CLEANSPARK, INC. 10-Q

Item 4. Controls and Procedures Limitation on Effectiveness of Controls and Procedures We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding 21 required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2024, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting described below. Material Weakness in Internal Control over Financial Reporting A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses that have been previously reported have been identified and included in management's assessment: • Information and Technology Controls: Certain individual control deficiencies related to information technology (“IT”) general controls and report reviews aggregate into a material weakness, as follows: o Controls were not fully documented responding to all of the Complementary User Entity Controls forwarded through Software as a Service (SaaS) vendor audit reports in the design and implementation of suggested controls. o There were not always appropriate IT controls related to information produced by the entity (IPE), including spreadsheets, that are relevant to the preparation of our condensed consolidated financial statements. • There exists a material weakness related to the cut-off accounting for the existence and calculation related to the impairment of property, plant and equipment. These material weaknesses did not result in any identified material misstatements to the condensed consolidated financial statements, and there were no changes to previously released financial results. Remediation Efforts to Address the Material Weakness The Company’s Board of Directors and management take internal control over financial reporting and the integrity of its condensed consolidated financial statements seriously. Management has implemented measures designed to ensure that control deficiencies contributing to the IT material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include the following: • redesigned and implemented controls to respond to Complementary User Entity Controls forwarded through SaaS vendor audit reports in the design and implementation of suggested controls; • expanded the management and governance over IT system controls, including the hiring of a Systems Analyst and an IT Analyst; • established more specific controls to gain additional comfort over the completeness and accuracy of IPE, including data used in spreadsheets used in the preparation of condensed consolidated financial statements; and • redesigned and implemented process controls around internal user access management including provisioning, removal, and periodic review for all financial reporting systems. Management has planned measures to ensure that control deficiencies contributing to the property, plant and equipment material weakness is remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include the following: 22 • redesigned and implement policies and procedures related to the counting of received property, plant and equipment • hiring additional resources in Financial Reporting • creation of a standard impairment calculation worksheet • training of documentation, policies and procedures for cross-department team members While the IT remediation actions above have been substantially completed, and remediation plans related to property, plant and equipment are still in process, changes to internal control over financial reporting will require operation for a sufficient period of time in order for management to evaluate and test the operating effectiveness of the internal controls over financial reporting. Management will continue to monitor and evaluate the effectiveness of these changes for a sufficient period of time prior to concluding that these controls are designed and operating effectively and the material weaknesses can be considered remediated. Changes in Internal Control over Financial Reporting Other than the material weakness related to the cut-off accounting for the existence and calculation related to the impairment of property, plant and equipment and the remediation efforts described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 23 PART II – OTHER INFORMATION Item 1. Legal Proceedings We are from time to time subject to various claims, lawsuits, and other legal and administrative proceedings arising in the ordinary course of business. See Note 16 - Commitments and Contingencies to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.