| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles
of Consolidation and basis of preparation The
accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly or majority owned and
controlled subsidiaries. Intercompany investments, balances and transactions have been eliminated in consolidation. Non–controlling
interests represents the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of
the net operating results and other components of equity relating to the non–controlling interest. Any
changes in the Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated
subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized
as an equity transaction, with appropriate adjustments to both the Company’s additional paid-in capital and the corresponding non-controlling
interest. On
March 9, 2021, Mawson AU was acquired by the Company. For accounting purposes, this was accounted for as a reverse asset acquisition
with Mawson AU as the accounting acquirer (refer to significant accounting policies below). The result of which is that these financial
statements are taken to be a continuation of Mawson AU’s financial statements, with the Company incorporated within the acquisition
and therefore the historical financial information of Mawson AU (then known as Cosmos Capital Limited) prior to March 9, 2021, became
the historical financial information of Mawson AU, which have been consolidated into the financial statements of the Company. Use
of Estimates and Assumptions The
preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions
that affect the amounts reported in the financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions.
The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available
at the time they are made. These
estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements, and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from those estimates. The Company has considered the following to be significant estimates made
by management, including but not limited to, going concern assumptions, estimating the useful lives of fixed assets, realization of long-lived
assets, unrealized tax positions and the realization of digital currencies, business combinations, reverse asset acquisition, and the
contingent obligation with respect to future revenues. Critical
Accounting Policies Critical
accounting policies are described in the consolidated financial statements for Mawson included in the Company’s 10-K filed March
21, 2022. There have been no changes to critical accounting policies in the three months period ended March 31, 2022, other than the
reverse asset acquisition accounting policy which is no longer considered to be a critical accounting policy and has therefore been included
in significant accounting policies. Revenue
Recognition – Digital asset mining revenue The
Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of ASC 606 is that a company should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. Five steps are required to be followed in evaluating revenue
recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation. In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in
the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of
a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can
benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e.,
the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the
context of the contract). There
is currently no specific definitive guidance in U.S. GAAP or alternative accounting frameworks for the accounting of managing digital
currencies and management has exercised significant judgement in determining appropriate accounting treatment for the recognition of
revenue for such operations. The
Company has entered into a contract with mining pools and has undertaken the performance obligation of providing computing power
in exchange for non-cash consideration in the form of cryptocurrency. The provision of computing power is the only performance obligation
in the Group’s contract with its pool operators. In certain pools the amount of reward for computing power depends on the pool’s
success in mining blocks. In other pools, the amount of reward includes no such contingency, although the fees payable to such pools
are typically higher as a result. Where the consideration received is variable (for example, due to payment only being made upon successful
mining), it is recognized when it is highly probable that the variability is resolved, which is generally when the cryptocurrency is
received. The
Company measures the non-cash consideration received at the fair market value of the cryptocurrency received. Management estimates fair
value on a daily basis, as the quantity of cryptocurrency received multiplied by the price quoted on the crypto exchanges that the Company
uses to dispose of cryptocurrency on the day it was received. Property
and equipment Property
and equipment are stated at cost, net of accumulated depreciation. The cost includes any cost of replacing part of the property and equipment
with the original cost of the replaced part being derecognized. All other repair and maintenance costs are recognized in profit or loss
incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective
asset if the recognition criteria for a provision are met. Property, plant and equipment transferred from customers is initially measured
at the fair value at the date on which control is obtained. The
depreciable amount of fixed assets is depreciated on a straight-line or declining balance basis based on the asset classification, over
their useful lives to the economic entity commencing from the time the assets arrive at their destination where they are ready for use.
Depreciation is calculated over the following estimated useful lives:
Financial
Asset class Useful
life Depreciation
Method
Fixtures
and Fittings 5 years Straight-Line
Plant
and equipment 10 years Straight-Line
Modular
data center 5 years Declining
Motor
Vehicles 5 years Straight-Line
Computer
equipment 3 years Straight-Line
Processing
Machinery (Miners) 2 years Declining
Transformers 15 years Straight-Line An
item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference
between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized. The
residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year end and
adjusted prospectively, if appropriate. The
Company changed its policy in relation to freight costs in relation to processing machines with effect from October 1, 2021. Prior to
this date these costs were expensed to the statement of operations and profit and loss, and afterwards these costs are capitalized into
processing machinery. This change resulted in an increase in processing machines in the balance sheet of $2,040,387 at March 31, 2022,
and an increase in the depreciation charge to the statement of operations and profit and loss of $84,735 over the prior treatment. The Company’s long-lived assets are reviewed for impairment in
accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment”, whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated
by the assets. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. During the periods ended March 31, 2022, and 2021, no impairment losses have been identified. Share
based payments The
Company follows FASB Codification Topic ASC 718-10 Compensation-Stock Compensation. The Company expenses stock-based compensation to
employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company
determines the grant date fair value of the options using the Black-Scholes option-pricing model. The assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment. These assumptions are the expected stock volatility, the risk–free interest rate, the expected
life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility computes stock price
volatility over expected terms based on its historical common stock trading prices. Risk–free interest rates are calculated based
on the implied yield available on U. S. 10-year Treasury bond. Significant
Accounting Policies Revenue
Recognition - Hosting Co-location revenue The
Company provides power for our co-location hosting customers on a variable basis which is received monthly from the customer based on
the power usage at the rate outlined in each customer contract. We
recognize variable power revenue each month as the uncertainty related to the consideration is resolved, power is provided to our customers,
and our customers utilize the power (the customer simultaneously receives and consumes the benefits of the Company’s performance). The
customer contracts contain performance obligations, variable consideration in such contracts to be allocated to and recognized in the
period to which the consideration relates. Usually this is when it is invoiced, rather than obtaining an estimation of variable consideration
at the beginning of the customer contracts. Customers
also are invoiced a fixed monthly fee for maintenance services which include, cleaning, cabling and other services to maintain the customers’
equipment. Revenue
Recognition - Sale of crypto currency mining equipment Crypto
currency mining equipment sales revenue includes revenues related to the sale of Miners. This is recognized as revenue upon delivery
to the customer, which is when the control of the Miner transfers. Payments are typically received at the point control transfers or
in accordance with payment terms customary to the business. Revenue
recognition – equipment sales The
Company earned revenues from the sale of earlier generation cryptocurrency mining units and modular data centers that have been assembled
or refurbished for resale (collectively “Hardware”). Revenue from the sale of Hardware is recognized when all of the following
conditions are satisfied: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed or determinable, (iii)
title and risk of loss have transferred, and (iv) payment is received. At the date of sale, the net book value is expensed in cost of
revenues. Cost
of revenues: Cost
of revenue consists primarily of expenses that are directly related to providing the Company’s service to its paying customers.
These primarily consist of costs associated with operating our co-location facilities such as direct power costs, energy costs (including
any carbon offset acquired during the year), freight costs and material costs related to cryptocurrency mining. Research
and development expenses: Research
and development expenses are charged to the statement of comprehensive loss as incurred. Income
taxes: Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance may be established to reduce the deferred tax asset to the level at which it is “more likely than not”
that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards
depends on having sufficient taxable income of an appropriate character within the carryback or carryforward periods. The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon review
by the taxing authority. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Functional
currency: All
subsidiaries of Company have a functional currency of United States dollar (“USD”) with the exceptions of Mawson Infrastructure
Group Pty Ltd, MIG No.1 Pty Ltd, Cosmos Trading Pty Ltd, BITTD Pty Ltd and Cosmos Asset Management Pty Ltd whose functional currency
is the Australian Dollar (“AUD”). The financial statements of foreign businesses have been translated into USD at current
exchange rates for balance sheet items and at the average rate for income statement items. Translation of all the consolidated companies’
financial records into USD is required due to the reporting currency for these consolidated financial statements presented as USD and
the functional currency of the parent company being that of AUD. Translation adjustments are accumulated in other comprehensive loss.
Revenue and expense accounts are converted at prevailing rates throughout the year. Gains or losses on foreign currency transactions
and translation adjustments in highly inflationary economies are recorded in income in the period in which they are incurred. Segment
Reporting: Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
Our chief operating decision–making group is composed of the chief executive officer. We currently operate in one segment surrounding
our cryptocurrency mining operation. Cash
and cash equivalents: Cash
and cash equivalents include cash on hand, deposits held at call with financial institutions, cash held with digital currency exchanges,
and other short-term and highly liquid investments that are readily convertible to known amounts of cash and have original maturities
of three months or less. Digital
Currencies Digital
currencies are included in current assets in the consolidated balance sheets. Digital currencies are classified as indefinite-lived intangible
assets in accordance with ASC 350, Intangibles - Goodwill and Other, and are accounted for in connection with the Company’s revenue
recognition policy detailed above. The
following table presents the Company’s digital currency (Bitcoin) activities for the quarter ended March 31, 2022, and 2021:
Three months to March 31,
2022 2021
Opening number of Bitcoin held as at December 31, 2021 and 2020 0.92 0.52
Number of Bitcoin added 458.68 123.22
Number of Bitcoin sold (459.60 ) (113.45 )
Closing number of Bitcoin held as at March 31, 2022 and 2021 0.00 10.29 Digital
currency is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating
that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair
value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more
likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative
impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses
is not permitted. The
Company’s policy is to dispose of production at the earliest opportunity, the holding period is minimal, usually no more than a
few days. Due to the short period which Bitcoin are held prior to sale and the consequent small numbers held, the risk of impairment
is not material. Equipment
deposits: The
Company records a prepaid expense for costs paid but not yet incurred. Those expected to be incurred within one year are recognized and
shown as equipment deposits. Equipment deposits result from advance payments to suppliers for goods to be received in the future. Equipment
deposits are initially recognized as assets at the date the amount is paid, and are subsequently recorded as equipment as the Company
takes delivery and control of the equipment from the supplier. Amounts are recognized initially at the amount of the unconditional consideration.
They are subsequently measured at cost, less loss allowance. Reverse
Asset Acquisition: On
March 9, 2021, the Company acquired the shares of Cosmos Capital Limited (now known as Mawson Infrastructure Group Pty Ltd and referred
to herein as Mawson AU) in a stock for stock exchange. This transaction has been accounted for as a reverse asset acquisition. This transaction
reverse asset acquisition and the associated impact is referred to as the “Cosmos Transaction”. Under
the terms of the Cosmos Transaction Bid Implementation Agreement, the Company was required to make share based payments consisting of
up to 40,000,000 shares under an Incentive Compensation Program and warrants issued to HC Wainwright as a fee related to the acquisition
by Mawson of Mawson AU. In addition, Mawson AU had an outstanding obligation to W Capital Advisors Pty Ltd (“W Capital”)
for options over the equity of Mawson AU which was terminated for consideration of warrants over the Company’s shares being issued
to W Capital. Fair
value of financial instruments: The
Company accounts for financial instruments under FASB Accounting Standards Codification Topic (“ASC”) 820, Fair Value Measurements.
This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows: Level
1 — quoted prices (unadjusted) in active markets for identical assets or liabilities; Level
2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose
significant value drivers are observable; and Level
3 — assets and liabilities whose significant value drivers are unobservable. Observable inputs are based on market data obtained
from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require
significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different
levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level
of input that is significant to the fair value measurement. Such determination requires significant management judgment. Of
the Company’s financial instruments on the Company’s balance sheet as at March 31, 2022, the only item measured and recorded
at fair value is the Marketable Securities of $336,897, which are categorized as Level 1. Concentrations
of credit risk: Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable
securities. Cash and cash equivalents and restricted bank deposits are invested in banks in Australia and the U.S. If the counterparty
completely failed to perform in accordance with the terms of the contract, is the maximum amount of loss the Company would be the balance.
Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly,
minimal credit risk exists with respect to these investments. The Company has no off-balance-sheet concentration of credit risk such
as foreign exchange contracts, option contracts or other foreign hedging arrangements. Legal
and other contingencies: The Company accounts for its contingent liabilities in accordance with
ASC 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of
negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular
matter. Legal costs incurred in connection with loss contingencies are expensed as incurred. As of March 31, 2022, the Company is not
a party to any litigation that could have a material adverse effect on the Company’s business, financial position, results of operations
or cash flows. Leases: The
Company accounts for its leases under ASC 842, Leases which was effective January 1, 2019. The Company determines if an arrangement is
a lease at inception. Using ASC 842 leases are classified as operating or finance leases on the Balance Sheet as a right of use (“ROU”)
assets and lease liabilities within current liabilities and long-term liabilities on our consolidated balance sheet. ROU assets and lease
liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.
The Company’s lease does not provide an implicit rate and therefore the Company measured the ROU asset and lease obligation based
upon the present value of future minimum lease payments. The Company’s incremental borrowing rate is estimated based on risk-free
discount rate for the lease, determined using a period comparable with that of the lease term and in a similar economic environment.
The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
The Company does not record leases on the consolidated balance sheets with a term of one year or less. The Company does not separate
lease and non-lease components but rather account for each separate component as a single lease component for all underlying classes
of assets. Where leases contain escalation clauses, rent abatements, or concessions, such as rent holidays and landlord or tenant incentives
or allowances, the Company applies them in the determination of straight-line operating lease cost over the lease term. Recent
Accounting Pronouncements From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies
and adopted by the Company as of the specified effective date. For information with respect to recent accounting pronouncements, see
Note 2 to the consolidated financial statements for Mawson as of December 31, 2021, included in the Company’s Annual Report on
Form 10-K filed March 21, 2022, recent accounting pronouncements since that date include: In
March 2022, the FSAB issued ASU update 2022-01—Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method.
The adoption of ASU 2021-01 did not have a material impact on the Company’s financial statements or disclosures. In
March 2022, the FSAB issued ASU 2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and
Vintage Disclosures. The adoption of ASU 2022-02 did not have a material impact on the Company’s financial statements or disclosures. |
