Applied Digital Corp. 10-Q

Item 1. Financial Statements APPLIED BLOCKCHAIN, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands, except number of shares and par value data) August 31, 2022 May 31, 2022 ASSETS Current Assets: Cash and cash equivalents $ 40,830 $ 46,299 Accounts receivable 50 227 Prepaid expenses and other current assets 1,500 1,336 Total current assets 42,380 47,862 Property and equipment, net 95,095 64,260 Right of use asset, net 6,995 6,408 Utility deposits 1,450 1,450 TOTAL ASSETS $ 145,920 $ 119,980 LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 13,456 $ 13,260 Current portion of lease liability 1,371 1,004 Current portion of term loan 2,587 1,333 Customer deposits 14,111 9,524 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 Long-term term loan 12,109 5,897 Total liabilities $ 69,019 $ 40,745 Commitments and contingencies (Note 12) Shareholders' equity (deficit): 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 $ 93 $ 98 Additional paid in capital 128,877 128,293 Treasury stock, 36,300 shares at August 31, 2022 and May 31, 2022, at cost ( 62 ) ( 62 ) Accumulated deficit ( 60,601 ) ( 56,070 ) 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 1 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended August 31, 2022 August 31, 2021 Revenues: Hosting revenue $ 6,924 $ — Cost of revenues $ 6,093 $ — Gross profit 831 — Costs and expenses: Selling, general and administrative $ 4,131 $ 698 Stock-based compensation 579 12,337 Depreciation and amortization 298 3 Total costs and expenses $ 5,008 $ 13,038 Operating loss $ ( 4,177 ) $ ( 13,038 ) Other income (expense): Interest Expense $ ( 356 ) $ — Gain on extinguishment of accounts payable — 40 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 ) — 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 ) Discontinued Operations $ — $ 0.01 Basic and diluted net loss per share $ ( 0.05 ) $ ( 0.31 ) Basic and diluted weighted average number of shares outstanding 93,105,835 44,937,269 See Accompanying Notes to the Financial Statements 2 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES 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 Stock Series B Convertible Preferred Stock Common Stock Additional Paid in Capital Treasury Stock Accumulated Deficit Total Shareholders Equity Total Equity Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Balance, May 31, 2021 660,000 15,135 — — 15,135 27,195 3,370 17,087 1,849 1,511,061 1 13,882 ( 62 ) ( 21,623 ) ( 2,583 ) 12,552 Extinguishment of Debt — — — — — — — — — 5,083,828 5 3,473 — — 3,478 3,478 Issuance of Dividends to Preferred Stock — — — — — 60,822 6,082 29,772 2,979 — — — — ( 8,946 ) 115 115 Conversion of Preferred Stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 29 14,251 — — — — 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 ) 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 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (In thousands of dollars) Three Months Ended August 31, 2022 August 31, 2021 CASH FLOW FROM 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 Gain on extinguishment of accounts payable — ( 40 ) Loss on extinguishment of debt 94 1,342 Stock-Based Compensation 579 12,337 Deferred Tax 32 — 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 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 (USED IN) OPERATING ACTIVITIES 17,294 ( 1,435 ) CASH FLOW FROM INVESTING ACTIVITIES Purchases of property and equipment ( 31,673 ) ( 988 ) Deposit on equipment — ( 10,300 ) Net cash used in investing activities of continuing operations ( 31,673 ) ( 11,288 ) Net cash used in investing activities of discontinued operations — — NET CASH USED IN INVESTING ACTIVITIES ( 31,673 ) ( 11,288 ) CASH FLOW FROM FINANCING ACTIVITIES Issuance of preferred stock — 32,600 Repayment of finance leases ( 209 ) — 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 Net cash provided by financing activities of discontinued operations — — CASH FLOW PROVIDED BY FINANCING ACTIVITIES 8,910 29,902 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 Less: cash and cash equivalents of discontinued operations — — Cash and cash equivalents of continuing operations $ 40,830 $ 28,929 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 Fixed assets in accounts payable $ 8,352 $ 4,391 See Accompanying Notes to the Financial Statements 4 Table of Contents APPLIED BLOCKCHAIN INC. AND Subsidiaries Notes to Consolidated Financial Statements For the Three Month Periods Ended August 31, 2022 1. BUSINESS AND ORGANIZATION Applied Blockchain, Inc. (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 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 The Company’s board of directors approved a reverse split of shares of the Company’s common stock on a one-for-six (1:6) 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. No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split. 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. 2. LIQUIDITY AND FINANCIAL CONDITION 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. Based on analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued. 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: 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 5 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. 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. 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. 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 The Company continually assesses any new accounting pronouncements to determine their applicability. 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 August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company has adopted ASU and determined that the adoption had no material impact on its financial statements and related disclosures. 6 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of August 31, 2022, and May 31, 2022: (in thousands) Estimated Useful Life August 31, 2022 May 31, 2022 Hosting Equipment Electric Generation and Transformers 15 years 4,376 4,338 Other Equipment and Fixtures 5 years- 7 years 588 588 Construction in Progress 46,086 18,305 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 Building 39 years 32,833 30,176 Total cost of property and equipment 96,942 65,269 Accumulated Depreciation ( 1,847 ) ( 1,009 ) Property Plant and Equipment, Net $ 95,095 $ 64,260 Depreciation expense from continuing operations totaled $ 838 ,000 and $ 3 ,000 for the three-month periods ended August 31, 2022 and 2021, respectively. 5. REVENUE FROM CONTRACTS WITH CUSTOMERS The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration to which the Company expects to be received in exchange for those services. The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue. 7 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 % — % Customer B 21.0 % — % Customer C 16.5 % — % Customer D 14.4 % — % Customer E 12.6 % — % Remaining Performance Obligations 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 $ — 6. 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. 8 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. 7. DEBT 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. Term Loan 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) August 31, 2022 May 31, 2022 Term Loan Balance $ 14,790 $ 7,324 Less: Deferred Issuance Costs ( 140 ) ( 94 ) Less: Current portion of Term Loan ( 2,587 ) ( 1,333 ) Long-term Portion of Term Loan $ 12,063 $ 5,897 9 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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) FY23 $ 1,923 FY24 2,726 FY25 2,923 FY26 3,134 FY27 3,361 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. 8. SHAREHOLDERS’ EQUITY (DEFICIT) Common Stock 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. 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 — $ — Vested — $ — Forfeited — $ — Outstanding as of August 31, 2022 1,366,665 $ 8.04 10 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 Vested — $ — 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, 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 11 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. 9. LEASES 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. 10. COMMITMENTS AND CONTINGENCIES Commitments 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 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. 11. EARNINGS PER SHARE Basic net income (loss) per share (“EPS”) of Common Stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of Common Stock outstanding during the period. 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. 12 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. Refer to Footnote 9 for details on outstanding classes of preferred shares. The table below shows the calculation for this quarter’s earnings per share: Basic and diluted loss per share: Quarterly Period Ended 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 ) Discontinued Operations $ — $ 0.01 Basic and diluted net loss per share $ ( 0.05 ) $ ( 0.31 ) Basic and diluted weighted average number of shares outstanding 93,105,835 44,937,269 12. DISCONTINUED OPERATIONS During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment. 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 August 31, 2022 August 31, 2021 Cryptoasset mining revenue, net $ — $ 612 Cost of sales — 349 Gross profit — 263 Impairment of cryptocurrency assets — ( 20 ) Net gain from discontinued operations $ — $ 243 As of August 31, 2022 and May 31, 2022, the Company did not hold any cryptoassets. 11 Table of Contents