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MAWSON INFRASTRUCTURE GROUP INC.
FORM 10-Q
FOR THE QUARTER ENDED June 30, 2021
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| June 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Trade and other receivables | ||||||||
| Cryptocurrencies | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Equipment deposits | - | |||||||
| Equity accounted investments | - | |||||||
| Security deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Trademarks | - | |||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade and other payables | $ | $ | ||||||
| Lease liability | ||||||||
| Borrowings | ||||||||
| Total current liabilities | ||||||||
| Paycheck protection program loan | ||||||||
| TOTAL LIABILITIES | ||||||||
| Common stock ( | ||||||||
| Contingencies | ||||||||
| Shareholders’ equity: | ||||||||
| Additional paid-in capital | ||||||||
| Share subscription receivable | - | ( | ) | |||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY | ||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
1
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Cryptocurrency mining revenue | ||||||||||||||||
| Sale of crypto currency mining equipment | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Operating cost and expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| LO2A write backs | ||||||||||||||||
| Share based payments | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Realized gain/(losses) on foreign currency transactions | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized gain/(losses) on foreign currency remeasurement | ( | ) | ( | ) | ||||||||||||
| Realized gain/(loss) on sale of digital currencies | ( | ) | ||||||||||||||
| Other income | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expenses | ||||||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss attributable to Non-Controlling interest | ( | ) | ( | ) | ||||||||||||
| Net Loss attributed to Mawson Infrastructure Group shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss per share, basic & diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
2
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three Months Ended June 30, 2021
| Series A Preferred Stock (#) | Series A Preferred Stock ($) | Common Shares (#) | Common Shares ($) | Common Stock (#) | Common Stock ($) | Share Subscription Receivable | Additional Paid-in-Capital | Accumulated Other Comprehensive Income/(Loss) | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non-controlling interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (@A$ | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share based payment (@A$ | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share based payments W Capital | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended June 30, 2020
| Series A Preferred Stock (#) | Series A Preferred Stock ($) | Common Shares (#) | Common Shares ($) | Common Stock (#) | Common Stock ($) | Share Subscription Receivable | Additional Paid-in-Capital | Accumulated Other Comprehensive Income/(Loss) | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non-controlling interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs | - | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive gain / (loss) | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
3
For the Six Months Ended June 30, 2021
| Series A Preferred Stock (#) | Common Shares (#) | Common Stock (#) | Common Stock ($) | Share Subscription Receivable | Additional Paid-in-Capital | Accumulated Other Comprehensive Income/(Loss) | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non-controlling interest | Total Equity | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Exchange of common stock of Cosmos Capital Limited for common stock of Wize Pharma Inc., adjusted to reflect the Exchange Ratio | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Acquisition of Wize Pharma Inc. | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of Common stock of Mawson Infrastructure Group, Inc., in a PIPE transaction upon the consummation of the Business Combination | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Exercise of | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Fair value of IPR&D acquired, net of Business Combination transaction costs | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of RSUs and stock options | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment of LO2A intellectual property revenue sharing obligation | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (@A$ | - | |||||||||||||||||||||||||||||||||||||||||||
| Share based payment (@A$ | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Share based payments W Capital | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
4
For the Six Months Ended June 30, 2020
| Series A Preferred Stock (#) | Series A Preferred Stock ($) | Common Shares (#) | Common Shares ($) | Common Stock (#) | Common Stock ($) | Share Subscription Receivable | Additional Paid-in-Capital | Accumulated
Other Comprehensive | Accumulated Deficit | Total Mawson Stockholders’ Equity | Non-controlling interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering costs | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive gain / (loss) | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | - | - | ||||||
| Depreciation and amortization | ||||||||
| LO2A write offs | - | |||||||
| Investment income | - | |||||||
| Interest expense | - | |||||||
| Interest paid | ( | ) | - | |||||
| Share based payments | - | |||||||
| Write-off of fixed assets | - | |||||||
| Unrealized gain (losses) on foreign currency remeasurement | ( | ) | ||||||
| Change in assets and liabilities | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Trade and other receivables | ||||||||
| Cryptocurrencies | ( | ) | ||||||
| Security deposits | ( | ) | ( | ) | ||||
| Trade and other payables | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net proceeds from sale and purchase of property and equipment | ( | ) | - | |||||
| Payment of fixed asset deposits | ( | ) | ( | ) | ||||
| Investment in financial assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITES | ||||||||
| Proceeds from common share issuances | ||||||||
| Unit redemptions | ||||||||
| Proceeds from convertible notes | - | |||||||
| Payments of capital issuance costs | ( | ) | - | |||||
| Proceeds from borrowings | - | |||||||
| Advances made to external companies | ( | ) | - | |||||
| Payments of borrowings | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | - | |||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | ||||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
General
Mawson Infrastructure Group, Inc. (the “Company” or “Mawson” or “the Group”), formally known as Wize Pharma, Inc was incorporated in the State of Delaware.
The accompanying unaudited interim condensed consolidated financial statements, including the results of the Company’s subsidiaries, Mawson Infrastructure Group Pty Ltd (formerly known as Cosmos Capital Limited) (“ Mawson AU”)) and its subsidiaries: Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, Cosmos Grid Tech Pty Ltd, Cosmos Asset Management Pty Ltd, and Luna Squares LLC (formerly known as Innovative Property Management LLC) (collectively referred to as the “Group”), have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Since Mawson acquired Mawson AU on March 9, 2021, it has managed most of its activity through Mawson Infrastructure Group Pty Ltd (formerly known as Cosmos Capital Limited), an Australian incorporated company, and its subsidiaries, Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, Cosmos Grid Tech Pty Ltd, Cosmos Asset Management Pty Ltd, and Luna Squares LLC (formerly known as Innovative Property Management LLC).
Since the acquisition of Mawson AU, Mawson has been treated as the acquiree, with Mawson AU being the acquirer. The result of which is that these financial statements are taken to be a continuation of the Mawson AU financial statements, with Mawson incorporated within the acquisition. For discussion regarding this acquisition and treatment (also referred to as either the “Mawson AU Transaction” or the “Cosmos Transaction”) please refer to the prior quarter form 10Q filed on May 19, 2021, under Note 2: Reverse asset acquisition.
Mawson, through its subsidiary Mawson AU, is a ‘Digital Asset Infrastructure’ business, which owns and operates modular data centers (MDCs) based in the United States. As at June 30, 2021 Mawson AU currently owns and has ordered 18,332 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”). As at June 30, 2021, the operational Miners produce up to 296 Petahash of computing power, with a total capacity upon deployment of all ordered equipment to produce up to a total capacity upon deployment of all ordered equipment to produce up to 1,483 Petahash.
Going Concern
Based on internally prepared forecast cash flows, combined with the existing cash reserves, which take into consideration what management of the Group considers reasonable scenarios given the inherent risks and uncertainties described both in this 10Q and the Company’s Current Report on Form 8-K/A filed May 13, 2021, management believes that the Group will have adequate cash reserves to enable the Group to meet its obligations for at least one year from the date of approval of the consolidated financial statements, and on this basis the accounts have been prepared on a going concern basis.
7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and basis of preparation
These consolidated, condensed interim financial statements should be read in conjunction with the audited consolidated financial statements for Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) and subsidiaries as of December 31, 2020, and the notes thereto, included in the Company’s Current Report on Form 8-K/A filed May 13, 2021. The results of the interim periods are not necessarily indicative of the results to be expected for the full year ended December 31, 2021. These consolidated condensed interim financial statements reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented.
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.
References in these notes to the “Company” as of a date prior to March 9, 2021, are references to Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) and its subsidiaries, not Mawson Infrastructure Group Inc. and its subsidiaries. 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) as the accounting acquirer (refer to significant accounting policies below). The consolidate results of the Company are reported in U.S. Dollars and include the operations of all its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the dates of the consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly 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 patent assets and fixed assets, realization of long-lived assets, unrealized tax positions and the realization of digital currencies, Business Combinations, Reverse Asset Acquisition, and the Contingent obligation with respect to future revenues.
Critical Accounting Policies
Critical accounting policies are described in the footnotes to the consolidated financial statements for Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) and subsidiaries as of December 31, 2020, included in the Company’s Current Report on Form 8-K/A filed May 13, 2021. There have been no changes to critical accounting policies in the three months period ended June 30, 2021 other than as a result of changes to operations as described below.
Reverse Asset Acquisition
On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) in a scrip for scrip exchange. This transaction has been accounted for as a reverse asset acquisition. Full details of the transaction and the impact are included in the Company’s Form 10Q filed May 19, 2021. This transaction reverse asset acquisition and the associated impact is referred to as the Cosmos Transaction.
8
Share based payments
Under the terms of the Cosmos Transaction Bid Implementation Agreement
the Company was required to make Share based payments consisting of up to
Share based payments expenses for the three months ended June 30, 2021
were $
Equity accounted investments
Mawson subscribed for
Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies to those previously disclosed in the consolidated financial statements for Cosmos Capital Limited and subsidiaries as of December 31, 2020, and the notes thereto, included in the Company’s Current Report on Form 8-K/A filed May 13, 2021, other than as a result of changes to operations as described below.
Revenue recognition – equipment sales
In Q2 2021 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, (iv) payment is received. At the date of sale, the net book value is expensed in cost of revenues.
Digital Currencies
Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are recorded at cost less impairment. The Company compares the book value of digital currencies held to the prevailing market price at each reporting period.
An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, 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 following table presents the activities of the digital currencies of the three months and six months ended June 30, 2021;
| BTC Held | Three months to June 30, 2021 | Six months to June 30, 2021 | ||||||
| Opening Digital currencies | ||||||||
| Additions of digital currencies | ||||||||
| Sale of digital currencies | ( | ) | ( | ) | ||||
| Digital currencies at June 30, 2021 | ||||||||
9
Basic and Diluted Net Loss per Share
Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.
Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share at June 30, 2021 and 2020 are as follows:
| As at June 30, | ||||||||
| 2021 | 2020 | |||||||
| Warrants to purchase common stock | ||||||||
| Restricted Stock-Units (“RSU”) issued under a management equity plan | ||||||||
| Mandatorily convertible notes which exchange into common stock | ||||||||
The following table sets forth the computation of basic and diluted loss per share:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average common shares - basic and diluted | ||||||||||||||||
| Loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Comparative weighted average common shares have been revised by the ratio of Mawson AU to the Company shares exchanged in the reverse asset acquisition in March 2021.
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2 to the consolidated financial statements for Cosmos Capital Limited (now knows as Mawson Infrastructure Group Pty Ltd) and subsidiaries as of December 31, 2020, and the notes thereto, included in the Company’s Current Report on Form 8-K/A filed May 13, 2021. Recent accounting pronouncements include.
Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)
Standard/Description– Issuance date: December 2019. This guidance simplifies various aspects of income tax accounting by removing certain exceptions to the general principle of the guidance and also clarifies and amends existing guidance to improve consistency in application.
Effective Date and Adoption Considerations– The guidance was effective January 1, 2021 and early adoption was permitted. The company adopted the guidance on a prospective basis as of the effective date.
Effect on Financial Statements or Other Significant Matters– The guidance did not have a material impact in the consolidated financial results.
10
Other new pronouncements not applicable to the Company:
Reference Rate Reform (“ASU 2021-01”) issued March 2020, with amendments in 2021; effective March 12, 2020 through December 31, 2022
Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) issued January 2017 effective January 1, 2020;
Financial Instruments - Credit Losses (“ASU 2016-13 / 2018-19 / 2019-04 / 2019-05 / 2019-10 / 2019-11”) issued June 2016 with amendments in 2018, 2019 and 2020; effective January 1, 2020
NOTE 3 – DEPOSIT, PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
On February 5, 2021,
The details of the Canaan Transaction were set out in our Form 10Q filed on May 19, 2021. During the period, the Company paid:
| b) | $1,058,000 during April, 2021 for 588 miners |
As a result of payments pursuant to the transaction, Canaan delivered 1,764 Miners in the 3 months ended June 30, 2021. The Company recognized these delivered assets as Property and Equipment on the consolidated balance sheet when the transfer of risk and title occurs for each shipment (i.e., the Miners have been delivered by Canaan to the agreed-upon port of loading in China).
On March 26, 2021, the Company acquired 1,000 Canaan A1166, and resold
As of June 30, 2021, approximately $
NOTE 4 – STOCKHOLDERS EQUITY
Common Stock
On March 9, 2021, as a part of closing the Cosmos Transaction, Mawson
issued a total of
On June 2, 2021, the Company issued
On June 15, 2021, the final
11
Restricted Stock
As at July 31 2021, making up the total
Series A Preferred Stock
As of June 30, 2021, there are
Common Stock Warrants
A summary of the status of the Company’s outstanding stock warrants and changes during the six months ended June 30, 2021 is as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of December 31, 2020 | ||||||||||||
| Issued | $ | |||||||||||
| Exercised | ( | ) | ||||||||||
| Expired | ||||||||||||
| Outstanding as of June 30, 2021 | $ | |||||||||||
| Warrants exercisable as of June 30, 2021 | $ | |||||||||||
As of March 16, 2021, the Company received a notice from OTC Markets
Group (“OTC”) that the Company failed to have a public float greater than
On June 2, 2021, the Company issued
NOTE 5 – DEBT, COMMITMENTS AND CONTINGENCIES
Convertible Note
On February 12, 2021, Mawson AU issued
The Mawson AU Notes automatically converted into convertible
notes of Mawson (“Mawson Notes”) upon close of the Cosmos Transaction on March 9, 2021. The Mawson Notes have
substantially the same terms as the Mawson AU notes and mandatorily convert into shares of Mawson the earlier of 6 months from
February 12, 2021 or upon the occurrence of certain events at an issue price of $
12
Debt
On January 25, 2021, the Company entered into a Leveraged Account Agreement
with Independent Reserve. This facility is denominated in Bitcoin (BTC) and enables the Company to borrow up to 10 BTC subject to certain
margin requirements. As at June 30, 2021 the Company had closed this facility and no longer has any liabilities to Independent Reserve.
To replace the liquidity provided by Independent Reserve Mawson AU entered into a working capital facility with Georgina Manning Pty Ltd
for up to AUD$
On January 27, 2021, Cosmos Infrastructure LLC (“Cosmos Infrastructure”)
entered into an Equipment Purchase and Finance and Security Agreement with Foundry Digital LLC (“Foundry”) to purchase machinery
that will be located at a facility hosted by Compute North LLC (“Compute North”). On February 5, 2021, the term of the agreement
was further amended to have a final payment due January 27, 2022.
Leases
As at June 30, 2021, the Company owns 50% of the equity in Luna Squares,
LLC. Luna Squares LLC leases a five-acre lot in the State of Georgia referred to as “Luna Squares” from the Development Authority
of Washington County.
The Company leases the headquarters of its business operations at Level
5, 97 Pacific Highway, North Sydney NSW 2060 Australia, being
Other than these leases, the Company does not lease any material assets. The Company believes that these offices and facilities are suitable and adequate for its operations as currently conducted and as currently foreseen. In the event additional or substitute offices and facilities are required, the Company believes that it could obtain such offices and facilities at commercially reasonable rates.
NOTE 6 – DEFERRED TAX
We compute our quarterly income tax expense/(benefit) by using a forecasted annual effective tax rate and adjust for any discrete items arising during the interim period. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and carryforward losses.
The tax effects of temporary differences and tax loss and other credit carry forwards that give rise to significant portions of deferred tax assets and liabilities at June 30, 2021, and December 31, 2020 are comprised of the following:
Significant components of our deferred tax assets and deferred tax liabilities are as follows:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Deferred income tax liabilities: | ||||||||
| Depreciation | $ | ( | ) | $ | ( | ) | ||
| Transaction gains and losses | ( | ) | ( | ) | ||||
| Other deferred tax liability | ( | ) | ||||||
| Net deferred tax liability | ( | ) | ( | ) | ||||
| Deferred income tax assets: | ||||||||
| Net operating loss carryforwards | ||||||||
| Transaction gains and losses | ||||||||
| Transaction costs | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
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For the six month period ended June 30, 2021 the Company recognized $nil income tax expense (June, 30 2020: $nil).
As of June 30, 2021,
we had federal and foreign net operating loss carryforwards of approximately $
Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Annual limitations may result in expiration of net operating loss and tax credit carryforwards before some or all of such amounts have been utilized.
The Company and its subsidiaries are subject to United States federal income tax, foreign income and withholding tax and income taxes from state jurisdictions. All tax years are open and subject to inspection by taxing authorities.
NOTE 7 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure herein except as stated directly below.
On July 5, 2021, the Company consummated the acquisition (“the Acquisition) of all of the outstanding membership interests of Luna Squares LLC, a Delaware limited liability company (f/k/a Innovative Property Management, LLC) (“Luna”) pursuant to the terms of a (i) Membership Interest Purchase Agreement with Kyle Hoffman (the “Hoffman MIPA”) and (ii) Membership Interest Purchase Agreement with TRS Ventures LLC (the “TRS MIPA”). This transaction will be referred to as “the Luna Squares Transaction”. Further information on the Luna Squares Transaction can be found on the Company’s form 8K filed on July, 9, 2021.
Pursuant to the Hoffman MIPA, on July 7, 2021, the Company paid USD50,000 to Mr Hoffman and on August 02, 2021, the Company issued 55,555 of its common stock to Mr Hoffman (calculated as USD50,000 worth of common stock at a stock price of USD0.90). This relates to Mr Hoffman’s equity interest of 25% in Luna.
Pursuant to the TRS MIPA, on July 7, 2021, the Company paid USD50,000 to TRS Ventures LLC and on August 02, 2021, the Company issued 111,111 of its common stock to TRS Ventures LLC (calculated as USD100,000 worth of common stock at a stock price of USD0.90). This relates to TRS Ventures LLC’s equity interest of 15% in Luna.
On August 10, 2021, the Company issued
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets, statements of comprehensive income (loss) and cash flows. This section should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 Form 10-K”) filed with the United States Securities and Exchange Commission(the “SEC”), The Annual consolidated financial statements of Mawson AU included in included in the Company’s Current Report on Form 8-K/A filed May 13, 2021 and our unaudited interim consolidated financial statements and accompanying notes to these Financial Statements included in this quarterly report on Form 10-Q. For accounting and financial purposes, Mawson is treated as the “acquired” company by Mawson AU, and historical financial information provided is that of Mawson AU, not Mawson. All amounts are in U.S. dollars.
Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” the “Company,” “Mawson,” “our company” and the “combined company” refer to Mawson Infrastructure Group Inc. (formerly known as Wize Pharma, Inc.), a Delaware corporation, and its direct and indirect subsidiaries, including Mawson Infrastructure Group Pty Ltd (formerly known as Cosmos Capital Limited), an Australian company (“Mawson AU”), Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, Cosmos Grid Tech Pty Ltd, Cosmos Asset Management Pty Ltd, and Luna Squares LLC (formerly known as Innovative Property Management LLC).
Forward-Looking Statement Notice
This Quarterly Report on Form 10-Q contains forward-looking statements about our expectations, beliefs or intentions regarding, among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects. In addition, from time to time, our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, and in Part II – Item 1A of this report.
This report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under Item 1A. “Risk Factors” as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, and in Part II – Item 1A of this report.
Such risk factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
| ● | We may be unable to raise additional capital needed to grow our business. |
| ● | The slowing or stopping of the development or acceptance of digital asset systems. |
| ● | Changes to any digital asset network’s protocols and software. |
| ● | Any decrease in the incentive for Bitcoin mining. |
| ● | Further or new regulation of digital assets such as Bitcoin as securities or investment securities or of our activities that would require further registration or compliance with additional regulations and laws. |
| ● | Global climate changes and related environmental regulations, or pandemic or similar items and events. |
| ● | Political or economic crises motivating large-scale sales of digital assets. |
| ● | Electricity costs. |
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by applicable law, we undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.
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Overview
General. Mawson (formerly known as Wize Pharma, Inc.), through its majority-owned subsidiary, Mawson AU, is a ‘Digital Asset Infrastructure’ business, which owns and operates (through Mawson AU) modular data centers (MDCs) currently based in the United States. and Australia. We are focused on developing the technology to enable us to own and operate MDCs that are both air-cooled and liquid immersion cooled.
Our primary business is the ownership and operation of Application-Specific Integrated Circuit (“ASIC”) computers known as Miners. We have existing operations at two locations in Nebraska and Georgia, from which we operate our business. The Miners are predominately focused on the process of digital mining, specifically for Bitcoin.
| As of June 30, 2021 | ||||||||||||
| Existing Operations online | Order and Purchase Agreements | Cumulative Fleet Fully Deployed | ||||||||||
| Total miners online | 4,649 | - | 4,649 | |||||||||
| Total miners in Transit | - | 1,426 | 1,426 | |||||||||
| Total miners on order | - | 9,508 | 9,508 | |||||||||
| Total miners in storage | 2,749 | 2,749 | ||||||||||
| Total miners | 7,398 | 10,934 | 18,332 | |||||||||
| Total theoretical production hashrate | 476 PH/s | 984 PH/s | 1460 PH/s | |||||||||
We continue to conduct research and development into our Modular Data Centre (MDC) which we are actively testing in several configurations and locations to determine the best configuration for both ASIC and alternate computing uses, including both for use in Graphics Processing Units (GPU) systems and traditional CPU based computing systems.
In addition, our indirect subsidiary, Cosmos Asset Management Pty Ltd (“Cosmos Asset Management”), is the investment manager of the Bitcoin Wholesale Access Fund, a wholesale, unregistered managed investment scheme which currently invests in and holds Bitcoin for third party investors.
Our Products and Services. Our digital asset infrastructure business can be divided into three main activities:
Digital Processing and Hosting Solutions (Mining)
The business of digital processing and mining requires the purchase and ownership of computing hardware and servers specific to the computing problem that a person is seeking to solve, referred to as a “Miner”. Each Miner or component thereof can be specifically specialized to perform a function better than other hardware for the purpose of maximizing the return from any specific processing task.
Mining hardware performs computational operations in support of the blockchain measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations. The original equipment used for mining Bitcoin utilized the Central Processing Unit (“CPU”) of a computer to mine various forms of cryptocurrency. Due to performance limitations, CPU mining was rapidly replaced by the Graphics Processing Unit (GPU), which offers significant performance advantages over CPUs. General purpose chipsets like CPUs and GPUs have since been replaced in the mining industry by Application Specific Integrated Circuits (“ASIC”) chips. These ASIC chips are designed specifically to maximize the rate of hashing operations.
Asset Management
We have a dedicated asset management business, which is operated through Cosmos Asset Management, which is involved in the ownership and management of digital assets and infrastructure, and which is the investment manager of the Bitcoin Access Wholesale Fund, a wholesale, unregistered managed investment scheme which invests in and holds Bitcoin for third party investors. This business leverages the existing knowledge and infrastructure of our digital asset business to provide its investors exposure to various investment opportunities.
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Through a strategic partnership with Independent Reserve Pty Limited, one of Australia’s leading digital exchanges, Cosmos Asset Management has custody agreements and security procedures in place to manage the various risks with investing in digital assets. In addition, Cosmos Asset Management manages a dedicated business in distributed storage infrastructure.
As of June 30, 2021, the funds under management of the asset management business are approximately USD$4.10 million.
Research and Development
Our research and development, or R&D, program is focused on researching and exploring opportunities to improve the efficiency of hardware and software and MDC’s, including the development of technology to enable us to own and operate MDCs that are both air cooled and liquid immersion cooled. We have also begun research into the software element of computing and are in the initial stages of researching a range of programs to improve efficiency through this avenue as well.
We are conducting research in both Australia and the United States. By conducting research in different countries, we are able to research improvements in efficiencies across varying climates. The climate in Nebraska (extremely warm dry summers, extremely cold, windy winters), varies greatly to Georgia (hot, humid summers, cool, still winters) which varies greatly to Sydney (warm, humid summers, mild, windy winters).
We have partnered with leading design firms in both Australia and the United States to ensure the finished products can be deployed in different climates. By using global designers and vendors, it provides us the opportunity to seek to enhance the design to ensure success of the technology in all jurisdictions, climates and scenarios.
LO2A Business.
Through our holdings in the Wize Subsidiaries, we also have in-licensed certain rights to purchase, market, sell and distribute a formula known as LO2A, a drug developed for the treatment of dry eye syndrome (“DES”), and other ophthalmological illnesses, including Conjunctivochalasis (“CCH”) and Sjögren’s syndrome (“Sjögren’s”). 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 Contingent Valued Rights (“CVRs”) and any contingent right holders.
Recent Developments.
Mawson has filed an application with The Nasdaq Stock Market LLC (“Nasdaq”) to list shares of Mawson’s common stock on The Nasdaq Capital Market. The application is under consideration by Nasdaq, and the outcome of Nasdaq’s review and consideration is uncertain and dependent on Mawson completing certain actions required to meet Nasdaq’s listing requirements. Should Mawson be successful in meeting the listing requirements and the application be accepted by Nasdaq, Mawson intends to submit the decision of whether to list its common stock on the The Nasdaq Capital Market to Mawson’s board of directors for final consideration and approval.
In May 2021, the Company, through its subsidiary Luna Squares LLC, had its first hosting contracts at its facilities in Georgia. The hosting contracts were for an initial single MDC and represents approximately $1.01 million in annualized revenue
On August 10, 2021, we issued 46,139,019 shares of our common stock at a purchase price of $0.80 per shares for aggregate gross proceeds of $36,911,215 in a private placement to certain accredited investors pursuant to entered into Securities Purchase Agreements dated August 6, 2021
COVID-19.
The COVID-19 global pandemic has been unpredictable and unprecedented and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. We currently do not expect any material impact on our long-term development, operations, or liquidity due to the COVID-19 pandemic. However, we are actively monitoring this situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.
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Results of Operations – Three months Ended June 30, 2021 compared to the three months ended June 30, 2020
| For the three months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Cryptocurrency mining revenue | 5,664,629 | 1,121,851 | ||||||
| Sale of crypto currency mining equipment | 280,038 | - | ||||||
| Total revenues | 5,944,667 | 1,121,851 | ||||||
| Operating cost and expenses: | ||||||||
| Cost of revenues | 294,140 | 837,714 | ||||||
| Selling, general and administrative | 4,161,256 | 522,361 | ||||||
| LO2A write backs | - | - | ||||||
| Share based payments | 5,559,495 | - | ||||||
| Depreciation and amortization | 2,533,242 | 1,098,079 | ||||||
| Total operating expenses | 12,548,133 | 2,458,154 | ||||||
| Loss from operations | (6,603,466 | ) | (1,336,303 | ) | ||||
| Other income (expense): | ||||||||
| Realized gain/(losses) on foreign currency transactions | (181,768 | ) | (187 | ) | ||||
| Unrealized gain/(losses) on foreign currency remeasurement | 121,021 | (722,875 | ) | |||||
| Realized gain/(loss) on sale of digital currencies | - | 5,508 | ||||||
| Other income | 315,353 | - | ||||||
| Loss before income taxes | (6,348,860 | ) | (2,053,857 | ) | ||||
| Income tax expenses | - | - | ||||||
| Net Loss | (6,348,860 | ) | (2,053,857 | ) | ||||
Revenues
Cryptocurrency mining revenues for the three months ended June 30, 2021 and 2020 were $5.66 million and $1.12 million respectively. This represented an increase of $4.54 million or 405% over the same three-month period in 2020. The increase in mining revenue for the three-month period was primarily attributable to higher bitcoin values in the 2021 period, averaging $45,864 per coin as compared to $8,427 per coin in the 2020 period. Bitcoins produced totaled 121 and we sold a total of 137.28 in 2021 as compared to 135.06 sold in the 2020 period.
For the three months ended June 30, 2021 sales of mining equipment were $0.28 million and no sales were recorded in 2020. The market for second hard equipment was softer in the three months ended June 30, 2021 resulting in no sales during this period.
Operating Cost and Expenses
Our operating cost and expenses include cost of revenues; selling, general and administrative expenses; and depreciation and amortization.
Cost of revenues.
Our cost of revenue consists primarily of: cost of mining equipment sold, and direct power costs related to cryptocurrency mining.
For the three months ended June 30, 2021 and 2020, cost of revenue were $0.29 million and $0.84 million respectively. The decrease in cost of revenue was primarily attributed to: the release of accruals from the prior quarter, the actual cost of revenues for this period was $0.55 million, rectifying an over accrual of expenses.
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Selling, general and administrative.
Our selling, general and administrative expenses consist primarily of: professional and management fees relating to: accounting, audit, and legal; research and development; and general office expenses.
Selling, general and administrative expenses for the three months ended June 30, 2021 and 2020 were $4.16 million and $0.52 million, respectively. The increase in selling, general and administrative expenses were primarily attributable to: one-off professional fees related to the Cosmos Transaction; and increases in expenses related to the increase in the scale of business operations.
Share based payments.
Share based payments consist of: the value of shares required to be issued to Incentive Compensation Program participants under the Cosmos Transaction Bid Implementation Agreement; and the value of warrants issued to HC Wainwright and W Capital as a fee related to the acquisition by Mawson of Mawson AU. The initial expense was recognized in the financial statements for Mawson AU for the period ended December 31, 2021, however as a result of the conversion from options to warrants as part of the Cosmos Transaction, the Company was required to recognize the incremental expense of the W Capital warrants.
Share based payments expenses for the three months ended June 30, 2021 and 2020 were $5.56 million and $nil respectively. The expense in the period relates to W Capital Warrants of $5.56 million.
Depreciation and amortization.
Depreciation consists primarily of depreciation of cryptocurrency mining hardware and modular data center (MDC) equipment.
Depreciation and amortization for the three months ended June 30, 2021 and 2020 were $2.53 million and $1.10 million, respectively. The increase is primarily attributable to the application of the diminishing value method, resulting in a higher depreciation expense in the initial months of mining equipment operation; and the procurement of new machines that have come in the ownership of the Company.
Other income (expenses)
Our other income (expenses) consists of: net realized gains (losses) on foreign currency transactions; net unrealized gains (losses) on foreign currency remeasurement; realized gains (losses) on sale of digital currencies; and other income. Other income consists of sales for hosting clients, investment management fees, unrealized fair value on investments and other minor income events.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss of $6.35 million for the three months ended June 30, 2021 compared to a net loss of $2.05 million for the three months ended June 30, 2020.
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Results of Operations – Six months ended June 30, 2021 compared to six months ended June 30, 2020
| For the six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Cryptocurrency mining revenue | 10,878,255 | 1,892,311 | ||||||
| Sale of crypto currency mining equipment | 2,157,651 | - | ||||||
| Total revenues | 13,035,906 | 1,892,311 | ||||||
| Operating cost and expenses: | ||||||||
| Cost of revenues | 2,666,921 | 1,287,611 | ||||||
| Selling, general and administrative | 7,043,881 | 998,514 | ||||||
| LO2A write backs | 23,963,050 | - | ||||||
| Share based payments | 20,354,897 | - | ||||||
| Depreciation and amortization | 3,848,142 | 2,455,564 | ||||||
| Total operating expenses | 57,876,891 | 4,741,689 | ||||||
| Loss from operations | (44,840,985 | ) | (2,849,378 | ) | ||||
| Other income (expense): | ||||||||
| Realized gain/(losses) on foreign currency transactions | 846,852 | (1,039 | ) | |||||
| Unrealized gain/(losses) on foreign currency remeasurement | (1,569,278 | ) | 166,969 | |||||
| Realized gain/(loss) on sale of digital currencies | - | (8,800 | ) | |||||
| Other income | 694,480 | 108,895 | ||||||
| Loss before income taxes | (44,868,930 | ) | (2,583,353 | ) | ||||
| Income tax expenses | - | - | ||||||
| Net Loss | (44,868,930 | ) | (2,583,353 | ) | ||||
Revenues
Cryptocurrency mining revenues for the six months ended June 30, 2021 and 2020 were approximately $10.88 million and $1.89 million, respectively. This represented an increase of $8.99 million or 475% over the same six-month period in 2020. The increase in mining revenue for the six-month period was primarily attributable to higher bitcoin values in the 2021 period, averaging $45,864 per coin as compared to $8,427 per coin in the 2020 period. Bitcoins produced and sold totaled 250.74 in 2021 as compared to 232.07 in the 2020 period.
Sales of hardware for the six months ended June 30, 2021 were approximately $2.16 million and no sales were recorded in 2020.
Operating Cost and Expenses
Our operating cost and expenses include cost of revenues; selling, general and administrative expenses; and depreciation and amortization.
Cost of revenues.
Our cost of revenue consists primarily of: cost of mining equipment sold, and direct power costs related to cryptocurrency mining.
Cost of revenues for the six months ended June 30, 2021 and 2020 were approximately $2.67 million and $1.29 million, respectively. The increase in cost of revenue was primarily attributable to: cost of cryptocurrency mining hardware sold of $1.42 million in the 2021 period; and an increase in power costs related to the increase in the deployment and operation of cryptocurrency mining hardware.
Selling, general and administrative.
Our selling, general and administrative expenses consist primarily of: professional and management fees relating to: accounting, audit, and legal; research and development; and general office expenses.
Selling, general and administrative expenses for the six months ended June 30, 2021 and 2020 were approximately $7.04 million and $1.00 million respectively. The increase in selling, general and administrative expenses were primarily attributable to: one-off professional fees related to the Cosmos Transaction; and increases in expenses related to the increase in the scale of business operations.
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Share based payments.
Share based payments consist of: the value of shares required to be issued to Incentive Compensation Program participants under the Cosmos Transaction Bid Implementation Agreement; and the value of warrants issued to HC Wainwright and W Capital as a fee related to the acquisition by Mawson of Mawson AU. The initial expense was recognized in the financial statements for Mawson AU for the period ended December 31, 2021, however as a result of the conversion from options to warrants as part of the Cosmos Transaction, the Company was required to recognized of the incremental expense of the W Capital warrants.
Share based payments expenses for the six months ended June 30, 2021 and 2020 were $20.35 million and $0, respectively. In the six month period to June 30, 2021, share based payments were split between HC Wainwright $6.18 million, W Capital Warrants of $5.56 million and an accrual of $8.58 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, included in the Company’s Current Report on Form 8-K/A filed May 13, 2021. No expenses were recorded in the 2020 period.
Depreciation and amortization.
Depreciation consists primarily of depreciation of cryptocurrency mining hardware and modular data center (MDC) equipment.
Depreciation and amortization for the six months ended June 30, 2021 and 2020 were approximately $3.85 million and $2.46 million, respectively. The increase is primarily attributable to the application of the diminishing value method, resulting in a higher depreciation expense in the initial months of mining equipment operation, and that new machines which are being procured have come into the ownership of the Company.
Other income (expenses)
Our other income (expenses) consists of: net realized gains (losses) on foreign currency transactions; net unrealized gains (losses) on foreign currency remeasurement; realized gains (losses) on sale of digital currencies; and other income. Other income consists of sales for hosting clients, investment management fees, unrealized fair value on investments and other minor income events.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss for the six months ended June 30, 2021 and 2020 of approximately $44.87 million and $2.58 million, respectively.
Liquidity and Capital Resources
General
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. For the six months ended June 30, 2021, we financed our operations primarily through:
| 1. | entering into Securities Purchase Agreements (the “PIPE Agreements”) on December 31,2020, with certain accredited investors (the “PIPE Investors”), whereby we agreed to sell to the PIPE Investors, in a private placement, an aggregate of 25 millions shares of common stock for aggregate gross proceeds of $3.0 million; |
| 2. | the issuance on March 9, 2021 of convertible notes with an aggregate principal amount of $21,442,694; and |
| 3. | net cash provided by operating activities of $7.66 million |
| 4. | Net cash from the proceeds of the sale of shares in Bonus Bio Group of $1.022 million |
Working Capital and Cash Flows
As of June 30, 2021 and December 31, 2020, we had $3.61 million and $1.11 million in cash and cash equivalents, respectively.
As of June 30, 2021, we had $991,524 of outstanding short-term loans, and as of December 31, 2020, we had $290,978 of short-term loans. As of June 30, 2021, and at December 31, 2020, we had $14,000 of outstanding long term loans. The loans as of June 30, 2021, relate primarily to: the acquisition of cryptocurrency mining equipment, payable in full by February, 2022 under the Foundry agreement. The repayment of a Leveraged Account Agreement which Mawson borrowed 10 Bitcoin and entered into another short-term loan to replace the Leverage Account Agreement (see Note 5 in Item 1 of Part 1 of this Quarterly Report), combined with an working capital advance.
As of June 30, 2021, and December 31, 2020, we had negative working capital of $807,425 and negative working capital of $463,345, respectively. The decrease in working capital was primarily attributable to: an increase in the trade payables and short term borrowings.
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The following table presents the major components of net cash flows (used in) provided by operating, investing and financing activities for the six month ending June 30, 2021 and 2020:
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 7,664,467 | $ | 59,245 | ||||
| Net cash used in investing activities | $ | (26,065,630 | ) | $ | (725,588 | ) | ||
| Net cash provided by financing activities | $ | 21,250,788 | $ | 2,190,692 | ||||
For the six months ended June 30, 2021 and 2020, net cash provided by operating activities was $7,664,467 and $59,245 respectively. The increase in net cash provided by operating activities was primarily attributable to timing differences in accounts payables and accounts receivables.
For the six months ended June 30, 2021 and 2020, net cash used in investing activities was $26,065,630 and $725,588, respectively. The increase in net cash used in investing activities was primarily attributable to the increase in the acquisition of cryptocurrency mining equipment.
For the six months ended June 30, 2021 and 2020, net cash provided by and used in financing activities was $21,250,788 and $2,190,692, respectively. The increase in net cash provided by financing activities was primarily attributable to proceeds from convertible notes.
Outlook
According to management estimates, liquidity resources as of June 30, 2021 are expected tobe sufficient to maintain our planned level of operations for the next 12 months. However, we may need to raise additional funding or capital raising in order to purchase more equipment or expand operations. Additional financing may not be available on acceptable terms, if at all. Our future capital requirements as well as the ability to obtain financing will depend on many factors, including those listed under Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020.
Off-Balance Sheet Arrangements
In connection with the Cosmos Transaction, we issued one CVR to each of our securityholders for each outstanding share of common stock of Mawson, and for each share of common stock of Mawson underlying other convertible securities and warrants, held immediately before the closing of the Cosmos Transaction. Each CVR represents the right to receive a pro rata share of any consideration that we may receive in connection with any successful monetization of our LO2A business, less transaction expenses and customary deductions as detailed in the CVR agreement, including a deduction of up to $300,000 to be repaid to us for amounts we spend in the development of the LO2A Technology at the request of the Holders’ Representative.
Other than the CVRs and the Contingent obligation in relation to LO2A, as of June 30, 2021, the Company did not have any other off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
As a smaller reporting company, the Company has elected not to provide the disclosure required by this item.
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the 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 Quarterly Report. The Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified a material weakness in internal control over financial reporting.
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 the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness identified is described below.
Significant Reliance on Key Individuals. There are significant manual processes involved in the Company’s accounting, management and control functions with limited segregation of duties and secondary review. 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. As well as the risk that compliance and other reporting obligations as a result of risk of management override are not adequately dealt with.
As a result of the material weakness in internal control over financial reporting described above, the Company’s management has concluded that, as June 30, 2021, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework issued by COSO.
Changes in internal control over financial reporting
The Company is 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.
Although the Company acquired and became the parent company of Mawson AU in the Cosmos Transaction, with limited exceptions, the management team of Mawson AU became the management team and became responsible for internal control over financial reporting upon completion of the Cosmos Transaction. Mawson AU was an Australian registered Unlisted Public Company with limited accounting personnel and other resources with which to address our internal controls and procedures, and was not previously subject to the same requirements. The Company’s new management may not be able to effectively and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements that are applicable to us. If our new management 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, the Company is not subject to the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. However, as the Company grows, it may become subject to the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
If the Company fails to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, the accuracy and timeliness of the filing of annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in reported financial information, which could have a negative effect on the trading price of common stock. In addition, a material weakness in the effectiveness of internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.
Since March 9, 2021, with the oversight of senior management and our audit committee, we have begun taking steps and plan to take additional measures to remediate the underlying causes of the identified material weaknesses, primarily through the performance of a risk assessment process; the development and implementation of formal, documented policies and procedures, improved processes and control activities (including an assessment of the segregation of duties); as well as the hiring of additional finance personnel for specific roles such as financial reporting. During the period covered by this Quarterly Report on Form 10-Q, we made the following changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
| ● | We have developed entity level and process level controls with respect to the preparation and review of our consolidated financial statements. We have developed process level controls relating to the review of manually prepared analyses and supporting information used to prepare our consolidated financial statements. We are in the process of testing and validating these controls. At this time, we cannot state whether these controls will prove to be effective. |
| ● | We are currently working to write policies and procedures to ensure the effective design and operation of general IT controls over our financial reporting systems We have not yet completed our development, implementation and testing of these controls. At this time, we cannot state whether these controls will prove to be effective. |
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of our business. However, as of June 30, 2021, we are unaware of any material pending legal proceedings.
Item 1A. Risk Factors
In light of recent developments related to the , the Company is supplementing the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, to include the following risk factors.
Summary of Risk Factors
The following constitutes a summary of the material risks relevant to an investment in our company:
Risks Relating to our Digital Asset Infrastructure Business through Mawson AU
Both we (collectively) and Mawson AU (individually) have incurred operating losses since inception and anticipates continuing to incur substantial operating losses in the near future.
We have historically incurred net losses, including net losses of approximately $10.42 million and $3.45 million for the years ended December 31, 2020 and 2019, respectively. As at December 31, 2020, we had an accumulated deficit of approximately $39.22 million. Similarly, and not included in the forgoing, Mawson AU has incurred net and operating losses since its inception in May 2019, including net losses of approximately $5.06 million and operating losses of approximately $4.93 million for the year ended December 31, 2020. Even with the change of our primary business away from our historical LO2A Business to the digital asset infrastructure business of Mawson AU, we do not know whether or when we will become profitable and we expect to continue to incur losses for the near future, and these losses will likely increase as we pursue our growth strategy. No certainty exists that we will become profitable and, even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.
We have a limited operating history and a history of operating losses, and expect to incur significant additional operating losses.
We have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations. We have generated net losses of $5.03 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively. We expect to incur additional net losses over the next several years as we seek to expand operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain. If we are unsuccessful at executing on our business plan, our business, prospects, and results of operations may be materially adversely affected.
We will need to raise additional capital to meet our business requirements in the future, and such capital raising may be costly or difficult to obtain and will dilute current stockholders’ ownership interests.
The sources of financing at our disposal are estimated by our management to be currently insufficient to conduct our ongoing business for the next 12 months. No certainty exists that we will be able to secure the additional sources of finance we need to perform the advanced and necessary stages of receiving regulatory approvals for marketing and distributing our products, including the costs derived from performing clinical trials and the requirements of the regulatory authorities.
The lack of satisfactory means of financing may causes us to suspend or cease operations. As of June 30, 2021, we had cash and cash equivalents of approximately $3.6 million. We have expended and believe that we will continue to expend substantial resources for the foreseeable future especially in relation to the purchase of Miners and related equipment.
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In addition, other unanticipated costs may arise. As a result of these and other factors currently unknown to us, we will require additional funds, through public or private equity or debt financings or other sources, such as strategic partnerships and alliances and licensing arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate our proposed expansion plans or results of operations.
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 an investment in us.
There is currently relatively small use of Bitcoin and other cryptocurrencies in the retail and commercial marketplaces compared 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 pessimism about their use and whether their popularity will gain further traction is difficult to predict. In May 2021, Tesla, Inc. (“Tesla”), which was accepting cryptocurrency as payment for its electric cars, announced that it would halt sale of cars for cryptocurrency due to environmental concerns with cryptocurrency mining. Decisions and announcements such as this can have a material and adverse effect on the values of cryptocurrencies.
If the popularity and use of cryptocurrencies diminish their value decreases. Our existing and potential further interest in cryptocurrencies would be detrimentally affected, and our business, financial condition, results of operations and prospects may be materially adversely affected.
The digital asset exchanges on which digital assets trade are relatively new and, in many cases, unregulated, and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the digital asset exchanges representing a substantial portion of the volume in digital asset trading are involved in fraud or experience security failures or other operational issues, such failures may result in a reduction in the price of some or all digital assets which could adversely affect our business, financial condition, results of operations and prospects.
The digital asset exchanges on which digital assets trade are new and, in many cases, largely unregulated. Furthermore, many digital asset exchanges (including several of the most prominent USD denominated digital asset exchanges) do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading.
A lack or perceived 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.
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 an investment in 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. This group of contributors is currently headed by Wladimir J. van der Laan, the current lead maintainer.
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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 any such 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. Although the MIT Media Lab’s Digital Currency Initiative funds the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not typical. 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 issues with the Bitcoin network may reduce incentives to address the issues adequately or in a timely manner. Changes to a digital asset network which we are mining could materially adversely affect our business, financial condition, results of operations and prospects.
Governments introducing new laws about the legality to operate Bitcoin mining businesses in their jurisdictions
Certain Governments around the world are beginning to halt the ability of companies to operate Bitcoin mining businesses in their jurisdiction. By way of example, in June 2021, China has intensified its crackdown on cryptocurrency mining in China. It is estimated that more than 90% of China’s bitcoin mining capacity has ceased. The implication of such action is that the price of Bitcoin has depreciated. If other Governments take similar action resulting in the continued depreciation in the price of Bitcoin, this could materially adversely affect our business, financial condition, results of operations and prospects.
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The incentive for Bitcoin mining may decrease over time as the reward decreases.
A Bitcoin halving occurs when block rewards, or the number of Bitcoins entering circulation whenever a block is produced (approximately every 10 minutes), is reduced by half. This means a new Bitcoin will be subsequently issued half as fast as before. This occurs on a schedule built into Bitcoin’s programming and happens every 210,000 blocks with the purpose being to issue the total supply into the market less frequently over time. This supply effect increases Bitcoin’s scarcity, which has, historically, increased its price. When Bitcoin first started, 50 Bitcoins were rewarded to miners per block produced. The reward was decreased over the years and, to date, following the last halving event in May 2020, the block reward is 6.25 Bitcoins per block. Halving events will continue until the block reward reaches zero. The process will end with a predetermined total of 21 million Bitcoins, estimated to be around the year 2140. Although, at each prior halving event, the short-term subsequent effect on the Bitcoin price has been an increase in price, this trend may not continue in the future and may have a reverse effect on the Bitcoin price, in which case, our business, financial condition, results of operations and prospects may be materially adversely affected.
If the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may cease expending hashrate to solve blocks and confirmations of transactions on the blockchain could be slowed temporarily.
Bitcoin miners record transactions when they solve for and add blocks of information to the blockchain. When a miner solves for a block, it creates that block, which includes data relating to (i) the solution to the block, (ii) a reference to the prior block in the blockchain to which the new block is being added and (iii) all transactions that have occurred but have not yet been added to the blockchain. The miner becomes aware of outstanding, unrecorded transactions through the data packet transmission and propagation discussed above. Typically, Bitcoin transactions will be recorded in the next chronological block if the spending party has an internet connection and at least one minute has passed between the transaction’s data packet transmission and the solution of the next block. If a transaction is not recorded in the next chronological block, it is usually recorded in the next block thereafter.
As the award of new digital assets for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an adequate incentive to continue mining and may cease their mining operations. For example, the current fixed reward on the Bitcoin network for solving a new block is six and a quarter (6.25) Bitcoins per block (the reward decreased from twelve and a half (12.5) Bitcoin in May 2020). It is estimated that it will halve again in about 4 years from 2020. This reduction may result in a reduction in the aggregate hashrate of the Bitcoin network as the incentive for miners will decrease. Moreover, miners ceasing operations would reduce the aggregate hashrate on the Bitcoin network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block solutions) and make the Bitcoin network more vulnerable to a malicious actor obtaining control in excess of fifty percent (50%) of the aggregate hashrate on the Bitcoin network. Periodically, the Bitcoin network has adjusted the difficulty for block solutions so that solution speeds remain in the vicinity of the expected ten (10) minute confirmation time targeted by the Bitcoin network protocol.
More significant reductions in aggregate hashrate on digital asset networks could result in material, though temporary, delays in block solution confirmation time. Any reduction in confidence in the confirmation process or aggregate hashrate of any digital asset network may negatively impact the value of digital assets, which will adversely impact our business, financial condition, results of operations and prospects.
An increase in transaction fees could reduce the price or 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.
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To the extent that the profit margins of digital asset mining operations are not high, operators of digital asset mining operations are more likely to immediately sell their digital assets earned by mining in the digital asset exchange market, resulting in a reduction in the price of digital assets that could adversely impact our business, financial condition, results of operations and prospects.
Over the past two years, digital asset mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation servers. Currently, new processing power brought onto the digital asset networks is predominantly added by incorporated and unincorporated “professionalized” mining operations. Professionalized mining operations may use proprietary hardware or sophisticated machines. They require the investment of significant capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale than prior miners and have more defined, regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to more immediately sell digital assets earned from mining operations on the digital asset exchange market, whereas it is believed that individual miners in past years were more likely to hold newly mined digital assets for more extended periods. The immediate selling of newly mined digital assets greatly increases the supply of digital assets on the digital asset exchange market, creating potential downward pressure on the price of each digital asset.
The extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital and operating costs determines the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher percentage of its newly mined digital assets rapidly if it is operating at a low profit margin—and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be sold into the digital asset exchange market more rapidly, thereby potentially reducing digital asset prices. Lower digital asset prices could result in further tightening of profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating a network effect that may further reduce the price of digital assets until mining operations with higher operating costs become unprofitable and remove mining power from the respective digital asset network. The network effect of reduced profit margins resulting in greater sales of newly mined digital assets could result in a reduction in the price of digital assets that could adversely impact our business, financial condition, results of operations and prospects.
Digital assets such as Bitcoin are likely to be regulated as securities or investment securities.
Digital assets and cryptocurrencies have been the source of much regulatory consternation, resulting in differing definitional outcomes without a single unifying statement. Although we do not believe our mining activities require us to be registered to conduct such activities and accumulate digital assets, the SEC, the Commodity Futures Trading Commission (“CFTC”), U.S. stock exchanges, or other governmental or quasi-governmental agencies or organization may conclude that our 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, as amended (the “Investment Company Act”). Such regulation or the inability to meet the requirements to continue operations, would have a material adverse effect on our business and operations.
Currently in Australia, Bitcoin in and of itself is not a financial product nor are digital assets regarded as money or currency for the purpose of Australian corporate law. The effect of any future regulatory change on digital assets or an entity dealing in or holding digital assets is impossible to predict, but such change could be substantial and adverse to the returns we seek.
Regulatory changes or actions may alter the nature of an investment or restrict the use of digital assets in a manner that could adversely affect an investment in us
While Bitcoin is presently legal in Australia and the U.S., it may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more other countries.
In May 2021, China banned financial and payment institutions from providing cryptocurrency services and warned against using digital coins as payment, which causes a significant decrease in the value of most of the major cryptocurrencies.
Regulatory changes or interpretations, such as those enacted by China, could cause us (or any of our subsidiaries) to be required to register and comply with new regulations, resulting in potentially extraordinary, recurring or non-recurring expenses to those holding digital assets, or could decrease the valuations of cryptocurrencies.
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Treating Bitcoin and other cryptocurrencies as “securities” may cause us to be an “investment company” and affect our ability to continue as a going concern.
Neither the SEC nor its staff has provided clear guidance on whether cryptocurrencies, including Bitcoin, should be treated as “securities” for purposes of the Investment Company Act. Although the SEC staff has stated that it would regard Bitcoin as a non-security for purposes of the Securities Act, the staff has not taken a clear position on treatment of Bitcoin and other cryptocurrencies for purposes of the Investment Company Act. In the absence of clear guidance and on the basis of positions taken by the staff under the Securities Act, we have concluded that Bitcoin that we hold for our own account may be treated as non-securities for purposes of the Investment Company Act.
If the SEC were to take a different view from that expressed above, we may have to significantly limit our holding of Bitcoin for our own account in order to avoid being an “investment company,” as that term is defined in the Investment Company Act. Otherwise, we may be required to register as an “investment company” and operate as such under the requirements of the Investment Company Act. Registration as an investment company will significantly affect our ability to operate or continue to operate in the manner intended, as described in the prospectus. We will have to amend our capital structure to conform to the much more limited capital structure required of registered investment companies. We will have to change our Board of Directors in order to satisfy the Board independence requirements applicable to registered investment companies. Transactions with persons who may be considered to be first- or second-tier affiliates of us will be significantly restricted and could not be conducted without first obtaining an order of the SEC granting relief to engage in the transaction. We will be required to value our assets at all times in accordance with requirements applicable to registered investment companies. The obligations that will apply to us in operating as a registered investment company will significantly affect our ability to continue to operate as a company that is engaged in the digital infrastructure and cryptocurrency mining business.
Global climate change and related environmental regulations may have an adverse effect on our business operations and financial position.
The constant discussion surrounding climate change 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.
Extreme weather events may:
| ● | cause damage to one or more of our modular data centres (that houses 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 impacting our financial forecasts which were scheduled for a certain period of time. |
In addition, there has been recent commentary about cryptocurrency mining and its impact on the environment and it currently seems that Governments and related government bodies around the world are introducing or contemplating legislative and regulatory changes in response to initiatives by various climate change interest groups. Non-government actors, such as businesses, like Tesla, may also decide to halt acceptance of cryptocurrency as payment due to environmental concerns with cryptocurrency mining, which are likely to have an adverse effect on the values of cryptocurrencies.
Any legislative changes regarding climate change in general, and those relating to crypto mining in particular, 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.
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If 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 under the authority of the U.S. Bank Secrecy Act, we may be required to register and comply with such 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 an MSB under the regulations promulgated by the Financial Crimes Enforcement Network (“FinCEN”), a unit of the U.S. Treasury Department focused on money laundering under the authority of the U.S. Bank Secrecy Act, we may be required to comply with FinCEN regulations, including those that would mandate we implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records. In addition, to the extent that our activities cause us to be deemed a “money transmitter” (“MT”) or equivalent designation, under state law in any state in which we operate, we may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may include the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements. Currently, the New York State Department of Financial Services has finalized its “BitLicense” framework for businesses that conduct “virtual currency business activity,” the Conference of State Bank Supervisors has proposed a model form of state level “virtual currency” regulation and additional state regulators including those from California, Idaho, Virginia, Kansas, Texas, South Dakota and Washington have made public statements indicating that virtual currency businesses may be required to seek licenses as money transmitters. In July 2016, North Carolina updated the law to define “virtual currency” and the activities that trigger licensure in a business-friendly approach that encourages companies to use virtual currency and blockchain technology. Specifically, the North Carolina law does not require miners or software providers to obtain a license for multi-signature software, smart contract platforms, smart property, colored coins and non-hosted, non-custodial wallets. Starting January 1, 2016, New Hampshire requires anyone exchanges a digital currency for another currency must 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.. Mawson AU will continue to monitor for developments in such legislation, guidance or regulations.
Such additional federal or state regulatory obligations may cause us to incur extraordinary expenses, possibly adversely affecting our business, financial condition, results of operations and prospects. Furthermore, we and our service providers may not be capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. If we are deemed to be subject to and determine not to comply with such additional regulatory and registration requirements, we may act to dissolve and liquidate our business. Any such action may materially adversely impact our business, financial condition, results of operations and prospects.
Current interpretations require the regulation of Bitcoins under the Commodity Exchange Act (“CEA”) by the CFTC, we may be required to register and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.
Current and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which Bitcoin is treated for classification and clearing purposes. In particular, Bitcoin derivatives are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoins under the law.
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Bitcoins has been deemed a “commodity” by the CFTC and we may in the future be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator and to register as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting our business, financial condition, results of operations and prospects. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect our business, financial condition, results of operations and prospects.
If regulatory changes or interpretations require the regulation of Bitcoins under the Securities Act and Investment Company Act by the SEC, we may be required to register and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us and we may also decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors. This would likely have a material adverse effect on us.
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 Bitcoin is treated for classification and clearing purposes. The SEC’s July 25, 2017 Report expressed its view that digital assets may be securities depending on the facts and circumstances. As of the date of this report/information statement, we are not aware of any rules that have been proposed to regulate Bitcoin as securities. We cannot be certain as to how future regulatory developments will impact the treatment of Bitcoin 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 Bitcoin 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 Bitcoin 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.
Stockholders do not and will not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act or commodity pools under the CEA.
The Investment Company Act establishes a comprehensive federal regulatory framework for investment companies. Regulation of investment companies under the Investment Company Act is designed to, among other things: prevent insiders from managing the companies to their benefit and to the detriment of public investors; prevent the inequitable or discriminate issuance of investment company securities and prevent the use of unsound or misleading methods of computing asset values. We are not registered as an investment company under the Investment Company Act, and we believe that we are not permitted or required to register under such act. We will not hold or trade in commodity interests regulated by the CEA, as administered by the CFTC. Furthermore, we believe that we are not a commodity pool for purposes of the CEA, and we are not subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor in connection with the operation of our investment management segment. Consequently, stockholders will not have the regulatory protections provided to investors in CEA-regulated instruments or commodity pools.
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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 means of 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.
Mining equipment is likely to breakdown or fail.
It is likely that the miners and related mining equipment used to mine digital assets will breakdown and may not function at any given time. Any downtime of the miners and mining equipment will have a direct impact on us as they would not be performing their role, that is, solving hashes and receiving a block reward. This would therefore decrease our revenue.
The market for mining hardware is new and subject to numerous issues.
There are currently a number of issues facing the mining hardware market, including but not limited to:
| ● | Computing Chip Shortage – There are a limited number of computing chips being produced at any given time, and the demand for computing chips is at an all-time high. This affects not only Bitcoin Mining, but computing worldwide as the costs related to purchasing any computing hardware may increase and the delay in receipt of any such computing hardware may be extended. |
| ● | COVID 19 – In December 2019, the novel coronavirus (“COVID-19) surfaced globally. The effect of the pandemic is being seen firsthand in all industries. It has affected mining activities due to, among other things, factory closings in China and elsewhere, and increased tariffs on worldwide trade having the most profound effect. |
| ● | International Freight – Due to movement restrictions of both people and freight attributed to the COVID-19 pandemic, international freight is experiencing increased wait times and increased costs due to a large backlog of orders, and unprecedented demand for international freight. |
Electricity costs often determine the profitability of our digital asset infrastructure business.
Electricity (or “consumption”) costs are a major factor which will determine whether our digital mining activities are profitable and viable. Digital mining consumes a significant amount of electricity. The financial modelling of our digital asset infrastructure business is based on certain assumptions, one of those being that its electricity costs per kilowatt (in the US) remains within a certain price range because its miners are located in the U.S. Electricity prices are subject to change, and any changes in U.S. electricity prices, due to regulatory changes, commercial events, or otherwise, are beyond our control. Any such changes which increase the costs of electricity to a point that we are unwilling to pay or unable to maintain based on our financial modelling, would significantly impact the profitability and viability of our business.
Commentators in the cryptocurrency industry influencing the price of Bitcoin
The price movements of Bitcoin following the publishing of information by certain commentators such as Elon Musk indicates the sensitivities of Bitcoin price to such information. By way of illustration, in May 2021, Mr Musk tweeted that Tesla Inc. (to which Mr Musk is its CEO) would no longer accept Bitcoin as payment for its products due to its environmental concerns relating to Bitcoins heavy energy consumption. As a result of that tweet, the price of Bitcoin dropped by approximately 15%.
Depending on the appreciation or depreciation in the price of Bitcoin, following the publishing of information certain commentators, it could impact the profitability and viability of our business.
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Our ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our digital assets.
The history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change in order to secure and safeguard their digital assets. We frequently liquidate cryptocurrencies held 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 believe that we may become a more appealing target of security threats as the size of our Bitcoin holdings grow. To the extent that we are unable to identify and mitigate or stop new security threats, our digital assets may be subject to theft, loss, destruction or other attack, which could adversely affect our business, financial condition, results of operations and prospects.
Security threats could result in a loss of digital assets, or damage to our reputation and brand, each of which could adversely affect us.
Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the digital asset exchange markets. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our digital assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect our business, financial condition, results of operations and prospects. Furthermore, we believe that, as our assets grow, we may become a more appealing target for security threats such as hackers and malware.
We frequently liquidate cryptocurrencies held and keep a minimum number of cryptocurrencies in our possession so as to minimize our risks and safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless, this security system may not be impenetrable 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.
A loss of confidence in our security system, or a breach of our security system, may adversely affect our business.
We will take measures to protect our self and our digital assets from unauthorized access, damage or theft; however, it is possible that the security system may not prevent the improper access to, or damage or theft of its digital assets. A security breach could harm our reputation or result in the loss of some or all of our digital assets. A resulting perception that our measures do not adequately protect our digital assets could adversely affect our business, financial condition, results of operations and prospects.
Digital asset transactions are irrevocable and stolen or incorrectly transferred digital assets may be irretrievable. As a result, any incorrectly executed digital asset transactions could adversely affect our business.
Digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on the respective digital asset network. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of digital assets or a theft of digital assets generally will not be reversible, and we may not be capable of seeking compensation for any such transfer or theft. Although our transfers of digital assets will regularly be made to or from vendors, consultants, services providers, etc. it is possible that, through computer or human error, or through theft or criminal action, our digital assets could be transferred from us in incorrect amounts or to unauthorized third parties.
To the extent that we are unable to seek a corrective transaction with such third party or are incapable of identifying the third party which has received its digital assets through error or theft, we will be unable to revert or otherwise recover incorrectly transferred digital assets. To the extent that we are unable to seek redress for such error or theft, such loss could adversely affect our business, financial condition, results of operations and prospects.
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The limited rights of legal recourse against us, and our lack of insurance protection expose us to the risk of loss of our digital assets for which no person is liable.
The digital assets we hold are not insured. Therefore, a loss may be suffered with respect to our digital assets which is not covered by insurance and for which no person is liable in damages which could adversely affect our business, financial condition, results of operations and prospects.
Digital assets we hold are not subject to FDIC or SIPC protections.
We do not hold its 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.
We may not have adequate sources of recovery if our digital assets are lost, stolen or destroyed.
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 its 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 may sell digital assets to pay expenses on an as-needed basis, irrespective of then-current prices. Consequently, our digital assets may be sold at a time when the prices on the respective digital asset exchange market are low, which could adversely affect our business, financial condition, results of operations and prospects.
We rely on a small number of key people, the loss of which could have a significant impact on us.
The responsibility of the direction and operation of our business relies heavily on a small number of key people, including CEO James Manning and COO, Liam Wilson. If any of our key employees or service providers cease their involvement in our business or, in the unfortunate situations one or more of them are seriously injured or dies, this loss would have a significant and likely adverse impact on us.
Our results of operations may be negatively impacted by the coronavirus outbreak.
In December 2019, the novel coronavirus, or COVID-19, surfaced globally. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak. The impacts of the outbreak are unknown and rapidly evolving. Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. In Australia, federal, state and local governments have enacted restrictions on travel, gatherings, and workplaces, with exceptions made for essential workers and businesses. As of the date of this report/information statement, our digital asset infrastructure business has not been declared an essential business. As a result, we may be required to substantially reduce or cease operations in response to governmental action or decree as a result of COVID-19.
Failure to effectively manage our growth could place strains on its managerial, operational and financial resources and could adversely affect our business and operating results.
As our digital asset infrastructure operations grow, the administrative demands upon us will grow, and our success will depend upon our ability to meet those demands.
We are organized as a holding company, with numerous subsidiaries. Both the parent company and each of our subsidiaries require certain financial, managerial and other resources, which could create challenges to our ability to successfully manage our subsidiaries and operations and impact our ability to assure compliance with our policies, practices and procedures. These demands include, but are not limited to, increased executive, accounting, management, legal services, staff support and general office services. We may need to hire additional qualified personnel to meet these demands, the cost and quality of which is dependent in part upon market factors outside of our control. Further, we will need to effectively manage the training and growth of our staff to maintain an efficient and effective workforce, and our failure to do so could adversely affect our business and operating results.
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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 and financial contingencies. |
If we are unable to manage these risks effectively as part of any acquisition, our business could be adversely affected.
We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002.
We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). Section 404 requires that our management maintain a system of internal control over financial reporting that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It also requires that our management annually evaluate whether our internal control over financial reporting is effective at providing reasonable assurance and to disclose its assessment to investors. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified a material weakness in internal control over financial reporting. As a result of the material weakness in internal control over financial reporting described above, our management has concluded that, as June 30, 2021, the Company’s internal control over financial reporting was not effective based on the criteria in Internal Control – Integrated Framework issued by COSO.
Although we acquired and became the parent company of Mawson AU in the Mawson AU Transaction, with limited exceptions, the management team of Mawson AU became our management team and became responsible for our internal control over financial reporting upon completion of the Mawson AU Transaction. Mawson AU had limited accounting personnel and other resources with which to address our internal controls and procedures and was not previously subject to the same requirements. Our new management may not be able to effectively and timely implement controls and procedures that adequately respond to the regulatory compliance and reporting requirements that are applicable to us.
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If our new management 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.
A large number of shares are issuable upon conversion or exercise of our outstanding Notes, Warrants or other convertible securities. The conversion or exercise of these securities could result in the substantial dilution of your investment in terms of your percentage ownership in our company. The sale of a large amount of Common Stock received upon conversion or exercise of these securities on the public market, or the perception that such sales could occur, could substantially depress the prevailing market prices for our shares.
As of July 14, 2021 there were outstanding presently convertible or exercisable (i) Notes entitling the holders thereof to convert into 63,626,903 shares of our common stock, (ii) warrants entitling the holders thereof to purchase 16,960,982 shares of Common Stock at an exercise price of $0.001 per share, (iii) 178 Shares of our Series A Preferred Stock, which are convertible into 178,000 share of Common Stock, and (iv) an obligation to issue 40,000,000 shares in Mawson in the form of performance-based restricted share units in accordance with the BIA. In the event of the exercise or conversion of these securities, you could suffer substantial dilution of your investment in terms of your percentage ownership in our company. In addition, the holders of such securities may sell shares in tandem with their exercise of those securities to finance that exercise, which could further depress the market price of the Common Stock.
The concentration of the capital stock ownership with our insiders will likely limit the ability of our stockholders to influence corporate matters.
As of July 14, 2021, our executive officers, directors, five percent or greater stockholders, and their respective affiliated entities in the aggregate beneficially own approximately 17% of our Common Stock. As a result of such ownership, despite the fact that each one of them, to our knowledge, will continue to operate independently from the other with respect to their respective shareholding of the Company’s shares, these stockholders, if acting together, will have control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a corporate transaction that other stockholders may view as beneficial, including preventing changes in control or in management.
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The public trading market for our Common Stock is volatile and may result in higher spreads in stock prices, which may limit the ability of our investors to sell their shares at a profit, if at all.
Our Common Stock trades in the over-the-counter market and is quoted on the OTCQB. The over-the-counter market for securities has historically experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations may adversely affect the market price of our Common Stock and result in substantial losses to its investors. In addition, the spreads on stock traded through the over-the-counter market are generally unregulated and higher than on stock exchanges, which mean that the difference between the price at which shares could be purchased by investors in the over-the-counter market compared to the price at which they could be subsequently sold would be greater than on these exchanges. Significant spreads between the bid and asked prices of the stock could continue during any period in which a sufficient volume of trading is unavailable or if the stock is quoted by an insignificant number of market makers. Historically our trading volume has been insufficient to significantly reduce this spread and has had a limited number of market makers sufficient to affect this spread. These higher spreads could adversely affect investors who purchase the shares at the higher price at which the shares are sold, but subsequently sell the shares at the lower bid prices quoted by the brokers. Unless the bid price for the stock exceeds the price paid for the shares by the investor, plus brokerage commissions or charges, the investor could lose money on the sale. For higher spreads such as those on over-the-counter stocks, this is likely a much greater percentage of the price of the stock than for exchange listed stocks. There is no assurance that at the time an investor in our Common Stock wishes to sell the shares, the bid price will have sufficiently increased to create a profit on the sale.
An active market for our Common Stock may not develop.
Although our Common Stock trades on the OTCQB, we do not have an active trading market and an active trading market may not develop. If an active trading market does not develop, or is not sustained, it may be difficult for investors to sell their shares without depressing the market price for the shares or at all. Further, an inactive market may also impair our ability to raise capital by selling shares of our Common Stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of Common Stock as consideration.
Our Common Stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
Our Common Stock has historically been sporadically traded on the OTCQB, meaning that the number of persons interested in purchasing our shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained.
Risks Relating to the LO2A Business
With respect to risks relating to our LO2A Business, please see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, which is incorporated by reference into this information statement. See “Where You Can Find More Information.” However, since the is completed, many of these risks will be (i) primarily related to the likelihood of our ability to successfully enter into any LO2A Transaction and, if we do, the terms thereof, which will mostly affect the holders of CVRs, and (ii) immaterial to the operation of the post-closing combined company.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| 1. | On June 5, 2021, the Company issued 8,250,000 warrants to W Capital Advisors Pty Ltd to satisfy an outstanding obligation of Mawson AU, under the terms of the Cosmos Transaction Bid Implementation Agreement. These warrants were issued with a $0.0001 exercise price. |
| 2. | On June 2, 2021, the Company issued 3,475,970 shares to a combination of Mawson AU shareholders, and service providers to Mawson AU, who were eligible for shares on December 31, 2021. The shares were issued under the exemption provided by Regulation S. We did not receive any proceeds from these issuances |
| 3. | On June 15, 2021, the final 48,983,148 shares under our Bid Implementation Agreement with Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd) were issued to Cosmos Capital Limited (now known as Mawson Infrastructure Group Ptd Ltd) shareholders. The shares were issued under the exemption provided by Regulation S. We did not receive any proceeds from this issuance. |
| 3. | On August 2, 2021, we issued 55,555 of our common stock to Kyle Hoffman (calculated as USD50,000 worth of common stock at a stock price of USD0.90) pursuant to our Membership Interest Purchase Agreement with Mr. Hoffman as partial consideration for our purchase of Mr. Hoffman’s equity interest of 25% in Luna Squares LLC. The shares were issued under the exemption provided by Rule 4(a)(2) of the Securities Act of 1933, as amended. We did not receive any proceeds from the issuance of these shares. |
| 4. | On August 2, 2021, we issued 111,111 of our common stock to TRS Ventures LLC (calculated as USD 100,000 worth of common stock at a stock price of USD 0.90) pursuant to our Membership Interest Purchase Agreement with TRS Ventures LLC as partial consideration for our purchase of TRS Ventures LLC’s equity interest of 15% in Luna Squares LLC The shares were issued under the exemption provided by Rule 4(a)(2) of the Securities Act of 1933, as amended. We did not receive any proceeds from the issuance of these shares. |
| 5. | On August 10, 2021, we issued 46,139,019 shares of our common stock at a purchase price of $0.80 per shares for aggregate gross proceeds of $36,911,215 in a private placement to certain accredited investors pursuant to Securities Purchase Agreements dated August 6, 2021. The shares were issued under the exemption provided by Rule 506 of Regulation D of the Securities Act of 1933, as amended and the proceeds will be used to expand Mawson’s installed petahash (PH), via the acquisition of additional ASIC bitcoin mining hardware, CAPEX for our facilities and additional power infrastructure. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
| 10.1* | Form of Securities Purchase Agreement dated August 6, 2021 | |
| 31.1* | Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32** | Certifications of Principal Executive Officer and Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020, and (iv) Notes to Consolidated Financial Statements | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Mawson Infrastructure Group Inc. | ||
| Date: August 10, 2021 | By: | /s / James Manning |
| James Manning, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 10, 2021 | By: | /s/ Or Eisenberg |
| Or Eisenberg, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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