CLEANSPARK, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read together with the interim condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements
and related notes as disclosed in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2021 (“Form 10-K”). This discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under Part II, Item 1A “Risk Factors” or in other
parts of this Quarterly Report on Form 10-Q, as well as those identified in the
“Risk Factors” section of our Form 10-K. Our historical results are not
necessarily indicative of the results that may be expected for any period in the
future. See “Forward-Looking Statements.”

Company Overview

CleanSpark, Inc. is a leading sustainable bitcoin mining company incorporated in
Nevada, whose common stock is listed on the Nasdaq Capital Market. The Company,
through itself and its wholly owned subsidiaries, has operated in the digital
currency mining industry since December 2020.

We are currently working with various industry participants in developing a
long-term sustainability and clean energy plan for our bitcoin mining
operations. As part of this plan, we are using the available clean and renewable
energy resources that we currently have reasonable access to at our bitcoin
mining locations in order to further support our sustainability efforts.

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 New
York
-based Coinmint in place since July 2021. In March 2022, we entered into a
colocation agreement with Lancium LLC pursuant to which we have access to up to
500 MWs of power. Bitcoin mining has now become our principal revenue generating
business activity, and consistent with our current business strategy, we intend
to explore and opportunistically continue to acquire additional facilities,
equipment and infrastructure capacity as well as evaluate other colocation
opportunities, with the intention of expanding our bitcoin mining operations. In
line with our business strategy, on August 5, 2022, the Company entered into a
definitive agreement (the “Transaction”) to purchase certain assets for total
consideration of $25,091,610, including cash, assumption of a real estate
mortgage and a seller issued note payable. The assets acquired include 27 acres
of real property and related electrical infrastructure currently providing 36
megawatts of power, with an additional 50 megawatts of capacity expected to be
available in mid-2023, located in Washington, GA. The Transaction also included
mining machines with computing power of approximately 341 petahash.

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
geographic location play important roles in mining. As of the date of this
filing, our mining units are currently capable of producing over 2.8 exahash per
second (“EH/s”). 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

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to deploy certain energy technologies from our portfolio 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 4.0 to 5.0 EH/s in hash rate capacity by December 31, 2022. We expect
to exceed 3 EH/s in capacity by September 30, 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
portion of the bitcoin we mine, 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). We do expect in the near future to
engage in hedging and yield generating 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, our operating needs and
monitoring the market in real time.

Through our 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.

The Company provides 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
throughout the world. The Company’s solutions are supported by a proprietary
suite of software solutions that include microgrid energy modeling, energy
market communications and energy management solutions. As of June 30, 2022, the
Company deemed its energy operations to be discontinued operations due to its
strategic shift to strictly focus on its bitcoin mining operations and divest of
its energy assets.

Results of continuing operations for the three months ended June 30, 2022 and
2021

Revenues

Revenues increased to $31,027,781 during the three months ended June 30, 2022,
as compared with $9,052,068 in revenues for the same period ended 2021 primarily
due to increase in revenues from our digital currency mining operations.

Costs and Expenses

We had costs and expenses of $45,969,250 for the three months ended June 30,
2022
, as compared with $21,032,382 for the three months ended June 30, 2021.

Our cost of revenues was $10,341,026 for the three months ended June 30, 2022,
as compared with cost of revenues of $1,147,281 for the three months ended June
30, 2021
. Our cost of revenues during the three months ended June 30, 2022 was
primarily the result of mining energy costs at owned facilities of $3,462,742
and mining hosting and associated energy fees of $1,147,281. Our cost of
revenues during the three months ended June 30, 2021 was primarily the result of
mining energy costs at owned facilities of $912,036. The increase in cost of
revenues between the comparative periods was mainly the result of revenue growth
over the same period.

Professional fees decreased to $1,432,747 for the three months ended June 30,
2022
from $1,939,907 for the three months ended June 30, 2021. Our professional
fees expenses for the three months ended June 30, 2022 consisted primarily of
legal expenses of $1,153,594. Our professional fees expenses for the three
months ended June 30, 2021 consisted mainly of legal fees of $1,317,261.

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Payroll expenses decreased to $7,617,576 for the three months ended June 30,
2022
from $10,959,362 for the three months ended June 30, 2021. Our payroll
expenses for the three months ended June 30, 2022 consisted primarily of
employee and officer stock-based compensation of $5,182,763, with primarily
salary and wages expense constituting remaining amounts. Our payroll expenses
for the three months ended June 30, 2021 consisted primarily of employee and
officer stock-based compensation of $3,189,389, with primarily salary and wages
expense constituting remaining amounts including non-recurring executive
compensation of $4,700,000.

General and administrative expenses increased to $2,113,414 for the three months
ended June 30, 2022 from $1,194,340 for the three months ended June 30, 2021.
Our general and administrative expenses for the three months ended June 30, 2022
consisted primarily of insurance expenses of $866,994, marketing expenses of
$518,985, travel expenses of $273,891 and dues and subscriptions of $265,777.
Our general and administrative expenses for the three months ended June 30, 2021
consisted primarily of marketing expenses of $791,708, dues and subscription
expenses of $235,256, and insurance expenses of $212,630.

Impairment expenses recorded for the three months ended June 30, 2022 were
$4,418,714, and $3,720,481 impairment expenses were recorded for the three
months ended June 30, 2021. Impairment expense for both periods consisted of
bitcoin impairment expenses.

Realized loss on sale of digital currency increased to $5,234,482 for the three
months ended June 30, 2022 from a realized gain of $36,438 for the three months
ended June 30, 2021 due to the decrease in bitcoin prices during the period.

Depreciation and amortization expense increased to $14,811,291 for the three
months ended June 30, 2022, from $2,107,449 for the three months ended June 30,
2021
due to increase in mining related equipment being placed in service during
the comparative period.

Other income (expenses)

Other expense decreased to $1,294,607 for the three months ended June 30, 2022
compared to other expenses of $2,094,681 for the three months ended June 30,
2021
. Our other expenses for the three months ended June 30, 2022 consisted
primarily of an unrealized loss on derivative security of $1,032,579. Our other
income for the three months ended June 30, 2021 consisted primarily of an
unrealized loss on derivative loss of $2,060,774.

Net Income

We recorded a net loss of $16,236,076 for the three months ended June 30, 2022,
as compared with a net loss of $14,074,995 for the three months ended June 30,
2021
. The increase was due primarily to the increased losses from sale of
digital currency and increased depreciation expense when compared to gain on the
sale of digital currency and significantly lesser depreciation during the prior
period.

Results of discontinued operations for the three months ended June 30, 2022 and
2021

The revenues from discontinued operations for the three months ended June 30,
2022
decreased to $601,001 from $2,863,997 for the three months ended June 30,
2021
primarily due to the Company’s strategic shift to strictly focus on its
bitcoin mining operations. The total costs and expenses for the three months
ended June 30, 2022 increased to $13,704,066 from $5,465,424 for the three
months ended June 30, 2021 primarily due to impairment expenses related to the
energy business and severance related payroll expenses. As a result, the net
loss for the three months ended June 30, 2022 increased to $13,104,147 from
$2,602,132 for the three months ended June 30, 2021.

Results of continuing operations for the nine months ended June 30, 2022 and
2021


Revenues


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Revenues increased to $105,351,561 during the nine months ended June 30, 2022,
as compared with $17,308,259 in revenues for the same period ended 2021
primarily due to increase in revenues from our digital currency mining
operations.

Costs and Expenses

We had costs and expenses of $102,558,191 for the nine months ended June 30,
2022
, as compared with $32,956,441 for the nine months ended June 30, 2021.

Our cost of revenues was $24,607,950 for the nine months ended June 30, 2022, as
compared with cost of revenues of $2,161,937 for the nine months ended June 30,
2021
. Our cost of revenues during the nine months ended June 30, 2022 was
primarily the result of mining energy costs at owned facilities of $7,375,070,
and mining hosting and associated energy fees of $16,626,999. Our cost of
revenues during the nine months ended June 30, 2021 was primarily the result of
mining energy costs at owned facilities of $1,802,556. The increase in cost of
revenues between the comparative periods was mainly the result of revenue growth
over the same period.

Professional fees increased to $5,588,980 for the nine months ended June 30,
2022
from $5,835,434 for the nine months ended June 30, 2021. Our professional
fees expenses for the nine months ended June 30, 2022 consisted primarily of
legal expenses of $2,013,440, accounting and tax expenses of $1,778,227, and
subcontractor expenses of $736,653. Our professional fees expenses for the nine
months ended June 30, 2021 consisted mainly of legal expenses of $4,143,460
largely related with litigation expenses and consulting fees of $988,393.

Payroll expenses increased to $24,209,787 for the nine months ended June 30,
2022
from 15,418,166 for the nine months ended June 30, 2021. Our payroll
expenses for the nine months ended June 30, 2022 consisted primarily of employee
and officer stock-based compensation of $17,441,828, with primarily salary and
wages expense constituting remaining amounts. Our payroll expenses for the nine
months ended June 30, 2021 consisted primarily of employee and officer
stock-based compensation of $4,751,747, with primarily salary and wages expense
constituting remaining amounts including non-recurring executive compensation of
$4,700,000.

General and administrative expenses increased to $6,708,440 for the nine months
ended June 30, 2022 from $2,938,543 for the nine months ended June 30, 2021. Our
general and administrative expenses for the nine months ended June 30, 2022
consisted primarily of insurance expenses of $2,319,797, marketing expenses of
$1,510,671, dues and subscriptions expenses of $696,278, travel expenses of
$555,277, and utilities expenses of $352,949. Our general and administrative
expenses for the nine months ended June 30, 2021 consisted primarily of
marketing expenses of $1,730,489, dues and subscriptions of $569,187, and
insurance expenses of $450,458.

Impairment expenses recorded for the nine months ended June 30, 2022 were
$11,452,405 and $3,720,481 impairment expenses were recorded for the nine months
ended June 30, 2021. Impairment expense for both periods consisted of bitcoin
impairment expenses.

Realized gain on sale of digital currency increased to $2,026,427 for the nine
months ended June 30, 2022 from a realized gain of $672,065 for the nine months
ended June 30, 2021 due to the decrease in bitcoin prices during the period.

Depreciation and amortization expense increased to $32,659,747 for the nine
months ended June 30, 2022, from $3,553,945 for the nine months ended June 30,
2021
due to increase in mining related equipment being placed in service during
the comparative period.

Other income (expenses)

Other expense increased to $1,728,580 for the nine months ended June 30, 2022
compared to other income of $6,170,824 for the nine months ended June 30, 2021.
Our other expense for the nine months ended June 30, 2022 consisted primarily of
an unrealized loss on derivative security of $2,143,876. Our other income for
the nine months ended June 30, 2021 consisted primarily of unrealized gain on
derivative security of $5,319,361.

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Net Income

We recorded a net income of $1,064,790 for the nine months ended June 30, 2022,
as compared with a net loss of $9,477,358 for the nine months ended June 30,
2021
. The increase was primarily due to increase in revenues from our digital
mining operations.

Results of discontinued operations for the nine months ended June 30, 2022 and
2021

The revenues from discontinued operations for the nine months ended June 30,
2022
increased to $9,157,184 from $4,985,062 for the nine months ended June 30,
2021
. The total costs and expenses for the nine months ended June 30, 2022
increased to $25,244,377 from $11,950,066 for the nine months ended June 30,
2021
primarily due to impairment expenses related to the energy business and
severance related payroll expenses. As a result, the net loss for the nine
months ended June 30, 2022 increased to $16,089,993 from $6,967,261 for the nine
months ended June 30, 2021.

Liquidity and Capital Resources

Our primary requirements for liquidity and capital are working capital,
inventory management, capital expenditures, public company costs and general
corporate needs. We expect these needs to continue as we further develop and
grow our business. Our principal sources of liquidity have been and are expected
to be our cash and cash equivalents and digital currency inventory.

As of June 30, 2022, we had total current assets of $29,448,673, consisting of
cash and cash equivalents, accounts receivable, inventory, prepaid expenses and
other current assets, digital currency, investment in equity security,
investment in debt security and related derivative asset, and current assets
held for sale, and total assets in the amount of $411,058,824. Our total current
liabilities and total liabilities as of June 30, 2022 were $19,986,294 and
$34,192,029 respectively. We had working capital of $9,462,379 as of June 30,
2022
. In addition, we have access to equity financing through our At-the-Market
offering facility and debt financing through the lending arrangement we entered
into in April 2022 (see Note 15 – Loan and Note 16 – Subsequent Events to our
consolidated financial statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q).

We believe our cash and cash equivalents on hand, together with cash we expect
to generate from future operations, will be sufficient to meet our working
capital and capital expenditure requirements for a period of at least twelve
months from the date of this Quarterly Report on Form 10-Q. We are likely to
require additional capital to respond to technological advancements, competitive
dynamics or technologies, customer demands, business opportunities, challenges,
acquisitions or unforeseen circumstances and in either the short-term or
long-term may determine to engage in equity or debt financings or enter into
credit facilities for other reasons. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, when we require it, our
ability to continue to grow or support our business and to respond to business
challenges could be significantly limited. In particular, the widespread
COVID-19 pandemic, including variants, rising inflation and interest rates, and
the conflict between Russia and Ukraine have resulted in, and may continue to
result in, significant disruption and volatility in the global financial
markets, reducing our ability to access capital. If we are unable to raise
additional funds when or on the terms desired, our business, financial condition
and results of operations could be adversely affected.

Material Cash Requirements

We are a party to many contractual obligations involving commitments to make
payments to third parties. These obligations impact our short-term and long-term
liquidity and capital resource needs. Certain contractual obligations are
reflected on the consolidated balance sheet as of June 30, 2022, while others
are considered future commitments. Our contractual obligations primarily consist
of cancelable purchase commitments with various parties to purchase goods or
services, primarily miners and equipment, entered into in the normal course of
business and operating leases.

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For information regarding our other contractual obligations, refer to Note 12,
Commitments and Contingencies on the Form 10-Q for the quarterly period ended
June 30, 2022, and Note 15, Commitments and Contingencies included in our Annual
Report on Form 10-K as filed with the SEC on December 14, 2021.

Operating Activities

Operating activities provided $52,479,289 in cash for the nine months ended June
30, 2022
, as compared with using $21,128,132 in cash for the nine months ended
June 30, 2021. Our sale of digital currencies of $108,070,207, depreciation and
amortization of $34,805,307, stock based compensation of $17,515,870, and
impairment of digital currency of $11,452,405 were the main components of our
operating cash flow for the nine months ended June 30, 2022, offset primarily by
the increase in digital currency mining of $104,882,043, net loss of
$15,025,203, and increase in prepaid and other current assets of $11,545,789.
Our use of net cash in operating activities during the nine months ended June
30, 2021
were primarily driven by net loss for the period of $16,444,619,
digital currency mining of $16,098,643, and unrealized gain on derivative asset
of $5,319,361, offset by stock based compensation of $8,599,029, depreciation
and amortization of $6,883,020, impairment of digital currency of $3,720,481,
and increase in accounts payable and accrued liabilities of $3,699,298.

Investing Activities

Investing activities used $153,495,072 during the nine months ended June 30,
2022
, as compared with using $193,596,196 for the nine month period ended June
30, 2021
. Our payments on miner deposits of $124,272,481, purchase of fixed
assets of $32,104,835, and sale of miners of $3,497,654 were the main components
of our investing cash flow for the nine months ended June 30, 2022. Our payments
on miner deposits of 125,855,501, purchase of fixed assets of $60,536,521, and
our investment in infrastructure development of $6,431,664 were the main
components of our investing cash flow for the nine months ended June 30, 2021.

Financing Activities

Cash flows generated from financing activities during the nine months ended June
30, 2022
amounted to $85,637,138, when compared to $233,807,996 for the nine
months ended June 30, 2021. Our cash flows from financing activities for the
nine months ended June 30, 2022 consisted primarily of proceeds from
underwritten offering of $67,988,993 and equipment backed loan of $18,704,416.
Our cash flows from financing activities for the nine months ended June 30, 2021
consisted of repayments of $5,865,476 on promissory notes, proceeds from
exercise of options and warrants of $3,731,563 and proceeds from underwritten
offerings of $236,123,384.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles in the United
States
. The preparation of these consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, net sales and expenses. We evaluate our estimates and assumptions
on an ongoing basis, and base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for the judgments we make
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Because these estimates can vary depending on the situation,
actual results may differ from these estimates. Making estimates and judgments
about future events is inherently unpredictable and is subject to significant
uncertainties, some of which are beyond our control. Should any of these
estimates and assumptions change or prove to have been incorrect, it could have
a material impact on our results of operations, financial position and statement
of cash flows.

There have been no material changes to our critical accounting policies and
estimates as compared to those disclosed in our Form 10-K. For a description of
our critical accounting policies and estimates, see Part I, Item 1, Note 2,
“Summary of Significant Accounting Policies” in our notes to the consolidated
financial statements in this Quarterly Report.

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Recent Accounting Pronouncements
Please refer to Note 2 in our unaudited condensed consolidated financial
statements contained elsewhere in this Quarterly Report on Form 10-Q for
recently adopted accounting pronouncements and recently issued accounting
pronouncements not yet adopted as of the date of this Quarterly Report on Form
10-Q.

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