Big Digital Energy, Inc.: Form 10-Q for the period ended Mar 31, 2023

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets, statements of operations and cash flows. The following discussion and analysis of our financial condition and results of operations should be read together with the interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. All amounts are in U.S. dollars.

Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” the “Company,” “Mawson,” “our company” and the “combined company” refer to Mawson Infrastructure Group Inc., a Delaware corporation, and its direct and indirect subsidiaries, including Mawson Infrastructure Group Pty Ltd, an Australian company (“Mawson AU”), Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, Cosmos MIG No.1 Pty Ltd, MIG No.1 LLC, Mawson AU Limited, Luna Squares LLC, Luna Squares Texas, Luna Squares Repairs LLC, Luna Squares Property LLC, Mawson Midland LLC, Mawson Ohio LLC, Mawson Hosting LLC and Mawson Mining LLC .

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.

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, 2022, 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, 2022.

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:

• our need to, and difficulty in, raising additional capital;
• downturns in the digital currency industry;
• inflation;
• increased interest rates;
• the inability to procure needed hardware;
• the failure or breakdown of mining equipment, or internet connection failure;
• access to reliable and reasonably priced electricity sources;
• Cyber-security threats;
• our ability to obtain proper insurance;
• construction risks;
• banks and other financial institutions ceasing to provide services to our industry.
• changes to the Bitcoin network’s protocols and software;
• the decrease in the incentive to mine Bitcoin;
• the increase of transaction fees related to digital assets:
• the fraud or security failures of large digital asset exchanges;
• future digital asset, technological and digital currency development; and
• the regulation and taxation of digital assets like Bitcoin;
• our ability to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002;
• material litigation, investigations or enforcement actions by regulators and governmental authorities.

All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by applicable law, we undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.

Overview

Mawson is a ‘Digital Asset Infrastructure’ business, which owns and operates (through its subsidiaries) modular data centers (“MDCs”) in the United States. 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 digital currency mining, and MDC equipment on a periodic basis, subject to prevailing market conditions and our surplus production capacity.

As of March 31, 2023

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.

Recent Developments.

On April 18, 2023, the Company sold 100% of its membership interest in Luna Squares Texas LLC, which held rights to 4 greenfield leases in Midland, TX, as well as related contracts. The sale price was $8.5 million in cash and stablecoins. In addition, the Company sold 59 transformers which were earmarked for these Texas sites. The buyer was a fund managed by Mainnet Capital, a Singapore-based fund manager, called M Turing VCC Oracle Phase 1 Fund.

Our legacy business was as a clinical-stage biopharmaceutical company focused on the treatment of ophthalmic disorders, including dry eye syndrome (the “LO2A” business). 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.

On April 18, 2023, the Company sold 100% of its membership interest in Luna Squares Texas LLC, which held rights to 4 greenfield leases in Midland, TX, as well as related revenue sharing contracts with the landlords. The sale price was $8.5m in cash and stablecoins. In addition, Mawson sold 59 transformers which were earmarked for these Texas sites.

Effective May 1, 2023 Mawson Ohio LLC took an assignment of a lease for a site in Corning, Ohio. The term of the lease is for 4 years, with 1 option to extend for 5 years. The site area has a capacity of up to 24MW, with a potential for a further 26MW (subject to the construction of a new substation). The site has not been accurately measured and is part of a much larger site of 118 acres, however the lease area is that are which Mawson Ohio LLC requires for the operation its data center facility comprising of 12 MDCs. 12 MDCs could house up to approximately 7,056 miners.

On May 3, 2023, the Company has entered into a definitive agreement with institutional investors for the issuance and sale of 2,083,336 shares of its common stock (or pre-funded warrants in lieu thereof) at a purchase price of $2.40 per share of common stock in a registered direct offering. In addition, in a concurrent private placement, the Company will issue to the institutional investors unregistered warrants to purchase up to 2,604,170 shares of its common stock with an exercise price of $3.23 per share and are exercisable six months following issuance for a period of five and one-half years following issuance. The shares of common stock and pre-funded warrants described above are being offered and sold by the Company pursuant to a “shelf” registration statement on Form S-3 (File No. 333-264062). The warrants to purchase common stock described above were offered and sold by the Company pursuant to Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. This offering closed on May 8, 2022. The net amount raised was approximately $5.0 million.

As a condition to the sale of 2,083,336 shares of common stock described above, the Company amended the warrants previously issued to one of the investors in that offering to purchase an aggregate of 1,666,667 shares of common stock for an exercise price of $6.06 per share, which were issued in July of 2022 (the “Existing Warrants”), effective upon the closing of the offering, such that the amended Existing Warrants have a reduced exercise price of $3.23 per share, are exercisable six months following the closing of the offering, and will expire five and one-half years following the closing of this offering.

Effective May 4, 2023, the Company filed a prospectus supplement to amend, supplement and supersede certain information contained in the prospectus supplement dated May 27, 2022, and its accompanying prospectus dated April 11, 2022 (collectively, the “May 2022 Prospectus”), relating to the offer and sale of common stock through H.C. Wainwright & Co., LLC (“Wainwright”), as sales agent, in “at the market offerings” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, pursuant to the At the Market Offering Agreement with Wainwright dated as of May 27, 2022 (the “ATM Agreement”). The prospectus supplement reduced the amount of shares of Common Stock The Company may offer and sell under the ATM Agreement to an aggregate offering price of up to $9,000,000 from time to time through Wainwright.

Under the May 2022 Prospectus, the Company initially registered up to $100,000,000 of our common stock for offer and sale pursuant to the ATM Agreement. However, on March 23, 2023, the date the Company filed its Annual Report on Form 10-K for the year ended December 31, 2022, the registration registering the shares being sold pursuant to the ATM Agreement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3. As of May 3, 2023, the aggregate market value of our outstanding common stock held by non-affiliates was approximately $45,720,757.33, which we calculated based on 14,371,373 shares of outstanding common stock as of May 3, 2023, of which 12,735,587 shares were held by non-affiliates, and a price per share of $3.59 which was the closing price of our common stock on March 23, 2023.

Environment, Sustainability, Governance

The Company 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. The Company believes it can make a positive contribution towards lowering carbon emissions by supporting low-emissions power sources.

The Company can provide, and has provided, electricity grid stability by curtailing its power usage during times of high power prices through its Energy Markets Program, for example through its membership in the PJM Market, and various demand response programs where they are available.

The Company recognizes the challenges posed by climate change, including regulatory, increased costs, and adverse weather events, and seeks to mitigate these risks by for example ensuring that it is informed of regulatory changes, keeping involved with industry groups and thought leaders, and ensuring that physical mitigation steps are undertaken, such as during the process if selecting sites in lower risk climates and regions (i.e. cooler climates, less prone to flooding, cyclones or wildfires), and then ensuring that the construction of the sites takes into account potential climate or weather-related events.

Results of Operations – Three months Ended March 31, 2023 compared to the three months ended March 31, 2022

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Revenues

Digital currency mining revenues from production for the three months ended March 31, 2023 and 2022 were $2.76 million and $18.78 million respectively. This represented a decrease of $16.02 million or 85%. The decrease in mining revenue for the period was primarily attributable to a decrease in the total Bitcoin produced. Bitcoin produced totaled 121.11 in 2023 compared with 458.68 in the 2022 period, a decrease of 74% of Bitcoin produced over the respective period. The reason for this decrease is due to less miners being deployed during the current period due to the sale of the Georgia site which occurred during October 2022, in addition to this the difficulty to mine Bitcoin was also higher during the current quarter. Another reason for the decrease in digital currency mining revenue is due to the average price of Bitcoin. During the quarter ended March 31, 2023, the average price of Bitcoin was $22,721 whereas the average price of Bitcoin during the quarter ended March 31, 2022 was $41,256, a 45% decrease in the average price.

Hosting co-location revenue for the three months ended March 31, 2023 and 2022 were $4.32 million and $0.55 million respectively. This increase is due to an increase in the number of miners we hosted during the period ended in March 2023.

Net energy benefits for the three months ended March 31, 2023 and 2022, were $0.44 million and $0 respectively. This increase is due to us not offering this service at in the three months ended March 31, 2022.

Sales of digital mining equipment for the three months ended March 31, 2023 and 2022, were $0.15 million and $0.09 million, respectively.

Operating Cost and Expenses

Our operating costs and expenses include cost of revenues; selling, general and administrative expenses; share based payments; and depreciation and amortization.

Cost of revenues.

Our cost of revenue consists primarily of direct power costs related to digital currency mining, and cost of mining equipment sold.

Cost of revenues for the three months ended March 31, 2023 and 2022 were $4.68 million and $8.41 million, respectively. The decrease in cost of revenue was primarily attributable to a decrease in power costs related to energy to operate the mining equipment within our owned and hosting facilities. This decrease is attributable to less miners being used in operations during the current quarter due to the sale of the Georgia site.

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; freight; insurance; consultant fees; lease amortization and general office expenses.

Selling, general and administrative expenses for the three months ended March 31, 2023 and 2022 were $4.98 million and $6.48 million respectively. Total selling, general and administrative expenses reduced by $1.51 million in the period. The main reasons for the decrease the expenses were due to equipment repair costs decreasing by $0.83 million; information technology expenses decreased by $0.37 million; freight costs decreased by $0.22 million and marketing costs decreased by $0.22 million. This is offset by an increase in property tax of $0.32 million in relation to the Georgia site which was sold during 2022 and an increase in business and property insurance by $0.14 million.

Share based payments.

Share based payments expenses for the three months ended March 31, 2023 and 2022 were $1.07 million and $0.39 million respectively. In the three months ended March 31, 2023, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $0.50 million, shares issued to W Capital Advisors Pty Ltd amounting to $0.31 million and $0.20 million in relation to long-term incentives for the Company’s leadership team.

Depreciation and amortization.

Depreciation consists primarily of depreciation of digital currency mining hardware and MDC equipment.

Depreciation and amortization for the three months ended March 31, 2023 and 2022 were $7.96 million and $13.80 million, respectively. The decrease is primarily attributable to the Company owning less miners in the quarter ended March 31, 2023, as at March 31 2023 there were 23,332 miners whereas as at March 31 2022 there were 39,225 miners. There was also a revised estimate 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 three months ended March 31, 2023, there was an adverse change in the fair value of the derivative asset by $0.68 million in relation to our power supply arrangements.

Non-operating expense

Non-operating expenses consist primarily of interest expense, losses on foreign currency transactions, loss on write off property, plant and equipment, and share of net loss of associates accounted for using the equity method.

Interest expense for the three months ended March 31, 2023 and 2022 were $0.84 million and $1.24 million, respectively. This was a decrease of $0.39 million which was attributable to the paydown of debt during 2022 and the current quarter resulting in a lower interest charge.

During the three months ended March 31, 2023, the realized and unrealized loss on foreign currency transactions was $0.42 million, and for the three months ended March 31, 2022 there was a loss of $0.70 million due to the movement in foreign exchange rates.

Non-operating income

Non-operating income consists primarily of a gain on the sale of investments, profit on sale of site assets and other income.

The gain on sales of marketable securities for the three months ended March 31, 2023 and 2022 were $1.44 million and $0, respectively. The gain during the quarter was in relation to the sale of CleanSpark shares.

The profit on sale of site assets for the three months ended March 31, 2023 and 2022 were $0.79 million and $0, respectively. This gain on sale relates to an accounting adjustment relating to the sale of the Georgia site to CleanSpark. The company determined the impact of recording this adjustment during 2023 was not material to the financial statements or the opening balance of the accumulated deficit.

Net loss attributable to Mawson Infrastructure Group, Inc. stockholders

As a result of the foregoing, the Company recognized a net loss of $11.10 million for the three months ended March 31, 2023, compared to a net loss of $11.34 million for the three months ended March 31, 2022.

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 three month period ended March 31, 2023, we financed our operations primarily through:

1. Net cash provided by operating activities of $1.22 million;

2. 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 March 31, 2023 is $9.08 million.

3. 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 outstanding balance as at March 31, 2023 is $11 million.

4. 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 outstanding loan balance as at March 31, 2023 is $0.5 million.

5. On July 17, 2022, the Company entered into a Securities Purchase Agreement with an institutional investor providing for the issuance and sale by the Company of 1.33 million shares of the Company’s common stock, at a price of $4.80 per share, accompanied by warrants to purchase 1.67 million shares of the Company’s common stock in a registered direct offering pursuant to a “shelf” registration statement on Form S-3 (File No. 333-264062). The warrants issued in this offering have an exercise price of $6.06 per share of our common stock, are exercisable 6 months after issuance and will expire five and one-half years following issuance. This offering closed on July 20, 2022. The net amount raised was $5.62 million.

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$8 million (USD$5.2 million. The outstanding balance as at March 31, 2023 is $2.36 million.

During the three months ending March 31, 2023 we repaid $5.40 million of principal payments against the historical facilities provided by Celsius and W Capital Advisors Pty Ltd.

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, however, the Company’s access to its ATM facility is currently limited by the Instruction I.B.6 to Form S-3, known as the “baby shelf” rules because of the Company’s public float being less than $75 million. Because of the “baby shelf” rules limitation and the Company’s recent offer and sale of approximately $5 million of shares of common stock and pre-funded warrants (along with a concurrent private offering of warrants to purchase common stock), the Company reduced the amount available to be sold through it ATM facility to $9 million. For our business to grow it is expected we will continue investing in mining equipment, and will require additional working capital in the short-term. We have an aggregate of $22.94 million of debt and 15.33 million of customer deposits that is required to be repaid within eleven months unless we refinance or renegotiate the terms.

Please see our Risk Factor entitled “We may need to raise additional capital to continue our operations and execute our business strategy” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Working Capital and Cash Flows

As of March 31, 2023, and December 31, 2022, we had cash and cash equivalents balance of $1.39 million and $0.95 million, respectively.

As of March 31, 2023, and December 31, 2022, our trade receivables balance was $7.95 million and $10.46 million, respectively.

As of March 31, 2023, we had $22.94 million of outstanding short-term borrowings, and as of December 31, 2022, we had $23.61 million of short-term borrowings. The short-term borrowings as of March 31, 2023, relate to the to the secured loan facilities with Celsius Mining LLC, W Capital Advisors Pty Ltd, the secured convertible promissory notes issued to investors and Marshall Investments MIG Pty Ltd. As of March 31, 2023, and as of December 31, 2022, we had $0 and $4.51 million, respectively, of outstanding long-term borrowings.

As of March 31, 2023, we had negative working capital of $31.81 million and as at December 31, 2022, we had negative working capital of $15.17 million.

The following table presents the major components of net cash flows (used in) provided by operating, investing and financing activities for the three months ending March 31, 2023 and 2022:

For the three months ended March 31, 2023, net cash provided by operating activities was $1,316,592 and for the three months ended March 31, 2022, net cash provided by operating activities was $5,865,759. 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 three months ended March 31, 2023, net cash provided by investing activities was $4,069,294 and for the three months ended March 31, 2022 net cash used in investing activities was $29,661,210. The net cash provided by investing activities during March 31, 2023 was primarily attributable the proceeds from sale of investment shares in CleanSpark.

For the three months ended March 31, 2023, net cash used in financing activities was $4,935,714 and for the three months ended March 31, 2022 net provided by financing activities was $23,484,932. The cash used in financing activities during March 31, 2023 was primarily attributable to the repayment of borrowings.

Financial condition

As at March 31, 2023 and December 31, 2022, we had net current liabilities of $31.81 million and $15.17 million respectively. As at March 31, 2023 and December 31, 2022, we had net assets of $66.73 million and $76.17 million respectively. As at March 31, 2023 we had an accumulated deficit of $133.36 million compared to $122.26 million as at December 31, 2022. Our cash position at March 31, 2023, was $1.39 million in comparison to $0.95 million at December 31, 2022. For the three month period ending March 31 2023 and March 31, 2022 the Company incurred a loss after tax of $11.38 million and a loss after tax of $11.57 million respectively.

Our primary requirements for liquidity and capital are working capital, capital expenditures, public company costs and general corporate needs. We expect these needs to continue as we further develop and grow our business. Our principal sources of liquidity have been and are expected to be our cash and cash equivalents, external debt facilities available to us and further issuances of shares.

In the event that we require additional capital to respond to competitive pressure, market dynamics, new technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances in either the short-term or long-term, we may determine to engage in equity or debt financings or enter into credit facilities for other reasons. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to continue to grow or support our business model and to respond to business challenges could be significantly limited. In particular, rising inflation and interest rates, and the conflict between Russia and Ukraine have resulted in, and may continue to result in, significant disruption and volatility in the global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.

On May 4, 2023, the Company has entered into a definitive agreement with institutional investors for the issuance and sale of 2,083,336 shares of its common stock at a purchase price of $2.40 per share of common stock in a registered direct offering. In addition, in a concurrent private placement, the Company will issue to the institutional investors unregistered warrants to purchase up to 2,604,170 shares of its common stock with an exercise price of $3.23 per share and are exercisable six months following issuance for a period of five and one-half years following issuance. The closing of the registered direct offering and the concurrent private placement is expected to occur on or about May 8, 2023, subject to the satisfaction of customary closing conditions.

Non-GAAP Financial Measures

The Company utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing its overall business performance, for making operating decisions and for forecasting and planning future periods. The Company considers the use of non-GAAP financial measures helpful in assessing its current financial performance, ongoing operations and prospects for the future. While the Company uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance, the Company does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures. Consistent with this approach, the Company believes that disclosing non-GAAP financial measures to the readers of its financial information provides such readers with useful supplemental data that, while not a substitute for GAAP financial measures, allows for greater transparency in the review of its financial and operational performance. Investors are cautioned that there are inherent limitations associated with the use non-GAAP financial measures as an analytical tool. In particular, non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and many of the adjustments to the GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the company’s financial results for the foreseeable future. In addition, other companies, including other companies in the Company’s industry, may calculate non-GAAP financial measures differently than the Company does, limiting their usefulness as a comparative tool.

The Company is providing supplemental financial measures for (i) non-GAAP adjusted earnings before interest, taxes, depreciation and amortization, or (“adjusted EBITDA”) that excludes the impact of interest, taxes, depreciation, amortization, share-based compensation expense, LO2A write-back, unrealized gains/losses on share of associates, and certain non-recurring expenses. We believe that adjusted EBITDA is useful to investors in comparing our performance across reporting periods on a consistent basis.

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Critical accounting estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. There have been no material changes to our critical accounting policies and estimates as set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e)) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2023, due to the material weaknesses in our internal control over financial reporting described below. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at a level of reasonable assurance because management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Significant Reliance on Key Individuals. There is inadequate segregation of duties in place related to our financial reporting and other management review and oversight procedures due to the lack of sufficient accounting personnel. This is not inconsistent with similar small fast-growing organizations. This gives rise to the risk of lack of ability to react in a timely manner to operations issues and meet increased US GAAP/SOX/SEC registrant requirements. In addition, this poses the risk that compliance and other reporting obligations are not dealt with in an adequate manner.

Controls over the financial statement close and reporting process. Controls were not adequately designed or implemented in the financial statement close and reporting process. This includes controls related to complex and judgmental accounting transactions including business acquisitions and divestures, derivatives, manual journal entries, account reconciliations and financial statement policies and disclosures.

Information and Technology Controls. There are control deficiencies related to information technology (“IT”) general controls that aggregate into a material weakness. Deficiencies identified include lack of controls over access to programs and data, program changes, program development, program changes and general IT controls.

Data from third parties. The Company did not properly execute its designed controls to ensure that data received from third parties is complete and accurate. Such data is relied on by the Company in determining amounts pertaining to mining and hosting revenue, net energy benefits, and digital currency assets.

Fixed asset verification. The Company did not properly execute its designed controls around physical asset verification at US mining sites. Together with system limitations, restricting tracking of fixed asset movements, there is a risk around the existence of fixed assets. The root cause is the lack of sufficient capable personnel to perform physical asset inspections, combined with system limitations.

Notwithstanding the identified material weaknesses and management’s assessment that our internal control over financial reporting was not effective as of March 31,2023, management believes that the consolidated condensed financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles. We rely on the assistance of outside advisors with expertise in these matters in preparing the financial statements.

Remediation

Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. With the oversight of senior management and our audit committee, we continue to remediate the underlying causes of the identified material weaknesses, such that the controls are designed, implemented and operating effectively.

Our remediation efforts commenced in the prior financial year, where we performed a risk assessment, designed controls, and gradually implemented controls for all business processes. In the current financial year, management updated the initial risk assessment, refined control designs, continued the implementation of controls and performed ongoing remediation efforts to uplift the quality and effectiveness of existing controls. Remediation efforts further included the implementation of new IT systems and applications with robust controls, segregating duties through implementing system workflows and the hiring of qualified personnel in financial reporting and IT. A number of controls remain to be implemented in the upcoming quarters.

The material weaknesses in our internal control over financial reporting will not be considered remediated until controls operated for a sufficient period of time and have been tested for and concluded on for effectiveness. Formal management testing of the effectiveness of controls is planned for the third and fourth quarters of this financial year.

Remediation efforts for upcoming quarters will be focused on implementing the remainder of controls, refining existing controls and validating the effectiveness of implemented controls using criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control. We cannot provide any assurance that our remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the identified material weaknesses, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.

Changes in internal control over financial reporting

Except for the remedial measures described above, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

The Company’s risk factors were disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 which was filed on March 23, 2023. The Company does not have any additional risk factors to disclose.