Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 sustainable bitcoin mining company incorporated in Nevada, whose common stock is listed on the Nasdaq Capital Market. The Company, through itself and its wholly owned subsidiaries, has operated in the digital currency mining industry since December 2020.
We are currently working with various industry participants in developing a long-term sustainability and clean energy plan for our bitcoin mining operations. 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.
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. In line with our business strategy, on August 5, 2022, the Company entered into a definitive agreement (the "Transaction") to purchase certain assets for total consideration of $25,091,610, including cash, assumption of a real estate mortgage and a seller issued note payable. The assets acquired include 27 acres of real property and related electrical infrastructure currently providing 36 megawatts of power, with an additional 50 megawatts of capacity expected to be available in mid-2023, located in Washington, GA. The Transaction also included mining machines with computing power of approximately 341 petahash.
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 2.8 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 the bitcoin network. Our activities in this area are complemented by our energy background and planning is underway
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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 by December 31, 2022. We expect to exceed 3 EH/s in capacity by 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.
The Company provides 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 throughout the world. The Company’s solutions are supported by a proprietary suite of software solutions that include microgrid energy modeling, energy market communications and energy management solutions. As of June 30, 2022, the Company deemed its energy operations to be discontinued operations due to its strategic shift to strictly focus on its bitcoin mining operations and divest of its energy assets.
Results of continuing operations for the three months ended June 30, 2022 and 2021
Revenues
Revenues increased to $31,027,781 during the three months ended June 30, 2022, as compared with $9,052,068 in revenues for the same period ended 2021 primarily due to increase in revenues from our digital currency mining operations.
Costs and Expenses
We had costs and expenses of $45,969,250 for the three months ended June 30, 2022, as compared with $21,032,382 for the three months ended June 30, 2021.
Our cost of revenues was $10,341,026 for the three months ended June 30, 2022, as compared with cost of revenues of $1,147,281 for the three months ended June 30, 2021. Our cost of revenues during the three months ended June 30, 2022 was primarily the result of mining energy costs at owned facilities of $3,462,742 and mining hosting and associated energy fees of $1,147,281. Our cost of revenues during the three months ended June 30, 2021 was primarily the result of mining energy costs at owned facilities of $912,036. 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 $1,432,747 for the three months ended June 30, 2022 from $1,939,907 for the three months ended June 30, 2021. Our professional fees expenses for the three months ended June 30, 2022 consisted primarily of legal expenses of $1,153,594. Our professional fees expenses for the three months ended June 30, 2021 consisted mainly of legal fees of $1,317,261.
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Payroll expenses decreased to $7,617,576 for the three months ended June 30, 2022 from $10,959,362 for the three months ended June 30, 2021. Our payroll expenses for the three months ended June 30, 2022 consisted primarily of employee and officer stock-based compensation of $5,182,763, with primarily salary and wages expense constituting remaining amounts. Our payroll expenses for the three months ended June 30, 2021 consisted primarily of employee and officer stock-based compensation of $3,189,389, with primarily salary and wages expense constituting remaining amounts including non-recurring executive compensation of $4,700,000.
General and administrative expenses increased to $2,113,414 for the three months ended June 30, 2022 from $1,194,340 for the three months ended June 30, 2021. Our general and administrative expenses for the three months ended June 30, 2022 consisted primarily of insurance expenses of $866,994, marketing expenses of $518,985, travel expenses of $273,891 and dues and subscriptions of $265,777. Our general and administrative expenses for the three months ended June 30, 2021 consisted primarily of marketing expenses of $791,708, dues and subscription expenses of $235,256, and insurance expenses of $212,630.
Impairment expenses recorded for the three months ended June 30, 2022 were $4,418,714, and $3,720,481 impairment expenses were recorded for the three months ended June 30, 2021. Impairment expense for both periods consisted of bitcoin impairment expenses.
Realized loss on sale of digital currency increased to $5,234,482 for the three months ended June 30, 2022 from a realized gain of $36,438 for the three months ended June 30, 2021 due to the decrease in bitcoin prices during the period.
Depreciation and amortization expense increased to $14,811,291 for the three months ended June 30, 2022, from $2,107,449 for the three months ended June 30, 2021 due to increase in mining related equipment being placed in service during the comparative period.
Other income (expenses)
Other expense decreased to $1,294,607 for the three months ended June 30, 2022 compared to other expenses of $2,094,681 for the three months ended June 30, 2021. Our other expenses for the three months ended June 30, 2022 consisted primarily of an unrealized loss on derivative security of $1,032,579. Our other income for the three months ended June 30, 2021 consisted primarily of an unrealized loss on derivative loss of $2,060,774.
Net Income
We recorded a net loss of $16,236,076 for the three months ended June 30, 2022, as compared with a net loss of $14,074,995 for the three months ended June 30, 2021. The increase was due primarily to the increased losses from sale of digital currency and increased depreciation expense when compared to gain on the sale of digital currency and significantly lesser depreciation during the prior period.
Results of discontinued operations for the three months ended June 30, 2022 and 2021
The revenues from discontinued operations for the three months ended June 30, 2022 decreased to $601,001 from $2,863,997 for the three months ended June 30, 2021 primarily due to the Company's strategic shift to strictly focus on its bitcoin mining operations. The total costs and expenses for the three months ended June 30, 2022 increased to $13,704,066 from $5,465,424 for the three months ended June 30, 2021 primarily due to impairment expenses related to the energy business and severance related payroll expenses. As a result, the net loss for the three months ended June 30, 2022 increased to $13,104,147 from $2,602,132 for the three months ended June 30, 2021.
Results of continuing operations for the nine months ended June 30, 2022 and 2021
Revenues
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Revenues increased to $105,351,561 during the nine months ended June 30, 2022, as compared with $17,308,259 in revenues for the same period ended 2021 primarily due to increase in revenues from our digital currency mining operations.
Costs and Expenses
We had costs and expenses of $102,558,191 for the nine months ended June 30, 2022, as compared with $32,956,441 for the nine months ended June 30, 2021.
Our cost of revenues was $24,607,950 for the nine months ended June 30, 2022, as compared with cost of revenues of $2,161,937 for the nine months ended June 30, 2021. Our cost of revenues during the nine months ended June 30, 2022 was primarily the result of mining energy costs at owned facilities of $7,375,070, and mining hosting and associated energy fees of $16,626,999. Our cost of revenues during the nine months ended June 30, 2021 was primarily the result of mining energy costs at owned facilities of $1,802,556. 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 $5,588,980 for the nine months ended June 30, 2022 from $5,835,434 for the nine months ended June 30, 2021. Our professional fees expenses for the nine months ended June 30, 2022 consisted primarily of legal expenses of $2,013,440, accounting and tax expenses of $1,778,227, and subcontractor expenses of $736,653. Our professional fees expenses for the nine months ended June 30, 2021 consisted mainly of legal expenses of $4,143,460 largely related with litigation expenses and consulting fees of $988,393.
Payroll expenses increased to $24,209,787 for the nine months ended June 30, 2022 from 15,418,166 for the nine months ended June 30, 2021. Our payroll expenses for the nine months ended June 30, 2022 consisted primarily of employee and officer stock-based compensation of $17,441,828, with primarily salary and wages expense constituting remaining amounts. Our payroll expenses for the nine months ended June 30, 2021 consisted primarily of employee and officer stock-based compensation of $4,751,747, with primarily salary and wages expense constituting remaining amounts including non-recurring executive compensation of $4,700,000.
General and administrative expenses increased to $6,708,440 for the nine months ended June 30, 2022 from $2,938,543 for the nine months ended June 30, 2021. Our general and administrative expenses for the nine months ended June 30, 2022 consisted primarily of insurance expenses of $2,319,797, marketing expenses of $1,510,671, dues and subscriptions expenses of $696,278, travel expenses of $555,277, and utilities expenses of $352,949. Our general and administrative expenses for the nine months ended June 30, 2021 consisted primarily of marketing expenses of $1,730,489, dues and subscriptions of $569,187, and insurance expenses of $450,458.
Impairment expenses recorded for the nine months ended June 30, 2022 were $11,452,405 and $3,720,481 impairment expenses were recorded for the nine months ended June 30, 2021. Impairment expense for both periods consisted of bitcoin impairment expenses.
Realized gain on sale of digital currency increased to $2,026,427 for the nine months ended June 30, 2022 from a realized gain of $672,065 for the nine months ended June 30, 2021 due to the decrease in bitcoin prices during the period.
Depreciation and amortization expense increased to $32,659,747 for the nine months ended June 30, 2022, from $3,553,945 for the nine months ended June 30, 2021 due to increase in mining related equipment being placed in service during the comparative period.
Other income (expenses)
Other expense increased to $1,728,580 for the nine months ended June 30, 2022 compared to other income of $6,170,824 for the nine months ended June 30, 2021. Our other expense for the nine months ended June 30, 2022 consisted primarily of an unrealized loss on derivative security of $2,143,876. Our other income for the nine months ended June 30, 2021 consisted primarily of unrealized gain on derivative security of $5,319,361.
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Net Income
We recorded a net income of $1,064,790 for the nine months ended June 30, 2022, as compared with a net loss of $9,477,358 for the nine months ended June 30, 2021. The increase was primarily due to increase in revenues from our digital mining operations.
Results of discontinued operations for the nine months ended June 30, 2022 and 2021
The revenues from discontinued operations for the nine months ended June 30, 2022 increased to $9,157,184 from $4,985,062 for the nine months ended June 30, 2021. The total costs and expenses for the nine months ended June 30, 2022 increased to $25,244,377 from $11,950,066 for the nine months ended June 30, 2021 primarily due to impairment expenses related to the energy business and severance related payroll expenses. As a result, the net loss for the nine months ended June 30, 2022 increased to $16,089,993 from $6,967,261 for the nine months ended June 30, 2021.
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 June 30, 2022, we had total current assets of $29,448,673, 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 current assets held for sale, and total assets in the amount of $411,058,824. Our total current liabilities and total liabilities as of June 30, 2022 were $19,986,294 and $34,192,029 respectively. We had working capital of $9,462,379 as of June 30, 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 - Loan and Note 16 - 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, rising inflation and interest rates, and the conflict between Russia and Ukraine have resulted in, and may continue to result in, significant disruption and volatility in the global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.
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 June 30, 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.
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For information regarding our other contractual obligations, refer to Note 12, Commitments and Contingencies on the Form 10-Q for the quarterly period ended June 30, 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 provided $52,479,289 in cash for the nine months ended June 30, 2022, as compared with using $21,128,132 in cash for the nine months ended June 30, 2021. Our sale of digital currencies of $108,070,207, depreciation and amortization of $34,805,307, stock based compensation of $17,515,870, and impairment of digital currency of $11,452,405 were the main components of our operating cash flow for the nine months ended June 30, 2022, offset primarily by the increase in digital currency mining of $104,882,043, net loss of $15,025,203, and increase in prepaid and other current assets of $11,545,789. Our use of net cash in operating activities during the nine months ended June 30, 2021 were primarily driven by net loss for the period of $16,444,619, digital currency mining of $16,098,643, and unrealized gain on derivative asset of $5,319,361, offset by stock based compensation of $8,599,029, depreciation and amortization of $6,883,020, impairment of digital currency of $3,720,481, and increase in accounts payable and accrued liabilities of $3,699,298.
Investing Activities
Investing activities used $153,495,072 during the nine months ended June 30, 2022, as compared with using $193,596,196 for the nine month period ended June 30, 2021. Our payments on miner deposits of $124,272,481, purchase of fixed assets of $32,104,835, and sale of miners of $3,497,654 were the main components of our investing cash flow for the nine months ended June 30, 2022. Our payments on miner deposits of 125,855,501, purchase of fixed assets of $60,536,521, and our investment in infrastructure development of $6,431,664 were the main components of our investing cash flow for the nine months ended June 30, 2021.
Financing Activities
Cash flows generated from financing activities during the nine months ended June 30, 2022 amounted to $85,637,138, when compared to $233,807,996 for the nine months ended June 30, 2021. Our cash flows from financing activities for the nine months ended June 30, 2022 consisted primarily of proceeds from underwritten offering of $67,988,993 and equipment backed loan of $18,704,416. Our cash flows from financing activities for the nine months ended June 30, 2021 consisted of repayments of $5,865,476 on promissory notes, proceeds from exercise of options and warrants of $3,731,563 and proceeds from underwritten offerings of $236,123,384.
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.
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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.