| 2. SUMMARY OF SIGNIFICANT POLICIES | 2.
SUMMARY OF SIGNIFICANT POLICIES Basis
of Presentation and Liquidity 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, 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, 2020, filed with the SEC on December
17, 2020 (“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. As shown in the accompanying unaudited consolidated financial statements,
the Company incurred a net loss of $16,444,619
during the nine months ended June 30, 2021. While the company has experienced negative cash flows from operations,
the Company has sufficient capital for ongoing operations from raising additional capital through the registered sale of equity securities
pursuant to a registration statement on Form S-3. (See Notes 11 and 17 for additional details.) In addition, the Company is continuing
to grow its business segments through which it expects to grow the working capital base. As of June 30, 2021, the Company had working
capital of $39,940,292 . Principles
of Consolidation The accompanying consolidated financial statements
include the accounts of CleanSpark, Inc., and its wholly owned operating subsidiaries, CleanSpark, LLC, CleanSpark II, LLC, CleanSpark
Critical Power Systems Inc., p2kLabs, Inc, GridFabric, LLC, ATL Data Centers LLC, CleanBlok, Inc., CSRE Properties, LLC and Solar Watt
Solutions, Inc. All material intercompany transactions have been eliminated upon consolidation of these entities. 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 at the date of
the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill impairment, intangible
assets acquired, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances
for uncollectible accounts, and the valuations of non-cash capital stock issuances. 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 COVID-19 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 by type of revenue is
provided below. Engineering, Service & Installation or Construction
Contracts The Company recognizes engineering and construction
contract revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. Engineering
and construction contracts are generally accounted for as a single unit of account (a single performance obligation) and are not segmented
between types of services. The Company recognizes revenue based primarily on contract cost incurred to date compared to total estimated
contract cost (an input method). The input method is the most faithful depiction of the Company’s performance because it directly
measures the value of the services transferred to the customer. Customer-furnished materials, labor, and equipment and, in certain cases,
subcontractor materials, labor, and equipment are included in revenue and cost of revenue when management believes that the Company is
acting as a principal rather than as an agent (i.e., the Company integrates the materials, labor and equipment into the deliverables promised
to the customer). Customer-furnished materials are only included in revenue and cost when the contract includes construction activity
and the Company has visibility into the amount the customer is paying for the materials or there is a reasonable basis for estimating
the amount. The Company recognizes revenue, but not profit, on certain uninstalled materials that are not specifically produced, fabricated,
or constructed for a project. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred).
Changes to total estimated contract cost or losses, if any, are recognized in the period in which they are determined as assessed at the
contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Project mobilization
costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred
to the client. Customer payments on engineering and construction contracts are typically due within 30 to 45 days of billing, depending
on the contract. The
Company recognizes energy (solar panel and battery) installation contract revenue
for residential customers at a point in time upon completion of the installation. The revenues associated with energy installations for
commercial customers are recognized over a period of time as noted in the engineering and construction contract revenue disclosure above. For service contracts (including maintenance
contracts) in which the Company has the right to consideration from the customer in an amount that corresponds directly with the value
to the customer of the Company’s performance completed to date, revenue is recognized when services are performed and contractually
billable. Service contracts that include multiple performance obligations are segmented between types of services. For contracts with multiple performance obligations,
the Company allocates the transaction price to each performance obligation using an estimate of the stand-alone selling price of each
distinct service in the contract. Revenue recognized on service contracts that have not been billed to clients is classified as a current
asset under contract assets on the Consolidated Balance Sheets. Amounts billed to clients in excess of revenue recognized on service contracts
to date are classified as a current liability under contract liabilities. Customer payments on service contracts are typically due within
30 days of billing, depending on the contract. Revenues from digital currency mining The Company has entered into a digital asset mining
pool to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s
enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing
computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less
net digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully
adding a block to the 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 noncash consideration, in the form of digital currency, which the Company measures
at fair value on the date received. The consideration is dependent on the number of digital assets mined on any given day. Fair
value of the digital currency award received is determined using the spot price of the related digital currency at the time of receipt. There is currently no specific definitive guidance
under GAAP or alternative accounting framework for the accounting for digital currencies recognized as revenue or held, and management
has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted
by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial
position and results from operations. Revenues from Sale of Equipment Performance obligations satisfied at a
point in time. We recognize revenue on agreements for non-customized
equipment we sell on a standardized basis to the market at a point in time. We recognize revenue at the point in time that the customer
obtains control of the good, which is generally upon shipment or when the customer has physical possession of the product depending on
contract terms. We use proof of delivery for certain large equipment with more complex logistics, whereas the delivery of other equipment
is estimated based on historical averages of in-transit periods (i.e., time between shipment and delivery). Generally, shipping costs
are included in the price of equipment unless the customer requests a non-standard shipment. In situations where an alternative shipment
arrangement has been made, the Company recognizes the shipping revenue upon customer receipt of the shipment. In situations where arrangements include customer
acceptance provisions based on seller or customer-specified objective criteria, we recognize revenue when we have concluded that the customer
has control of the goods and that acceptance is likely to occur. We generally do not provide for anticipated losses on point in time transactions
prior to transferring control of the equipment to the customer. Our billing terms for these point in time
equipment contracts vary and generally coincide with shipment to the customer; however, within certain businesses, we receive progress
payments from customers for large equipment purchases, which is generally to reserve production slots with our manufacturing partners,
which are recorded as contract liabilities. Due to the customized nature of the equipment,
the Company does not allow for customer returns. Service performance obligations satisfied
over time. We enter into long-term product service agreements
with our customers primarily within our microgrid segment. These agreements require us to provide preventative maintenance, and standby
support services that include certain levels of assurance regarding system performance throughout the contract periods; these contracts
will generally range from 1 to 10 years. We account for items that are integral to the maintenance of the equipment as part of our service-related
performance obligation, unless the customer has a substantive right to make a separate purchasing decision (e.g., equipment upgrade).
Contract modifications that extend or revise contract terms are not uncommon and generally result in our recognizing the impact of the
revised terms prospectively over the remaining life of the modified contract (i.e., effectively like a new contract). Revenues are recognized
for these arrangements on a straight-line basis consistent with the nature, timing and extent of our services, which primarily relate
to routine maintenance and as needed product repairs. Our billing terms for these contracts vary, but we generally invoice periodically
as services are provided. Contract
assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts)
of $0 $0 $4,103 $0 $0 $596,873 $64,198 Revenues
from software The Company derives its software revenue from
both subscription fees from customers for access to its (i) energy software offerings and software license sales and (ii) support services.
Revenues from software licenses are generally recognized upfront when the software is made available to the customer, and revenues from
the related support is generally recognized ratably over the contract term. The Company’s policy is to exclude sales and other indirect
taxes when measuring the transaction price of its subscription agreements. The Company’s subscription agreements
generally have monthly or annual contractual terms. Revenue is recognized ratably over the related contractual term beginning on the date
that the platform is made available to a customer. Access to the platform represents a series of distinct services as the Company continually
provides access to, and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents
a single performance obligation that is satisfied over time. Revenues from design, software development
and other technology-based consulting services For service contracts performed under Master
Services Agreements (“MSA”) and accompanying Statement(s) of Work (“SOW”), revenue is recognized based on the
performance obligation(s) outlined in the SOW which is typically hours worked or specific deliverable milestones. In the case of a milestone-based
SOW, the Company recognizes revenue as each deliverable is signed off by the customer. 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. Variable Consideration The nature of the Company’s contracts
gives rise to several types of variable consideration, including claims and unpriced change orders, awards and incentive fees, and liquidated
damages and penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration
using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better
predict the amount. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved
change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides
a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result
of deficiencies in the Company’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the
work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims
or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have
been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of
such cost is probable, and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described
above for claims accounting have been satisfied. The C Practical Expedients If the Company has a right to consideration from a
customer in an amount that corresponds directly with the value of the Company’s performance completed to date (a service contract
in which the Company bills a fixed amount for each hour of service provided), the Company recognizes revenue in the amount to which it
has a right to invoice for services performed. The Company does not adjust the contract price for
the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company
transfers a service to a customer and when the customer pays for that service will be one year or less. The Company has made an accounting policy election
to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are collected by the Company
from its customers (use taxes, value added taxes, some excise taxes). For
the nine months ended June 30, 2021 and 2020, the Company reported revenues of $22,293,321
and $8,073,781 ,
respectively. Cash
and cash equivalents For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months
or less to be cash equivalents. There was $22,209,870 $3,126,202 Digital
Currency Digital currencies are included in current assets
in the consolidated balance sheets. Digital currencies are recorded at cost less impairment, and amounts held are accounted for as intangible
assets with indefinite useful lives. 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, which is measured using the quoted price of the
digital currency at the time its fair value is being measured. 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. 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. Digital currencies awarded to the Company through
its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of
digital currencies are included within investing 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. 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
digital currencies for the nine months ended June 30, 2021:
Amount
Balance at September 30, 2020 $ —
Additions
of digital currencies 16,098,643
Realized
gain on sale of digital currencies 672,065
Sale of digital
currencies ( 2,499,757
Digital currencies
issued for services ( 162,038
Impairment
loss ( 3,720,481
Balance
at June 30, 2021 $ 10,388,432 Accounts
receivable Accounts receivable is comprised of uncollateralized customer obligations
due under normal trade terms. 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 are presented
net of an allowance for doubtful accounts of $695,688 and
$42,970 Retention receivable is the amount withheld
by a customer until a contract is completed. Retention receivables of $0 $615 Inventories Inventories are stated at the lower of cost or net
realizable value with cost being measured on a first-in, first-out basis. For solar panel and battery installations, the Company transfers
component parts from inventories to cost of goods sold once installation is complete. The Company periodically reviews inventories for
unusable and obsolete items based on assumptions about future demand and market conditions. Based on this evaluation, provisions are made
to write inventories down to their net realizable value. The composition of inventory as of June 30, 2021 is as follows:
Inventory Amount
Batteries and
solar panels 3,033,075
Supplies and other materials 1,007,332
Balance at June 30, 2021 4,040,407 Investment
securities Investment securities include debt securities
and equity securities. Debt securities are classified as available for sale (“AFS”) and are reported as an asset in the consolidated
balance sheets at their estimated fair value. As the fair values of AFS debt securities change, the changes are reported net of income
tax as an element of OCI, except for other-than-temporarily-impaired securities. When AFS debt securities are sold, the unrealized gains
or losses are reclassified from OCI to non-interest income. Securities classified as AFS are securities that the Company intends to hold
for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on
various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities,
liquidity needs, decline in credit quality, and regulatory capital considerations. Interest income is recognized based on the
coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life
of the security. For individual debt securities where the Company
either intends to sell the security or more likely than not will not recover all of its amortized cost, the other than temporary impairment
is recognized in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date.
For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization as well as
accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended
is recognized in income on a cash basis. The Company holds investments in both publicly
held and privately held equity securities. However, as described in Note 1, the Company primarily operates in the alternative energy sector
and in the digital currency mining sector, and thus, it is not in the business of investing in securities. Privately held equity securities are recorded
at cost and adjusted for observable transactions for the same or similar investments of the issuer (referred to as the measurement alternative)
or impairment. All gains and losses on privately held equity securities, realized or unrealized, are recorded through gains or losses
on equity securities on the consolidated statement of operations. Publicly held equity securities are based
on fair value accounting with unrealized gains or losses resulting from changes in fair value reflected as unrealized gains or losses
on equity securities in the consolidated statements of operations. Concentration
Risk At times throughout the year, the Company may maintain
cash balances in certain bank accounts in excess of FDIC limits. As of June 30, 2021, the cash balance in excess of the FDIC limits was
$21,959,870 Warranty
Liability The Company establishes warranty liability reserves
to provide for estimated future expenses as a result of installation and product defects, product recalls, and litigation incidental
to the Company’s business. Liability estimates are determined based on management’s judgment, considering such factors as
historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in
sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with the Company’s
general counsel and outside counsel retained to handle specific product liability cases. The Company’s manufacturers and service
providers currently provide substantial warranties between ten to twenty-five years with full reimbursement to replace and install replacement
parts. Warranty costs and associated liabilities were $0
$0 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 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. Earnings
(loss) per share The
Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“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 June
30, 2021 and June 30, 2020, there were 1,375,805 shares
and 1,503,639 Property
and equipment Property
and equipment are stated at cost. Construction in progress is the construction or development of property and equipment that has not
yet been placed in service for its intended use. Depreciation for equipment, buildings, and leasehold improvements commences once they
are ready for its intended use. Land is not depreciated. Depreciation is calculated on a straight-line basis over the estimated useful
life of the asset as follows:
Useful
life
Building 30
Machinery and equipment 1 7
Mining equipment 3 15
Leasehold improvements Shorter
of estimated lease term or 5
Furniture and fixtures 1 5 Long-lived
Assets In accordance with the Financial Accounting
Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property, Plant and Equipment," the carrying
value of intangible assets 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 flow 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. For the nine months ended June 30, 2021 and 2020, the Company did not record an impairment expense. Intangible
Assets and Goodwill The Company accounts for business combinations
under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price
is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The
purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after
obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions to preliminary estimates.
The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized
as goodwill. The Company reviews its indefinite lived intangibles
and goodwill for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair
value and may not be recoverable. In accordance with its policies, the Company performed an assessment of indefinite lived intangibles
and goodwill and determined there was no impairment for the nine months ended June 30, 2021 and 2020. Software
Development Costs The Company capitalizes software development
costs under guidance of ASC 985-20 “Costs of Software to be Sold, Leased or Marketed” for our mPulse platform and under ASC
350-40 “Internal Use Software” for our mVSO, Canvas & Plaid products. Software development costs include payments made
to independent software developers under development agreements, as well as direct costs incurred for internally developed products. Software
development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable.
Technological feasibility of a product requires both technical design documentation and infrastructure design documentation, or the completed
and tested product design and a working model. Significant management judgments and estimates are utilized in the assessment of when technological
feasibility is established, and the evaluation is performed on a product-by-product basis. For products where proven technology exists,
this may occur early in the development cycle. Prior to a product's release, if and when we we Commencing upon a product's release, capitalized
software development costs are amortized to "Cost of revenues—software amortization" based on the ratio of current revenues,
to total projected revenues for the specific product, generally resulting in an amortization period of seven years for our current product
offerings. In recognition of the uncertainties involved in estimating future revenue, amortization will never be less than straight-line
amortization of the products remaining estimated economic life. We evaluate the future recoverability of capitalized
software development costs on a quarterly basis. For products that have been released in prior periods, the primary evaluation criterion
is the actual performance of the software platform to which the costs relate. For products that are scheduled to be released in future
periods, recoverability is evaluated based on the expected performance of the specific products to which the costs relate. Criteria used
to evaluate expected product performance include: historical performance of comparable products developed with comparable technology,
market performance of comparable software, orders for the product prior to its release, pending contracts, and general market conditions. Significant management judgments and estimates are utilized in assessing
the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance
utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are
less than the originally forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than
originally estimated in any given quarter, which could result in an |
