Mawson Infrastructure Group Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022 

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number 001-40849

Mawson Infrastructure Group Inc.

(Exact name of registrant as specified in its charter)

Level 5, 97 Pacific Highway, North Sydney NSW Australia 2060

(Address of principal executive offices, including zip code)

+61 2 8624 6130

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changes since last report)

Securities registered pursuant to Section 12(b) of the Act: 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of November 8, 2022, the issuer had a total of 81,568,310 shares of common stock, par value $0.001 per share, outstanding.

MAWSON INFRASTRUCTURE GROUP INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three Months Ended September 30, 2022

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three Months Ended September 30, 2021

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Nine Months Ended September 30, 2022

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

For the Nine Months Ended September 30, 2021

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.

MAWSON INFRASTRUCTURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – GENERAL

General

Mawson Infrastructure Group, Inc. (the “Company” or “Mawson” or “we”), formerly known as Wize Pharma, Inc, and before that, known as OphthaliX Inc., was incorporated in the State of Delaware on February 10, 2012.

The accompanying consolidated financial statements, including the results of the Company’s subsidiaries: Mawson Infrastructure Group Pty Ltd (“Mawson AU”, previously known as Cosmos Capital Limited), Cosmos Trading Pty Ltd, Cosmos Infrastructure LLC, Cosmos Manager LLC, MIG No.1 Pty Ltd, Mawson AU Limited, Luna Squares LLC, Luna Squares Texas LLC, Luna Squares Repairs LLC, Luna Squares Property LLC, Mawson Midland LLC (formed September 21, 2022), Mawson Ohio LLC (formed September 21, 2022) and Mawson Mining LLC (collectively referred to as the “Group”), have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Wize NC Inc, Occuwize Ltd and Wize Pharma Ltd are additional subsidiaries of Mawson, these companies are subject to contingent value rights (“CVR”), further described in NOTE 11.

These consolidated, condensed unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements of the Group as of December 31, 2021, and the notes thereto, included in the Company’s Annual Report on Form 10-K filed with SEC on March 21, 2022. Accordingly, they do not include all the information and footnotes required by U.S GAAP for complete financial statements. The results of the interim period are not necessarily indicative of the results to be expected for the full year ended December 31, 2022. These consolidated, condensed interim financial statements reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented.

Mawson, through its subsidiaries, is a ‘Digital Asset Infrastructure’ business, which owns and operates modular data centers (“MDCs”) based in the United States and Australia. As at September 30, 2022, Mawson owned 33,350 Application-Specific Integrated Circuit (“ASIC”) computers known as “Miners,” specifically focused on the SHA-256 algorithm, from a variety of manufacturers, including Bitmain Technology Holding Company (“Bitmain”), Canaan Creative (HK) Holdings Limited (“Canaan”) and Shenzhen MicroBT Electronics Technology Co., Ltd (“Whatsminer”).

Going Concern

For the nine-month period ending September 30, 2022, the Company incurred a loss after tax of $35.23 million, and as at September 30, 2022, had net current liabilities of $24.69 million, had total net assets of $92.77 million and had an accumulated deficit of $103.81 million. The Company’s cash position as at September 30, 2022, was $1.18 million. These conditions raise substantial doubt upon the Company’s ability to continue as a going concern for at least a year from the date of approval of these unaudited consolidated financial statements.

Management of the Company believes that there are reasonable grounds to conclude that the Company will continue as a going concern after consideration of the following factors:

The Company’s plans include improving profitability and generating sufficient cash flow from operations.

On September 8, 2022, the Company entered into a (i) Purchase and Sale Agreement (“Purchase Agreement”) with CleanSpark , Inc. (“CleanSpark”), and (ii) an Equipment Purchase and Sale Agreement. Pursuant of the Purchase Agreement, CleanSpark assumed from the Company a lease for approximately 16.35 acres of real property located in Sandersville, Washington County, Georgia, and all personal property situated on the property. This transaction closed on October 8, 2022, and CleanSpark paid the following consideration to the Company pursuant to the Purchase Agreement: (i) $13.50 million in cash; (ii) 1,590,175 shares of common stock, par value $0.001 per share, of CleanSpark (valued at $4.8 million on October 7, 2022), and (iii) $6.5 million in seller financing in the form of promissory notes. Pursuant to the Equipment Purchase and Sale Agreement, CleanSpark’s subsidiary purchased from the Company, 6,468 (which number was later reduced to 6,349 by amendment) application-specific integrated circuit miners for $9.48 million in cash (which was later reduced to $9.02 million by amendment). This transaction initially closed on October 8, 2022, and was amended on October 21, 2022.

Management of the Company is of the opinion that the Company can continue to access adequate debt and equity funding to meet its working capital requirements. The Company has the ability through it’s At the Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”), to sell shares of its common stock with an aggregate sales price of up to $100 million. To the extent the Company raises additional capital or debt, this could cause additional dilution to the Company’s current stockholders. The terms of any future capital raise or debt issuance and the costs of any financing are uncertain. There are no assurances that the Company would be able to raise additional financing when needed or that it would be able to do so on favorable terms.

 Based on internally prepared forecast cash flows which take into consideration what management considers to be reasonable scenarios given the inherent risks and uncertainties, combined with existing cash balances, management believes that the Company will be able to meet its obligations as they become due for at least one year from the date of approval of these unaudited consolidated financial statements.

Accordingly, management of the Company believes that it is appropriate to prepare the Group’s consolidated financial statements on a going concern basis. However, should the Company be unable to source sufficient funding through the factors noted above, the Company may not be able to realize assets at their recognized values and extinguish its liabilities in the normal course of business at the amounts stated in these unaudited consolidated financial statements.

These unaudited consolidated financial statements do not include any adjustments relating to the recoverability and carrying amounts of assets and the amounts of liabilities should the Company be unable to continue as a going concern and meet its obligations and debts as and when they fall due.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and basis of preparation

The accompanying consolidated financial statements of the Group include the accounts of the Company and its wholly or majority owned and controlled subsidiaries, other than those subsidiaries subject to the CVR described more in NOTE 11. Intercompany investments, balances and transactions have been eliminated on consolidation. Non–controlling interests represent the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.

Any changes in the Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized as an equity transaction, with appropriate adjustments to both the Company’s additional paid-in capital and the corresponding non-controlling interest.

On March 9, 2021, Mawson AU was acquired by the Company. For accounting purposes, this was accounted for as a reverse asset acquisition with Mawson AU as the accounting acquirer (refer to significant accounting policies below). The result of which is that these consolidated financial statements are taken to be a continuation of Mawson AU’s financial statements, with the Company incorporated within the acquisition and therefore the historical financial information of Mawson AU (then known as Cosmos Capital Limited) prior to March 9, 2021, became the historical financial information of Mawson AU, which have been consolidated into the financial statements of the Company. 

Use of Estimates and Assumptions

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made.

These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates. The Company has considered the following to be significant estimates made by management, including but not limited to, going concern assumptions, estimating the useful lives of fixed assets, realization of long-lived assets, unrealized tax positions and the realization of digital currencies, valuing the derivative asset classified under Level 3 fair value hierarchy, business combinations, reverse asset acquisition, and the contingent obligation with respect to future revenues.

Critical Accounting Policies

Critical accounting policies are described in the consolidated financial statements for the Company included in the Company’s Annual Report on Form10-K filed with SEC on March 21, 2022. There have been some changes to critical accounting policies in the nine months period ended September 30, 2022. The reverse asset acquisition accounting policy which is no longer considered to be a critical accounting policy and has therefore been included in significant accounting policies, the fair value of financial instruments has been moved from significant accounting policies to critical accounting policies.

Revenue Recognition – Digital asset mining revenue

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Five steps are required to be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

There is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting of managing digital currencies and management has exercised significant judgement in determining appropriate accounting treatment for the recognition of revenue for such operations.

The Company has entered into a contract with mining pools and has undertaken the performance obligation of providing computing power in exchange for non-cash consideration in the form of cryptocurrency. The provision of computing power is the only performance obligation in the Company’s contract with its pool operators. Where the consideration received is variable (for example, due to payment only being made upon successful mining), it is recognized when it is highly probable that the variability is resolved, which is generally when the cryptocurrency is received.

The Company measures the non-cash consideration received at the fair market value of the cryptocurrency received. Management estimates fair value on a daily basis, as the quantity of cryptocurrency received multiplied by the price quoted on the crypto exchanges that the Company uses to dispose of cryptocurrency on the day it was received.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation. The cost includes any cost of replacing part of the property and equipment with the original cost of the replaced part being derecognized. All other repair and maintenance costs are recognized in profit or loss incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Property, plant and equipment transferred from customers is initially measured at the fair value at the date on which control is obtained.

The depreciable amount of fixed assets is depreciated on a straight-line or declining balance basis based on the asset classification, over their useful lives to the economic entity commencing from the time the assets arrive at their destination where they are ready for use. Low-cost assets are capitalized and immediately depreciated. Depreciation is calculated over the following estimated useful lives:

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 September 30, 2022, and an increase in the depreciation charge to the nine months to September 30, 2022 statement of operations and profit and loss of $84,735 over the prior treatment.

The Company’s long-lived assets are reviewed for impairment in accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were impairment charges recognized for processing machines of $4,195,046 for the nine month period ended September 30, 2022, and $nil for the nine month period ended September 30, 2021.

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.

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 nine months ended September 30, 2022, the Company sold all its shares in DXN.

Level 3 Assets: 

Power Supply Agreement

During the quarter ended June 30, 2022, the Company recorded a derivative asset related to its Power Supply Agreement with Energy Harbor LLC, the energy supplier to the Company’s Pennsylvania facility. The Power Supply Agreement was classified as a derivative asset 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.

Tasmania Data Infrastructure Pty Ltd (“TDI”)

During June 2022, Mawson AU Limited entered into a License and Services Agreement with TDI in exchange for 42,562,432 fully paid issued shares in TDI. During September 2022, Mawson AU sold a MDC to TDI in exchange for a further 10 million fully paid issued shares. TDI is held at fair value of $1.71 million as at September 30, 2022, the fair value of the asset is classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs utilized in the valuation. The change in fair value is recognized in the accompanying unaudited condensed consolidated statements of operations.

Accounting for Power Supply Contract

In June 2022, the Company entered into a Power Supply Agreement with Energy Harbor LLC 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).

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.

Significant Accounting Policies

Revenue Recognition - Hosting Co-location revenue

The Company provides power for our co-location hosting customers on a variable basis which is received monthly from the customer based on the power usage at the rate outlined in each customer contract.

The Company recognizes variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers, and our customers utilize the power (the customer simultaneously receives and consumes the benefits of the Company’s performance).

The customer contracts contain performance obligations, variable consideration in such contracts to be allocated to and recognized in the period to which the consideration relates. Usually this is when it is invoiced, rather than obtaining an estimation of variable consideration at the beginning of the customer contracts.

Customers also are invoiced a fixed monthly fee for maintenance services which includes cleaning, cabling and other services to maintain the customers’ equipment.

Revenue recognition – equipment sales

The Company earned revenues from the sale of earlier generation cryptocurrency mining units and modular data centers that have been assembled or refurbished for resale (collectively “Hardware”). Revenue from the sale of Hardware is recognized when all of the following conditions are satisfied: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed or determinable, (iii) title and risk of loss have transferred. At the date of sale, the net book value is expensed in cost of revenues.

Net energy benefits

In exchange for powering down the Company’s systems and curtailing power, in response to instances of high electricity demand, the Company receives net energy benefits from the grid. The company also has a contract with Energy Harbor LLC where it can sell back any power not used at the market rate.

Cost of revenues

Cost of revenue consists primarily of expenses that are directly related to providing the Company’s service to its paying customers. These primarily consist of costs associated with operating our co-location facilities such as direct power costs, energy costs (including any carbon offset acquired during the year), freight costs and material costs related to cryptocurrency mining.

Research and development expenses

Research and development expenses are charged to the statement of comprehensive loss as incurred.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance may be established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryback or carryforward periods.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon review by the taxing authority. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Functional currency

All subsidiaries of Company have a functional currency of United States dollar (“USD”) with the exceptions of Mawson Infrastructure Group Pty Ltd, MIG No.1 Pty Ltd, Cosmos Trading Pty Ltd and Mawson AU Limited whose functional currency is the Australian Dollar (“AUD”). The financial statements of foreign businesses have been translated into USD at current exchange rates for balance sheet items and at the average rate for income statement items. Translation of all the consolidated companies’ financial records into USD is required due to the reporting currency for these consolidated financial statements presented as USD and the functional currency of the parent company being that of AUD. Translation adjustments are accumulated in other comprehensive income (loss). Revenue and expense accounts are converted at prevailing rates throughout the year. Gains or losses on foreign currency transactions and translation adjustments in highly inflationary economies are recorded in income in the period in which they are incurred.

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making group is composed of the chief executive officer. We currently operate in one segment surrounding our cryptocurrency mining operation.

Cash and cash equivalents:

Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, cash held with digital currency exchanges, and other short-term and highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.

Assets held for sale (NOTE 7)

Assets and liabilities are classified as held-for-sale if it is highly probable they will be recovered primarily through sale rather than through continuing use. On September 8, 2022, the Company entered into an agreement with CleanSpark to sell its Sandersville, Georgia Bitcoin mining facility, along with 6,468 (which number was later reduced to 6,349) miners. This transaction closed on October 8, 2022, therefore all assets and liabilities that were included in this sale have been classified as held for sale. Such assets have been measured at the lower of carrying amount and fair value less costs to sell. The property and equipment included in this sale ceased being depreciated from September 8, 2022, depreciation which would have been charged for the period from September 9, 2022 to September 30, 2022 would have been $1.0 million.

Digital Currencies

Digital currencies are included in current assets in the consolidated balance sheets. Digital currencies are classified as indefinite-lived intangible assets in accordance with ASC 350, Intangibles - Goodwill and Other, and are accounted for in connection with the Company’s revenue recognition policy detailed above.

The following table presents the Company’s digital currency (Bitcoin) activities for the three months and nine months ended September 30, 2022:

Digital currency is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not likely that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.

The Company’s policy is to dispose of production at the earliest opportunity, therefore the holding period is minimal, usually no more than a few days. Due to the short period which Bitcoin are held prior to sale and the consequent small numbers held, the risk of impairment is not material.

Equipment deposits

The Company records a prepaid expense for costs paid but not yet incurred. Those costs expected to be incurred within one year are recognized and shown as equipment deposits. Equipment deposits result from advance payments to suppliers for goods to be received in the future. Equipment deposits are initially recognized as assets at the date the amount is paid and are subsequently recorded as equipment as the Company takes delivery and control of the equipment from the supplier. Amounts are recognized initially at the amount of the unconditional consideration paid. They are subsequently measured at cost, less loss allowance.

Reverse Asset Acquisition

On March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd and referred to herein as Mawson AU) in a stock for stock exchange. This transaction has been accounted for as a reverse asset acquisition. The reverse asset acquisition and the associated impact is referred to as the “Cosmos Transaction”.

Under the terms of the Cosmos Transaction Bid Implementation Agreement, the Company was required to make share-based payments consisting of up to 40,000,000 shares (pre 10-for-1 reverse stock split which occurred on August 11, 2021) under an Incentive Compensation Program and warrants issued to HC Wainwright as a fee related to the acquisition of common stock by Mawson of Mawson AU. In addition, Mawson AU had an outstanding obligation to W Capital Advisors Pty Ltd (“W Capital”) for options over the equity of Mawson AU which was terminated for consideration of warrants over the Company’s shares being issued to W Capital.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and marketable securities. Cash and cash equivalents and restricted bank deposits are invested in banks in Australia and the U.S. If the counterparty completely failed to perform in accordance with the terms of the contract, the maximum amount of loss to the Company would be the balance. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

Legal and other contingencies 

The Company accounts for its contingent liabilities in accordance with ASC 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of September 30, 2022, the Company is not a party to any litigation that would reasonably be expected to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows.

Leases

The Company accounts for its leases under ASC 842, Leases which was effective January 1, 2019. The Company determines if an arrangement is a lease at inception. Using ASC 842, leases are classified as operating or finance leases on the Balance Sheet as a right of use (“ROU”) assets and lease liabilities within current liabilities and long-term liabilities on our consolidated balance sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company’s lease does not provide an implicit rate and therefore the Company measured the ROU asset and lease obligation based upon the present value of future minimum lease payments. The Company’s incremental borrowing rate is estimated based on risk-free discount rate for the lease, determined using a period comparable with that of the lease term and in a similar economic environment. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. The Company does not record leases on the consolidated balance sheets with a term of one year or less. The Company does not separate lease and non-lease components but rather account for each separate component as a single lease component for all underlying classes of assets. Where leases contain escalation clauses, rent abatements, or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them in the determination of straight-line operating lease cost over the lease term.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. For information with respect to recent accounting pronouncements, see Note 2 to the consolidated financial statements for Mawson as of December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with SEC on March 21, 2022. Recent accounting pronouncements since that date include:

In March 2022, the FASB issued ASU update 2022-01—Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The adoption of ASU 2021-01 did not have a material impact on the Company’s consolidated financial statements or disclosures.

In March 2022, the FASB issued ASU 2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements or disclosures.

In June 2022, the FASB issued ASU 2022-03—Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements or disclosures.

In September 2022, the FASB issued ASU 2022-04— Liabilities—Supplier Finance Programs (Topic 405-50): Disclosure of Supplier Finance Program Obligations. The adoption of ASU 2022-04 did not have a material impact on the Company’s consolidated financial statements or disclosures.

NOTE 3 – BASIC AND DILUTED NET LOSS PER SHARE

Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding, as they would be anti-dilutive.

Securities that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share as at September 30, 2022 and 2021 are as follows:

The following table sets forth the computation of basic and diluted loss per share:

Comparative weighted average common shares have been revised by the ratio of Mawson AU to the Company shares exchanged in the reverse asset acquisition in March 2021. Pursuant to that certain Certificate of Amendment to the Certificate of Incorporation of the Company dated August 11, 2021, Mawson executed a 10-for-1 reverse stock split of its outstanding common stock and reduced its authorized common stock to 120,000,000 shares, as set forth in the Company’s Current Report on Form 8-K filed August 16, 2021. 

NOTE 4 – DEPOSIT, PROPERTY AND EQUIPMENT

During the nine months ended September 30, 2022, $32.05 million cash was paid for equipment which was recorded as either a deposit or within property plant and equipment on the balance sheet.

NOTE 5 – LEASES

Luna Squares LLC leased a 16.35-acre lot in Georgia from the Development Authority of Washington County until October 8, 2022, when the lease was transferred and assigned to CleanSpark. The lease term was originally for 1 acre from May 1, 2020, until April 30, 2023. An amendment to the lease and exercise of option to lease 4 additional acres was signed and became effective February 23, 2021. A further amendment to the lease and exercise of option to lease was signed and became effective August 24, 2021. The Lease Amendment covers an additional 11.35 acres of the property, bringing the total to 16.35 acres under the lease. It also includes 5, 3-year extension options bringing the total lease period to run potentially until 2038.

The Company leases the headquarters of its business operations at Level 5, 97 Pacific Highway, North Sydney NSW 2060 Australia, being 1,076 square feet of office space held under a license agreement.

The Company leases 6-acres of land in Pennsylvania which began in October 2021 for thirty-six months with the option to exercise four additional three-year extensions.

On March 16, 2022, Luna Squares Property LLC entered into a lease with respect to a property in the City of Sharon, Mercer County, Pennsylvania with Vertua Property, Inc. (a related entity – refer to note 12 for details). The term of the lease is for 5 years, with 2 options to extend for 5 years each.

During May 2022, Luna Square Texas LLC entered into four lease agreements to lease 11 acres of land in Texas for a period of five years.

Other than the foregoing leases, the Company does not lease any material assets. The Company believes that these offices and facilities are suitable and adequate for its operations as currently conducted and as currently foreseen. In the event additional or substitute offices and facilities are required, the Company believes that it could obtain such offices and facilities at commercially reasonable rates.

The Company’s lease costs recognized in the Consolidated Statements of Income and Comprehensive Loss consist of the following:

The following is a schedule of the Company’s lease liabilities by contractual maturity as of September 30, 2022:

Other lease information as of September 30,2022:

NOTE 6 – PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following:

Depreciation and amortization expense for the three month period ended September 30, 2022 and 2021 was $16,252,106 and $4,129,862, respectively. Depreciation and amortization expense for the nine month period ended September 30, 2022 and 2021 was $46,061,673 and $7,977,800, respectively. There were impairment charges recognized for processing machines of $4,195,046 for nine month period ended September 30, 2022, and $nil for nine month period ended September 30, 2021. 

The reclassification of property and equipment to assets held for sale is in relation to the sale of the Georgia Bitcoin Mining facility to CleanSpark, refer to NOTE 7 for further details.

NOTE 7 – ASSETS HELD FOR SALE

On September 8, 2022, the Company entered into an agreement with CleanSpark to sell its Sandersville, Georgia Bitcoin Mining facility and an agreement to sell, up to 6,468 (which number was later reduced to 6,349) application-specific integrated circuit miners.

Total consideration for the sale of the Bitcoin Mining facility was (i) $22.52 million in cash; (ii) 1,590,175 shares of common stock, par value $0.001 per share of CleanSpark, and (iii) $6.5 million in Seller financing in the form of promissory notes. Total consideration for the application-specific integrated circuit miners was $9.48 million in cash (which was later reduced to $9.02 million upon reduction in the number of miners).

The sale of the Georgia Bitcoin Mining facility was announced to the market on September 8, 2022 and therefore the corresponding assets and liabilities were classified as held for sale from this date. Depreciation on the property and equipment ceased on September 8, 2022. At September 30, 2022 the assets and liabilities included in the sale are stated at fair value less costs to sell and comprised of the following assets and liabilities.

These figures are shown after recognizing an impairment on processing machines (miners), which were previously included in property and equipment, of $4,195,046.

NOTE 8 – FINANCIAL ASSETS

During June 2022 Mawson AU Limited entered into a License and Services Agreement with Tasmania Data Infrastructure Pty Ltd (“TDI”) in exchange for 42,562,432 fully paid issued shares in TDI. During September 2022 Mawson AU sold a MDC to TDI in exchange for a further 10 million fully paid issued shares. This investment is held at fair value, $1.71 million as at September 30, 2022.

NOTE 9 – INCOME TAXES

The following table summarizes our effective tax rate based on the tax expense/(benefit) for income taxes attributable to pretax income:

The Company’s effective tax rate is calculated by dividing total income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The Company has maintained a full valuation allowance for federal and the majority of its state jurisdictions.

NOTE 10 – STOCKHOLDERS EQUITY

Common Stock

Under the terms of the Cosmos Transaction Bid Implementation Agreement the Company made share-based awards under an Incentive Compensation Program during September 2021 (refer to reverse acquisition accounting policy). During the three-month period ending September 30, 2022, certain participants partially converted certain of these awards into 727,125 shares of common stock of Mawson.

Restricted Stock

As of September 30, 2022, there was no restricted stock.

Common Stock Warrants

A summary of the status of the Company’s outstanding stock warrants and changes during the nine months ended September 30, 2022, is as follows:  

On February 23, 2022, Mawson issued to Celsius Mining LLC (“Celsius”) warrants with an expiry date of August 23, 2023, to purchase up to 3,850,000 shares of common stock of Mawson at an exercise price of US$6.50 per share, in connection with the $20 million loan made by Celsius to Luna Squares LLC in connection with a Customer Equipment and Co-Location Agreement entered into by Celsius and Luna Squares LLC.

On July 17, 2022, the Company entered into a Securities Purchase Agreement with an institutional investor providing for the issuance and sale by the Company of 8,000,000 shares of the Company’s common stock, accompanied by warrants to purchase 10,000,000 shares of the Company’s common stock. The warrants issued in this offering have an exercise price of $1.01 per share of our common stock, are exercisable 6 months after issuance and will expire five and one-half years following issuance.

Under the terms of the Cosmos Transaction Bid Implementation Agreement the Company made share-based awards in the form of warrants, options and RSUs under an Incentive Compensation Program during September 2021 (refer to reverse acquisition accounting policy). During the nine months ended September 30, 2022, certain participants exercised 2,003,125 of their warrants to convert these into common stock of Mawson.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Agreements

NOTE 12 – BORROWINGS

Short-term Borrowings

Whatsminers

On October 15, 2021, the Company acquired 2,000 Whatsminers M30S for delivery in October 2021 from Foundry Digital LLC for a total consideration of $16,481,328. The Company paid a deposit of $3,202,766 and entered into an extension of the original Foundry finance agreement with Foundry for the balance of the consideration over a 12-month term, of which $1.42 million is outstanding at September 30, 2022. The amount was paid in full on October 17, 2022.

Marshall loan

In December 2021 MIG No. 1 Pty Ltd entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd which was payable in three tranches. The first tranche was received during December 2021 with an amount of $7.86 million. Tranche two and three were received during January and February 2022 with a total amount of $7.11 million. The loan matures in 2024 and bears interest at a rate of 12.00% per annum, payable monthly which commenced December 2021. This loan facility is secured by a general security agreement given by the Company. Principal repayments begin during 2023. 

The amount classified as a current liability is $3.89 million with the remaining balance classified as a long-term liability.

On November 11, 2022 $3.0 million of this loan was repaid, this has been disclosed in NOTE 14 Subsequent events.

Celsius loan

On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement with Celsius Mining LLC, in connection with this agreement, Celsius Mining LLC loaned Luna Squares LLC a principal amount of $20,000,000, for the purpose of funding the infrastructure required to meet the obligations of the Co-Location Agreement, for which Luna Squares LLC issued a Secured Promissory Note for repayment of such amount. The Secured Promissory Note accrues interest daily at a rate of 12% per annum. Luna Squares LLC is required to amortize the loan at a rate of 15% per quarter, principal repayments began at the end of September 2022. The Secured Promissory Note has a maturity date of August 23, 2023, the outstanding balance is $17.59 million as at September 30, 2022. Celsius Mining LLC filed for Chapter 11 bankruptcy protection on July 13, 2022. The Company does not anticipate any changes to the terms of the loan agreement due to Celsius Mining LLC’s bankruptcy filing.

W Capital loan

On September 2, 2022, Mawson Infrastructure Group Pty Ltd entered into a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with a total loan facility of AUD$3 million (USD$1.9 million). This was amended on September 29, 2022 and the loan facility was increased to AUD$8 million (USD$5.2 million). As at September 30, 2022, AUD$7.4 million (USD$4.80 million) has been drawn down from this facility. The Secured Loan Facility accrues interest daily at rate of 12% per annum and is paid monthly. Principal repayments are due in March 2023. On October 14, 2022 AUD$5 million (USD $3.2 million) of this loan was repaid.

Convertible notes

On July 8, 2022, the Company issued secured convertible promissory notes to investors in the aggregate principal amount of $3,600,000 (the “Secured Convertible Promissory Notes”) in exchange for an aggregate of $3,600,000. The Secured Convertible Promissory Notes are convertible at the option of the holder at a price of $0.85 per share of our common stock. The Secured Convertible Promissory Notes bear interest of twenty percent per annum. One-half of the interest that accrues each month on the Secured Convertible Promissory Notes must be paid monthly. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Notes, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) one year after its issuance, or (ii) following an event of default.  On September 29, 2022, the Company entered into a letter variation relating to some of the Secured Convertible Promissory Notes, with an aggregate principal amount of $3.1 million, which gave those holders the option to elect for pre-payment (including accrued interest to maturity) subject to certain conditions. Payments may be made partially in common stock of the Company, at the Company’s election.

Long-term Borrowings

Marshall loan

The total classified as payable after more than one year under this arrangement is $9.09 million.

NOTE 13 – RELATED PARTY TRANSACTIONS

On March 16, 2022, Luna Squares LLC entered into a lease with respect to a property in the City of Sharon, Mercer County, Pennsylvania with Vertua Property, Inc, a subsidiary entity in which Vertua Ltd has a 100% ownership interest. James Manning, CEO, a director and a significant shareholder of the Company, is also a director of Vertua Ltd and has a material interest in the Sharon lease as a large shareholder of Vertua Ltd. The lease contains market standard legal terms, and will be for a term of 5 years, and Luna Squares LLC has 2 options to extend for 5 years each. The Company’s Audit Committee has compared the rent and terms to other arms’ length leases the Company has entered into and formed the view the rent is in line with the market for similar properties. Rent is subject to annual increases equal to the amount of the Consumer Price Index for the Northeast Region, or 4%, whichever is higher. The base rental amount in the first year is $0.24 million. Depending on power energization and usage, variable additional rent may be payable, with charges ranging from $500 to $10,000 per month, depending on power energized and whether it is available. Upon the recommendation from the Audit Committee, the directors of the Company, other than James Manning, were made aware of the material facts as to Mr. Manning’s interest in the lease and authorized the Company in good faith to enter the lease after determining the lease to be fair to the Company.

During the nine month period to September 30, 2022 and the nine month period to September 30, 2022 Mawson Infrastructure Group Pty Ltd paid Vertua Limited $168,084 and $43,384 respectively, for reimbursement for office costs. James Manning, CEO, a director and a significant shareholder of the Company, is also a director of Vertua Ltd.

NOTE 14 – SUBSEQUENT EVENTS

On October 17, 2022 the Company made the final payment of the Whatsminers loan amount to Foundry Digital LLC, bringing to an end the loan agreement between the parties.

On October 14, 2022 the Company made an early repayment of AUD$5 million (USD $3.2 million) against the W Capital loan.

On September 8, 2022, the Company entered into a (i) Purchase and Sale Agreement with CleanSpark, and (ii) an Equipment Purchase and Sale Agreement. Pursuant of the Purchase Agreement, CleanSpark assumed from the Company a lease for approximately 16.35 acres of real property located in Sandersville, Washington County, Georgia, and all personal property situated on the Property. This transaction closed on October 8, 2022, and CleanSpark paid the following consideration to the Company pursuant to the Purchase Agreement: (i) $13.50 million in cash; (ii) 1,590,175 shares of common stock, par value $0.001 per share of CleanSpark (valued at $4.8 million on October 7, 2022), and (iii) $6.5 million in Seller financing in the form of promissory notes. Pursuant to the Equipment Purchase Agreement, CleanSpark purchased from the Company, 6,468 (which number was later reduced to 6,349) application-specific integrated circuit miners, this transaction closed on October 8, 2022 for $9.48 million in cash (which was later reduced to $9.02 million upon reduction in the number of miners).

There may be additional consideration payable to the Company from CleanSpark following the closing date of the Purchase and Sale Agreement as follows:

On 7 November 2022, MIG No 1 Pty Ltd, a subsidiary of the Company, (the “Borrower”) signed an amendment to a Secured Loan Facility Agreement originally dated 9 December 2021. The primary commercial driver of the agreed amended terms was to provide the Borrower with some flexibility as to future uses of the loan collateral (certain Australia-based MDCs and miners), in return for an early repayment of USD$3m due on 14 November 2022. The new arrangement resulted in a change to amounts repayable in relation to the loan within one year from September 30, 2022 to $5.7m (from $3.4m), with a corresponding decrease in the amounts repayable after one year from September 30, 2022 to $7.3m (from $9.1m).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets, statements of comprehensive income (loss) and cash flows. 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, 2021. 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, Mawson AU Limited, Luna Squares LLC, Luna Squares Texas, Luna Squares Repairs LLC, Luna Squares Property LLC, Mawson Midland LLC, Mawson Ohio LLC and Mawson Mining LLC . Wize NC Inc, Ocuwize Ltd and Wize Pharma Ltd are subsidiaries of Mawson however these companies have not been consolidated into the financial statements are not included when referring to we, us, our or the Company or Mawson as these are subject to contingent value rights (“CVR”), refer to NOTE 11 of the financial statements.

Pursuant to that certain Certificate of Amendment to the Certificate of Incorporation of the Company dated August 11, 2021, Mawson executed a 1-for-10 reverse stock split of its outstanding common stock and reduced its authorized common stock to 120,000,000 shares, as set forth in the Company’s Current Report on Form 8-K filed with the SEC on August 16, 2021. Unless otherwise specified, all Mawson share numbers in this Quarterly Report on Form 10-Q reflect post-reverse stock split numbers.

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, 2021, 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, 2021, and in Part II – Item 1A of this report.

Such risk factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

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 and Australia. We are also developing technology to enable us to own and better operate MDCs.

Our primary business is the ownership and operation of Application-Specific Integrated Circuit (“ASIC”) computers known as Miners. We currently operate three sites, with two locations in USA, and a location in Australia, from which we operate our combined business. The Miners are predominately focused on the process of digital mining, specifically for Bitcoin.

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 sell back any power not used at the market rate. We have recognized a derivative asset on our balance sheet for the contract we have with our energy provider, which has been measured at fair value with any changes in fair value recognized in our statement of operations.

 We offer ‘hosting’ or ‘co-location’ facilities to other businesses in the digital asset infrastructure industry to have their Miners located within our MDCs. These businesses pay us a fee for the use of our facilities and related services (often based on power consumption).

We also sell new and used crypto currency mining, and MDC equipment on a periodic basis, subject to prevailing market conditions and our surplus production capacity.

As of September 30, 2022

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 September 8, 2022, we entered into a (i) Purchase and Sale Agreement with CleanSpark, and (ii) an Equipment Purchase and Sale Agreement. Pursuant of the Purchase Agreement, CleanSpark assumed from us a lease for approximately 16.35 acres of real property located in Sandersville, Washington County, Georgia, and all personal property situated on the Property. This transaction closed on October 8, 2022, 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. Pursuant to the Equipment Purchase Agreement, CleanSpark purchased from the Company, 6,468 (which number was later reduced to 6,349) application-specific integrated circuit miners, this transaction closed on October 8, 2022 for $9.48 million in cash (which was later reduced to $9.02 million upon reduction in the number of miners). There is also additional potential consideration payable pursuant to the Purchase and Sale Agreement of; (i) up to 1,100,890 shares of CleanSpark Common Stock dependent the number of modular data centers on the Property occupied by the Company being emptied and made available for use by CleanSpark, and (ii) $2 million in a Seller-financed earn-out 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.

COVID-19.

The COVID-19 global pandemic has been unpredictable and unprecedented and continues to result in national and global economic disruption, which may adversely affect our business. The Company relies on equipment supplied by third parties which, like many manufacturing businesses globally, are at risk of supply chain issues. We currently do not expect any material impact on our long-term development, operations, or liquidity due to the COVID-19 pandemic. However, we continue to actively monitor the situation and the possible effects on our financial condition, liquidity, operations, suppliers, and industry.

Regulation of Digital Assets

Digital assets and cryptocurrencies have been the source of much regulatory consternation, resulting in differing definitional outcomes without a single unifying statement. We do not believe our mining activities require registration to conduct such activities and accumulate digital assets. Nevertheless, it is likely that regulation in the digital asset industry will increase.

On August 22, 2022, the Australian Government announced that it planned to start consultation with stakeholders on a framework for industry and regulators, which allowed consumers to participate in the market while also better protecting them. The first step would be “token mapping” to help identify how crypto assets and related services should be regulated.

On September 16, 2022 the U.S. Government released a Fact Sheet which noted that the President of the United States of America has received 9 reports from various stakeholders across government, industry, academia and civil society in response to the Executive Order issued on March 9, 2022, which together creates a framework for action on cryptocurrencies, with the intention to promote innovation, but mitigate downside risks.

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. Currently in Australia, Bitcoin itself is not considered a financial product nor are digital assets regarded as money or currency for the purpose of Australian law. The effect of any future regulatory change on digital assets or an entity dealing in or holding digital assets is impossible to predict, but such change could be substantial and adverse to our financial returns.

Results of Operations – Three months Ended September 30, 2022 compared to the three months ended September 30, 2021