What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-10-12 compared with 2022-05-13 · 157 added, 123 removed, 124 unchanged (69% of the section changed)

13 unchanged sentences

• the addition or loss of significant customers or material changes to our relationships with these customers;

•our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;

• our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies;

• our ability to continue to grow sales in our hosting business;

•volatility of cryptoasset prices

uncertainties of cryptoasset regulation policy

You should carefully review the risks described in the final prospectus of our Registration Statement on Form S-1 (Reg.

333-261278) filed with the SEC on April 13, 2022, as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

• concentration of customers in the crypto mining industry, which customer base may decline due to price volatility and uncertainties around regulation policy of cryptoasset prices;

• equipment failures, power or other supply disruptions;

• the lack of final approval of funding initiatives to be made by the City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund in favor of the Company, the application of which funding initiatives would decrease the interest rate of the Company’s repayment of the Starion Term Loan (as defined below).

You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year-ended May 31, 2022, which was filed on August 29, 2022, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

Executive Overview

1 unchanged sentence

Business Overview

We build and operate Next-Gen datacenters which are designed to provide massive computing power.

Our first facility was constructed in North Dakota and as of February 2, 2022 is online and providing 55MW of energy and services to customers, with the remaining 45MW expected to be brought online during the second calendar quarter of 2022.

We design, build, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications.

Our first facility was constructed in North Dakota with 100 Megawatts (“MW”) of capacity.

We signed an energy services agreement with a utility to power this facility.

We provide energized space for customers to host computing equipment.

Initially, these datacenters primarily will host servers securing the Bitcoin network but can also host hardware for other applications such as artificial intelligence, machine learning and other blockchain networks in the future.

We have a colocation business model where our customers place hardware they own into our facilities, and we provide full operational and maintenance services for a fixed fee.

Initially, these datacenters primarily hosted servers securing the Bitcoin network, but these facilities can also host hardware for other applications such as artificial intelligence, protein sequencing, drug discovery, machine learning and additional blockchain networks and applications.

We are mid-construction on our second facility in Garden City, Texas, and are in the development stage of the Company's third facility, also located in North Dakota.

We have a colocation business

model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a fixed fee.

We typically enter into long-term fixed rate contracts with our customers.

1 unchanged sentence

Regulatory Environment

We have a material concentration of customers in the crypto mining industry.

Our customers’ businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax.

Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies.

As a result, they

do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.

As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.

federal, state and local and international jurisdictions.

9 unchanged sentences

Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.

The COVID-19 pandemic has had unpredictable and unprecedented impacts in the United States and around the world.

The implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain.

The economic effects of the pandemic and any recovery and resulting societal changes, including the impact of current labor shortages in the United States, are currently not predictable, and the future financial impacts could vary from those foreseen.

To the extent we are providing maintenance and repair services to our customers, our ability to provide such services may also be hampered by supply chain and labor disruptions.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

In connection with the preparation of our financial

statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.

In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.

We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared.

1 unchanged sentence

However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 3 – Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Hosting Operation Highlights

On January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies Holding Company, entered into a joint venture in the form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8 million and $2 million, respectively, and will initially own 80% and 20% of 1.21 Gigawatts, respectively.

1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with initially up to 1.5GW of capacity for hosting blockchain infrastructure.

are the managing member of 1.21 Gigawatts and are responsible for all site development, construction and operations of the datacenters.

However, certain activities of 1.21 Gigawatts and its subsidiaries, if any, require the vote of 90% of the then outstanding units of each such entity.

As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts.

1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member.

Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of other members to purchase some or all of such units.

Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our Common Stock equal to the capital contributions by Antpool in connection with the acquisition of such units divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts.

On February 2, 2022, we brought our North Dakota facility online as to the first 55MW, with the remaining 45MW expected to be brought online during the second calendar quarter of 2022.

Crypto Mining Operations

Applied Blockchain’s first facility is in Jamestown, North Dakota with capacity of 100 MW.

The entire 100 MW of capacity has been fully contracted on multi-year contracts with our customers, providing revenue visibility for the Company.

Additionally, the facility is powered through a five-year energy services agreement

with a local utility, providing visibility into the cost structure as a stable pricing mechanism for energy costs has been negotiated.

The facility began energizing in late January 2022 and had over 90 MW online as of June 2022.

As previously reported in a Current Report on Form 8-K filed by the Company on July 18, 2022, there was an unexpected equipment failure at the substation powering the facility, resulting in a partial outage of approximately 50%.

The power provider completed the required repairs in mid-August, fully restoring power capacity to Jamestown ahead of the schedule for early September.

The Jamestown facility was not damaged and remains fully operational and capable of hosting the entire 100 MW of capacity.

On July 12, 2022, the Company entered into a five-year hosting contract with Marathon Digital Holdings, Inc.

("Marathon") for 200 MW of mining capacity.

As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility in Texas and at least 110 MW of hosting capacity at its second facility in North Dakota.

As part of this agreement, the Company has also provided Marathon with the option to increase hosting capacity utilizing up to an additional 70 MW in North Dakota, which would increase the total amount of hosting across all of the Company's facilities to 270 megawatts if the option is exercised.

Discontinued Operations

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, and the Company will recognize a loss $2.9 million on the sale of the equipment during the quarter ending May 31, 2022.

The Company has no plans to return to crypto mining operations in the future as we grow our 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.

The results of the crypto mining operations are accounted for as discontinued operations in our consolidated financial statements.

Expansion Opportunities

On November 24, 2021, we entered into a letter of intent to develop a facility in Texas with 200MW of wind power.

The arrangement is subject to entry into definitive agreements by the parties.

Construction of the facility began in March 2022.

We are exploring potential new locations where we intend to replicate our hosting business model.

Additionally, we are evaluating potential partnerships with owners of low-cost energy sources, with a particular focus on renewable sources, as a potential avenue to grow our hosting operations.

On November 24, 2021, we entered into a letter of intent to develop a facility in Texas using 200 MW of wind power.

On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, TX, with the intent to build our second datacenter facility on this site.

On April 25, 2022 the Company began construction on this site.

This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers.

The facility is expected to begin operating in calendar fourth quarter of 2022 and the 200 MW capacity is fully contracted with our customers.

On August 8, 2022, the Company completed the purchase of 40 acres of land ("the Land") in Ellendale, North Dakota, for a total cost of $1 million.

The Company took possession of the Land on August 15, 2022, and plans to build a 200 MW datacenter on the Land, with completion scheduled for the first quarter of calendar 2023.

As our hosting operations expand, we believe our business structure will become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE:

3 unchanged sentences

We have begun to investigate the possibility, costs and benefits of converting to a REIT structure.

Public Offering and Changes to Equity

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

On November 22, 2021, the Company filed a registration statement for the sale by the Company of shares of Common Stock with the SEC (Reg.

333-261278) (the “IPO Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022.

On April 11, 2022, the Company filed a registration statement for the Common Stock under the Securities Exchange Act of 1934, as amended, with the SEC which became effective automatically 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.

Changes to Equity

The Company’s board of directors approved a reverse split of shares of the Company’s common stock on a one-for-six basis , which was effected on April 12, 2022 (the “Reverse Stock Split”).

All references to Common

Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split.

1 unchanged sentence

Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share.

On April 13, 2022, the Company announced its initial public offering of 8 million 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.

Results of Operations Comparative Results for the Three and Nine Months Ended February 28, 2022 and 2021:

The following table sets forth key components of the results of operations (in thousands) of Applied Blockchain during the three and nine months ended February 30, 2021 and 2020.

Three Months Ended Nine Months Ended

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

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.

Results of Operations Comparative Results for the Three Months Ended August 31, 2022 and 2021:

The following table sets forth key components of the results of operations (in thousands) of Applied Blockchain during the three months ended August 31, 2022 and 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)

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)

Adjusted Amounts (a)

Adjusted Operating Loss from Continuing Operations $ (2,896) $ 601

Adjusted Operating Margin from Continuing Operations (201.17) % — % (223.14) % — %

as a percentage of revenues (42) % — %

Adjusted Net Loss from Continuing Operations $ (3,378) $ (701)

as a percentage of revenues (49) % — %

Other Financial Data (a)

3 unchanged sentences

as a percentage of revenues (27) % — %

Adjusted Gross Profit $ 1,667 $ —

as a percentage of revenues 24 % — %

(a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.

A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A.

Commentary on Results of Operations Comparative Results for the Three Months Ended February 28, 2022 and 2021:

For the three months ended February 28, 2022, hosting revenue was $1 million, and there was no data center hosting revenue for the three months ended February 28, 2021.

Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided.

All of the Company’s revenues were generated from its North Dakota facility which became operational on February 2, 2022.

Costs and expenses

Cost of revenues for hosting for the three months ended February 28, 2022, was $2.1 million and there were no hosting costs for the three months ended February 28, 2021.

The costs consisted primarily of electricity costs, including costs for the North Dakota facility under noncancelable purchase commitments prior to the facility becoming operational on February 2, 2022.

Other costs include personnel cost for employees directly working at the hosting facility and depreciation expense for equipment in service at the hosting facility.

Selling, general and administrative expenses during the three months ended February 28, 2022 were $1.4 million and there were no selling, general, and administrative expenses during the three months ended February 28, 2021.

The 2022 costs consist of selling, general and administrative expenses consist of legal and professional fees, advertising and marketing expenses, and other personnel and related costs.

Other income and expense :

Other income for the three months ended February 28, 2022 was $20 thousand and other expense for the three months ended February 28, 2021 was $77 thousand.

The change is primarily related to a decrease in interest expense due to the conversion of a related party note payable into Common Stock during the first fiscal quarter of the year ending May 31, 2022, as well as a gain recognized in the extinguishment of accounts payable, partially offset by an increase in income tax expense.

Commentary on Results of Operations Comparative Results for the Nine Months Ended February 28, 2022 and 2021

For the nine months ended February 28, 2022, hosting revenue was $1 million, and there was no data center hosting revenue for the nine months ended February 28, 2021.Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided.

All of the Company’s revenues were generated from its North Dakota facility which became operational on February 2, 2022.

Costs and expenses:

Cost of revenues for hosting for the nine months ended February 28, 2022, was $2.1 million and there were no hosting costs for the nine months ended February 28, 2021.

Other costs include personnel cost for employees directly working at the hosting facility and depreciation expense for equipment in service at the hosting facility.

Selling, general and administrative expenses during the nine months ended February 28, 2022 were $3.2 million and there were no selling, general, and administrative expenses during the nine months ended February 28, 2021.

The 2022 costs consist of selling, general and administrative expenses consist of legal and professional fees, advertising and marketing expenses, and other personnel and related costs.

Stock-based compensation during nine months ended February 28, 2022 was $12.3 million and there were no stock-based compensation costs for the nine months ended February 28, 2021.

The 2022 cost was incurred as part of a service agreement for the first fiscal quarter in the year ending May 31, 2022.

Other Expenses:

Other expenses for the nine months ended February 28, 2022 was $1.2 million and other expense for the nine months ended February 28, 2021 was $223 thousand.

The change is primarily related to a loss recognized on the extinguishment of a related party note to Common Stock during the first fiscal quarter of the year ended May 31, 2022, as well as recognition of income tax expense during 2022, partially offset by a reduction of interest expense due to the conversion of a related party note payable to Common Stock during the first fiscal quarter of the year ended May 31, 2022, and gains recognized on the extinguishment of accounts payable.

A reconciliation of reported amounts to adjusted amounts can be found in the section titled "Non-GAAP Measures and Reconciliation".

Hosting revenues increased from $0 to $6.9 million, from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

The increase in hosting revenues was driven by our completion of our first hosting facility in Jamestown, North Dakota, which was brought online in phases during the six months ended May 31, 2022.

Cost of Revenues

Cost of revenues increased from $0 to $6.1 million, from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

The increase in cost of revenues was primarily driven by the initiation of our co-hosting business in late fiscal year ended May 31, 2022, which represents all of our continuing operations.

Cost of revenues for the three month period ending August 31, 2022 consists of $836,000 of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, ND hosting facility, $4.9 million of energy costs used to generate our hosting revenues, and $360,000 of personnel expenses for employees directly working at the hosting facility.

Operating Expenses

Selling, general and administrative expenses increased by $3.4 million, or 492%, from $698,000 for the three month period ended August 31, 2021 to $4.1 million for the three month period ending August 31, 2022.

The two primary drivers of Selling, general and administrative expense are $1.3 million of employee salaries and benefits expense, and $1.4 million of professional service expenses incurred to support the growth of the business.

Stock-based compensation for service agreement decreased $11.8 million, or 95%, from $12.3 million for the three month period ended August 31, 2021 to $579,000 for the three month period ending August 31, 2022.

The expense was related to our service agreements with strategic partners, who provided advisory and consulting services in exchange for shares of common stock we issued to them.

These services were fully rendered within the three month period ending August 31, 2021.

The Company did recognize expenses related to stock compensation agreements for the three month period ending August 31, 2022, but the number of shares granted under these agreements, and therefore the related expense, was much smaller relative to the number of shares granted under the service agreements as described above.

Depreciation and amortization expense not attributable to costs of sales increased $295,000 or 9,838%, from $3,000 for the three month period ended August 31, 2021 to $298,000 for the three month period ending August 31, 2022.

The change was driven by a significant increase in assets placed in service between periods to support the growth of the business.

Other Expense

Interest expense increased from $0 to $356,000, from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

This increase was driven by the increase in finance leases and change in the company’s debt obligations between periods, as the Company has entered into the Starion Loan agreement in the three month period ending August 31, 2022, and previously entered into a term loan agreement with Vantage Bank, which was subsequently extinguished.

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

The City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund provides a multimillion-dollar economic development program, available to assist with expanding or relocating businesses.

As part of financial packages, the Jamestown Stutsman Development Corporation (JSDC) makes direct loans, equity investments, and interest buy-downs to businesses.

upon such incentives, the Company expects the effective interest rate of the Starion Term Loan to be less than 6.50% per annum after different state funds are applied to the Loan, pending final approval.

The Loan is secured by a mortgage on the Property, and a security interest in substantially all of the assets of the Company as set forth in the Security Agreement dated as of July 25, 2022 by and between Hosting and the Starion Lender and a security interest in the form of a collateral assignment of the Company’s rights and interests in a master hosting agreement related to the Property and records and data relating thereto as set forth in the Security Agreement dated as of July 25, 2022 by and among Hosting, the Company as Grantor and the Starion Lender.

In addition, the Company unconditionally guaranteed the Company’s obligations to the Starion Lender, including under the Starion Term Loan, pursuant to an Unlimited Commercial Corporate Guaranty of the Company dated as of July 25, 2022.

Loss on extinguishment of debt decreased $1.25 million, or (93)% from the three month period ended August 31, 2021 to the three month period ended August 31, 2022.

This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the three month period ended August 31, 2021, compared to a smaller extinguishment of debt that was recognized in the three month period ended August 31, 2022.

Income tax expense

Income tax expense increased from $0 to $32,000 from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

This increase was driven by a change in valuation allowance for three month period ending August 31, 2022.

Gain from Discontinued Operations

Beginning in the quarter ended August 31, 2021 (the first quarter of fiscal year ended May 31, 2022), we began cryptoasset mining operations, using Nvidia GPU miners which we hosted at a facility operated by Coinmint.

In fiscal year ended May 31, 2022, we made the strategic decision to discontinue our mining operations and focus on hosting operations in the future.

As a result of this strategic shift, our mining operations were reclassified as discontinued operations.

Gain from discontinued operations decreased $243,000 or 100% from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

The decrease was due to the fact that the Company no longer generates revenues from mining operations.

Non-GAAP Measures and Reconciliation

The reconciliations of (1) adjusted operating loss from continuing operations to operating loss from continuing operations, (2) adjusted net loss from continuing operations to net loss from continuing operations, (3) EBITDA and Adjusted EBITDA to net loss from continuing operations, and (4) adjusted gross profit to gross profit, is as follows:

Three Months Ended

Nine Months Ended

$ in thousands February 28, 2022 February 28, 2021 February 28, 2022 February 28, 2021

$ in thousands August 31, 2022 August 31, 2021

Adjusted operating loss

3 unchanged sentences

Loss on Extinguishment of Debt 94 1,342

Non-deferred professional service costs 433 — 1,069 —

Non-recurring professional service costs 408

Other non-recurring expenses 200 —

Adjusted Operating Loss from Continuing Operations (Non-GAAP) $ (2,896) $ 601

Adjusted operating margin from Continuing Operations (41.8) % — %

Adjusted net income (loss)

Adjusted net loss

Net Loss from Continuing Operations (GAAP) (4,659) (14,340)

2 unchanged sentences

Loss on Extinguishment of Debt 94 1,342

Non-deferred professional service costs 433 — 1,069 —

Non-recurring professional service costs 408

Other non-recurring expenses 200 —

Adjusted net loss from Continuing Operations (Non-GAAP) $ (3,378) $ (701)

8 unchanged sentences

Loss on Extinguishment of Debt 94 1,342

Non-deferred professional service costs 433 — 1,069 —

Non-recurring professional service costs 408

Other non-recurring expenses 200 —

Adjusted EBITDA (Non-GAAP) $ (1,854) $ (698)

Adjusted Gross Profit

Gross profit (GAAP) $ 831 $ —

Depreciation in cost of revenues 836 —

Adjusted Profit (Non-GAAP) $ 1,667 $ —

Adjusted Operating Loss and Adjusted Net Loss

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represents operating loss and net loss, respectively, from continuing operations excluding stock-based compensation and nonrecurring expenses.

We believe these are useful metrics as they provide additional information regarding factors and trends affecting our business and provide perspective on results absent one-time or significant non-cash items.

However, Applied Blockchain’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items.

Applied Blockchain’s computation of Adjusted Operating Loss and Adjusted Net Loss may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Operating Loss and Adjusted Net Loss in the same fashion.

Because of these limitations, Adjusted Operating Loss and Adjusted Net Loss should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Applied Blockchain compensates for these limitations by relying primarily on its GAAP results and using Adjusted Operating Loss and Adjusted Net Loss on a supplemental basis.

You should review the reconciliation of operating loss to Adjusted Operating Loss and net loss to Adjusted Net Loss above and not rely on any single financial measure to evaluate Applied Blockchain’s business.

EBITDA and Adjusted EBITDA

1 unchanged sentence

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, and one-time professional service costs not directly related to the company’s offering and therefore not deferred under the guidance in ASC 340 and SAB Topic 5A.

have been adjusted as they are not indicative of business operations.

These costs have been adjusted as they are not indicative of business operations.

Adjusted EBITDA is intended as a supplemental measure of Applied Blockchain’s performance that is neither required by, nor presented in accordance with, GAAP.

Applied Blockchain believes that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors.

We also believe EBITDA and Adjusted EBITDA are useful metrics to investors because they provide additional information regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of their importance as measures of underlying operating performance, as the primary compensation performance measure under certain programs and plans.

However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Blockchain may incur future expenses similar to those excluded when calculating these measures.

3 unchanged sentences

Applied Blockchain compensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis.

You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate Applied Blockchain’s business.

You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA above and not rely on any single financial measure to evaluate Applied Blockchain’s business.

Adjusted Gross Profit

“Adjusted Gross Profit” is a non-GAAP measure that represents gross profit adjusted for depreciation expense within cost of revenues.

We believe this is a useful metric as it provides additional information regarding gross profit aside from significant non-cash expense in depreciation.

However, Applied Blockchain’s presentation of this measure should not be construed as an inference that its future results will be unaffected by other factors

within cost of revenues.

Applied Blockchain’s computation of Adjusted Gross Profit may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Gross Profit in the same fashion.

Because of these limitations, Adjusted Gross Profit should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Applied Blockchain compensates for these limitations by relying primarily on its GAAP results and using Adjusted Gross Profit on a supplemental basis.

You should review the reconciliation of gross profit to Adjusted Gross Profit above and not rely on any single financial measure to evaluate Applied Blockchain’s business.

The Sources of Liquidity

We have generated cash from the sale of our convertible preferred stock, the sale of Ether generated from our discontinued mining operations, and the receipt of contractual deposits and revenue pre-payments from hosting customers.

Since December 2020, when we began planning to acquire or build an operational business, we have raised aggregate gross proceeds of $49 million from issuances of our convertible preferred stock.

On April 15, 2021, we received $16.5 million in gross proceeds from the issuance of our Series C Convertible Redeemable Preferred Stock and on July 30, 2021, we received $32.5 million in gross proceeds from the issuance of our Series D Preferred Stock.

On April 18, 2022, we received $40.0 million in gross proceeds from the issuance of 8 million shares of the Company’s Common Stock in conjunction with the closing of our initial public offering.

During fiscal year 2021, we did not generate any revenue from crypto mining, co-hosting or otherwise.

We have incurred net losses from operations.

In June 2021, as a result of commencement of our crypto mining operations, we began to generate revenue.

As of February 28, 2022 and May 31, 2021, we had cash of $12 million and $11.8 million respectively, and an accumulated deficit of $(52.5) million and $21.6 million, respectively.

On March 11, 2022, we entered into a term loan agreement for $7.5 million for a term of five years with an interest rate of 5% per annum.

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.

We have primarily generated cash in the last 12 months from the proceeds of our term loan, proceeds from our initial public offering, and the receipt of contractual deposits and revenue prepayments from hosting customers.

On April 18, 2022, we received $36 million in net proceeds from the issuance of 8 million shares of the Company’s Common Stock in conjunction with the closing of our initial public offering.

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 contains customary covenants, representations and warranties and events of default.

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

A portion of the proceeds were used to pay down the Vantage term loan that was entered into on March 11, 2022.

The remaining 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.

See Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the Starion Term Loan.

During the three month period ended August 31, 2022, we received $22.2 million in payments for future hosting services.

During fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations.

As of August 31, 2022 and May 31, 2022, we had cash of $40.8 million and $46.3 million respectively, and an accumulated deficit of $60.6 million and $56.1 million, respectively.

Funding Requirements

Having ceased our prior operations in 2014, we have experienced net losses until the first quarter of our fiscal year ending May 31, 2022, with net losses also heaving been incurred in the second and third quarters of our fiscal year ending May 31, 2022.

Our transition to sustained profitability is dependent on successful operation of our co-hosting facilities.

We believe that amounts we received from our April 2021 and July 2021 sales of convertible preferred stock, from our crypto mining operations, prior to cessation of such operations on March 9, 2022, proceeds from our initial public offering, and revenue we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online as to 55MW on February 2, 2022, after planned expenditures to build our co-hosting operations, will be sufficient to meet our working capital needs for at least the next 12 months.

We have experienced net losses through our fiscal year ended May 31, 2022.

Our transition to profitability is dependent on the successful operation of our co-hosting facilities.

We believe that amounts we received from our proceeds from our term loan, proceeds from our initial public offering, and revenue payments we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online in February 2022, after planned expenditures with respect to the items described in the section titled “ Expansion Opportunities” above , will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash.

We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company.

We also expect that our revenues will increase as we continue to bring online additional capacity, including the remaining 45MW of capacity at our first operational co-hosting facility.

We expect to need additional capital to fund continued growth, which we may obtain through one or more equity offerings, debt financings or other third-

party funding.

Because of the numerous risks and uncertainties associated with the crypto mining industry, we are unable to estimate the amount of increased capital we may need to raise to continue to build additional co-hosting facilities and we may use our available capital sooner that we currently expect.

We believe that our existing cash, together with the anticipated revenues from current operations, will enable us to fund our operating expense requirements through at least 12 months.

We expect significant increases in our investment in property and equipment as we expand our co-hosting capacity.

We also expect that our revenues will increase as we continue to bring online additional capacity at our Jamestown, ND, Garden City, TX, and Ellendale, ND locations.

We expect to need additional capital to fund continued growth, which we may obtain through one or more equity offerings, debt financings or other third-party funding.

Because of the numerous risks and uncertainties associated with the Company’s concentration of customers in the crypto mining industry, we are unable to estimate the amount of increased capital we may need to raise to continue to build additional co-hosting facilities and we may use our available capital sooner that we currently expect.

We believe that our existing cash, together with the anticipated revenues from current operations and debt funding opportunities, will enable us to fund our operating expense requirements through at least 12 months as well as all of the Company’s known requirements and plans for cash.

We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all.

1 unchanged sentence

Summary of Cash Flows

The following table provides information about Applied Blockchain’s net cash flow (in thousands) for the nine months ended February 28, 2022 and 2021.

Nine Months Ended February 28,

$ in thousands 2022 2021

The following table provides information about Applied Blockchain’s net cash flow (in thousands) for the three months ended August 31, 2022 and 2021.

Three Months Ended

$ in thousands August 31, 2022 August 31, 2021

Net cash provided by operating activities $ 17,294 $ (1,435)

4 unchanged sentences

Cash and cash equivalents at end of period $ 40,830 $ 28,929

The net cash generated by operating activities of $4.1 million for the nine months ended February 28, 2022 consisted primarily of $12.3 million of non-cash compensation for service agreement expenses, an increase of $10.7 million of accounts payable and accrued liabilities, $1.3 million gain on the extinguishment of debt, and $1 million provided by discontinued operations, partially offset by a net loss from continuing operations of $17.8 million, increases in accounts receivable of $1 million, and increases in prepaid expenses and other current assets of $2.1 million.

The net cash used in investing activities for the nine months ended February 28, 2022 represents deposits on mining equipment and purchases of property and equipment.

The net cash provided by financing activities for the nine months ended February 28, 2022 represents proceeds from issuance of our Series D Preferred Stock.

For the nine months ended February 28, 2021 there was no cash used by operating activities, investing activities and financing activities.

The net cash generated by operating activities of $17.3 million for the three month period ending August 31, 2022 consisted primarily of an increase in customer deposits of $4.6 million and an increase in deferred revenue of $15.3 million, offset by a loss from continuing operations of $4.7 million.

Both customer deposits and deferred revenue increased during the three month period ending August 31, 2022 due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.

The net cash used in operating activities of $1.4 million for the three month period ending August 31, 2021 consisted primarily of non-cash expenses of stock based compensation charges of $12.3 million and loss on extinguishment of debt of $1.3 million, as well as an increase in accounts payable of $0.4 million, offset by losses from continuing operations of $14.3 million.

The net cash used in investing activities of $31.7 million for the three month period ending August 31, 2022 represents purchases of property and equipment.

The net cash used in investing activities of $11.3 million for the three month period ending August 31, 2021 represents purchases of property and equipment.

The net cash provided by financing activities of $8.9 million for the three month period ending August 31, 2022 is primarily driven by the proceeds from the Starion term loans which total $15.0 million, as well as by equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest of $1.7 million , partially offset by the extinguishment of the Vantage term loan totaling $7.1 million

The net cash provided by financing activities of $29.9 million for the three month period ending August 31, 2021 represents proceeds from the issuance of preferred stock $32.6 million offset by issuance costs of $2.7 million.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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 2. Management’s Discussion and Analysis