What changed in this filing

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Item 1. Financial Statements

2022-05-13 compared with 2009-04-13 · 750 added, 440 removed, 25 unchanged (98% of the section changed)

Financial Statements

FLIGHT SAFETY TECHNOLOGIES, INC.

APPLIED BLOCKCHAIN, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Consolidated Balance Sheets (Unaudited)

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

February 28, 2022 May 31, 2021

Current Assets:

Cash and cash equivalents $ 11,961 $ 11,750

Customer receivables

Investment, at fair value

Other current assets

Machinery and equipment, net of accumulated

depreciation of $449,440 and $478,149, respectively

Other assets:

Intangible assets, net of accumulated

amortization of $104,589 and $10,662, respectively

Other receivable

Liabilities and Shareholders' Equity

Accounts receivable 1,038 —

Prepaid expenses and other current assets 2,096 5

Current assets of discontinued operations 3,573 —

Total current assets 18,668 11,755

Right of use asset, net 1,207 —

Deposit on equipment — 3,277

Property and equipment, net 43,619 20

TOTAL ASSETS $ 63,494 $ 15,052

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY

Current Liabilities:

Accounts payable

Accrued expenses

Accounts payable and accrued liabilities $ 13,038 $ 248

Accrued dividends — 116

Notes payable and current portion of long-term debt

Long-term note payable

Stockholders' equity:

Series A, convertible preferred stock, $.001 par value

authorized 70,000 shares, 24,400 issued and

outstanding, less notes receivable of $29,333

Common stock, $.001 par value, 50,000,000 shares

authorized, 8,981,363 and 8,431,510 shares

outstanding, respectively

Current portion of lease liability 211 —

Related party notes payable — 2,135

Customer deposits 5,645 —

Deferred revenue 3,909 —

Other current liabilities 16 —

Total current liabilities 22,819 2,500

Deferred tax liability 274 —

Long-term portion of lease liability 1,009 —

Other Long Term Liabilities 50

Total liabilities 24,152 2,500

Commitments and contingencies (Note 12)

Mezzanine equity:

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

$ 15,537 $ 15,135

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

Total mezzanine' equity 47,951 15,135

Shareholders' equity (deficit):

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

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

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

Additional paid in capital 43,657 13,874

Treasury stock, 36,300 shares, at cost

( 62 ) ( 62 )

Accumulated deficit ( 52,524 ) ( 21,623 )

Total Liabilities and Shareholders' Equity

The accompanying notes are an integral part of these consolidated financial statements

FLIGHT SAFETY TECHNOLOGIES, INC.

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

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

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE-MONTHS ENDED

FEBRUARY 28, 2009 AND FEBRUARY 29, 2008 (unaudited)

Three-months ended

Nine-months ended

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

Three Months Ended Nine Months Ended

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

Hosting revenue $ 1,026 $ — $ 1,026 $ —

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

Cost of revenues $ 2,073 $ — $ 2,073 $ —

Operating expenses:

Gross Profit ( 1,047 ) — ( 1,047 ) —

Costs and expenses:

Selling, General and Administrative 1,356 — 3,234 —

Depreciation and amortization

Research and development

Total operating expenses

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

Depreciation 14 — 14 —

Total costs and expenses 1,370 — 15,585 —

Operating loss ( 2,417 ) — ( 16,632 ) —

Interest income (expense), net

Loss before provision for income

Provision for income taxes

Dividends on preferred stock

Net loss to common shareholders

$ (2,440,663)

Net loss per common share:

Weighted average number of common

shares outstanding:

The accompanying notes are an integral part of these consolidated financial statements

FLIGHT SAFETY TECHNOLOGIES, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED

Cash flows from operating activities:

Net loss to common shareholders

$ (1,241,830)

Other income (expense):

Interest Expense — ( 77 ) 0 ( 223 )

Gain on Extinguishment of Accounts Payable 80 — 405 —

Loss on Extinguishment of Debt — — ( 1,342 ) —

Income Tax Expenses ( 60 ) — ( 274 ) —

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

Net Loss from continuing Operations ( 2,397 ) ( 77 ) ( 17,843 ) ( 223 )

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

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

Basic and diluted net loss per share:

Continuing Operations $ ( 0.04 ) $ ( 0.05 ) $ ( 0.35 ) $ ( 0.15 )

Discontinued Operations $ ( 0.08 ) $ — $ ( 0.06 ) $ —

Basic and diluted net loss per share $ ( 0.12 ) $ ( 0.05 ) $ ( 0.41 ) $ ( 0.15 )

Basic and diluted weighted average number of shares outstanding 53,396,920 1,511,061 50,546,048 1,511,061

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except per share data)

Three Months Ended February 28, 2022

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

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

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

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

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

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

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

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

Three Months Ended February 28, 2021

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

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

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

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

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

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except per share data)

Nine Months Ended February 28, 2022

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

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

Balance, May 31, 2021 660,000 $ 15,135 — $ — $ 15,135 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 $ 13,874 $ ( 62 ) $ ( 21,623 ) $ ( 2,583 )

Extinguishment of Debt — — — — — — — — — 5,083,828 31 3,446 — — 3,477

Issuance of Dividends to Preferred Stock — — — — — 60,822 6,082 29,772 2,979 — — — — ( 8,946 ) 115

Conversion of Preferred Stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 172 14,108 — — —

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

Issuance of Preferred Stock — — 1,380,000 34,500 34,500 — — — — — — — — — —

Issuance Costs of Preferred Stock — — — ( 2,926 ) ( 2,926 ) — — — — — — — — — —

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

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

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

Nine Months Ended February 28, 2021

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

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Shareholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

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

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

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

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands of dollars)

Nine Months Ended

February 28, 2022 February 28, 2021

CASH FLOW FROM OPERATING ACTIVITIES

Net Loss attributable to Applied Blockchain, Inc.

$ ( 20,713 ) $ ( 223 )

Adjustments to reconcile net loss to net cash used in

operating activities:

Net Loss from discontinued operations ( 2,870 ) —

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

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

Depreciation and amortization 14 —

Share-based compensation

Gain on disposition of assets

Common stock issued pursuant to legal settlement

Loss on Extinguishment of Debt 1,342 —

Gain on Extinguishment of Accounts Payable ( 405 ) —

Stock-Based Compensation for Service Agreement 12,337 —

Amortization of Right of Use Asset 136 —

Deferred Tax 274 —

Changes in Operating Assets and liabilities:

Customer and other receivables

Accrued dividends

Other current assets

Accounts payable and accrued expenses

Net cash used in operating activities

Cash flows from investing activities:

Purchase of furniture and equipment

Proceeds from sale of investment securities

Proceeds from sale of assets

Cash of business acquired

Accounts receivable ( 1,038 ) —

Prepaid expenses and other current assets ( 2,091 ) —

Accounts payable and accrued liabilities 10,654 223

Payments of operating leases ( 233 ) —

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

Net cash provided by operating activities of discontinued operations 966 —

NET CASH PROVIDED BY OPERATING ACTIVITIES 4,113 —

CASH FLOW FROM INVESTING ACTIVITIES

Purchases of property and equipment ( 31,457 )

Deposit on equipment 3,277 —

Payments for patents and trademarks — —

Net cash provided by investing activities

Cash flows from financing activities:

Repayment of debt

Sale of preferred stock, net of notes receivable issuance

Net cash provided by financing activities

Net cash used in investing activities of continuing operations ( 28,180 ) —

Net cash used in investing activities of discontinued operations ( 7,408 ) —

NET CASH USED IN INVESTING ACTIVITIES ( 35,588 ) —

CASH FLOW FROM FINANCING ACTIVITIES

Dividends Issued on preferred stock — —

Conversion of preferred stock to common stock 115 —

Issuance of common stock — —

Issuance of preferred stock 34,500 —

Repayment of finance leases ( 2 ) —

Issuance cost for preferred stock ( 2,927 ) —

Net cash provided by financing activities of continuing operations 31,686 —

Net cash provided by financing activities of discontinued operations — —

CASH FLOW PROVIDED BY FINANCING ACTIVITIES 31,686 —

NET DECREASE IN CASH AND CASH EQUIVALENTS 211 —

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental non-cash disclosures:

Issuance of common stock for purchase of furniture

and equipment and license fee

Issuance of preferred stock for acquired business

Issuance of notes payable to finance prepaid expenses

Issuance of notes receivable in exchange for preferred

Proceeds on asset sale offset by amounts due

The accompanying notes are an integral part of these consolidated financial statements

FLIGHT SAFETY TECHNOLOGIES, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE NINE-MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008

Series A Convertible

Preferred Stock

Stockholders'

Issuance of treasury stock

Common stock issued

Share-based compensation

February 29, 2008

$(11,782,459)

$(12,628,125)

Share-based compensation

Issuance of stock

Sale of preferred stock

Note payments

Acquisition of CFP

Dividend on preferred stock

February 28, 2009

$(13,869,955)

The accompanying notes are an integral part of these consolidated financial statements

FLIGHT SAFETY TECHNOLOGIES, INC.

AND SUBSIDIARY

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

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

cash and cash equivalents of discontinued operations $ — $ —

Cash and cash equivalents of continuing operations $ 11,961 $ —

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Right-of-use asset obtained by lease obligation $ 1,207 $ —

Fixed assets in accounts payable $ 12,156 $ —

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND Subsidiaries

Notes to Consolidated Financial Statements

FOR THE THREE AND NINE MONTHS ENDED

FEBRUARY 28, 2009 AND FEBRUARY 29, 2008

Basis of Presentation

The interim consolidated financial statements include the accounts of Flight Safety Technologies, Inc.

and it's newly formed wholly-owned subsidiary Advanced Plasma Products, Inc.

("APP") and as of January 1, 2009, its recently acquired wholly-owned subsidiary Cummins Family Produce, Inc.

On August 7, 2008, the Company executed a letter of intent with the University of Tennessee Research Foundation (UTRF) for the licensing of patent rights related to atmospheric glow plasma technology.

The agreement provides for exclusive worldwide rights to commercialize the technology in all but a few fields of use.

The letter of intent provides for an initial license fee of $150,000 payable in shares of common stock of the Company and minimum annual royalty payments starting in year two.

Additionally, in a related transaction, on August 28, 2008, Advanced Plasma Products, Inc.

purchased the assets of Atmospheric Glow Technologies, Inc., the previous licensee of this technology and a company in bankruptcy.

These assets included essential instrument prototypes, engineering drawings, test equipment and a variety of facility related assets.

We paid $125,000 in cash and issued 289,436 shares of our common stock valued at $200,000.

On September 10, 2008 , we concluded our agreement with UTRF and subsequently issued 260,417 shares of our common stock as payment for the license fee.

As of January 1, 2009, we acquired 100% of the outstanding stock of Cummins Family Produce, Inc., a potato packing business located in Idaho.

The consideration we provided is the assumption of a bank promissory note in the amount of approximately $204,000 and 20,000 shares Preferred Stock (see note 10) valued at $2 million.

Under a performance based earn-out provision, we are obligated to issue an additional number of shares of Preferred Stock, such that the total purchase price is equal to 4.25 times the yearly average earnings before interest, taxes, depreciation and amortization calculated over the next two years, less the value of the bank promissory note assumed.

Immediately prior to this transaction, CFP executed (a) a 5-year supply agreement with its primary growers who will provide their entire potato harvest to the packing facility and (b) a 5-year lease agreement whereby CFP will lease the packing facility and equipment from the prior owners.

We believe that both agreements reflect current pricing in the industry.

We have no rights to renew these agreements.

See Notes 10 and 11 to our consolidated financial statements for a more detailed explanation of these transactions and for related party information.

These interim financial statements for the three and nine-months ended February 28, 2009 and February 28, 2008, included herein, have been prepared, without audit, pursuant to the rules and regulations of the SEC.

Results for the periods presented are not necessarily indicative of results for the entire year.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, which are necessary for a fair statement of operating results for the interim periods have been made.

These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with our financial statements and related footnotes for the years ended May 31, 2008 and 2007 which are included in our annual report on Form 10-KSB filed on August 29, 2008.

Certain reclassifications have been made to prior interim period balances in order to conform to the current year's presentation.

Going Concern and Liquidity

The report of our independent registered public accountant issued in conjunction with our audited financial statements and notes thereto for the year-ended May 31, 2008 indicated that there is substantial doubt about our ability to continue as a going concern.

The Company has had recurring losses from operations that have diminished its financial resources.

Our liquidity to date has primarily been provided by revenue from government contracts and proceeds from the sale of our equity securities.

We have not been successful in securing any additional government funding and we will have to rely on the sale of our equity securities to generate sufficient working capital in order to successfully commercialize our newly acquired technology and to pay for our ongoing operations.

As a result of the lack of government funding for our aviation security technologies, we have suspended all related research and develop work.

On January 14, 2009, we completed a series of transactions in order to generate recurring cash flow and working capital.

See Notes 9 and 10 of Notes to Consolidated Financial Statements for a full description of the transactions.

However, we anticipate that by the end of April 2009, we will need to secure additional working capital financing, until product revenues and cash flow from CFP create a sustainable operation, of which there can be no assurance.

However, we cannot predict or estimate the timing or amount of our working capital needs with certainty as the timing and amounts will depend on many variables, such as potential third party development or licensing fees, the pace and success of our product development and sales, and cash generated by the transaction described in Note 10.

In the event we are unable to secure additional working capital as and when we need it, we will have to curtail our operations accordingly, thus slowing down our product development and marketing efforts.

Any curtailment of our operations could have a material adverse effect on our operations and financial position.

On September 29, 2008, we were delisted from the American Stock Exchange for failure to maintain the required listing standards.

We are currently trading on the over-the-counter market under the symbol "FLTS".

Summary of Significant Accounting Policies

Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and the reported amounts of revenue and expenses during the reporting period.

Material estimates that are particularly susceptible to significant change in the near term relate to the carrying values of receivables, inventory, intangible assets, and the calculation of share-based compensation.

Actual results could differ from those estimates.

Share-Based Compensation:

Effective June 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.

123, "Share-Based Payments (revised 2004)," (SFAS No.

123R) which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period).

Under SFAS No.

123R, the Company provides an estimate of forfeitures at initial grant date.

The Company elected the modified prospective transition method under SFAS 123R and accordingly has not restated periods prior to adoption.

The Company recognized compensation expense related to employee stock options of $11,649 and $34,947 for the three and nine months ended February 28, 2009, respectively and $9,749 and $142,224 for the three and nine months ended February 28, 2008, respectively.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option pricing model.

There were no options granted in each of the nine-months ended February 28, 2009 and February 29, 2008, respectively.

Loss Per Share:

Basic loss per share is computed by dividing net loss to common shareholders by the weighted average number of shares of common stock outstanding during the period.

For the interim periods presented the effect of stock options, warrants and convertible preferred stock was anti-dilutive;

therefore, they were not included in the computation of diluted loss per share.

The number of shares issuable upon the exercise of outstanding stock options, warrants and convertible preferred stock that were excluded from the computation as their effect would be anti-dilutive, were 7,967,875 and 3,953,215 for the nine months ended February 28, 2009 and February 29, 2008, respectively.

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

BUSINESS AND ORGANIZATION

Applied Blockchain, Inc.

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

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

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

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

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

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

The Company was originally incorporated in Nevada in May 2001.

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

from Applied Science Products, Inc.

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

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

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

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

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

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

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

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

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

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

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.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Initial Public Offering

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

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

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

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

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

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

LIQUIDITY AND FINANCIAL CONDITION

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

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.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

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

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

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

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

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

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

Use of Estimates

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

Actual results could differ significantly from those estimates.

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Revenue Recognition

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

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

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

Identify the contract, or contracts, with the customer;

Identify the performance obligations in the contract;

Determine the transaction price;

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

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

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

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

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

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

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

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

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

• Variable consideration;

• Constraining estimates of variable consideration;

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

• Noncash consideration;

• Consideration payable to a customer.

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

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

Three Months Ended Nine Months Ended

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

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

Invoiced hosting revenue 5,544 — 6,070 —

Recognized hosting revenue 1,026 — 1,026 —

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

Cash and Cash Equivalents

For purposes of reporting cash flows we consider all highly liquid investments with maturities of three months or less at the date of purchase to be cash and cash equivalents.

Revenue and Cost Recognition:

Our prior contracts with the United States government and our maritime industry customers are cost-reimbursable contracts that provide for a fixed profit percentage (base fee) applied to our actual costs to complete the work.

These contracts are subject to audit and adjustment by our customer, and are subject to cost limitations as provided by the contract and the Federal Acquisition Regulations.

The government has audited and accepted our rates through our fiscal year ended May 31, 2006.

For these contracts, revenue is recorded at the time services are performed based upon actual project costs incurred including a reimbursement for general, administrative, and overhead costs and the base fee.

The general, administrative, and overhead costs are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred subject to approval.

Revenue may be adjusted for our estimate of costs that may be categorized as disputed or unallowable as a result of cost overruns or the audit process.

Project costs include all direct material, labor and subcontracting costs.

General and administrative costs are charged to expense as incurred.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Changes in job performance, job conditions and estimated profitability and final contract settlements may result in revisions to chargeable costs and revenue recorded and are recognized in the period in which the revisions are determined.

Revenue related to additional claims under the contract is recorded at the lesser of actual costs incurred or the amount expected to be realized.

The Company recognizes revenue in accordance with the provision of the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No.

104 which establishes guidance in applying generally accepted accounting principles to revenue recognition in financial statements.

104 requires that four basic criteria must be met before revenue can be recognized:

(1) persuasive evidence of an arrangement exists;

(2) delivery has occurred or services rendered;

(3) the price to the buyer is fixed or determinable;

and (4) collectability is reasonably assured.

The Company`s shipping terms are customarily FOB shipping point.

Revenues for products sold in the normal course of business are recognized upon shipment when delivery terms are FOB shipping point and all other revenue recognition criteria have been met.

In regards to our newly acquired potato packing business (CFP) the cost of product (the amount we pay to the growers) is determined by subtracting from our selling price previously negotiated packing fees with the respective growers.

Inventories consist primarily of a base stock of consumable parts as relates to APP and packing materials and packed and loose potatoes as relates to CFP.

Inventories are valued at lower of cost or market as relates to APP and estimated selling price less packing fee as relates to CFP.

Machinery and Equipment:

Machinery and equipment are stated at original cost or fair value at the date of acquisition in the case of CFP and Advanced Plasma Products, Inc.

less accumulated depreciation.

Depreciation is computed using the straight-line method.

Cost and accumulated depreciation of assets retired or disposed of are removed from the accounts.

Gains and losses are recognized upon disposal of assets.

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

Fair Value of Financial Instruments

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

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

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

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

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

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

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

Unobservable inputs require significant management judgment or estimation.

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

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

Such determination requires significant management judgment.

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

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

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

Estimated useful lives by asset class are as follows:

Machinery & equipment 7-10 years

Furniture & fixtures 10 years

Automobiles 5 years

Software and computers 3-5 years

Intangible Assets:

At February 28, 2009, intangible assets consist of patent costs associated with, AWSM, TIICM™

and atmospheric glow technologies and the value of the supply contract between CFP and certain growers.

Acquisition costs related to obtaining new patents are capitalized.

Patent costs are being amortized using the straight-line method over the lesser of seventeen years from the date incurred or the remaining life of the underlying patent.

The supply contract is being amortized over its five-year term.

In accordance with Statement of Financial Accounting Standards No.

144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144) the Company assesses its intangible assets for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable.

Such circumstances may include a significant adverse change in legal factors or the business climate that could affect the value of the intangible assets.

The Company also considers the likelihood of obtaining required research and development funding in relation to patent valuation.

In determining recoverability, the Company must determine the asset's fair value, which may require Management to make significant assumptions about the future cash generating ability of the asset.

If an asset is determined to be impaired, the difference between the asset's fair value and book value is charged to expense in the period the impairment is identified.

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new basis.

Subsequent reversal of a previously recognized impairment loss is prohibited under SFAS 144.

Concentration of Credit Risk:

The Company had amounts in excess of $250,000 in a single bank during the year.

Amounts over $250,000 are not covered by the Federal Deposit Insurance Corporation.

Concentration of credit risk also exists with respect to investment securities and contract receivables.

The concentrated risk associated with contract receivables is mitigated by the fact that these receivables are due primarily from the United States Government.

The risk for investment securities is mitigated by an Investment Policy which, approved by the Board of Directors, restricts investing in fixed income securities below an "A" rating at the time of purchase and investments in asset backed securities, mortgage backed securities and collateralized mortgage obligations below a "AAA" rating at the time of purchase.

Research and Development:

Company sponsored research and development costs, including proposal costs and un-reimbursed expenditures for developmental activities, are charged to operations as incurred.

Income Taxes:

The Company uses the asset and liability method of accounting for income taxes.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized.

Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of enactment.

Our recent acquisition of CFP will create limitations on the use of our net operating loss carryforwards.

Retirement Savings Plan:

Effective July 1, 2004, the Company established a Retirement Savings Plan (the "Plan") under the provisions of Section 401(k) of the Internal Revenue Code.

Employees, as defined in the plan, are eligible to participate on their first day of employment.

Under the terms of the Plan, the Company can match up to the employee's contribution of 5% of gross pay.

The Company matching funds immediately vest 100%.

The Company discontinued its match in September 2008.

Lease Accounting

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

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

If a lease is

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

Variable lease costs are recognized as incurred.

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

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

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

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

Offering Costs

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

“Expenses of Offering”.

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

Recent Accounting Pronouncements

Fair Values of Assets and Liabilities:

The Company adopted Statement of Financial Accounting Standards No.

157 ("SFAS 157"), Fair Value Measurements , which provides a framework for measuring fair value under generally accepted accounting principles.

This Statement became effective for the Company on June 1, 2008 and did not have a material impact on the Company's consolidated financial statements.

The Company also adopted SFAS No.

159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No.

SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

The Company did not elect fair value treatment for any financial assets or liabilities upon adoption.

SFAS 159 also became effective for the Company on June 1, 2008 and did not have a material impact on the Company's consolidated financial statements.

In accordance with SFAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market.

Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;

quoted prices in markets that are not active;

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments or mortgage loans held for sale, for which the fair value is based on what the securitization market is currently offering for mortgage loans with similar characteristics.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Also, the Company may be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP.

These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The Company had no such adjustments as of February 28, 2009.

At May 31, 2008 the investment consisted of an auction market preferred security, valued using Level 2 methodology.

Customer Receivables

Customer receivables consisted of the following at:

February 28, 2009

Contract receivables-billed

Contract receivable-unbilled

Customer receivables

The amount classified as other receivables and contract receivable unbilled is a retained fee on a recently completed government contract.

Machinery and Equipment

Property and equipment are summarized by major classifications as follows:

Machinery and equipment

Furniture and fixtures

Software and computers

Less accumulated depreciation

Intangible Assets

Intangible assets currently consist of costs associated with the newly acquired atmospheric glow technology, the company's existing TIICM and AWSM technologies and a supply contract acquired through the acquisition of CFP (see Note 10).

As more fully explained in Note 2, the Company has suspended all further research and development on the TIICM and AWSM technologies, having an aggregate carrying value $64,714.

Accordingly, we continue to evaluate the carrying value of the TIICM and AWSM technologies to determine if those values have been impaired.

Our intangibles are as follows at February 28, 2009:

Supply contract

Patents and trademarks

Long-Term Note Payable

Long-term debt consists of the following:

Bank installment note-6%-payable in equal monthly

installments of $7,616 consisting of interest and principal.

Note due May 15, 2011

Less current portion

Long-term note payable

This note is personally guaranteed by one of our directors and former shareholder of CFP.

Stockholders' Equity

As of February 28, 2009 and May 31, 2008, the Company had 0 and 1,919,200 warrants outstanding, respectively, with exercise prices ranging from $3.30 to $5.40 and a weighted average exercise price of $3.49.

All of the Company's warrants expired January 29, 2009.

Stock Options:

Under the Company's 2005 Stock Incentive Plan, there are 1,470,000 shares available for future awards at February 28, 2009.

During the nine-month period ended February 28, 2009, no awards were made and 443,000 shares were cancelled.

The weighted average exercise price of the 600,000 options outstanding is $3.50.

The aggregate intrinsic value of the outstanding options is $0.

As of February 28, 2009 there was $18,400 of total unrecognized compensation cost related to the non-vested stock options that is expected to be expensed over the next 2 fiscal quarters.

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 December 2019, the FASB issued ASU No.

2019-12, “ Income Taxes (Topic 740):

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

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

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

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

In August 2020, the FASB issued ASU No.

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.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

PROPERTY AND EQUIPMENT

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

Estimated Useful Life February 28, 2022 May 31, 2021

Hosting Equipment

Electric Generation and Transformers 15 years $ 4,172 $ —

Office and computer equipment

Software 5 years 41 —

Computer Equipment 5 years 17 17

Furniture and Fixtures 7 years 432 4

Construction in Progress 4,677 —

Autos 5 years 135 —

General Equipment 5 years 8,955 —

Land & Building

Land Improvements 15 years 1,180 —

Building 39 years 23,181 —

Total cost of property and equipment $ 43,864 $ 21

Accumulated Depreciation ( 245 ) ( 1 )

Property Plant and Equipment, Net $ 43,619 $ 20

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

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

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

This loss has been presented within loss from discontinued operations.

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.

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

Hosting revenue

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

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

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

Customer contracts include advance payment terms.

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

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

Customer A 62 % — %

Customer B 16 % — %

Customer C 13 % — %

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

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

Customer A 62 % — %

Customer B 16 % — %

Customer C 13 % — %

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

Customer February 28, 2022 May 31, 2021

Customer A 62 % — %

Customer B 16 % — %

Customer C 13 % — %

Remaining Performance Obligations

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

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

RELATED PARTY NOTES PAYABLE

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

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

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

Nine Months Ended Period Ended February 28, 2022

Current expense (benefit) - Continuing Operations

Federal $ — $ —

State $ — $ —

Total current expense $ — $ —

Deferred expense (benefit)

Federal $ 274 $ —

State $ — $ —

Total deferred expense (benefit) $ 274 $ —

Total income tax expense (benefit) $ 274 $ —

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

February 28, 2022 February 28, 2021

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

statutory rate 21.00 % 21.00 %

Extinguishment of Debt - 0.79 %

State Tax Expense 0.00 % 0 %

Change in Valuation Allowance - 21.68 % - 21.00 %

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

REDEEMABLE EQUITY

Series C Preferred Stock

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

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

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

Series D Preferred Stock

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

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

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

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

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

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

APPLIED BLOCKCHAIN INC.

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Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

Conversion of Preferred Stock

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

333-258818) (the “Resale

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

Liquidation preferences table for Preferred Stock shown below:

Class of Stock Ranking Liquidation Preferences

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

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

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

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

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

Class of Stock Original Proceeds,

Net Accrued Dividends Redemption

Amount Liquidation

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

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

SHAREHOLDERS’ EQUITY (DEFICIT)

The Company is authorized to issue 166,666,666 shares of Common Stock at $ .001 par value per share.

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

Equity Compensation

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

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

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

The Company weighted two different scenarios as follow:

Scenario Weight

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

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

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

Share-Based Compensation

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

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

All shares were issued in June 2021.

Service Provider Common Stock

Shares Committed

ValueFinder 3,156,427

SparkPool 7,440,148

GMR 7,441,648

Total 18,038,223

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

All shares issued under the agreement were vested immediately.

Class of Stock Option Pricing Fair Value Weight

Common Stock $ 0.402 8 %

Conversion Price of Series C Shares 0.780 92 %

Series A Convertible Preferred Stock

Each share of Series A Convertible Preferred Stock ("Preferred Stock") has a liquidating value of $100 per share, is convertible into 1,429 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 paid quarterly and are based on the original purchase price of the Preferred Stock.

No dividends will accrue or be paid for any fiscal quarter where shares of our common stock, on a volume weighted average price, trade in excess of $0.14.

Initially, each share of Preferred Stock will have the equivalent voting rights of 1,429 shares of common stock and will vote with our existing common shareholders as a group on all matters subject to shareholder vote.

However, the Preferred Stock shareholders will not be able to vote on issues involving redemption or a liquidation event until there has been an affirmative vote on such issues by our common stock shareholders.

In that event, they will be allowed to vote as a group with the common stock shareholders on such issues, in effect, giving them a veto right.

In the event of a liquidation of the Company, the Preferred Stock will have a liquidating preference and will participate in any remaining liquidating proceeds on an as-converted basis with the common shareholders after receiving the liquidating value of their Preferred Stock.

Each share of Preferred Stock is convertible at the option of the holder at any time into shares of our common stock by dividing the liquidation value of $100 by a conversion price of $0.07 per share of common stock.

The number of shares of common stock issuable upon conversion is subject to antidilution protections if we issue additional shares of common stock at less than $0.07 per share and upon stock splits, dividends and certain other events.

Reference is made to the Certificate of Designation for a complete description of the terms of the Preferred Stock.

We will not register the shares of Preferred Stock or shares of common stock into which it may be converted with the U.S.

Securities and Exchange Commission so as to make them eligible for publicly trading, and have no obligation or plans to do so in the future.

Such shares will only be eligible to be sold or traded pursuant to the requirements of Rule 144, promulgated by the U.S.

Securities and Exchange Commission, and applicable state securities laws.

Sale Of Shares Of Preferred Stock

During the period January 13, 2009 through January 26, 2009, we sold 4,400 shares of our Preferred Stock for $100 per share to a group of investors (the "Investors") raising an aggregate of $440,000 of equity for working capital purposes.

Participating in this transaction are our two senior executives and three key employees (together "Employees").

The Employees purchased an aggregate amount of $100,000 of Preferred Stock.

Four of these employees purchased shares with a 20% cash payment and by executing a non-interest bearing promissory note payable semimonthly with a maturity date of March 31, 2009.

One of these employees purchased shares with an 8% cash payment and by executing a non-interest bearing promissory note payable semimonthly with a maturity date of October 31, 2009.

These notes are nonrecourse and collateralized solely by the employee's Preferred Stock.

The Preferred Stock sold herewith, is convertible at $0.07 per share into a total of 6,285,714 shares of the Company's common stock, significantly diluting our existing common stock shareholders.

We agree to indemnify Investors against damages they may suffer in the event of our breach of certain representations and warranties we have made.

Reference is made to the Certificate and the Investor Purchase Agreement for a complete description of the terms of the Preferred Stock.

The net proceeds were used for general working capital purposes.

Acquisition Of CFP With Shares Of Preferred Stock

Pursuant to a Purchase Agreement dated as of January 13, 2009 (the "CFP Purchase Agreement"), the Company acquired from the Cummins Family Limited Partnership, an Idaho limited partnership (the "Purchaser"), 100% of the outstanding stock of Cummins Family Produce, Inc., ("CFP") a potato packing business located in Idaho.

The general partner and majority limited partner of the Purchaser is Cummins Family Holdings, LLC, an Idaho limited liability company controlled by Mr.

Wes Cummins, a director of the Company.

In exchange, the Company assumed a bank promissory note in the amount of approximately $204,000 owed by Mr.

Cummins in connection with the operations of CFP and issued 20,000 shares Preferred Stock valued at $2 million.

Under a performance based earn-out provision, the Company is obligated to issue an additional number of shares of Preferred Stock, such that the total purchase price is equal to 4.25 times the yearly average earnings before interest, taxes, depreciation, and amortization, calculated over the next two years, less the value of the bank promissory note assumed.

Immediately prior to this transaction, CFP executed (a) a 5-year supply agreement with Southern Slope, Inc., and Black Rock Ag., Inc.

(together the "Growers") who will provide their entire potato harvest to the packing facility and (b) a 5-year lease agreement whereby CFP will lease the packing facility and equipment from Cummins Family Holdings, LLC.

The Company believes that both agreements reflect current pricing in the industry.

The Company has no rights to renew these agreements.

Cummins is a majority shareholder in Southern Slope, Inc.

and family members of his are the majority shareholders in Black Rock Ag., Inc.

The Preferred Stock initially issued to the Purchaser in regard to this transaction is convertible at $0.07 per share into a total of 28,571,429 shares of our common stock and has substantially diluted our existing common shareholders.

As a result of this transaction, Mr.

Cummins will control over 60% of the voting shares of the Company.

In the CFP Purchase Agreement, the Company agreed to indemnify the Purchaser against damages it may suffer in the event of our breach of certain representations and warranties the Company has made in that Agreement.

The Purchaser also has agreed to indemnify the Company against damages in the event of breaches in representations and warranties it has made relating to CFP and the Purchaser.

This acquisition was accounted for under the purchase method of accounting with results of operations for CFP included in our results beginning January 1, 2009.

Under the purchase method of accounting, the assets and liabilities of CFP were recorded at their respective fair values as of January 1, 2009.

The following condensed balance sheet of CFP discloses the amounts assigned to each major asset and liability caption at the acquisition date.

The allocation of the final purchase price is subject to adjustment based upon future EBITDA and as additional information becomes available.

January 1, 2009

Customer receivables

Other current assets

Supply contract (1)

Accounts payable

Accruals and other

Long-term note payable

Total liabilities

Net assets acquired

(1) the supply contract is being amortized over its 5-year term

The following unaudited pro-forma condensed consolidated statements of operations for the nine-months ended February 28, 2009 and February 29, 2008, reflects the consolidated results of operations as if the acquisition of CFP had occurred as of June 1, 2008 and 2007.

The historical information of CFP was not audited and the condensed financial information is based on the historical results of the Company and the unaudited results of CFP.

Unaudited pro-forma data is not necessarily indicative of the results that would have occurred had the acquisition taken place at the beginning of the periods presented, nor of future results.

Pro Forma Consolidated Combined Financial Statements

For the Nine-Months Ended February 28, 2009

Flight Safety (1)

Cost of revenues

Operating expenses

Operating (loss)

Interest income (expense), net

Loss before provision for

Income tax expense

Dividends on preferred stock

Net loss to common

$ (1,241,830)

$ (1,704,337)

Net loss per common share:

Basic and diluted

Weighted average number of shares outstanding:

Basic and diluted

(1) Includes results of CFP from date of acquisition consisting of revenues of $1,527,604 and net income of $46,062.

(2) Amortization of growers' supply contract for the period prior to acquisition ($268,800)

(3) Adjustment for facility lease $149,304

(3) Elimination of state income tax provision

Pro Forma Consolidated Combined Financial Statements

For the Nine-Months Ended February 29, 2008

Flight Safety

Cost of revenues

Operating expenses

Operating (loss)

Interest income (expense), net

Loss before provision for

Income tax expense

$ (2,440,633)

$ (2,709,885)

Net loss per common share:

Basic and diluted

Weighted average number of shares outstanding:

Basic and diluted

(1) Amortization of growers supply contract ($345,600)

(2) Adjustment for facility lease ($180,000)

(3) Adjustment for facility lease

CFP was formed in May 2008 in connection with the acquisition of a previously existing, potato packing and trucking business that was family owned and managed.

During the period prior to the acquisition by CFP, the acquired business engaged in several significant transactions amongst its shareholders and other related parties that may not have been at arms-length.

Further, we believe that historical financial statements of CFP and its predecessor prior to our acquisition of CFP would not be indicative of the operations of the ongoing business that we acquired due to the restructuring and streamlining of operations that occurred subsequent to May 2008.

As a result, we believe that we cannot prepare audited financial statements.

Had we been able to conduct an audit of the acquired business's historical financial statements, potential adjustments to the amounts included above may have come to our attention.

Related Party Transactions and Change in Control

Wesley Cummins, a director and shareholder of the Company, holds a controlling interest in Cummins Family Limited Partnership, Cummins Family Holdings, LLC and Southern Slope, Inc.

Wesley Cummins' family members hold a controlling interest in Black Rock Ag., Inc.

Amounts due from Southern Slope, Inc.

at February 28, 2009 are $4,584 and are included in customer receivables on the consolidated balance sheet.

Amounts due to Southern Slope, Inc.

and Black Rock Ag, Inc.

under the supply agreement at February 29, 2009 amount to $1,207,944 and are included in accounts payable on the consolidated balance sheet.

James Schwartz, a director of the Company, is the managing member of Harvey Partners, LLC, a Delaware limited liability company that is the manager of Harvey SMidCap Fund LP, a Delaware limited partnership, and Harvey SMidCap Offshore Fund, Ltd., a Cayman Islands exempted company, which participated in the Preferred Stock offering.

Kenneth Wood, President and Chief Executive Officer and a director of the Company participated in the Preferred Stock offering.

Rosenfeld, Chief Financial Officer, Vice president of Operations, Secretary/Treasurer participated in the Preferred Stock offering.

As a result of these transactions, Mr.

Wesley Cummins now exercises or controls in excess of 60% of the voting power of the Company.

This change in control will also create limitations to the use of the Company's existing net operating tax loss carryforwards.

Segment Information

Information regarding segments is presented in accordance with SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." Based on the criteria outlined in SFAS 131, the Company's operations are classified into two reportable business segments as described below.

Advanced Plasma Products, Inc.

APP has exclusive proprietary rights to a series of patents relating to One Atmospheric Uniform Glow Discharge Plasma (OAUGDP®) technology, and the rights to develop products and capabilities based upon this technology.

APP's OAUGDP®

is a technology that electrically breaks down air creating highly reactive chemical species.

This resultant unique plasma-generated chemistry is then used to produce desired outcomes such as alteration of material properties, destruction of microorganisms, and destruction of odor-causing chemicals.

The Company is currently developing commercial products utilizing this technology as well as pursuing certain research and development projects and accordingly includes revenues from previous research and development contracts.

Cummins Family Produce, Inc.

CFP is a potato packing facility that was acquired for its cash flow.

See Note 10 for a fuller description.

CFP was acquired as of January 1, 2009.

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

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

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

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

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

Series B Convertible Preferred Stock

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

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

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

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

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

Equity Plan Approval

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

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

Lease Type Consolidated Balance Sheet Location February 28, 2022

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

Finance lease assets Right of use asset, net $ 65

Total lease assets $ 1,207

Operating Lease liabilities Current portion of operating lease liability $ 185

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

Total Operating Lease Liabilties $ 1,154

Finance lease liabilities Current portion of lease liability $ 26

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

Total Finance Lease Liabilities $ 66

Total lease liabilities $ 1,220

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

3 Months Ended 9 Months Ended

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

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

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

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

Total Lease Cost $ 100 $ 284

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

Year Operating Leases Finance Leases Total

FY22 $ 78 $ 7 $ 85

FY23 318 29 347

FY24 326 29 355

FY25 334 6 340

FY26 342 — 342

Beyond 176 — 176

Total $ 1,574 $ 71 $ 1,645

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

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

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

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

Weighted-average months remaining 55 months

Weighted-average discount rate 12.20 %

Cash flows from operating leases $ 233

Cash flows from finance leases $ 2

RELATED PARTY TRANSACTIONS

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

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.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

COMMITMENTS AND CONTINGENCIES

Purchase Agreements

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

Claims and Litigation

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

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

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.

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.

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 income (loss) per share:

Quarterly Period Ended

February 28, 2022 February 28, 2021

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

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

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

Continuing Operations $ ( 0.04 ) $ ( 0.05 )

Discontinued Operations $ ( 0.08 ) $ —

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Basic and diluted income (loss) per share:

Year-to-Date Period Ended

February 28, 2022 February 28, 2021

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

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

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

Continuing Operations $ ( 0.35 ) $ ( 0.15 )

Discontinued Operations $ ( 0.06 ) $ —

Basic and diluted net loss per share $ ( 0.41 ) $ ( 0.15 )

Basic and diluted weighted average number of shares outstanding 50,546,048 $ 1,511,061

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

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

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

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

Operating results of discontinued operations are summarized below:

Three Months Ended

February 28, 2022 February 28, 2021

Cryptoasset Mining Revenue 916 —

Mining Revenue Pool Fees 9 —

Cryptoasset Mining Revenue, Net 907 —

Cost of Sales 628 —

Gross Profit 279 —

Impairment of Cryptocurrency Assets ( 226 ) —

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

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

Net Loss from Discontinued Operations ( 4,048 ) —

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Nine Months Ended

Consolidated revenues

Operating income (loss):

Consolidated operating (loss)

Interest income (expense), net

Provision for income tax

Depreciation and amortization:

Consolidated depreciation and

Total assets:

Consolidated assets

For the nine months ended February 28, 2009, 3 customers accounted for 42% of revenues of the CFP segment.

All revenues are U.S.

generated and all assets are U.S.

based, for all segments.

February 28, 2022 February 28, 2021

Cryptoasset Mining Revenue 2,975 —

Mining Revenue Pool Fees 30 —

Cryptoasset Mining Revenue, Net 2,945 —

Cost of Sales 1,589 —

Gross Profit 1,356 —

Impairment of Cryptocurrency Assets ( 390 ) —

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

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

Net Loss from Discontinued Operations ( 2,870 ) —

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

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

The remaining assets are comprised of GPUs for cryptomining.

Current assets related to discontinued operations are summarized below

ASSETS February 28, 2022 May 31, 2021

Current assets of discontinued operations 3,573 —

Crypto Assets

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

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

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

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

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

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

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

Three Months Nine Months

Beginning Balance - May 31, 2021

Cryptoassets earned through mining 916 2,975

Mining pool operating fees ( 9 ) ( 30 )

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

Impairment of Cryptocurrency Assets 226 390

Ending Balance - February 28, 2022

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Additional Cryptomining Accounting Policies

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

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

Management will evaluate market conditions on a quarterly basis.

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

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

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

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

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

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

Cryptoasset mining revenue

The Company has entered into cryptoasset mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool.

The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator.

In exchange for providing computing power, the Company is entitled to a theoretical fractional share of the cryptoasset award the mining pool operator receives (less service fees to the mining pool operator which are recorded as a reduction of revenue) for successfully adding a block to the blockchain.

The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.

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

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

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

The consideration is all variable.

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

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

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

SUBSEQUENT EVENTS

Sale of Crypto Mining Equipment

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

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

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

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

its co-hosting operations.

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

Loan Agreement

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

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

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

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

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

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

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

What changed 10-Q

Item 1. Financial Statements