Big Digital Energy, Inc.: Form 10-Q for the period ended Sep 30, 2023

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

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

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 summarized below.

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” below.

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.

The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those expressed or implied in our forward-looking statements:

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

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, the risk factors set out in Item 1A. Risk Factors.

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 do not undertake 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.

Company Overview

Mawson Infrastructure Group, Inc. (the “Company” or “Mawson” or “we”) is a digital infrastructure company headquartered in the United States.

The Company has 3 primary businesses – digital currency mining, co-location and related services, and energy management.

The Company develops and operates digital infrastructure for digital currency, such as bitcoin, mining activities on the Bitcoin blockchain network. The Company also provides digital infrastructure services for its co-location customers that use computational machines to mine bitcoin through our data centers and the Company charges for the use of its digital infrastructure and related services. The Company also has an energy management program through which it can receive net energy benefits in exchange for curtailing the power we utilize from the grid in response to instances of high electricity demand.

The Company may also transact in digital currency mining, data center infrastructure and related equipment on a periodic basis, subject to prevailing market conditions.

The Company designs, develops, operates and manages its digital infrastructure to responsibly support the Bitcoin network by contributing to the scale, structure, and decentralization of the Bitcoin network and optimizing energy consumption. The Company helps contribute to the ecosystem and growth of digital currencies and commodities as there continues to be a global transition to the new digital economy.

We strive to operate and invest in markets and communities that offer low or zero carbon renewable energy sources and participate in energy management activities. We also invest in the communities in which we operate and support our broader ecosystem.

Recent Developments

On August 22, 2023, Mr. James Edward Manning resigned as a director of Mawson Infrastructure Group Inc. (“the Company”). Mr. Manning resigned from his role as the sole director of the Company’s Australian subsidiaries effective September 4, 2023.

On September 28, 2023, the Board of Directors of the Company announced Mr. Ryan Costello, former United States Congressman from Pennsylvania, to serve as member of the Board of Directors effective October 2, 2023. Mr. Costello will serve on the Board until the Company’s 2024 annual meeting of stockholders at which time he will stand for election alongside the Company’s current directors. The Board has also appointed Mr. Costello to serve as a member of the Audit, and Nominating and Corporate Governance Committees, and chair of the Compensation Committee. Mr. Costello’s appointment was decided upon after seeking a nomination and recommendation from the Company’s Nominating and Corporate Governance Committee. The Board has determined that Mr. Costello qualifies as “independent” in accordance with the published listing requirements of NASDAQ.

On October 4, 2023, the company received written notice (“The Bid Price Letter”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company is not in compliance with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810-2(c)(3)(A), the Company has a period of 180 calendar days, or until April 1, 2024, to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this 180-day period. The Bid Price Letter is a notice of deficiency, not delisting, and does not currently affect the listing or trading of shares of our common stock on Nasdaq, which will continue to trade under the symbol “MIGI.” The Company intends to actively monitor the closing bid price of shares of its common stock and may, if appropriate, consider implementing available options to regain compliance with the Bid Price Rule. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company’s common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.

Environment, Sustainability, Governance

The Company has a strategy to source renewable or sustainable sources of energy, including carbon-neutral or low carbon emissions sources for the majority of its operations. These are key criteria when analyzing a new site for acquisition, lease or selling an existing site. The Company believes it can make a positive contribution towards lowering carbon emissions by supporting carbon neutral or low-emissions power sources.

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

The Company also invests and supports the communities in which we operate and support our broader ecosystem.

Results of Operations – Three months Ended September 30, 2023 compared to the three months ended September 30, 2022

30

Revenues

Digital currency mining revenues from production of bitcoin for the three months ended September 30, 2023 and 2022 were $6.90 million and $5.91 million respectively. This represented an increase of $0.99 million or 17%. During the 2023 period, the Company continued to increase its self-mining operations at its two Pennsylvania mining facilities, post transition from the prior Georgia facilities that were used for mining in 2022 period. The increase in mining revenue for the period was primarily attributable to the average price of bitcoin increasing. During the quarter ended September 30, 2022, the average price of bitcoin was $21,293, whereas the average price of bitcoin during the quarter ended September 30, 2023, was $28,109, a 32% increase in the average price. However, this increase was offset by the total bitcoin produced in the 2023 period versus the 2022 period. Bitcoin produced totaled 245.65 in the 2023 period compared with 282.99 in the 2022 period, a decrease of 13% of bitcoin produced over the respective period.

Co-location revenue for the three months ended September 30, 2023, and 2022 were $2.96 million and $5.73 million respectively. The decrease in revenue was due to the expiration of the co-location agreement with Celsius Mining LLC which occurred on August 23, 2023. Celsius Mining LLC was the Company’s sole co-location customer at that time.

Net energy benefits for the three months ended September 30, 2023, and 2022, were $1.48 million and $6.30 million respectively. This represented a decrease of $4.82 million or a 77% decrease. This decrease is due to the Company participating less in the energy programs in the 2023 period because of lower power prices than in the 2022 period.

Sales of digital mining equipment for the three months ended September 30, 2023, and 2022, were $0 million and $10.39 million respectively.

Operating Cost and Expenses

Our operating costs and expenses include cost of revenues, selling, general and administrative expenses; stock-based compensation; and depreciation and amortization.

Cost of revenue

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

Cost of revenue for the three months ended September 30, 2023, and 2022 were $7.72 million and $18.18 million, respectively. The decrease in cost of revenue was primarily attributable to a decrease in power costs related to the energy used to operate the Company mining equipment and co-located mining equipment within our facilities.

Selling, general and administrative

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

Selling, general and administrative expenses for the three months ended September 30, 2023, and 2022 were $3.66 million and $5.00 million, respectively, which is a reduction of $1.34 million in the period. The decrease in these expenses is primarily attributable to payroll costs decreasing by $1.16 million due to cost reduction actions that the Company has undertaken during the quarter, and equipment repairs decreasing by $0.56 million. This was offset by a $1.15 million adjustment to accruals which occurred in the 2022 period.

Stock based compensation

Stock based compensation expenses for the three months ended September 30, 2023, and 2022 were $3.78 million and $0.80 million, respectively. In the three months ended September 30, 2023, stock based compensation was largely attributable to costs recognized in relation to long-term incentives for the Company’s management of $3.28 million and warrants issued to Celsius Mining LLC amounting to $0.50 million.

Depreciation and amortization

Depreciation consists primarily of depreciation of digital currency mining hardware and modular data center (“MDC”) equipment.

Depreciation and amortization for the three months ended September 30, 2023, and 2022 were $11.88 million and $16.25 million, respectively. The decrease is primarily attributable to the Company owning less miners in the quarter ended September 30, 2023, due to the sale of its Georgia facility and the miners and other equipment associated with it in November of 2022. The Company has continued to increase operations at its two Pennsylvania facilities where, as of September 30, 2023, it had approximately 16,730 miners online and hashing. We also revised our estimate of the useful life of miners with effect from December 1, 2022, to better reflect the pattern of consumption. The change was affected by updating the method of depreciation from reducing balance to the straight-line method from that date.

Change in fair value of derivative asset

During the three months ended September 30, 2023, and 2022, there was a loss on the fair value of the derivative asset by $0.52 million and gain of $3.67 million, respectively, in relation to our power supply arrangements. The loss on the derivative asset was due to the fall in the price of energy costs and due to less time left on the power supply agreement.

Non-operating expenses

Non-operating expenses consist primarily of interest expenses, losses on foreign currency transactions, impairment of equity accounted investment and other expenses.

Interest expenses for the three months ended September 30, 2023 and 2022 were $0.51 million and $1.56 million, respectively. This decrease of $1.05 million was attributable to the paydown of debt during 2022 and the nine months ended September 30, 2023, resulting in lower interest expense.

During the three months ended September 30, 2023, the company recognized an impairment of $1.84 million on its equity accounted investment Tasmania Data Infrastructure Pty Ltd.

During the three months ended September 30, 2023, the realized and unrealized loss on foreign currency transactions was $0.60 million, in contrast to the three months ended September 30, 2022, where there was a loss of $7.32 million due to the movement in foreign exchange rates.

Net loss attributable to Mawson Infrastructure Group, Inc. stockholders

As a result of the foregoing, the Company recognized a net loss of $19.05 million for the three months ended September 30, 2023, compared to a net loss of $20.86 million for the three months ended September 30, 2022.

Results of Operations – Nine months Ended September 30, 2023, compared to the nine months ended September 30, 2022

33

Revenues

Digital currency mining revenues from production for the nine months ended September 30, 2023, and 2022 were $14.55 million and $40.91 million respectively. This represented a decrease of $26.36 million or 64%. The decrease in mining revenue for the period was primarily attributable to a decrease in the total bitcoin produced. bitcoin produced totaled 548.38 in 2023 compared with 1,231.26 in the 2022 period, a decrease of 55% of bitcoin produced over the respective period due to less miners being deployed during the current period. During the current period, the Company continued to increase its self-mining operations across its Pennsylvania facilities, whereas the prior period included the operations of the Georgia facility, which was sold in October 2022. In addition to this, the difficulty to mine bitcoin was also higher during the current nine month period. Another reason for the decrease in digital currency mining revenue is due to the average price of bitcoin being less for the nine months ended September 30, 2023, than during the nine months ended September 30, 2022. During the nine month period ended September 30, 2023, the average price of bitcoin was $26,338 whereas the average price of bitcoin during the nine month period ended September 30, 2022 was $31,620, a 17% decrease in the average price.

Co-location revenue for the nine months ended September 30, 2023, and 2022 were $11.88 million and $9.84 million respectively. This increase is due to an increase in the number of miners we co-located during the 2023 period.

Net energy benefits for the nine months ended September 30, 2023, and 2022, were $2.93 million and $10.48 respectively. This represented a decrease of $7.55 million or a 72% decrease. This decrease is due to the Company participating less in the energy programs and selling less energy in the 2023 period because the price of power was much lower than in the 2022 period.

Sales of digital mining equipment for the nine months ended September 30, 2023, and 2022, were $0.19 million and $6.30 million, respectively.

Operating Cost and Expenses

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

Cost of revenues.

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

Cost of revenues for the nine months ended September 30, 2023, and 2022 were $19.42 million and $40.95 million, respectively. The decrease in cost of revenue was primarily attributable to a decrease in power costs related to energy to operate our mining equipment and co-location facilities. This decrease is attributable to less miners being used in operations during the current nine-month period due to the sale of the Georgia site.

Selling, general and administrative.

Our selling, general and administrative expenses consist primarily of professional and management fees relating to: accounting, employee compensation, audit, and legal; equipment repairs; marketing; freight; insurance; consultant fees; lease amortization and general office expenses.

Selling, general and administrative expenses for the nine months ended September 30, 2023, and 2022 were $14.90 million and $20.88 million, respectively. Total selling, general and administrative expenses were reduced by $5.98 million in the period. Some of the main factors impacting the decrease the expenses were due to payroll costs decreasing by $0.90 million; marketing costs decreased by $0.76 million; contact labor costs decreased by $1.1 million; recruitment costs decreased by $0.37 million and equipment repairs decreased by $2.0 million, as a result of the cost reduction actions that the Company has undertaken during the period. This reduction was offset by an increase in freight of $0.66 million.

Stock based compensation

Stock based compensation expenses for the nine months ended September 30, 2023, and 2022 were $5.48 million and $2.12 million, respectively. In the nine months ended September 30, 2023, stock based compensation was largely attributable to costs recognized for warrants issued to Celsius Mining LLC amounting to $1.50 million, shares issued to W Capital Advisors Pty Ltd amounting to $0.31 million for consultancy and advisory work and $3.66 million in relation to Company’s employees’ long term incentive plans.

Depreciation and amortization

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

Depreciation and amortization for the nine months ended September 30, 2023, and 2022 were $28.63 million and $46.06 million, respectively. The decrease is primarily attributable to the Company owning less miners following the sale of its Georgia facilities in October 2022, and the increase self-mining operations at its two Pennsylvania facilities in the nine month period ended September 30, 2023. There was also a revised estimate of the useful life of miners with effect from December 1, 2022 to better reflect the pattern of consumption the change being effected by changing the method of depreciation from reducing balance to the straight line method from that date.

Change in fair value of derivative asset

During the nine months ended September 30, 2023, and 2022, there was loss on the fair value of the derivative asset by $6.65 million and a gain of $21.38 million, respectively, in relation to our power supply arrangements. The loss on the derivative asset is due to the fall in the price of energy costs combined with less time left on the power supply agreement.

Non-operating expense

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

Interest expense for the nine months ended September 30, 2023 and 2022 were $2.06 million and $4.36 million, respectively. This was a decrease of $2.30 million which was attributable to the paydown of debt during 2022 and the current nine month period resulting in a lower interest expense.

During the nine months ended September 30, 2023, the company recognized an impairment of $1.84 million on its equity accounted investment Tasmania Data Infrastructure Pty Ltd.

During the nine months ended September 30, 2023, the realized and unrealized loss on foreign currency transactions was $1.42 million, and for the nine months ended September 30, 2022, there was a loss of $6.36 million due to the movement in foreign exchange rates.

Non-operating income

Non-operating income consists primarily of profit on sale of site assets, gain on sales of marketable securities and other income.

The profit on sale of site assets for the nine months ended September 30, 2023, and 2022 were $3.35 million and $0, respectively. The 2023 amounts mainly relate to the sale of the Luna Squares Texas LLC and 59 transformers.

The gain on sales of marketable securities for the nine months ended September 30, 2023, and 2022 were $1.44 million and $0, respectively. The gain during the nine-month period ended September 30, 2023 was in relation to the sale of CleanSpark, Inc shares.

Net loss attributable to Mawson Infrastructure Group, Inc. stockholders

As a result of the foregoing, the Company recognized a net loss of $47.49 million for the nine months ended September 30, 2023, compared to a net loss of $34.32 million for the nine months ended September 30, 2022.

Liquidity and Capital Resources

General

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. For the nine-month period ended September 30, 2023, we financed our operations primarily through:

1. Net cash used by operating activities of $4.82 million;

2. On September 2, 2022, Mawson AU entered into a Secured Loan Facility Agreement with W Capital Advisors Pty Ltd with a total loan facility of AUD$8 million (USD$5.2 million). During the nine-month period ending September 30, 2023, the Company received AUD$3 million (USD$1.99 million) from this loan facility. As at September 30, 2023, AUD$1.51 million (USD$0.97 million) has been drawn down from this facility. The Secured Loan Facility expired in March 2023 and the Company and W Capital Advisors Pty Ltd are in ongoing discussions regarding the terms and extension of the loan. W Capital Advisors Pty Ltd and Mawson AU have each reserved their rights.

3. The Company has the ability through its ATM Agreement to sell shares of its common stock. Effective May 4, 2023, the Company filed a prospectus supplement to amend, supplement and supersede certain information contained in the earlier prospectus and prospectus supplement, which reduced the number of shares of common stock the Company may offer and sell under the ATM Agreement to an aggregate offering price of up to $9,000,000 from time to time. During the nine months ended September 30, 2023, 415,271 shares were issued as part of the ATM Agreement for cash proceeds of $1.19 million, net of issuance costs. The Company had been contractually restricted from issuing any stock under its ATM Agreement until November 7, 2023. but the Company may now seek to utilize its ATM Agreement to sell shares of its common stock when and as permitted by the offering limits set forth in General Instruction I.B.6 of Form S-3, which is referred to as the “baby shelf” rules.

4. On May 3, 2023, the Company entered into a definitive agreement with institutional investors for the issuance and sale of 2,083,336 shares of its common stock (or pre-funded warrants in lieu thereof) at a purchase price of $2.40 per share of common stock in a registered direct offering. In addition, in a concurrent private placement, the Company issued to the institutional investors unregistered warrants to purchase up to 2,604,170 shares of its common stock with an exercise price of $3.23 per share, which are exercisable nine months following issuance for a period of five and one-half years following issuance. The shares of common stock and pre-funded warrants described above were offered and sold by the Company pursuant to a “shelf” registration statement on Form S-3 (File No. 333-264062). The warrants to purchase common stock described above were offered and sold by the Company pursuant to Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. This offering closed on May 8, 2022. The net amount raised was $4.60 million. As a condition of the offering the Company was precluded from issuing new shares until 60 days after the offering closed, or new shares under the ATM until November 7, 2023.

During the nine months ending September 30, 2023, we repaid $12.83 million of principal payments against the historical facilities provided by Celsius, Marshall and W Capital Advisors Pty Ltd.

We believe our working capital requirements will continue to be funded through a combination of the cash we expect to generate from future operations, our existing funds, external debt facilities that may be available to us, further issuances of shares, and other potential sources of capital, monetization or funds. These are expected to be adequate to fund our operations over the next twelve months. For our business to grow it is expected, we may continue investing in mining equipment and infrastructure and will require additional working capital in the short-term and long-term. As at September 30, 2023 we had an aggregate of $17.78 million of debt that is required to be repaid within five months unless we refinance, unless we refinance or renegotiate the terms. In addition, the Celsius deposit of $15.33 million is the subject of a dispute.

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

Working Capital and Cash Flows

As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents balance of $1.50 million and $0.95 million, respectively.

As of September 30, 2023 and December 31, 2022, our trade receivables balance was $10.61 million and $10.46 million, respectively.

As of September 30, 2023, we had $17.78 million of outstanding short-term borrowings, and as of December 31, 2022, we had $23.61 million of short-term borrowings. The short-term borrowings as of September 30, 2023, relate to the to the secured loan facilities with Celsius Mining LLC, W Capital Advisors Pty Ltd, and Marshall Investments MIG Pty Ltd, and the secured convertible promissory notes issued to W Capital Advisors Pty Ltd. As of September 30, 2023, and as of December 31, 2022, we had $0 and $4.51 million, respectively, of outstanding long-term borrowings.

As of September 30, 2023, we had negative working capital of $32.98 million and as at December 31, 2022, we had negative working capital of $15.17 million.

The following table presents the major components of net cash flows (used in) provided by operating, investing and financing activities for the three months ending September 30, 2023, and 2022:

For the nine months ended September 30, 2023, net cash used by operating activities was $4,818,073 and for the nine months ended September 30, 2022, net cash provided by operating activities was $25,141,208. The decrease in net cash provided by operating activities was primarily attributable to timing differences in trade and other receivables and trade and other payables.

For the nine months ended September 30, 2023, net cash provided by investing activities was $10,510,543 and for the nine months ended September 30, 2022, net cash used in investing activities was $55,466,574. The net cash provided by investing activities during September 30, 2023, was primarily attributable to the proceeds from sale of investment shares in CleanSpark, Inc.

For the nine months ended September 30, 2023, net cash used in financing activities was $5,115,470 and for the nine months ended September 30, 2022, net provided by financing activities was $26,240,336. The cash used in financing activities during September 30, 2023, was primarily attributable to the repayment of borrowings.

Material Cash Requirements

The following discussion summarizes our material cash requirements from contractual and other obligations.

In December 2021 MIG No. 1 Pty Ltd entered into a Secured Loan Facility Agreement with Marshall Investments MIG Pty Ltd. The loan matures in February 2024 and bears interest at a rate of 12% per annum (with an overdue rate provision of an additional 500bps), payable monthly with interest payments commencing that commenced in December 2021. This loan facility is secured by direct assets of MIG No.1 Pty Ltd and a general security agreement given by the Company. Principal repayments began during November 2022. The outstanding balance is $8.05 million as at September 30, 2023, all of which is classified as a current liability. MIG No. 1 Pty Ltd has not made a principal and interest payment since May 2023. MIG No. 1 Pty Ltd and Marshall are in ongoing discussions with respect to the payment, and the loan terms generally. Marshall and MIG No. 1 Pty Ltd have each reserved their rights.

On February 23, 2022, Luna Squares LLC entered into a Co-Location Agreement with Celsius Mining LLC. In connection with this agreement, Celsius Mining LLC loaned Luna Squares LLC a principal amount of $20 million, 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 (with an overdue rate provision of an additional 200bps). 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 $8.24 million as of September 30, 2023, all of which is classified as a current liability. Celsius Mining LLC transferred the benefit of the promissory note to Celsius Network Ltd. Celsius Mining LLC and Celsius Network Ltd filed for Chapter 11 bankruptcy protection on July 13, 2022. Under the Co-location Agreement, Celsius Mining LLC advanced $15.33 million to Luna Squares LLC that were held as a deposit. Whether that amount has been forfeited or must be returned to Celsius Mining LLC is the subject of a commercial dispute between the parties.

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$3.00 million (USD$1.9 million). This was amended on September 29, 2022, and the loan facility was increased to AUD$8.00 million (USD$5.2 million). As at September 30, 2023, AUD$1.51 million (USD$0.97 million) has been drawn down from this facility, all of which is classified as a current liability. The Secured Loan Facility accrues interest daily at a rate of 12% per annum and is paid monthly. Principal repayments are paid ad hoc in line with the loan facility agreement. The Secured Loan Facility expired in March 2023 and Mawson Infrastructure Group Pty Ltd and W Capital Advisors Pty Ltd are in ongoing discussions in respect of the facility. On October 30, 2023, Mawson AU appointed voluntary administrators, and the facility will be managed as part of the voluntary administration.

On July 8, 2022, the Company issued secured convertible promissory notes to investors in the aggregate principal amount of $3.60 million (the “Secured Convertible Promissory Notes”) in exchange for an aggregate of $3.60 million in cash. 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. All of the investors included in this letter variation elected for the pre-payment option and therefore there were $3.1 million principal repayments made during November 2022. The final convertible noteholder who was not a party to this variation opted to enter into an arrangement whereby it received pre-payment of interest but agreed that repayment of the principal was not required therefore the remaining $0.50 million has been classified as a current liability. The convertible note matured in July 2023 and the Company has not repaid the principal amount. Interest has been accrued from July onwards and therefore the outstanding balance is $0.53 million as at September 30, 2023, all of which is classified as a current liability.

Financial condition

As at September 30, 2023 and December 31, 2022, we had net current liabilities of $32.98 million and $15.17 million respectively. As at September 30, 2023 and December 31, 2022, we had net assets of $40.05 million and $76.17 million respectively. As at September 30, 2023, we had an accumulated deficit of $169.75 million compared to $122.26 million as at December 31, 2022. Our cash position at September 30, 2023, was $1.50 million in comparison to $0.95 million at December 31, 2022. For the nine-month period ending September 30, 2023 and September 30, 2022 the Company incurred a loss after tax of $47.49 million and a loss after tax of $34.32 million respectively. Included in trade and other receivables is a $2 million payment being the final payment due from CleanSpark, Inc for the sale of the Georgia facility. CleanSpark, Inc has disputed this payment and there is uncertainty as to whether the Company can recover this amount in part or full.

Our primary requirements for liquidity and capital are working capital, capital expenditures, public company costs and general corporate needs. In particular, we have large power usage costs, and other significant costs include our lease, operational and employee costs. We expect these capital and liquidity 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.

We require additional capital to respond to near-term debt repayment obligations, competitive pressure, market dynamics, new technologies, customer demands, business opportunities, challenges, potential acquisitions or unforeseen circumstances, and we will likely need to determine to engage in equity or debt financings in the short term. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our ability to continue to fund, grow or support our business model and to respond to business challenges could be significantly limited, our business, financial condition and results of operations could be adversely affected, and this may result in bankruptcy or our ceasing operations.

The Company is taking steps to preserve cash by optimizing costs and negotiating with suppliers to improve their terms of trade. The Company has been improving its revenue generation by improving the efficiency of its operations. The Company will continue to seek to optimize its cashflows.

Non-GAAP Financial Measures

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

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, change in fair value of derivative asset, impairment of financial assets, unrealized gains/losses on share of associates, and certain non-recurring expenses. We believe that adjusted EBITDA is useful to investors in comparing our performance across reporting periods on a consistent basis.

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Critical accounting estimates

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

Celsius Mining LLC loaned $20 million to Luna Squares LLC, through a Secured Promissory Note (the “Celsius Promissory Note”), which had a maturity date of August 23, 2023, and a total outstanding balance as at September 30, 2023, of $8.24 million. Luna Squares LLC has not repaid the loan as required on the maturity date, and is therefore in default. Celsius Mining LLC transferred to benefit of the Celsius Promissory Note to Celsius Network Ltd. Celsius Network Ltd has so far not taken any formal steps to enforce its rights against Luna Squares LLC or the collateral, but has notified Luna Squares the default interest is payable.

The Company has a Secured Loan Facility Agreement with Marshall Investments GCP Pty Ltd ATF for the Marshall Investments MIG Trust (“Marshall”). The loan matures in February 2024 and the total outstanding balance is $8.05 million as at September 30, 2023. MIG No. 1 Pty Ltd has not made a principal and interest payment since May 2023, despite such payments falling due, and is therefore in default. MIG No. 1 Pty Ltd is also in default of a number of other covenants under the terms of the loan. MIG No. 1 Pty Ltd and Marshall are in ongoing discussions with respect to the payment, and the loan terms generally. Marshall and MIG No. 1 Pty Ltd have each reserved their rights.

A subsidiary of the Company in Australia, Mawson AU has a Secured Loan Facility Agreement for working capital with W Capital Advisors Pty Ltd with a total loan facility of AUD$8 million (USD$5.2 million) (“Working Capital Loan”). As at September 30, 2023, AUD$1.51 million (USD$0.97 million) has been drawn down from this facility. The Secured Loan Facility expired in March 2023, and Mawson AU did not extend the maturity date, and has not repaid the loan amount, and is therefore in default. W Capital Advisors Pty Ltd and Mawson AU each reserved their rights.

The Company has a Secured Convertible Promissory Note with W Capital Advisors Pty Ltd with an outstanding balance of $0.50 million as at September 30, 2023. The Convertible Note matured in July 2023. W Capital Advisors did not convert the note, and the Company has not repaid the face value of the, and is therefore in default. W Capital Advisors Pty Ltd has not taken formal steps to enforce its rights in connection with the Convertible Note (including against the relevant collateral) and the Company reserves its rights.

The Company, or its subsidiaries, have not fulfilled specific payment obligations related to the Celsius Promissory Note, Marshall loan, the Working Capital Loan and Secured Convertible Promissory Note mentioned above. Consequently, the creditors associated with these debt facilities may initiate actions as allowed by relevant grace periods. This includes the possibility of opting to expedite the repayment of the principal debt, pursuing legal action against the Company for payment default, raising interest rates to the default or overdue rate, or taking appropriate measures concerning collateral (including appointing a receiver), if applicable.

Evaluation of disclosure controls and procedures

Our Board of Directors and management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e)) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Our Board of Directors and 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, 2023, including 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.

Whilst remediation actions are ongoing and controls have been implemented across all business processes, the material weaknesses in our internal control over financial reporting and information technology will not be considered remediated, until controls have operated for a sufficient period of time and have been tested for and concluded to be operating effectively. As operating effectiveness testing is ongoing as of the date of this report, we continue to disclose the following material weaknesses.

Significant Reliance on Certain Individuals. There is inadequate segregation of duties in place related to our financial reporting and other review and oversight procedures due to the lack of sufficient accounting personnel. This is not inconsistent with similar small organizations. This gives rise to the risk of lack of ability to react in a timely manner to operations issues and to meet the requirements of the SEC, U.S. GAAP and the Sarbanes-Oxley Act of 2002. In addition, this poses the risk that compliance and other reporting obligations are not dealt with in an adequate manner.

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

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

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

Fixed asset verification. The Company did not properly execute its designed controls around physical asset verification. Together with system limitations, restricting tracking of fixed asset movements, there is a risk around the existence of fixed assets.

Notwithstanding the identified material weaknesses and management’s assessment that our disclosure controls and procedures were not effective as of September 30, 2023, management believes that the consolidated condensed financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles. We rely on the assistance of outside advisors with expertise in these matters in preparing the financial statements.

Remediation

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

Our remediation efforts commenced in fiscal year 2022, when we performed a risk assessment, designed controls, and gradually implemented controls for all business processes. In the current financial year, management updated the initial risk assessment, refined control designs, continued the implementation of controls and performed ongoing remediation efforts to uplift the quality and effectiveness of existing controls. Remediation efforts further included the implementation of new IT systems and applications with robust controls, segregating duties through implementing system workflows and the hiring of qualified personnel in financial reporting and IT. A small number of controls remain to be implemented in the upcoming quarter.

Whilst controls have been implemented across all business processes and are operating, the material weaknesses in our internal control over financial reporting and information technology will not be considered remediated until controls have operated for a sufficient period of time and have been tested for and concluded on for effectiveness. Further testing of the effectiveness of controls is planned in the subsequent quarter.

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

Changes in internal control over financial reporting

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

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

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

The Company’s risk factors were disclosed in (i) Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed on March 23, 2023 and (ii) Part II, Item 1A of our Quarterly Report on form 10-Q for the quarter ended March 31, 2023. In addition, the Company includes the additional risk factors and updates to existing risk factors below:

Listing on The Nasdaq Capital Market (“Nasdaq”)

On October 4, 2023, the company received written notice (“The Bid Price Letter”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company is not in compliance with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810-2(c)(3)(A), the Company has a period of 180 calendar days, or until April 1, 2024, to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this 180-day period. The Bid Price Letter is a notice of deficiency, not delisting, and does not currently affect the listing or trading of shares of our common stock on Nasdaq, which will continue to trade under the symbol “MIGI.” The Company intends to actively monitor the closing bid price of shares of its common stock and may, if appropriate, consider implementing available options to regain compliance with the Bid Price Rule. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company’s common stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel.

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 stockholders:

• The liquidity of our common stock;
• The market price of our common stock;
• Our ability to obtain financing for the continuation of 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.

We will need to raise substantial additional capital to continue our operations and execute our business strategy, and we may not be able to raise adequate capital on a timely basis, on favorable terms, or at all.

We have a history of losses from operations, we expect negative cash flows from our operations to continue for the foreseeable future, and we expect that our net losses will continue for the foreseeable future as we seek to increase the efficiency of our operations, find new co-location customers, and grow the size of our self-mining operations. These circumstances raise substantial doubt about our ability to continue as a going concern. Our financial statements as of September 30, 2023, have been prepared on the basis that we will be able to continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. At September 30, 2023, our accumulated deficit was $169.75 million, our cash and cash equivalents were $1.50 million, and we had negative working capital of $32.98 million. Advancing our future plans will require substantial additional investment. Based on our current operating plan estimates, we do not have sufficient cash to satisfy our working capital needs and other liquidity requirements over the next 12 months from the date of this report. We will need to raise substantial additional capital in the near term to continue to fund our operations and execute our current business strategy. The amount and timing of our capital needs have and will continue to depend on many factors, as discussed further below as well as under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources.”

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

• working capital,
• capital expenditures,
• public company costs and
• general corporate needs.

We are seeking to raise additional capital through a variety of means, including equity, equity-linked or debt securities offerings, or other types of arrangements or sources of capital, monetization or funds. Our past success in raising capital through equity offerings should not be viewed as an indication we will be successful in raising capital through those or any other means in the future. We expect that our ability to raise additional capital and the amount of capital available to us will depend not only on our operations, assets and progress effecting our business plan, but also on several factors outside of our control, such as macroeconomic and financial market (including cryptocurrency market) conditions.

Unstable and unfavorable market and economic conditions may harm our ability to raise additional capital. An economic downturn, recession or recessionary concerns, delay or failure of the U.S. government to raise the federal debt ceiling, increased inflation, rising interest rates, adverse developments affecting financial institutions or the financial services industry, or the occurrence or continued occurrence of events similar to those in recent years, such as a fall in the price of bitcoin, the COVID-19 pandemic or other public health emergencies, geopolitical conflict (such as the war in Ukraine and Gaza), natural/environmental disasters, supply-chain disruptions, terrorist attacks, strained relations between the U.S. and a number of other countries, social and political discord and unrest in the U.S. and other countries, and government shutdowns, among others, increase market volatility and have long-term adverse effects on the U.S. and global economies and financial markets. Volatility and deterioration in the financial markets and liquidity constraints or other adverse developments affecting financial institutions may make equity or debt financings more difficult, more costly or more dilutive and may increase competition for, or limit the availability of, funding from other third-party sources, such as from strategic collaborations and government and other grants.

Our management may devote significant time and we may incur substantial costs in pursuing, evaluating and negotiating potential strategic options or capital-raising transactions and those efforts may not prove successful on a timely basis, or at all. If we cannot raise adequate additional capital when needed, we may be forced to reorganize or merge with another entity, sell or monetize assets, file for bankruptcy, or cease operations. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and our stockholders may lose all or part of their investment in our common stock.

We will need to raise capital to meet our debt service obligations, and to fund our working capital needs. Our inability to raise sufficient capital would have a material adverse effect on our financial condition and business.

As of September 30, 2023, we had cash and cash equivalents of approximately $1.50 million. As at September 30, 2023 we had an aggregate of $17.78 million of debt that is required to be repaid within five months unless we refinance, unless we refinance or renegotiate the terms. In addition, the Celsius deposit of $15.33 million is the subject of a dispute. Mawson has a need to raise capital to meet those debt service obligations and to fund our working capital needs. We currently have no arrangements for such capital and no assurances can be given that we will be able to raise such capital when needed, on acceptable terms, or at all. If we are unable to raise or source sufficient capital, we will need to implement additional measures to reduce operating expenses and to preserve capital, any of which may further adversely affect our operations. If we fail to comply with our debt service obligations, our lenders could declare a default, which could lead to all or a number of payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business. The Company may not be able to make all those payments at once.

The Company requires capital to invest in new hardware. Bitcoin mining hardware becomes obsolete over time, and the difficulty to mine for bitcoin increases as the total hashrate of the Bitcoin network increases. This means that if competitors continue to increase their hashing power relative to the Company, the Company will tend to earn less bitcoin if its hashing power does not increase in a similar manner.

The Company has only one co-location customer, and therefore a significant part of its business is exposed to that counterparty risk, for example if that counterparty fails to meet its contractual obligations, including delivering hardware on time, or failing to make payments on time, or at all. The Company has sought to mitigate such risks through its contractual arrangements, and may seek to further mitigate this risk in other ways, such as executing further co-location agreements with other counterparties.