Correspondence 0000950170-23-019070 from CLEANSPARK, INC. (CLSK)
CLEANSPARK, INC.
Date: May 8, 2023 · CIK: 0000827876 · Accession: 0000950170-23-019070
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-39187, 001-39187
Referenced dates: March 31, 2023
Letter
VIA EDGAR Division of Corporation Finance Attention: Filed December 15, 2022 Form 10-Q for the Quarterly Period Ended December 31, 2022 Filed February 9, 2023 File No. 001-39187
Dear Mr. Wall and Ms. Bednarowski:
This letter is being furnished on behalf of CleanSpark, Inc. (the “Company,” “we” or “us”) in response to the comment received from the staff of the Division of Corporation Finance Office of Crypto Assets (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) by letter dated March 31, 2023, regarding the Company’s Form 10-K for the Fiscal Year Ended September 30, 2022 (the “10-K”) (File No. 000-39187) filed on December 15, 2022 and the Company’s Form 10-Q for the Quarterly Period Ended December 31, 2022 (File No. 001-39187) filed on February 9, 2023.
The text of the Staff’s comment has been included in bold and italics for your convenience, and we have numbered the paragraph below to correspond to the number in the Staff’s letter. For your convenience, we have also set forth the Company’s response immediately below the numbered comment.
10-K for the Fiscal Year Ended September 30, 2022 General
1.Refer to your response to comment 2. In future filings, please include a table that shows a comprehensive breakeven analysis that compares the cost to earn or mine one bitcoin with the value of one bitcoin. Show each cost in a separate row, and include footnotes to the table to explain any assumptions used in the analysis.
Response:
The Company acknowledges the Staff’s comment and confirms that a table showing a comprehensive breakeven analysis that compares the average cost to earn or mine one bitcoin with the average revenue earned per bitcoin in the period will be included in future filings, including the Company’s upcoming Quarterly Report on Form 10-Q for the period ended March 31, 2023 expected to be filed on or about May 10, 2023 (the “Second Quarter
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10-Q”). The format of the table that we intend to include in the Second Quarter 10-Q is included below and will include both a 3-month and year-to-date comparable periods.
As depicted above in the table, the Company calculates the “Cost of Mining” based on the Cost of Revenues line item in the Consolidated Statements of Operations and Comprehensive Income (Loss), which includes energy costs as well as hosting fee expenses. The Company considers these costs as directly associated with the mining costs. We also are including statistics in this table, which we believe enhance investors’ understanding of our fleet and the key metrics that drive our energy usage.
2.Refer to your responses to comments 3, 7 and 9. In your response letter, please provide the information requested in each comment.
Comment 3: In future filings, please disclose the percentage of your energy usage that uses clean and renewable energy resources as well as the locations in which you use these resources. In addition, please identify the types of “clean and renewable” energy sources you use and explain how you plan to increase your usage.
Response:
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The Company acknowledges the Staff’s comment and will disclose the requested information in each future filing that is required to include information required by Item 101 (Business) of Regulation S-K, including the 2023 10-K. The Company notes that such information is not required to be included in the Second Quarter 10-Q or any other quarterly reports on Form 10-Q.
The Company derives energy from the electrical grid, and as a result the Company’s energy mix will vary from period to period based on a variety of factors including weather, temperature, demand, and how the grid operator ultimately procures and utilizes energy resources.
In March 2023, the Company published its first ESG and Corporate Responsibility Report (the “ESG Report”), which is available on the Company’s website. The ESG Report stated that, for the fiscal year ending 2022, based upon data published by the Company’s power providers, the Company’s energy mix was comprised of approximately 94.02% clean energy, 5.70% carbon-based energy, and 0.28% undisclosed energy sources. Clean energy includes hydroelectric, solar, nuclear and wind. Additionally, the Company participates in renewable energy programs, such as Georgia’s Simple Solar (or Flex RECs program), in order to increase access to clean energy sources.
The Company does not currently have location-based data on energy sources. We have engaged a third party, Cleartrace, to generate additional data on energy consumption, which the Company expects will be reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the “2023 10-K”).
Furthermore, the Company is currently engaged with NASDAQ as an ESG advisor to identify additional long-term target goals for clean energy in the coming years. Additionally, as we identify sites for expansion, the availability of clean and low-carbon energy is one important factor (of many) in evaluating such sites and the associated power providers.
Comment 7: In future filings, please disclose the range, mean and average age of your miners, the average downtime attributed to scheduled maintenance and non-scheduled maintenance as well as the average, mean and range of the energy efficiency of your miners.
Response:
The Company acknowledges the Staff’s comment and will provide in its future filings, including in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Second Quarter 10-Q, the following disclosure, as appropriately updated in such filing, in response to this request (even though such disclosure is responsive to Item 101 (Business) of Regulation S-K, which is not required in quarterly reports on Form 10-Q).
The Company owns approximately 71,300 miners as of March 31, 2023, which range in age from 1-34 months and have an average age of 12 months. The Company does not have scheduled downtime for its miners, however, it periodically performs unscheduled maintenance on its miners, but such downtime has not historically been significant. When performing unscheduled maintenance,
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the Company will typically replace the miner with a substitute miner to limit overall downtime. The miners owned as of March 31, 2023 have a range of energy efficiency (watts per terahash – “w/th”) of 21.5 to 38 w/th with an average energy efficiency of 31.0 w/th.
Comment 9: In future filings, please disclose your custody procedures and arrangements by identifying all third-party custodians and the material terms of the agreements, including:
•what portion of your bitcoin or other crypto assets, if any, are held in hot wallets and cold wallets;
•the geographic location where crypto assets are held in cold wallets;
•whether any persons (e.g., auditors, etc.) are responsible for verifying the existence for the crypto assets held by the third party custodian(s);
•a description of your custodian’s insurance and the degree to which those policies provide coverage for the loss of your crypto assets; and
•whether any insurance providers have inspection rights associated with the crypto assets held in storage.
Response:
The Company acknowledges the Staff’s comment and will disclose the requested information in each future filing that is required to include information required by Item 101 (Business) of Regulation S-K, including the 2023 10-K. The Company notes that such information is not required to be included in the Second Quarter 10-Q or any other quarterly reports on Form 10-Q.
Specifically, the Company will disclose information consistent with the following:
The Company holds most of its bitcoin in hot wallets, which are maintained by Coinbase, as it frequently uses its bitcoin balances as a source of liquidity. To the extent the future value of the bitcoin produced exceeds the Company’s needs for operational and other liquidity needs, the Company expects it will store larger bitcoin balances in cold storage, for which the Company has a custody agreement with Coinbase.
For security reasons, Coinbase does not disclose the geographic location of its cold storage wallets to its customers.
The Company currently monetizes its bitcoin balances often, and the CFO or his delegate reconciles expected bitcoin balances to the Coinbase hot wallet on a daily basis. Additionally, cold wallets are reconciled monthly and are considered “on-chain.” In other words, the cold wallets have a unique blockchain address and activity is tracked through the blockchain by the Company if there are any reconciling issues.
Our custody agreement with Coinbase provides that Coinbase Custody will obtain and maintain, at its sole expense, insurance coverage in such types and amounts as are commercially reasonable for the Custodial Services provided under the custody agreement. We do not carry additional insurance coverage on our bitcoin holdings. Further, we are not aware of any insurance providers having inspection rights associated with the crypto assets held in storage.
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Lines of Business, page 5
3.Refer to your response to comment 5. Please tell us whether or not you currently have any planned material strategic acquisitions, and, if so, the stage of such acquisitions, as well as the estimated time line, the estimated costs and the sources of capital for the acquisitions.
Response:
The Company acknowledges the Staff’s comments and advises the Staff that it has no specific material strategic acquisitions that are probable at this time, although we regularly review and explore potential targets. Specifically, the Company regularly enters into non-binding LOIs and performs due diligence on various acquisition targets as part of the Company’s strategy to expand its bitcoin mining operations. The Company currently has an executed, non-binding LOI with a potential target and is in the process of conducting due diligence on that target. While the Company has not yet conducted a significant analysis on that target, the Company does not believe it would be significant if the transaction were to proceed to closing.
At this time, there is no intention to engage in the mining or staking of any other crypto assets. The Company further respectfully submits that it will include the following disclosure in its Second Quarter 10-Q, and will continue to include such disclosure in future filings and update the disclosure as needed to reflect the Company’s latest activities and strategy, and will comply with its obligations (including with respect of financial information and pro forma financial information) in respect of material acquisitions that are completed or, to the extent applicable, are probable:
We regularly evaluate opportunities to expand our business, including through potential acquisitions of businesses or assets. We will evaluate a variety of sources of capital in connection with financing any future possible acquisitions, including the incurrence of debt, sales of stock or bitcoin, or using cash on hand. We may also use the Company’s stock as transaction consideration, as we have done in the past.
4.Refer to your response to comment 6. Please tell us whether you have any agreements with Coinbase or any other exchanges.
Response:
The Company confirms it has a Custody Agreement with Coinbase. The Company also has a Custody Agreement with Genesis Custody Limited, which acts as its backup cold wallet option. However, the Company only has 0.01777 bitcoin with Genesis Custody Limited, which was the result of a test transfer. No further amounts were transferred to this account since the test was completed in mid-2022.
Distribution, Marketing and Strategic Relationships, page 7
5.Refer to your response to comment 8. Please tell us whether Coinmint, pursuant to the agreement to use commercially reasonable efforts to mine bitcoin on your behalf,
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contributes your computing power to a mining pool that it or another third-party operates, and please identify the mining pool operator or operators. Also, please tell us (i) whether the mining pools you use provide services only for bitcoin mining or if they are multi-crypto asset mining pools, (ii) the fees associated with participating in the mining pool and (iii) the processing power you contribute to each mining pool you use.
Response:
Under the the agreement between the Company and Coinmint, Coinmint houses and provides power to CleanSpark’s mining servers located at Coinmint’s site. Additionally, Coinmint provides basic repair and IT services for CleanSpark’s machines. Those servers then connect directly to CleanSpark’s mining pool operated by Foundry. The Company participates in a single mining pool operated by Foundry (“Foundry USA Pool”) and contributes all 6.7 EH/s of current processing power to this pool.
The Foundry USA Pool in which CleanSpark participates does not provide services to any other cryptocurrencies, but other Foundry pools may provide services for other cryptocurrencies. Prior to May 2023, Foundry did not charge the Company any fees for pool services. However, the Company was given notice in April 2023 that Foundry would begin implementing fees for its services, at a rate of 0.19% of total bitcoin earned. Once the Company reaches 10 EH/s of computing power for a quarter, the fee will decrease to 0.15% of total bitcoin earned. This new fee structure was implemented on May 2, 2023.
Cybersecurity, page 10
6.Refer to your response to comment 10. In future filings, please disclose the terms and provisions of any insurance policies covering your miners, including the amount of coverage, term and termination provisions, renewal options and limitations on coverage. To the extent that you do not have insurance coverage for your miners, please disclose and add risk factor disclosure.
Response:
The Company acknowledges the Staff’s comment and will provide the requested information, as set forth below, in each future filing, as appropriately updated, that is required to include information required by Item 101 (Business) of Regulation S-K, including the 2023 10-K. The Company notes that such information is not required to be included in the Second Quarter 10-Q or any other quarterly reports on Form 10-Q.
We have property insurance coverage for our bitcoin miners under a multi-tiered insurance program with 18 different underwriters for a total of $100,000,000 in limits. This insurance coverage covers all the Company’s bitcoin miners and includes Earthquake/Flood insurance with a $5,000,000 limit and Storm/Wind/Hail coverage with a limit of 3% Value at Risk of Time of Loss. We also maintain equipment breakdown coverage, with a property damage limit of $100,000,000. We do not maintain Business Interruption Coverage, which is currently not being provided by underwriters to any bitcoin mining companies. The policies also exclude coverage of our bitcoin holdings and cybersecurity coverage. We engage our insurance broker annually to solicit underwriters to provide proposals to renew our current coverage or update our policies to meet our needs, prior to the policies’ expiration on November 1st of each year.
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Note 2. Summary of Significant Accounting Policies
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CORRESP
May 8, 2023
VIA EDGAR
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention:
Mr. Christopher Wall
Ms. Sonia Bednarowski
Ms. Kate Tillan
Ms. Bonnie Baynes
Re:
CleanSpark, Inc.
Form 10-K for the Fiscal Year Ended September 30, 2022
Filed December 15, 2022
Form 10-Q for the Quarterly Period Ended December 31, 2022
Filed February 9, 2023
File No. 001-39187
Dear Mr. Wall and Ms. Bednarowski:
This letter is being furnished on behalf of CleanSpark, Inc. (the “Company,” “we” or “us”) in response to the comment received from the staff of the Division of Corporation Finance Office of Crypto Assets (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) by letter dated March 31, 2023, regarding the Company’s Form 10-K for the Fiscal Year Ended September 30, 2022 (the “10-K”) (File No. 000-39187) filed on December 15, 2022 and the Company’s Form 10-Q for the Quarterly Period Ended December 31, 2022 (File No. 001-39187) filed on February 9, 2023.
The text of the Staff’s comment has been included in bold and italics for your convenience, and we have numbered the paragraph below to correspond to the number in the Staff’s letter. For your convenience, we have also set forth the Company’s response immediately below the numbered comment.
10-K for the Fiscal Year Ended September 30, 2022 General
1.Refer to your response to comment 2. In future filings, please include a table that shows a comprehensive breakeven analysis that compares the cost to earn or mine one bitcoin with the value of one bitcoin. Show each cost in a separate row, and include footnotes to the table to explain any assumptions used in the analysis.
Response:
The Company acknowledges the Staff’s comment and confirms that a table showing a comprehensive breakeven analysis that compares the average cost to earn or mine one bitcoin with the average revenue earned per bitcoin in the period will be included in future filings, including the Company’s upcoming Quarterly Report on Form 10-Q for the period ended March 31, 2023 expected to be filed on or about May 10, 2023 (the “Second Quarter
DOCPROPERTY "CUS_DocIDChunk0" 157102389v2
10-Q”). The format of the table that we intend to include in the Second Quarter 10-Q is included below and will include both a 3-month and year-to-date comparable periods.
As depicted above in the table, the Company calculates the “Cost of Mining” based on the Cost of Revenues line item in the Consolidated Statements of Operations and Comprehensive Income (Loss), which includes energy costs as well as hosting fee expenses. The Company considers these costs as directly associated with the mining costs. We also are including statistics in this table, which we believe enhance investors’ understanding of our fleet and the key metrics that drive our energy usage.
2.Refer to your responses to comments 3, 7 and 9. In your response letter, please provide the information requested in each comment.
Comment 3: In future filings, please disclose the percentage of your energy usage that uses clean and renewable energy resources as well as the locations in which you use these resources. In addition, please identify the types of “clean and renewable” energy sources you use and explain how you plan to increase your usage.
Response:
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The Company acknowledges the Staff’s comment and will disclose the requested information in each future filing that is required to include information required by Item 101 (Business) of Regulation S-K, including the 2023 10-K. The Company notes that such information is not required to be included in the Second Quarter 10-Q or any other quarterly reports on Form 10-Q.
The Company derives energy from the electrical grid, and as a result the Company’s energy mix will vary from period to period based on a variety of factors including weather, temperature, demand, and how the grid operator ultimately procures and utilizes energy resources.
In March 2023, the Company published its first ESG and Corporate Responsibility Report (the “ESG Report”), which is available on the Company’s website. The ESG Report stated that, for the fiscal year ending 2022, based upon data published by the Company’s power providers, the Company’s energy mix was comprised of approximately 94.02% clean energy, 5.70% carbon-based energy, and 0.28% undisclosed energy sources. Clean energy includes hydroelectric, solar, nuclear and wind. Additionally, the Company participates in renewable energy programs, such as Georgia’s Simple Solar (or Flex RECs program), in order to increase access to clean energy sources.
The Company does not currently have location-based data on energy sources. We have engaged a third party, Cleartrace, to generate additional data on energy consumption, which the Company expects will be reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the “2023 10-K”).
Furthermore, the Company is currently engaged with NASDAQ as an ESG advisor to identify additional long-term target goals for clean energy in the coming years. Additionally, as we identify sites for expansion, the availability of clean and low-carbon energy is one important factor (of many) in evaluating such sites and the associated power providers.
Comment 7: In future filings, please disclose the range, mean and average age of your miners, the average downtime attributed to scheduled maintenance and non-scheduled maintenance as well as the average, mean and range of the energy efficiency of your miners.
Response:
The Company acknowledges the Staff’s comment and will provide in its future filings, including in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Second Quarter 10-Q, the following disclosure, as appropriately updated in such filing, in response to this request (even though such disclosure is responsive to Item 101 (Business) of Regulation S-K, which is not required in quarterly reports on Form 10-Q).
The Company owns approximately 71,300 miners as of March 31, 2023, which range in age from 1-34 months and have an average age of 12 months. The Company does not have scheduled downtime for its miners, however, it periodically performs unscheduled maintenance on its miners, but such downtime has not historically been significant. When performing unscheduled maintenance,
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the Company will typically replace the miner with a substitute miner to limit overall downtime. The miners owned as of March 31, 2023 have a range of energy efficiency (watts per terahash – “w/th”) of 21.5 to 38 w/th with an average energy efficiency of 31.0 w/th.
Comment 9: In future filings, please disclose your custody procedures and arrangements by identifying all third-party custodians and the material terms of the agreements, including:
•what portion of your bitcoin or other crypto assets, if any, are held in hot wallets and cold wallets;
•the geographic location where crypto assets are held in cold wallets;
•whether any persons (e.g., auditors, etc.) are responsible for verifying the existence for the crypto assets held by the third party custodian(s);
•a description of your custodian’s insurance and the degree to which those policies provide coverage for the loss of your crypto assets; and
•whether any insurance providers have inspection rights associated with the crypto assets held in storage.
Response:
The Company acknowledges the Staff’s comment and will disclose the requested information in each future filing that is required to include information required by Item 101 (Business) of Regulation S-K, including the 2023 10-K. The Company notes that such information is not required to be included in the Second Quarter 10-Q or any other quarterly reports on Form 10-Q.
Specifically, the Company will disclose information consistent with the following:
The Company holds most of its bitcoin in hot wallets, which are maintained by Coinbase, as it frequently uses its bitcoin balances as a source of liquidity. To the extent the future value of the bitcoin produced exceeds the Company’s needs for operational and other liquidity needs, the Company expects it will store larger bitcoin balances in cold storage, for which the Company has a custody agreement with Coinbase.
For security reasons, Coinbase does not disclose the geographic location of its cold storage wallets to its customers.
The Company currently monetizes its bitcoin balances often, and the CFO or his delegate reconciles expected bitcoin balances to the Coinbase hot wallet on a daily basis. Additionally, cold wallets are reconciled monthly and are considered “on-chain.” In other words, the cold wallets have a unique blockchain address and activity is tracked through the blockchain by the Company if there are any reconciling issues.
Our custody agreement with Coinbase provides that Coinbase Custody will obtain and maintain, at its sole expense, insurance coverage in such types and amounts as are commercially reasonable for the Custodial Services provided under the custody agreement. We do not carry additional insurance coverage on our bitcoin holdings. Further, we are not aware of any insurance providers having inspection rights associated with the crypto assets held in storage.
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Lines of Business, page 5
3.Refer to your response to comment 5. Please tell us whether or not you currently have any planned material strategic acquisitions, and, if so, the stage of such acquisitions, as well as the estimated time line, the estimated costs and the sources of capital for the acquisitions.
Response:
The Company acknowledges the Staff’s comments and advises the Staff that it has no specific material strategic acquisitions that are probable at this time, although we regularly review and explore potential targets. Specifically, the Company regularly enters into non-binding LOIs and performs due diligence on various acquisition targets as part of the Company’s strategy to expand its bitcoin mining operations. The Company currently has an executed, non-binding LOI with a potential target and is in the process of conducting due diligence on that target. While the Company has not yet conducted a significant analysis on that target, the Company does not believe it would be significant if the transaction were to proceed to closing.
At this time, there is no intention to engage in the mining or staking of any other crypto assets. The Company further respectfully submits that it will include the following disclosure in its Second Quarter 10-Q, and will continue to include such disclosure in future filings and update the disclosure as needed to reflect the Company’s latest activities and strategy, and will comply with its obligations (including with respect of financial information and pro forma financial information) in respect of material acquisitions that are completed or, to the extent applicable, are probable:
We regularly evaluate opportunities to expand our business, including through potential acquisitions of businesses or assets. We will evaluate a variety of sources of capital in connection with financing any future possible acquisitions, including the incurrence of debt, sales of stock or bitcoin, or using cash on hand. We may also use the Company’s stock as transaction consideration, as we have done in the past.
4.Refer to your response to comment 6. Please tell us whether you have any agreements with Coinbase or any other exchanges.
Response:
The Company confirms it has a Custody Agreement with Coinbase. The Company also has a Custody Agreement with Genesis Custody Limited, which acts as its backup cold wallet option. However, the Company only has 0.01777 bitcoin with Genesis Custody Limited, which was the result of a test transfer. No further amounts were transferred to this account since the test was completed in mid-2022.
Distribution, Marketing and Strategic Relationships, page 7
5.Refer to your response to comment 8. Please tell us whether Coinmint, pursuant to the agreement to use commercially reasonable efforts to mine bitcoin on your behalf,
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contributes your computing power to a mining pool that it or another third-party operates, and please identify the mining pool operator or operators. Also, please tell us (i) whether the mining pools you use provide services only for bitcoin mining or if they are multi-crypto asset mining pools, (ii) the fees associated with participating in the mining pool and (iii) the processing power you contribute to each mining pool you use.
Response:
Under the the agreement between the Company and Coinmint, Coinmint houses and provides power to CleanSpark’s mining servers located at Coinmint’s site. Additionally, Coinmint provides basic repair and IT services for CleanSpark’s machines. Those servers then connect directly to CleanSpark’s mining pool operated by Foundry. The Company participates in a single mining pool operated by Foundry (“Foundry USA Pool”) and contributes all 6.7 EH/s of current processing power to this pool.
The Foundry USA Pool in which CleanSpark participates does not provide services to any other cryptocurrencies, but other Foundry pools may provide services for other cryptocurrencies. Prior to May 2023, Foundry did not charge the Company any fees for pool services. However, the Company was given notice in April 2023 that Foundry would begin implementing fees for its services, at a rate of 0.19% of total bitcoin earned. Once the Company reaches 10 EH/s of computing power for a quarter, the fee will decrease to 0.15% of total bitcoin earned. This new fee structure was implemented on May 2, 2023.
Cybersecurity, page 10
6.Refer to your response to comment 10. In future filings, please disclose the terms and provisions of any insurance policies covering your miners, including the amount of coverage, term and termination provisions, renewal options and limitations on coverage. To the extent that you do not have insurance coverage for your miners, please disclose and add risk factor disclosure.
Response:
The Company acknowledges the Staff’s comment and will provide the requested information, as set forth below, in each future filing, as appropriately updated, that is required to include information required by Item 101 (Business) of Regulation S-K, including the 2023 10-K. The Company notes that such information is not required to be included in the Second Quarter 10-Q or any other quarterly reports on Form 10-Q.
We have property insurance coverage for our bitcoin miners under a multi-tiered insurance program with 18 different underwriters for a total of $100,000,000 in limits. This insurance coverage covers all the Company’s bitcoin miners and includes Earthquake/Flood insurance with a $5,000,000 limit and Storm/Wind/Hail coverage with a limit of 3% Value at Risk of Time of Loss. We also maintain equipment breakdown coverage, with a property damage limit of $100,000,000. We do not maintain Business Interruption Coverage, which is currently not being provided by underwriters to any bitcoin mining companies. The policies also exclude coverage of our bitcoin holdings and cybersecurity coverage. We engage our insurance broker annually to solicit underwriters to provide proposals to renew our current coverage or update our policies to meet our needs, prior to the policies’ expiration on November 1st of each year.
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Note 2. Summary of Significant Accounting Policies
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