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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3 Months Ended
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Dec. 31, 2022
Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent annual report on Form 10-K for the year ended September 30, 2022, filed with the SEC on December 15, 2022 (“Form 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented in this quarterly report on Form 10-Q have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. The accompanying unaudited consolidated financial statements include the accounts of CleanSpark, Inc., and the Company’s wholly owned subsidiaries, ATL Data Centers LLC (“ATL”), CleanBlok, Inc. (“CleanBlok”), CleanSpark DW, LLC, and CleanSpark GLP, LLC, CSRE Properties Norcross, LLC, CSRE Property Management Company, LLC, CSRE Properties, LLC, CSRE Properties Washington, LLC and CSRE Properties Sandersville, LLC. All intercompany transactions have been eliminated upon consolidation of these entities. Liquidity As shown in the accompanying unaudited consolidated financial statements, the Company generated a net loss from continuing operations of $30,488 during the three months ended December 31, 2022. The Company has experienced negative cash flows from investing activities from continuing operation due to its investments in capital expenditures and acquisitions in support of its bitcoin mining operations, but it has generated positive cash flows from operating and financing activities for continuing operations. In the three months ended December 31, 2022, the Company generated cash flows from operating activities from its continuing operations of $4,703. The Company generates sufficient cash flows from operating activities of continuing operations, which should continue to support its ongoing operations for the next twelve months. In addition, the Company has access to equity financing through its At-the-Market offering facility and debt financing through the lending arrangement the Company entered into in April 2022 (see Note 15 and Note 16). Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include estimates used to review the Company’s goodwill and bitcoin impairment, intangible assets acquired, impairments and estimations of long-lived assets, revenue recognition from b itcoin mining, valuation of derivative assets and liabilities, available-for-sale investments, allowances for uncollectible accounts, valuation of bitcoin, valuation of contingent consideration, warranty, and the valuations of share based awards. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions including, but not limited to, the ultimate impact that the ongoing global supply chain issues may have on the Company’s operations. Revenue Recognition We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board's (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five steps be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation. Our accounting policy on revenue recognition for our bitcoin mining segment (sole reporting unit as of December 31, 2022) by type of revenue is provided below. Revenues from bitcoin mining The Company has entered into contracts with bitcoin mining pool operators to provide computing power to the mining pools. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company starts providing computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed bitcoin award the mining pool operator receives (less net digital asset transaction fees to the mining pool operator), for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. The transaction consideration the Company receives is non-cash digital consideration, in the form of bitcoin, which the Company measures at fair value on the date received which is not materially different than the fair value at contract inception or time the Company has earned the award from the mining pools. The transaction consideration the Company receives is a minimal amount compared to the bitcoin awards. Fair value of the bitcoin received as consideration is determined using the spot price of bitcoin on the date earned and the bitcoin is typically deposited the day after computing power is contributed to the mining pool. Additionally, the Company receives bitcoin consideration designated in units, the smallest of which is referred to as a “Satoshi” and which represents one hundred millionth of a bitcoin. Revenues from data center services The Company provides data services such as providing its customers with rack space, power and equipment, and cloud services such as virtual services, virtual storage, and data backup services, generally based on monthly services provided at a defined price included in the contracts. The performance obligations are the services provided to a customer for the month based on the contract. The transaction price is the price agreed with the customer for the monthly services provided and the revenues are recognized monthly based on the services rendered for the month. Cost of Revenues Bitcoin mining segment (sole reportable segment) The Company includes energy costs and external co-location mining hosting fees in cost of revenues. Cash and cash equivalents Cash and cash equivalents include cash and amounts due from banks and restricted cash. The Company did not have any restricted cash as of December 31, 2022 or September 2022 reported in the consolidated balance sheet. Accounts Receivable, net Accounts receivable is comprised of uncollateralized customer obligations due under normal trade terms. They are initially recorded at the invoiced amount upon the sale of goods or services to customers, and do not bear interest. The Company performs ongoing credit evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate of the amounts that will not be collected is recorded. Accounts receivable, net consists of the following:
($ in thousands) |  | December 31, 2022 |  |  | September 30, 2022 |
Accounts Receivable, gross |  | $ | 250 |  |  | $ | 247 |
Provision for doubtful allowances |  |  | (220 | ) |  |  | (220 | )
Total Accounts Receivable, net |  | $ | 30 |  |  | $ | 27 |
Inventory Inventory balances mainly include supplies inventory used to maintain bitcoin mining facilities and are presented at net realizable value with cost being measured on a first-in, first-out basis. The Company periodically reviews inventories for unusable and obsolete items. Based on this evaluation, provisions are made to write inventories down to their net realizable value. Inventory was $392 and $216 as of December 31, 2022 and September 30, 2022, respectively. P repaid expense and other current assets The Company records a prepaid expense for costs paid but not yet incurred. Those expected to be incurred within one year are recognized and shown as a short-term pre-paid expense. Any costs expected to be incurred outside of one year would be considered other long-term assets. Other current assets are assets that consist of supplies, deposits and interest receivable. Deposits and interest we expect to receive within one year are shown as short-term. Those we expect to receive outside of one year are shown as other long-term assets. Concentration Risk At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. The cash balance, in excess of the FDIC limits was $1,811 and $20,213 as of December 31, 2022 and September 30, 2022, respectively. The accounts offered by custodians of the Company’s bitcoin, which was $3,863 and $11,147 as of December 31, 2022 and September 30, 2022, respectively, are not insured by the FDIC. The Company has not experienced any losses in such accounts. The Company has certain customers and vendors who individually represented 10% or more of the Company’s revenue or capital expenditures. Please refer to Note 14 - Major Customers and Vendors. Stock-based compensation The Company follows the guidelines in FASB Codification Topic ASC 718-10 Compensation-Stock Compensation, which requires companies to measure the cost of employee and non-employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense for stock options is recognized on a straight-line basis over the requisite service period. The Company may issue compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model. For equity awards granted by the Company that are contingent upon market-based conditions, the Company fair values these awards using the Monte Carlo simulation model. For discussion of accounting for restricted stock units (RSUs), please refer Note 12 – Stock-Based Compensation. Earnings (loss) per share The Company reports earnings (loss) per share in accordance with FASB ASC 260-10 “Earnings Per Share,” which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. As of December 31, 2022, all common stock equivalents that consist of options, warrants and restricted stock units were excluded from the calculation of the diluted (loss) per share calculation for the three months ended December 31, 2022 as their effect is anti-dilutive. Provided below is the income (loss) per share calculation for the three months ended December 31, 2022 and 2021:
|  | For the Three Months Ended December 31, |
($ in thousands, except share and per share) |  | 2022 |  |  | 2021 |
Continuing Operations |  |  |  |  |  |
Numerator |  |  |  |  |  |
(Loss) income from continuing operations |  | $ | (30,488 | ) |  | $ | 15,644 |
Preferred stock dividends |  |  | — |  |  |  | 315 |
(Loss) income from continuing operations attributable to common shareholders |  | $ | (30,488 | ) |  | $ | 15,330 |
Denominator |  |  |  |  |  |
Weighted- average common shares outstanding, basic |  |  | 66,395,174 |  |  |  | 40,279,938 |
Dilutive impact of stock options and other share-based awards |  |  | — |  |  |  | 205,823 |
Weighted- average common shares outstanding, diluted |  |  | 66,395,174 |  |  |  | 40,485,761 |
(Loss) income from continuing operations per common share attributable to common shareholders |  |  |  |  |  |
Basic |  | $ | (0.46 | ) |  | $ | 0.38 |
Diluted |  | $ | (0.46 | ) |  | $ | 0.38 |
Discontinued Operations |  |  |  |  |  |
Numerator |  |  |  |  |  |
Income (loss) on discontinued operations |  | $ | 1,457 |  |  | $ | (1,158 | )
Denominator |  |  |  |  |  |
Weighted- average common shares outstanding, basic |  |  | 66,395,174 |  |  |  | 40,279,938 |
Dilutive impact of stock options and other share-based awards |  |  | 1,005,160 |  |  |  | — |
Weighted- average common shares outstanding, diluted |  |  | 67,400,334 |  |  |  | 40,279,938 |
Income (loss) on discontinued operations per common share attributable to common shareholders |  |  |  |  |  |
Basic |  | $ | 0.02 |  |  | $ | (0.03 | )
Diluted |  | $ | 0.02 |  |  | $ | (0.03 | )
Property and equipment Property and equipment are stated at cost less accumulated depreciation. Construction in progress is the construction or development of assets that have not yet been placed in service for its intended use. Depreciation for machinery and equipment, mining equipment, buildings, furniture and fixtures and leasehold improvements commences once they are ready for its intended use. Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or the terms of the related leases. Land is not depreciated. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:
|  | Useful life (years)
Land Improvements |  | 15
Building |  | 30
Leasehold improvements | ﻿ | Shorter of lease term or 15 years
Miners |  | 3-5
Mining Equipment |  | 3-15
Infrastructure asset |  | Shorter of lease term or 5 years
Machinery and equipment |  | 1-10
Furniture and fixtures |  | 3-7
In accordance with the FASB ASC 360-10, "Property, Plant and Equipment” the carrying value of property and equipment, and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the three months ended December 31, 2022 and 2021, the Company did no t record an impairment expense. Bitcoin Bitcoin are included in current assets in the consolidated balance sheets. Bitcoin are recorded at cost less impairment. They are classified as indefinite-lived intangible assets in accordance with ASC 350, Intangibles — Goodwill and Other, and are accounted for in connection with the Company’s revenue recognition policy detailed above and in Note 2 – Summary of Significant Accounting Policies. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. Quantitative impairment is measured using the quoted price of the bitcoin at the time its fair value is being measured in accordance with ASC 820, Fair Value Measurement. Quoted prices are obtained from the principal market. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted as per ASC 350, Intangibles – Goodwill and Other. Bitcoin earned by the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of bitcoin are also included within operating activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations and comprehensive income (loss). The Company accounts for its gains or losses in accordance with the first in first out (“FIFO”) method of accounting. The following table presents the activities of the bitcoin for the three months ended December 31, 2022:
($ in thousands) |  | Amount |
Balance as on September 30, 2022 |  | $ | 11,147 |
Addition of bitcoin |  |  | 27,746 |
Sale of bitcoin |  |  | (34,067 | )
Bitcoin issued for services |  |  | (134 | )
Bitcoin issued for software |  |  | (229 | )
Realized loss on sale of bitcoin |  |  | (517 | )
Impairment loss |  |  | (83 | )
Balance as on December 31, 2022 |  | $ | 3,863 |
The Company's bitcoin holdings are not subject to rehypothecation and do not serve as collateral for any existing loans or agreements. Fair Value Measurement of financial instruments, derivative asset and contingent consideration Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of input, of which the first two are considered observable and the last unobservable. Level 1 Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. Level 3 Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. The carrying value of cash, accounts payable, accrued expenses and short-term portion of loan payable approximate their fair values because of the short-term nature of these instruments. The carrying amount of the Company's long-term portion of loan payable is also stated at fair value since the stated rate of interest approximates market rates. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments. The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of December 31, 2022 and September 30, 2022:
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
($ in thousands) |  | Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Derivative asset |  | $ | 1,685 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,685 |
Investment in debt security |  |  | 639 |  |  |  | — |  |  |  | — |  |  |  | 639 |
Contingent consideration |  |  | 4,840 |  |  |  | 4,840 |  |  |  | — |  |  |  | — |
Total |  | $ | 7,164 |  |  | $ | 4,840 |  |  | $ | — |  |  | $ | 2,324 |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |
($ in thousands) |  | Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
Derivative asset |  | $ | 2,956 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,956 |
Investment in debt security |  |  | 610 |  |  |  | — |  |  |  | — |  |  |  | 610 |
Total |  | $ | 3,566 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,566 |
There were no transfers between Level 1, 2 or 3 during the three months ended December 31, 2022. The activities of the financial instruments that are measured and recorded at fair value on the Company's balance sheets on a recurring basis during the three months ended December 31, 2022, and is included in Note 5 - Investments. The activity during the three months ended December 31, 2022 relating to the contingent consideration is described in Note 3 -Acquisitions. Income taxes The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of December 31, 2022 and September 30, 2022. Deferred income taxes are recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from managements estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax expense. The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of December 31, 2022 and September 30, 2022, the Company had no accrued interest or penalties related to uncertain tax positions. Income tax expense/(benefit) from operations for the three months ended December 31, 2022 and 2021 was $0 in each period, which resulted primarily from maintaining a full valuation allowance against the Company's deferred tax assets. Segment Reporting The Company determines its operating segments based on how the Chief Operating Decision Maker ("CODM") views and evaluates operations, performance and allocates resources. As of June 30, 2022, the Company only has the bitcoin mining business as its operating segment due to its determination to consider the energy business as discontinued operation based on its decision to make a strategic shift to focus on the bitcoin mining business and divest of its energy assets. Discontinued Operations The Company deems it appropriate to classify a business as a discontinued operation if the related disposal group meets all the following criteria: 1) the disposal group is a component of the Company; 2) the component meets the held-for-sale criteria; and 3) the disposal of the component represents a strategic shift that has a major effect on the Company's operations and financial results. A s of June 30, 2022, the Company deemed its energy operations to be discontinued operation due to its strategic shift to strictly focus on its bitcoin mining operations and divest of its energy assets. Reclassifications Certain prior year amounts have been reclassified for consistency with the current year presentation. In June 2022, the Company made a strategic shift to focus on the bitcoin mining business and divest its energy assets. As a result, assets and liabilities related to the energy segment have been classified as held for sale for all periods presented. Additionally, amounts previously presented as part of continuing operations have been reclassified into discontinued operations for all periods presented. Recently issued accounting pronouncements In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. This new guidance is effective for the Company for its fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is evaluating its potential impact but does not expect the new standard to have a material impact on the Company's results of operations or cash flows. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on October 1, 2020 (“ASU 2016-13”). ASU 2016-13 requires entities to use a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates, which generally will result in the earlier recognition of allowances for losses. As the Company was a Smaller Reporting Company at the time of issuance of the ASU, the Company expects to adopt the ASU effective October 1, 2023, including the interim periods within the fiscal year. Early application of the adoption is permitted. The Company is evaluating its potential impact but does not expect the new standard to have a material impact on the Company's results of operations or cash flows. In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (subtopic 815-40),” which reduces the number of accounting models in ASC 470-20 that require separate accounting for embedded conversion features. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. The treasury stock method should no longer be used to calculate diluted net income per share for convertible instruments. The amendment is effective for the Company for this fiscal year, including interim periods. The adoption of ASU 2020-06 did not have a material impact on the Company’s financial statements or disclosures.

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