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 ("Form 10-K"). 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 Form 10-K. 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. As part of this plan, we are
using the available clean and renewable energy resources that we currently have
reasonable access to at 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. In March 2022, we entered into a
colocation agreement with Lancium LLC pursuant to which we have access to up to
500 MWs of power. Bitcoin mining has now become our principal revenue generating
business activity, and consistent with our current business strategy, we intend
to explore and opportunistically continue to acquire additional facilities,
equipment and infrastructure capacity as well as evaluate other colocation
opportunities, with the intention of expanding 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
geographic location play important roles in mining. As of the date of this
filing, our mining units are currently capable of producing over 2.4 exahash per
second ("EH/s"). In cryptocurrency mining, "hash rate" is a measure of the
processing capacity and speed by which a mining computer mines and processes
transactions on
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the bitcoin network. Our activities in this area are complemented by our energy
background and planning is underway to deploy certain energy technologies from
our portfolio 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 to 5.0 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 30, 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
portion of the bitcoin we mine, 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). We do expect in the near future to
engage in hedging and yield generating 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, our operating needs and
monitoring the market in real time.
Through our 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
globally.
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.
Because we view Bitcoin mining as our core focus, we are taking steps to
strategically streamline and maximize our capital, as part of this process we
are evaluating strategic opportunities and alternative to best utilize this
segment.
Other business activities
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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.
Results of operations for the three months ended March 31, 2022 and 2021
Revenues
Revenues increased to $41,637,992 during the three months ended March 31, 2022,
as compared with $8,119,688 in revenues for the same period ended 2021 primarily
due to increase in revenues from our digital currency mining segment.
For the three months ended March 31, 2022, our revenue was derived from digital
currency mining, the sale of equipment, solar panels, batteries, design,
engineering, energy services, and data center services. Income from our mining
segment of $36,965,739 is a result of bitcoin mining activities in the United
States. Income from our Energy segment of $4,585,971 is the result of contracts
to sell switchgear equipment, perform engineering and design services, provide
software for distributed energy and microgrid systems, and solar and battery
installation services.
Costs and Expenses
We had costs and expenses of $38,305,184 for the three months ended March 31,
2022, as compared with $10,616,660 for the three months ended March 31, 2021.
Our cost of revenues was $12,127,120 for the three months ended March 31, 2022,
as compared with cost of revenues of $1,537,683 for the three months ended March
31, 2021. Our cost of revenues during the three months ended March 31, 2022 was
primarily the result of mining energy costs at owned facilities of $2,539,146,
mining hosting and associated energy fees of $5,205,369, and energy hardware
related cost of inventory of $2,949,422. Our cost of revenues during the three
months ended March 31, 2021 was primarily the result of mining energy costs at
owned facilities of $724,374, and energy hardware related cost of inventory of
$543,330. The increase in cost of revenues between the comparative periods was
mainly the result of revenue growth over the same period.
Professional fees decreased to $900,976 for the three months ended March 31,
2022 from $2,456,554 for the three months ended March 31, 2021. Our professional
fees expenses for the three months ended March 31, 2022 consisted primarily of
legal expenses of $583,742 and subcontractor expenses of $315,064. Our
professional fees for the three months ended March 31, 2021 consisted primarily
of legal fees of $1,608,671 and consulting expenses of $203,688.
Payroll expenses increased to $10,542,025 for the three months ended March 31,
2022 from $3,262,097 for the three months ended March 31, 2021. Our payroll
expenses for the three months ended March 31, 2022 consisted primarily of salary
and wages expense of $2,608,458, and employee and officer stock-based
compensation of $6,509,964. Our payroll expenses for the three months ended
March 31, 2021 consisted primarily of salary and wages expenses of $1,781,039
and employee and officer stock-based compensation of $834,014.
General and administrative expenses increased to $3,182,946 for the three months
ended March 31, 2022 from $1,243,154 for the three months ended March 31, 2021.
Our general and administrative expenses for the three months ended March 31,
2022 consisted primarily of insurance expenses of $970,965, marketing expenses
of $697,374, dues and subscriptions expenses of $271,886, utilities expense of
$165,117, and travel expenses of $197,944. Our general and administrative
expenses for the three months ended March 31, 2021 consisted primarily of
marketing expenses of $294,069, dues and subscriptions expenses of $233,307, bad
debt expenses of $231,932, rent expenses of $226,843, and insurance expenses of
$172,483.
Our gain on disposal of assets increased to $920,861 for the three months ended
March 31, 2022 from $0 for the three months ended March 31, 2021. The gain on
disposal is from the sale of miners and there were no such disposals for the
three months ended March 31, 2021.
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Impairment expenses recorded for the three months ended March 31, 2022 were
$811,345, and $0 impairment expenses were recorded for the three months ended
March 31, 2021. Impairment expense for the three months ended March 31, 2022
consisted of bitcoin impairment of $811,345.
Depreciation and amortization expense increased to $11,661,633 for the three
months ended March 31, 2022, from $2,117,172 for the three months ended March
31, 2021.
Other income (expenses)
Other expense increased to $3,503,543 for the three months ended March 31, 2022
compared to other income of $9,897,012 for the three months ended March 31,
2021. Our other expenses for the three months ended March 31, 2022 consisted
primarily of a realized loss on sales of digital currency of $2,733,882 and an
unrealized loss on derivative security of $1,410,146. Our other income for the
three months ended March 31, 2021 consisted primarily of a realized gain on
sales of digital currency of $585,709 and an unrealized gain on derivative
security of $8,400,629.
Net Income
We recorded a net loss of $170,735 for the three months ended March 31, 2022, as
compared with a net income of $7,400,040 for the three months ended March 31,
2021. The decrease was due primarily to the increased losses from sale of
digital currency and unrealized losses on derivative asset compared to a
significant gain on the derivative asset in the prior period.
Results of operations for the six months ended March 31, 2022 and 2021
Revenues
Revenues increased to $82,879,961 during the six months ended March 31, 2022, as
compared with $10,377,258 in revenues for the same period ended 2021 primarily
due to increase in revenues from our digital currency mining segment.
For the six months ended March 31, 2022, 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 of $73,940,317 is a result of bitcoin mining activities in the United
States. Income from our Energy segment of $8,556,181 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 $75,390,160 for the six months ended March 31,
2022, as compared with $19,044,328 for the six months ended March 31, 2021.
Our cost of revenues was $20,925,046 for the six months ended March 31, 2022, as
compared with cost of revenues of $2,879,197 for the six months ended March 31,
2021. Our cost of revenues during the six months ended March 31, 2022 was
primarily the result of mining energy costs at owned facilities of $3,912,857,
mining hosting and associated energy fees of $9,377,031, and energy hardware
related cost of inventory of $5,587,847. Our cost of revenues during the six
months ended March 31, 2021 was primarily the result of mining energy costs at
owned facilities of $890,520, and energy hardware related cost of inventory of
$1,556,295. The increase in cost of revenues between the comparative periods was
mainly the result of revenue growth over the same period.
Professional fees increased to $4,218,795 for the six months ended March 31,
2022 from $4,169,277 for the six months ended March 31, 2021. Our professional
fees expenses for the six months ended March 31, 2022 consisted primarily of
accounting and tax expenses of $1,560,228, legal expenses of $868,318, and
subcontractor expenses of $733,053.
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Our professional fees for the six months ended March 31, 2021 consisted
primarily of legal expenses of $2,840,232 and consulting expenses of $253,395.
Payroll expenses increased to $19,425,072 for the six months ended March 31,
2022 from $6,576,298 for the six months ended March 31, 2021. Our payroll
expenses for the six months ended March 31, 2022 consisted primarily of salary
and wages expenses of $5,092,739, and employee and officer stock-based
compensation of $12,303,091. Our payroll expenses for the six months ended March
31, 2021 consisted primarily of salary and wages expenses of $3,118,279 and
employee and officer stock-based compensation of $1,766,054.
General and administrative expenses increased to $5,071,046 for the six months
ended March 31, 2022 from $2,193,293 for the six months ended March 31, 2021.
Our general and administrative expenses for the six months ended March 31, 2022
consisted primarily of insurance expenses of $1,458,645, marketing expenses of
$1,041,640, dues and subscriptions expenses of $534,330, utilities expenses of
$361,242, and travel expenses of $348,465. Our general and administrative
expenses for the six months ended March 31, 2021 consisted primarily of
marketing expenses of $1,016,294, dues and subscription expenses of $405,600,
rent expenses of $257,236, and insurance expenses of $244,641, and bad debt
expenses of $231,932.
Our gain on disposal of assets increased to $642,691 for the six months ended
March 31, 2022 from $0 for the six months ended March 31, 2021. The gain on
disposal is from the sale of miners, offset by loss on disposal of miners, and
there were no such disposals for the six months ended March 31, 2021.
Impairment expenses recorded for the six months ended March 31, 2022 were
$7,033,691 and $0 impairment expenses were recorded for the six months ended
March 31, 2021. Impairment expense for the six months ended March 31, 2022
consisted of bitcoin impairment of $811,345.
Depreciation and amortization expense increased to $19,359,201 for the six
months ended March 31, 2022, from $3,226,263 for the six months ended March 31,
2021.
Other income (expenses)
Other income decreased to $6,825,219 for the six months ended March 31, 2022
compared to other income of $8,899,580 for the six months ended March 31, 2021.
Our other income for the six months ended March 31, 2022 consisted primarily of
a realized gain on sales of digital currency of $7,260,909 and an unrealized
loss on derivative security of $1,111,297. Our other income for the six months
ended March 31, 2021 consisted primarily of a realized gain on sales of digital
currency of $635,627 and an unrealized gain on derivative security of
$7,380,135.
Net Income
We recorded a net income of $14,315,020 for the six months ended March 31, 2022,
as compared with a net income of $232,510 for the six months ended March 31,
2021. The increase was due primarily to the increased gains for sale of digital
currency and unrealized gains on derivative securities.
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 further 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 March 31, 2022, we had total current assets of $41,956,064, 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 $424,797,304. Our total current liabilities and total liabilities
as of March 31, 2022 were $22,577,517 and $23,849,400 respectively. We had
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working capital of $19,378,547 as of March 31, 2022. In addition, we have access
to equity financing through our At-the-Market offering facility and debt
financing through the lending arrangement we entered into in April 2022 (see
Note 15 - Subsequent Events to our consolidated financial statements in Part I,
Item 1 of this Quarterly Report on Form 10-Q.
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.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make
payments to third parties. These obligations impact our short-term and long-term
liquidity and capital resource needs. Certain contractual obligations are
reflected on the consolidated balance sheet as of March 31, 2022, while others
are considered future commitments. Our contractual obligations primarily consist
of cancelable purchase commitments with various parties to purchase goods or
services, primarily miners and equipment, entered into in the normal course of
business and operating leases. For information regarding our other contractual
obligations, refer to Note 12, Commitments and Contingencies on the Form 10-Q
for the quarterly period ended March 31, 2022, and Note 15, Commitments and
Contingencies included in our Annual Report on Form 10-K as filed with the SEC
on December 14, 2021.
Operating Activities
Operating activities used $33,548,507 in cash for the six months ended March 31,
2022, as compared with using $11,686,460 in cash for the six months ended March
31, 2021. Our net income of $14,315,020 was the main component of our operating
cash flow for the six months ended March 31, 2022, offset primarily by realized
gain on digital currency of $7,260,909, increased by impairment of digital
currency of $7,033,691, stock based compensation of $12,303,091, and unrealized
loss on derivative asset of $1,111,297. Other components of our operating cash
flow are the changes in operating assets and liabilities including increase in
mining of digital currency of $73,940,317, increase in prepaid expenses and
other current assets of $12,985,662, increase in accounts payable and accrued
liabilities of $10,083,770, increase in accounts receivables of $3,963,323, and
decrease in inventory of $1,495,321. Our net income of $232,510 was the main
component of our negative operating cash flow for the six months ended March 31,
2021, increased primarily by stock based compensation of $5,199,658, and
depreciation and amortization of $3,226,263, and decreased primarily by
unrealized gain on derivative asset of $7,380,135. Other components of our
operating cash flow are the changes in operating assets and liabilities
including increase in production of digital currency of $7,449,202, increase in
accounts payable and accrued liabilities of $2,890,270, and increase in prepaid
expenses and other current assets of $1,130,741.
Investing Activities
Investing activities used $50,679,613 during the six months ended March 31,
2022, as compared with $55,909,101 for the six month period ended March 31,
2021. Our sale of digital currencies of $80,430,113, sale of miners of
$3,497,654, payments on miner deposits of $105,077,053 and purchase of fixed
assets of $28,914,917 were the main components of our investing cash flow for
the six months ended March 31, 2022. Our sale of digital currencies of
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--------------------------------------------------------------------------------$2,422,282, payments on miner deposits of $45,488,258, purchase of fixed assets
of $9,058,011, investment in infrastructure development of $2,830,560, and
acquisition of Solar Watt Solutions of $1,000,337 were the main components of
our investing cash flow for the six months ended March 31, 2021.
Financing Activities
Cash flows generated from financing activities during the six months ended March
31, 2022 amounted to $68,100,740, when compared to $221,743,901 for the six
months ended March 31, 2021. Our cash flows from financing activities for the
six months ended March 31, 2022 consisted primarily of proceeds from
underwritten offering of $67,988,993. Our cash flows from financing activities
for the six months ended March 31, 2021 consisted primarily of proceeds from
underwritten offering of $224,262,818, exercise of options and warrants of
$3,346,559, and offset by payments on promissory notes of $5,865,476.
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 Form 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.
Recent Accounting Pronouncements
Please refer to Note 2 in our unaudited condensed consolidated financial
statements contained elsewhere in this Quarterly Report on Form 10-Q for
recently adopted accounting pronouncements and recently issued accounting
pronouncements not yet adopted as of the date of this Quarterly Report on Form
10-Q.
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