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Item 8. Financial Statements and Supplementary Data

2023-08-02 compared with 2022-08-29 · 370 added, 432 removed, 285 unchanged (74% of the section changed)

9 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Applied Blockchain Inc.

To the Shareholders and Board of Directors of Applied Digital Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Applied Blockchain Inc.

(the “Company”) as of May 31, 2022 and 2021, the related statements of operations, changes in stockholders’ deficit and cash flows for each of the two years in the period ended May 31, 2022, and the related notes (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Applied Digital Corporation (the “Company”) as of May 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended May 31, 2023, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

1 unchanged sentence

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

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See Accompanying Notes to the Consolidated Financial Statements

APPLIED BLOCKCHAIN, INC.

AND SUBSIDIARIES

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

4 unchanged sentences

Accounts receivable 82 227

Utility deposits 1,450 —

Prepaid expenses and other current assets 16,678 1,337

Total current assets 45,759 40,362

Right of use asset, net 6,408 —

Deposit on equipment — 3,277

Property and equipment, net 195,593 64,260

Operating lease right of use asset, net 1,290 1,110

Finance lease right of use asset, net 14,303 5,298

Other Assets 7,012 8,950

TOTAL ASSETS $ 263,957 $ 119,980

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable and accrued liabilities $ 14,776 $ 13,260

Accrued dividends — 116

Current portion of lease liability 1,004 —

Current portion of notes payable 1,333 —

Related party notes payable — 2,135

Current portion of operating lease liability 320 191

Current portion of finance lease liability 5,722 813

Current portion of term loan 7,950 1,333

Customer deposits 36,370 9,524

Deferred revenue 3,877 —

Other current liabilities 16 —

Current deferred revenue 48,692 3,877

Sales and use tax payable 1,630 —

Total current liabilities 115,460 28,998

Deferred tax liability — 540

Long-term portion of lease liability 5,310 —

Long-term notes payable 5,897 —

Long-term portion of operating lease liability 1,005 936

Long-term portion of finance lease liability 8,334 4,374

Long-term portion of term loan 33,222 5,897

Long-term related party loan 35,257 —

Other long-term related party liabilities 1,000 —

Total liabilities 194,278 40,745

Commitments and contingencies (Note 11)

Mezzanine equity:

Series C, convertible and redeemable preferred stock, $ .001 par value, 0 and 660,000 shares authorized, issued and outstanding, respectively

Stockholders’ deficit:

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

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

Common stock, $ .001 par value, 166,666,667 shares authorized, 97,837,798 and 1,511,061 issued and outstanding, respectively

Additional paid in capital 128,293 13,881

Treasury stock, 36,300 shares, at cost

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023, and 97,837,703 shares issued and 97,801,407 shares outstanding at May 31, 2022

Treasury stock, 5,001,728 shares at May 31, 2023 and 36,296 shares at May 31, 2022, at cost

( 62 ) ( 62 )

Additional paid in capital 160,194 128,293

Accumulated deficit ( 100,716 ) ( 56,070 )

Total stockholders’ equity (deficit) attributable to Applied Blockchain, Inc.

72,259 ( 2,583 )

Total stockholders’ equity attributable to Applied Digital Corporation 59,517 72,259

Noncontrolling interest 10,162 6,976

Total Mezzanine equity and stockholders' deficit 79,235 12,552

TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY $ 119,980 $ 15,052

Total Stockholders' equity including noncontrolling interest 69,679 79,235

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 263,957 $ 119,980

See Accompanying Notes to the Consolidated Financial Statements

APPLIED BLOCKCHAIN, INC.

AND SUBSIDIARIES

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

(In thousands, except share and per share data)

Fiscal Year Ended

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Cost of revenues $ 44,388 $ 9,506

Gross loss $ ( 957 ) $ —

Gross profit 11,004 ( 957 )

Costs and expenses:

Selling, general and administrative $ 55,059 $ 19,941

Stock-based compensation 12,337 —

Depreciation and amortization 49 —

Total costs and expenses $ 55,059 $ 19,941

Operating loss $ ( 44,055 ) $ ( 20,898 )

Other (expense) income:

Other income (expense):

Interest Expense $ ( 1,980 ) $ ( 112 )

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

Total other expense $ ( 1,048 ) $ ( 236 )

Total other expense, net ( 2,074 ) ( 1,048 )

Net loss from continuing operations before income tax expenses ( 46,129 ) ( 21,946 )

Income tax expenses ( 540 ) —

Income tax benefit (expense) 523 ( 540 )

Net loss from continuing operations ( 45,606 ) ( 22,486 )

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Net loss including noncontrolling interests ( 45,606 ) ( 23,530 )

Net loss attributable to noncontrolling interests 10 —

Net loss attributable to Applied Blockchain $ ( 23,520 ) $ ( 568 )

Net loss attributable to noncontrolling interest ( 960 ) ( 10 )

Net loss attributable to Applied Digital Corporation $ ( 44,646 ) $ ( 23,520 )

Basic and diluted net loss per share:

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See Accompanying Notes to the Consolidated Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

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(In thousands, except per share data)

Preferred Stock Series D Convertible 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 Stockholders’ Equity Noncontrolling interest Total Equity

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 $ 2 $ 13,881 $ ( 62 ) $ ( 21,055 ) $ ( 2,015 ) $ — $ ( 2,015 )

Issuance of Series C preferred stock 660,000 16,500 — — 16,500 — — — — — — — — — — $ 16,500

Issuance costs of Series C preferred stock — ( 1,365 ) — — ( 1,365 ) — — — — — — — — — — — ( 1,365 )

Net Loss — — — — — — — — — — — — — $ ( 568 ) ( 568 ) — ( 568 )

Preferred Stock Series D Convertible Preferred Stock Total Mezzanine Equity Series A Convertible Preferred Stock Series B Convertible Preferred Stock Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity

Shares Amount Shares Amount Amount Shares 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 $ 2 ( 36,296 ) $ ( 62 ) $ 13,881 $ ( 21,623 ) $ ( 2,583 ) $ — $ 12,552

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Balance, May 31, 2022 — — — — — — — — — 97,837,703 98 ( 36,296 ) ( 62 ) 128,293 ( 56,070 ) 72,259 6,976 79,235

Issuance of common stock - vesting of awards — — — — — — — — — 2,615,550 3 — — ( 171 ) — ( 168 ) — $ ( 168 )

Issuance of common stock - restricted stock awards — — — — — — — — — 474,105 — — — — — — — $ —

Stock-based compensation — — — — — — — — — — — — — 32,072 — 32,072 — $ 32,072

Common stock forfeited — — — — — — — — — — — ( 4,965,432 ) — — — — — $ —

Capital contribution to noncontrolling interest — — — — — — — — — — — — — — — — 4,146 $ 4,146

Net Loss — — — — — — — — — — — — — — ( 44,646 ) ( 44,646 ) ( 960 ) ( 45,606 )

Balance, May 31, 2023 — — — — — — — — — 100,927,358 101 ( 5,001,728 ) ( 62 ) 160,194 ( 100,716 ) 59,517 10,162 69,679

See Accompanying Notes to the Consolidated Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands of dollars)

Fiscal Years Ended

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (In thousands)

Fiscal Year Ended

May 31, 2023 May 31, 2022

CASH FLOWS FROM OPERATING ACTIVITIES

Net Loss attributable to Applied Blockchain, Inc.

$ ( 23,520 ) $ ( 568 )

Net Loss from discontinued operations ( 1,044 ) —

CASH FLOW FROM OPERATING ACTIVITIES

Net loss attributable to Applied Digital Corporation $ ( 44,646 ) $ ( 23,520 )

Net loss from discontinued operations, net of income taxes — ( 1,044 )

Net loss attributable to noncontrolling interest ( 960 ) ( 10 )

Net loss from continuing operations ( 45,606 ) ( 22,486 )

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

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and Amortization 7,267 1,120

Accrued paid in kind interest — 236

Loss on extinguishment of debt 1,342 —

Gain on extinguishment of accounts payable — ( 406 )

Stock-Based compensation for service agreement 12,337 —

Amortization of right of use asset 111 —

Deferred tax 540 —

Changes in operating assets and liabilities —

Loss on extinguishment of debt 94 1,342

Stock-Based Compensation 32,072 12,337

Lease Expense 347 328

Non-cash interest expense 410 —

Changes in assets and liabilities:

Accounts receivable 145 ( 227 )

Utility deposits ( 1,450 ) —

Prepaid expenses and other current assets ( 766 ) ( 1,331 )

1 unchanged sentence

Deferred revenue 44,815 3,877

Deferred Tax ( 540 ) 540

Accounts payable and accrued liabilities ( 6,265 ) 6,417

Other Assets 364 ( 1,450 )

Lease Assets and Liabilities ( 118 ) —

Payments of operating leases ( 330 ) ( 310 )

1 unchanged sentence

Net cash used in operating activities of discontinued operations — ( 10,147 )

NET CASH PROVIDED BY OPERATING ACTIVITIES ( 872 ) ( 83 )

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment ( 58,251 ) ( 20 )

Deposit on equipment 3,277 ( 3,282 )

NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES 58,735 ( 872 )

CASH FLOW FROM INVESTING ACTIVITIES

Purchases of property and equipment and other assets ( 128,721 ) ( 54,974 )

Deposits on equipment ( 2,557 ) —

Investments in private companies ( 810 ) —

Net cash used in investing activities of continuing operations ( 132,088 ) ( 54,974 )

1 unchanged sentence

NET CASH USED IN INVESTING ACTIVITIES ( 132,088 ) ( 45,871 )

CASH FLOWS FROM FINANCING ACTIVITIES

CASH FLOW FROM FINANCING ACTIVITIES

Initial public offering of common stock — 40,000

Issuance of preferred stock — 34,500

Issuance costs for preferred stock ( 2,927 ) ( 1,365 )

Issuance costs for common stock ( 4,276 ) —

Repayment of finance leases ( 3,353 ) ( 221 )

Preferred stock issuance costs — ( 2,927 )

Common stock issuance costs — ( 4,276 )

Term loan payoff ( 7,056 ) —

Proceeds from issuance of term loan 45,650 7,324

Issuance costs for term loan ( 94 ) —

Contributions by noncontrolling interest 6,986 —

Term Loan Issuance Costs ( 567 ) ( 94 )

Proceeds from issuance of related party term loan 36,500 —

Related party term Loan Issuance Costs ( 1,548 ) —

Loan Payments ( 2,977 ) —

Payments of employee restricted stock tax withholdings ( 168 ) —

Noncontrolling interest contributions 4,147 6,986

Net cash provided by financing activities of continuing operations 70,628 81,292

Net cash provided by financing activities of discontinued operations — —

NET CASH PROVIDED BY FINANCING ACTIVITIES 81,292 15,135

NET INCREASE IN CASH AND CASH EQUIVALENTS 34,549 11,750

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

CASH AND CASH EQUIVALENTS, END OF YEAR 46,299 11,750

Cash and cash equivalents of discontinued operations — —

Cash and cash equivalents of continuing operations $ 46,299 $ 11,750

CASH FLOW PROVIDED BY FINANCING ACTIVITIES 70,628 81,292

NET (DECREASE ) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 2,725 ) 34,549

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD (See Note 3) 46,299 11,750

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD (See Note 3) $ 43,574 $ 46,299

cash, cash equivalents, and restricted cash of discontinued operations — —

Cash, cash equivalents, and restricted cash of continuing operations $ 43,574 $ 46,299

See Accompanying Notes to the Consolidated Financial Statements

Consolidated Statements of Cash Flows (In thousands)

Fiscal Year Ended

May 31, 2023 May 31, 2022

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest Paid $ 1,570 $ 112

Taxes Paid $ — $ —

Income Taxes Paid $ 18 $ —

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Non-cash dividends paid in-kind $ — $ 11,042

Right-of-use asset obtained by lease obligation $ 8,879 $ —

Operating right-of-use assets obtained by lease obligation $ 397 $ 1,288

Finance right-of-use assets obtained by lease obligation $ 12,331 $ 5,418

Fixed assets in accounts payable $ 7,399 $ 6,998

2 unchanged sentences

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 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.

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

Applied Digital Corporation, f/k/a Applied Blockchain, Inc.

(the “Company”) is a designer, builder and operator of next-generation digital infrastructure.

The Company has three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.

For the fiscal year ended May 31, 2023, the Company has only had operational activity in the crypto datacenter hosting business.

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.

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.

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 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.

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.”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.

On November 14, 2022, the Company changed its corporate name from Applied Blockchain, Inc.

to Applied Digital Corporation.

LIQUIDITY AND FINANCIAL CONDITION

As of May 31, 2022, the Company had approximate cash and cash equivalents of $ 46.3 million and working capital of $ 20.3 million.

In April 2022, the Company raised $ 40.0 million in gross proceeds from our initial public offering of Common Stock.

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 revenues, 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.

As of May 31, 2023, the Company had approximate cash and cash equivalents of $ 29.0 million and negative working capital of $ 69.7 million.

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

Based on an 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 were issued.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

5 unchanged sentences

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, Ltd, 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.

The Company’s consolidated operating subsidiaries include the Company's wholly-owned subsidiaries, the Company's interest in Highland Digital Holdings LLC, and the Company's majority interests in Sai Foundry Computing LLC, as well as 1.21 Gigawatts LLC.

Use of Estimates

1 unchanged sentence

Actual results could differ significantly from those estimates.

The most significant accounting estimate inherent in the preparation of the Company’s financial statements is the valuation allowance associated with the Company’s deferred tax assets.

Revenue Recognition

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

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, net of credits, 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.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements are:

• The valuation allowance associated with the Company’s deferred tax assets.

• The probability assessment associated with performance conditions in share based payment awards

Cash and Cash Equivalents

1 unchanged sentence

Our cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although we believe they are subject to minimal risk.

The Company has restricted cash related to its letter of credit totally $ 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.

Restricted Cash

The Company has restricted cash related to its letters of credit totaling $ 14.6 million.

The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which last through the first quarter of calendar 2024 .

The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of May 31, 2023, and May 31, 2022.

1 unchanged sentence

Cash and cash equivalents $ 28,999 $ 38,798

Restricted Cash $ 7,501 $ —

Total Cash and Cash Equivalents $ 46,299 $ 11,750

Restricted cash included in prepaid expenses and other current assets 14,575 —

Restricted cash included in other assets — 7,501

Total Cash, Cash Equivalents, and Restricted Cash $ 43,574 $ 46,299

Property and Equipment

3 unchanged sentences

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.

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

If a lease is 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.

9 unchanged sentences

Variable lease costs are recognized as incurred.

Assets and liabilities related to operating leases are presented in separate captions from those relating to finance leases.

For the Company's finance leases, expense is split between amortization and interest expense.

Variable lease costs are recognized as incurred.

Assets and liabilities related to finance leases are presented in separate captions from those relating to operating leases.

Revenue Recognition

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

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

hosting facility.

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

Hosting revenue is recorded monthly in fixed amounts, net of credits for non-performance, based on the terms of the hosting agreements.

Any ancillary revenue for maintenance or installation services is at a point in time when the Customer has received the full service.

As these services support the hosting operation as a whole, all revenue is within the hosting revenue caption.

Customer contracts include advance payment terms.

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

Stock-based compensation

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 has recognized the cost of the restricted stock-based on the grant date fair value of the awards ratably over the related vesting terms as it is probable that the performance condition for the reserved underlying shares will be met.

Restricted Stock Units

The Company has granted restricted stock units (“RSUs”) to certain consultants and employees, in all cases as compensatory grants for services rendered to the Company, which contain performance conditions that affect vesting.

The Company has recognized the cost of these RSUs based on the grant date fair value ratably for each tranche, as applicable, based on the probability that the performance conditions will be achieved over the related vesting terms.

In addition, the Company has granted RSUs to employees as compensation for employment services.

The average term of the RSUs granted under the employee incentive plan is three years from grant date, and the only conditions for vesting are service conditions.

The Company has recognized the expense of the RSUs based on grant date fair value of the awards ratably over the service period.

ASC Topic 740, Income Taxes, (“ASC 740”), 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.

3 unchanged sentences

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.

Segment Information

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance.

Accordingly, the Company has one operating and reporting segment.

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.

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.

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.

We are currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

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.

The Company has determined that there are no recently issued pronouncements that are currently applicable to the Company.

Reclassifications

Within the Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current period presentation.

The Company has reclassified restricted cash from cash and cash equivalents to other assets.

In addition, the Company has reclassified utility deposits to other assets.

These reclassifications had no impact on reported operating income or net income;

cash flows from operations, investing, or financing activities;

or total assets and liabilities.

PROPERTY AND EQUIPMENT

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Land & Building

Land 2,152 1,074

Land Improvements 15 years 1,293 1,180

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Accumulated Depreciation ( 4,940 ) ( 1,009 )

Property Plant and Equipment, Net $ 64,260 $ 20

Depreciation expense totaled $ 1.0 million and $ 1,000 for the years ended May 31, 2022 and 2021, respectively.

Property and Equipment, Net $ 195,593 $ 64,260

Depreciation expense totaled $ 3.9 million and $ 1 million for the years ended May 31, 2023 and 2022, respectively.

Depreciation is computed on the straight-line basis for the period assets are in service.

Construction in progress represents assets received but not placed into service as of May 31, 2023.

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.

Below is a summary of the Company’s revenue concentration by major customer for the year ended May 31, 2022 and 2021.

Year Ended May 31,

Customer 2022 2021

Below is a summary of the Company’s revenue concentration by major customer for the years ended May 31, 2023 and 2022

Fiscal Year Ended

Customer May 31, 2023 May 31, 2022

Customer A 24 % — %

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Customer E 12 % 15 %

Customer F 11 % 15 %

Total 100 % 100 %

Remaining Performance Obligations

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(in thousands)

Balance at June 1, 2020 $ —

Balance at May 31, 2021 $ —

Advance billings 12,426

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(in thousands)

Balance at June 1, 2020 $ —

Balance at May 31, 2021 $ —

Customer deposits received $ 9,524

Customer deposits refunded —

Other adjustments —

Balance at May 31, 2022 $ 9,524

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Customer deposits refunded —

Other adjustments $ ( 135 )

Balance at May 31, 2022 $ 36,370

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 related party transactions.

Related Party Note Payable

A related party note payable was held by the CEO of the Company during the years ended May 31, 2022, and 2021.

Pursuant to an exchange agreement effective June 12, 2021, 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 Notes Payable

See discussion below in Note 7 - Debt, regarding the Company's term loan agreement with B.

Riley Commercial Capital, LLC and B.

Riley Securities, Inc, both wholly-owned subsidiaries of B.

Riley Financial, Inc.

Bryant Riley, chairman of the board and co-chief executive officer, of B.

Riley Financial, Inc.

RILY), directly or indirectly through subsidiaries of RILY, held in excess of 5 % of our then outstanding Common Stock beginning in April 2023.

The following table illustrates the related party balances on this loan for the fiscal year ended May 31, 2023.

(in thousands)

Description May 31, 2023

Principal Outstanding $ 36,500

Other long-term liabilities 1,000

Accrued Interest Payable 81

Related Party Revenue

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

The Company recognized $ 3.5 million and $ 0 of revenue from this customer for the year ended May 31, 2022 and 2021, respectively.

The Company had $ 1.7 million and $ 0 of advance billings from this customer and $ 1.7 million and $ 0 of deposits from this customer as of May 31, 2022 and 2021, respectively.

Letter of Credit

As of 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.

The Company did not have a letter of credit as of May 31, 2021.

Further, the Company has no unused lines of credit as of May 31, 2022 or May 31, 2021, respectively.

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 “VBT Loan Agreement”) by and among Hosting, as the borrower, Vantage Bank Texas, as lender (the “VBT 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 “VBT Term Loan”).

The proceeds of the VBT Term Loan were used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota (the "Property").

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

In addition, the VBT Note contains certain affirmative and negative covenants and other terms and conditions for a facility of this type.

The effective interest rate for the VBT Note was 5.6 % and 0 % for the years ended May 31, 2022 and 2021, respectively.

Below is a summary of the remaining principal payments due over the life of the VBT note as of May 31, 2022

Year Principal Payments (in thousands)

Total VBT Term Loan Remaining Payments $ 7,190

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

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

In connection with the VBT Note, the Company incurred debt issuance costs of $ 93,939 .

Below is a summary of total debt, including current debt and deferred financing fees related to the VBT Note, for the year ended May 31, 2022, and 2021.

(in thousands) Year ended Year ended

Term Loan Balance $ 7,324 $ —

The Company has revenue transactions with two related party customers:

• Customer A is a subsidiary of an entity which is deemed to beneficially own over 5 % of the Company's outstanding common stock.

• Customer B is 60 % owned by an individual who is deemed to beneficially own over 5 % of the Company's outstanding stock.

The following tables illustrate related party revenue for fiscal years ended ended May 31, 2023 and May 31, 2022.

(in thousands) Related Party Revenue for the Fiscal Year Ended

Customer May 31, 2023 May 31, 2022

Customer A $ 8,007 $ 1,417

Customer B $ 6,401 $ 1,268

The following tables illustrate related party deferred revenue and deposits balances as of May 31, 2023 and May 31, 2022.

(in thousands) Customer A Balances as of

Caption May 31, 2023 May 31, 2022

Deferred revenue $ 1,474 $ 692

Customer Deposits $ 2,450 $ 2,059

(in thousands) Customer B Balances as of

Caption May 31, 2023 May 31, 2022

Deferred revenue $ 50 $ 262

Customer Deposits $ 1,361 $ 1,171

Related Party Sublease Income

For the fiscal years ending May 31, 2023 and May 31, 2022, the Company received sublease income from B.

Riley Asset Management, which is also a wholly-owned subsidiary of B.

Riley Financial, Inc.

Cummins, the CEO of the Company, is also the President of B.

Riley Asset Management.

(in thousands)

Description May 31, 2023 May 31, 2022

Sublease Income $ 84 $ 80

Below is a summary of the Company’s term loan balances, including current debt and deferred financing fees as of May 31, 2023 and 2022.

(in thousands) May 31, 2023 May 31, 2022

Total Outstanding Loan Balances 79,441 7,324

Deferred Issuance Costs ( 3,012 ) ( 94 )

Current portion of Term Loan ( 7,950 ) ( 1,333 )

Long-term related party loan ( 35,257 ) —

Long-term portion of Term Loan $ 33,222 $ 5,897

The Company recorded income tax expense of $ 540 ,000 for the year ended May 31, 2022, compared to no expense for the year ended May 31, 2021.

The Company’s effective tax rate was ( 2.4 %) and 0 % for the year ended May 31, 2022 and 2021, respectively.

The following table presents current and deferred tax expense for the year ended May 31, 2022, and 2021

Year ended Year ended

Below is the weighted-average interest rate for the Company's term loans as of May 31, 2023 and 2022.

May 31, 2023 May 31, 2022

Weighted-average interest rate 13.4 % 5.0 %

Remaining Principal Payments

Below is a summary of the remaining principal payments due over the life of the term loans as of May 31, 2023.

(in thousands)

Year Principal Payments

Total Term Loan Remaining Payments $ 79,441

Starion Term Loan

On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of the Company, entered into a loan agreement with Starion Bank 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 under the Starion Loan Agreement until May 31, 2024.

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

Deferred financing costs related to the Starion Term Loan total $ 0.1 million.

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.

The Company has entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5 % for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”).

The loan totals $ 0.2 million and bears an interest rate of 2 %, and the bond totals $ 0.5 million.

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

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

Vantage Garden City Loan

On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned indirect subsidiary of the Company, entered into a loan agreement with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan in the principal amount of $ 15 million (the “Vantage Garden City Loan Agreement”).

The loan pursuant to the Vantage Garden City Loan Agreement will be advanced in 16 installments, with each installment not exceeding approximately $ 0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”).

The unpaid principal amount of the Garden City Facility will bear interest at a fixed rate of 6.15 % per annum, and the Company may prepay the Garden City Facility, in whole or in part, without the payment of any fee or penalty.

The Garden City Facility matures April 26, 2028.

The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default.

As of May 31, 2023, an aggregate amount of $ 10.3 million has been advanced under the Vantage Garden City Loan Agreement, with the outstanding balance totaling $ 10.1 million.

Total deferred costs related to the issuance of this loan total are $ 0.2 million.

Starion Ellendale Loan

On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”).

The Ellendale Loan Agreement provides for a term loan in the principal amount of $ 20 million with a maturity date of February 3, 2028.

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

The Ellendale Loan Agreement provides for an interest rate of 7.48 % per annum.

The proceeds of the loan under the Ellendale Loan Agreement will be used to fund expansion on the Ellendale, North Dakota hosting datacenter.

Total deferred costs related to the issuance of this loan total are $ 0.2 million.

As of May 31, 2023, the total balance outstanding under the Ellendale Loan Agreement was $ 19.7 million.

On May 23, 2023, Sai Computing LLC, a wholly-owned subsidiary of the Company, entered into a Loan and Security Agreement (the "B.

Riley Loan and Security Agreement") with B.

Riley Commercial Capital, LLC and B.

Riley Securities, with the Company as Guarantor.

Riley Loan and Security Agreement provides for a term

loan of up to $ 50 million in the principal with an interest rate of 9.00 % per annum (the "B.

Riley Loan").

The proceeds of the B.

Riley Loan will be used to provide additional liquidity to help fund the buildout of the Company’s recently announced AI cloud services platform and datacenters by the Company, and for general corporate purposes and working capital.

Riley Loan and Security Agreement contains initial fees of approximately $ 1.5 million that were reduced from the initial funds remitted to the Company.

Riley Loan and Security agreement also contains a term fee of $ 1 million that is due upon the Company's initial principal payment.

Finally, the B.

Riley Loan and Security agreement contains a commitment fee of 3 % on any balance outstanding as of each quarter end beginning with the calendar quarter ending September 30, 2023.

As of the date of May 31, 2023, the total outstanding balance of the B.

Riley Loan was $ 36.5 million.

The Company recorded income tax benefit of $ 0.5 million for the year ended May 31, 2023, compared to income tax expense of $ 0.5 million for the year ended May 31, 2022.

The Company’s effective tax rate was 1.2 % and ( 2.4 )%, for the years ended May 31, 2023 and 2022 respectively.

(in thousands) For the Fiscal Year Ended

May 31, 2023 May 31, 2022

Current expense / (benefit)

Federal $ — $ —

Total current benefit $ — $ —

Total current expense $ 18 $ —

Deferred expense / (benefit)

Federal $ ( 540 ) $ 540

Total deferred expense $ 540 —

Total income tax expense $ 540 $ —

Total deferred (benefit) expense $ ( 540 ) $ 540

Total income tax (benefit) expense $ ( 523 ) $ 540

The following table reconciles the statutory rate to our effective tax rate:

May 31, 2023 May 31, 2022

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

Statutory Rate 21.0 % 21.0 %

Federal income tax benefit 0.6 % — %

Permanent differences ( 0.9 %) — %

Current and deferred state taxes 3.9 % — %

Stock-based compensation ( 6.0 ) % — %

State income taxes, net of federal tax benefit — % 4.5 %

Change in valuation allowance ( 13.0 ) % ( 27.0 ) %

Other, net ( 0.8 ) % ( 0.9 ) %

Income tax expense / (benefit) 1.2 % ( 2.4 ) %

Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes.

The primary components of the temporary differences that gave rise to the Company’s deferred tax assets and liabilities are as follows for the year

ended May 31, 2022, and 2021:

The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities are as follows for the year ended May 31, 2023, and 2022:

(in thousands) May 31, 2023 May 31, 2022

Deferred Tax Assets:

Intangibles $ 78 $ —

Lease Adjustment 2,080 —

Federal Net Operating Loss 9,158 175

Charitable Contributions 17 —

Passthrough Entities 13 —

Valuation Allowance ( 6,393 ) ( 175 )

Net Operating Loss $ 15,137 $ 11,971

Stock-Based Compensation 3,068 —

Capitalized Research and Development 897 —

Lease Liability 1,875 2,080

Other 360 248

Gross Deferred Tax Assets 21,337 14,298

Valuation Allowances ( 15,697 ) ( 9,346 )

Total Net Deferred Tax Asset $ 5,640 $ 4,953

Deferred Tax Liability

Deferred Tax Liabilities:

Property, Plant, and Equipment $ ( 3,712 ) $ ( 3,407 )

Lease Adjustment ( 2,086 ) —

Total Net Deferred Tax Asset $ ( 5,493 ) $ —

Deferred Tax Liability, Net $ ( 540 ) $ —

The Company had federal tax net operating losses of $ 35.6 million and $ 568 ,000 at May 31, 2022 and 2021, respectively.

The May 31, 2021 and May 31, 2022 losses can both be carried forward indefinitely.

Right of Use Assets ( 1,929 ) ( 2,086 )

Total Net Deferred Tax Liability ( 5,640 ) ( 5,493 )

Net deferred tax assets (liabilities) $ — $ ( 540 )

The Company had $ 114.8 million and $ 83.6 million of federal and state tax net operating losses at May 31, 2023 and 2022, respectively.

At May 31, 2023, $ 99.3 million is available indefinitely to offset future income.

The remaining carryforward amounts expire at varying dates beginning in 2028.

A valuation allowance is provided when it is more likely than not that some portion or the entire net deferred tax asset will not be realized.

The Company has recorded an increase in the valuation allowance of $ 6.2 million and $ 120 ,000 as of May 31, 2022 and 2021, respectively.

The Company has recorded an increase in the valuation allowance of $ 6.3 million and $ 6.2 million as of May 31, 2023 and 2022, respectively.

The Company has provided a valuation allowance for the portion of the deferred tax assets that it has determined are not more likely than not to be recognized.

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Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income.

The Company did not have any unrecognized tax benefits for the years ended May 31, 2022, and 2021, respectively.

The Company recognizes interest expense related to unrecognized tax benefits in income tax expense.

The Company did not have any interest expense or expense for penalties related to unrecognized tax benefits for the reported periods.

The Company is subject to U.S.

2 unchanged sentences

The Company is not currently under examination by the IRS or any other taxing jurisdictions for any tax years.

REDEEMABLE EQUITY

Series C Preferred Stock

As of May 31, 2021, 660,000 shares of Series C Preferred Stock were outstanding.

The shares of Series C Preferred Stock were 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.

The Series C Preferred Stock was entitled to participate on an as-converted basis in any dividends paid to the holders of Common Stock.

The Series C Preferred Stock was entitled to Paid-in-kind (“PIK”) Dividends which accrued based on a percentage of the Stated Value, which ranged from 10 - 15 % per annum, depending on when the Company filed a registration statement for its common stock, and when the registration statement was declared effective by the SEC and the common stock began trading on a public market.

The Company accrued PIK dividends at 12 % per annum of the Stated Value from December 15, 2021, until April 12, 2022, when the Company's registration statement was declared effective by the SEC.

The Series C Preferred Stock did not accrue any other PIK Dividends.

The Series C Preferred Stock was subject to automatic conversion on the date on which the Company's registration statement was declared effective by the SEC (the “Conversion Date”), at which point all outstanding shares of Series C Preferred Stock were 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 $ 0.75 in effect on the Conversion Date.

All rights with respect to the Series C Preferred Stock terminated on the Conversion Date.

Pursuant to the automatic conversion provision, 685,633 Shares of Series C Preferred Shares, which included 25,633 shares issued to settle PIK dividends, were converted to Common Stock on April 12, 2022.

Upon conversion, the Company issued 22,865,857 shares of Common Stock to the holders of Series C Preferred Stock.

Series D Preferred Stock

1,380,000 Shares of Series D Preferred Stock were issued during the year ended May 31, 2022 for gross proceeds of $ 34,500 .

The Company incurred $ 2,927 of issuance costs related to the Series D Preferred Stock.

The shares of Series D Preferred Stock were 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 ranked pari passu with the Series C Preferred Stock.

The Series D Preferred Stock accrued PIK dividends under the same terms as the Series C Preferred Stock.

The Company accrued PIK dividends at 12 % of the stated value of the Series D Preferred Stock from December 15, 2021 to April 12, 2022, when the Company's registration statement was declared effective.

The Series D Preferred Stock was subject to automatic conversion on the Conversion Date.

All shares of Series D Preferred Stock were 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 of $ 2.64 in effect on such Conversion Date.

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

Pursuant to the automatic conversion provision, 1,433,587 Shares of Series D Preferred Shares, which included 53,587 shares issued to settle PIK dividends, were converted to Common Stock on April 12, 2022.

Upon conversion, the Company issued 13,575,634 shares of Common Stock to the holders of Series D Preferred Stock.

As of May 31, 2022, there are no shares of Series D or Series C Preferred Stock outstanding.

STOCKHOLDERS’ EQUITY (DEFICIT)

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

As of May 31, 2022 and 2021, 97,837,798 and 1,511,061 shares of Common Stock were outstanding, respectively.

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 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 of an effective registration statement for the reserved underlying shares will be met.

The fair value of the restricted stock was estimated to be $ 11.0 million.

The Company's restricted stock shares are considered to be nonvested share awards.

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 covering the resale of the shares of common stock comprising the stock award shares 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.

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”) 95 %

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

As the performance condition of an effective registration statement covering the resale of the shares of common stock comprising the restricted stock and RSUs to officers, non-employee directors, and consultants has not been met as of May 31, 2022, no expense has been recognized for the year ended May 31, 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

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 %

Weighted-average fair value $ 0.750

Series A Convertible Preferred Stock

Each share of Series A Convertible Preferred Stock (“Series A Preferred Stock”) had a liquidating 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 accrued quarterly and were 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 upon this conversion.

Series B Convertible Preferred Stock

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

The dividends are accrued quarterly and are 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 upon this conversion.

Series C Convertible Preferred Stock

Each share of Series C Convertible Preferred Stock (“Series C Preferred Stock”) has a liquidating value of $ 25 per share, is convertible into 1,000 shares of Common Stock of the Company (subject to adjustment) and pays a dividend in kind of 10 %.

The dividends are accrued quarterly and are based on the original purchase price of the Series C Preferred Stock.

All shares of Series C Preferred Stock were converted, effective April 12, 2022, to shares of Common Stock.

22,865,857 shares of Common Stock were issued in exchange for the Series C Convertible Preferred Stock upon this conversion.

Series D Convertible Preferred Stock

Each share of Series D Convertible Preferred Stock (“Series D Preferred Stock”) has a liquidating value of $ 25 per share, is convertible into 1,000 shares of Common Stock of the Company (subject to adjustment) and pays a dividend in kind of 10 %.

The dividends are accrued quarterly and are based on the original purchase price of the Series D Preferred Stock.

All shares of Series D Preferred Stock were converted, effective April 12, 2022, to shares of Common Stock.

13,575,634 shares of Common Stock were issued in exchange for the Series D Convertible Preferred Stock upon this conversion.

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

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

As of May 31, 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 several finance leases for equipment and land as of May 31, 2022.

As of May 31, 2022, the Company did have one significant finance lease balance related to a land lease related to the Company's Garden City, TX facility.

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 May 31, 2022, and May 31, 2021, the balance of the right of use assets were $ 6.4 million and $ 0 , respectively, and the balance of the lease liability is $ 6.3 million and $ 0 , respectively, for the Company’s office lease, land 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 Presentation May 31, 2022

Operating Lease Assets Right of use asset, net $ 1,110

Finance lease assets Right of use asset, net 5,298

Total lease assets $ 6,408

Operating Lease liabilities Current portion of operating lease liability 191

Operating Lease liabilities Long-term portion of lease Liability 936

Total Operating Lease Liabilities $ 1,127

Finance lease liabilities Current portion of lease liability $ 813

Finance Lease liabilities Long-term portion of lease liability 4,374

Total Finance Lease Liabilities $ 5,187

Total lease liabilities $ 6,314

The Company presents lease costs under ASC 842 is as follows:

Lease Type Consolidated Statements of Operations Presentation Year Ended

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

As of May 31, 2023, the Company had issued approximately 0.6 million shares of restricted stock awards and approximately 12.4 million of restricted stock units under the plans.

Restricted Stock Awards

The following is a summary of the activity and balances for unvested restricted stock awards granted for the fiscal year ended May 31, 2023:

Number of Shares Weighted Average Grant Date Fair Value Per Share

Outstanding as of May 31, 2022 1,366,666 $ 8.04

Granted 551,605 $ 2.19

Vested ( 1,537,316 ) $ 7.38

Forfeited — $ —

Outstanding as of May 31, 2023 380,955 $ 2.22

As of May 31, 2023, total remaining expense to be recognized related to these awards was $ 0.8 million and the weighted average remaining recognition period for the unvested awards was 5 months.

Restricted Stock Units

The following is a summary of the activity and balances for unvested restricted stock units granted for the fiscal year ended May 31, 2023:

Number of Shares Weighted Average Grant Date Fair Value Per Share

Outstanding as of May 31, 2022 1,791,666 $ 8.04

Granted 12,391,207 $ 2.28

Vested ( 1,180,525 ) $ 6.41

Forfeited ( 536,413 ) $ 6.71

Outstanding as of May 31, 2023 12,465,935 $ 2.53

As of May 31, 2023, total remaining expense to be recognized related to these awards was $ 31.5 million and the weighted average remaining recognition period for the unvested awards was 24 months.

Share Forfeiture

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

Sparkpool had 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 returned to the Company and placed in treasury.

The Company has entered into leases for hosting equipment, office space, and land.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions.

The liabilities are split between current and long-term, respectively.

The Company presents lease costs as follows:

(in thousands) Fiscal Year Ended

Lease Type Consolidated Statements of Operations Presentation May 31, 2023 May 31, 2022

Operating lease cost:

Operating lease expense Selling, General and Administrative $ 347 $ 328

Short-term lease expense Selling, General and Administrative 187 126

Sublease Income Selling, General and Administrative ( 103 ) ( 159 )

Total operating lease cost $ 431 $ 295

Finance lease expense:

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Interest on finance leases Interest Expense 773 50

Short-term lease expense Selling, General and Administrative 126

Variable lease expense Selling, General and Administrative —

Variable finance lease expense Selling, General and Administrative 3 —

Total finance lease cost $ 4,112 $ 161

Total Lease Cost $ 4,543 $ 456

The following table represents the Company’s future minimum operating lease payments as of May 31, 2022, under ASC 842 (in thousands):

The following table represents the Company’s future minimum lease payments as of May 31, 2023:

(in thousands)

Year Operating Leases Finance Leases Total

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

Operating Leases Finance Leases

Weighted-average years remaining 4 years 57 years

Fiscal Year Ended

May 31, 2023 May 31, 2022

Weighted-average years remaining (in years)

Finance leases 22 57

Operating leases 3 4

Weighted-average discount rate

Cash paid for the amounts included in the measurement of lease liabilities:

Operating cash flows $ 310 $ 50

Financing cash flows $ — $ 221

Finance leases 8 % 8 %

Operating leases 11 % 13 %

The Company has entered into operating leases signed but not yet commenced with total minimum payments of approximately $ 83.1 million to support the Company's AI Cloud service business.

The payments are expected to be made over a total of 84 months.

The Company has entered into finance leases signed but not yet commenced with total minimum payments of approximately $ 8.5 million.

The payments are expected to be made over a total of 30 months.

COMMITMENTS AND CONTINGENCIES

As of May 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.

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

As of May 31, 2023, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 10 - Leases , respectively.

The Company also has the following commitments:

Jamestown Energy Services Agreement

The Company has a commitment of approximately $ 28 million related to the energy services agreement for its Jamestown, North Dakota hosting facility.

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 fiscal year, as the company commits to specific power consumption on an annual basis as part of the energy services agreement.

The Company purchased approximately $ 8.1 million and $ 0 in power under the energy services agreement for the fiscal years ended May 31, 2022 and May 31, 2021, respectively.

The Company has no other commitments or contingencies as of May 31, 2022.

The Company has other purchase commitments of approximately $ 10.2 million related to the buildout of its AI Cloud hosting services business and insurance premiums.

These commitments are expected to be fulfilled within twelve months of May 31, 2023.

The Company also has a commitment for 1,024 H100 GPUs to support its AI Cloud services business, which has been subsequently financed through an arrangement totaling approximately $ 41 million over 24 months as discussed in Note 14 - Subsequent Events .

Contingencies

Letter of Credit

As of May 31, 2023 and May 31, 2022, the Company had letters of credit outstanding totaling $ 14.5 million and $ 7.5 million, respectively.

As discussed in Note 3 - Basis of Presentation and Significant Accounting Policies , the Company is required to maintain these amounts in separate accounts, and therefore the cash is restricted.

Further, the Company had no unused lines of credit as of May 31, 2023 or May 31, 2022, respectively.

The Company has agreed to enter into mediation, tentatively scheduled for August 18, 2023, around the allegations previously announced by the Company on June 23, 2023.

The Company estimates the potential range of loss based on such allegations to be $ 0 to $ 1 million.

Claims and Litigation

6 unchanged sentences

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

Refer to Note 9 - Redeemable Equity for details on outstanding classes of preferred shares.

As of May 31, 2023, the Company had approximately 12.8 million shares of granted but unvested restricted stock and restricted stock units that would have a potentially dilutive effect on earnings per share.

Earnings per share for the year ended May 31, 2023 and 2022 are shown in the following table:

Basic and diluted income (loss) per share:

(in thousands, except for share and per share data) Fiscal Year Ended

May 31, 2023 May 31, 2022

3 unchanged sentences

Net Loss attributable to noncontrolling interest ( 960 ) ( 10 )

Net loss attributable to Applied Blockchain $ ( 23,520 ) $ ( 568 )

Net loss attributable to Applied Digital Corporation $ ( 44,646 ) $ ( 23,520 )

Continuing operations $ ( 0.49 ) $ ( 0.39 )

3 unchanged sentences

DISCONTINUED OPERATIONS

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

The assets sold were reflective of the entire mining reportable segment.

As the Company completed the sale of the assets shortly after the quarter ended February 28, 2022, the Company used the sale price and actual costs to sale to determine actual carrying value of the assets held for sale, and recorded a loss to write the assets down to their fair value.

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 grows.

During the fiscal year ended May 31, 2022, the Company recognized a net loss from discontinued operations related to the Company's cryptocurrency mining operation.

The Company had no results from discontinued operations during the year ended May 31, 2023.

Operating results of discontinued operations are summarized below:

May 31, 2022 May 31, 2021

(in thousands) Fiscal Year Ended

Cryptoasset Mining Revenue $ 2,987

Mining Revenue Pool Fees 51 —

Cryptoasset Mining Revenue, Net 2,987 —

Cost of Sales 1,611

4 unchanged sentences

Net Loss from Discontinued Operations $ ( 1,044 )

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 May 31, 2022 and 2021, the Company did not hold any cryptoassets.

For the year ended May 31, 2022, and 2021, the Company recorded impairment expense of $ 393 ,000 and $ 0 , respectively.

The following table presents a summary of cryptoasset activity for the year ended May 31, 2022.

Beginning Balance - May 31, 2021 $ —

Cryptoassets earned through mining 3,038

Mining pool operating fees ( 51 )

Cryptoassets sold or converted ( 3,380 )

Impairment of Cryptocurrency Assets 393

Ending Balance - May 31, 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 Note 5 - Revenue from Contracts with Customers .

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 had 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.

As noted above, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment in service on March 9, 2022.

SUBSEQUENT EVENTS

Sparkpool Share Cancellation

On June 6, 2022, through a letter 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, which is described in Note 10 - Stockholders' Equity (Deficit) .

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, reducing the number of shares of Common Stock outstanding.

Marathon Digital Hosting Agreement

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

("Marathon") for 200 -Megawatts ("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.

New Term Loan Agreement

On July 25, 2022, Hosting 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.

Advances on the Starion Term Loan shall not exceed the principal total of $ 15 million.

The first advance on the Starion Term Loan was made at the time the Starion Loan Agreement was entered into and was not to exceed 80 % of the total principal amount of the Loan, or $ 12 million.

The remaining 20 % balance of this Loan shall be available for advance following Hosting's proof of 100 % intended operating capacity at the Property.

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

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

Contingent 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.

Deferred financing costs related to the Starion Term Loan totals $ 10 ,000.

The Loan is secured by a mortgage on the Property, and a security interest in the substantially all of the assets of Hosting 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 Hosting'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.

VBT Term Loan Repayment

On August 5, 2022, the VBT Term Loan was paid off in full and the VBT Term Loan Agreement and the associated VBT Mortgage were terminated.

Land Purchase

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.

Financing Arrangements

The Company entered into a finance arrangement for approximately $ 41 million over 24 months for 1,024 H100 GPUs in connection with its AI Cloud Services business.

Additional Debt Financing

The Company received an additional $ 3 million in funding from the B.

Riley Loan and Security Agreement, bringing the total outstanding loan principal balance to $ 39.5 million.

Subsequently, the Company repaid the entire outstanding loan principal balance, along with all outstanding interest and fees.

Common Stock Issuance

The Company began issuing common stock under an "at the market" sale agreement pursuant to which the Company may sell up to $ 125 million in shares of Common Stock.

The Company has sold approximately 7.9 million shares.

Net proceeds, less commission fees of approximately $ 2.0 million, are approximately $ 64.7 million.

Customer Prepayment

The Company has confirmed receipt of a customer prepayment for its AI cloud services business of approximately $ 22.5 million.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data