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Item 1. Financial Statements

2022-10-12 compared with 2022-05-13 · 241 added, 590 removed, 185 unchanged (82% of the section changed)

4 unchanged sentences

(In thousands, except number of shares and par value data)

February 28, 2022 May 31, 2021

August 31, 2022 May 31, 2022

Current Assets:

2 unchanged sentences

Prepaid expenses and other current assets 1,500 1,336

Current assets of discontinued operations 3,573 —

Total current assets 42,380 47,862

Right of use asset, net 1,207 —

Deposit on equipment — 3,277

Property and equipment, net 95,095 64,260

Right of use asset, net 6,995 6,408

Utility deposits

TOTAL ASSETS $ 145,920 $ 119,980

2 unchanged sentences

Accounts payable and accrued liabilities $ 13,456 $ 13,260

Accrued dividends — 116

Current portion of lease liability 1,371 1,004

Related party notes payable — 2,135

Current portion of term loan 2,587 1,333

Customer deposits 14,111 9,524

Deferred revenue 3,909 —

Other current liabilities 16 —

Current deferred revenue 17,142 3,877

Total current liabilities 48,667 28,998

Deferred tax liability 572 540

Long-term deferred revenue 2,051 —

Long-term portion of lease liability 5,620 5,310

Other Long Term Liabilities 50

Long-term term loan 12,109 5,897

Total liabilities $ 69,019 $ 40,745

Commitments and contingencies (Note 12)

Mezzanine equity:

Series C, convertible redeemable preferred stock, $ .001 par value, 676,086 and 660,000 shares authorized, issued and outstanding, respectively

$ 15,537 $ 15,135

Series D, convertible redeemable preferred stock, $ .001 par value, 1,413,624 and 0 shares authorized, issued, and outstanding, respectively

Total mezzanine' equity 47,951 15,135

Shareholders' equity (deficit):

Series A, convertible preferred stock, $ .001 par value, authorized 70,000 shares, 0 and 27,195 shares issued and outstanding, respectively

Series B convertible preferred stock, $ .001 par value, authorized 50,000 shares, 0 and 17,087 shares issued and outstanding, respectively

Common stock, $ .001 par value, 166,666,666 shares authorized, 53,396,920 and 1,511,061 shares issued and outstanding

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 92,872,271 shares issued and 92,835,974 shares outstanding at August 31, 2022, and 97,837,703 shares issued and outstanding at May 31, 2022

Additional paid in capital 128,877 128,293

Treasury stock, 36,300 shares, at cost

Treasury stock, 36,300 shares at August 31, 2022 and May 31, 2022, at cost

( 62 ) ( 62 )

Accumulated deficit ( 60,601 ) ( 56,070 )

Total shareholders' deficit ( 8,609 ) ( 2,583 )

TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' DEFICIT $ 63,494 $ 15,052

Total stockholders’ equity attributable to Applied Blockchain, Inc.

68,307 72,259

Noncontrolling interest 8,594 6,976

Total Stockholders' equity (deficit) including noncontrolling interest $ 76,901 $ 79,235

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 145,920 $ 119,980

See Accompanying Notes to the Financial Statements

3 unchanged sentences

(In thousands, except per share data)

Three Months Ended Nine Months Ended

February 28, 2022 February 28, 2021 February 28, 2022 February 28, 2021

Three Months Ended

August 31, 2022 August 31, 2021

Hosting revenue $ 6,924 $ —

Total revenue, net $ 1,026 $ — $ 1,026 —

Cost of revenues $ 6,093 $ —

2 unchanged sentences

Selling, general and administrative $ 4,131 $ 698

Stock-based compensation for service agreement — — 12,337 —

Depreciation 14 — 14 —

Stock-based compensation 579 12,337

Depreciation and amortization 298 3

Total costs and expenses $ 5,008 $ 13,038

4 unchanged sentences

Loss on extinguishment of debt ( 94 ) ( 1,342 )

Total other expense, net ( 450 ) ( 1,302 )

Net loss from continuing operations before income tax expenses ( 4,627 ) ( 14,340 )

Income tax expenses ( 32 ) —

Total Other Income (Expense) 20 ( 77 ) ( 1,211 ) ( 223 )

Net loss from continuing operations ( 4,659 ) ( 14,340 )

Net Loss from discontinued Operations ( 4,048 ) — ( 2,870 ) —

Total Net Loss $ ( 6,445 ) $ ( 77 ) $ ( 20,713 ) $ ( 223 )

Basic and diluted net loss per share:

Net gain from discontinued operations, net of income taxes — 243

Net loss including noncontrolling interests ( 4,659 ) ( 14,097 )

Net loss attributable to noncontrolling interest ( 128 ) —

Net loss attributable to Applied Blockchain $ ( 4,531 ) $ ( 14,097 )

Basic and diluted net (loss) gain per share:

Continuing Operations $ ( 0.05 ) $ ( 0.32 )

5 unchanged sentences

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except per share data)

Three Months Ended February 28, 2022

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

Balance, November 30, 2021 660,000 15,135 1,380,000 31,574 46,709 — — — — 53,396,920 320 43,657 ( 62 ) ( 44,837 ) ( 922 )

Issuance of Preferred Stock — — — — — — — — — — — — — — —

Issuance Costs of Preferred Stock — — — — — — — — — — — — — — —

Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — — — — — — ( 1,242 ) ( 1,242 )

Net Income (Loss) — — — — — — — — — — — — — ( 6,445 ) ( 6,445 )

Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 47,951 $ — — $ — — 53,396,920 $ 320 $ 43,657 $ ( 62 ) $ ( 52,524 ) $ ( 8,609 )

Three Months Ended February 28, 2021

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

Balance, November 30, 2020 — $ — — $ — $ — 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 $ 13,874 $ ( 62 ) $ ( 21,201 ) $ ( 2,161 )

Net Income (Loss) — — — — — — — — — — — — — $ ( 77 ) $ ( 77 )

Balance, February 28, 2021 — $ — — $ — $ — 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 $ 13,874 $ ( 62 ) $ ( 21,278 ) $ ( 2,238 )

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except per share data)

Nine Months Ended February 28, 2022

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except share data)

Three Months Ended August 31, 2022

Common Stock Additional Paid in Capital Treasury Stock Accumulated deficit Total Shareholders Equity Noncontrolling Interest Total Equity

Shares Amount

Balance, May 31, 2022 97,837,703 98 128,293 ( 62 ) ( 56,070 ) 72,259 6,976 79,235

Stock based compensation — — 579 — — 579 — 579

Capital contribution to noncontrolling interest — — — — — — 1,746 1,746

Stock Cancellation ( 4,965,432 ) ( 5 ) 5 — — —

Net Loss — — — — ( 4,531 ) ( 4,531 ) ( 128 ) ( 4,659 )

Balance, August 31, 2022 92,872,271 93 128,877 ( 62 ) ( 60,601 ) 68,307 8,594 76,901

Three Months Ended August 31, 2021

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred

2 unchanged sentences

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Deficit Total Shareholders Equity Total Equity

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

3 unchanged sentences

Conversion of Preferred Stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 29 14,251 — — — —

Service Agreement — — — — — — — — — 18,036,723 108 12,229 — — 12,337

Service agreement stock compensation — — — — — — — — — 18,036,723 18 12,319 — — 12,337 12,337

Issuance of Preferred Stock — — 1,304,000 32,600 32,600 — — — — — — — — — — 32,600

Issuance Costs of Preferred Stock — — — ( 2,698 ) ( 2,698 ) — — — — — — — — — — ( 2,698 )

Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — ( 1,242 ) ( 1,242 )

Net Income (Loss) — — — — — — — — — — — — — $ ( 20,713 ) $ ( 20,713 )

Balance, February 28, 2022 676,086 15,537 1,413,624 32,414 47,951 — — — — 53,396,920 320 43,657 ( 62 ) ( 52,524 ) ( 8,609 )

Nine Months Ended February 28, 2021

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

Balance, May 31, 2020 — $ — — $ — $ — 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 $ 13,874 $ ( 62 ) $ ( 21,055 ) $ ( 2,015 )

Net Income (Loss) — — — — — — — — — — — — — $ ( 223 ) ( 223 )

Balance, February 28, 2021 — $ — — $ — $ — 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 $ 13,874 $ ( 62 ) $ ( 21,278 ) $ ( 2,238 )

Net Loss — — — — — — — — — — — — — ( 14,097 ) ( 14,097 ) ( 14,097 )

Balance, August 31, 2021 660,000 15,135 1,304,000 29,902 45,037 — — — — 53,396,920 $ 53 43,925 ( 62 ) ( 44,666 ) ( 750 ) 44,286

See Accompanying Notes to the Financial Statements

3 unchanged sentences

(In thousands of dollars)

Nine Months Ended

February 28, 2022 February 28, 2021

Three Months Ended

August 31, 2022 August 31, 2021

CASH FLOW FROM OPERATING ACTIVITIES

Net Loss attributable to Applied Blockchain, Inc.

$ ( 20,713 ) $ ( 223 )

Net Loss from discontinued operations ( 2,870 ) —

Net Loss from continuing operations ( 17,843 ) ( 223 )

Adjustments to reconcile net loss to net cash used in operating activities:

Net loss attributable to Applied Blockchain $ ( 4,531 ) $ ( 14,097 )

Net gain from discontinued operations, net of income taxes — ( 243 )

Net Loss attributable to noncontrolling interest ( 128 ) —

Net Income (loss) from continuing operations ( 4,659 ) ( 14,340 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and Amortization 1,136 3

Loss on Extinguishment of Debt 1,342 —

Gain on extinguishment of accounts payable — ( 40 )

Stock-Based Compensation for Service Agreement 12,337 —

Amortization of Right of Use Asset 136 —

Loss on extinguishment of debt 94 1,342

Stock-Based Compensation 579 12,337

Deferred Tax 32 —

Changes in Operating Assets and liabilities:

Changes in assets and liabilities:

Accounts receivable 177 —

Utility Deposits — ( 773 )

Prepaid expenses and other current assets ( 164 ) ( 770 )

Customer deposits 4,587 —

Deferred revenue 15,316 —

Accounts payable and accrued liabilities 196 368

Payments of operating leases ( 233 ) —

Net cash provided by operating activities of continuing operations 3,147 —

Net cash provided by (used in) operating activities of continuing operations 17,294 ( 1,870 )

Net cash provided by operating activities of discontinued operations — 435

NET CASH PROVIDED BY OPERATING ACTIVITIES 4,113 —

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 17,294 ( 1,435 )

CASH FLOW FROM INVESTING ACTIVITIES

1 unchanged sentence

Deposit on equipment — ( 10,300 )

Payments for patents and trademarks — —

Net cash used in investing activities of continuing operations ( 31,673 ) ( 11,288 )

2 unchanged sentences

CASH FLOW FROM FINANCING ACTIVITIES

Dividends Issued on preferred stock — —

Conversion of preferred stock to common stock 115 —

Issuance of common stock — —

Issuance of preferred stock — 32,600

Repayment of finance leases ( 209 ) —

Issuance cost for preferred stock ( 2,927 ) —

Preferred stock issuance costs — ( 2,698 )

Term loan paydown ( 7,056 ) —

Proceeds from issuance of term loan 15,000 —

Term Loan Issuance Costs ( 140 ) —

Loan principal payments ( 432 ) —

Equity contributions to subsidiaries 1,747 —

Net cash provided by financing activities of continuing operations 8,910 29,902

1 unchanged sentence

CASH FLOW PROVIDED BY FINANCING ACTIVITIES 8,910 29,902

NET DECREASE IN CASH AND CASH EQUIVALENTS 211 —

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,750 —

CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,961 $ —

NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS ( 5,469 ) 17,179

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,299 11,750

CASH AND CASH EQUIVALENTS, END OF PERIOD 40,830 28,929

cash and cash equivalents of discontinued operations — —

1 unchanged sentence

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest Paid $ 356 $ —

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Right-of-use asset obtained by lease obligation $ 922 $ 1,291

4 unchanged sentences

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

For the Three Month Periods Ended August 31, 2022

BUSINESS AND ORGANIZATION

Applied Blockchain, Inc.

(the “Company,” “we,” “our” or “us”) operates co-hosting facilities that are designed to provide massive computing power in which our customers lease space and access to electricity primarily designed to mine cryptoassets.

(the “Company”) is a builder and operator of next-generation data centers across North America, which provide substantial computing power to blockchain infrastructure and support Bitcoin mining.

The Company has a colocation business model where customers place hardware they own into the Company’s facilities and the Company provides full operational and maintenance services for a fixed fee.

The Company typically enters into long term fixed rate contracts with our customers.

In the third quarter of the fiscal year ended May 31, 2022, the Company approved plans to sell all crypto mining equipment and cease all crypto mining operations.

The results of these operations, financial position, and cash flows have been presented as discontinued operations and the related assets and liabilities have been classified as held-for-sale.

Refer to Note 14 – Discontinued Operations for additional information, including accounting policies, about the Company’s discontinued operations.

The Company was originally incorporated in Nevada in May 2001.

Effective April 14, 2021, the Company’s name was changed to Applied Blockchain, Inc.

from Applied Science Products, Inc.

During the year ended May 31, 2021, the Company formed two subsidiaries, Shanghai Sparkly Ore Tech, Ltd and Applied Blockchain, Ltd.

Shanghai Sparkly Ore Tech, Ltd is a wholly owned foreign entity in China.

Applied Blockchain, Ltd., a Cayman limited company, managed the Company’s digital wallet.

During the year ending May 31, 2022, the Company formed five new wholly-owned subsidiaries, APLD Hosting, LLC, Applied Talent Resources LLC, APLD-JTND Phase II, LLC, APLD-Rattlesnake Den I, LLC, and APLD-Rattlesnake Den II, LLC.

In June 2021, we formed APLD Hosting, LLC, in Nevada.

APLD Hosting is entering into agreements to own and operate our co-hosting facilities.On November 2, 2021, we formed Applied Talent Resources LLC in Nevada to employ and manage our employees, employee staffing among our entities and projects and employment related plans and policies.

On November 8, 2021, we formed APLD-JTND Phase II, LLC and on November 15, 2021, we formed APLD-Rattlesnake Den I, LLC and APLD-Rattlesnake Den II, LLC, each of which is a Delaware limited liability company formed to build and operate a co-hosting facility.

In the third quarter of the fiscal year ending May 31, 2022, the Company entered into a joint venture agreement to form 1.21 Gigawatts, LLC (“the joint venture entity”), with Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies, bringing together the world’s leading provider of blockchain mining solutions and a leader in next generation datacenters used to host blockchain infrastructure.

Applied Blockchain and Antpool intend to leverage their combined resources and expertise to initially build up to 1.5 Gigawatts (GW) of datacenter hosting capacity over the next 24 months.

The Company has a majority interest in the joint venture entity and therefore the results of the joint venture entity will be consolidated in the Company’s financial statements.

The Company typically enters into long term fixed rate contracts with its customers.

During the three month period ended August 31, 2022, the Company formed ELN-01, LLC, which is a Delaware limited liability company formed to build and operate a co-hosting facility.

Reverse Stock Split

3 unchanged sentences

Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Initial Public Offering

On April 13, 2022, the Company announced its initial public offering of 8,000,000 shares of its common stock at $ 5.00 per share.

The shares began trading on The Nasdaq Global Select Market on April 13, 2022, under the ticker symbol “APLD.”

On April 18, 2022, the Company completed its initial public offering.

In addition, the Company granted the underwriters a 30 -day option to purchase up to an additional 1,200,000 shares of common stock at the public offering price, less underwriting discounts and commissions.

The net proceeds received by the Company from the offering (after deducting underwriting discounts and commission and estimated offering expenses) were approximately $ 36 million.

The Company intends to use the net proceeds to lease or purchase additional property on which to build additional co-hosting facilities, to construct those facilities, to enter into additional energy service agreements for each additional site and for funding its working capital and general corporate purposes.

LIQUIDITY AND FINANCIAL CONDITION

As of February 28, 2022, the Company had approximate cash and cash equivalents of $ 12.0 million and negative working capital of $ 4.5 million.

As of August 31, 2022, the Company had approximate cash and cash equivalents of $ 40.8 million and negative working capital of $ 6.3 million.

Historically the Company has incurred losses and has relied on equity financings to fund its operations.

2 unchanged sentences

Principles of Consolidation:

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).

The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly owned and controlled subsidiaries.

Consolidated subsidiaries results are included from the date the subsidiary was formed or acquired.

Noncontrolling interests in consolidated subsidiaries in the consolidated financial statements represent non-controlling stockholders' proportionate share of the operations in such subsidiaries.

Intercompany investments, balances and transactions have been eliminated in the consolidated financial statements.

The Company’s consolidated operating subsidiaries include wholly-owned Shanghai Sparkly Ore Technology, Applied Blockchain, Ltd., APLD-JTND Phase II, LLC, APLD-Rattlesnake Den I LLC, APLD-Rattlesnake Den II LLC, APLD Hosting, LLC, Applied Talent Resources LLC, as well the Company’s majority interest in 1.21 Gigawatts, LLC.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods.

Actual results could differ significantly from those estimates.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates associated with asset valuations, and the valuation allowance associated with the Company’s deferred tax assets.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers.

The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services.

The following five steps are applied to achieve that core principle:

Identify the contract, or contracts, with the customer;

Identify the performance obligations in the contract;

Determine the transaction price;

Allocate the transaction price to the performance obligations in the contract;

Recognize revenue when, or as, the Company satisfies a performance obligation.

To identify the performance obligations in a contract with a customer, the Company must assess the promised goods or services in the contract and identify each promised good or service that is distinct.

A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.

The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

When determining the transaction price, an entity must consider the effects of all the following:

• Variable consideration;

• Constraining estimates of variable consideration;

• The existence of a significant financing component in the contract;

• Noncash consideration;

• Consideration payable to a customer.

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

The accompanying interim Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X.

Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted.

The Condensed Consolidated Balance Sheet as of May 31, 2022 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements.

For further information, please refer to and read these interim Consolidated Financial Statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2022 filed with the SEC on August 29, 2022.

Significant Accounting Policies and Use of Estimates:

There were no material changes in the Company’s significant accounting policies for the three months ended August 31, 2022 as compared to the year ended May 31, 2022.

See Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year-ended May

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

The following table provides information about the activity of deferred revenue for monthly hosting services:

Three Months Ended Nine Months Ended

(in thousands) February 28, 2022 February 28, 2021 February 28, 2022 February 28, 2021

Balance, beginning of the period $ 526 $ — $ — $ —

Invoiced hosting revenue 5,544 — 6,070 —

Recognized hosting revenue 1,026 — 1,026 —

Balance, end of the period $ 3,909 $ — $ 3,909 $ —

For the Three Month Period Ended August 31, 2022

31, 2022, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

Actual results could differ significantly from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.

Fair Value of Financial Instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements.

This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.

To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 — Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly;

Level 3 — Inputs for the asset or liability that are not based on observable market data.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions.

Unobservable inputs require significant management judgment or estimation.

In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy.

In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement.

Such determination requires significant management judgment.

As of February 28, 2022 there were no financial assets or liabilities measured at fair value.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

The cost of maintenance and repairs is charged to operations as incurred, whereas significant repairs are capitalized.

Lease Accounting

The Company accounts for its leases under ASC 842, Leases (“ASC 842”).

Accordingly, the Company determines whether an arrangement contains a lease at the inception of the arrangement.

If a lease is

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor.

The Company’s assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising.

The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.

For leases with a term exceeding 12 months, a lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term.

A corresponding right-of-use (“ROU”) asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received.

For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable.

The Company’s incremental borrowing rate reflects the rate it would pay to borrow and incorporates the term and economic environment of the associated lease.

For the Company’s operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term.

For leases with a term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company’s consolidated balance sheet as an accounting policy election.

Leases qualifying for the short-term lease exception were insignificant.

Variable lease costs are recognized as incurred.

ASC Topic 740, Income Taxes, (“ASC 740”), also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The benefit of a tax position is recognized in the financial statements in the period during which based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.

Tax positions taken are not offset or aggregated with other positions.

Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements.

Offering Costs

The Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin Topic 5A;

“Expenses of Offering”.

The Company had deferred offering costs of $ 314 thousand as of February 28, 2022 and no deferred offering costs as of May 31, 2021.

The deferred offering costs as of February 28, 2022 relate to the Company’s initial public offering, and primarily

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

consist of accounting and legal services, and securities registration expenses.

These offering costs will be charged to shareholders’ equity at the offering close date.

The Company’s cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although the Company believes it is subject to minimal risk.

The Company has restricted cash related to its letter of credit totaling $ 7.5 million.

The company is required to keep this balance in a separate account for the duration of the letter of credit agreement, which lasts through January 2024.

The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of August 31, 2022, and May 31, 2022.

(in thousands) August 31, 2022 May 31, 2022

Net Cash & Equivalents $ 33,330 $ 38,798

Restricted Cash $ 7,500 $ 7,501

Total Cash & Cash Equivalents $ 40,830 $ 46,299

Recent Accounting Pronouncements

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When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.

In December 2019, the FASB issued ASU No.

2019-12, “ Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12” ), which is intended to simplify various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The adoption of this ASU had no impact on the Company’s financial statements.

In August 2020, the FASB issued ASU No.

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Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

This update permits the use of either the modified retrospective or fully retrospective method of transition.

The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

The Company has adopted ASU and determined that the adoption had no material impact on its financial statements and related disclosures.

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

For the Three Month Period Ended August 31, 2022

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP;

and instead requires an entity to reflect its current estimate of all expected credit losses.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.

For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP;

however, this ASU requires that credit losses be presented as an allowance rather than as a write-down.

ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income.

The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of June 1, 2023.

Early adoption will continue to be permitted.

The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of February 28, 2022, and May 31, 2021:

Estimated Useful Life February 28, 2022 May 31, 2021

Property and equipment consisted of the following as of August 31, 2022, and May 31, 2022:

(in thousands) Estimated Useful Life August 31,

Hosting Equipment

Electric Generation and Transformers 15 years 4,376 4,338

Office and computer equipment

Software 5 years 41 —

Computer Equipment 5 years 17 17

Furniture and Fixtures 7 years 432 4

Other Equipment and Fixtures 5 years- 7 years

Construction in Progress 46,086 18,305

Autos 5 years 135 —

General Equipment 5 years 8,955 —

Information Systems and Software 5 years 9,675 9,608

Land & Building

Land 2,125 1,074

Land Improvements 15 years 1,259 1,180

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Property Plant and Equipment, Net $ 95,095 $ 64,260

Depreciation expense from continuing operations totaled $ 245 thousand and $ 0 for the three and nine-month periods ended February 28, 2022 and 2021, respectively.

As part of the Company's presentation of discontinued operations, the Company reclassified approximately $ 7.2 million of gross assets and $ 690 thousand of accumulated depreciation into current assets of discontinued operations.

The Company also recognized a $ 3.3 million loss to measure the current assets of discontinued operations at fair value less cost to sell in accordance with ASC 360-10-45-13.

This loss has been presented within loss from discontinued operations.

Depreciation expense from continuing operations totaled $ 838 ,000 and $ 3 ,000 for the three-month periods ended August 31, 2022 and 2021, respectively.

REVENUE FROM CONTRACTS WITH CUSTOMERS

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The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue.

All revenue recognized from cryptoasset mining revenue is included within discontinued operations.

Hosting revenue

The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility.

All performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations.

Hosting revenue is recorded monthly in fixed amounts based on the terms of the hosting agreements.

Customer contracts include advance payment terms.

Advanced payments are recorded as deferred revenue until the related service is provided.

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

The Company has a material customer concentration in the hosting business.

The Company has entered into contracts with JointHash Holding Limited (a subsidiary of GMR), Bitmain Technologies Limited, F2Pool Mining, Inc.

and Hashing LLC to utilize the first co-hosting facility which was brought online in February 2022.

Below is a summary of the Company’s revenue concentration by major customer for the three months ended February 28, 2022 and 2021.

Customer Three Months Ended February 28, 2022 Three Months Ended February 28, 2021

Customer A 62 % — %

Customer B 16 % — %

Customer C 13 % — %

Below is a summary of the Company’s revenue concentration by major customer for the nine months ended February 28, 2022 and 2021.

Customer Nine Months Ended February 28, 2022 Nine Months Ended February 28, 2021

Customer A 62 % — %

Customer B 16 % — %

Customer C 13 % — %

Additionally, the below table illustrates the Company’s accounts receivable concentration as of February 28, 2022 and May 31, 2021.

Customer February 28, 2022 May 31, 2021

For the Three Month Period Ended August 31, 2022

Below is a summary of the Company’s revenue concentration by major customer for the three-month periods ended August 31, 2022 and 2021, respectively.

Three Months Ended August 31,

Customer 2022 2021

Customer A 35.5 % — %

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Customer C 16.5 % — %

Customer D 14.4 % — %

Customer E 12.6 % — %

Remaining Performance Obligations

As of February 28, 2022, the Company had $ 3.9 million in deferred revenue, which represents the Company’s remaining performance obligations.

The Company expects to recognize all of this revenue within the next 12 months.

RELATED PARTY NOTES PAYABLE

A related party note payable held by the CEO of the Company was extinguished with stock issuance settlement on June 12, 2021.

An exchange agreement was reached effective June 12, 2021, whereby outstanding debt principal of $ 470 thousand and accrued interest of $ 1.6 million was converted to 5.1 million aggregate Common Stock shares at a fair value price of $ .75 per share for a loss on extinguishment of $ 1.3 million.

Upon the consummation of the Exchange Agreement, the note payable was surrendered and cancelled;

and all rights including rights to accrued interest due will be extinguished.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

The Company recorded income tax expense of $ 60 thousand for the three months ended February 28, 2022, and $ 274 thousands for the nine months ended February 28, 2022 compared to zero for the three and nine months ended February 28, 2021.

The Company’s effective tax rate was ( 1.47 )% and 0 % for the nine months ended February 28, 2022 and 2021, respectively.

The effective tax rate for the nine months ended February 28, 2022 differed from the statutory rate of 21% primarily due to permanent differences related to debt extinguishment as well as changes in the valuation allowance.

The following table presents current and deferred tax expense for the nine month periods ended February 28, 2022 and 2021.

Nine Months Ended Period Ended February 28, 2022

Current expense (benefit) - Continuing Operations

Federal $ — $ —

State $ — $ —

Total current expense $ — $ —

Deferred expense (benefit)

Federal $ 274 $ —

State $ — $ —

Total deferred expense (benefit) $ 274 $ —

Total income tax expense (benefit) $ 274 $ —

The following table presents a reconciliation of the statutory tax rate to the effective tax rate for the nine month periods ended February 28, 2022 and 2021.

February 28, 2022 February 28, 2021

Expected income tax expense (benefit) at U.S.

statutory rate 21.00 % 21.00 %

Extinguishment of Debt - 0.79 %

State Tax Expense 0.00 % 0 %

Change in Valuation Allowance - 21.68 % - 21.00 %

Income Tax Expense / (Benefit) - 1.47 % 0 %

REDEEMABLE EQUITY

Series C Preferred Stock

As of February 28, 2022, 676,086 shares of Series C Preferred Stock are outstanding.

The shares of Series C Preferred Stock are convertible into shares of Common Stock.

These shares were offered and sold to certain “accredited investors” in a private placement without registration of the shares under Rule 506 of the Securities Act and the rules and regulations promulgated thereunder.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Holders of Series C Preferred Stock shall vote together with holders of common stock on an as-if converted to Common Stock basis, except in certain circumstances, such as a material change to the principal business, or a significant transaction event defined by the certificate of designation.

Series C Preferred Stock ranks pari passu with the Series D Preferred Stock.

Paid-in-kind (“PIK”) Dividends will be charged at a rate of 10 % per annum provided that the Company’s Common Stock is not listed or traded before December 15, 2021, or 12 % if the registration statement relating to the resale of shares of Common Stock issuable upon conversion of the outstanding shares of Series C Preferred Stock has not been declared by that date.

The rate will increase to 15 % if these targets are not met by October 15, 2022.

Dividends will be terminated upon conversion or upon the Company’s satisfaction of the listing target and registration statement target.

On the date that an event triggers an automatic conversion, including the date on which the Resale Registration Statement (as defined below) is declared effective by the SEC (the “Conversion Date”), all outstanding shares of Series C Preferred Stock will be automatically converted (without payment of additional consideration) into such number of fully paid and non-assessable shares of common stock as determined by dividing the Stated Value of such shares by the Conversion Price of $ 0.13 , subject to adjustment, in effect on such Conversion Date.

The Company is required to reserve and keep available shares of Common Stock out of authorized and unissued shares of common stock for the sole purpose of issuance upon conversion of the Series C Preferred Stock, free from preemptive rights or any other actual contingent purchase rights.

Each holder of shares of Series C Preferred Stock is entitled to convert any portion of the outstanding Series C Preferred Stock and any PIK Dividends held by such holder, without the payment of additional consideration, into such number of fully paid and non-assessable shares of Common Stock.

Unless prohibited by Nevada law, shares of Series C Preferred Stock shall be redeemed (a “Mandatory Redemption”) at a price equal to Stated Value of such Series C Preferred Stock, plus an amount per share equal to the Stated Value of each share of Series C Preferred Stock issuable as a result of accrued but unpaid PIK Dividends (the “Redemption Price”), if the Requisite Holders provide written notice of redemption to the Company on or after October 15, 2022, which notice may only be so provided if on or after such date Common Stock is not listed on a Trading Market.

The date of redemption will be selected by the Company and occur within 30 days following the date that the Company receives such notice.

If the Company fails to redeem the Series C Preferred Stock as set forth above, PIK Dividends will continue to accrue.

Series D Preferred Stock

As of the date hereof, 1,413,624 shares of Series D Preferred Stock are issued and outstanding.

The shares of Series D Preferred Stock are convertible into shares of Common Stock.

These shares were offered and sold to certain “accredited investors” and non-U.S.

Persons in a private placement without registration of the shares under Regulation D and Regulation S of the Securities Act.

The Series D Preferred stock ranks pari passu with the Series C Preferred Stock.

Holders of Series D Preferred Stock shall vote together with holders of Common Stock on an as-if converted to common stock basis, except in certain circumstances, such as a material change to the principal business, or a significant transaction event defined by the certificate of designation.

As of August 31, 2022, the Company had $ 19.2 million in deferred revenue, which represents the Company’s remaining performance obligations.

The Company expects to recognize $ 17.1 million within the next 12 months.

Deferred Revenue

Changes in the Company's deferred revenue balances from hosting operations for the three-month periods ended August 31, 2022 and 2021, respectively, are shown in the following table:

Balance at May 31, 2022 $ 3,877 Balance at May 31, 2021 $ —

Advance billings 22,240 Advance billings —

Revenue recognized ( 6,924 ) Revenue recognized —

Other adjustments $ — Other adjustments $ —

Balance at August 31, 2022 $ 19,193 Balance at August 31, 2021 $ —

Customer Deposits

Changes in the Company's customer deposits balances for the three-month periods ended August 31, 2022 and 2021, respectively, are shown in the following table:

Balance at May 31, 2022 $ 9,524 Balance at May 31, 2021 $ —

Customer deposits received 4,587 Customer deposits received —

Customer deposits refunded — Customer deposits refunded —

Balance at August 31, 2022 $ 14,111 Balance at August 31, 2021 $ —

RELATED PARTY TRANSACTIONS

Related Party Policy

Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company.

Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

The Company discloses all material related party transactions.

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

PIK dividends will be charged at a rate of 10 % per annum provided that the Company’s Common Stock is not listed or traded before December 15, 2021, or 12 % if the registration statement relating to the resale of the shares of Common Stock issuable upon conversion of the outstanding shares of Series D Preferred Stock has not been declared by that date.

The rate will increase to 15 % if these targets are not met by October 15, 2022.

Dividends will be terminated upon conversion or upon the Company’s satisfaction of the listing target and registration statement target.

On the Conversion Date, all shares of Series D Preferred Stock will be automatically converted (without payment of additional consideration) into such number of fully paid and non-assessable shares of Common Stock as determined by dividing the Stated Value by the Conversion Price in effect on such Conversion Date.

All rights with respect to the Series D Preferred Stock will terminate on the Conversion Date.

The conversion price shall be a price per share equal to the least of (i) $ 0.44 per share, (ii) 75 % of the price per share to be sold in certain offerings, including an initial public offering, (iii) 75 % of the opening public price per share in a direct listing of Common Stock on a Trading Market (as defined in the Certification of Designations for the Series D Preferred Stock), or (iv) 75 % of the per share amount to be paid for each share of Common Stock in a sale of all or substantially all of stock or assets, in each case subject to adjustment.

The Company is required to reserve and keep available shares of Common Stock out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Series D Preferred Stock, free from preemptive rights or any other actual contingent purchase rights.

Each holder of shares of Series D Preferred Stock is entitled to convert any portion of the outstanding Series D Preferred Stock and any PIK Dividends held by such holder, without the payment of additional consideration, into such number of fully paid and non-assessable shares of Common Stock by dividing (A) the sum of (1) the Stated Value of all outstanding shares of Series D Preferred Stock being converted, (2) the aggregate Stated Value of all shares of Series D Preferred Stock due as PIK Dividends to such holder being converted and (3) any cash dividends accrued and payable to such holder by (B) the conversion price in effect, as adjusted.

Unless prohibited by Nevada law, shares of Series D Preferred Stock shall be redeemed (a “Mandatory Redemption”) at a price equal to Stated Value of such Series D Preferred Stock, plus an amount per share equal to the Stated Value of each share of Series D Preferred Stock issuable as a result of accrued but unpaid PIK Dividends (the “Redemption Price”), if the Requisite Holders provide written notice of redemption to the Company on or after October 15, 2022, which notice may only be so provided if on or after such date common stock is not listed on a Trading Market.

The date of redemption will be selected by the Company and occur within 30 days following the date that the Company receives such notice.

If the Company fail to redeem the Series D Preferred Stock as set forth above, PIK Dividends will continue to accrue.

For the three and nine months ended February 28, 2022, the Company has accrued approximately $ 402 thousand and $ 840 thousand of Series C PIK Dividends and Series D PIK Dividends, respectively.

Conversion of Preferred Stock

On August 13, 2021, the Company filed a registration statement for the resale by certain selling stockholders of shares of Common Stock with the SEC (Reg.

333-258818) (the “Resale

For the Three Month Period Ended August 31, 2022

Related Party Note Payable

During the three month period ended August 31, 2021, a related party note payable was held by the CEO of the Company.

During this period, the outstanding debt principal of $ 470,000 and accrued interest of $ 1.6 million was converted to 5.1 million shares of Common Stock with a fair value of $ 0.75 per share which resulted in a loss on extinguishment of $ 1.3 million.

Upon the consummation of the Exchange Agreement, the note payable was surrendered and cancelled;

all rights including rights to accrued interest due were extinguished.

Related Party Revenue

One of the Company's major customers is an entity that is the parent company of the minority member of the 1.21 Gigawatts joint venture.

The Company recognized $ 2.5 million and no revenue from this customer for the three-month periods ended August 31, 2022 and 2021, respectively.

The Company had $ 2.0 million and no advance billings from this customer and $ 1.7 million and no deposits from this customer as of August 31, 2022 and May 31, 2022, respectively.

Letter of Credit

As of August 31, 2022 and May 31, 2022, the Company had a letter of credit totaling $ 7.5 million.

As discussed in Footnote 3, the Company is required to maintain this amount in a separate cash balance, and therefore the cash is restricted.

Further, the Company has no unused lines of credit as of August 31, 2022 or May 31, 2022, respectively.

On July 25, 2022, the Company entered into a Loan Agreement with Starion Bank (“Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”).

The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $ 15 million with a maturity date of July 25, 2027.

The Starion Loan Agreement provides for an interest rate of 6.50 % per annum.

The Starion Loan Agreement contains customary covenants, representations and warranties and events of default.

The Company is not subject to financial covenants until May 31, 2024.

At this time, the Company will be subject to a debt service coverage ratio.

Deferred financing costs related to the Starion Term Loan totals $ 142 ,000.

The effective interest rate was 7.0 % as of August 31, 2022.

Below is a summary of the term loan balance, including current debt and deferred financing fees as of August 31, 2022 and May 31, 2022.

(in thousands)

2022 May 31, 2022

Term Loan Balance $ 14,790 $ 7,324

Deferred Issuance Costs ( 140 ) ( 94 )

Current portion of Term Loan ( 2,587 ) ( 1,333 )

Long-term Portion of Term Loan $ 12,063 $ 5,897

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022.

On April 12, 2022, concurrent with receipt of the notice of effectiveness for the Resale Registration Statement, all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were automatically converted (without payment of additional consideration) into fully paid and non-assessable shares of Common Stock, consistent with the Series C and Series D Preferred Stock terms.

All rights with respect to the Series C and Series D Preferred Stock terminated upon conversion.

Liquidation preferences table for Preferred Stock shown below:

Class of Stock Ranking Liquidation Preferences

Redeemable and Convertible Series C shares Priority 1 Cash equal to $ 25 per share plus accrued or unpaid PIK dividends

Ratably share in distribution of assets in proportion to preferential entitled amounts

Redeemable and Convertible Series D shares Priority 1 Cash equal to $ 25 per share plus accrued or unpaid PIK dividends

Ratably share in distribution of assets in proportion to preferential entitled amounts

Valuation summary table for Preferred Stock for both the three and nine months ended February 28, 2022 is shown below:

Class of Stock Original Proceeds,

Net Accrued Dividends Redemption

Amount Liquidation

Redeemable and Convertible Series C shares $ 15,135,023 $ 402,150 $ 15,537,173 $ 16,500,000

Redeemable and Convertible Series D shares $ 31,574,000 $ 840,300 $ 32,414,600 $ 34,500,000

For the Three Month Period Ended August 31, 2022

Below is a summary of the remaining principal payments due over the life of the Starion Loan Agreement note as of August 31, 2022.

Year Principal Payments (in thousands)

Thereafter 583

Total Term Loan Remaining Payments $ 14,650

In connection with the Starion Loan Agreement, the Company repaid all of the outstanding balance on the March 11, 2022 agreement between the Company and Vantage Bank Texas.

This agreement included a promissory note agreement for $ 7.5 million for a five year term with an interest rate of 5 % per annum.

SHAREHOLDERS’ EQUITY (DEFICIT)

The Company is authorized to issue 166,666,667 shares of Common Stock at $ 0.001 par value per share.

As of August 31, 2022, 92,872,271 shares of Common Stock were issued and 92,835,974 shares were outstanding and as of May 31, 2022, 97,837,703 shares of Common Stock were issued and outstanding.

Note that all shares of Common Stock in this disclosure reflect the one-for-six reverse stock split disclosed in Note 1 - Business and Organization.

Equity Compensation

On January 18, 2022, the Company issued (i) an aggregate of 600,000 shares of restricted stock, consisting of 100,000 shares to each of its non-employee directors and (ii) an aggregate of 766,666 shares of restricted stock to three executives, in all cases as compensatory grants for services rendered to the Board or the Company.

Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement with the Securities and Exchange Commission (the “SEC”).

The Company will recognize the cost of these RSUs based on the grant date fair value of the awards over the related vesting terms using a straight-line method when it is probable that the performance condition of an effective registration statement will be met.

The fair value of these RSUs was estimated to be $ 11.0 million.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

On January 14, 2022, the Company granted an aggregate of 1,791,666 restricted stock units (“RSUs”) to three consultants, in all cases as compensatory grants for consulting services rendered to the Company which contain performance conditions that affect vesting.

The performance conditions specify that the RSUs are achieved based on specific thresholds of power to become available in the Company’s colocation hosting facility and also upon the occurrence of an effective registration statement with the SEC.

The Company will recognize the cost of these RSUs based on the grant date fair value of the awards when it is probable that the performance conditions will be achieved over the related vesting terms, which is expected to result in expense recognition for the years ended May 31, 2022 and May 31, 2023.

The fair value of these RSUs was estimated to be $ 14.4 million.

The fair value of the shares of common stock underlying equity compensation has been determined by using a third-party valuation specialist to assist management in its determination.

Management determines the fair value of the Company’s Common Stock by considering a number of objective and subjective factors including:

the valuation of comparable companies, sales of redeemable convertible preferred stock to unrelated third parties, the Company’s operating and financial performance, and general and industry specific economic outlook, amongst other factors.

The Company estimated the fair value of the Common Stock at issuance date using a Probability Weighted Expected Return Method (“PWERM”).

The PWERM estimated the fair value assuming two possible outcomes, for which each discrete outcome is probability weighted to arrive at a weighted-average value.

The Company weighted two different scenarios as follow:

Scenario Weight

Public Company scenario (“listing scenario”) through a traditional IPO 95 %

Remain a private Company scenario (“private scenario”) 5 %

As the performance condition of an effective registration statement has not been met as of February 28, 2022, no expense has been recognized for the three and nine months ended February 28, 2022.

Share-Based Compensation

In March 2021, the Company entered into service agreements collectively with GMR Limited, Xsquared Holding Limited (“SparkPool”), and Valuefinder to provide cryptocurrency mining management, equipment, and other services to assist with the mining operation of the Company during 2021 and 2022.

In exchange, the Company agreed to issue Common Stock shares as shown below and included in the agreement.

All shares were issued in June 2021.

Service Provider Common Stock

Shares Committed

ValueFinder 3,156,427

SparkPool 7,440,148

GMR 7,441,648

Total 18,038,223

Restricted Stock Awards

The Company has granted restricted stock awards to officers and directors.

Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of common stock comprising the stock award with the Securities and Exchange Commission (the “SEC”).

The Company will recognize the cost of the restricted stock based on the grant date fair value of the awards over the related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met.

The following is a summary of the activity and balances for unvested restricted stock awards granted:

Number of Shares Weighted Average Grant Date Fair Value Per Share

Outstanding as of May 31, 2022 1,366,665 $ 8.04

Granted — $ —

Forfeited — $ —

Outstanding as of August 31, 2022 1,366,665 $ 8.04

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

The fair value of the share-based compensation issued was calculated using the fair value of outstanding equity using the option pricing method, weighted as shown below.

All shares issued under the agreement were vested immediately.

Class of Stock Option Pricing Fair Value Weight

Common Stock $ 0.402 8 %

Conversion Price of Series C Shares 0.780 92 %

Series A Convertible Preferred Stock

Each share of Series A Convertible Preferred Stock ("Series A Preferred Stock") had a liquidation value of $ 100 per share, was convertible into 1,429 shares of Common Stock of the Company (subject to adjustment) and paid a cash dividend of 8 % or a dividend in kind of 10 %.

The dividends were accrued quarterly based on the original purchase price of the Series A Preferred Stock.

All shares of Series A Preferred Stock were converted effective June 12, 2021, to shares of Common Stock.

6,809,833 shares of Common Stock were issued in exchange for the Series A Convertible Preferred Stock.

There are no accrued dividends related to the Series A Convertible Preferred Stock as of February 28, 2022.

Series B Convertible Preferred Stock

Each share of Series B Convertible Preferred Stock (“Series B Preferred Stock”) had a liquidation value of $ 100 per share, was convertible into 1,000 shares of Common Stock of the Company (subject to adjustment) and paid a cash dividend of 8 % or a dividend in kind of 10 %.

The dividends were accrued quarterly based on the original purchase price of the Series B Preferred Stock.

All shares of Series B Preferred Stock were converted effective June 12, 2021, to shares of Common Stock.

6,809,833 shares of Common Stock were issued in exchange for the Series B Convertible Preferred Stock.

There are no accrued dividends related to the Series B Convertible Preferred Stock as of February 28, 2022.

For the Three Month Period Ended August 31, 2022

Restricted Stock Units

The Company has granted restricted stock awards to certain consultants, in all cases as compensatory grants for consulting services rendered to the Company which contain performance conditions that affect vesting.

The Company will recognize the cost of these RSUs based on the grant date fair value of the awards when it is probable that the performance conditions will be achieved over the related vesting terms.

The following is a summary of the activity and balances for unvested restricted stock units granted:

Number of Shares Weighted Average Grant Date Fair Value Per Share

Outstanding as of May 31, 2022 1,791,646 $ 8.04

Granted 505,834 $ 4.86

Forfeited 416,650 $ 8.04

Outstanding as of August 31, 2022 1,880,830 $ 7.18

Stock-Based Compensation Expense

Total stock based compensation expense for the respective periods is listed below

in thousands As of

August 31, 2022 August 31, 2021

Stock-based compensation expense $ 579 $ 12,337

At August 31, 2022, there was $ 23.9 million of unrecognized stock compensation expense, which the Company expects to recognize over a weighted-average period of 8.5 months as the performance conditions are met.

Share Forfeiture

On June 6, 2022, through an agreement between the Company and Sparkpool, Sparkpool agreed to forfeit to the Company shares of Common Stock that had been issued pursuant to the service agreement executed on March 19, 2021.

Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered.

As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and canceled by the Company.

Equity Plan Approval

On October 9, 2021, our Board approved two equity incentive plans, which our stockholders approved on January 20, 2022.

The two plans consist of the 2022 Incentive Plan, previously referred to in our SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to our employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in our SEC filings as the 2022 Incentive Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date.

As of February 28, 2022, no awards had been granted under either plan.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

As of February 28, 2022, the Company had an operating lease liability and right of use asset for its office space that expires in October 2026.

The Company also entered into one finance lease for equipment as of February 28, 2022.

As of February 28, 2021, the Company did not have any significant operating or finance lease balances.

Rental expense for lease payments related to operating leases is recognized on a straight -line basis over the remaining lease term.

The Company has elected the short-term lease exception and therefore, only recognized lease liabilities and right of use assets for leases longer than one year.

The Company has also elected the practical expedient of not separating lease components from non-lease components for its real estate leases.

As of February 28, 2022, and May 31, 2021 the balance of the right of use assets were $ 1.2 million and $ 0 , respectively, and the balance of the lease liability is $ 1.2 million and $ 0 , respectively, for the Company’s office lease and its leased equipment.

The calculation of these lease assets and liabilities includes minimum lease payments over the remaining lease term.

Any variable lease payments are excluded from the amounts and are recognized in the period in which those obligations are incurred.

Operating lease assets are included as right of use assets, net on the Balance Sheet.

The current portion of lease liabilities are presented as current portion of lease liability on the Balance Sheet with the remainder included as long-term portion of lease liability on the Balance Sheet.

Balance sheet presentation of lease assets and liabilities, net is as follows:

Lease Type Consolidated Balance Sheet Location February 28, 2022

Operating Lease Assets Right of use asset, net $ 1,142

Finance lease assets Right of use asset, net $ 65

Total lease assets $ 1,207

Operating Lease liabilities Current portion of operating lease liability $ 185

Operating Lease liabilities Long-term Portion of Lease Liability $ 969

Total Operating Lease Liabilties $ 1,154

Finance lease liabilities Current portion of lease liability $ 26

Finance Lease liabilities Long-term portion of lease liability $ 40

Total Finance Lease Liabilities $ 66

Total lease liabilities $ 1,220

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

The Company’s lease cost under ASC 842 is as follows:

3 Months Ended 9 Months Ended

Lease Type Consolidated Statements of Income Location February 28, 2022 February 28, 2022

Operating lease expense Selling, General and Administrative $ 78 $ 243

Finance lease expense Selling, General and Administrative $ 2 $ 2

Short-term lease expense Selling, General and Administrative $ 20 $ 39

Total Lease Cost $ 100 $ 284

The following table represents the Company’s future minimum operating lease payments as of February 28, 2022, under ASC 842 (in thousands):

Year Operating Leases Finance Leases Total

FY22 $ 78 $ 7 $ 85

FY23 318 29 347

FY24 326 29 355

FY25 334 6 340

FY26 342 — 342

Beyond 176 — 176

Total $ 1,574 $ 71 $ 1,645

Present Value of lease liabilities $ 1,154 $ 66 $ 1,220

Less Current portion of lease liability $ 185 $ 26 $ 211

Long-term portion of lease liability $ 969 $ 40 $ 1,009

Supplemental cash flow and other information related to leases is as follows:

Weighted-average months remaining 55 months

Weighted-average discount rate 12.20 %

Cash flows from operating leases $ 233

Cash flows from finance leases $ 2

RELATED PARTY TRANSACTIONS

Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company.

The Company discloses all related party transactions.

On October 9, 2021, the Company’s board of directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022.

The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

In March 2021, the Company executed a strategy planning and portfolio advisory services agreement with an entity that is controlled by a board member of the Company.

Compensation for the services provided will be through issuance of 19.0 million shares of Company’ fully diluted and outstanding Common Stock.

All shares of Common Stock issuable under the agreement were issued in June 2021.

For the Three Month Period Ended August 31, 2022

for deferral of cash and stock compensation if such deferral provisions are activated at a future date.

As of August 31, 2022, no awards had been granted under either plan.

During the three months ended August 31, 2022, the Company added 11 leases.

The Company considered the nature of the leases under ASC 842 Leases and determined each of these leases represents finance leases.

The weighted average term of the leases is 32 months and the weighted average discount rate of the leases is 7.33 %.

Total ROU assets and lease liabilities added during the period totaled $ 922 ,000.

COMMITMENTS AND CONTINGENCIES

Purchase Agreements

As of February 28, 2022, the Company has purchase commitments totaling $ 697 thousand for the year ending May 31, 2022, and has no purchase commitments for periods beyond May 31, 2022.

As of August 31, 2022, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Term Loan and Note 11 - Leases, respectively.

Energy Commitment

The Company also has a commitment of approximately $ 24.2 million related to the energy services agreement for its first cohosting facility as of August 31, 2022.

The minimum term of this agreement is five years , and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination.

The commitment is fully due within the next year, as the company commits to specific power consumption on an annual basis as part of the energy services agreement.

The Company purchased approximately $ 4.9 million and $ 0 in power under the energy services agreement during the the three-month periods ended August 31, 2022 and 2021, respectively

Claims and Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business.

As of February 28, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

As of August 31, 2022 and May 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

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Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

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The table below shows the calculation for this quarter’s earnings per share:

Basic and diluted income (loss) per share:

Basic and diluted loss per share:

Quarterly Period Ended

February 28, 2022 February 28, 2021

Net Income (loss) from continuing Operations $ ( 2,397 ) $ ( 77 )

Net Income (loss) from discontinued Operations $ ( 4,048 ) $ —

Net Income (loss) attributable to Applied Blockchain $ ( 6,445 ) $ ( 77 )

Continuing Operations $ ( 0.04 ) $ ( 0.05 )

Discontinued Operations $ ( 0.08 ) $ —

Basic and diluted net loss per share $ ( 0.12 ) $ ( 0.05 )

Basic and diluted weighted average number of shares outstanding 53,396,920 1,511,061

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Basic and diluted income (loss) per share:

Year-to-Date Period Ended

February 28, 2022 February 28, 2021

Net Income (loss) from continuing Operations $ ( 17,843 ) $ ( 223 )

Net Income (loss) from discontinued Operations $ ( 2,870 ) $ —

Net Income (loss) attributable to Applied Blockchain $ ( 20,713 ) $ ( 223 )

August 31, 2022 August 31, 2021

Net loss from continuing operations $ ( 4,659 ) $ ( 14,340 )

Net gain from discontinued operations, net of income taxes — 243

Net loss including noncontrolling interests ( 4,659 ) ( 14,097 )

Net loss attributable to noncontrolling interest ( 128 ) —

Net loss attributable to Applied Blockchain $ ( 4,531 ) $ ( 14,097 )

Basic and diluted net (loss) gain per share:

Continuing Operations $ ( 0.05 ) $ ( 0.32 )

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During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment.

The assets to be sold are reflective of the entire mining reportable segment.

Therefore, the mining operations represent a component of the entity, and meet all the criteria for held-for-sale classification under ASC 205.

Further, the Company’s plan represents a strategic shift, as the Company plans to generate the majority of future revenue through hosting operations.

Therefore, the results of operations, financial position and cash flows of the mining operation have been presented as discontinued operations and the related assets have been classified as held-for-sale.

The Company ceased all crypto mining operations and completed the sale of the assets shortly during the year ended May 31, 2022.

The Company has no plans to return to crypto mining operations in the future as the Company grows.

The results of these operations have been displayed as discontinued operations.

Operating results of discontinued operations are summarized below:

Three Months Ended

February 28, 2022 February 28, 2021

Cryptoasset Mining Revenue 916 —

Mining Revenue Pool Fees 9 —

Cryptoasset Mining Revenue, Net 907 —

Cost of Sales 628 —

Gross Profit 279 —

Impairment of Cryptocurrency Assets ( 226 ) —

Gain/Loss on Sale of Fixed Assets ( 847 ) —

Gain/Loss on Assets Reclass to Discontinued Operations ( 3,254 ) —

Net Loss from Discontinued Operations ( 4,048 ) —

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Nine Months Ended

February 28, 2022 February 28, 2021

Cryptoasset Mining Revenue 2,975 —

Mining Revenue Pool Fees 30 —

August 31, 2022 August 31, 2021

Cryptoasset mining revenue, net $ — $ 612

2 unchanged sentences

Impairment of cryptocurrency assets — ( 20 )

Gain/Loss on Sale of Fixed Assets ( 582 ) —

Gain/Loss on Assets Reclass to Discontinued Operations ( 3,254 ) —

Net Loss from Discontinued Operations ( 2,870 ) —

The assets related to the cryptomining operation have all been remeasured to the fair value less cost to sale.

As the Company completed the sale of the assets shortly after the quarter ended February 28, 2022, the Company has used the sale price and actual costs to sale to determine actual carrying value of the assets held for sale.

The remaining assets are comprised of GPUs for cryptomining.

Current assets related to discontinued operations are summarized below

ASSETS February 28, 2022 May 31, 2021

Current assets of discontinued operations 3,573 —

Crypto Assets

The Company recognizes revenue at the spot price of the cryptoasset when mined.

The Company then tracks any gain or loss from the time the cryptoasset was mined to the time when it was ultimately sold or converted.

The sale or conversion generally results in a realized gain or loss at the time of sale or conversion.

The sale or conversion of cryptoassets results in the receipt of cash consideration.

As of February 28, 2022 and 2021, the Company did not hold any cryptoassets.

For the three and nine months ended February 28, 2022, the Company recorded impairment expense of $ 226 thousand and $ 390 thousand respectively.

The following table presents a summary of cryptoasset activity by period.

Three Months Nine Months

Beginning Balance - May 31, 2021

Cryptoassets earned through mining 916 2,975

Mining pool operating fees ( 9 ) ( 30 )

Cryptoassets sold or converted ( 1,133 ) ( 3,336 )

Impairment of Cryptocurrency Assets 226 390

Ending Balance - February 28, 2022

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

Additional Cryptomining Accounting Policies

Cryptoassets are included in current assets in the accompanying consolidated balance sheets.

Cryptoassets are classified as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles — Goodwill and Other, and are accounted for in connection with the Company’s revenue recognition policy detailed above and in Footnote 5.

Management will evaluate market conditions on a quarterly basis.

When events or circumstance identified through this process indicate that cryptoassets may be impaired, they are tested for impairment.

Impairment, if any, is recognized for the difference between the fair value of the underlying cryptoasset and the carrying amount of the cryptoasset.

Fair value is measured using the quoted price of the cryptoasset at the time its fair value is being measured.

Cryptoassets awarded to the Company through its mining activities are included within the operating activities in the accompanying consolidated statements of cash flows.

Gains from the sales of cryptoassets are recorded in other income (expense) in the accompanying consolidated statements of operations.

The Company accounts for its gains in accordance with the first in, first out (“FIFO”) method of accounting.

Cryptoasset mining revenue

The Company has entered into cryptoasset mining pools by executing contracts with the mining pool operators 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 theoretical fractional share of the cryptoasset award the mining pool operator receives (less service fees to the mining pool operator which are recorded as a reduction of revenue) 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.

Providing computing power in cryptoasset transaction verification services is an output of the Company’s ordinary activities.

The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators and is satisfied over the time it takes to mine each block.

The transaction consideration the Company receives, if any, is noncash consideration, which the Company receives on a daily basis and measures at fair value on the date received using the average price of the cryptoasset during the date, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools.

The consideration is all variable.

Because validation awards are not known until a block is placed, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized.

It is not probable that a significant reversal of revenue will occur.

Fair value of the cryptoasset award received is determined using the quoted price on the Company’s primary exchange of the related cryptoasset.

SUBSEQUENT EVENTS

Sale of Crypto Mining Equipment

On March 9, 2022, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment in service.

Total proceeds from the sale of the equipment were $ 1.6 million.

The Company has no plans to return to crypto mining operations in the future as the Company’s grows

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Periods Ended February 28, 2022

its co-hosting operations.

The results of the crypto mining operations are accounted for as discontinued operations in our consolidated financial statements as of and for the period ended February 28, 2022.

Loan Agreement

On March 11, 2022, the Company and Applied Hosting, LLC (“Hosting”), a wholly-owned subsidiary of the Company, entered into a term loan agreement (the “Loan Agreement”) by and among Hosting, as the borrower, Vantage Bank Texas, as lender (the “Lender”) and the Company as guarantor.

Pursuant to the Loan Agreement, on March 11, 2022, Hosting entered into a promissory note agreement (the “ VBT Note”) and borrowed $ 7.5 million for a five (5) year term with an interest rate of five percent ( 5 %) per annum (the “Term Loan”).

The proceeds of the Term Loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.

The Loan Agreement and VBT Note contain customary covenants, representations and warranties and events of default.

Also on March 11, 2022, the Company entered into a continuing guaranty agreement (the “Guaranty Agreement”) with the Lender, pursuant to which the Company agreed to guaranty Hosting’s indebtedness and obligations under the Loan Agreement.

The Term Loan is secured by a mortgage on the real property constituting Phase I of the Jamestown, North Dakota property (the “Property”) pursuant to a Mortgage, Security Agreement and Fixture Financing Statement (the “Mortgage”), dated March 11, 2022, by and between Hosting and the Lender, and a security interest in the accounts receivable, rents and servicing agreements relating to the Property, and equipment as set forth in or required by the Loan Agreement.

Net gain from discontinued operations $ — $ 243

As of August 31, 2022 and May 31, 2022, the Company did not hold any cryptoassets.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements