Big Digital Energy, Inc.: Form 10-Q for the period ended Sep 30, 2022

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:

• that we have incurred operating losses and may continue to do so for the foreseeable future;
• our ability to raise additional capital (including by selling assets or raising equity or debt capital), under favorable terms or at all, and continue as a going concern;
• meet future liquidity requirements and comply with covenants in our indebtedness;
• attract and retain employees, officers and directors;
• increase brand awareness;
• upgrade and maintain effective business controls and information technology systems;
• acquire and protect intellectual property;
• anticipate the impact of, and respond to, new accounting standards;
• anticipate the impact of US federal income tax laws, including the impact on deferred tax assets
• that we may never become profitable;
• competition and technological challenges we may face;
• the slowing or stopping of the development or acceptance of digital asset systems;
• changes to the Bitcoin network’s protocols and software;
• any decrease in the incentive for Bitcoin mining;
• increases in Bitcoin network difficulty (which typically leads to lower Bitcoin rewards for the same effort);
• growth challenges we may face;
• our ability to obtain and maintain adequate insurance;
• we may become subject to existing or future government regulations which increase the cost of doing business, or which cause us to cease some or all of our operations;
• our exposure to fluctuations in the market value of digital assets, in particular Bitcoin, and the relative attractiveness of those digital assets to investors, speculators, and users payment network services over other solutions;
• our reliance on third party manufacturers for Miners and other infrastructure and hardware and the anticipated delivery dates of new miners;
• counter-party and customer default risks due to cryptocurrency market fluctuations and disruptions;
• increased input costs, such as increased energy prices or hardware and infrastructure costs;
• risks relating to supply chain disruptions due to the COVID-19 pandemic , shortages (computer chips), and geo-political tensions (e.g. China trade bans, war in Ukraine);
• climate and climate change risks, including direct risks from storms and floods, but also the implementation of policies which may lead to higher energy costs;
• political or economic crises motivating large-scale sales of digital assets;
• regulatory risks, including local and global governments regulating, or even banning, Bitcoin or Bitcoin mining;
• the impact of our business successes or failures on the value of our common stock;
• the impact of future stock sales on our stock price;
• the potential lack of liquidity, or volatility, of our common stock and warrants;
• the potential failure to maintain effective internal controls over financial reporting;
• the existence of anti-takeover provisions in our charter documents and Delaware law;
• that we do not intend to pay dividends on our common stock;
• competitive companies and technologies within our industry, and outside it (such as central bank digital currencies and quantum computing); and
• the potential inability to maintain compliance with Nasdaq Listing Rules

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

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Revenues

Cryptocurrency mining revenues from production for the three months ended September 30, 2022 and 2021 were $5.91 million and $10.15 million respectively. This represented a decrease of $4.24 million or 42%. The decrease in mining revenue for the three months ended September 30, 2022, from the three months ended September 30, 2021,was primarily attributable to the decrease in average price of Bitcoin, in the 2022 period the average price was $21,293 whereas in the 2021 period the average price was $41,877. This decrease is offset by an increase in the Bitcoin produced, in total 282.99 were produced in 2022 compared with 251.52 in the 2021 period, or an increase of 12.5% of Bitcoin produced over the respective periods.

Hosting co-location revenue for the three months ended September 30, 2022 and 2021 were $5.73 million and $0.80 million respectively. This increase is due to an increase in the number of co-location customers that we hosted during the period ended in September 2022.

Sales of crypto currency mining equipment for the three months ended September 30, 2022 and 2021, were $10.39 million and $0, respectively.

Net energy benefits for the three months ended September 30, 2022 and 2021, were $6.30 million and $0 respectively. This increase is due to there being no income from energy contracts in the 2021 period because we did not offer this service at that time.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future revenue and expenses may be affected.

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 cryptocurrency mining, and cost of mining equipment sold.

Cost of revenues for the three months ended September 30, 2022 and 2021 were $18.18 million and $2.50 million, respectively. The increase in cost of revenue was primarily attributable to: an increase in power costs, and increased deployment of cryptocurrency mining hardware. Included in our cost of revenues is any costs associated with offsetting carbon emissions.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future revenue and expenses may be affected.

Selling, general and administrative.

Our selling, general and administrative expenses consist primarily of professional and management fees relating to: accounting, payroll, audit, and legal; equipment repairs; marketing; consultant fees and general office expenses.

Selling, general and administrative expenses for the three months ended September 30, 2022 and 2021 were $5.0 million and $5.15 million respectively. Selling, general and administrative expenses overall remained static, but there were a number of expenses movements which were offset with one another. Payroll expenses increased by $1.5 million due to an increase in employee numbers; property tax expense decrease by $1.20 million, equipment repair costs increased by $0.46 million; freight costs decreased by $0.79 million, and research and development costs decreased by $0.57 million.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future revenue and expenses may be affected.

Share based payments.

Share based payments expenses for the three months ended September 30, 2022 and 2021 were $0.80 million and $1.43 million respectively. In the three months ended September 30, 2022, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $0.50 million and $0.3 million in relation to long-term incentives for the Company’s leadership team.

Depreciation and amortization.

Depreciation consists primarily of depreciation of cryptocurrency mining hardware and MDC equipment.

Depreciation and amortization for the three months ended September 30, 2022 and 2021 were $16.25 million and $4.13 million, respectively. The increase is primarily attributable to new machines and MDCs which were procured and have come into the ownership of the Company and the application of the diminishing value method, resulting in a higher depreciation expense in the initial months of mining equipment operation.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future depreciation and amortization expenses may be affected.

Change in fair value of derivative asset

During the three months ended September 30, 2022, there was a change in the fair value of the derivative asset by $3.67 million in relation to our Power Supply Agreement with Energy Harbor LLC.

Non-operating expense

Non-operating expenses consist primarily of interest expense, loss on classification of assets held for sale and losses on foreign currency transactions.

Interest expense for the three months ended September 30, 2022 and 2021 were $1.56 million and $0.36 million, respectively. This was an increase of $1.2 million which was attributable to the interest costs charged on the loans taken out with Celsius Mining LLC, W Capital Advisors Pty Ltd and the Secured Convertible Promissory Notes issued in July of 2022.

During the three months ended September 30, 2022, the realized and unrealized loss on foreign currency transactions was $7.32 million, and for the three months ended September 30, 2021 there was a loss of $0.36 million.

There was a loss on re-classification to assets held for sale of $4.20 million recognized in relation to the sale of the miners to CleanSpark in the three month period ending September 30, 2022.

Net loss available to Common Shareholders

As a result of the foregoing, the Company recognized a net loss of $21.86 million for the three months ended September 30, 2022, compared to a net loss of $2.50 million for the three months ended September 30, 2021.

Results of Operations – Nine months Ended September 30, 2022 compared to the nine months ended September 30, 2021

Revenues

Cryptocurrency mining revenues from production for the nine months ended September 30, 2022 and 2021 were $40.91 million and $21.02 million respectively. This represented an increase of $19.88 million or 95% for the nine months ended September 30, 2022, over the nine months ended September 30, 2021. The increase in mining revenue was primarily attributable to an increase in the total Bitcoin produced. Bitcoin produced totaled 1,231.26 in the nine months ended September 30, 2022 compared with 501.74 in the nine months ended September 30, 2021, or an increase of 145% of Bitcoin produced over the respective periods. This increase was offset by the decrease in the average price of Bitcoin. During the 2022 period the average Bitcoin price was $31,620 whereas during the 2021 period the average price was $45,521.

Hosting co-location revenue for the nine months ended September 30, 2022 and 2021 were $9.84 million and $1.02 respectively. This increase is due to an increase in the number of co-location customers that we hosted during the period ended in September 2022.

Sales of equipment for the nine months ended September 30, 2022, were $10.48 million and $2.16 million respectively.

Net energy benefits for the nine months ended September 30, 2022, were $6.30 million and $0, respectively. This increase is due to there being no income from energy contracts in the prior period because we did not offer this service at that time.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future revenue and expenses may be affected.

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 cryptocurrency mining, and cost of mining equipment sold.

Cost of revenues for the nine months ended September 30, 2022 and 2021 were $40.95 million and $6.22 million, respectively. The increase in cost of revenue was primarily attributable to: an increase in power costs, increase in the deployed operations of cryptocurrency mining hardware. Included in our cost of revenues is any costs associated with offsetting carbon emissions.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future revenue and expenses may be affected.

Selling, general and administrative

Our selling, general and administrative expenses consist primarily of professional and management fees relating to: accounting, payroll, audit, and legal; equipment repairs; marketing; consultant fees and general office expenses.

Selling, general and administrative expenses for the nine months ended September 30, 2022 and 2021 were $20.88 million and $10.26 million respectively. The increase in selling, general and administrative expenses were attributable to a number of factors; payroll expenses increased by $5.40 million due to an increase in employee numbers during the period; equipment repair costs increased by $2.36 million; marketing costs increased by $1.06 million and operating lease expense increased by $1.24 million due to the new lease agreements entered into during the period.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future revenue and expenses may be affected.

Share based payments

Share based payments expenses for the nine months ended September 30, 2022 and 2021 were $2.12 million and $21.78 million respectively. In the nine months ended September 30, 2022, share based payments were largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $1.17 million and $0.87 million in relation to long-term incentives for the Company’s leadership team. The prior period contained a $5.53 million fair value modification to warrants issued, another $6.18 million warrants were issued, and $8.58 million share-based payments were made under an Incentive Compensation Program in relation to the Bid Implementation Agreement.

Depreciation and amortization

Depreciation consists primarily of depreciation of cryptocurrency mining hardware and MDC equipment.

Depreciation and amortization for the nine months ended September 30, 2022 and 2021 were $46.06 million and $7.98 million, respectively. The increase is primarily attributable to new machines and MDCs which were procured and have come into the ownership of the Company and the application of the diminishing value method, resulting in a higher depreciation expense in the initial months of mining equipment operation.

Given the subsequent sale transaction of property and assets located in Sandersville Georgia, future depreciation and amortization expenses may be affected.

Change in fair value of derivative asset

During the nine months ended September 30, 2022, there was a change in the fair value of the derivative asset of $21.38 million recognized in relation to our Power Supply Agreement with Energy Harbor LLC.

Non-operating expense

Non-operating expenses consist primarily of interest expense, impairment of financial assets, loss on classification of assets held for sale and losses on foreign currency transactions.

Interest expense for the nine months ended September 30, 2022 and 2021 were $4.36 million and $1.08 million, respectively. This was an increase of $3.28 million which was attributable to the interest costs charged on the loans taken out with Celsius Mining LLC, W Capital Advisors Pty Ltd and the Secured Convertible Promissory Notes issued in July of 2022.

There was an impairment of financial assets in relation to the equity accounted investment Cosmos Asset Management Pty Ltd of $1.11 million during the nine months to September 30, 2022.

There was a loss on re-classification to assets held for sale of $4.20 million recognized in relation to the sale of the miners to CleanSpark in the nine month period ending September 30, 2022.

During the nine months ended September 30, 2022, the realized and unrealized loss on foreign currency transactions was $6.36 million, and for the nine months ended September 30, 2021 there was a loss of $1.08 million.

Non-operating income

During the nine months ended September 30, 2022, there was other income recognized which mainly consisted of the sale of our intellectual property of $1.12 million and $0.59 million for curtailment income.

Net loss available to Common Shareholders

As a result of the foregoing, the Company recognized a net loss of $34.32 million for the nine months ended September 30, 2022, compared to a net loss of $47.26 million for the nine months ended September 30, 2021.

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 nine month period ended September 30, 2022, we financed our operations primarily through:

1. Net cash provided by operating activities of $25.14 million;

2. On October 15, 2021, an expansion of the Equipment Finance and Security Agreement was entered into with Foundry Digital LLC (“Foundry”) to purchase an additional 2000 Whatsminers M30’s delivered in October 2021. In total $13,185,062 was borrowed from Foundry, of which $1.42 is owed at September 30, 2022. The amount was paid in full on October 17 2022;

3. On December 9, 2021, MIG No.1 Pty Ltd entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd (“Marshall”) with a total loan facility of AUD$20 million (USD$12.98 million). Principal repayments will begin in January 2023. On November 11, 2022 $3 million of this loan was repaid, this has been disclosed in NOTE 14 Subsequent events.

4. On February 23, 2022, Luna Squares LLC entered into the Co-Location Agreement with Celsius Mining LLC, in connection with this agreement, Celsius Mining loaned Luna Squares LLC a principal amount of US$20,000,000, for the purpose of funding the infrastructure required to meet part of the obligations of the Co-Location Agreement. The Secured Promissory Note evidencing this loan accrues interest daily at rate of 12% per annum. Luna Squares LLC is required to amortize the loan at a rate of 15% per quarter, with principal repayments starting in the third quarter following the closing. This Secured Promissory Note has a maturity date of August 23, 2023. The outstanding balance as at September 30, 2022 is $17.59 million.

5. On July 8, 2022, the Company issued secured convertible promissory notes to investors in the aggregate principal amount of $3,600,000 in exchange for an aggregate of $3,600,000. The Secured Convertible Promissory Notes are convertible at the option of the holder at a price of $0.85 per share of our common stock. The Secured Convertible Promissory Notes bear interest of twenty percent (20%) per annum. One-half of the interest that accrues each month on the Secured Convertible Promissory Notes must be paid monthly. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Notes, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) one year after its issuance, or (ii) following an event of default.

6. On September 2, 2022, Mawson Infrastructure Group Pty Ltd entered into a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with a total loan facility of AUD$3 million (USD$1.9 million). This was amended on September 29, 2022 and the loan facility was increased to AUD$8 million (USD$5.2 million). As at 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 due March 2023. On October 14, 2022 AUD$5 million (USD $3.2 million) of this loan was repaid.

During the nine months ending September 30, 2022 we repaid $12.69 million of principal payments against the historical facilities provided by Foundry and Celsius.

We believe our working capital requirements will continue to be funded through a combination of the cash we expect to generate from future operations, our existing funds, external debt facilities available to us and further issuances of shares. These are expected to be adequate to fund our operations over the next twelve months. In addition, the Company has access to equity financing through the ATM offering facility entered in May 2022. For our business to grow it is expected we will continue investing in mining equipment, but we are likely to require additional capital in either the short-term or long-term.

Working Capital and Cash Flows

As of September 30, 2022, and December 31, 2021, we had cash and cash equivalents balance of $1.18 million and $5.47 million, respectively.

As of September 30, 2022, and December 31, 2021, our trade receivables balance was $11.79 million and $5.61 million, respectively.

As of September 30, 2022, we had $31.39 million of outstanding short-term borrowings, and as of December 31, 2021, we had $11.10 million of short-term borrowings. The short-term borrowings as of September 30, 2022, relate to the acquisition of cryptocurrency mining equipment under the Foundry agreements, and also 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 September 30, 2022, and as of December 31, 2021, we had $9.11 million and $7.64 million, respectively, of outstanding long-term borrowings. The long-term borrowings as of September 30, 2022, relate to the secured loan facility with Marshall Investments MIG Pty Ltd.

As of September 30, 2022, we had negative working capital of $24.69 million and as at December 31, 2021, we had negative working capital of $8.63 million. The decrease in working capital was primarily attributable to an increase in the Company’s short term and long-term borrowings during 2022, as compared to 2021.

The following table presents the major components of net cash flows (used in) provided by operating, investing and financing activities for the nine months ending September 30, 2022 and 2021:

For the nine months ended 30, 2022, net cash provided by operating activities was $25,141,208 and for the nine months ended September 30, 2021, net cash provided by operating activities was $8,337,277. The increase 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 nine months ended September 30, 2022 and 2021, net cash used in investing activities was $55,466,574 and $62,261,396, respectively. The net cash used in investing activities during September 30, 2022 was primarily attributable the acquisition of cryptocurrency mining equipment.

For the nine months ended September 30, 2022 and 2021, net cash provided by financing activities was $26,240,336 and $86,026,426, respectively. The cash provided by financing activities during September 30, 2022 was primarily attributable to proceeds from borrowings.

Financial condition

As at September 30, 2022 and December 31, 2021, we had net current liabilities of $24.69 million and $8.63 million respectively. As at September 30, 2022 and December 31, 2021, we had net assets of $92.77 million and $176.01 million respectively. As at September 30, 2022 we had an accumulated deficit of $103.81 million compared to $71.12 million as at December 31, 2021. Our cash position at September 30, 2022, was $1.18 million in comparison to $5.47 million at December 31, 2022. For the nine month period ending September 30, 2022 and September 30, 2021 the Company incurred a loss after tax of $34.32 million and a loss after tax of $47.26 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 addition, Mawson has an active At The Market (ATM) available for sale of shares of Common Stock having an aggregate offering price of up to $100.0 million. These are expected to be adequate to fund our operations over the next twelve months.

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, the widespread COVID-19 pandemic, including 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.

In relation to the Purchase and Sale Agreement and the Equipment Purchase and Sale Agreement with CleanSpark, the Company received in total $22.52 million in cash and 1,590,175 shares of common stock, par value $0.001 per share of CleanSpark during October 2022, and is due to receive $6.5 million in Seller financing in the form of promissory notes during December 2022, improving our overall working capital, liquidity and net asset position.

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. The Company has considered the following to be significant estimates made by management, including but not limited to:

Going concern assumption- Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Please see NOTE 1-GENERAL to the consolidated condensed financial statements in Item 1 of PART I of this Quarterly Report on Form 10-Q for more information about this assumption.

Long-lived assets- Management reviews long-lived assets for impairment whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include property and equipment and operating lease right-of-use assets. A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the estimated fair value of the asset.

Stock based compensation- Management used Black-Scholes to evaluate our awards and will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e)) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2022, due to the material weaknesses in our internal control over financial reporting described below. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at a level of reasonable assurance because management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.

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/PCAOB/SOX/SEC registrant requirements. In addition, this poses the risk that compliance and other reporting obligations are not dealt with in an adequate manner.

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

Information and Technology Controls. There are control deficiencies related to information technology (“IT”) general controls that aggregate into a material weakness. The inadequate design of these IT general and application controls prevent the system from providing complete and accurate information consistent with financial reporting objectives. 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 design or implement controls to ensure that data received from third parties is complete and accurate. Such data is relied on by the Company in determining amounts pertaining to mining and hosting revenue, net energy benefits, and cryptocurrency assets.

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

Notwithstanding the identified material weaknesses and management’s assessment that our internal control over financial reporting was not effective as of September 30, 2022, management believes that the consolidated financial statements included in this quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles. We rely on the assistance of outside advisors with expertise in these matters in preparing the financial statements.

Remediation

Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. Our management continues to work to improve its controls related to our material weaknesses. With the oversight of senior management and our audit committee, we continue to remediate the underlying causes of the identified material weaknesses, primarily through the performance of a risk assessment process; the development and implementation of formal, documented policies and procedures, improved processes and control activities (including an assessment of the segregation of duties); as well as the hiring of additional finance personnel for specific roles such as financial reporting. During the nine months to September 30, 2022, we made the following changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

• We have performed a risk assessment and designed controls for all significant business processes. We have continued implementation of entity level and process level controls with respect to the preparation and review of our consolidated financial statements as well as transactional level controls over all significant business processes and IT. We have developed process level controls relating to the review of manually prepared analyses and supporting information used to prepare our consolidated financial statements. We are in the process of implementing and validating these controls. At this time, we cannot state whether these controls will prove to be effective. Using criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control, we have developed a plan to assess the effectiveness of the internal control structure and procedures as at the end of the fiscal year.

The material weaknesses in our internal control over financial reporting will not be considered remediated until other information technology general controls and process-level controls operate for a sufficient period of time and can be tested and concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the identified material weaknesses, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above.

Changes in internal control over financial reporting

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

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, 2021. In addition, the Company wishes to disclose the following risk factors.

Listing on The Nasdaq Capital Market (“Nasdaq”)

Although our common stock is currently listed on Nasdaq, we may not be able to continue to meet Nasdaq’s minimum listing requirements or those of any other national exchange. On August 31, 2022 we received written notice from Nasdaq that we were not in compliance with the minimum bid price requirements for continued listing. The Nasdaq Listing Rules allow a period of 180 calendar days, or until February 27, 2023 to regain compliance. We are actively monitoring the closing bid price of our shares, and are considering implementing available options to regain compliance with the minimum bid price requirements. On October 24, 2022 we received written notice from Nasdaq that we were not in compliance with Nasdaq’s audit committee requirements for continued listing due to the resignation of one of our directors. The Nasdaq Listing Rules provide a cure period in order to regain compliance as follows: (a) until the earlier of our next annual stockholders’ meeting or September 13, 2023; or (b) if our next annual stockholders’ meeting is held before March 13, 2023, then until March 13, 2023. We have begun the recruitment process to fill the vacancy on the audit committee to regain compliance with the audit committee requirements.

If we are unable to maintain listing on Nasdaq or if a liquid market for our common stock does not develop or is not sustained, our common stock may remain thinly traded. If, for any reason, Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur, each of which could have a material adverse effect on our shareholders:

• The liquidity of our common stock;
• The market price of our common stock;
• Our ability to obtain financing for the continuation of our operations;
• The number of investors that will consider investing in our common stock;
• The number of market makers in our common stock;
• The availability of information concerning the trading prices and volume of our common stock; and
• The number of broker-dealers willing to execute trades in our common stock.

The Cryptocurrency Industry has recently experienced a downturn

As of September 30, 2022, the price of Bitcoin was down by over 50% from the beginning of the year and many businesses in this industry have been impacted by this downturn. The fall in the Bitcoin price directly affects our ability to generate revenue. Further, volatility in energy prices has meant that the major input cost to generate Bitcoin has increased. In July of 2022, Celsius Networks, LLC and Celsius Mining LLC, filed for Chapter 11 bankruptcy. Celsius Mining LLC is one of our significant hosting customers and its failure to pay (or pay timely) amounts it owes to us when due could have a material adverse effect on our financial situation.

Inflation in the global economy could negatively impact our business and results of operations.

General inflation in the United States and around the world has risen to levels not experienced in recent decades. General inflation, including rising prices for energy, metals, components, and other inputs as well as rising wages negatively impact our business by increasing our operating costs. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not effective, our business, financial condition, results of operations, and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.

Our business could be harmed by prolonged internet outages.

Our operations require a significant amount of electrical power and access to high-speed internet to be successful. If we are unable to secure sufficient electrical power, or if we lose, internet access for a prolonged period, we may be required to reduce our operations or cease them altogether. If this occurs, our business and results of operations may be materially and adversely affected.

Increased Interest Rates

Central banks around the world (including the US Federal Reserves, and the Reserve Bank of Australia) have been increasing their interest rates. While our current borrowings are at fixed rates of interest, any future borrowings or refinancing may be at higher interest rates than the rates that we have obtained in the past.

Network difficulty

The Bitcoin network hash rate and the network difficulty have in recent times both been at all-time highs. An increase in the network difficulty means that for the same amount of effort, a Bitcoin miner will receive less reward. If the network difficulty continues to increase, the amount of Bitcoin we can produce with the equipment that we have at any given point in time, will decrease.

We are subject to risks associated with our need for significant electrical power.

Our operations have required significant amounts of electrical power, and, as we continue to expand our mining fleet, we anticipate our demand for electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments. If power prices increase or decrease materially this will likely materially impact whether we can generate Bitcoin profitably, and how much net energy benefits we will be entitled to.

Additionally, our operations could be materially adversely affected by prolonged power outages. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected.

We may need to raise additional capital to continue our operations and execute our business strategy.

We expect that we may incur net losses for the foreseeable future. Accordingly, our ability to continue as a going concern and execute our business strategy depends on our ability to raise additional capital through equity, debt or structured financings, collaborations and strategic alliances or other similar types of arrangements.

Our capital needs have depended on, and will continue to depend on, many factors that are highly variable and difficult to predict, including:

• the rate of growth we choose to pursue;
• the cost of energy;
• the cost of key supplies, materials and equipment; and
• the price of Bitcoin;

At September 30, 2022, our cash and cash equivalents were approximately $1.18 million and our accumulated deficit was approximately $103. 81 million. We incurred a net loss of approximately $35.23 million for the nine month period ended September 30, 2022. We may never become profitable. Based on some of our current operating plan estimates, we have sufficient cash to satisfy our working capital needs and other liquidity requirements over the next 12 months from the date of issuance of the accompanying consolidated financial statements. We may need to raise additional capital or significantly curtail our planned operations to remain a going concern.

Additional capital may not be available to us, or even if it is, the cost of such capital may be high. We may be forced to obtain additional capital when our stock price or trading volume or both are low, or when the general market for cryptocurrency companies is weak. Raising capital under any of these or similar scenarios, if we can raise any at all, may lead to significant dilution to our existing stockholders.