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 September 30, 2021. This discussion contains forward-looking
statements based upon current expectations that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under Part II, Item 1A "Risk Factors" or in other parts of this Quarterly
Report on Form 10-Q, as well as those identified in the "Risk Factors" section
of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
Our historical results are not necessarily indicative of the results that may be
expected for any period in the future. See "Forward-Looking Statements."
Company Overview
CleanSpark, Inc. is a leading bitcoin mining and diversified energy company
incorporated in Nevada, whose common stock is listed on the Nasdaq Capital
Market. We sustainably mine bitcoin; we also provide advanced energy technology
solutions to commercial and residential customers to solve modern energy
challenges. The Company, through itself and its wholly owned subsidiaries, has
operated in the digital currency mining sector since December 2020, and in the
alternative energy sector since March 2014.
We are currently working with industry leaders and other advisors in developing
a long-term sustainability and clean energy plan. We are also using all
available clean and renewable energy resources that we currently have reasonable
access to in all of our bitcoin mining locations in order to further support our
sustainability efforts.
Lines of Business
Digital Currency Mining Segment
Through our wholly owned subsidiaries, ATL Data Centers LLC ("ATL") and
CleanBlok, Inc. ("CleanBlok"), we mine bitcoin. We entered the bitcoin mining
industry through our acquisition of ATL in December 2020. We acquired a second
data center in August 2021 and have had a co-location agreement with New
York-based Coinmint in place since July 2021. Bitcoin mining has now become our
principal revenue generating business activity. We currently intend to continue
to acquire additional facilities, equipment and infrastructure capacity to
continue to expand our bitcoin mining operations.
Bitcoin was introduced in 2008 with the goal of serving as a digital means of
exchanging and storing value. Bitcoin is a form of digital currency that depends
upon a consensus-based network and a public ledger called a "blockchain," which
contains a record of every bitcoin transaction ever processed. The bitcoin
network is the first decentralized peer-to-peer payment network, powered by
users participating in the consensus protocol, with no central authority or
middlemen, that has wide network participation. The authenticity of each bitcoin
transaction is protected through digital signatures that correspond with
addresses of users that send and receive bitcoin. Users have full control over
remitting bitcoin from their own sending addresses. All transactions on the
bitcoin blockchain are transparent, allowing those running the appropriate
software to confirm the validity of each transaction. To be recorded on the
blockchain, each bitcoin transaction is validated through a proof-of-work
consensus method, which entails solving complex mathematical problems to
validate transactions and post them on the blockchain. This process is called
mining. Miners are rewarded with bitcoins, both in the form of newly-created
bitcoins and fees in bitcoin, for successfully solving the mathematical problems
and providing computing power to the network.
Factors such as access to computer processing capacity, interconnectivity,
electricity cost, environmental factors (such as cooling capacity) and location
play important roles in mining. As of the date of this filing, our mining units
are currently capable of producing over 2.0 exahash per second ("EH/s") in hash
rate capacity. In cryptocurrency mining, "hash rate" is a measure of the
processing capacity and speed by which a mining computer mines and processes
transactions on the bitcoin network. Our activities in this area are
complemented by our energy background and
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planning is underway to deploy our portfolio of energy technologies to advance
our bitcoin mining business, with the goal of maximizing energy savings,
increasing total power capacity, providing resilient electricity, and reducing
greenhouse gas emissions. We are expanding our bitcoin mining business with the
goal of reaching 4.0 EH/s in hash rate capacity at or near the end of December
31, 2022. We expect to exceed 3 EH/s in capacity at or near the end of September
31, 2022. Hash rate capacity is one of the most important metrics for evaluating
bitcoin mining companies.
We obtain bitcoin as a result of our mining operations; while we retain a
significant portion of the bitcoin, we have sold, and intend to sell bitcoin
from time to time, to support our operations and strategic growth. We do not
currently plan to engage in regular trading of bitcoin (other than as necessary
to convert our bitcoin to U.S. dollars) or to engage in hedging activities
related to our holding of bitcoin; however, our decisions to hold or sell
bitcoin at any given time may be impacted by the bitcoin market, which has been
historically characterized by significant volatility. Currently, we do not use a
formula or specific methodology to determine whether or when we will sell
bitcoin that we hold, or the number of bitcoins we will sell. Rather, decisions
to hold or sell bitcoins are currently determined by analyzing forecasts and
monitoring the market in real time.
Through our recently formed wholly owned subsidiaries, CSRE Properties, LLC,
CSRE Property Management Company LLC, and CSRE Properties Norcross, LLC, we
maintain real property holdings for ATL and CleanBlok.
Energy Segment
We provide energy solutions through our wholly-owned subsidiaries CleanSpark,
LLC, CleanSpark Critical Power Systems, Inc., GridFabric, LLC, and Solar Watt
Solutions, Inc. These solutions consist of engineering, design and software
solutions, custom hardware solutions, Open Automated Demand response
("OpenADR"), solar, energy storage for microgrid and distributed energy systems
to military, commercial and residential customers in Southern California and
through the world.
Our solutions are supported by our proprietary suite of software platforms
(collectively, the "Platforms") that include microgrid energy modeling, energy
market communications and energy management solutions as summarized below:
· mPulse and mVoult: Patented, proprietary controls platforms that enable
integration and optimization of multiple energy sources.
· Canvas: Middleware used by grid operators and aggregators to administrate
load shifting programs.
· Plaid: Middleware used by controls and IoT (internet-of-things) product
companies to participate in load shifting programs.
· mVSO: Energy modeling software for internal microgrid design .
The Platforms were developed to enable the designing, building, and operating of
distributed energy systems and microgrids which efficiently manage energy
assets. These strategies are generally targeted to achieve resiliency and
economic optimization.
We also own patented gasification energy technologies. Our technology converts
organic material into synthesis gas, which can be used as fuel for a variety of
applications and as feedstock for the generation of DME (Di-Methyl Ether). As
previously disclosed, we currently plan to continue to focus on our other
offerings.
Other business activities
Through p2kLabs, Inc., we provide design, software development, and other
technology-based consulting services. The services provided are generally hourly
or fixed-fee project-based arrangements.
Through ATL, we also provide traditional data center services, such as providing
customers with rack space, power and equipment, and offer several cloud services
including virtual services, virtual storage, and data backup services.
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Results of operations for the three months ended December 31, 2021 and 2020
Revenues
Revenues increased to $41,241,969 during the three months ended December 31,
2021, as compared with $2,257,570 in revenues for the same period ended 2020
primarily due to increase in revenues from our digital currency mining segment.
For the three months ended December 31, 2021, our revenue was derived from
digital currency mining, the sale of equipment, solar panels, batteries, design,
engineering, and services, and data center services. Income from our mining
segment is a result of bitcoin mining activities in the United States. Income
from our Energy segment is the result of contracts to sell switchgear equipment,
perform engineering design, provide software for distributed energy and
microgrid systems, and provide solar and battery installation.
Costs and Expenses
We had costs and expenses of $36,806,806 for the three months ended December 31,
2021, as compared with $8,427,668 for the three months ended December 31, 2020.
Our cost of revenues was $8,797,926 for the three months ended December 31,
2021, as compared with cost of revenues of $1,332,890 for the three months ended
December 31, 2020. Our cost of revenues during the three months ended December
31, 2021 was mainly the result of mining energy costs of $1,373,711, mining
hosting fees of $4,171,662, hardware material purchases of $2,280,279 and
contract manufacturing expenses of $344,088. Our cost of revenues during the
three months ended December 31, 2020 was mainly the result of contract
manufacturing expenses of $748,214, hardware material purchase of $236,247, and
mining expenses of $169,046.
Professional fees increased to $3,317,819 for the three months ended December
31, 2021 from $1,712,723 for the three months ended December 31, 2020. Our
professional fees expenses for the three months ended December 31, 2021
consisted mainly of accounting and tax consulting fees of $1,548,189, audit and
review fees of $498,121, subcontractor expenses of $417,989, legal fees of
$290,278, recruitment fees of $222,240, and consulting fees of $155,983. Our
professional fees for the three months ended December 31, 2020 consisted mainly
of legal fees of $1,231,562, and investor relations and public relations
consulting expense of $120,838.
Payroll expenses increased to $8,883,047 for the three months ended December 31,
2021 from $3,314,201 for the three months ended December 31, 2020. Our payroll
expenses for the three months ended December 31, 2021 consisted mainly of salary
and wages expense of $2,901,295, and employee and officer stock-based
compensation and related bonuses of $5,749,101. Our payroll expenses for the
three months ended December 31, 2020 consisted mainly of salary and wages
expense of $1,726,526 and employee and officer stock-based compensation of
$932,040.
General and administrative expenses increased to $1,888,100 for the three months
ended December 31, 2021 from $950,139 for the three months ended December 31,
2020. Our general and administrative expenses for the three months ended
December 31, 2021 consisted mainly of insurance expenses of $487,680, marketing
expenses of $280,614, dues and subscriptions expense of $217,084, utilities
expense of $196,125, and travel expenses of $114,489. Our general and
administrative expenses for the three months ended December 31, 2020 consisted
mainly of dues and subscriptions expense of $110,681 and marketing expense of
$601,387.
Depreciation and amortization expense increased to $7,697,568 for the three
months ended December 31, 2021, from $1,117,715 for the three months ended
December 31, 2020.
Impairment expenses were recorded for the three months ended December 31, 2021
for $6,222,346, and no impairment expenses were recorded for the three months
ended December 31, 2020. Impairment expense for the three months ended December
31, 2021 consisted of bitcoin impairment of $6,222,346.
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Other income (expenses)
Other income increased to $10,050,592 for the three months ended December 31,
2021 compared to other expense of ($997,432) for the three months ended December
31, 2020. Our other income/(expenses) for the three months ended December 31,
2021 consisted mainly of a realized gain on sales of digital currency of
$9,994,791, an unrealized loss on derivative security of $298,849, and loss on
write off of assets of ($278,170). Our other expenses for the three months ended
December 31, 2020 consisted mainly of an unrealized loss on derivative security
of ($1,020,494).
Net Income
We recorded a net income of $14,485,755 for the three months ended December 31,
2021, as compared with a net loss of $7,167,530 for the three months ended
December 31, 2020. The increase was due mainly to the increase in digital
currency mining revenue.
Liquidity and Capital Resources
Our primary requirements for liquidity and capital are working capital,
inventory management, capital expenditures, public company costs and general
corporate needs. We expect these needs to continue as we develop and grow our
business. Our principal sources of liquidity have been and are expected to be
our cash and cash equivalents and digital currency inventory.
As of December 31, 2021, we had total current assets of $58,682,565, consisting
of cash and cash equivalents, accounts receivable, inventory, prepaid expenses
and other current assets, digital currency, investment in equity security,
investment in debt security and related derivative asset, and total assets in
the amount of $418,144,771. Our total current and total liabilities as of
December 31, 2021 were $22,481,979 and $24,069,321 respectively. We had working
capital of $36,200,586 as of December 31, 2021.
As of December 31, 2021, there were no off-balance sheet arrangements.
We believe our cash and cash equivalents on hand, together with cash we expect
to generate from future operations, will be sufficient to meet our working
capital and capital expenditure requirements for a period of at least twelve
months from the date of this Quarterly Report on Form 10-Q. We are likely to
require additional capital to respond to technological advancements, competitive
dynamics or technologies, customer demands, business opportunities, challenges,
acquisitions or unforeseen circumstances and in either the short-term or
long-term 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 or financing on terms satisfactory to us, when we require it, our
ability to continue to grow or support our business and to respond to business
challenges could be significantly limited. In particular, the widespread
COVID-19 pandemic, including variants, has resulted in, and may continue to
result in, significant disruption of 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.
Operating Activities
Operating activities used $(20,969,236) in cash for the three months ended
December 31, 2021, as compared with using $(6,833,578) in cash for the three
months ended December 31, 2020. Our net income of $14,485,755 was the main
component of our negative operating cash flow for the three months ended
December 31, 2021, offset mainly by realized gain on digital currency
$(9,994,791). Other components of our operating cash flow are the changes in
operating assets and liabilities including production of digital currency
$(36,974,578), increase in prepaid expenses and other current assets
$(6,682,127), increase in accounts receivables $(2,002,045), and decrease in
accounts payable and accrued liabilities $(911,848). Our net loss of
$(7,167,530) was the main component of our negative operating cash flow for the
three months ended December 31, 2020, offset mainly by unrealized loss on
derivative assets of $1,020,494, stock based compensation of $4,350,643, and
depreciation and amortization of $1,117,715.
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Investing Activities
Investing activities used $(60,037,647) during the three months ended December
31, 2021, as compared with $(2,427,972) for the three month period ended
December 31, 2020. Our sale of digital currencies of $33,965,188, payments on
miner deposits of $(70,633,823), purchase of fixed assets of $(21,429,893), and
investment in infrastructure development of $(1,948,709) were the main
components of our investing cash flow for the three months ended December 31,
2021. Our investment in infrastructure development of $(2,830,560) was the main
component of our negative investing cash flow for the three months ended
December 31, 2020.
Financing Activities
Cash flows generated from financing activities during the three months ended
December 31, 2021 amounted to $68,178,970, when compared to $31,767,261 for the
three months ended December 31, 2020. Our cash flows from financing activities
for the three months ended December 31, 2021 consisted of proceeds from exercise
of options and warrants of $281,616, and proceeds from underwritten offering of
$67,988,999. Our positive cash flows from financing activities for the three
months ended December 31, 2020 consisted of proceeds from exercise of options
and warrants of $192,656 and proceeds from underwritten offering of $37,049,605,
offset by payments on promissory notes of $(5,475,000).
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles in the United
States. The preparation of these consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, net sales and expenses. We evaluate our estimates and assumptions
on an ongoing basis, and base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for the judgments we make
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Because these estimates can vary depending on the situation,
actual results may differ from these estimates. Making estimates and judgments
about future events is inherently unpredictable and is subject to significant
uncertainties, some of which are beyond our control. Should any of these
estimates and assumptions change or prove to have been incorrect, it could have
a material impact on our results of operations, financial position and statement
of cash flows.
There have been no material changes to our critical accounting policies and
estimates as compared to those disclosed in our 2021 10-K. For a description of
our critical accounting policies and estimates, see Part I, Item 1, Note 2,
"Summary of Significant Accounting Policies" in our notes to the consolidated
financial statements in this Quarterly Report.
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