was not effective as of December 31, 2022, management believes that the consolidated financial statements included in this quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles. We rely on the assistance of outside advisors with expertise in these matters in preparing the financial statements.
Remediation
Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. Our management continues to work to improve its controls related to our material weaknesses. With the oversight of senior management and our audit committee, we continue 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 year ended December 31, 2022, we made the following changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
| ● | At the start of the financial year, we performed a risk assessment and designed controls for all significant business processes. Subsequently, we have continued to refine our design assessment and we have gradually implemented controls over the course of the year. Key remediation efforts performed include the expansion of our finance and compliance team, the implementation of entity level controls and process level controls over financial reporting and IT, and the implementation of new systems and applications in support of creating an effective and sustainable control environment. A number of controls remain to be implemented in the upcoming financial year. |
The material weaknesses in our internal control over financial reporting will not be considered remediated as controls did not operate for a sufficient period of time up to the end of the financial year, to be tested for and concluded on for effectiveness.
Remediation efforts for upcoming financial year will be focused on refining and implementing the remainder of controls and validating the effectiveness of implemented controls using criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the identified material weaknesses, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.
Changes in internal control over financial reporting
Except for the remedial measures described above, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
Not applicable.
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 2023 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2022.
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 2023 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2022.
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 2023 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2022.
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 2023 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2022.
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 2023 annual stockholder meeting, which we intend to file within 120 days of the end of our fiscal year ended December 31, 2022.
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:
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022
U.S. DOLLARS
INDEX
F-
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, 2022 and 2021 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, 2022 and 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, 2022 and 2021 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 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.
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 Matters
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
As disclosed in Note 2 to the financial statements, the Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company provides computing power to bitcoin mining pools in exchange for the award of non-cash consideration in the form of bitcoin, which the Company measures at fair value on the date awarded.
We identified the recognition, measurement and disclosure of bitcoin mining revenue as a critical audit matter because of the complexity of auditing this revenue. This is because mining digital assets is an emerging industry with unique technological aspects that raise a number of auditing challenges and significant audit effort is required, and that there is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting for mining of digital currencies.
F-
The Company has exercised significant judgement in determining appropriate accounting treatment for the recognition, measurement and disclosure of revenue from bitcoin mining operations. During the year ended December 31, 2022, the Company recognized digital currency mining revenue of approximately $43.1 million.
The primary procedures we performed to address this critical audit matter included the following:
| ● | Evaluated the design and effectiveness of the IT general controls over the Company’s IT environment and key financially relevant systems |
| ● | Evaluated the design and effectiveness of certain financial controls pertaining to the Company’s processes for identifying and recognizing revenue from Bitcoin Mining |
| ● | 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 Bitcoin 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 | |
| Anthony Rose | |
| Director |
Sydney, NSW, Australia
March 23, 2023
We have served as the Company’s auditor since 2021.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 946,265 | $ | 5,467,273 | ||||
| Prepaid expenses | 3,488,868 | 332,154 | ||||||
| Trade and other receivables | 10,458,076 | 5,606,780 | ||||||
| Assets held for sale | 5,446,059 | |||||||
| Cryptocurrencies | 40,800 | |||||||
| Total current assets | 20,339,268 | 11,447,007 | ||||||
| Property and equipment, net | 91,016,498 | 76,936,850 | ||||||
| Derivative asset | 11,299,971 | |||||||
| Equipment deposits | 51,369,216 | |||||||
| Equity accounted investments | 2,085,373 | |||||||
| Marketable securities | 3,243,957 | 326,801 | ||||||
| Security deposits | 2,524,065 | 1,246,236 | ||||||
| Operating lease right-of-use asset | 2,819,933 | 3,968,262 | ||||||
| Total assets | $ | 133,329,065 | $ | 145,294,372 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade and other payables | $ | 10,572,061 | $ | 7,746,988 | ||||
| Current portion of operating lease liability | 1,300,062 | 1,222,382 | ||||||
| Current portion of finance lease liability | 30,702 | 8,105 | ||||||
| Borrowings | 23,610,583 | 11,095,388 | ||||||
| Total current liabilities | 35,513,408 | 20,072,863 | ||||||
| Trade and other payables | 15,328,445 | |||||||
| Operating lease liability, net of current portion | 1,727,975 | 2,962,765 | ||||||
| Finance lease liability, net of current portion | 83,223 | 38,764 | ||||||
| Long-term borrowings | 4,509,894 | 7,639,391 | ||||||
| Total liabilities | 57,162,945 | 30,713,783 | ||||||
| Commitments and Contingencies (note 15) | ||||||||
| Shareholders’ equity: | ||||||||
| Additional paid-in capital; Common stock (90,000,000 authorized, 13,625,882 issued and outstanding $0.001 par value shares). Series A preferred stock (1,000,000 authorized shares; nil issued and outstanding as at December 31, 2022) | 194,308,185 | 186,389,568 | ||||||
| Accumulated other comprehensive income (loss) | 5,021,467 | (521,094 | ) | |||||
| Accumulated deficit | (122,257,628 | ) | (71,123,259 | ) | ||||
| Total stockholders’ equity | 77,072,024 | 114,745,215 | ||||||
| Non-controlling interest | (905,904 | ) | (164,626 | ) | ||||
| Total liabilities and stockholders’ equity | $ | 133,329,065 | $ | 145,294,372 | ||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Cryptocurrency mining revenue | 43,106,162 | 38,446,438 | ||||||
| Hosting Co-Location revenue | 13,340,143 | 852,954 | ||||||
| Sale of equipment | 14,237,860 | 2,157,651 | ||||||
| Net energy benefits | 13,701,242 | |||||||
| Other revenue | 2,405,613 | |||||||
| Total revenues | 84,385,407 | 43,862,656 | ||||||
| Less: Cost of revenues (excluding depreciation) | 47,714,895 | 9,904,273 | ||||||
| Gross profit | 36,670,512 | 33,958,383 | ||||||
| Selling, general and administrative | 25,850,177 | 16,061,088 | ||||||
| LO2A write off | 23,963,050 | |||||||
| Share based payments | 3,012,480 | 22,491,100 | ||||||
| Depreciation and amortization | 63,200,178 | 14,113,730 | ||||||
| Total operating expenses | 92,062,835 | 76,628,968 | ||||||
| Change in fair value of derivative asset | 11,299,971 | |||||||
| Loss from operations | (44,092,352 | ) | (42,670,585 | ) | ||||
| Non-operating income/(expense): | ||||||||
| Losses on foreign currency transactions | (6,673,124 | ) | (932,866 | ) | ||||
| Share of net loss of associates accounted for using the equity method | (1,254,025 | ) | (368,426 | ) | ||||
| Other income | 2,401,555 | 902,629 | ||||||
| Interest expense | (6,063,894 | ) | (1,643,724 | ) | ||||
| Loss on write off property, plant and equipment | (1,560,541 | ) | (470,975 | ) | ||||
| Profit on sale of site | 8,276,440 | |||||||
| Unrealized loss on marketable securities | (1,694,388 | ) | ||||||
| Impairment of financial assets | (3,375,230 | ) | ||||||
| Loss before income taxes | (54,035,559 | ) | (45,183,947 | ) | ||||
| Income tax expenses | (277,717 | ) | ||||||
| Net Loss | (54,035,559 | ) | (45,461,664 | ) | ||||
| Less: Net loss attributable to non-controlling interests | (1,273,251 | ) | (497,944 | ) | ||||
| Net Loss attributed to Mawson Infrastructure Group shareholders | (52,762,308 | ) | (44,963,720 | ) | ||||
| $ | (4.16 | ) | $ | (4.79 | ) | |||
| Weighted average number of shares outstanding | 12,695,654 | 9,383,971 | ||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| For the Years Ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Net Loss | (54,035,559 | ) | (45,461,664 | ) | ||||
| Other comprehensive income/(loss) | ||||||||
| Foreign currency translation adjustment | 5,542,561 | 820,732 | ||||||
| Comprehensive loss | (48,492,998 | ) | (44,640,932 | ) | ||||
| Less: Comprehensive loss attributable to non-controlling interests | (1,275,297 | ) | (497,944 | ) | ||||
| Comprehensive loss attributable to common stockholders | (47,217,701 | ) | (44,142,988 | ) | ||||
The accompanying notes are an integral part of the consolidated Financial Statements.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Year Ended December 31, 2022
| Common Stock (#) |
Common Stock ($) |
Additional Paid-in- Capital | Reserves | Accumulated Other Comprehensive Income/ (Loss) |
Accumulated Deficit | Total Mawson Stockholders’ Equity |
Non- controlling interest | Total Equity | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 11,791,085 | 611,504 | 165,600,831 | 20,177,233 | (521,094 | ) | (71,123,259 | ) | 114,745,215 | (164,626 | ) | 114,580,589 | ||||||||||||||||||||||||
| Issuance of common stock, stock based compensation | 3,131 | 19 | 134,880 | 408,584 | 543,483 | 543,483 | ||||||||||||||||||||||||||||||
| Issuance of warrants | - | (10,243,200 | ) | 11,911,533 | 1,668,333 | 1,668,333 | ||||||||||||||||||||||||||||||
| Issuance of RSU’s and stock options | 410,165 | 2,454 | 6,037,506 | (5,292,988 | ) | 746,972 | 746,972 | |||||||||||||||||||||||||||||
| Issuance of common stock, net of offer costs | 1,421,501 | 5,877,513 | 5,877,513 | 5,877,513 | ||||||||||||||||||||||||||||||||
| Net loss | - | (52,762,308 | ) | (52,762,308 | ) | (1,273,251 | ) | (54,035,559 | ) | |||||||||||||||||||||||||||
| Other comprehensive income | - | 5,542,561 | 5,542,561 | (2,046 | ) | 5,540,515 | ||||||||||||||||||||||||||||||
| Non-controlling interest | - | (917,684 | ) | 1,627,939 | 710,255 | 534,019 | 1,244,274 | |||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 13,625,882 | 613,977 | 166,489,846 | 27,204,362 | 5,021,467 | (122,257,628 | ) | 77,072,024 | (905,904 | ) | 76,166,120 | |||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Year Ended December 31, 2021
| Series A Preferred Stock (#) |
Series A Preferred Stock ($) |
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 | - | - | 7,539,275 | - | - | (16,690 | ) | 34,457,051 | 652,949 | (1,341,826 | ) | (26,159,539 | ) | 7,591,945 | (27,066 | ) | 7,564,879 | |||||||||||||||||||||||||||||||||||
| Exchange of stock and Reverse recapitalization of Wize Pharma Inc | 178 | - | (7,539,275 | ) | 8,531,361 | 511,882 | - | (5,436,541 | ) | - | - | - | (4,924,659 | ) | - | (4,924,659 | ) | |||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offer costs, PIPE transaction | - | - | - | 416,667 | 25,000 | - | 2,975,000 | - | - | - | 3,000,000 | - | 3,000,000 | |||||||||||||||||||||||||||||||||||||||
| Issuance of convertible notes, net of offer costs | - | - | - | - | - | - | 20,301,427 | - | - | - | 20,301,427 | - | 20,301,427 | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants | - | - | - | - | - | - | (7,571,740 | ) | 16,817,286 | - | - | 9,245,546 | - | 9,245,546 | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs / at-the market offerings | - | - | - | 1,437,094 | 8,592 | - | 74,912,708 | - | - | - | 74,921,300 | - | 74,921,300 | |||||||||||||||||||||||||||||||||||||||
| Fair value of IPR&D acquired, net of Business Combination transaction costs | - | - | - | - | - | - | 24,765,831 | - | - | - | 24,765,831 | - | 24,765,831 | |||||||||||||||||||||||||||||||||||||||
| Fair value adjustment of LO2A intellectual property revenue sharing obligation | - | - | - | - | - | - | 5,440,863 | - | - | - | 5,440,863 | - | 5,440,863 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, stock based compensation | - | - | - | 33,154 | 4,140 | - | 358,104 | 5,782,051 | - | - | 6,144,295 | - | 6,144,295 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, settlement of convertible note interest | - | - | - | 14,493 | 8,691 | - | 851,680 | - | - | - | 860,371 | - | 860,371 | |||||||||||||||||||||||||||||||||||||||
| Issuance of RSU’s and stock options | - | - | - | - | - | - | 890,251 | 10,332,552 | - | - | 11,222,803 | - | 11,222,803 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, conversion of Series A preferred stock | (178 | ) | - | - | 2,967 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, on conversion of convertible notes | - | - | - | 1,060,448 | 63,627 | - | - | - | - | - | 63,627 | - | 63,627 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, exercise of warrants | - | - | - | 290,808 | 1,820 | - | 13,468,875 | (13,346,668 | ) | - | - | 124,027 | - | 124,027 | ||||||||||||||||||||||||||||||||||||||
| Issuance of stock by subsidiary to non-controlling interest | - | - | - | - | - | - | 406,534 | - | - | - | 406,534 | 511,150 | 917,684 | |||||||||||||||||||||||||||||||||||||||
| Purchase remaining non-controlling interest of Luna Squares LLC | - | - | - | - | - | - | (241,713 | ) | - | - | - | (241,713 | ) | (150,766 | ) | (392,479 | ) | |||||||||||||||||||||||||||||||||||
| Exercise of RSU’s | - | - | - | 4,063 | 24 | - | 60,913 | (60,937 | ) | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Other | - | - | - | 30 | (12,272 | ) | 16,690 | (38,412 | ) | - | - | (33,994 | ) | - | (33,994 | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | (44,963,720 | ) | (44,963,720 | ) | (497,944 | ) | (45,461,664 | ) | |||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | - | 820,732 | - | 820,732 | - | 820,732 | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | - | - | - | 11,791,085 | 611,504 | - | 165,600,831 | 20,177,233 | (521,094 | ) | (71,123,259 | ) | 114,745,215 | (164,626 | ) | 114,580,589 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | (54,035,559 | ) | (45,461,664 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 63,200,178 | 14,113,730 | ||||||
| LO2A write offs | 23,963,050 | |||||||
| Non-cash lease expense | 1,619,627 | 491,782 | ||||||
| Unrealized loss on marketable securities | 1,694,471 | |||||||
| Unrealized gain on derivative asset | (11,299,971 | ) | ||||||
| Non-cash proceeds from the sale of intellectual property | (1,448,187 | ) | ||||||
| Impairment on equity accounted associate investment | 2,060,779 | |||||||
| Non-cash consideration received in the form of shares | (7,033,825 | ) | ||||||
| Loss on write off on property and equipment | 1,560,541 | |||||||
| Non-controlling interest | 1,244,274 | |||||||
| Share of loss of equity accounted investments | 1,284,398 | 368,426 | ||||||
| Interest on convertible notes satisfied by issue of notes | 860,399 | |||||||
| Interest accrued | 30,502 | |||||||
| Foreign exchange loss | 1,547 | 1,026,770 | ||||||
| Loss on sale of shares | 4,807 | 72,623 | ||||||
| Share based payments | 3,012,480 | 22,491,100 | ||||||
| Gain on disposal of fixed assets | (3,526,226 | ) | (283,434 | ) | ||||
| Acquisition of Wize Pharma Inc | 5,436,541 | |||||||
| Buyout of non-controlling interest | (150,766 | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Trade and other receivables | (605,480 | ) | (4,991,635 | ) | ||||
| Other current assets | (4,863,945 | ) | (847,872 | ) | ||||
| Trade and other payables | 21,355,883 | 5,864,742 | ||||||
| Net cash provided by operating activities | 14,256,294 | 22,953,792 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (49,978,074 | ) | (76,804,866 | ) | ||||
| Proceeds from sale of investments | 165,316 | |||||||
| Deposits received in relation to sale of Georgia site | 27,170,531 | |||||||
| Purchase of investment shares | (767,850 | ) | ||||||
| Proceeds from sales of property and equipment | 22,156,131 | 694,181 | ||||||
| Payment of fixed asset deposits | (32,054,326 | ) | (51,369,216 | ) | ||||
| Net cash used in investing activities | (32,540,422 | ) | (128,247,751 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITES | ||||||||
| Proceeds from common share issuances | 6,698,221 | 85,102,014 | ||||||
| Proceeds from convertible notes | 3,600,000 | 20,301,427 | ||||||
| Payments of capital issuance costs | (793,172 | ) | (6,122,429 | ) | ||||
| Proceeds from borrowings | 34,256,475 | 14,269,454 | ||||||
| Proceeds from shareholder loans | ||||||||
| Repayment of lease liabilities | (1,776,144 | ) | (230,962 | ) | ||||
| Repayments of borrowings | (27,998,884 | ) | (3,465,044 | ) | ||||
| Net cash provided by financing activities | 13,986,496 | 109,854,460 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (223,376 | ) | (206,039 | ) | ||||
| Net increase in cash and cash equivalents | (4,521,008 | ) | 4,354,462 | |||||
| Cash and cash equivalents at beginning of period | 5,467,273 | 1,112,811 | ||||||
| Cash and cash equivalents at end of period | 946,265 | 5,467,273 | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | 5,877,091 | 653,506 | ||||||
| Non-cash investing and financing transactions | ||||||||
| Sale of site in exchange for shares | 7,048,144 | |||||||
| Sale of property and equipment in exchange for shares | 3,642,113 | |||||||
The accompanying notes are an integral part of the consolidated Financial Statements.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1:- | GENERAL |
| a. |
Mawson Infrastructure Group, Inc. (the “Company” or “Mawson” or “we”), formerly known as Wize Pharma, Inc, and before that, known as OphthaliX Inc., was incorporated in the State of Delaware on February 10, 2012.
The accompanying consolidated financial statements, including the results of the Company’s subsidiaries: Mawson Infrastructure Group Pty Ltd (“Mawson AU”, previously known as Cosmos Capital Limited), Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, MIG No.1 Pty Ltd, Mawson AU Limited, Luna Squares LLC, Luna Squares Texas LLC, Luna Squares Repairs LLC, Luna Squares Property LLC, Mawson Midland LLC (formed September 21, 2022), Mawson Ohio LLC (formed September 21, 2022) and Mawson Mining LLC (collectively referred to as the “Group”), have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd were additional subsidiaries of Mawson, until December 31, 2022, when they were sold to a third party company.
Mawson, through its subsidiaries, is a ‘Digital Asset Infrastructure’ business, which owns and operates modular data centers (“MDCs”) based in the United States and Australia. As at December 31, 2022, Mawson owned 23,971 Application-Specific Integrated Circuit (“ASIC”) computers known as “Miners,” specifically focused on the SHA-256 algorithm, from a variety of manufacturers, including Bitmain Technology Holding Company (“Bitmain”), Canaan Creative (HK) Holdings Limited (“Canaan”) and Shenzhen MicroBT Electronics Technology Co., Ltd (“Whatsminer”). |
| b. | Going concern: |
For the year ended December 31, 2022, the Company incurred a loss after tax of $49.08 million, and as at December 31, 2022, had net current liabilities of $18.87 million, had total net assets of $81.12 million and had an accumulated deficit of $117.31 million. The Company’s cash position as at December 31, 2022, was $0.95 million. These conditions raise substantial doubt upon the Company’s ability to continue as a going concern for at least a year from the date of approval of these unaudited consolidated financial statements.
Management of the Company believes that there are reasonable grounds to conclude that the Company will continue as a going concern after consideration of the following factors:
The Company’s plans include improving profitability and generating sufficient cash flow from operations.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1:- | GENERAL (Cont.) |
On September 8, 2022, the Company entered into a (i) Purchase and Sale Agreement (“Purchase Agreement”) with CleanSpark, Inc. (“CleanSpark”), and (ii) an Equipment Purchase and Sale Agreement. Pursuant of the Purchase Agreement, CleanSpark assumed from the Company a lease for approximately 16.35 acres of real property located in Sandersville, Washington County, Georgia, and all personal property situated on the property. This transaction closed on October 8, 2022, and CleanSpark paid the following consideration to the Company pursuant to the Purchase Agreement: (i) $13.50 million in cash; (ii) 1,590,175 shares of common stock, par value $0.001 per share, of CleanSpark (valued at $4.8 million on October 7, 2022), and (iii) $6.5 million in seller financing in the form of promissory notes. Pursuant to the Equipment Purchase and Sale Agreement, CleanSpark’s subsidiary purchased from the Company, application-specific integrated circuit miners for $9.48 million in cash (which was later reduced to $9.02 million by amendment). This transaction initially closed on October 8, 2022, and was amended on October 21, 2022.
Management of the Company is of the opinion that the Company can continue to access adequate debt and equity funding to meet its working capital requirements. The Company has the ability through it’s At the Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”), to sell shares of its common stock with an aggregate sales price of up to $100 million. To the extent the Company raises additional capital or debt, this could cause additional dilution to the Company’s current stockholders. The terms of any future capital raise or debt issuance and the costs of any financing are uncertain. There are no assurances that the Company would be able to raise additional financing when needed or that it would be able to do so on favorable terms. However, based on the Company’s public float, as of the date of the filing of its Annual Report on Form 10-K, the Company is only permitted to utilize a “shelf” registration statement, including the registration statement under which the Company’s ATM Facility is operated, subject to Instruction I.B.6 to Form S-3, which is referred to as the “baby shelf” rules. For so long as the Company’s public float is less than $75,000,000, it may not sell more than the equivalent of one-third of its public float during any twelve consecutive months pursuant to the baby shelf rules. Although alternative public and private transaction structures are expected to be available, these may require additional time and cost, may impose operational restrictions on the Company, and may not be available on attractive terms. As of March 17, 2023, the Company had the capacity to issue up to $10.12 million worth of shares under the baby shelf rules. If the Company’s public float decreases, the amount of securities the Company may sell under its Shelf Registration Statement will also decline.
Based on internally prepared forecast cash flows which take into consideration what management considers to be reasonable scenarios given the inherent risks and uncertainties, combined with existing cash balances, management believes that the Company will be able to meet its obligations as they become due for at least one year from the date of approval of these consolidated financial statements.
Accordingly, management of the Company believes that it is appropriate to prepare the Group’s consolidated financial statements on a going concern basis. However, should the Company be unable to source sufficient funding through the factors noted above, the Company may not be able to realize assets at their recognized values and extinguish its liabilities in the normal course of business at the amounts stated in these consolidated financial statements.
These consolidated financial statements do not include any adjustments relating to the recoverability and carrying amounts of assets and the amounts of liabilities should the Company be unable to continue as a going concern and meet its obligations and debts as and when they fall due.
F-
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 income and expenses during the reporting periods. Actual results could differ from those estimates. The Company has considered the following to be significant estimates made by management, including but not limited to, going concern assumptions, estimating the useful lives of fixed assets, realization of long-lived assets, unrealized tax positions and the realization of digital currencies, valuing the derivative asset classified under Level 3 fair value hierarchy, business combinations, reverse asset acquisition, and the contingent obligation with respect to future revenues.
| 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 February 6, 2023, Mawson executed at a ratio of 1-6 reverse stock split of its outstanding common stock and reduced its authorized common stock to 90,000,000 shares, as set forth in the Company’s Current Report on Form 8-K filed February 9, 2023.
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-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| c. | Revenue recognition: |
Digital asset mining revenue
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Five steps are required to be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
There is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting of managing digital currencies and management has exercised significant judgement in determining appropriate accounting treatment for the recognition of revenue for such operations.
The Company has entered into a contract with mining pools and has undertaken the performance obligation of providing computing power in exchange for non-cash consideration in the form of cryptocurrency. The provision of computing power is the only performance obligation in the Company’s contract with its pool operators. 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-
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.
Sale of crypto currency mining equipment
The Company earned revenues from the sale of earlier generation cryptocurrency mining units and modular data centers that have been assembled or refurbished for resale (collectively “Hardware”). Revenue from the sale of Hardware is recognized when all of the following conditions are satisfied: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed or determinable, (iii) title and risk of loss have transferred. At the date of sale, the net book value is expensed in cost of revenues.
Net energy benefits
In exchange for powering down the Company’s systems and curtailing power, in response to instances of high electricity demand, the Company receives net energy benefits from the grid. The company also has a power pricing arrangements pursuant to which it can trade energy to achieve net energy benefits.
| 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-
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 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
| 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 and Mawson AU Limited whose functional currency is the Australian Dollar (“AUD”). The financial statements of foreign businesses have been translated into USD at current exchange rates for balance sheet items and at the average rate for income statement items. Translation of all the consolidated companies’ financial records into USD is required due to the reporting currency for these consolidated financial statements presented as USD and the functional currency of the parent company being that of AUD. Translation adjustments are accumulated in other comprehensive income (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-
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 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Year-end AUD 1 = USD | 0.681 | 0.726 | (6 | )% | (6 | )% | ||||||||||
| Average AUD 1 = USD | 0.693 | 0.751 | (8 | )% | 9 | % | ||||||||||
| 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. | Assets held for sale: |
Assets and liabilities are classified as held-for-sale if it is highly probable they will be recovered primarily through sale rather than through continuing use. On March 8, 2023, the Company entered into an agreement with BMF HOLDING GP PTE. LTD. to sell all its member interests in Luna Squares Texas LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of the Company. Luna Squares Texas LLC holds four Texas leases. In addition, the Company sold 59 transformers in connection with those Texas leases. This transaction is due to close on March 31, 2023, therefore all assets and liabilities that were included in this sale have been classified as held for sale. Such assets have been measured at the lower of carrying amount and fair value less costs to sell. The transformers and leases included in this sale ceased being depreciated and amortized from November 9, 2022, when they were assessed as being held for sale.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| k. | 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, 2022, and 2021:
Number of Bitcoin Held
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Opening number of Bitcoin held | 0.92 | 0.52 | ||||||
| Number of Bitcoin added | 1,342.59 | 808.88 | ||||||
| Number of Bitcoin sold | (1,343.51 | ) | (808.48 | ) | ||||
| Closing number of Bitcoin held | (0.00 | ) | 0.92 | |||||
Digital currency is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
The Company’s policy is to dispose of production at the earliest opportunity, 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.
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| l. | Equipment deposits: |
The Company records a prepaid expense for costs paid but not yet incurred. Those costs 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 paid. They are subsequently measured at cost, less loss allowance.
| m. | Marketable securities |
The Company has a marketable security which consists entirely of common shares of CleanSpark. The Company accounted for this investment in accordance with ASC 321, Investments-Equity Securities, (“ASC 321”) due to the shares having a readily determinable fair value since they are traded on NASDAQ and have significant average daily volume traded. As a result, the investment is required to be measured at fair value at each balance sheet date with unrealized holding gains and losses recorded in other income (expense).
| n. | Reverse Asset Acquisition: |
On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd and referred to herein as Mawson AU) in a stock for stock exchange. This transaction has been accounted for as a reverse asset acquisition. The reverse asset acquisition and the associated impact is referred to as the “Cosmos Transaction”.
Under the terms of the Cosmos Transaction Bid Implementation Agreement, the Company was required to make share-based payments consisting of up to 40,000,000 shares (pre 1-10 reverse stock split which occurred on August 11, 2021 and 1-6 reverse stock split which occurred February 6, 2023) under an Incentive Compensation Program and warrants issued to HC Wainwright as a fee related to the acquisition of common stock 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
| o. | Fair value of and recognition of revenue from 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;
F-
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Level 2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 — assets and liabilities whose significant value drivers are unobservable. Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.
| Fair value measured at December 31, 2022 | ||||||||||||||||
|
Total carrying December 31, |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
| Derivative asset | $ | 11,299,971 | 11,299,971 | |||||||||||||
| Marketable securities | $ | 3,243,957 | 3,243,957 | |||||||||||||
| Fair value measured at December, 2021 | ||||||||||||||||
| Total carrying value at December 31, 2021 |
Quoted prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
| Derivative asset | $ | $ | $ | $ | ||||||||||||
| Marketable securities | $ | 326,801 | $ | 326,801 | $ | $ | ||||||||||
Level 1 Assets:
The Company held 50 million shares in DXN Limited (“DXN”), an Australian Securities Exchange (“ASX”) listed company as at December 31, 2021. This was recorded at fair value with changes in fair value recognized in the accompanying unaudited condensed consolidated statements of operations. The fair value of the DXN investment is classified in Level 1 of the fair value hierarchy as it is quoted on an active market, that being the ASX. During the year ended December 31, 2022, the Company sold all its shares in DXN.
The Company holds 1.59 million shares in CleanSpark a Nasdaq listed company, as at December 31, 2022. This was recorded at fair value with changes in fair value recognized in the accompanying consolidated statements of operations. The fair value of the CleanSpark investment is classified in Level 1 of the fair value hierarchy as it is quoted on an active market, that being the Nasdaq.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
Level 3 Assets:
In June 2022, the Company entered into a Power Supply Agreement with Energy Harbor LLC, the energy supplier to the Company’s Pennsylvania facility, to provide the delivery of a fixed portion of the total amount of electricity for a fixed price through to December 2026. If the Pennsylvania facility uses more electricity than contracted, the cost of the excess is incurred at a new price quoted by Energy Harbor LLC.
While the Company manages operating costs at the Pennsylvania facility in part by periodically selling unused or uneconomical power back to the market, the Company does not consider such actions trading activities. That is, the Company does not engage in speculation in the power market as part of its ordinary activities. Because the sale of any electricity under a curtailment program allows for net settlement, the Company has determined the Power Supply Agreement meets the definition of a derivative under ASC 815, Derivatives and Hedging, (“ASC 815”). However, because the Company has the ability to sell the power back to the grid rather than take physical delivery, physical delivery is not probable through the entirety of the contract and therefore, the Company does not believe the normal purchases and normal sales scope exception applies to the Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging derivative contract) is recorded at estimated fair value each reporting period with the change in the fair value recorded in change in fair value of derivative asset in the consolidated statements of operations (refer to fair value of financial instruments policy).
The Power Supply Agreement was classified as a derivative asset from the quarter ended 30 June 2022 and measured at fair value on the date of Power Supply Agreement, with changes in fair value recognized in the accompanying unaudited condensed consolidated statements of operations. The estimated fair value of the Company’s derivate asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. Specifically, the Company’s discounted cash flow estimation models contain quoted commodity exchange spot and forward prices and are adjusted for basis spreads for load zone-to-hub differentials through the term of the Power Supply Agreement, which ends in December 2026. In addition, the Company adopted a further discount rate of approximately 20% above the terminal value of the observable market inputs, but also includes unobservable inputs based on qualitative judgment related to company-specific risk factors. The terms of the Power Supply Agreement require pre-payment of collateral, calculated as forward cost based on the market cost rate of electricity versus the fixed price stated in the contract.
| p. | Equity accounted investments: |
Equity investments are accounted for under the equity method if we are able to exercise significant influence, but not control, over an investee. Our share of the earnings or losses as reported by the investees is classified as income from equity investees on our consolidated statements of operations. The investments are evaluated for impairment annually and when facts and circumstances indicate that the carrying value may not be recoverable. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in interest income and other, net on our consolidated statements of earnings.
| q. | Concentrations of credit risk: |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and 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, the maximum amount of loss to 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.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| r. | Property and equipment: |
Property and equipment are stated at cost, net of accumulated depreciation. The cost includes any cost of replacing part of the property and equipment with the original cost of the replaced part being derecognized. All other repair and maintenance costs are recognized in profit or loss incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Property, plant and equipment transferred from customers is initially measured at the fair value at the date on which control is obtained.
The depreciable amount of fixed assets is depreciated on a straight-line or declining balance basis based on the asset classification, over their useful lives to the economic entity commencing from the time the assets arrive at their destination where they are ready for use. Low-cost assets are capitalized and immediately depreciated. Depreciation is calculated over the following estimated useful lives:
| 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 | Straight-Line |
||
| Transformers | 15 years | Straight-Line | ||
| Leasehold improvements | 10 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 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 $3,130,638 as at December 31, 2022, and an increase in the depreciation charge to the year to December 31, 2022 statement of operations and profit and loss of $84,735 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.
| s. | Share based payments |
The Company follows FASB Codification Topic ASC 718-10 Compensation-Stock Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company determines the grant date fair value of the restricted stock units (“RSUs”) and options using the Black-Scholes option-pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility computes stock price volatility over expected terms based on its historical common stock trading prices. Risk–free interest rates are calculated based on the implied yield available on U. S. 10-year Treasury bond.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| t. | Legal and other contingencies: |
The Company accounts for its contingent liabilities in accordance with ASC 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of September 30, 2022, the Company is not a party to any litigation that would reasonably be expected to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.
| u. | 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 sheets. 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.
| v. | 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.
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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 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.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 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, 2022 and 2021 are as follows:
| Year ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Warrants to purchase common stock | 2,825,278 | 626,278 | ||||||
| Options to purchase common stock | 4,910 | 125,577 | ||||||
| Restricted Stock-Units (“RSUs”) issued under a management equity plan | 420,914 | 377,381 | ||||||
| 3,251,102 | 1,139,236 | |||||||
The following table sets forth the computation of basic and diluted loss per share:
| Year ended December 31, |
||||||||
| 2022 | 2021 | |||||||
| Numerator: | ||||||||
| Net loss | ||||||||
| Denominator: | $ | (52,762,308 | ) | $ | (44,963,720 | ) | ||
| Weighted average common shares - basic and diluted | 12,695,654 | 9,383,971 | ||||||
| Net loss per share of Common Stock, basic and diluted | $ | (4.16 | ) | $ | (4.79 | ) | ||
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 120,000,000 shares. A further Certificate of Amendment to the Certificate of Incorporation of the Company dated February 6, 2023, was executed at a ratio of 1-6 reverse stock split of its outstanding common stock and reduced its authorized common stock to 90,000,000 shares.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 4:- | ACQUISITIONS |
Tasmania Data Infrastructure Pty Ltd
During June 2022 the Company, through its wholly owned subsidiary Mawson AU Limited entered into a License and Services Agreement with Tasmania Data Infrastructure Pty Ltd (“TDI”) in exchange for 42,562,432 fully paid issued shares in TDI.
Mawson AU Limited entered into a further sale agreement during September 2022 to sell a MDC to TDI in exchange for a further 10,000,000 fully paid issued shares in TDI.
Mawson AU Limited entered into a further agreement with TDI during November 2022 to sell a 2,144 ASIC Bitcoin Miners to TDI in exchange for a further 107,042,254 fully paid issued shares in TDI, this sale was effective on November 23, 2022.
| Consideration: | ||||
| ($ in thousands) | Fair Value | |||
| Intellectual property, and Equipment | $ | 4,159,452 | ||
| Total Consideration | $ | 4,159,452 | ||
| Less impairment | $ | (2,060,779 | ) | |
| Total | 2,098,673 | |||
| Preliminary | ||||
| Allocation at | ||||
| Purchase Price Allocation | Acquisition | |||
| ($ in thousands) | Date | |||
| Other assets | $ | 170,771 | ||
| Equipment | 1,453,529 | |||
| Intellectual property | 505,417 | |||
| Payables | (31,044 | ) | ||
| Total | $ | 2,098,673 | ||
From November 23, 2022, Mawson AU Limited became a 34.9% shareholder of TDI and therefore was accounted for as an equity investment from this date under ASC 323 Investments – Equity Method and Joint Ventures (ASC 323). Prior to November 23, 2022, when Mawson did not have significant control of TDI it was accounted at fair value using ASC 321 Investments — Equity Securities (ASC 321).
An impairment to the investment in TDI was recognized of $2.06 million.
| NOTE 5:- | TRADE AND OTHER RECEIVABLES |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Trade receivables | $ | 10,413,031 | $ | 977,498 | ||||
| Research and development tax credit | 2,785,748 | |||||||
| Goods and service tax refund | 45,045 | 1,843,534 | ||||||
| $ | 10,458,076 | $ | 5,606,780 | |||||
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 6:- | PROPERTY AND EQUIPMENT |
Property and equipment, net, consisted of the following:
| December 31, 2022 |
December 31, 2021 |
|||||||
| Plant and equipment | 4,263,662 | 1,046,866 | ||||||
| Computer equipment | 163,060 | 216,099 | ||||||
| Furniture & fixtures | 29,492 | 31,474 | ||||||
| Processing machines (Miners) | 103,337,719 | 81,341,098 | ||||||
| Modular data center | 19,713,534 | 9,819,796 | ||||||
| Motor Vehicles | 326,704 | 250,425 | ||||||
| Transformers | 8,886,576 | 1,190,609 | ||||||
| Low-cost assets | 995,292 | 246,154 | ||||||
| Assets under construction | 11,592,582 | 1,008,001 | ||||||
| Leasehold improvements | 487,527 | |||||||
| Total | 149,796,148 | 95,150,522 | ||||||
| Less: Accumulated depreciation | (54,489,966 | ) | (18,213,672 | ) | ||||
| Reclassification to assets held for sale (NOTE 8) | (4,289,684 | ) | ||||||
| Property and equipment, net | 91,016,498 | 76,936,850 | ||||||
The Company incurred depreciation and amortization expense in the amounts of $63,200,178 and $14,113,730 for the year ended December 31, 2022 and December 31, 2021, respectively. The company changed its estimate of the useful life of its Miners with effect from December 1, 2022 to better reflect the pattern of consumption, the change was effected by changing the method of depreciation from reducing balance to the straight line method from that date. The effect of this is to increase the depreciation charge in the period by $5.29 million to $63.20 million. The effect on loss per share in the period is a change from $3.74 per share to $4.16 per share.
There were impairment charges recognized for processing machines of $5.45 million for year ended December 31, 2022, these assets were disposed of as part of the sale of the Georgia site to CleanSpark. There was $nil impairment charges for the year ended December 31, 2021. There was a write-off of miners amounting to $1.56 million during the year to December 2022.
The reclassification of property and equipment to assets held for sale is in relation to the sale of Luna Squares Texas LLC to BMF HOLDING GP PTE.LTD., refer to NOTE 8 for further details.
During the year ended December 31, 2022, $32.05 million cash was paid for equipment which was recorded as either a deposit or within property plant and equipment on the balance sheet.
| NOTE 7:- | 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, 2022 reporting year. As at December 31, 2022, and 2021, the Company had $2,524,065 and $1,246,236 respectively, in refundable security deposits.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 8:- | ASSETS HELD FOR SALE |
On March 8, 2023, the Company entered into a Member Interest Purchase Agreement (“MIPA”) and a related Equipment Purchase and Sale Agreement (“EPSA”) with BMF HOLDING GP PTE. LTD. Pursuant to the MIPA, the Company sold all its member interests in Luna Squares Texas LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of Company, and holds 4 leases in Texas and various related contracts, as well as 59 transformers it held separately in connection with those Texas leases.
From November 9, 2022 these assets were classified as held for sale, from this date depreciation and amortization on the property and equipment and the leases ceased. As at December 31, 2022 the assets included in the sale are stated at carrying value and comprised of the following assets.
| December 31, 2022 |
||||
| Property and equipment | 4,289,684 | |||
| Security deposit | 1,010,716 | |||
| Operating lease right-of-use asset | 145,659 | |||
| Assets held for sale | 5,446,059 | |||
| NOTE 9:- | EQUITY METHOD INVESTMENTS |
As of November 23, 2022, we had a 34.9% ownership interest in TDI, a private Australian company. Additional disclosure regarding changes in our equity method investments due to acquisition is included in Note 4, Acquisitions.
As of 9 March 2023, 2022 we had a 20.63% ownership interest in DSS, a public unlisted Australian Company.
Our share of income and losses from our equity method investments is included in share of net loss of associates accounted for using the equity method in our consolidated statement of operations.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10:- | LEASES |
Luna Squares LLC leased a 16.35-acre lot in Georgia from the Development Authority of Washington County until October 8, 2022, when the lease was transferred and assigned to CleanSpark.
The Company leases the headquarters of its business operations at Level 5, 97 Pacific Highway, North Sydney NSW 2060 Australia, being 1,076 square feet of office space held under a license agreement.
The Company leases 6-acres of land in Pennsylvania which began in October 2021 for thirty-six months with the option to exercise four additional three-year extensions.
On March 16, 2022, Luna Squares Property LLC entered into a lease with respect to a property in the City of Sharon, Mercer County, Pennsylvania with Vertua Property, Inc. (a related entity – refer to note 18 for details). The term of the lease is for 5 years, with 2 options to extend for 5 years each.
During May 2022, Luna Square Texas LLC entered into four lease agreements to lease 11 acres of land in Texas for a period of five years.
Other than the foregoing leases, the Company does not lease any material assets. The Company believes that these offices and facilities are suitable and adequate for its operations as currently conducted and as currently foreseen. In the event additional or substitute offices and facilities are required, the Company believes that it could obtain such offices and facilities at commercially reasonable rate.
The Company’s lease costs recognized in the Consolidated Statements of Income and Comprehensive Loss consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating lease charges (1) | $ | 1,608,095 | $ | 452,479 | ||||
| Finance lease charges: | ||||||||
| Amortization of right-of-use assets | 28,662 | 792 | ||||||
| Interest on lease obligations | 8,507 | 317 | ||||||
| (1) | Included in Selling, General & Administrative Expenses. |
The following is a schedule of the Company’s lease liabilities by contractual maturity as of December 31, 2022:
| Operating leases |
Finance Leases |
|||||||
| 2022 | $ | 1,532,470 | $ | 38,176 | ||||
| 2023 | 1,211,898 | 38,176 | ||||||
| 2024 | 267,372 | 38,176 | ||||||
| 2025 | 278,064 | 15,016 | ||||||
| 2026 | 70,190 | |||||||
| Total undiscounted lease obligations | 3,359,994 | 129,544 | ||||||
| Less imputed interest | (331,957 | ) | (15,619 | ) | ||||
| Total present value of lease liabilities | 3,028,037 | 113,925 | ||||||
| Less current portion of lease liabilities | 1,300,062 | 30,702 | ||||||
| Non-current lease liabilities | $ | 1,727,975 | $ | 83,223 | ||||
Other lease information as of December 31,2022:
| Operating leases |
Finance Leases |
|||||||
| Operating cash flows from operating and finance leases | $ | 1,742,408 | $ | 33,736 | ||||
| Weighted-average remaining lease term – operating and finance leases (years) | 2.53 | 3.39 | ||||||
| Weighted-average discount rate – operating and leases (%) | 8 | % | 7.5 | % | ||||
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 11:- | TRADE AND OTHER PAYABLES |
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Trade payables | $ | 18,152,399 | $ | 4,778,784 | ||||
| Accrued expenses | 2,164,178 | 1,790,921 | ||||||
| Deferred income | 2,000,000 | |||||||
| Employee payables | 1,881,897 | 754,376 | ||||||
| Tax payables | 1,702,032 | 422,907 | ||||||
| $ | 25,900,506 | $ | 7,746,988 | |||||
| NOTE 12:- | LOANS |
Outstanding loans as of December 31, 2022:
| Maturity Date |
Rate | Loan Balance |
||||||||
| Marshall | Feb-24 | 12.00 | % | $ | 10,207,500 | |||||
| Celsius | Aug-23 | 12.00 | % | 14,000,000 | ||||||
| W Capital | Mar-23 | 12.00 | % | 3,373,878 | ||||||
| Convertible notes | Jun-23 | 20.00 | % | 523,729 | ||||||
| SBA loan | May-50 | 3.80 | % | 15,370 | ||||||
| Total Loans Outstanding | $ | 28,120,477 | ||||||||
| Less: current portion of long-term loans | (23,610,583 | ) | ||||||||
| Long-term loans, excluding current portion | $ | 4,509,894 | ||||||||
The following table reflects the principal amount of loan maturities due over the next two years as of December 31, 2022:
| Outstanding Loan | FY 2023 | FY 2024 | Total | |||||||||
| Marshall | $ | 5,697,606 | $ | 4,509,894 | $ | 10,207,500 | ||||||
| Celsius | 14,000,000 | 14,000,000 | ||||||||||
| W Capital | 3,368,475 | 3,368,475 | ||||||||||
| Convertible notes | 500,000 | 500,000 | ||||||||||
| SBA loan | 14,000 | 14,000 | ||||||||||
| Total principal amount of loan payments by fiscal year | $ | 23,580,081 | $ | 4,509,894 | $ | 28,089,975 | ||||||
| Interest accrued to December 31,2022 | $ | 30,502 | ||||||||||
| Total loan book value as of December 31, 2022 | $ | 28,120,477 | ||||||||||
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 12:- | LOANS (Cont.) |
Description of Outstanding Loans
Marshall loan
In December 2021 MIG No. 1 Pty Ltd entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd which was payable in three tranches. The first tranche was received during December 2021 with an amount of $7.86 million. Tranche two and three were received during January and February 2022 with a total amount of $7.11 million. The loan matures in 2024 and bears interest at a rate of 12.00% per annum, payable monthly which commenced December 2021. This loan facility is secured by a general security agreement given by the Company. Principal repayments begin during 2023.
The outstanding balance is $10.21 million as at December 31, 2022 with $5.70 million classified as a current liability and the remaining balance classified as a long-term liability.
Celsius loan
On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement with Celsius Mining LLC, in connection with this agreement, Celsius Mining LLC loaned Luna Squares LLC a principal amount of $20,000,000, for the purpose of funding the infrastructure required to meet the obligations of the Co-Location Agreement, for which Luna Squares LLC issued a Secured Promissory Note for repayment of such amount. The Secured Promissory Note accrues interest daily at a rate of 12% per annum. Luna Squares LLC is required to amortize the loan at a rate of 15% per quarter, principal repayments began at the end of September 2022. The Secured Promissory Note has a maturity date of August 23, 2023, the outstanding balance is $14.0 million as at December 31, 2022, all of which is classified as a current liability. Celsius Mining LLC filed for Chapter 11 bankruptcy protection on July 13, 2022. The Company does not anticipate any changes to the terms of the loan agreement due to Celsius Mining LLC’s bankruptcy filing.
W Capital loan
On September 2, 2022, Mawson Infrastructure Group Pty Ltd entered into a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with a total loan facility of AUD$3 million (USD$1.9 million). This was amended on September 29, 2022 and the loan facility was increased to AUD$8 million (USD$5.2 million). As at December 31, 2022, AUD$4.96 million (USD$3.37 million) has been drawn down from this facility, all of which is classified as a current liability. The Secured Loan Facility accrues interest daily at a rate of 12% per annum and is paid monthly. Principal repayments are due in March 2023. The Company expects to amend the current loan with W Capital Advisors Pty Ltd prior to the due date.
Convertible notes
On July 8, 2022, the Company issued secured convertible promissory notes to investors in the aggregate principal amount of $3,600,000 (the “Secured Convertible Promissory Notes”) in exchange for an aggregate of $3,600,000. The Secured Convertible Promissory Notes are convertible at the option of the holder at a price of $0.85 per share of our common stock. The Secured Convertible Promissory Notes bear interest of twenty percent per annum. One-half of the interest that accrues each month on the Secured Convertible Promissory Notes must be paid monthly. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Notes, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) one year after its issuance, or (ii) following an event of default. On September 29, 2022, the Company entered into a letter variation relating to some of the Secured Convertible Promissory Notes, with an aggregate principal amount of $3.1 million, which gave those holders the option to elect for pre-payment (including accrued interest to maturity) subject to certain conditions. Payments of the interest may be made partially in common stock of the Company, at the Company’s election. All of the investors included in this letter variation elected for the pre-payment option and therefore there were $3.1 million principal repayments made during November 2022. The final convertible noteholder who was not a party to this variation opted to enter into an arrangement whereby it received pre-payment of interest, but agreed that repayment of the principal was not required until the originally agreed Repayment Date, all of which is classified as a current liability.
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 13:- | SIGNIFICANT TRANSACTIONS |
| 1. | On September 8, 2022, the Company entered into a (i) Purchase and Sale Agreement with CleanSpark, and (ii) an Equipment Purchase and Sale Agreement. Pursuant of the Purchase Agreement, CleanSpark assumed from the Company a lease for approximately 16.35 acres of real property located in Sandersville, Washington County, Georgia, and all personal property situated on the Property. This transaction closed on October 8, 2022, and CleanSpark paid the following consideration to the Company pursuant to the Purchase Agreement: (i) $13.50 million in cash; (ii) 1,590,175 shares of common stock, par value $0.001 per share of CleanSpark (valued at $4.8 million on October 7, 2022), and (iii) $6.5 million in Seller financing in the form of promissory notes. Pursuant to the Equipment Purchase Agreement, CleanSpark purchased from the Company, application-specific integrated circuit miners, this transaction closed on October 8, 2022, for $9.48 million in cash (which was later reduced to $9.02 million upon reduction in the number of miners). There is also additional potential consideration payable pursuant to the Purchase and Sale Agreement of; (i) up to 1,100,890 shares of CleanSpark Common Stock dependent the number of modular data centers on the Property occupied by the Company being emptied and made available for use by CleanSpark. We achieved this additional consideration on December 30, 2022 and received the shares on January 13, 2023, and (ii) $2 million in cash if CleanSpark is able to utilize at least an additional 150 MW of power on the property by the six month anniversary of the Closing Date, this was not achieved by the end of December 31, 2022. |
The profit on sale recognized in the consolidated statement of operations is outlined below:
| October 8, 2022 | ||||
| Cash | $ | 22,517,954 | ||
| Financing provided by seller | 6,500,000 | |||
| 1,590,175 shares of CLSK common stock | 4,802,329 | |||
| Total purchase price | $ | 33,820,283 | ||
| Contingent Consideration earned | ||||
| Earn-out Shares of CLSK common stock | 2,245,815 | |||
| Total contingent consideration earned | $ | 2,245,815 | ||
| Total consideration | $ | 36,066,098 | ||
| Less costs associated with sale of assets: | ||||
| Processing machines (Miners) | 9,051,369 | |||
| Impairment on miners | 5,447,199 | |||
| Modular data center | 7,669,285 | |||
| Transformers | 2,591,275 | |||
| Plant and equipment | 2,695,144 | |||
| Other | 335,386 | |||
| Total costs associated with sale of assets | 27,789,658 | |||
| Profit on sale of site | $ | 8,276,440 | ||
| 2. | On March 8, 2023, the Company entered into an agreement with BMF HOLDING GP PTE. LTD to sell all its member interests in Luna Squares Texas LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of the Company. Luna Squares Texas LLC holds four Texas leases, and certain related contracts. In addition, the Company sold 59 transformers in connection with those Texas leases. This transaction is due to close on March 31, 2023, therefore all assets and liabilities that were included in this sale have been classified as held for sale. Refer to NOTE 8 for further details. |
| 3. | During the year ended December 31, 2022 Mawson AU Limited sold equipment to and entered into intellectual property agreements with TDI in exchange for shares in TDI. From November 23, 2022 Mawson AU Limited became a 34.9% shareholder of TDI and therefore was accounted for as an equity investment from this date. Total consideration for this transaction after impairment was $2.10, refer to NOTE 4 for further details. |
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 13:- | SIGNIFICANT TRANSACTIONS (Cont.) |
| 4. | During June 2022 the Company entered into a power pricing agreement with Energy Harbor LLC, the energy supplier to the Company’s Pennsylvania facility. The contract allows us to trade our energy to achieve net energy benefits. We have recognized a derivative asset on our balance sheet for the contract, which has been measured at fair value with any changes in fair value recognized in our statement of operations. |
| 5. | On February 23, 2022, Luna Squares LLC entered into a loan agreement with Celsius Mining LLC for a principal amount of $20,000,000. The Secured Promissory Note accrues interest daily at a rate of 12% per annum. The Secured Promissory Note has a maturity date of August 23, 2023, and the outstanding balance is $14.0 million as at December 31, 2022. Celsius Mining LLC filed for Chapter 11 bankruptcy protection on July 13, 2022. The Company does not anticipate any changes to the terms of the loan agreement and security arrangements have not changed as at the date of this report as a result of Celsius Mining LLC’s bankruptcy filing. |
|
| 6. | On September 2, 2022, Mawson Infrastructure Group Pty Ltd entered into a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with a total loan facility of AUD$3 million (USD$1.9 million). This was amended on September 29, 2022, and the loan facility was increased to AUD$8 million (USD$5.2 million). As at December 31, 2022, AUD$4.96 million (USD$3.37 million) has been drawn down from this facility, all of which is classified as a current liability. The Secured Loan Facility accrues interest daily at a rate of 12% per annum and is paid monthly. The loan matures in March 2023, however the Company expects to amend the current loan with W Capital Advisors Pty Ltd prior to the due date to extend the maturity date. | |
| 7. | On July 8, 2022, the Company issued secured convertible promissory notes to investors in the aggregate principal amount of $3,600,000 (the “Secured Convertible Promissory Notes”). On September 29, 2022, the Company entered into a letter of variation relating to most of the Secured Convertible Promissory Notes, with an aggregate principal amount of $3.1 million, which gave those holders the option to elect for pre-payment (including accrued interest to maturity) subject to certain conditions. Payments of the interest could be made partially in common stock of the Company. All of the investors included in this letter variation elected for the pre-payment option and therefore there were $3.1 million principal repayments made during November 2022. The final convertible noteholder who was not a party to this variation opted to enter into another arrangement whereby it received pre-payment of interest, but agreed that repayment of the principal was not required until the originally agreed Repayment Date. |
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 14:- | TAXES ON INCOME |
Income/(loss) before income taxes consisted of income from domestic and foreign operations of ($52.3) million for the calendar year ended December 31, 2022. Income tax expense (benefit) included in the statements of income and comprehensive income consisted of the following.
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Current | ||||||||
| Federal | $ | - | $ | - | ||||
| Foreign | - | (277,717 | ) | |||||
| State | - | - | ||||||
| - | ||||||||
| Deferred | ||||||||
| Federal | - | - | ||||||
| Foreign | - | - | ||||||
| State | - | - | ||||||
| Total | $ | - | $ | (277,717 | ) | |||
Income tax expense differed from the amount computed by applying the Federal statutory income tax rate of 21% to pretax income/(loss) for fiscal year 2022 as a result of the following:
| December 31, 2022 | ||||||||
| Amount | Rate | |||||||
| Federal tax at statutory rate | $ | (10,988,857 | ) | 21.00 | % | |||
| State income taxes, net of federal tax benefit | (1,069,093 | ) | 2.04 | % | ||||
| Foreign Taxes | (1,435,961 | ) | 2.74 | % | ||||
| Change in Valuation Allowance | 13,703,637 | (26.20 | )% | |||||
| Other | (209,726 | ) | 0.40 | % | ||||
| Total | $ | - | ||||||
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 14:- | TAXES ON INCOME (Cont.) |
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, | ||||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Net operating loss carryforwards | $ | 15,762,452 | 6,244,902 | |||||
| Operating Lease Liability | 782,080 | 911,463 | ||||||
| Accrued Liabilities | 166,650 | 88,833 | ||||||
| Unrealized Loss | 2,473,377 | 714,428 | ||||||
| Stock based compensation | 5,874,815 | 4,710,358 | ||||||
| Disallowed Interest Expense | 2,548,266 | 425,302 | ||||||
| Other | 186,432 | 32,853 | ||||||
| Total deferred tax assets | 27,794,072 | 13,128,139 | ||||||
| Liabilities | ||||||||
| Right of Use Asset | 770,635 | 934,086 | ||||||
| Depreciation | 1,112,435 | (13,311 | ) | |||||
| Total deferred tax liabilities | 1,883,071 | 920,775 | ||||||
| Valuation allowance | (25,911,002 | ) | (12,207,364 | ) | ||||
| 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 $13.70 million for the year ended December 31, 2022, primarily as a result of current year activities.
As of December 31, 2022, the Company had approximately $45.6 million Australian net operating losses (NOL), that will have an indefinite life carryforward. The Internal Revenue Code (“IRC”) limits the amount of NOL carryforwards that a company may use in a given year in the event of certain cumulative changes in ownership over a three-year period as described in Section 382 of the IRC. Utilization of NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
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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, 2022, 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 twelve months. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no interest or penalty accruals associated with uncertain tax benefits in its consolidated balance sheet and consolidated statement of operations for the tax year ended December 31, 2022.
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, 2022. The Company is not currently under examination by income tax authorities in federal or state jurisdictions. All tax returns will remain open for examination by the federal and most state taxing authorities for three years and four years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.
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, 2022. 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. | On March 8, 2021, the Company entered into the Contingent Value Rights Agreement (“CVR Agreement”), pursuant to which certain holders of the CVRs had certain rights to any value created in respect of the LO2A business previously carried on by the Company. Despite the holders’ representative’s good faith endeavors, the holders’ representative was unable to procure a suitable transaction. The company 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 $300,000 to be repaid to us for amounts we spend in the development of the LO2A Technology at the request of the representative of the holders of the CVRs. As at December 31, 2022, the Company cannot reliably measure the cost of the CVRs and it is not probable that these payments will be made and therefore this has been classified as a contingent liability. On March 8, 2023, the CVR Agreement expired and was terminated, and the rights of the CVR holders under that agreement expired at the same time. On February 7, 2023, the Company entered into a share purchase agreement with N. Danenberg Holding (2000) Ltd to sell the Company’s shares or interests in Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd (“Wize Entities”) effective December 31, 2022 in consideration for $10,000. This transaction closed on March 9, 2023. As a result of the sale transaction the Wize Entities were deconsolidated from the group as at December 31, 2022. | |
2. | The Company is currently in the process of applying for sales tax registrations and exemptions in different states in the U.S. At this stage the company is unable to determine the sales tax financial impact. |
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 16:- | STOCKHOLDERS’ EQUITY |
TraDigital Marketing Group LLC was issued 1,666 shares of common stock during January 2022 and May 2022 for consultancy services provided to the Company.
Under the terms of the Cosmos Transaction Bid Implementation Agreement the Company made share-based payments under an Incentive Compensation Program during September 2021 (refer to reverse acquisition accounting policy). During the year to December 31, 2022, certain participants partially converted certain of these awards into 408,854 shares of common stock of Mawson.
During February 2022, Kyle Hoffman was paid $50,000 in shares of the Company’s common stock as part of the contingent consideration for the Membership Interest Purchase Agreement to acquire shares in Luna Squares LLC.
On July 17, 2022, Mawson Infrastructure Group Inc entered into a Securities Purchase Agreement with Wainwright providing for the issuance and sale by the Company of 1,333,333 shares of our common stock, par value $0.001 per share, at a price of $0.80 per share, accompanied by warrants to purchase 1,666,667 shares of Common Stock in a registered direct offering.
The Company made share-based payments under an Incentive Compensation Program during December 2022. During the year to December 31, 2022, certain participants partially converted certain of these awards into 1,310 shares of common stock of Mawson.
On May 27, 2022, Mawson entered into an ATM Agreement with Wainwright, to sell shares of our common stock, par value $0.001 per share, having an aggregate sales price of up to $100 million, from time to time, through an “at the market offering” program under which Wainwright acts as the sales agent. During the year to December 31, 2022, 88,168 were issued as part of the ATM agreement.
Pursuant to that certain Certificate of Amendment to the Certificate of Incorporation of the Company dated February 6, 2023 Mawson executed at a ratio of 1-6 reverse stock split of its outstanding common stock and reduced its authorized common stock to 90,000,000 shares, as set forth in the Company’s Current Report on Form 8-K filed February 9, 2023.
Restricted Stock
As of December 31, 2022, there was no restricted stock.
Series A Preferred Stock
As of December 31, 2022, there are no shares of Series A Preferred Stock outstanding.
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, 2021 | 587,365 | |||||||||||
| Issued | 2,450,580 | 4.17 | 3.54 | |||||||||
| Exercised | (212,667 | ) | ||||||||||
| Expired | ||||||||||||
| Outstanding as of December 31, 2022 | 2,825,278 | 4.17 | 3.54 | |||||||||
| Warrants exercisable as of December 31, 2022 | 2,825,278 | |||||||||||
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MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 16:- | STOCKHOLDERS’ EQUITY (Cont.) |
On February 23, 2022, Mawson issued to Celsius Mining LLC (“Celsius”) warrants with an expiry date of August 23, 2023, to purchase up to 641,667 shares of common stock of Mawson at an exercise price of US$6.50 per share, in connection with the $20 million loan made by Celsius to Luna Squares LLC in connection with a Customer Equipment and Co-Location Agreement entered into by Celsius and Luna Squares LLC.
On July 17, 2022, the Company entered into a Securities Purchase Agreement with Wainwright providing for the issuance and sale by the Company of 1,333,333 shares of the Company’s common stock, accompanied by warrants to purchase 1,666,667 shares of the Company’s common stock. The warrants issued in this offering have an exercise price of $1.01 per share of our common stock, are exercisable 6 months after issuance and will expire five and one-half years following issuance. As compensation to Wainwright, the Company also issued to designees of the Wainwright warrants to purchase up to 93,333 shares of Common Stock.
Under the terms of the Cosmos Transaction Bid Implementation Agreement the Company made share-based awards in the form of warrants, options and RSUs under an Incentive Compensation Program during September 2021 (refer to reverse acquisition accounting policy). During the year ended December 31, 2022, certain participants exercised 212,667 of their warrants to convert these into common stock of Mawson.
| NOTE 17:- | RELATED PARTY TRANSACTIONS |
On March 16, 2022, Luna Squares LLC entered into a lease with respect to a property in the City of Sharon, Mercer County, Pennsylvania with Vertua Property, Inc, a subsidiary entity in which Vertua Ltd has a 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 Company’s Audit Committee has compared the rent and terms to other arms’ length leases the Company has entered into and formed the view that the rent is in line with the market for similar properties. Rent is subject to annual increases equal to the amount of the Consumer Price Index 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, 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.
During the year ended December 31, 2022 and year ended December 31, 2022 Mawson Infrastructure Group Pty Ltd paid Vertua Limited $239,977 and $81,598 respectively, for reimbursement for office costs. James Manning, CEO, a director and a significant shareholder of the Company, is also a director of Vertua Ltd.
| NOTE 18:- | SUBSEQUENT EVENTS |
On February 6, 2023, the Company amended its Certificate of Incorporation to (i) execute a reverse stock split of all of the outstanding shares of our common stock, par value $0.001 per share, at a ratio of 1-6; and (ii) decrease the Company’s authorized Common Stock from 120,000,000 shares to 90,000,000 shares. The reverse stock split was effective as of February 9, 2023. On March 7, 2023 the issued capital of the Company on a post-split basis was 14,131,110.
On February 23, 2023 the Company has closed its bitcoin mining facility in Condong, NSW, Australia. All ASIC miners and MDCs in the Condong site have been transferred to the Pennsylvania facilities. The Company now only operates in the United States exclusively.
On March 8, 2023, the Company entered into a Member Interest Purchase Agreement (“MIPA”) as well as an Equipment Purchase and Sale Agreement (“EPSA”) with BMF Holding GP PTE. LTD. (“BMF”). Pursuant to the MIPA, the Company has agreed to sell all its member interests in Luna Squares Texas LLC, a Delaware limited liability company, which is a wholly-owned subsidiary of Company, and holds 4 leases in Texas, and various related contracts. Under the EPSA the Company will sell 59 transformers. Total consideration for this sale was $8.5 million and 400 Ethereum. As part of this transaction Luna Squares Texas LLC acquired all the memberships’ interests in an entity known as JAI TX LLC, which is party to some relevant contracts related to the Texas leases.
On March 9, 2023, the CVR Agreement was terminated, and the rights of the CVR holders under that agreement expired at the same time.
On February 7, 2023, the Company entered into a share purchase agreement with N.Danenberg Holding (2000) Ltd to sell the Company’s shares or interests in Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd (“Wize Entities”) effective December 31, 2022 in consideration for $10,000. This transaction closed on March 9, 2023.
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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
| # | 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.
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 23, 2023 | By: | /s/ James Manning |
|
James Manning |
||
| Date: March 23, 2023 | By: | /s/ Ariel Sivikofsky |
|
Ariel Sivikofsky |
||
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 Ariel Sivikofsky 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 23, 2023 | ||
| James Manning | ||||
| /s/ Ariel Sivikofsky | March 23, 2023 | |||
| Ariel Sivikofsky | Principal Financial Officer | |||
| /s/ Greg Martin | Chairman of the Board/Director | March 23, 2023 | ||
| Greg Martin | ||||
| /s/ Michael Hughes | Director | March 23, 2023 | ||
| Michael Hughes | ||||
| /s/ Rahul Mewawalla | Director | March 23, 2023 | ||
| Rahul Mewawalla | ||||
49
Exhibit 4.2
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION
12 OF THE SECURITIES EXCHANGE ACT OF 1934
As of March 10, 2022, Mawson Infrastructure Group Inc. (the “Company”, “we”, “us” or “our”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is our Common Stock, par value $0.001 per share (the “Common Stock”). The Common Stock is currently listed on the Nasdaq Stock Market and trades under the symbol “MIGI.” The following is a summary of some of the terms of the Company’s Common Stock. This summary is not complete and is subject to and qualified in its entirety by reference to the Company’s Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), and Amended and Restated Bylaws (the “Bylaws”). The terms of the Common Stock are also subject to and qualified by the Delaware General Corporation Law (“DGCL”). We urge you to read the applicable provisions of the DGCL, our Certificate of Incorporation and our Bylaws.
Authorized Capital Stock
Under our Certificate of Incorporation, we are authorized to issue up to ninety million (90,000,000) shares of Common Stock, and one million (1,000,000) shares of preferred stock.
Common Stock
Holders of our Common Stock are entitled to one vote for each share held on all matters submitted to a vote of our stockholders. Holders of our Common Stock have no cumulative voting rights. Further, holders of our Common Stock have no preemptive or conversion rights or other subscription rights. Upon our liquidation, dissolution or winding-up, holders of our Common Stock are entitled to share in all assets remaining after payment of all liabilities and the liquidation preferences of any of our outstanding shares of preferred stock. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of our Common Stock are entitled to receive dividends, if any, as may be declared from time to time by our Board of Directors (the “Board”) out of our assets which are legally available. Such dividends, if any, are payable in cash, in property or in shares of capital stock.
The holders of shares of our Common Stock that are entitled to cast at least 33⅓ of the total votes entitled to be cast by the holders of all of our outstanding capital stock, present in person or by proxy, are necessary to constitute a quorum at any meeting. If a quorum is present, an action by stockholders entitled to vote on a matter is approved if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action, with the exception of the election of directors, which requires a plurality of the votes cast, represented in person or by proxy, necessary to constitute a quorum for the transaction of business at any meeting. If a quorum is present, an action by stockholders entitled to vote on a matter is approved if the number of votes cast in favor of the action exceeds the number of votes cast in opposition to the action, with the exception of the election of directors, which requires a plurality of the votes cast.
Anti-Takeover Provisions of Delaware Law, Our Certificate of Incorporation and Bylaws
The provisions of Delaware law, our Certificate of Incorporation and our Bylaws could discourage or make it more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or in our best interests. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our Board and in the policies formulated by our Board and to discourage certain types of transactions that may involve an actual or threatened change of our control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. Such provisions also may have the effect of preventing changes in our management.
Delaware Statutory Business Combinations Provision
Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three (3) years after the date of the transaction in which the person became an interested stockholder, unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a “business combination” is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and, subject to certain exceptions, an “interested stockholder” is a person who, together with his or her affiliates and associates, owns, or within three (3) years prior, did own, 15% or more of the corporation’s voting stock. However, we elected to opt out of the provisions of Section 203.
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations of Directors
Our Bylaws provide that, for nominations to our Board or for other business to be properly brought by a stockholder before a meeting of stockholders, the stockholder must first have given timely notice of the proposal in writing to our secretary at our principal offices. For an annual meeting, a stockholder’s notice generally must be delivered not less than 45 days nor more than 75 days prior to the one-year anniversary of the date on which we first mailed our proxy materials for the preceding year’s annual meeting of stockholders. For an annual meeting, the notice must generally be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement is first made. Detailed requirements as to the form of the notice and information required in the notice are specified in our Bylaws. If it is determined that business was not properly brought before a meeting in accordance with our Bylaws, such business will not be conducted at the meeting.
Special Meetings of Stockholders
Special meetings of the stockholders may be called only by either (i) the chairman of our Board, chief executive officer, or the president, (ii) by our Board pursuant to a resolution adopted by a majority of the total number of directors which we would have if there were no vacancies, or (iii) by the holders of 20% of the total votes entitled to be cast by the holders of all our outstanding capital stock entitled to vote generally in an election of directors.
Stockholder Action by Written Consent
Each of our Certificate of Incorporation and our Bylaws permit our stockholders to act by written consent.
Super Majority Stockholder Vote Required for Certain Actions
The DGCL generally provides that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless the corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our Certificate of Incorporation requires the affirmative vote of the holders of at least 66⅓ of our outstanding voting stock to amend or repeal any provision of our Bylaws or any amend or repeal any provision of our Certificate of Incorporation relating to limitation of director liability, indemnification and advancement of expenses or amendments to our Certificate of Incorporation or our Bylaws. All other provisions of our Certificate of Incorporation may be amended or repealed by a simple majority vote of our Board.
Dividends
We have not declared any cash dividends on our Common Stock since inception.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is Computershare.
Stock Market Listing
Our Common Stock is currently listed on the Nasdaq Stock Market and trades under the symbol “MIGI.”
Certain Effects of Authorized but Unissued Stock
We have shares of Common Stock and preferred stock available for future issuance without stockholder approval. We may issue these additional shares for a variety of corporate purposes, including future public or private offerings to raise additional capital or to facilitate corporate acquisitions or for payment as a dividend on our capital stock. The existence of unissued and unreserved preferred stock may enable our board of directors to issue shares of preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, thereby protecting the continuity of our management. In addition, if we issue preferred stock, the issuance could adversely affect the voting power of holders of Common Stock and the likelihood that holders of our Common Stock will receive dividend payments or payments upon liquidation.
Exhibit 10.3
MAWSON INFRASTRUCTURE GROUP INC.
2021 EQUITY INCENTIVE PLAN
(Adopted by the Board of Directors on August 3, 2021)
ARTICLE 1. PURPOSE
The purpose of the Mawson Infrastructure Group Inc. 2021 Equity Incentive Plan (as it may be amended or restated from time to time, the “Plan”) is to promote the long-term success and enhance the value of Mawson Infrastructure Group Inc., a Delaware corporation, (the “Company”) by linking the individual interests of Employees, Directors and Consultants to those of Company stockholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to Company stockholders. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Employees, Directors and Consultants.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1 “Administrator” shall mean the Board or a Committee to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee.
2.2 “Applicable Accounting Standards” shall mean Generally Accepted Accounting Principles in the United States, International Financial Reporting Standards or such other accounting principles or standards as may apply to the Company’s financial statements under United States federal securities laws from time to time.
2.3 “Applicable Law” shall mean any applicable law, including, without limitation: (a) provisions of the Code, the Securities Act, the Exchange Act and any rules or regulations thereunder; (b) corporate, securities, tax or other laws, statutes, rules, requirements or regulations, whether U.S. or non-U.S., federal, state or local; and (c) rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded.
2.4 “Award” shall mean an Option, a Stock Appreciation Right, a Restricted Stock award, a Restricted Stock Unit award, any Other Stock or Cash Based Award or a Dividend Equivalent award, which may be awarded or granted under the Plan.
2.5 “Award Agreement” shall mean any written notice, agreement, terms and conditions, contract or other instrument or document evidencing an Award, including through electronic medium, which shall contain such terms and conditions with respect to an Award as the Administrator shall determine consistent with the Plan.
2.6 “Board” shall mean the Board of Directors of the Company.
2.7 “Cause” shall mean, unless otherwise specifically provided in any applicable Award Agreement or in any other written agreement entered into between the Company and a Participant, with respect to any Participant: (a) the Participant’s commission of an act of fraud or embezzlement upon the Company or any of its affiliates; (b) the Participant’s commission of any willful act intended to injure the reputation, business, or any business relationship of the Company or any of its affiliates; (c) the Participant is found by a court of competent jurisdiction to have committed a felony (or equivalent offense under Applicable Law), unless the Administrator determines that such event shall not constitute Cause; or (d) the refusal or failure of the Participant to comply with any of his or her material obligations under any Award Agreement or to perform the Participant’s duties with the Company or any of its affiliates, as applicable, in a competent and professional manner that is not cured by the Participant within fifteen (15) business days after a written demand therefor is delivered to the Participant by the Company or, if applicable, an affiliate, which specifically identifies the manner in which the Company or affiliate, as applicable, believes that the Participant has materially breached the Award Agreement or not substantially performed the Participant’s duties; provided, however, that if the Company or applicable affiliate, in good faith, determines that the refusal or failure by the Participant is egregious in nature or is not susceptible of cure, then no such cure period shall be required.
2.8 “Change in Control” means the occurrence of any of the following events:
(a) A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than fifty percent (50%) of the total voting power of the stock of the Company; provided, however, that for purposes of this Section 2.8(a), the acquisition of additional stock by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the stock of the Company will not be considered a Change in Control; provided, further, that if the stockholders of the Company immediately before such change in ownership continue to retain immediately after the change in ownership, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately prior to the change in ownership, direct or indirect beneficial ownership of fifty percent (50%) or more of the total voting power of the stock of the Company, such event shall not be considered a Change in Control under this Section 2.8(a). For purposes of this Section 2.8(a), indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company, as the case may be, either directly or through one or more subsidiary corporations or other business entities;
(b) A change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of this Section 2.8(b), if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control;
(c) A change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this Section 2.8(c), the following will not constitute a change in the ownership of a substantial portion of the Company’s assets: (i) a transfer to an entity that is controlled by the Company’s stockholders immediately after the transfer; or (ii) a transfer of assets by the Company to: (A) a stockholder of the Company (immediately before the asset transfer) in exchange for or with respect to the Company’s stock; (B) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the Company; (C) a Person, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the Company; or (D) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a Person described in this Section 2.8(c). For purposes of this Section 2.8(c), gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. For purposes of this Section 2.8(c), persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company.
Notwithstanding anything in this Section 2.8 to the contrary, a transaction shall not constitute a Change in Control if it is effected for the purpose of changing the place of incorporation or form of organization of the Company (including where the Company is succeeded by an issuer incorporated under the laws of another state, country or foreign government for such purpose and whether or not the Company remains in existence following such transaction), where all or substantially all of the persons or group that beneficially own all or substantially all of the combined voting power of the Company’s voting securities immediately prior to the transaction beneficially own all or substantially all of the combined voting power of the Company in substantially the same proportions of their ownership after the transaction. Further, if a Change in Control constitutes a payment event with respect to any Award (or any portion of an Award) that provides for the deferral of compensation that is subject to Section 409A, to the extent required to avoid the imposition of additional taxes under Section 409A, the transaction or event described in subsection (a), (b) or (c) with respect to such Award (or portion thereof) shall constitute a Change in Control for purposes of the payment timing of such Award only if such transaction also constitutes a “change in control event,” as defined in Treasury Regulation Section 1.409A-3(i)(5). The Administrator shall have full and final authority, which shall be exercised in its sole discretion, to determine conclusively whether a Change in Control has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto; provided that any exercise of authority in conjunction with a determination of whether a Change in Control is a “change in control event” as defined in Treasury Regulation Section 1.409A-3(i)(5) shall be consistent with such regulation.
2.9 “Code” shall mean the U.S. Internal Revenue Code of 1986, as amended from time to time, together with the regulations and official guidance promulgated thereunder, whether issued prior or subsequent to the grant of any Award.
2.10 “Committee” shall mean the Compensation Committee of the Board, or another committee or subcommittee of the Board which may be comprised of one or more Directors and/or executive officers of the Company as appointed by the Board, to the extent permitted by Applicable Law, as set forth in Article 11 hereof.
2.11 “Common Stock” shall mean the common stock of the Company, par value $0.001 per share.
2.12 “Company” shall have the meaning set forth in Article 1.
2.13 “Consultant” shall mean any consultant or adviser engaged to provide services to the Company or any parent of the Company or Subsidiary who qualifies as a consultant or advisor under the applicable rules of the Securities and Exchange Commission for registration of shares on a Form S-8 Registration Statement.
2.14 “Director” shall mean a member of the Board, as constituted from time to time.
2.15 “Director Limit” shall have the meaning set forth in Section 4.5.
2.16 “Dividend Equivalent” shall mean a right to receive the equivalent value (in cash or Shares) of dividends paid on Shares, awarded under Section 9.2.
2.17 “Effective Date” shall mean the date the Plan is adopted by the Board.
2.18 “Eligible Individual” shall mean any person who is an Employee, a Consultant or a Non-Employee Director, as determined by the Administrator.
2.19 “Employee” shall mean any officer or other employee (as determined in accordance with Section 3401(c) of the Code and the Treasury Regulations thereunder) of the Company, or of any parent of the Company, or any Subsidiary.
2.20 “Equity Restructuring” shall mean a nonreciprocal transaction between the Company and its stockholders, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, that affects the number or kind of Shares (or other securities of the Company) or the share price of Shares (or other securities) and causes a change in the per-share value of Shares underlying outstanding Awards or such other event that constitutes an “equity restructuring” within the meaning of the U.S. Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor pronouncement thereto).
2.21 “Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended from time to time.
2.22 “Fair Market Value” shall mean, as of any given date, the value of a Share determined as follows:
(a) If the Shares are (i) listed on any established securities exchange (such as the New York Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq Global Select Market), (ii) listed on any national market system or (iii) quoted or traded on any automated quotation system, its Fair Market Value shall be the closing sales price for a Share as quoted on such exchange or system for such date or, if there is no closing sales price for a Share on the date in question, the closing sales price for a Share on the last preceding date for which such quotation exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(b) If the Shares are not listed on an established securities exchange, national market system or automated quotation system, but the Shares are regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices for a Share on such date, the high bid and low asked prices for a Share on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or
(c) If the Shares are neither listed on an established securities exchange, national market system or automated quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be established by the Administrator in good faith.
2.24 “Non-Employee Director” shall mean a Director of the Company who is not an Employee.
2.25 “Non-Qualified Stock Option” shall mean an Option that is not an “incentive stock option” within the meaning of Section 422 of the Code.
2.26 “Option” shall mean a right to purchase Shares at a specified exercise price, granted under Article 5. All Options granted under the Plan shall be Non-Qualified Stock Options.
2.27 “Option Term” shall have the meaning set forth in Section 5.3.
2.28 “Organizational Documents” shall mean, collectively, (a) the Company’s articles of incorporation, certificate of incorporation, bylaws or other similar organizational documents relating to the creation and governance of the Company, and (b) the Committee’s charter or other similar organizational documentation relating to the creation and governance of the Committee, each as may be amended from time to time.
2.29 “Other Stock or Cash Based Award” shall mean a cash payment, cash bonus award, stock payment, stock bonus award or incentive award that is paid in cash, Shares or a combination of both, awarded under Section 9.1, which may include, without limitation, deferred stock, deferred stock units and performance awards.
2.30 “Participant” shall mean a person who has been granted an Award.
2.31 “Performance Criteria” shall mean the criteria that the Administrator selects for an Award for purposes of establishing the Performance Goal or Performance Goals for a Performance Period. The Performance Criteria that may be used to establish Performance Goals include, but are not limited to, the following: (a) revenue and income measures (such as revenue, gross margin, income from operations, net income, net sales, earnings per share, earnings before interest, taxes, depreciation and amortization (“EBIDTA”), and economic value added (“EVA”); (b) expense measures (such as costs of goods sold, selling, finding and development costs, general and administrative expenses and overhead costs); (c) operating measures (such as productivity, energy consumption, operating income, funds from operations, cash from operations, after-tax operating income, market share, margin and sales volumes); (d) cash flow measures (such as net cash flow from operating activities and working capital); (e) liquidity measures (such as earnings before or after the effect of certain items such as interest, taxes, depreciation and amortization, and free cash flow); (f) leverage measures (such as debt-to-equity ratio and net debt); (g) market measures (such as market share, stock price, growth measure, total stockholder return and market capitalization measures); (h) return measures (such as return on equity, return on assets and return on invested capital); (i) corporate value measures (such as compliance, safety, environmental and personnel matters); and (j) other measures such as those relating to acquisitions, dispositions or customer satisfaction.
2.32 “Performance Goals” shall mean, for a Performance Period, one or more goals (and adjustments) established in writing by the Administrator for the Performance Period based upon one or more Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a Subsidiary, division, business unit, or an individual, or a combination thereof, or in such other manner determined by the Administrator. The permissible forms in which a Performance Goal may be expressed further include, without limitation, percentage growth, performance against an index or peer companies, absolute growth, cumulative growth, a designated absolute amount, and per Share outstanding. The achievement of each Performance Goal may be determined with reference to Applicable Accounting Standards or other methodology as determined appropriate by the Administrator. The Administrator, in its sole discretion, may provide that one or more adjustments shall be made to one or more of the Performance Goals.
2.33 “Performance Period” shall mean one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, vesting of, and/or the payment in respect of, an Award.
2.34 “Permitted Transferee” shall mean, with respect to a Participant other than a Participant who is subject to Australian income taxation, any “family member” of the Participant, as defined in the General Instructions to Form S-8 Registration Statement under the Securities Act (or any successor form thereto), or any other transferee specifically approved by the Administrator after taking into account Applicable Law.
2.35 “Plan” shall have the meaning set forth in Article 1.
2.36 “Restricted Stock” shall mean Shares awarded under Article 7 that is subject to certain restrictions and may be subject to risk of forfeiture or repurchase.
2.37 “Restricted Stock Units” shall mean the right to receive Shares awarded under Article 8.
2.38 “SAR Term” shall have the meaning set forth in Section 5.3.
2.39 “Section 409A” shall mean Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance issued thereunder, including, without limitation, any such regulations or other guidance that may be issued after the Effective Date.
2.40 “Securities Act” shall mean the U.S. Securities Act of 1933, as amended.
2.41 “Shares” shall mean shares of Common Stock, and such other securities of the Company, as may be substituted or resubstituted for Common Stock pursuant to Section 12.2.
2.42 “Stock Appreciation Right” shall mean an Award entitling the Participant (or other person entitled to exercise pursuant to the Plan) to exercise all or a specified portion thereof (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per Share of such Award from the Fair Market Value on the date of exercise of such Award by the number of Shares with respect to which such Award shall have been exercised, subject to any limitations the Administrator may impose.
2.43 “Subsidiary” shall mean any entity (other than the Company), whether domestic or foreign, in an unbroken chain of entities beginning with the Company if each of the entities other than the last entity in the unbroken chain beneficially owns, at the time of the determination, securities or interests representing at least fifty percent (50%) of the total combined voting power of all classes of securities or interests in one of the other entities in such chain.
2.44 “Substitute Award” shall mean an Award granted under the Plan in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock, in any case, upon the assumption of, or in substitution for, outstanding equity awards previously granted by a company or other entity; provided, however, that in no event shall the term “Substitute Award” be construed to refer to an award made in connection with the cancellation and repricing of an Option or Stock Appreciation Right.
2.45 “Takeover” shall mean a Change in Control in the form of a tender or exchange offer under Section 14(d) of the Exchange Act, pursuant to which a Person acquires ownership of the stock of the Company constituting one hundred percent (100%) of the total voting power of the stock of the Company, other than where such Person is (a) the Company or an Affiliate, (b) an employee benefit plan of the Company or any of its Affiliates, (c) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, or (d) an underwriter temporarily holding securities pursuant to an offering of such securities.
2.46 “Termination of Service” shall mean the time when the Participant ceases to be an Eligible Individual for any reason, including, without limitation, a termination by resignation, discharge (with or without Cause), disability, death or retirement; but excluding terminations where the Participant simultaneously commences or remains in employment with the Company or any parent of the Company or Subsidiary. The Administrator, in its sole discretion, shall determine the effect of all matters and questions relating to any Termination of Service, including, without limitation, whether a Termination of Service has occurred, whether a Termination of Service resulted from a discharge for Cause and all questions of whether particular leaves of absence constitute a Termination of Service. For purposes of the Plan, a Participant’s employee-employer relationship or consultancy relationship shall be deemed to be terminated in the event that the Subsidiary employing or engaging such Participant ceases to remain a Subsidiary following any merger, sale of stock or other corporate transaction or event (including, without limitation, a spin-off or divestiture).
ARTICLE 3. SHARES SUBJECT TO THE PLAN
3.1 Number of Shares.
(a) Subject to Section 3.1(b) and Section 12.2, the aggregate number of Shares which may be issued or transferred pursuant to Awards under the Plan shall be 70,000,000 Shares (the “Share Limit”). Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares purchased on the open market.
(b) If any Shares subject to an Award are forfeited or expire (including Shares repurchased by the Company under Section 7.4 upon a forfeiture of unvested Restricted Stock), are converted to shares of another entity in connection with a recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other similar event, or such Award is settled in cash (in whole or in part), the Shares subject to such Award shall, to the extent of such forfeiture, conversion, expiration or cash settlement, again be available for future grants of Awards under the Plan. Notwithstanding anything to the contrary herein, the following Shares shall not be added to the Shares authorized for grant under Section 3.1(a) and shall not be available for future grants of Awards under the Plan: (i) Shares tendered by a Participant or withheld by the Company in payment of the exercise price of an Option; (ii) Shares tendered by the Participant or withheld by the Company to satisfy any tax withholding obligation with respect to an Award; (iii) Shares subject to Stock Appreciation Rights that are not issued in connection with the stock settlement of the Stock Appreciation Rights on exercise thereof; and (iv) Shares purchased on the open market by the Company with the cash proceeds received from the exercise of Options. The payment of Dividend Equivalents in cash in conjunction with any outstanding Awards shall not be counted against the Shares available for issuance under the Plan.
(c) Substitute Awards may be granted on such terms as the Administrator deems appropriate, notwithstanding limitations on Awards in the Plan. Substitute Awards shall not reduce the Shares authorized for grant under the Plan, and Shares subject to such Substitute Awards shall not be added to the Shares available for Awards under the Plan as provided in Section 3.1(b) above. Additionally, in the event that a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines has shares available under a pre-existing plan approved by its stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the Shares authorized for grant under the Plan (and Shares subject to such Awards shall not be added to the Shares available for Awards under the Plan as provided in Section 3.1(b) above); provided that Awards using such available Shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall be made only to individuals who were not employed by or providing services to the Company or its Subsidiaries immediately prior to such acquisition or combination.
ARTICLE 4. GRANTING OF AWARDS
4.1 Participation. The Administrator may, from time to time, select from among all Eligible Individuals, those to whom an Award shall be granted and shall determine the nature and amount of each Award, which shall not be inconsistent with the requirements of the Plan. No Eligible Individual or other person shall have any right to be granted an Award pursuant to the Plan and neither the Company nor the Administrator is obligated to treat Eligible Individuals, Participants or any other persons uniformly. Participation by each Participant in the Plan shall be voluntary and nothing in the Plan shall be construed as mandating that any Eligible Individual or other person shall participate in the Plan.
4.2 Award Agreement. Each Award shall be evidenced by an Award Agreement that sets forth the terms, conditions and limitations for such Award as determined by the Administrator in its sole discretion (consistent with the requirements of the Plan). The Administrator, in its sole discretion, may grant Awards to Eligible Individuals that are based on one or more Performance Criteria or achievement of one or more Performance Goals or any such other criteria or goals as the Administrator shall establish.
4.3 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including Rule 16b-3 of the Exchange Act and any amendments thereto) that are requirements for the application of such exemptive rule. To the extent permitted by Applicable Law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
4.4 At-Will Service. Nothing in the Plan or in any Award Agreement hereunder shall confer upon any Participant any right to continue in the employ of, or as a Director or Consultant of, the Company or any Subsidiary, or shall interfere with or restrict in any way any rights of the Company and any Subsidiary, which rights are hereby expressly reserved, to discharge any Participant at any time for any reason whatsoever, with or without cause, and with or without notice, or to terminate or change all other terms and conditions of employment or engagement, except to the extent expressly provided otherwise in a written agreement between the Participant and the Company or any Subsidiary.
4.5 Director Limit. Notwithstanding any provision to the contrary in the Plan or in any policy of the Company regarding compensation payable to a Non-Employee Director, the sum of the grant date fair value (determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, or any successor thereto) of all Awards payable in Shares and the maximum cash value of any other Award granted under the Plan to an individual as compensation for services as a Non-Employee Director, together with cash compensation paid to such Director in the form of Board and Committee retainer, meeting or similar fees, during any calendar year shall not exceed USD $750,000 (the “Director Limit”). For avoidance of doubt, compensation will count towards the Director Limit for the calendar year in which it was granted or earned, and not later when distributed, in the event it is deferred. The Director Limit may not be increased without the approval of the stockholders of the Company.
4.6 Non-U.S. Participants. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in countries other than the United States in which the Company and its Subsidiaries operate or have Employees, Directors or Consultants, or in order to comply with the requirements of any non-U.S. securities exchange or other Applicable Law, the Administrator, in its sole discretion, shall have the power and authority to: (a) determine which Subsidiaries shall be covered by the Plan; (b) determine which Eligible Individuals outside the United States are eligible to participate in the Plan; (c) modify the terms and conditions of any Award granted to Eligible Individuals outside the United States to comply with Applicable Law (including, without limitation, applicable non-U.S. laws or listing requirements of any Non-U.S. securities exchange); (d) establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable; provided, however, that no such subplans and/or modifications shall increase the Share Limit contained in Section 3.1; and (e) take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with any necessary local governmental regulatory exemptions or approvals or listing requirements of any Non-U.S. securities exchange.
ARTICLE 5. GRANTING OF OPTIONS AND STOCK APPRECIATION RIGHTS
5.1 Granting of Options and Stock Appreciation Rights to Eligible Individuals. The Administrator is authorized to grant Options and Stock Appreciation Rights to Eligible Individuals from time to time, in its sole discretion, on such terms and conditions as it may determine, which shall not be inconsistent with the Plan.
5.2 Option and Stock Appreciation Right Exercise Price. The exercise price per Share subject to each Option and Stock Appreciation Right shall be set by the Administrator, but shall not be less than 100% of the Fair Market Value of a Share on the date the Option or Stock Appreciation Right, as applicable, is granted. Notwithstanding the foregoing, in the case of an Option or Stock Appreciation Right that is a Substitute Award, the exercise price per share of the Shares subject to such Option or Stock Appreciation Right, as applicable, may be less than the Fair Market Value per share on the date of grant; provided that the exercise price of any Substitute Award shall be determined in accordance with the applicable requirements of Section 424 and 409A of the Code.
5.3 Option and SAR Term. The term of each Option (the “Option Term”) and the term of each Stock Appreciation Right (the “SAR Term”) shall be set by the Administrator in its sole discretion; provided, however, that the Option Term or SAR Term, as applicable, shall not be more than ten (10) years from the date the Option or Stock Appreciation Right, as applicable, is granted to an Eligible Individual. Except as limited by the requirements of Section 409A of the Code and regulations and rulings thereunder or the first sentence of this Section 5.3 and without limiting the Company’s rights under Section 10.7, the Administrator may extend the Option Term of any outstanding Option or the SAR Term of any outstanding Stock Appreciation Right, and may extend the time period during which vested Options or Stock Appreciation Rights may be exercised, in connection with any Termination of Service of the Participant or otherwise, and may amend, subject to Section 10.7 and Section 12.1, any other term or condition of such Option or Stock Appreciation Right relating to such Termination of Service of the Participant or otherwise. Further, unless determined otherwise by the Administrator, in the event that on the last business day of the term of an Option or Stock Appreciation Right (i) the exercise of the Option or Stock Appreciation Right is prohibited by Applicable Law, as determined by the Company, or (ii) Shares may not be purchased or sold by the applicable Participant due to any Company insider trading policy (including blackout periods), the term of the Option or Stock Appreciation Right shall be extended until the date that is thirty (30) days after the end of the legal prohibition or black-out period, as determined by the Company; provided, however, in no event shall the extension last beyond the ten (10) year (or shorter) term of the applicable Option or Stock Appreciation Right.
5.4 Option and SAR Vesting. The period during which the Participant may have a right to vest in and exercise, in whole or in part, an Option or Stock Appreciation Right shall be set by the Administrator and set forth in the applicable Award Agreement. At any time after the grant of an Option, the Administrator may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the vesting of the Option; provided, however, that in no event shall an Option become exercisable following its expiration, termination or forfeiture. Notwithstanding the foregoing, unless otherwise determined by the Administrator in the Award Agreement or by action of the Administrator following the grant of the Option or Stock Appreciation Right (i) no portion of an Option or Stock Appreciation Right which is unexercisable at a Participant’s Termination of Service shall thereafter become exercisable and (ii) the portion of an Option or Stock Appreciation Right that is unexercisable at a Participant’s Termination of Service shall automatically expire on the date of such Termination of Service.
5.6 Substitution of Stock Appreciation Rights. The Administrator may provide in the applicable Award Agreement evidencing the grant of an Option that the Administrator, in its sole discretion, shall have the right to substitute a Stock Appreciation Right for such Option at any time prior to or upon exercise of such Option; provided that such Stock Appreciation Right shall be exercisable with respect to the same number of Shares for which such substituted Option would have been exercisable, and shall also have the same exercise price, vesting schedule and remaining term as the substituted Option.
ARTICLE 6. EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS
6.1 Exercise and Payment. An exercisable Option or Stock Appreciation Right may be exercised in whole or in part. However, unless the Administrator otherwise determines, an Option or Stock Appreciation Right shall not be exercisable with respect to fractional Shares and the Administrator may require that, by the terms of the Option or Stock Appreciation Right, a partial exercise must be with respect to a minimum number of Shares. Payment of the amounts payable with respect to Stock Appreciation Rights pursuant to this Article 6 shall be in cash, Shares (based on the Fair Market Value as of the date the Stock Appreciation Right is exercised), or a combination of both, as determined by the Administrator.
6.2 Manner of Exercise. All or a portion of an exercisable Option or Stock Appreciation Right shall be deemed exercised upon delivery of all of the following to the Secretary of the Company, the stock plan administrator of the Company or such other person or entity designated by the Administrator, or his, her or its office, as applicable:
(a) A written or electronic notice complying with the applicable rules established by the Administrator stating that the Option or Stock Appreciation Right, or a portion thereof, is exercised. The notice shall be signed or otherwise acknowledged electronically by the Participant or other person then entitled to exercise the Option or Stock Appreciation Right or such portion thereof;
(b) Such representations and documents as the Administrator, in its sole discretion, deems necessary or advisable to effect compliance with Applicable Law;
(c) In the event that the Option or Stock Appreciation Right shall be exercised pursuant to Section 10.3 by any person or persons other than the Participant, appropriate proof of the right of such person or persons to exercise the Option or Stock Appreciation Right, as determined in the sole discretion of the Administrator; and
(d) Full payment of the exercise price and applicable withholding taxes for the Shares with respect to which the Option or Stock Appreciation Right, or portion thereof, is exercised, in a manner permitted by the Administrator in accordance with Section 10.1 and Section 10.2.
ARTICLE 7. AWARD OF RESTRICTED STOCK
7.1 Award of Restricted Stock. The Administrator is authorized to grant Restricted Stock to Eligible Individuals, and shall determine the terms and conditions, including the restrictions applicable to each award of Restricted Stock, which terms and conditions shall not be inconsistent with the Plan, and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. The Administrator shall establish the purchase price, if any, and form of payment for Restricted Stock; provided, however, that if a purchase price is charged, such purchase price shall be no less than the par value, if any, of the Shares to be purchased, unless otherwise permitted by Applicable Law. In all cases, legal consideration shall be required for each issuance of Restricted Stock to the extent required by Applicable Law.
7.2 Rights as Stockholders. Subject to Section 7.4, upon issuance of Restricted Stock, the Participant shall have, unless otherwise provided by the Administrator, all of the rights of a stockholder with respect to said Shares, subject to the restrictions in the Plan and/or the applicable Award Agreement, including the right to receive all dividends and other distributions paid or made with respect to the Shares to the extent such dividends and other distributions have a record date that is on or after the date on which the Participant to whom such Restricted Stock are granted becomes the record holder of such Restricted Stock; provided, however, that, any dividends and distributions with respect to the Shares shall be subject to the restrictions set forth in Section 7.3. Except in connection with a spin-off or other similar event or as otherwise permitted under Section 12.2, dividends which are paid prior to vesting of shares of Restricted Stock shall only be paid out to the Participant to the extent that the vesting conditions are subsequently satisfied and the share of Restricted Stock vests.
7.3 Restrictions. All shares of Restricted Stock (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall be subject to such restrictions and vesting requirements as the Administrator shall provide in the applicable Award Agreement. By action taken after the Restricted Stock is issued, the Administrator may, on such terms and conditions as it may determine to be appropriate, accelerate the vesting of such Restricted Stock by removing any or all of the restrictions imposed by the terms of the applicable Award Agreement.
7.4 Repurchase or Forfeiture of Restricted Stock. Except as otherwise determined by the Administrator, if no price was paid by the Participant for the Restricted Stock, upon a Termination of Service during the applicable restriction period, the Participant’s rights in unvested Restricted Stock then subject to restrictions shall lapse, and such Restricted Stock shall be surrendered to the Company and cancelled without consideration on the date of such Termination of Service. If a price was paid by the Participant for the Restricted Stock, upon a Termination of Service during the applicable restriction period, the Company shall have the right to repurchase from the Participant the unvested Restricted Stock then subject to restrictions at a cash price per share equal to the price paid by the Participant for such Restricted Stock or such other amount as may be specified in the applicable Award Agreement. Notwithstanding the foregoing, the Administrator, in its sole discretion, may provide that upon certain events, including, without limitation, the Participant’s death, retirement or disability or any other specified Termination of Service or any other event, the Participant’s rights in unvested Restricted Stock then subject to restrictions shall not lapse, such Restricted Stock shall vest and cease to be forfeitable and, if applicable, the Company shall cease to have a right of repurchase.
7.5 Section 83(b) Election. If a Participant makes an election under Section 83(b) of the Code to be taxed with respect to the Restricted Stock as of the date of transfer of the Restricted Stock rather than as of the date or dates upon which the Participant would otherwise be taxable under Section 83(a) of the Code, the Participant shall be required to deliver a copy of such election to the Company promptly after filing such election with the Internal Revenue Service along with proof of the timely filing thereof with the Internal Revenue Service.
ARTICLE 8. AWARD OF RESTRICTED STOCK UNITS
8.1 Grant of Restricted Stock Units. The Administrator is authorized to grant Awards of Restricted Stock Units to any Eligible Individual selected by the Administrator in such amounts and subject to such terms and conditions as determined by the Administrator. A Participant will have no rights of a stockholder with respect to Shares subject to any Restricted Stock Unit unless and until the Shares are delivered in settlement of the Restricted Stock Unit.
8.2 Vesting of Restricted Stock Units. At the time of grant, the Administrator shall specify the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate, including, without limitation, vesting based upon the Participant’s duration of service to the Company or any Subsidiary, or vesting based on achievement of one or more Performance Goals, in each case on a specified date or dates or over any period or periods, as determined by the Administrator. By action taken after the Restricted Stock Units are granted, the Administrator may, on such terms and conditions as it may determine to be appropriate, accelerate the vesting of such Restricted Stock Units by removing any or all of the restrictions imposed by the terms of the applicable Award Agreement.
8.3 Settlement and Payment. At the time of grant, the Administrator shall specify the settlement date applicable to each grant of Restricted Stock Units, which shall be no earlier than the vesting date or dates of the Award and may be determined at the election of the Participant (if permitted by the applicable Award Agreement and subject to compliance with Section 409A to the extent applicable). On the settlement date, the Company shall, in accordance with the applicable Award Agreement and subject to Section 10.4(f), transfer to the Participant one unrestricted, fully transferable Share for each Restricted Stock Unit scheduled to be paid out on such date and not previously forfeited, or in the sole discretion of the Administrator, an amount in cash equal to the Fair Market Value of such Shares on the settlement date or a combination of cash and Shares as determined by the Administrator.
8.4 Payment upon Termination of Service. An Award of Restricted Stock Units shall only be payable while the Participant is an Employee, a Non-Employee Director or a Consultant; provided, however, that the Administrator, in its sole discretion, may provide (in an Award Agreement or otherwise) that a Restricted Stock Unit award may be paid subsequent to a Termination of Service in certain events, including a Change in Control, the Participant’s death, retirement or disability or any other specified Termination of Service.
ARTICLE 9. AWARD OF OTHER STOCK OR CASH BASED AWARDS AND DIVIDEND EQUIVALENTS
9.1 Other Stock or Cash Based Awards. The Administrator is authorized to grant Other Stock or Cash Based Awards, including awards entitling a Participant to receive Shares or cash to be delivered immediately or in the future, to any Eligible Individual. Subject to the provisions of the Plan, the Administrator shall determine the terms and conditions of each Other Stock or Cash Based Award, including the term of the Award, any exercise or purchase price, any Performance Criteria and Performance Goals, transfer restrictions, vesting conditions and other terms and conditions applicable thereto, which shall be set forth in the applicable Award Agreement. Other Stock or Cash Based Awards may be paid in cash, Shares, or a combination of cash and Shares, as determined by the Administrator, and may be available as a form of payment in the settlement of other Awards granted under the Plan, as stand-alone payments, as a part of a bonus, deferred bonus, deferred compensation or other arrangement, and/or as payment in lieu of compensation to which an Eligible Individual is otherwise entitled. Except in connection with a spin-off or other similar event or as otherwise permitted under Section 12.2, dividends which are paid prior to vesting of shares of any Other Stock or Cash Based Award shall only be paid out to the Participant to the extent that the vesting conditions are subsequently satisfied and the share of Restricted Stock vests.
9.2 Dividend Equivalents and Dividends. Dividend Equivalents may be granted by the Administrator, either alone or in tandem with another Award, based on dividends declared with respect to Shares, to be credited or paid, as determined by the Administrator, as of dividend payment dates during the period between the date the Dividend Equivalents are granted to a Participant and the date such Dividend Equivalents terminate or expire, as determined by the Administrator. Such Dividend Equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such restrictions and limitations as may be determined by the Administrator.
ARTICLE 10. ADDITIONAL TERMS OF AWARDS
10.1 Payment. The Administrator shall determine the method or methods by which payments by any Participant with respect to any Awards granted under the Plan shall be made, including, without limitation: (a) cash, wire transfer of immediately available funds or check, (b) Shares (including, in the case of payment of the exercise price of an Award, Shares issuable pursuant to the exercise of the Award) or Shares held for such minimum period of time as may be established by the Administrator, in each case, having a Fair Market Value on the date of delivery equal to the aggregate payments required, (c) delivery of a written or electronic notice that the Participant has placed a market sell order with a broker acceptable to the Company with respect to Shares then issuable upon exercise or vesting of an Award, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the aggregate payments required; provided that payment of such proceeds is then made to the Company upon settlement of such sale, (d) other form of legal consideration acceptable to the Administrator in its sole discretion, or (e) any combination of the above permitted forms of payment. Notwithstanding any other provision of the Plan to the contrary, no Participant who is a Director or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to make payment with respect to any Awards granted under the Plan, or continue any extension of credit with respect to such payment, with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.
10.2 Tax Withholding. The Company or any Subsidiary shall have the authority and the right to deduct or withhold from any payment of any kind otherwise due to a Participant, or require a Participant to remit to the Company, an amount sufficient to satisfy U.S. federal, state, local and Non-U.S. taxes (including the Participant’s FICA, employment tax or other social security contribution obligation) required or permitted by law to be withheld with respect to any taxable event concerning a Participant arising as a result of the Plan or any Award. The Administrator may, in its sole discretion and in satisfaction of the foregoing requirement, allow a Participant to satisfy such obligations by any payment means described in Section 10.1 hereof, including without limitation, by allowing such Participant to elect to have the Company withhold Shares otherwise issuable under an Award (or allow the surrender of Shares). The number of Shares which may be so withheld or surrendered shall be limited to the number of Shares that have a fair market value on the date of withholding or repurchase no greater than the aggregate amount of such liabilities based on the maximum statutory withholding rates in such Participant’s applicable jurisdictions for U.S. federal, state, local and Non-U.S. income tax and payroll tax purposes that are applicable to such taxable income (or such other rate as may be required to avoid adverse accounting consequences). The Administrator shall determine the fair market value of the Shares, consistent with applicable provisions of the Code and other Applicable Law, for tax withholding obligations due in connection with a broker-assisted cashless Option or Stock Appreciation Right exercise involving the sale of Shares to pay the Option or Stock Appreciation Right exercise price or for purposes of any other tax withholding or reporting obligation.
10.3 Transferability of Awards.
(a) Except as otherwise provided in Section 10.3(b):
(i) No Award under the Plan may be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution;
(ii) No Award or interest or right therein shall be liable for or otherwise subject to the debts, contracts or engagements of the Participant or the Participant’s successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) unless and until such Award has been exercised, or the Shares underlying such Award have been issued, and all restrictions applicable to such Shares have lapsed, and any attempted disposition of an Award prior to satisfaction of these conditions shall be null and void and of no effect, except to the extent that such disposition is permitted by Section 10.3(a)(i); and
(iii) During the lifetime of the Participant, only the Participant may exercise any exercisable portion of an Award granted to such Participant under the Plan. After the death of the Participant, any exercisable portion of an Award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Award Agreement, be exercised by the Participant’s personal representative or by any person empowered to do so under the deceased Participant’s will or under the then-applicable laws of descent and distribution.
(b) Notwithstanding Section 10.3(a), the Administrator, in its sole discretion, may determine to permit a Participant or a Permitted Transferee of such Participant to transfer an Award to any one or more Permitted Transferees of such Participant, subject to the following terms and conditions: (i) an Award transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee other than (A) to another Permitted Transferee of the applicable Participant or (B) by will or the laws of descent and distribution or, subject to the consent of the Administrator; (ii) an Award transferred to a Permitted Transferee shall continue to be subject to all of the terms and conditions of the Award as applicable to the original Participant (other than the ability to further transfer the Award to any person other than another Permitted Transferee of the applicable Participant); (iii) the Participant (or transferring Permitted Transferee) and the receiving Permitted Transferee shall execute any and all documents requested by the Administrator, including, without limitation documents to (A) confirm the status of the transferee as a Permitted Transferee, (B) satisfy any requirements for an exemption for the transfer under Applicable Law and (C) evidence the transfer; and (iv) the transfer of an Award to a Permitted Transferee shall be without consideration. Notwithstanding the foregoing, in no event may a Participant or a Permitted Transferee who is subject to Australian income taxation transfer an Award as provided in this Section 10.3(b).
10.4 Conditions to Issuance of Shares.
(a) The Administrator shall determine the methods by which Shares shall be delivered or deemed to be delivered to Participants. Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates or make any book entries evidencing Shares pursuant to the exercise of any Award, unless and until the Administrator has determined that the issuance of such Shares is in compliance with all Applicable Laws and the Shares are covered by an effective registration statement or applicable exemption from registration. In addition to the terms and conditions provided herein, the Administrator may require that a Participant make such reasonable covenants, agreements and representations as the Administrator, in its sole discretion, deems advisable in order to comply with Applicable Law. The inability or impracticability of the Company to obtain or maintain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained, and shall constitute circumstances in which the Administrator may determine to amend or cancel Awards pertaining to such Shares, with or without consideration to the Participant.
(b) All share certificates delivered pursuant to the Plan and all Shares issued pursuant to book entry procedures are subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with Applicable Law. The Administrator may place legends on any share certificate or book entry to reference restrictions applicable to the Shares (including, without limitation, restrictions applicable to Restricted Stock).
(c) The Administrator shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement, distribution or exercise of any Award, including a window-period limitation, as may be imposed in the sole discretion of the Administrator.
(d) Unless the Administrator otherwise determines, no fractional Shares shall be issued and the Administrator, in its sole discretion, shall determine whether cash shall be given in lieu of fractional Shares or whether such fractional Shares shall be eliminated by rounding down.
(e) The Company, in its sole discretion, may (i) retain physical possession of any stock certificate evidencing Shares until any restrictions thereon shall have lapsed and/or (ii) require that the stock certificates evidencing such Shares be held in custody by a designated escrow agent (which may but need not be the Company) until the restrictions thereon shall have lapsed, and that the Participant deliver a stock power, endorsed in blank, relating to such Shares.
(f) Notwithstanding any other provision of the Plan, unless otherwise determined by the Administrator or required by Applicable Law, the Company shall not deliver to any Participant certificates evidencing Shares issued in connection with any Award and instead such Shares shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator).
10.5 Malus, Forfeiture and Clawback. All Awards (including any proceeds, gains or other economic benefit actually or constructively received by a Participant upon any receipt or exercise of any Award or upon the receipt or resale of any Shares underlying the Award) may be subject to forfeiture and/or repayment to the Company where: (a) in the sole discretion of the Administrator, a Participant (i) acts, or has acted, fraudulently or dishonestly or made a material misstatement on behalf of the Company and its affiliates; (ii) is in material breach of any of his or her duties or obligations to the Company and its affiliates, including any applicable post-employment obligations; (iii) has engaged in serious misconduct or gross negligence (including recklessness or wilful indifference) or (iv) is convicted of an offence or has a judgment entered against them in connection with the affairs of the Company and its affiliates; (b) there is a material misstatement in, or omission from, the Company’s financial statements, or a misstatement concerning the satisfaction of a Performance Criteria applicable to an Award (in each case whether intentional or inadvertent), which results in a Participant obtaining an Award or an Award vesting, where, in the sole discretion of the Administrator, such Award would not have been obtained or vested, but for that misstatement or omission; (c) all or part of the initial Award is no longer justified having regard to information or circumstances which have come to light after a grant of an Award under the Plan was made; (d) required to comply with applicable laws and/or the rules and regulations of the securities exchange or inter-dealer quotation system on which Shares are listed or quoted, including, without limitation, pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and/or (e) under the terms of any policy, guideline or Board committee charter adopted by the Company as may be amended from time to time for reasons related to fraud prevention, governance, avoidance of monetary or reputational damage to the Company and its affiliates or similar considerations, whether or not such policy or guideline was in place at the time of grant of an Award (and such requirements shall be deemed incorporated into this Plan without the consent of Participant).
10.6 Prohibition on Repricing. Subject to Section 12.2, the Administrator shall not, without the approval of the stockholders of the Company, (a) authorize the amendment of any outstanding Option or Stock Appreciation Right to reduce its price per Share, (b) cancel any Option or Stock Appreciation Right in exchange for cash or another Award when the Option or Stock Appreciation Right price per Share exceeds the Fair Market Value of the underlying Shares, or (c) cancel an Option or Stock Appreciation Right in exchange for an Option or Stock Appreciation Right with a lower exercise price than such original Option or Stock Appreciation Right.
10.7 Amendment of Awards. Subject to Applicable Law and Section 10.6 above, the Administrator may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type or changing the date of vesting, exercise or settlement. The Participant’s consent to such action shall be required unless (a) the Administrator determines that the action, taking into account any related action, would not materially and adversely affect the Participant, or (b) the change is otherwise permitted under the Plan (including, without limitation, under Section 12.2, 12.7 or 12.10).
ARTICLE 11. ADMINISTRATION
11.1 Administrator. The Committee shall administer the Plan (except as otherwise permitted herein). To the extent required to comply with the provisions of Rule 16b-3, it is intended that each member of the Committee will be, at the time the Committee takes any action with respect to an Award that is subject to Rule 16b-3, a “non-employee director” within the meaning of Rule 16b-3. Additionally, to the extent required by Applicable Law, each of the individuals constituting the Committee shall be an “independent director” under the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded. However, any action taken by the Committee shall be valid and effective, whether or not members of the Committee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section 11.1 or the Organizational Documents. Notwithstanding the foregoing, (i) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Awards granted to Non-Employee Directors and, with respect to such Awards, the term “Administrator” as used in the Plan shall be deemed to refer to the Board and (ii) the Board or Committee may delegate its authority hereunder to the extent permitted by Section 11.6.
11.2 Duties and Powers of Administrator. It shall be the duty of the Administrator to conduct the general administration of the Plan in accordance with its provisions. The Administrator shall have the power to interpret the Plan and all Award Agreements, and to adopt such rules for the administration, interpretation and application of the Plan as are not inconsistent with the Plan, to interpret, amend or revoke any such rules and to amend the Plan or any Award Agreement; provided that the rights or obligations of the Participant of the Award that is the subject of any such Award Agreement are not materially and adversely affected by such amendment, unless the consent of the Participant is obtained or such amendment is otherwise permitted under the Plan, including, without limitation, under Section 12.2, Section 12.7 or Section 12.10. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee in its capacity as the Administrator under the Plan except with respect to matters which under Rule 16b-3 under the Exchange Act or any successor rule, or any regulations or rules issued thereunder, or the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded are required to be determined in the sole discretion of the Committee.
11.3 Action by the Administrator. Unless otherwise established by the Board, set forth in any Organizational Documents or as required by Applicable Law, a majority of the Administrator shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by all members of the Administrator in lieu of a meeting, shall be deemed the acts of the Administrator. Each member of the Administrator is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. Neither the Administrator nor any member or delegate thereof shall have any liability to any person (including any Participant) for any action taken or omitted to be taken or any determination made in good faith with respect to the Plan or any Award.
11.4 Authority of Administrator. Subject to the Organizational Documents, any specific designation in the Plan and Applicable Law, the Administrator has the exclusive power, authority and sole discretion to:
(a) Designate Eligible Individuals to receive Awards;
(b) Determine the type or types of Awards to be granted to each Eligible Individual (including, without limitation, any Awards granted in tandem with another Award granted pursuant to the Plan);
(c) Determine the number of Awards to be granted and the number of Shares to which an Award will relate;
(d) Determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the exercise price, grant price, purchase price, any Performance Criteria and/or Performance Goals, any restrictions or limitations on the Award, any schedule for vesting, lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, and any provisions related to non-competition and clawback and recapture of gain on an Award, based in each case on such considerations as the Administrator in its sole discretion determines;
(e) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(g) Decide all other matters that must be determined in connection with an Award;
(h) Establish, adopt, or revise any policies, rules and regulations as it may deem necessary or advisable to administer the Plan;
(i) Interpret the terms of, and any matter arising pursuant to, the Plan, any policy or any Award Agreement; (j) Accelerate wholly or partially the vesting or lapse of restrictions of any Award or portion thereof at any time after the grant of an Award, pursuant to any terms and conditions it selects, subject to Section 12.2; and
(k) Make all other decisions and determinations that may be required pursuant to the Plan or as the Administrator deems necessary or advisable to administer the Plan.
11.5 Decisions Binding. The Administrator’s interpretation of the Plan, any Awards granted pursuant to the Plan and any Award Agreement and all decisions and determinations by the Administrator with respect to the Plan are final, binding and conclusive on all persons.
11.6 Delegation of Authority. The Board or Committee may from time to time delegate to a committee of one or more Directors or one or more officers of the Company the authority to grant or amend Awards or to take other administrative actions pursuant to this Article 11; provided, however, that in no event shall an officer of the Company be delegated the authority to grant Awards to, or amend Awards held by, the following individuals: (a) individuals who are subject to Section 16 of the Exchange Act, or (b) officers of the Company (or Directors) to whom authority to grant or amend Awards has been delegated hereunder; provided, further, that any delegation of administrative authority shall only be permitted to the extent it is permissible under any Organizational Documents and Applicable Law. Any delegation hereunder shall be subject to the restrictions and limits that the Board or Committee specifies at the time of such delegation or that are otherwise included in the applicable Organizational Documents, and the Board or Committee, as applicable, may at any time rescind the authority so delegated or appoint a new delegate. At all times, the delegate appointed under this Section 11.6 shall serve in such capacity at the pleasure of the Board or the Committee, as applicable, and the Board or the Committee may abolish any committee at any time and re-vest in itself any previously delegated authority.
ARTICLE 12. MISCELLANEOUS PROVISIONS
12.1 Amendment, Suspension or Termination of the Plan.
(a) Except as otherwise provided in Section 12.1(b), the Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board; provided that, except as provided in Section 10.7, no amendment, suspension or termination of the Plan shall, without the consent of the Participant, materially and adversely affect any rights or obligations under any Award theretofore granted or awarded, unless the Award itself otherwise expressly so provides.
(b) Notwithstanding Section 12.1(a), the Board may not, except as provided in Section 12.2, take any of the following actions without approval of the Company’s stockholders given within the timeframe required by Applicable Law: (i) increase the Share Limit imposed in Section 3.1 on the maximum number of Shares which may be issued under the Plan; (ii) reduce the price per share of any outstanding Option or Stock Appreciation Right granted under the Plan or take any action prohibited under Section 10.6; (iii) cancel any Option or Stock Appreciation Right in exchange for cash or another Award in violation of Section 10.6; or (iv) effect any other material amendment of the Plan that would require stockholder approval under the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded or under any other Applicable Law.
(c) No Awards may be granted or awarded during any period of suspension or after termination of the Plan. The Plan shall remain in effect until it is terminated under Section 12.1(a). Any Awards that are outstanding on the date that the Plan is terminated shall remain in force according to the terms of the Plan and the applicable Award Agreement.
12.2 Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company, Change in Control and Other Corporate Events.
(a) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the shares of the Company’s stock or the share price of the Company’s stock other than an Equity Restructuring, the Administrator may make equitable adjustments to reflect an economic position that is the same as, or substantially similar to, the economic position a Participant would have been in immediately prior to such Equity Restructuring, if any, to reflect such change with respect to: (i) the aggregate number and kind of Shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Section 3.1 on the maximum number and kind of Shares which may be issued under the Plan); (ii) the number and kind of Shares (or other securities or property) subject to outstanding Awards; (iii) the terms and conditions of any outstanding Awards (including, without limitation, any applicable Performance Goals or Performance Criteria with respect thereto); and (iv) the grant or exercise price per share for any outstanding Awards under the Plan.
(b) In the event of any transaction or event described in Section 12.2(a) or any unusual or nonrecurring transactions or events affecting the Company, any Subsidiary of the Company, or the financial statements of the Company or any Subsidiary, or of changes in Applicable Law or Applicable Accounting Standards, the Administrator, in its sole discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in Applicable Law or Applicable Accounting Standards:
(i) To provide for the termination of any such Award in exchange for an amount of cash and/or other property with a value equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 12.2 the Administrator determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment);
(ii) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and applicable exercise or purchase price, in all cases, as determined by the Administrator;
(iii) To make adjustments in the number and type of Shares of the Company’s stock (or other securities or property) subject to outstanding Awards, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Awards and Awards which may be granted in the future;
(iv) To provide that such Award shall be exercisable or payable or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; (v) To replace such Award with other rights or property selected by the Administrator; and/or
(vi) To provide that the Award cannot vest, be exercised or become payable after such event.
(c) In connection with the occurrence of any Equity Restructuring, and notwithstanding anything to the contrary in Section 12.2(a) and Section 12.2(b):
(i) The number and type of securities subject to each outstanding Award and the exercise price or grant price thereof, if applicable, shall be equitably adjusted (and the adjustments provided under this Section 12.2(c)(i) shall be nondiscretionary and shall be final and binding on the affected Participant and the Company); and/or
(ii) The Administrator shall make such equitable adjustments, if any, as the Administrator, in its sole discretion, may deem appropriate to reflect such Equity Restructuring with respect to the aggregate number and kind of Shares that may be issued under the Plan (including, but not limited to, adjustments of the limitation in Section 3.1 on the maximum number and kind of Shares which may be issued under the Plan).
(d) Notwithstanding any other provision of the Plan and except as otherwise set forth in an Award Agreement, in the event of a Change in Control, unless outstanding Awards are assumed by the successor corporation (or parent thereof) or replaced with a comparable award for shares of the capital stock of the successor corporation (or parent thereof), then immediately prior to the Change in Control such outstanding Awards shall automatically become fully vested and exercisable for all of the Shares at the time subject to such Awards, all forfeiture restrictions on such Awards shall lapse and all Performance Goals with respect to any outstanding Award shall be deemed met at the applicable target level or to such other degree as may be provided in a Participant’s Award Agreement or in such other written agreement entered into between the Company and a Participant. Upon, or in anticipation of, a Change in Control in which outstanding Awards will not be assumed or replaced as described above in this Section 12.2(d), the Administrator may cause any and all Awards outstanding hereunder to terminate at a specific time in the future, including but not limited to the date of such Change in Control, and shall give each Participant the right to exercise such Awards during a period of time as the Administrator, in its sole and absolute discretion, shall determine. The determination of Award comparability shall be made by the Administrator, and its determination shall be final, binding and conclusive.
(e) The Administrator, in its sole discretion, may include such further provisions and limitations in any Award, agreement or certificate, as it may deem equitable and in the best interests of the Company that are not inconsistent with the provisions of the Plan.
(f) Unless otherwise determined by the Administrator, no adjustment or action described in this Section 12.2 or in any other provision of the Plan shall be authorized to the extent it would (i) result in short-swing profits liability under Section 16 of the Exchange Act or violate the exemptive conditions of Rule 16b-3 of the Exchange Act; or (ii) cause an Award to fail to be exempt from or comply with Section 409A.
(g) The existence of the Plan, any Award Agreement and/or the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Shares or the rights thereof or which are convertible into or exchangeable for Shares, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
(h) In the event of any pending stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the Shares or the share price of the Shares including any Equity Restructuring, for reasons of administrative convenience, the Administrator, in its sole discretion, may refuse to permit the exercise of any Award during a period of up to thirty (30) days prior to the consummation of any such transaction.
12.3 Approval of Plan by Stockholders. The Plan shall be submitted for the approval of the Company’s stockholders to the extent and by the time required by any Applicable Law. Awards may be granted or awarded prior to any such stockholder approval; provided that to the extent that stockholder approval is required by an Applicable Law, such Awards shall not be exercisable, shall not vest and the restrictions thereon shall not lapse and no Shares shall be issued pursuant thereto prior to the time when any such required approval is obtained, and if such approval is not obtained, all Awards previously granted or awarded under the Plan for which such approval was required shall thereupon be canceled and become null and void. Without limiting the foregoing, any amendments to the Plan shall be subject to stockholder approval to the extent provided in Section 12.1(b) above.
12.4 No Stockholders Rights. Except as otherwise provided herein or in an applicable Award Agreement, a Participant shall have none of the rights of a stockholder with respect to Shares covered by any Award until the Participant becomes the record owner of such Shares.
12.5 Paperless Administration. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the documentation, granting or exercise of Awards, such as a system using an internet website or interactive voice response, then the paperless documentation, granting or exercise of Awards by a Participant may be permitted through the use of such an automated system.
12.6 Effect of Plan upon Other Compensation Plans. The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in the Plan shall be construed to limit the right of the Company or any Subsidiary: (a) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of the Company or any Subsidiary, or (b) to grant or assume options or other rights or awards otherwise than under the Plan in connection with any proper corporate purpose including without limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association.
12.7 Compliance with Laws. The Plan, the granting and vesting of Awards under the Plan and the issuance and delivery of Shares and the payment of money under the Plan or under Awards granted or awarded hereunder are subject to compliance with all Applicable Law (including but not limited to U.S. state, federal and Non-U.S. securities law and margin requirements), and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all Applicable Law. The Administrator, in its sole discretion, may take whatever actions it deems necessary or appropriate to effect compliance with Applicable Law, including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars. To the extent permitted by Applicable Law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to Applicable Law.
12.8 Titles and Headings, References to Sections of the Code or Exchange Act. The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. References to sections of the Code or the Exchange Act shall include any amendment or successor thereto.
12.9 Governing Law. The Plan and any Award Agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts of laws thereof or of any other jurisdiction.
12.10 Section 409A. To the extent that the Administrator determines that any Award granted under the Plan is subject to Section 409A, the Plan and the Award Agreement evidencing such Award shall incorporate the terms and conditions required by Section 409A. In that regard, to the extent any Award under the Plan or any other compensatory plan or arrangement of the Company or any of its Subsidiaries is subject to Section 409A, and such Award or other amount is payable on account of a Participant’s Termination of Service (or any similarly defined term), then (a) such Award or amount shall only be paid to the extent such Termination of Service qualifies as a “separation from service” as defined in Section 409A, and (b) if such Award or amount is payable to a “specified employee” as defined in Section 409A then, to the extent required in order to avoid a prohibited distribution under Section 409A, such Award or other compensatory payment shall not be payable prior to the earlier of (i) the expiration of the six-month period measured from the date of the Participant’s Termination of Service, or (ii) the date of the Participant’s death. To the extent applicable, the Plan and any Award Agreements shall be interpreted in accordance with Section 409A. Notwithstanding any provision of the Plan to the contrary, in the event that, following the Effective Date the Administrator determines that any Award may be subject to Section 409A, the Administrator may (but is not obligated to), without a Participant’s consent, adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Administrator determines are necessary or appropriate to (A) exempt the Award from Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (B) comply with the requirements of Section 409A and thereby avoid the application of any penalty taxes under Section 409A. The Company makes no representations or warranties as to the tax treatment of any Award under Section 409A or otherwise. The Company shall have no obligation under this Section 12.10 or otherwise to take any action (whether or not described herein) to avoid the imposition of taxes, penalties or interest under Section 409A with respect to any Award and shall have no liability to any Participant or any other person if any Award, compensation or other benefits under the Plan are determined to constitute non-compliant, “nonqualified deferred compensation” subject to the imposition of taxes, penalties and/or interest under Section 409A.
12.11 Unfunded Status of Awards. The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary.
12.12 Relationship to Other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
12.13 Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
22
Exhibit 21.1
Subsidiaries of Mawson Infrastructure Group Inc
Name of Subsidiary |
Jurisdiction of Incorporation or Organisation | |
| Mawson Infrastructure Group Pty Ltd | Australia |
|
| Mawson AU Ltd |
Australia | |
| MIG No. 1 Pty Ltd |
Australia | |
| Cosmos Trading Pty Ltd |
Australia | |
| Cosmos Manager LLC | Delaware |
|
| Cosmos Infrastructure LLC | Delaware |
|
| Luna Squares Repairs LLC |
Delaware | |
| Luna Squares LLC |
Delaware | |
| Luna Squares Property LLC |
Delaware | |
| Luna Squares Texas LLC |
Delaware | |
| Mawson Mining LLC |
Delaware | |
| Mawson Ohio LLC |
Delaware | |
| Mawson Midland LLC |
Delaware | |
| Mawson Hosting LLC |
Delaware | |
| MIG No 1 LLC |
Delaware |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 23, 2023, with respect to the December 31, 2022 consolidated financial statements, included in the Annual Report of Mawson Infrastructure Group Inc. on Form 10-K for the year ended December 31, 2022. We consent to the incorporation by reference of said report in the Registration Statement of Mawson Infrastructure Group Inc. on Forms S-3 (Form No. 333-260600, and 333-264062) and Form S-8 (File No. 333-258878).
/s/ LNP Audit and Assurance International Pty Ltd
Sydney, New South Wales, Australia
March 23, 2023
Exhibit 31.1
CERTIFICATION
I, James Manning, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Mawson Infrastructure Group Inc. for the year ended December 31, 2022; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 23, 2023 | /s/ James Manning |
| James Manning | |
| Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Ariel Sivikofsky, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Mawson Infrastructure Group Inc. for the year ended December 31, 2022; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 23, 2023 | /s/ Ariel Sivikofsky |
| Ariel Sivikofsky | |
| Principal Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Mawson Infrastructure Group Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned principal executive officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“SOX”), that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
This certification accompanies this Report pursuant to Section 906 of SOX and shall not, except to the extent set forth in the Exchange Act, be deemed filed by the Company for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filling under the Securities Act of 1993, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Rule 13a-14(b) or 15d-14(b) of the Exchange Act and Section 906 of SOX has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: March 23, 2023 | |
| /s/ James Manning | |
| James Manning, | |
| Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Mawson Infrastructure Group Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned principal financial officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“SOX”), that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
This certification accompanies this Report pursuant to Section 906 of SOX and shall not, except to the extent set forth in the Exchange Act, be deemed filed by the Company for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filling under the Securities Act of 1993, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Rule 13a-14(b) or 15d-14(b) of the Exchange Act and Section 906 of SOX has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: March 23, 2023 | |
| /s/ Ariel Sivikofsky | |
| Ariel Sivikofsky | |
| Principal Financial Officer |