CLEANSPARK, INC. 10-K

Item 1. Business As used in this Annual Report on Form 10-K, the terms “we”, “us”, “our”, the “Company”, “CleanSpark, Inc.” and “CleanSpark” mean CleanSpark, Inc. and its consolidated subsidiaries, unless otherwise indicated. Overview CleanSpark, Inc. is a Nevada corporation. We are in the business of providing advanced software and controls technology solutions to solve modern energy challenges. We have a suite of software solutions that provide end-to-end microgrid energy modeling, energy market communications and energy management solutions. Our offerings consist of intelligent energy monitoring and controls, intelligent microgrid design software, middleware communications protocols for the energy industry, energy system engineering and software consulting services. The software platforms (the “Platforms”) which are integral to our business are summarized as follows: · mVSO Platform: Energy modeling software for microgrid design and sales · mPulse Platform: Patented, proprietary controls platform that enables 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 Product Companies to participate in load shifting programs The Platforms are designed to allow customers to design, build, and operate distributed energy systems and microgrids which efficiently manage energy generation assets, energy storage assets, and energy consumption assets. Our software products enable users to implement software solutions to execute on these strategies. These strategies are generally targeted to operate distributed energy assets in a manner that provides resiliency and economic optimization and/or revenue generation through wholesale market activities. We also offer digital agency services through p2kLabs, Inc. including creative design, marketing/digital content, technical development, and engineering. We also own patented gasification technologies. Our technology converts any organic material into SynGas 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 plan to continue to focus on our other product offerings, as opposed to expending significant efforts on the Gasifier side of the business. Lines of Business Energy Business Segment Through CleanSpark, LLC, the Company provides microgrid engineering, design and software solutions to military, commercial and residential customers. Our services consist of distributed energy microgrid system engineering and design, and project consulting services. Through CleanSpark Critical Power Systems, Inc., the Company provides custom hardware solutions for distributed energy systems that serve military and commercial residential properties. Through GridFabric, LLC the Company provides Open Automated Demand response (“OpenADR”) and other middleware communication protocol software solutions to commercial and utility customers. Digital Agency Segment Through p2kLabs, Inc., the Company provides design, software development and other technology-based consulting services. 4 Table of Contents Distributed Energy Management and Microgrid Industry Integral to our business is our Distributed Energy Management Business (the “DER Business”). The main assets of our DER Business include our propriety software systems (“Systems”) and also our engineering and methodology trade secrets. The Distributed Energy systems and Microgrids that utilize our Systems are capable of providing secure, sustainable energy with significant cost savings for its energy customers. The Systems allows customers to design, engineer, and then efficiently communicate with and manage renewable energy generation, storage and consumption. By having autonomous control over the multiple facets of energy usage and storage, customers are able to reduce their dependency on utilities, thereby keeping energy costs relatively constant over time. The overall aim is to transform energy consumers into intelligent energy producers by supplying and managing power in a manner that anticipates their routine instead of interrupting it. Around the world, the aging grid is becoming unstable and unreliable due to increases in loads and lack of new large-scale generation facilities. This inherent instability is compounded by the push to integrate a growing number and variety of renewable but intermittent energy generation assets and advanced technologies into outdated electrical grid systems. Simultaneously, defense installations, industrial complexes, communities, campuses and other aggregators across the world are turning to virtual power plants and microgrids as a means to decrease their reliance from the grid, reduce utility costs, utilize cleaner power, and enhance energy security and surety. The convergence of these factors is creating significant opportunities in the power supply optimization and energy management industry. Efficiently operating and managing the distributed energy management systems and microgrids of tomorrow, while maximizing the use of sustainable energy to produce affordable, stable, predictable and reliable power on a large scale, is a significant opportunity that early-movers can leverage to capture a large share of this emerging global industry. A microgrid is comprised of any number of energy generation, energy storage, and smart distribution assets that serve a single or multiple loads, both connected to the utility grid and separate from the utility grid “islanded”. In the past, distributed energy management systems and microgrids have consisted of off-grid generators organized with controls to provide power where utility lines cannot run. Today, modern distributed energy management systems and microgrids integrate renewable energy generation systems (REGS) with advanced energy storage devices and interoperate with the local utility grid. Advanced autonomous cyber-secure microgrids controls relay information between intelligent hardware and servers to make decisions in real-time that deliver optimum power where it is needed, when it is needed. Our mPulse software is an integrated distributed energy management control platform that seamlessly integrates and controls all forms of energy generation with energy storage devices to provide energy security in real time free of cyber threats to service facility loads. DER systems are able to interoperate with the local utility grid, and bring users the ability to choose when to buy or sell power to and from the utility grid. mPulse is ideal DER systems for commercial, industrial, defense, campus and residential users and ranges in size from 4KW to 100MW and beyond. mPulse Software Suite mPulse is a modular platform that provides intelligent control of a Microgrid based on a systems operational goals, energy assets and forecasted energy load and generation. mPulse performs high-frequency calculations, threshold-based alarming, execution of domain-specific business rules, internal and external health monitoring, historical data persistence, and system-to-operator notifications. The modular design increases system flexibility and extensibility. In addition, the deployment of the mPulse system follows a security-conscious posture by deploying hardware-based firewalls as well as encryption across communication channels. mPulse allows configuration for site-specific equipment and operation and provides a clean, informative user interface to allow customers to monitor and analyze the data streams that describe how their microgrid is operating. mPulse supports our innovative fractal approach to microgrid design, which enables multiple microgrids on a single site to interact in a number of different ways, including as peers, in a parent-child relationship, and in parallel or completely disconnected. Each grid can have different operational objectives, and those operational objectives can change over time. Any microgrid can be islanded from the rest of the microgrid as well as the larger utility grid. The mPulse software can control the workflow required in both the islanding steps as well as the reconnecting steps of this maneuver and coordinate connected equipment such that connections are only made when it is safe to do so. 5 Table of Contents Microgrid Value Stream Optimizer (mVSO) The Microgrid Value Stream Optimizer (mVSO) software platform provides a robust distributed energy and microgrid system modeling solution. mVSO takes utility rate data and load data for a customer site and helps automate the sizing and analysis of potential microgrid solutions as well as providing a financial analysis around each grid configuration. mVSO uses historical data to generate projected energy performance of generation assets and models how storage responds to varying operational modes and command logics based upon predicted generation and load curves. mVSO analyzes multiple equipment combinations and operational situations to determine the optimal configuration for a site based on the financial and economic results, equipment outlay, utility cost savings, etc., to arrive at payback and IRR values. This ultimately provides the user with data to design a distributed energy and/or microgrid system that will meet the customers’ performance benchmarks. The system also provides users with business development and proposal generation tools to more efficiently present the results to end-customers. Critical power switchgear and hardware solutions – CleanSpark Critical Power Systems, Inc. Through the Company’s wholly owned subsidiary, CleanSpark Critical Power Systems, Inc. we provide parallel switchgear, automatic transfer switches and related control and circuit protective equipment solutions for commercial, industrial, defense, campus and residential users. We utilize Pioneer Power Solutions, Inc. for contract manufacturing, of our parallel switchgear, automatic transfer switches and related control and circuit protective equipment. OpenADR and communication protocol software solutions – GridFabric Through the Company’s wholly owned subsidiary, GridFabric, LLC we offer Open ADR solutions to commercial and utility customers. GridFabric provides middleware software solutions for utilities and IoT (Internet of Things) products that manage energy loads. OpenADR 2.0b is now the basis for the standard to be developed by the International Electrotechnical Commission. GridFabric's core products are Canvas and Plaid. Canvas Canvas is an OpenADR 2.0b Virtual Top Node ('VTN') built for testing and managing Virtual End Nodes ('VENs') that are piloting and running load shifting programs. Canvas is offered to customers in the Cloud as a SaaS solution or as a licensed software. Plaid Plaid is a licensed software solution that allows any internet connected product that uses energy (i.e. Solar, Storage & Inverters, Demand Response, EV Charging, Lighting, Industrial controls, Building Management Systems, etc.) to add load shifting capabilities by translating load shifting protocols into their existing APIs. Companies that implement Plaid through GridFabric get a Certified OpenADR 2.0b Virtual End Node (VEN) upon completion of the implementation process. Digital Agency Segment – p2kLabs Through the Company’s wholly owned subsidiary, p2kLabs, Inc. we provide a suite of digital services from creative design to technical development for products and services through the entire product/service lifecycle. P2k is made up of “labs” whereas each lab contains its own unique offering including design, marketing/digital content, engineering & SalesForce development, and strategy services. Legacy Gasifier Business Our Gasification technologies and prototype will need to undergo further additional testing to further establish its commercial capability of producing large volumes of clean, renewable energy from any carbon compound (Municipal Solid Waste (MSW), Coal, Sewage Sludge) into clean Synthesis Gas(“ SynGas”) . Our prototype Gasifier is still under development and a commercially viable Gasifier is not expected to be sellable until we expend additional resources on its testing and development. A third-party consulting firm has independently tested the Gasifer's performance and certified the results of its performance. Upon completion of the testing, an initial white paper was published outlining the results and suggested improvements for commercialization. We anticipate that the investment to complete these improvements would b e between approximately $500,000. Upon completion of the improvements, we would be required to conduct an extended test run with an independent third party to verify the results needed to prove its commercial viability, at which time we could begin to actively market our Gasifier units. 6 Table of Contents We own Patent Nos. 9,890,340B2, 9,359,567, 8,518,133 8,105,401 and 8,347,829 protecting our gasification technology and process for using feedstock comprising gaseous fuel Our patented process involves the grinding, drying, separating, mixing, and then pelletizing of solid waste. These pellets constitute the feedstock for the Gasifier. Gasifying feedstock using our technology converts waste and organic material into SynGas. SynGas can be converted into multiple forms of fuel for power plants, motor vehicles, jets, duel-fuel diesel engines, gas turbines, and steam boilers and as feedstock for the generation of DME (Di-Methyl Ether). The SynGas produced is mostly hydrogen and carbon monoxide which are primary building blocks for many fuels and chemicals. Syngas is sufficiently clean that it if processed directly it generally does not require costly hot-gas cleanup. As discussed above, we do not anticipate deploying significant resources on the gasification business at this time. As opportunities arise, we intend to utilize the gasification assets and intellectual properties through licensing or sales agreements. We have not engaged in any significant negotiations to sell or license our Gasifier products to any major customers. Markets, Geography and Major Customers The Company’s products and services predominantly serve the North American and Latin American energy markets, and primarily the commercial and industrial space. Based on recent market experience, it appears there may be some seasonality with deliveries decreasing in November and December each year, likely as a result of the US holiday season and as a result of varied customer appropriation cycles; however, we believe these market factors will continue to evolve and the Company’s insight to these trends will improve with continued commercial success and time. For the year ended September 30, 2020 and 2019, respectively 58.3% and 34.8% of our total consolidated revenues were associated primarily with one customer. A loss or decline in business with this customer, could have an adverse impact on our business, financial condition, and results of operations. We provide our hardware products under contract manufacturing agreements. we provide our software and services at customer locations and from our offices located in Utah, Nevada and California . Working Capital Items We do not maintain significant inventory. Our inventory levels are currently adequate for our short-term needs based upon present levels of demand. We consider the component parts of our different products to be generally available and current suppliers to be reliable and capable of satisfying anticipated needs. Distribution, Marketing and Strategic Relationships We have developed strategic relationships with well-established companies in key areas including distribution and manufacturing. We sell our products worldwide, with a primary focus on North America and Latin America, through our direct product sales force, and partner networks. Materials and Suppliers Although most components essential to our business are generally available from multiple sources. We believe there are component suppliers and manufacturing vendors whose loss to us could have a material adverse effect upon our business and financial condition. The Company currently engages a contract manufacturer, whereby they exclusively manufacture parallel switchgear, automatic transfer switches and related control and circuit protective equipment for us. Historically, we have not experienced significant delays in the supply or availability of our key materials or components provided by our suppliers, nor have we experienced a significant price increase for materials or components. We do not anticipate any such delays or significant price increases in our fiscal year 2021. 7 Table of Contents Environmental Issues No significant pollution or other types of hazardous emission result from the Company’s operations and it is not anticipated that our operations will be materially affected by federal, state or local provisions concerning environmental controls. Our costs of complying with environmental, health and safety requirements have not been material. We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on our business or markets that we serve, nor on our results of operations, capital expenditures or financial position. We will continue to monitor emerging developments in this area. Competition We experience competition in all areas of our business. The markets we address for alternative energy and microgrid markets, energy controls and communications systems are characterized by the presence of both new start-ups and well-established product providers. We believe the principal competitive factors in the markets in which we operate include product features, including scalability, relative price and performance, lifetime operating cost, including any maintenance and support, product quality and reliability, safety, ease of use, rapid integration with new and existing distributed energy assets, customer support, design innovation, marketing and distribution capability, service and support and corporate reputation. Some of our competitors have substantially larger financial and other resources. Factors that could affect our ability increase sales of our System may include resource limitations, available information and our standards established for projected return on investment. Distributed Energy Management Business Competition Our DER Business and software platforms are set up to compete against larger companies. We offer an end-to-end suite of software solution that enables microgrids from design through operations and communication .Our integrated microgrid control platform seamlessly integrates energy generation with energy storage devices and controls facility loads to provide energy security in real time. The platforms are able to interoperate with the local utility grid and allows users the ability to obtain the most cost-effective power for a facility. The systems are technology agnostic and can incorporate into multiple vendors and manufacturers products and legacy systems. The systems are ideal for commercial, industrial, mining, defense, campus and community users ranging from 4 kw to 100 MW and beyond and can deliver power at or below the current cost of utility power. All of these attributes contribute to our ability to compete with the larger, more established competitors that have rely on their own manufactured products and hardware solutions. The principal advantages of our Platforms are: § Technology agnostic approach allows customers to leverage aged legacy systems reducing implementation costs. § The automated process is user friendly and does not require highly qualified engineers to operate. § We believe our project proposal tool is more accurate than any other option on the market. Distributed Energy and Microgrid control technologies are fairly new to the market and can be deployed in various formats. Eight technologies that are predominantly used in commercial applications and/or have been extensively studied are: § Schneider Electric § Spirae § Ageto Energy § PowerSecure § ABB 8 Table of Contents Energy Modeling Business Competition § Energy Toolbase § Homer Gasifier Business Competition Our Gasifier system is expected to compete against larger gasification projects. Our modular concept allows for parallel processing so a facility could be easily expanded or reduced without risk or changing the basic structure by simply adding or removing module units; it also allows for multiple end product processing, producing electricity, ethanol, and fuels simultaneously, and for universal parts which reduces maintenance costs. We expect a ll of these attributes contribute to our ability to compete with the larger, more established competitors that have large systems that require significant downtime for maintenance and repair. As previously disclosed, we plan to continue to focus on our other product offerings, as opposed to expending significant efforts on the Gasifier side of the business. Intellectual Property In relation to our microgrid business, we own the following patents: Patent No. 9,941,696 B2 "Establishing Communication and Power Sharing Links Between Components of a Distributed Energy System, awarded April 10, 2018, is a revolutionary patent that specifically addresses CleanSpark's engineering and data-analytics technologies, processes and procedures. The patent covers CleanSpark's ability to receive data from a plurality of sources within a microgrid, which is then analyzed to forecast power needs across the microgrid, or a combination of multiple 'fractal' microgrids, and then determining whether or when to share power with the requesting module. In relation to our legacy gasifier business, we own the following patents: Patent No. 9,359,567 ‘Gasification Method Using Feedstock Comprising Gaseous Fuels’; Patent No. 8,518,133 ‘Parallel Path, Downdraft Gasifier Apparatus and Method’; and Patent No. 8,105,401 ‘Parallel Path, Downdraft Gasifier Apparatus and Method.’ ; Patent No. 8,347,829 Electrolytic Reactor and Related Methods for Supplementing the Air Intake of an Internal Combustion Engine. The second Patent, "Parallel Path Downdraft Gasifier Apparatus and Method, US 9,890, 340 B2", awarded February 13, 2018, further enhances CleanSpark's patent portfolio surrounding its proprietary gasification and waste-to-energy technologies. Our patents begin to expire between 2028 and 2035. Government Regulation We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations concerning the protection of the environment and human health will not have a material effect upon us, our capital expenditures, or earnings. We cannot predict what effect additional regulation or legislation, enforcement policies thereunder and claims for damages for injuries to property, employees, other persons and the environment resulting from our operations. Our operations are subject to environmental regulation by state and federal authorities including the Environmental Protection Agency (“EPA”). This regulation has not increased the cost of planning, designing and operating to date. Although we believe that compliance with environmental regulations will not have a material adverse effect on our operations or results of these operations, there can be no assurance that significant costs and liabilities, including criminal penalties, will not be incurred. Moreover, it is possible that other developments, including stricter environmental laws and regulations, and claims for damages for injuries to property or persons resulting from our activities could result in substantial costs and liabilities. In the conduct of our activities, our operations will be subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used, released or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. We are also subject to the requirements and reporting set forth in OSHA workplace standards. 9 Table of Contents Other than the above regulations and maintaining our good standing in the State of Nevada, complying with applicable local business licensing requirements, complying with all state and federal tax requirements, preparing our periodic reports under the Securities Exchange Act of 1934, as amended, and complying with other applicable securities laws, rules, and regulations, and our discussion related to our newly acquired ATL Data Centers LLC subsidiary regarding bitcoin mining operations, we do not believe that existing or probably governmental regulations will have a material effect on our operations. We do not currently require the approval of any governmental agency or affiliated program for our operations. Product Development Because the distributed energy and related software industry is still in an early state of adoption, our ability to compete successfully is heavily dependent upon our ability to ensure a continual and timely flow of competitive products, services, and technologies to the marketplace. We continue to develop new products and technologies and to enhance existing products in order to drive further commercialization. We may also expand the range of our product offerings and intellectual property through licensing and/or acquisition of third-party business and technology. Human Capital Resources; Employees; Personnel We believe that our future success will depend, in part, on our ability to continue to attract, hire, and retain qualified personnel. As of December 14, 2020, we had 62 staff members with 56 full time salaried employees. We continue to seek additions to our staff, although the competition for such personnel in our segments is significant. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good. Company Websites We maintain a corporate Internet website at: www.cleanspark.com and informational websites for our subsidiaries at www.p2klabs.com and www.gridfabric.io. The contents of these websites are not incorporated in or otherwise to be regarded as part of this Annual Report. We file reports with the SEC which are available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, “Section 16” filings on Form 3, Form 4, and Form 5, and other related filings, each of which is provided on our website as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.