CLEANSPARK, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Company Overview 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 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. 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 suite 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 suite is an ideal DER system 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 OpenADR 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. 6 Table of Contents 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 be 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. Bitcoin mining and Data Center business Through its wholly-owned subsidiary, ATL Data Centers LLC, CleanSpark owns and operates a data center that provides customers with traditional on-site and cloud-based data center services. The Company also owns and operates a fleet of Bitcoin miners producing over 200 PH/s. Mining capacity is expected to increase to over 300 PH/s in early 2021. CleanSpark plans to apply its energy technologies to these divisions with a goal of mining bitcoins at the lowest energy prices in the United States. Results of operations for the three months ended December 31, 2020 and 2019 Revenues Revenues increased to $2,257,570 during the three months ended December 31, 2020, as compared with $976,824 in revenues for the same period ended 2019 primarily due to revenues from our digital agency and digital currency mining segments. Gross Profit Our cost of revenues was $1,332,890 for the three months ended December 31, 2020, resulting in gross profit of $924,680, as compared with cost of revenues of $882,721 for the three months ended December 31, 2019, resulting in gross profit of $94,103. The increase in our cost of revenues for the three months ended December 31, 2020 was mainly the result of an increase in manufacturing and hardware expenses. Product sale revenue costs increased to $1,014,931 for the three months ended December 31, 2020, from $784,574 for the same period ended 2019. The increase in our product sale expense consisted mainly as a result of an increase in the cost of contract manufacturing for our switchgear products and hardware costs. Our cost of services increased to 148,913 for the three months ended December 31, 2020, from $98,147 for the same period ended 2019. The increase in our service, software, and related revenues expenses for the three months ended December 31, 2020, and 2019 consisted mainly as a result of an increase in the cost of allocated payroll costs of employees and consultants and subcontractors for services rendered through our digital agency services and installation of solar panels and energy storage. Our cost of mining and data center revenue increased to $169,046 for the three months ended December 31, 2020 from $0 for the same period ended 2019. The increase in these costs consisted mainly as a result of an increase in the utility costs and labor for data center services rendered. 7 Table of Contents Operating Expenses We had operating expenses of $7,094,778 for the three months ended December 31, 2020, as compared with $3,085,564 for the three months ended December 31, 2019. Professional fees increased to $1,712,723 for the three months ended December 31, 2020, from $1,516,587 for the same period ended December 31, 2019. Our professional fees expenses for the three months ended December 31, 2020 consisted mainly of legal fees of $1,230,362, consulting fees of $226,450, external marketing fees of $120,838, and accounting, audit and review fees of $97,350. Our professional fees expenses for the three months ended December 31, 2019 consisted mainly of officers and directors’ consulting fees of $150,000, consulting fees of $62,818, and accounting, audit and review fees of $71,655 and stock-based compensation of $586,181. Professional fees increased in 2020 mainly as a result of increased legal fees. Payroll expenses increased to $3,314,201 for the three months ended December 31, 2020, from $711,539 for the same period ended 2019. Our payroll expenses for the three months ended December 31, 2020 consisted mainly of salary and wages expense of $2,382,161 and employee stock-based compensation of $932,040. The increase in our payroll expenses for the three months ended December 31, 2019 consisted mainly as a result of an increase in salary and wages expense of $680,551 and employee stock-based compensation of $30,988. General and administrative fees increased to $950,139 for the three months ended December 31, 2020, from $230,661 for the same period ended 2019. The increase in our general and administrative expenses for the three months ended December 31, 2020 consisted mainly as a result of an increase in our marketing expenses of 555,429, dues and subscriptions of $171,992, insurance expenses of $72,159, and rent expenses of $30,393. Our general and administrative expenses for the three months ended December 31, 2019 consisted mainly of travel expenses of $31,585, rent expenses of $21,318, insurance expenses of $42,901, dues and subscriptions of $51,367 and office expense of $10,445. Product development expense was $39,286 for the three months ended December 31, 2020, and $39,287 for the same period ended 2019. Our product development expenses for the three months ended December 31, 2020 and 2019 consisted mainly of amortization of capitalized software. Depreciation and amortization expense increased to $1,078,429 for the three months ended December 31, 2020, from $587,490 for the same period ended 2019 mainly due to the depreciation expense related to the equipment used in the data center and digital currency miners. We expect that our operating expenses will increase in future quarters as we further implement our business plan. As we execute on customer contracts we may be required to hire and compensate additional personnel and support increased operational costs. Other income (expenses) Other income/(expenses) decreased to ($997,432) for the three months ended December 31, 2020, from $1,075,207 for the same period ended December 31, 2019. Our other income/(expenses) for the three months ended December 31, 2020 consisted mainly of a realized gain on sales of digital currency of $49,918, net interest income of $46,644, an unrealized loss on equity securities of ($73,500), and derivative loss of ($1,020,494). Our other income/(expenses) for the three months ended December 31, 2019 consisted mainly of an unrealized gain on equity security of $368,868, derivative income of $2,266,654 and interest expense of ($1,560,315). Net Loss We recorded a net loss of $7,167,530 for the three months ended December 31, 2020, as compared with a net loss of $1,916,254 for the same period ended December 31, 2019 mainly due to increase in payroll expenses, general and administrative expenses, and depreciation and amortization expenses. 8 Table of Contents Liquidity and Capital Resources As of December 31, 2020, we had total current assets of $33,306,373, consisting of cash, digital currency, accounts receivable, and prepaid expenses and other current assets, and total assets in the amount of $78,172,736. Our total current and total liabilities as of December 31, 2020 were $4,594,815 and $6,137,646 respectively. We had working capital of $28,711,558 as of December 31, 2020. Operating Activities Operating activities used $6,833,578 in cash for the three months ended December 31, 2020, as compared with $885,386 for the same period ended December 31, 2019. 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 stock based compensation of $4,350,643 unrealized loss on equity security of $73,500, loss on derivative asset of $1,020,494, depreciation and amortization of $1,078,429, and amortization of capitalized software of $39,286. Other components of our negative operating cash flow are the changes in operating assets and liabilities including prepaid expenses and other current assets of ($2,329,318), accounts payable of ($2,366,531), digital currency of ($733,410), accounts receivable of ($463,199), and inventory of ($276,750). Our net loss of $1,916,254 was the main component of our negative operating cash flow for the three months ended December 31, 2019, offset mainly by unrealized gain on equity security of ($368,868), gain on derivative asset of ($2,266,654), depreciation and amortization of $626,777, amortization of capitalized software of $39,286, amortization of debt discounts of $1,512,174, and stock-based compensation of $636,269. Investing Activities Investing activities used $(2,427,972) during the three months ended December 31, 2020, as compared with ($509,447) for the same period ended December 31, 2019. Our sale of digital currencies of $375,887, acquisition of ATL Data Centers, LLC of $45,783, investment in infrastructure development of $(2,830,560), and purchase of fixed assets of ($19,082) were the main components of our investing cash flow for the three months ended December 31, 2020. Our investment in International Land Alliance of $(500,000) and purchase of fixed assets of $(9,447) were the main components of our negative investing cash flow for the three months ended December 31, 2019. Financing Activities Cash flows received/(used) in financing activities during the three months ended December 31, 2020 amounted to $31,767,261, as compared with ($67,467) for the three months ended December 31, 2019. Our cash flows from financing activities for the three months ended December 31, 2020 consisted of repayments of ($5,475,000) on promissory notes, proceeds from exercise of warrants of $192,656, and proceeds from underwritten offering of $37,049,605. Our negative cash flows from financing activities for the three months ended December 31, 2019 consisted of repayments of $(67,467) on promissory notes. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of our sales and marketing, the timing of new product introductions and the continuing market acceptance of our products and services. Management believes that the Company has sufficient liquidity to satisfy its anticipated cash requirements for the next twelve months. However, there can be no assurance that our operations will become profitable or that external sources of financing, including the issuance of debt and/or equity securities, will be available at times and on terms acceptable to us, or at all. The Company’s management prepares budgets and monitors the financial results of the Company as a tool to align liquidity needs to the recurring business requirements. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise monies on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. 9 Table of Contents Off Balance Sheet Arrangements As of December 31, 2020, there were no off-balance sheet arrangements. Recently Issued Accounting Pronouncements The Company has evaluated all recent accounting pronouncements and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows. Critical Accounting Policies In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our accounting policies are discussed in detail in the footnotes to our financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2020. However, we consider our critical accounting policies to be those related to revenue recognition, long-lived assets, accounts receivable, fair value of financial instruments, cash and cash equivalents, accounts receivable, warranty liability and stock-based compensation. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.