The following discussion of our financial condition and results of operations for the years ended December 31, 2022 and 2021 should be read in conjunction with our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Annual Report. All amounts are in U.S. dollars.
Pursuant to that certain Certificate of Amendment to the Certificate of
Incorporation of the Company dated February 6, 2023 Mawson executed at a ratio
of 1-6 reverse stock split of its outstanding common stock and reduced its
authorized common stock to 90,000,000 shares, as set forth in the Company’s
Current Report on Form 8-K filed February 9, 2023.
Overview
Mawson is a 'Digital Asset Infrastructure' business, which owns and operates
(through its subsidiaries) modular data centers ("MDCs") in the United States.
We are also developing technology to enable us to own and better operate MDCs.
Our primary business is the ownership and operation of the digital
infrastructure associated with the operation of blockchain applications.
Application-Specific Integrated Circuit ("ASIC") computers known as Miners
enable the 'mining' of digital assets such as Bitcoin. We currently operate in
one site located in Pennsylvania USA. The Miners we operate are predominately
focused on the process of digital mining, specifically for Bitcoin.
In exchange for powering down our systems and curtailing the power we get from
the grid in response to instances of high electricity demand, we receive net
energy benefits. We also have a contract with our energy provider where we can
trade our energy to achieve net energy benefits. We have recognized a derivative
asset on our balance sheet for the contract we have with our energy provider,
which has been measured at fair value with any changes in fair value recognized
in our statement of operations.
We offer 'hosting' or 'co-location' facilities to other businesses in the
digital asset infrastructure industry to have their Miners located within our
MDCs. These businesses pay us a fee for the use of our facilities and related
services (often based on power consumption).
We also sell new and used crypto currency mining, and MDC equipment on a
periodic basis, subject to prevailing market conditions and our surplus
production capacity.
27
As of December 31, 2022
Existing Cumulative
Operations Order and Purchase Fleet Fully
Online Agreements Deployed
Total miners online 8,792 - 8,792
Total miners on order - -
Total miners in storage 15,010 - 15,010
Total miners 23,802 - 23,802
We continue to conduct research and development in relation to our MDCs which we
are actively testing in several configurations and locations to determine the
best configuration for both ASIC and alternate computing uses.
Prior LO2A Business
On March 9, 2021, the Company acquired the shares of Mawson AU in a stock for
stock exchange (the "Cosmos Transaction"). Prior to the Cosmos Transaction our
main business undertaking was as a clinical-stage biopharmaceutical company
focused on the treatment of ophthalmic disorders, including dry eye syndrome
(our "LO2A business"). However, as part of the Cosmos Transaction, substantially
all of the economic benefits of any successful monetization of our LO2A
business, if any, will benefit only the holders of the CVRs. Accordingly, we
assessed that the fair value of this asset at the acquisition date was $0. The
asset was therefore assessed as impaired and the prior carrying amount of $23.96
million has been fully expensed in the consolidated statements of operations for
the year ended December 31, 2021.
Recent Developments.
On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement
with Celsius Mining LLC ("Celsius Mining"), pursuant to which Luna Squares LLC
provides a hosting facility, electrical power and internet access to Celsius
Mining for the purposes of installing, maintaining and operating Celsius
Mining's ASIC machines (cryptocurrency mining equipment) for a monthly services
fee based on power consumption, plus an infrastructure fee, plus a market
margin. In addition, Celsius Mining loaned Luna Squares LLC a principal amount
of US$20,000,000 ("Principal"), for the purpose of funding the infrastructure
required to meet the obligations of the Co-Location Agreement, for which Luna
Squares LLC issued a Secured Promissory Note (the "Promissory Note") in the
principal amount equal to the Principal. The Promissory Note accrues interest
daily at a rate of 12% per annum. Luna Squares LLC is required to amortize the
loan at a rate of 15% per quarter, with principal repayments starting in the
third quarter following the closing. The Promissory Note has a maturity date of
August 23, 2023. . The Promissory Note includes customary events of default and
remedies. In connection with the transaction, Mawson issued to Celsius Mining,
warrants to purchase up to 3,850,000 shares of common stock, par value $0.001
per share, of Mawson at an exercise price of US$6.50 per share. The warrant may
be exercised at any time after issuance and until the later to occur of the
eighteen (18) month anniversary of issuance and the date on which the Promissory
Note has been completely repaid. The outstanding loan balance as at December 31,
2022 is $14.0 million.
On March 16, 2022, Luna Squares LLC entered into a lease with respect to a
property in the City of Sharon, Mercer County, Pennsylvania with Vertua
Property, Inc, a subsidiary entity in which Vertua Ltd has a 100% ownership
interest. James Manning, CEO, a director and a significant stockholder of the
Company is also a director of Vertua Ltd and has a material interest in the
Sharon lease as a large shareholder of Vertua Ltd. The lease contains market
standard legal terms, and has a 5 year term, and Luna Squares LLC has 2 options
to extend the term for 5 years each. The Audit Committee of the Company has
compared the rent and terms to other arms' length leases the Company has entered
into and formed the view the rent is in line with the market for similar
properties. Rent is subject to annual increases equal to the CPI for the
Northeast Region, or 4%, whichever is higher. The base rental amount in the
first year is $0.24 million. Depending on power energization and usage, variable
additional rent may be payable, with charges ranging from $500 to $10,000 per
month, depending on power energized and whether it is available. Upon the
recommendation from the Audit Committee, the directors of the Company, other
than James Manning, were made aware of the material facts as to Mr. Manning's
interest in the lease and authorized the Company in good faith to enter the
lease after determining the lease to be fair to the Company.
On May 12, 2022, Luna Squares Texas LLC (our wholly owned subsidiary) entered
into an Option Agreement and Gross Profit Agreement with JAI TX, LLC and then
signed or took and assignment of 4 leases for properties in Texas (all in close
proximity) with the intent to develop MDC facilities for mining Bitcoin. Luna
Squares Texas LLC intended to execute relevant power agreements, with the
expectation that the four locations could provide a combined 120MW of power.
Rent under the leases ranges from $1,500 to $5,227.20 per acre per annum. The
lessors include a substantial listed holder of land in Texas, and family groups.
Under the Option Agreement, JAI TX, LLC has the option to receive an issue of up
to 20% of the membership interests in Luna Squares Texas LLC. The purchase
prices will be a share of capital costs equal to the membership interest
acquired by JAI TX, LLC, and an amount of Luna Squares Texas LLC's debt
financing in proportion to JAI TX, LLC's shareholding. In return for certain
services provided by JAI TX, LLC, JAI TX, LLC will be entitled to a share of all
Electric Reliability Council of Texas program payments paid to Luna Squares
Texas LLC ("ERCOT Payment"), as well as a share of the Bitcoin profit from the
Texas locations less certain costs, including depreciation. Capital costs for
Luna Squares Texas LLC are expected to exceed $4.19m. See further details
regarding the sale of Luna Squares Texas LLC below.
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On May 27, 2022, Mawson entered into an ATM Agreement with H.C. Wainwright &
Co., LLC ("Wainwright"), to sell shares of our common stock, par value $0.001
per share, (the "Shares") having an aggregate sales price of up to $100 million,
from time to time, through an "at the market offering" program under which
Wainwright will act as sales agent. We will pay Wainwright a commission rate
equal to 3.0% of the aggregate gross proceeds from each sale of Shares and have
agreed to provide Wainwright with customary indemnification and contribution
rights. We will also reimburse Wainwright for certain specified expenses in
connection with entering into the ATM Agreement. The ATM Agreement contains
customary representations and warranties and conditions to the sale of the
Shares pursuant thereto.
During June 2022 Mawson AU Limited entered into a share subscription and
equipment sale deed with Tasmania Data Infrastructure Pty Ltd ("TDI"). TDI has a
proposed 100% renewable energy Bitcoin Mining facility at the Que River Mine
Site in Tasmania, Australia. Mawson AU Limited has agreed to exchange
approximately 2,144 ASIC Bitcoin Miners for 107,042,254 fully paid issued shares
in TDI.
On September 8, 2022, we entered into a (i) Purchase and Sale Agreement with
CleanSpark (as amended, "Purchase Agreement"), and (ii) an Equipment Purchase
and Sale Agreement. Pursuant to the Purchase Agreement, CleanSpark assumed from
us a lease for approximately 16.35 acres of real property located in
Sandersville, Washington County, Georgia, and all personal property situated on
the ("Georgia Property"). This transaction closed on October 8, 2022, CleanSpark
paid the following consideration to the Company pursuant to the Purchase
Agreement: (i) $13.50 million in cash; (ii) 1,590,175 shares of common stock,
par value $0.001 per share of CleanSpark (valued at $4.8 million October 7,
2022), and (iii) $6.5 million in Seller financing in the form of promissory
notes. The Promissory Note was paid down in full on December 16, 2022. Pursuant
to the Equipment Purchase Agreement, CleanSpark purchased from the Company,
application-specific integrated circuit miners, and this transaction closed on
October 8, 2022 for $9.48 million in cash (which was later reduced to $9.02
million upon reduction in the number of miners). Additional consideration of
1,100,890 shares of CleanSpark Common Stock was paid to the Company pursuant to
the Purchase and Sale Agreement after it successfully emptied all required
modular data centers on the Georgia Property and made them available for use by
CleanSpark. We achieved this on December 30, 2022 and received the shares on
January 13, 2023. Further potential consideration of $2 million in cash if
CleanSpark is able to utilize at least an additional 150 MW of power on the
property by the six month anniversary of the Closing Date.
On March 8, 2023, the Company entered into a Member Interest Purchase Agreement
("MIPA") as well as an Equipment Purchase and Sale Agreement ("EPSA") with BMF
Holding GP PTE. LTD. ("BMF"). Pursuant to the MIPA, the Company has agreed to
sell all its member interests in Luna Squares Texas LLC, a Delaware limited
liability company, which is a wholly-owned subsidiary of Company, and holds 4
leases in Texas, and various related contracts. Under the EPSA the Company will
sell 59 transformers. Total consideration for this sale was $8.5 million and 400
Ethereum. As part of this transaction Luna Squares Texas LLC acquired all the
memberships' interests in an entity known as JAI TX LLC, which is party to some
relevant contracts related to the Texas leases.
Our legacy business was as a clinical-stage biopharmaceutical company focused on
the treatment of ophthalmic disorders, including dry eye syndrome. All of the
economic benefits of any successful monetization of our LO2A business, if any,
would benefit only the holders of contingent value rights ("CVR") and any
contingent right holders. Accordingly we assessed that the fair value of this
asset at the acquisition date was $nil. The asset was therefore assessed as
impaired and the prior carrying amount of $23.96 million has been fully expensed
in the consolidated statements of operations for the year ended December 31,
2021.On March 8, 2021, the Company entered into the Contingent Value Rights
Agreement ("CVR Agreement"), pursuant to which certain holders of the CVRs had
certain rights to any value created in respect of the LO2A business previously
carried on by the Company. Despite the holders' representative's good faith
endeavors, the holders' representative was unable to procure a suitable
transaction. On March 9, 2023, the CVR Agreement was terminated, and the rights
of the CVR holders under that agreement expired at the same time. On February 7,
2023, the Company entered into a share purchase agreement with N.Danenberg
Holding (2000) Ltd to sell the Company's shares or interests in Wize NC Inc,
Occuwize Ltd and Wize Pharma Ltd ("Wize Entities") effective December 31, 2022
in consideration for $10,000. This transaction closed on March 9, 2023. As a
result of the sale transaction the Wize Entities were deconsolidated from the
group effective December 31, 2022.
29
COVID-19.
The COVID-19 global pandemic has been unpredictable and unprecedented. The Company relies on equipment supplied by third parties which, like many manufacturing businesses globally, are at risk of supply chain issues. While the effects of the COVID-19 pandemic have continued to recede, and we currently do not expect any material impact on our long-term development, operations, or liquidity, we continue to monitor the situation. Regulation of Digital Assets
Digital assets and cryptocurrencies are constantly the subject of proposed
regulatory oversight. In the USA most proposals relate to the issue of
cryptocurrencies, and consumer protections. Some laws have been enacted in North
America to limit Bitcoin mining activities in certain regions where the Company
is not active, and no such laws are proposed in the areas where the Company is
active, or plans to be active. China [reportedly] banned Bitcoin mining within
its borders, which forced many local miners to commence mining activities in
neighboring Kazakhstan, taking advantage of that country's subsidized power. Due
to the influx of mining activity, Kazakhstan was forced to import power from
neighboring countries at great cost, however rather than ban mining activities
the government has sought to minimize the negative effects of mining by issuing
mining licenses and conditioning mining activity. We do not believe our mining
activities require licensing or registration or any kind, including to conduct
mining activities and selling of digital assets produced. Mawson does not
accumulate or hold large amounts of digital assets for prolonged periods. It is
likely that regulation in the digital asset industry will increase.
In the past it has also been noted that the SEC, the Commodity Futures Trading
Commission ("CFTC"), Nasdaq or other governmental or quasi-governmental agency
or organization (including similar authorities in other jurisdictions such as
Australia) may conclude that our digital asset mining activities involve the
offer or sale of "securities", or ownership of "investment securities", and we
may face regulation under the Securities Act of 1933, as amended (the
"Securities Act") or the Investment Company Act of 1940. Such regulation or the
inability to meet the requirements to continue operations, would have a material
adverse effect on business, financial condition, results of operations and
prospects of our business. The effect of any future regulatory change, including
tax treatment, on digital assets or an entity dealing in or holding digital
assets is impossible to predict, but such change could be substantial and
adverse to our financial returns.
Environment, Sustainability, Governance
Mawson has a strategy to source renewable or sustainable sources of energy, including carbon-neutral or low carbon emissions sources for the majority of its operations. This is a key criteria when analyzing a new site for acquisition, or selling an existing site. Mawson believes it can make a positive contribution towards lowering carbon emissions by supporting low-emissions power sources.
The Company can provide, and has provided, electricity grid stability by
curtailing its power usage during times of high power prices through its Energy
Markets Program, for example through its membership in the PJM Market, and
various demand response programs where they are available.
The Company recognizes the challenges posed by climate change, including
regulatory, increased costs, and adverse weather events, and seeks to mitigate
these risks by for example ensuring that it is informed of regulatory changes,
keeping involved with industry groups and thought leaders, and ensuring that
physical mitigation steps are undertaken, such as during the process if
selecting sites in lower risk climates and regions (i.e. cooler climates, less
prone to flooding, cyclones or wildfires), and then ensuring that the
construction of the sites takes into account potential climate or
weather-related events.
30
Results of Operations
Revenue
Cryptocurrency mining revenues from production for the years ended December 31, 2022 and 2021 were $43.11 million and $38.45 million respectively. This represented an increase of $4.65 million or 12% over the year. The increase in mining revenue for the year was primarily attributable to the increase in the Bitcoin produced, in total 1,342.59 were produced in 2022 compared with 808.88 in the 2021 period, or an increase of 66% of Bitcoin produced over the respective period. This increase is offset by an decrease in the in average price of Bitcoin, in the 2022 period the average price was $28,205 whereas in the 2021 period the average price was $47,390, or a 40% decrease in the average Bitcoin price over the respective period. Hosting co-location revenue for the year ended December 31, 2022 and 2021 were $13.34 million and $0.85 million respectively. This increase is due to an increase in the number of co-location customers that we hosted during the year ended December 31, 2022.
Sales of crypto currency mining equipment for the year ended December 31, 2022
and 2021 were $14.24 million and $2.16 million, respectively.
Net energy benefits (which comprises curtailment income and sale of excess energy to the grid) for the years ended December 31, 2022 and 2021, were $13.70 million and $0 respectively. This increase is due to there being no income from energy contracts in the 2021 period because we did not offer this service at that time. Operating costs and expenses
Our operating costs and expenses include cost of revenues; selling, general and
administrative expenses; share based payments; and depreciation and
amortization.
Cost of revenues
Our cost of revenue consists primarily of: direct power costs related to
cryptocurrency mining and hosting, and cost of mining equipment sold.
Cost of revenues for the year ended December 31, 2022 and 2021 were $47.72 million and $9.90 million, respectively. The increase in cost of revenue was primarily attributable to an increase in power costs related to energy costs to operate the mining equipment within our owned and hosting facilities.
Selling, general and administrative
Our selling, general and administrative expenses consist primarily of
professional and management fees relating to: accounting, payroll, audit, and
legal; equipment repairs; marketing; consultant fees; lease amortization and
general office expenses.
Selling, general and administrative expenses for the years ended December 31,
2022 and 2021 were $25.85 million and $16.06 million respectively. The increase
in selling, general and administrative expenses were attributable to a number of
factors; payroll costs increased by $6.24 million due to an increase in employee
numbers; equipment repairs increased by $2.11 million; lease amortization
increased by $1.18 million due to new leases entered into during the year;
marketing expense increased by $1.0 million and there was an increase in
property business insurance by $0.8 million. These increases were partially
offset by: a decrease in freight expenses by $1.37 million; a decrease in
research and development expenses by $1.08 million; and a decrease in legal
expenses by $0.8 million. The remaining increase in expenses relates to the
increase in the scale of business operations during the year.
31
Share based payments
Share based payment expenses for the year ended December 31, 2022 and 2021 were $3.01 million and $22.49 million respectively. In the year to December 31, 2022, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $1.67 million and $1.26 million in relation to long-term incentives for the Company's leadership team. Whereas in December 31, 2021 share based payments were largely attributable to HC Wainwright Warrants $6.18 million, W Capital Warrants of $5.78 million, $10.00 million for amounts related to the obligation of Mawson to issue RSU's pursuant to the terms of the Bid Implementation Agreement for the Cosmos Transaction and $0.33 million costs recognized in relation long-term incentives for the leadership team.
Depreciation and amortization
Depreciation consists primarily of depreciation of cryptocurrency mining
hardware and modular data center (MDC) equipment.
Depreciation and amortization for the year ended December 31, 2022, and 2021 were $63.20 million and $14.11 million, respectively. The increase is primarily attributable to the new miners and MDCs which have been procured and have come into use by the Company in the year ended December 31, 2022 being greater than in the year ended December 31, 2021, and the application of a revised estimate of the of the useful life of miners with effect from December 1, 2022 to better reflect the pattern of consumption the change being effected by changing the method of depreciation from reducing balance to the straight line method from that date.
Change in fair value of derivative asset
During the year ended December 31, 2022, there was a change in the fair value of
the derivative asset by $11.30 million in relation to our power pricing
arrangements.
Non-operating expense Non-operating expenses consist primarily of interest expense, losses on foreign currency transactions, impairment of financial assets, loss on write off of property and equipment, fair value loss on investments, and share of losses of equity accounted investments. During the year ended December 31, 2022, the realized and unrealized loss on foreign currency transactions was $6.67 million, and for the year ended December 31, 2021, there was a loss of $0.93 million. Interest expense for the year ended December 31, 2022 and 2021 were $6.06 million and $1.64 million, respectively. This was an increase of $4.42 million which was attributable to the interest costs charged on the new loans taken out with Celsius Mining LLC, W Capital Advisors Pty Ltd and the Secured Convertible Promissory Notes issued in July of 2022.
There was a loss from the write off of property and equipment for the years
ended December 31, 2022 and 2021 of $1.56 million and $0.47 million
respectively.
There was an impairment of financial assets during the year to December 31, 2022 of $3.38 million, $2.06 million related to the equity accounted investment TDI, $1.13 million is related to the equity accounted investment Cosmos Asset Management Pty Ltd and $0.19 million in relation to the deconsolidation of
the
Wize Entities.
There was fair value loss on investments of $1.69 million during the year to
December 31, 2022, this was in relation to the decrease in the share price of
the investment held in CleanSpark, a NASDAQ listed company.
There were losses recognized for the share of losses in relation to equity
accounted investments of $1.25 million and $0.37 million for the year ended
December 31, 2022 and 2021 respectively. The current year loss related to the
equity accounted investment in TDI whereas the prior year loss related to the
equity accounted investment Distributed Storage Solutions Pty Ltd ("DSS").
32
Non-operating income
Non-operating expenses consist primarily of profit on the sale of our Georgia
site and other income.
During the year ended December 31, 2022, there was profit of site of $8.28
million. This sale was in relation to the sale of our Georgia bitcoin mining
site which was sold to CleanSpark on October 7, 2022.
During the year ended December 31, 2022, there was other income recognized which mainly consisted of the license of our intellectual property of $1.46 million and $0.53 million for curtailment income. The license of our intellectual property relates to consulting and advisory services to enable TDI to build a facility in Tasmania, Australia.
Net loss available to Common Shareholders
As a result of the foregoing, the Company recognized a net loss for the years
ended December 31, 2022 and 2021 of $52.76 million and $44.96 million,
respectively.
Non-GAAP Financial Measures
The Company utilizes a number of different financial measures, both GAAP and
non-GAAP, in analyzing and assessing its overall business performance, for
making operating decisions and for forecasting and planning future periods. The
Company considers the use of non-GAAP financial measures helpful in assessing
its current financial performance, ongoing operations and prospects for the
future. While the Company uses non-GAAP financial measures as a tool to enhance
its understanding of certain aspects of its financial performance, the Company
does not consider these measures to be a substitute for, or superior to, the
information provided by GAAP financial measures. Consistent with this approach,
the Company believes that disclosing non-GAAP financial measures to the readers
of its financial information provides such readers with useful supplemental data
that, while not a substitute for GAAP financial measures, allows for greater
transparency in the review of its financial and operational performance.
Investors are cautioned that there are inherent limitations associated with the
use of non-GAAP financial measures as an analytical tool. In particular,
non-GAAP financial measures are not based on a comprehensive set of accounting
rules or principles and many of the adjustments to the GAAP financial measures
reflect the exclusion of items that are recurring and will be reflected in the
company's financial results for the foreseeable future. In addition, other
companies, including other companies in the Company's industry, may calculate
non-GAAP financial measures differently than the Company does, limiting their
usefulness as a comparative tool.
33
The Company is providing supplemental financial measures for (i) non-GAAP
adjusted earnings before interest, taxes, depreciation and amortization, or
("adjusted EBITDA") that excludes the impact of interest, taxes, depreciation,
amortization, share-based compensation expense, LO2A write-back, unrealized
gains/losses on share of associates, and certain non-recurring expenses. We
believe that adjusted EBITDA is useful to investors in comparing our performance
across reporting periods on a consistent basis.
For the Years Ended
December 31,
2022 2021
Reconciliation of non-GAAP adjusted EBITDA:
Net loss:
(54,035,559 ) (45,461,664 )
Share of net loss of associates accounted for using the
equity method
1,254,025 368,426
Depreciation and amortization 63,200,178 14,113,730
Share based payments 3,012,480 22,491,100
Unrealized and realized losses 6,673,124 932,866
Other non-operating revenue (2,401,555 ) (902,629 )
Other non-operating expenses 7,624,435 2,114,699
Tax - 277,717
LO2A write-back - 23,963,050
Impairment of financial assets 3,375,230 -
Fair value loss on investments 1,694,388 -
EBITDA (non-GAAP) $ 30,396,746 $ 17,897,295
For the Quarters Ended
December 31,
2022 2021
Revenue $ 16,852,208 $ 19,647,771
Cost of revenues (excluding depreciation) (6,759,938 ) (3,686,578 )
Gross Profit 10,092,270 15,961,193
Reconciliation of non-GAAP adjusted EBITDA:
Net Profit/(loss):
(18,808,069 ) 1,804,928
Share of net loss of associates accounted for using the
equity method
1,254,025 90,630 Depreciation and amortization 17,138,505 6,186,396 Share based payments 887,806 711,203 Unrealized and realized losses 310,530 204,309 Other non-operating revenue (469,603 ) (322,924 ) Other non-operating expenses 3,263,618 1,040,202 Tax - 276,216 Fair value loss on investments 1,694,388 - Impairment of financial assets 2,240,682 - EBITDA (non-GAAP) $ 7,511,882 $ 9,990,960
Liquidity and Capital Resources
General
For the year ended December 31, 2022, we financed our operations primarily
through:
1. Net cash provided by operating activities of $14.26 million;
2. On October 15, 2021, an expansion of the Equipment Finance and Security
Agreement was entered into with Foundry Digital LLC ("Foundry") to
purchase an additional 2000 Whatsminers M30's delivered in October
2021. In total $13,185,062 was borrowed from Foundry. The
amounts due
were repaid in full on October 17 2022;
3. On December 9, 2021, MIG No.1 Pty Ltd entered into a Secured Loan
Facility Agreement with Marshall Investments MIG Pty Ltd
(“Marshall”)
with a total loan facility of AUD$20 million (USD$12.98
million).
Principal repayments began in November 2022. The outstanding
balance as
at December 31, 2022, is USD$10.21 million.
34
4. On February 23, 2022, Luna Squares LLC entered into the Co-Location
Agreement with Celsius Mining LLC, in connection with this
agreement,
Celsius Mining loaned Luna Squares LLC a principal amount of
US$20,000,000, for the purpose of funding the infrastructure required
to meet part of the obligations of the Co-Location Agreement. The
Secured Promissory Note evidencing this loan accrues interest daily at
rate of 12% per annum. Luna Squares LLC is required to amortize the
loan at a rate of 15% per quarter, with principal repayments starting
in the third quarter following the closing. This Secured
Promissory
Note has a maturity date of August 23, 2023. The outstanding
principal
balance as at December 31, 2022, is $14.0 million.
5. On July 8, 2022, the Company issued secured convertible promissory
notes to investors in the aggregate principal amount of
$3,600,000 in
exchange for an aggregate of $3,600,000. The Secured
Convertible
Promissory Notes are convertible at the option of the holder at a
price of $0.85 per share of our common stock. The Secured
Convertible
Promissory Notes bear interest of twenty percent (20%) per annum.
One-half of the interest that accrues each month on the Secured
Convertible Promissory Notes must be paid monthly. All unpaid
principal, together with any then unpaid and accrued interest and
other amounts payable under the Secured Convertible Promissory Notes,
is due and payable if not converted pursuant to the terms and
conditions of the Secured Convertible Promissory Note on the earlier
of (i) one year after its issuance, or (ii) following an event of
default. On September 29, 2022, the Company entered into a letter
variation relating to some of the Secured Convertible
Promissory
Notes, with an aggregate principal amount of $3.1 million,
which gave
those holders the option to elect for pre-payment (including accrued
interest to maturity) subject to certain conditions. Payments of the
interest may be made partially in common stock of the Company, at the
Company's election. All of the investors included in this letter
variation elected for the pre-payment option and therefore
there were
$3.1 million principal repayments made during November 2022.
6. On September 2, 2022, Mawson Infrastructure Group Pty Ltd entered into
a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with
a total loan facility of AUD$3 million (USD$1.9 million). This was
amended on September 29, 2022, and the loan facility was
increased to
AUD$8 million (USD$5.2 million). As at December 31, 2022,
AUD$4.9
million (USD$3.37 million) has been drawn down from this
facility. The
Secured Loan Facility accrues interest daily at a rate of 12% per
annum and is paid monthly. Principal repayments due March 2023.
During the year ended December 31, 2022 we repaid $28.0 million of principal
payments against the historical facilities provided by Foundry, Celsius,
Marshall, W Capital and the convertible notes.
We believe our working capital requirements will continue to be funded through a combination of the cash we expect to generate from future operations, our existing funds, external debt facilities available to us and further issuances of shares. These are expected to be adequate to fund our operations over the next twelve months. In addition, the Company has access to equity financing through the ATM offering facility entered in May 2022. For our business to grow it is expected we will continue investing in mining equipment, but we are likely to require additional capital in either the short-term or long-term.
Working Capital and Cash Flows
As of December 31, 2022, and December 31, 2021, we had cash and cash equivalent
balance of $0.95 million and $5.47 million in cash and cash
equivalents, respectively.
As of December 31, 2022, and December 31, 2021, the trade receivables balance
was $10.46 million and $5.61 million respectively.
As of December 31, 2022, we had $23.61 million of outstanding short-term
borrowings, and as of December 31, 2021, we had $11.10 million of short-term
borrowings. The short-term borrowings as of December 31, 2022, relate to Celsius
Mining LLC, W Capital Advisors Pty Ltd, the secured convertible promissory notes
issued to investors and Marshall Investments MIG Pty Ltd. As of December 31,
2022, and as of December 31, 2021, we had $4.51 million and $7.64 million,
respectively, of outstanding long-term borrowings. The long-term borrowings as
of December 31, 2022, relate to the secured loan facility with Marshall
Investments MIG Pty Ltd.
35
As of December 31, 2022, we had negative working capital of $15.17 million and as at December 31, 2021, we had negative working capital of $8.63 million. The decrease in working capital was primarily attributable to an increase in the Company's short term and long-term borrowings during 2022, as compared to 2021.
The following table presents the major components of net cash flows (used
in)/provided by operating, investing and financing activities for the year
ending December 31, 2022 and 2021:
Year Ended
December 31,
2022 2021
Net cash provided by operating activities $ 14,256,294 $ 22,953,792
Net cash used in investing activities $ (32,540,422 ) $ (128,247,751 )
Net cash provided by financing activities $ 13,986,496 $ 109,854,460
For the year ended December 31, 2022, net cash provided by operating activities
was $14,256,294 and for the year ended December 31, 2021, net cash used in
operating activities was $22,953,792. The decrease in net cash provided by
operating activities was primarily attributable to timing differences in trade
and other receivables and trade and other payables.
For the year ended December 31, 2022, and 2021, net cash used in investing
activities was $32,540,422 and $128,247,751, respectively. The decrease in net
cash used in investing activities was primarily attributable to the decrease in
the acquisition of cryptocurrency mining equipment.
For the year ended December 31, 2022, and 2021, net cash provided by financing
activities was $13,986,496 and $109,854,460, respectively. The decrease in net
cash provided by financing activities was primarily attributable to proceeds
from the capital raises which occurred in the prior period.
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2v to our audited consolidated financial statements for the year ended December 31, 2022.
Critical Accounting Policies
Revenue Recognition – Digital asset mining revenue
The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Five steps are required to be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation. In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
There is currently no specific definitive guidance in U.S. GAAP or alternative
accounting frameworks for the accounting of managing digital currencies and
management has exercised significant judgement in determining appropriate
accounting treatment for the recognition of revenue for such operations.
36
The Company has entered into a contract with mining pools and has undertaken the
performance obligation of providing computing power in exchange for non-cash
consideration in the form of cryptocurrency. The provision of computing power is
the only performance obligation in the Company's contract with its pool
operators. Where the consideration received is variable (for example, due to
payment only being made upon successful mining), it is recognized when it is
highly probable that the variability is resolved, which is generally when the
cryptocurrency is received.
The Company measures the non-cash consideration received at the fair market value of the cryptocurrency received. Management estimates fair value on a daily basis, as the quantity of cryptocurrency received multiplied by the price quoted on the crypto exchanges that the Company uses to dispose of cryptocurrency
on the day it was received. Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. The cost includes any cost of replacing part of the property and equipment with the original cost of the replaced part being derecognized. All other repair and maintenance costs are recognized in profit or loss incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Property, plant and equipment transferred from customers is initially measured at the fair value at the date on which control is obtained. The depreciable amount of fixed assets is depreciated on a straight-line or declining balance basis based on the asset classification, over their useful lives to the economic entity commencing from the time the assets arrive at their destination where they are ready for use. Low-cost assets are capitalized and immediately depreciated. Depreciation is calculated over the following estimated useful lives: Asset class Useful life Depreciation Method Fixtures and Fittings 5 years Straight-Line Plant and equipment 10 years Straight-Line Modular data center 5 years Declining Motor Vehicles 5 years Straight-Line Computer equipment 3 years Straight-Line Processing Machinery (Miners) 2 years Straight-Line Transformers 15 years Straight-Line Leasehold improvements Lease term Straight-Line
An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when
the asset is derecognized.
The residual values, useful lives and methods of depreciation of property, plant
and equipment are reviewed at each financial year end and adjusted
prospectively, if appropriate.
The Company changed its policy in relation to freight costs in relation to
processing machines with effect from October 1, 2021. Prior to this date these
costs were expensed to the statement of operations and profit and loss, and
afterwards these costs are capitalized into processing machinery. This change
resulted in an increase in processing machines in the balance sheet of
$3,130,638 as at December 31, 2022, and an increase in the depreciation charge
to the year to December 31, 2022 statement of operations and profit and loss of
$84,735 over the prior treatment.
The Company's long-lived assets are reviewed for impairment in accordance with
Accounting Standards Codification ("ASC") 360, "Property, Plant and Equipment",
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If such an asset
is considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair value. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value
less costs to sell.
37
Fair value of and recognition of revenue from financial instruments:
The Company accounts for financial instruments under FASB Accounting Standards
Codification Topic ("ASC") 820, Fair Value Measurements. This statement defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value
measurements, ASC 820 establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into three levels
as follows:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or
liabilities;
Level 2 - observable inputs other than Level 1, quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, and model-derived prices whose
inputs are observable or whose significant value drivers are observable; and
Level 3 - assets and liabilities whose significant value drivers are
unobservable. Observable inputs are based on market data obtained from
independent sources, while unobservable inputs are based on the Company's market
assumptions. Unobservable inputs require significant management judgment or
estimation. In some cases, the inputs used to measure an asset or liability may
fall into different levels of the fair value hierarchy. In those instances, the
fair value measurement is required to be classified using the lowest level of
input that is significant to the fair value measurement. Such determination
requires significant management judgment.
Fair value
measured at December 31, 2022
Total carrying Quoted prices Significant other Significant
value as at in active observable unobservable
December 31, markets inputs inputs
2022 (Level 1) (Level 2) (Level 3)
Derivative asset $ 11,299,971 - - 11,299,971
Marketable securities $ 3,243,957 $ 3,243,957 $ - $ -
Fair
value measured at December, 2021
Total carrying Quoted prices Significant other Significant
value at in active observable unobservable
December 31, markets inputs inputs
2021 (Level 1) (Level 2) (Level 3)
Derivative asset $ - $ - $ - $ -
Marketable securities $ 326,801 $ 326,801 $ - $ -
Level 1 Assets:
The Company held 50 million shares in DXN Limited ("DXN"), an Australian
Securities Exchange ("ASX") listed company as at December 31, 2021. This was
recorded at fair value with changes in fair value recognized in the accompanying
unaudited condensed consolidated statements of operations. The fair value of the
DXN investment is classified in Level 1 of the fair value hierarchy as it is
quoted on an active market, that being the ASX. During the year ended December
31, 2022, the Company sold all its shares in DXN.
38
The Company holds 1.59 million shares in CleanSpark, as at December 31, 2022.
This was recorded at fair value with changes in fair value recognized in the
accompanying consolidated statements of operations. The fair value of the
CleanSpark investment is classified in Level 1 of the fair value hierarchy as it
is quoted on an active market, that being the Nasdaq.
Level 3 Assets:
Power Supply Agreement
In June 2022, the Company entered into a Power Supply Agreement with Energy
Harbor LLC, the energy supplier to the Company's Pennsylvania facility, to
provide the delivery of a fixed portion of the total amount of electricity for a
fixed price through to December 2026. If the Pennsylvania facility uses more
electricity than contracted, the cost of the excess is incurred at a new price
quoted by Energy Harbor LLC.
While the Company manages operating costs at the Pennsylvania facility in part
by periodically selling unused or uneconomical power back to the market, the
Company does not consider such actions trading activities. That is, the Company
does not engage in speculation in the power market as part of its ordinary
activities. Because the sale of any electricity under a curtailment program
allows for net settlement, the Company has determined the Power Supply Agreement
meets the definition of a derivative under ASC 815, Derivatives and Hedging,
("ASC 815"). However, because the Company has the ability to sell the power back
to the grid rather than take physical delivery, physical delivery is not
probable through the entirety of the contract and therefore, the Company does
not believe the normal purchases and normal sales scope exception applies to the
Power Supply Agreement. Accordingly, the Power Supply Agreement (the non-hedging
derivative contract) is recorded at estimated fair value each reporting period
with the change in the fair value recorded in change in fair value of derivative
asset in the consolidated statements of operations (refer to fair value of
financial instruments policy).
The Power Supply Agreement was classified as a derivative asset from the quarter
ended 30 June 2022 and measured at fair value on the date of Power Supply
Agreement, with changes in fair value recognized in the accompanying unaudited
condensed consolidated statements of operations. The estimated fair value of the
Company's derivate asset is classified in Level 3 of the fair value hierarchy
due to the significant unobservable inputs utilized in the valuation.
Specifically, the Company's discounted cash flow estimation models contain
quoted commodity exchange spot and forward prices and are adjusted for basis
spreads for load zone-to-hub differentials through the term of the Power Supply
Agreement, which ends in December 2026. In addition, the Company adopted a
further discount rate of approximately 20% above the terminal value of the
observable market inputs, but also includes unobservable inputs based on
qualitative judgment related to company-specific risk factors. The terms of the
Power Supply Agreement require pre-payment of collateral, calculated as forward
cost based on the market cost rate of electricity versus the fixed price stated
in the contract.
Share based payments
The Company follows FASB Codification Topic ASC 718-10 Compensation-Stock
Compensation. The Company expenses stock-based compensation to employees and
non-employees over the requisite service period based on the estimated
grant-date fair value of the awards. The Company determines the grant date fair
value of the restricted stock units ("RSUs") and options using the Black-Scholes
option-pricing model. The assumptions used in calculating the fair value of
stock-based awards represent management's best estimates and involve inherent
uncertainties and the application of management's judgment. These assumptions
are the expected stock volatility, the risk-free interest rate, the expected
life of the option, the dividend yield on the underlying stock and the expected
forfeiture rate. Expected volatility computes stock price volatility over
expected terms based on its historical common stock trading prices. Risk-free
interest rates are calculated based on the implied yield available on U. S.
10-year Treasury bond.
39
© Edgar Online, source Glimpses
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