Item 1. Business
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 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. We are also using all available clean and renewable energy
resources that we currently have reasonable access to in all of 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 N ew York-based
Coinmint in place since July 2021. Bitcoin mining has now become our principal revenue generating
business activity. We currently intend to continue to acquire additional facilities,
equipment and infrastructure capacity to continue to expand 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 location
play important roles in mining. As of the date of this filing, our mining units are currently capable of producing over 1.3 exahash/s
(“EH”) in hash rate capacity. 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 to deploy our portfolio of energy technologies 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 2.0 EH/s in hashrate capacity at or near the end
of December 31, 2021. We expect to exceed 3 EH/s in capacity by mid-to-late 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 significant portion of the bitcoin, 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) or to engage in hedging 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 and monitoring the market in real time.
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Through our recently formed 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 through the world .
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.
Other business
activities
Through p2kLabs, Inc., we provide design, software
development, and other technology-based consulting services. The services provided are generally hourly or fixed-fee project-based arrangements.
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.
Markets, Geography and Major Customers
Digital Currency Mining Segment
Bitcoin is a global store and exchange of value used
by people across the world as an asset and to conduct daily transactions. Mining bitcoin supports the global bitcoin blockchain and the
millions of people that depend on it for economic security and other benefits. Strictly speaking, there is no customer market for mining
bitcoin but we consider our mining pool operators as customers because they compensate us for providing processing power to the mining
pool (see Item 1A. Risk Factors for more information on our mining pool operators). We own and operate our own facilities and do not lease
mining space to other mining companies or private individuals that mine. Our wholly-owned mining operations are located in the State of
Georgia in the United States. We also have a relationship with a facility located in New York State that hosts a portion of our miners.
Energy Segment
Around the world, an aging energy infrastructure is
becoming unstable and unreliable due to increases in loads and limited 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. Defense installations, industrial complexes, communities, campuses and other aggregators
across the world are turning to microgrids as a means to decrease their reliance on the grid, reduce utility costs, utilize cleaner power,
and enhance energy security.
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The Company’s products and services predominantly
serve the energy markets throughout the Americas in the residential, commercial, and industrial sectors. Federal, state and local governmental
bodies provide incentives to owners and system integrators of solar energy systems to promote renewable energy in the form of rebates,
tax credits, and other similar incentives. These incentives help to catalyze customer acceptance of renewable energy systems as an alternative
to utility-provided power. Over the most recent year, our energy business operated extensively in California’s residential energy
markets by participating in the state’s Self-Generation Incentive Program (“SGIP”).
For the years ended September 30, 2021 and 2020,
respectively, 61.2% and 64.8% of our total energy revenues were associated primarily with three customers. A loss or decline in business
with these customers could have an adverse impact on our business, financial condition, and results of operations.
We provide our hardware
products under manufacturing and distribution agreements. We provide our software and services at customer locations and from our office
located in Carlsbad, California .
Working Capital Items
Digital Currency Mining Segment
The bitcoin mining industry is highly competitive
and dependent on specialized mining machines that have few manufacturers. Machine purchases require large down payments and miner deliveries
often arrive many months after initial orders are placed.
At the time the Company
acquired ATL in December 2020, the Company had approximately 3,471 bitcoin mining units with application-specific integrated circuits
(“ASICs”) in operation, which produced approximately 190 petahash/s. Since acquiring ATL, the Company has expanded its operations
and purchased additional ASICs. The Company now has 12,900 ASICs (as of the date of this filing )
in daily operation, which are producing approximately 1.3 EH/s. In addition to the ASICs in operation, the
Company has also entered into futures contracts, pursuant to which it has pre-paid significant down payments to acquire additional mining
machines. The majority of miners we operate and expect to operate once received are the latest generation Antminers manufactured by Bitmain,
including the S19, S19-Pro, and S19j-Pro. We believe that Bitmain’s miners are the most efficient and productive miners currently
on the market, though that may change as new manufacturers enter the market.
In addition to our currently deployed fleet of approximately
12,900 latest-generation miners (as of the date of this filing), we have purchased an additional 26,830 miners that are slated for delivery
over the next 12 months. With the full deployment of these miners, our total fleet will consist of approximately 38,610 miners.
Energy Segment
We currently possess a significant amount of inventory,
however, our short-term demand currently exceeds our current inventory levels. We are actively working with our current suppliers to satisfy
our short-term and anticipated long-term needs. Due to current supply chain dynamics worldwide constraining our ability to secure certain
inventory, these constraints have resulting in a significant customer backlog.
Distribution, Marketing and Strategic Relationships
Digital Currency Mining Segment
We have developed strategic relationships with well-established
companies in key areas including traditional and renewable energy, infrastructure, and bitcoin mining equipment procurement.
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Coinmint
In addition to operating our own mining facilities,
we may engage with third-parties to operate mining equipment on behalf of the Company. On July 8, 2021, CleanBlok entered into a services
agreement with Coinmint, LLC (“Coinmint”). Pursuant to the agreement, Coinmint has agreed to house and power certain of our
cryptocurrency mining equipment in its facilities, and to use commercially reasonable efforts to mine bitcoin on our behalf. All bitcoin
mining services performed by Coinmint are conducted using mining equipment owned by the Company. As of the date of this filing, we have
received and deployed approximately 6,700 total miners pursuant to the co-location mining services agreement at Coinmint’s facility
in New York.
Pursuant to the agreement, as consideration for the
services, we pay Coinmint certain services fees, which are based on the operating costs incurred by Coinmint in performing the services,
and a variable fee calculated based on the profitability of the bitcoin mined during the relevant payment period, subject to uptime performance
commitments. The agreement has an initial term of one year, after which it will renew automatically for three-month periods until terminated
in accordance with the terms of the agreement.
Energy Segment
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 Southern California
and the Americas, through our direct product sales force, and partner networks.
Materials and Suppliers
Digital Currency Mining Segment
We engage in high efficiency bitcoin mining by using
ASICs. These specialized computers, often called mining rigs, have few manufacturers. A majority of the machines we purchased this year
were manufactured by Bitmain, a Chinese company and the preeminent manufacturer of bitcoin mining rigs.
In addition to ASICS, mining equipment includes networking
equipment, power cords, racking, other specialized storage, transformers, and energy. We rely on utility providers for our power needs.
These utilities buy into local energy mixes to source power. We make every effort to establish our facilities in locations serviced by
utilities that generate a substantial portion of their energy from clean and renewable sources. We supplement the energy mix provided
by our partners with the purchase of renewable energy credits because the precise ratio of renewable energy in local energy mixes is not
within our control. We also intend to generate a portion of our own power through renewable solar energy by installing our microgrid solutions
at our mining centers.
Historically, we have been able to manage our supply
chains effectively, but global supply chains are highly constrained, and we are experiencing substantial increases in shipping costs and
unprecedented logistical delays as we make efforts to ensure timely delivery of equipment. There can be no certainty that we will not
be affected in the future, and we believe that there is significant risk that equipment supply chains will be affected in 2022. Inflationary
pressures may also impact our fiscal year 2022.
Energy Segment
Although most components essential to our energy business
are generally available from multiple sources, we believe there are component suppliers and manufacturing vendors whose loss to us could
have an adverse effect on our business and financial condition. The Company also currently engages a contract manufacturer, whereby they
exclusively manufacture parallel switchgear, automatic transfer switches and related control and circuit protective equipment for us.
The Company sources energy storage devices (batteries) from a variety of vendors based on availability, cost, and quality. If we fail
to maintain or expand our relationships with our suppliers and manufacturers, or if one or more that we rely upon to meet anticipated
demand reduces or ceases production, it may be difficult to quickly identify and qualify alternatives on acceptable terms. In addition,
equipment prices may increase in the coming years, or not decrease at the rates we historically have experienced, due to tariffs or other
factors.
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In 2021, we experienced periodic supply chain constraints
around certain inventory items, most notably battery energy supply systems. Global supply chains are highly constrained, and unprecedented
logistical delays have the potential to impact our abilities timely delivery of equipment. There can be no certainty that we will not
be affected in the future, and we believe that there is significant risk that equipment supply chains will be affected in 2022. Inflationary
pressures may also impact our fiscal year 2022.
Environmental Issues
Digital Currency Mining and Energy Segments
No significant pollution or other types of hazardous
emission result from the Company’s direct 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. Starting in the fourth calendar quarter of 2021, we began to voluntarily purchase renewable energy credits to
offset a significant portion of our energy usage that is derived from non-renewable sources. The Company has also engaged market professionals
to enhance and build a comprehensive environmental, social and governance (“ESG”) strategy.
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
continue to monitor emerging developments in this area.
Competition
Digital Currency Mining Segment
Bitcoin mining is a global activity. During our most
recent fiscal year, a majority of bitcoin mining occurred in China. After China banned bitcoin mining in May 2021, the center of mining
moved to North America. Although bitcoin mining by its nature is not a directly competitive business, all miners compete for bitcoin rewards;
based on this, we define competitors as other bitcoin miners. Our competitors include large, publicly-listed mining companies, large private
mining companies, and, in some cases, independent, individual miners who pool resources. We believe our principal competitive factors
include our energy technology background, a combination of owned, operated, and co-located miners and facilities, our strategic use of
the bitcoin we mine to fund growth, and our commitment to sustainable business practices, including sourcing renewable energy. Within
North America, our major competitors include:
1) Marathon Digital Holdings
2) Riot Blockchain, Inc.
3) Greenidge Generation Holdings
4) Bit Digital, Inc.
5) Hut 8 Mining Corp.
6) Hive Blockchain Technologies
7) Compute North
8) Core Scientific
9) Bitfarms LTD.
In addition to the foregoing, we compete with other
companies that focus all or a portion of their activities on mining activities at scale. We face significant competition in certain operational
aspects of our business, including, but not limited to, the acquisition of new miners, obtaining the lowest cost of electricity, obtaining
clean energy sources, obtaining access to energy sites with reliable sources of power, and evaluating new technology developments in the
industry.
Energy Segment
The
markets we address in our energy operations are characterized by the presence of both new start-ups and well-established product providers. This
industry is capital intensive and highly competitive. The ability to compete effectively is determined by product features, scalability,
relative price, lifetime operating cost, product durability and reliability, safety, ease
of integration, customer support, design innovation, marketing and distribution capability, service and support and corporate reputation.
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We offer turnkey energy solutions which include
system design, installation and grid integration. Our P latforms are capable of interoperating
with the local utility
grid to help users optimize power for their homes or businesses.
Our solutions are vendor agnostic . Our solutions are ideal for commercial,
industrial, mining, defense, campus and
community users, both small and large,
with an aim to deliver power at or below the customers
cost of utility power. These attributes contribute to our ability
to compete with larger,
more established competitors. Our major competitors include:
1) Schneider
Electric
2) Siemens
3) Spirae
4) Ageto
Energy
5) PowerSecure
6) ABB
7) Homer
8) Tesla
Intellectual Property
Digital Currency Mining Segment
We do not currently own any patents in connection
with our existing and planned digital currency mining related operations. We do rely, and expect to continue relying, upon trade secrets,
trademarks, service marks, trade names, copyrights and other intellectual property rights.
Energy Segment
In relation
to our microgrid business, we own
the following patent: Patent No. 9,941,696 B2 “ Establishing
Communication and Power
Sharing Links Between Components of a
Distributed Energy System,” awarded
April 10, 2018, which addresses our engineering and
data-analytics technologies, processes and procedures.
The patent covers our 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;” 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.” Another patent, "Parallel Path Downdraft Gasifier Apparatus and Method, US 9,890, 340 B2,"
awarded February 13, 2018, further enhanced our patent portfolio surrounding our proprietary gasification and waste-to-energy technologies.
Our patents begin to expire between 2028 and 2035.
Government Regulation
Digital Currency Mining and Energy Segments
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 the effects
of any additional regulation or legislation,
enforcement policies thereunder and claims
for damages for injuries to property,
employees, other persons and the
environment resulting from our
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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 or civil 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 our 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.
Blockchain technologies
and digital currencies, including bitcoin, are increasingly becoming subject to governmental regulation, both in the U.S. and internationally.
B lockchain technologies and cryptocurrency are under review with a number of U.S. governmental agencies,
including, without limitation, the SEC, the Commodity Futures Trading Commission, the Federal Trade Commission and the Financial Crimes
Enforcement Network of the U.S. Department of the Treasury. State and local regulations also may
apply to our digital currency mining. Other governmental or quasi-governmental regulatory bodies have shown an interest in regulating
or investigating companies engaged in digital currency related business. For instance, the Cyber-Digital Task Force of the U.S. Department
of Justice (the “DOJ”) published a report entitled “Cryptocurrency: An Enforcement Framework” in October 2020.
This report provides a comprehensive overview of the possible threats and enforcement challenges the DOJ views as associated with the
use and prevalence of digital currencies, amongst other things. Further, in early March 2021, the SEC chairperson nominee expressed an
intent to focus on investor protection issues raised by cryptocurrencies.
Presently, we do not believe any U.S. or State regulatory
body has taken any action or position adverse to our digital currency mining activities; however, future changes to existing regulations
or entirely new regulations may affect our business in ways it is not presently possible for us to predict with any reasonable degree
of reliability.
In addition, regulators and the media have
expressed concerns related to the potential environmental impacts of bitcoin mining, and its energy-intensive nature in particular. We
are not materially impacted by any current regulations targeted toward the digital currency mining industry.
Other than the above regulations and maintaining
our good standing in the states in which we operate, 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, we do not believe that existing governmental regulations will have a material
effect on our operations. Certain governmental and quasi-governmental bodies are considering additional regulations in the bitcoin mining
and energy industries; it is not currently known whether any such regulations would have a material impact on our businesses. We do not
currently require the approval of any governmental agency or affiliated program for our operations.
In the future we may become subject to new
laws and/or regulations, such as further regulation by the SEC and other agencies, which may affect our digital currency mining and other
activities. For additional discussion regarding our belief about the potential risks existing and future regulation pose to our business,
see the Section entitled “Risk Factors,” below.
Product Development
Digital Currency Mining and Energy Segments
Because the distributed energy and related
software industry is still in a relatively 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 enhance
our 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.
Bitcoin mining by its nature has no products.
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Human Capital Resources; Employees; Personnel
Digital Currency Mining and Energy Segments
We believe that our future success depends,
in part, on our ability to continue to attract, hire, and retain qualified personnel. As of December 1, 2021, we had 87 staff members,
86 of which were full time. Employees participate in equity incentive plans and receive generous compensation in the form of salary and
benefits. We continually seek to hire and retain talented professionals, 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.
Company Websites
We maintain a corporate website at: www.cleanspark.com
and informational websites for our subsidiaries at www.cleanblok.com, www.gridfabric.io , and www.p2klabs.com.
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.