What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2009-04-13 · 243 added, 114 removed, 4 unchanged (99% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

Except for the historical information presented in this document, the matters discussed in this quarterly report on Form 10-Q for the three and nine month periods ended February 28, 2009 or otherwise incorporated by reference into this document, contain "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995).

These statements are identified by the use of forward-looking terminology such as "believes", "plans", "intend", "scheduled", "potential", "continue", "estimates", "hopes", "goal", "objective", expects", "may", "will", "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.

The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by us.

We caution you that no statements contained in this Form 10-Q should be construed as a guarantee or assurance of future performance or results.

These forward-looking statements involve risks and uncertainties, which include risks and uncertainties associated with, among other things, availability of capital to fund operations, research and development, the impact of competitive products and pricing, limited visibility into future product demand, generally slower economic growth, difficulties inherent in the development of complex technology, new products sufficiency, fluctuations in operating results, and other risks are discussed in the "Known Trends, Risks and Uncertainties" section of Management's Discussion and Analysis of Financial Conditions and Results of Operations of this Form 10-Q.

The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties.

These forward-looking statements are based on current expectations, and, except as required by law, we assume no obligation to update this information whether as a result of new information, future events or otherwise.

Readers are urged to carefully review and consider the various disclosures made by us in this Form 10-Q and in our annual report on Form 10-KSB and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

We have four basic developmental technologies, all in the field of aviation security that we were pursuing.

These technologies were substantially funded by government contracts.

We have been unsuccessful in securing additional funding for these projects, and at May 31, 2008 decided to suspend all efforts on them.

In an effort to reduce our reliance on our aviation security technologies, we have undertaken an effort to identify potential diversifying, technology-based acquisitions to enhance shareholder value and provide better opportunity for profitable operations.

To that end, through our wholly owned subsidiary, Advanced Plasma Products, Inc.

("APP"), which is a Nevada corporation, we have licensed patent rights from the University of Tennessee Research Foundation relating to atmospheric glow plasma technology.

In addition, APP acquired the key assets from the previous licensee of that technology, hired some of its key employees, and secured a lease on its former facility.

We believe that this technology has been advanced to the stage where several products can be commercialized and released to the market within two years.

Atmospheric glow discharge plasma is a technology that produces tailored plasma gas chemistry for a wide range of applications such as air purification, materials processing, decontamination, sterilization and many others.

We believe these applications can create market opportunities that cover homeland security, health care, process control, and environmental protection, remediation and control.

Effective January 1, 2009, we acquired a 100% interest in Cummins Family Produce, Inc.

("CFP"), a potato packing facility in Idaho.

We consider our acquisition of CFP strictly as a financial transaction by which we intend to procure cash flow from CFP over a five year period that will help support development, marketing and sales of our atmospheric glow plasma technology.

As we have previously indicated, we need approximately $2.5 million over a period of time in order to execute our business plan with respect to the acquired atmospheric glow plasma technology.

It became apparent that we would not be able to raise that amount of equity in a single transaction as a result of the deterioration of our financial condition, the delisting from Amex, the decline of our share price and the current state of the financial markets.

Our management and directors therefore explored other means to provide the needed capital.

On January 14, 2009, we completed the sale of $440,000 of our Series A Convertible Preferred Stock.

The cash provided by our sale of this Preferred Stock provides us with the initial capital to continue product development and start sales and marketing effort in our plasma business.

We anticipate the cash provided by the CFP packing facility acquisition will supplement the initial capital as well as continue to supplement our monthly cash needs into our fourth fiscal quarter that began March 1, 2009 so as to enable us to continue to operate and enable our wholly owned subsidiary, APP, to continue to develop the atmospheric plasma glow technology.

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 the packing facility 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 CFP.

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.

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.

We have had recurring losses from operations that have greatly diminished our financial resources.

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

Because we have not been successful in securing any additional government funding for development of our aviation security technologies, it became apparent that we needed to rely on the sale of equity securities and/or some type of financial transaction in order to generate sufficient working capital to successfully commercialize our newly acquired plasma gas technology and to pay for ongoing operations.

In Item 5 of this Report on Form 10-Q, we described certain transactions we closed on January 14, 2009 which partially fill our need for working capital.

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

Our shares of common stock currently trade on the over-the-counter market under the symbol "FLTS".

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties.

In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words.

Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.

Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false.

These statements are based on our management’s beliefs and assumptions, which are based on currently available information.

These assumptions could prove inaccurate.

You are cautioned not to place undue reliance on forward-looking statements.

Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

•labor and other workforce shortages and challenges;

•our dependence on principal customers;

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

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

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

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

•volatility of cryptoasset prices

uncertainties of cryptoasset regulation policy

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

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

Executive Overview

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

Business Overview

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

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

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

We provide energized space for customers to host computing equipment.

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

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

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

Trends and Other Factors Affecting Our Business

Regulatory Environment

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

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

As a result, they

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

federal, state and local and international jurisdictions.

These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another.

Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions.

To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations.

As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S.

Congress and certain U.S.

agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets.

Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry.

For instance, on September 24, 2021, China imposed a ban on all crypto transactions and mining.

Ongoing and future regulatory actions could effectively prevent our customers’ mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete.

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

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

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

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

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

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared according to accounting principles generally accepted in the United States of America.

In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.

We evaluate these estimates on an on-going basis.

We base these estimates on historical experiences and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Actual results may differ from these estimates under different assumptions or conditions.

Our management has discussed these estimates and assumptions with our finance and audit committee.

Subjective judgments may have a material impact on our financial statements, including the valuation of inventory and intangible assets.

Federal Acquisitions Regulations require that, among other things, our reimbursable costs are reasonable.

We have analyzed our actual overhead rate and general administrative rate for the fiscal year ended May 31, 2008.

We believe all component costs have been ordinary and necessary but that government auditors may consider some of our selling, general and administrative expenses for the fiscal year ended May 31, 2008 unreasonable for a company our size.

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

Since there is a degree of subjectivity in the judgment of what levels of cost are reasonable, we can make no assurance that the government will not require further adjustments.

Results of Operations

Revenues for the three months ended February 28, 2009 and February 29, 2008 were $1,531,804 and $125,885, respectively.

The increase of $1,405,919 consisted primarily of revenues of $1,527,604 from CFP which was acquired as of January 1, 2009 offset by the decrease in revenues in our APP segment of $121,685.

Revenues in our APP segment came primarily from our hydrodynamic software development contracts issued by companies in the maritime industry.

As of November 30, 2008, we terminated these contracts as the software developer who worked on them resigned.

Revenues for the nine months ended February 28, 2009 and February 29, 2008 were $1,669,517 and $247,230, respectively.

The increase of $1,422,287 consisted primarily of revenues of $1,527,604 from CFP, offset by the decrease in revenues of $105,317 from our hydrodynamic software development contracts, discussed above.

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

In connection with the preparation of our financial

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

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

On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

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

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

Hosting Operation Highlights

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

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

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

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

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

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

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

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

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

Crypto Mining Operations

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

Total proceeds from the sale of the equipment were $1.6 million, and the Company will recognize a loss $2.9 million on the sale of the equipment during the quarter ending May 31, 2022.

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

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

Expansion Opportunities

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

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

Construction of the facility began in March 2022.

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

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

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

DLR) and Equinix, Inc.

EQIX), each of which is a traditional datacenter operator and Innovative Industrial Properties, Inc.

IIPR), a specialty REIT that similarly services a new growth industry.

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

Public Offering and Changes to Equity

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

333-258818) (the “Resale Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022.

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

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

On April 11, 2022, the Company filed a registration statement for the Common Stock under the Securities Exchange Act of 1934, as amended, with the SEC which became effective automatically on April 12, 2022.

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

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

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.

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

On April 13, 2022, the Company announced its initial public offering of 8 million shares of its Common Stock at $5.00 per share.

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

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

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

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

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

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

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

Three Months Ended Nine Months Ended

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

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

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

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

Cost of revenues for the three months ended February 28, 2009 and February 29, 2008 were $1,322,812 and $31,269, respectively.

The increase of $1,291,543 is attributable to costs of $1,320,632 associated with CFP revenues offset by reduced costs of the remaining business segment of $29,089 associated with its reduced revenues.

Cost of revenues for the nine months ended February 28, 2009 and February 29, 2008 were $1,383,848 and $109,285, respectively.

The increase of $1,247,563 is attributable to costs of $1,320,632 associated with CFP revenues offset by reduced costs of the remaining business segment of $73,069 associated with its reduced revenues.

Selling, general and administrative expenses:

Selling, general and administrative expenses for the three months ended February 28, 2009 and February 29, 2008 were $449,364 and $791,777, respectively.

The decrease of $342,413 is attributable to reduced total corporate expenses of $505,065 partially offset by aggregate expenses of APP and CFP of $162,652.

In the 2009 three-month reporting period we did not incur 2008 reporting period incurred expenses relating to share-based compensation, legal and litigation settlement of approximately $290,000, and business development, lobbying and fund raising activities of approximately $145,000, in addition to reduced personnel and related costs.

Selling, general and administrative expenses for the nine months ended February 28, 2009 and February 29, 2008 were $1,214,900 and $2,349,685, respectively.

The decrease of $1,134,785 is attributable to reduced total corporate expenses of $1,390,303 partially offset by aggregate expenses of APP and CFP of $255,518.

In the 2009 nine-month reporting period we did not incur the 2008 reporting period incurred expenses relating to share-based compensation, legal and litigation settlement costs of approximately $750,000, business development, lobbying and fund raising activities of approximately $450,000 with the balance attributable to reduced personnel and related costs.

Depreciation and amortization:

Depreciation and amortization expense for the three months ended February 28, 2009 and February 29, 2008 was $105,190, $27,250, respectively.

For the nine months ended February 28, 2009 and February 29, 2008 the expense was $131,131 and $81,750, respectively.

For both periods the increases were attributable to the amortization of intangible assets attributable to the CFP and APP acquisitions, offset by reduced depreciation and amortization relating to the aviation related technologies.

Research and development:

Research and development expenses for the three months ended February 28, 2009 and February 29, 2008 was $84,903, and $36,373, respectively.

For the nine months ended February 28, 2009 and February 29, 2008 the expense was $175,629 and $230,133, respectively.

The increase of $48,530 in the three month period was attributable to APP's plasma development expenses of $84,993 offset by the suspension of work on the aviation related technologies.

The decrease of $54,504 in the nine month period was attributable to the suspension of work on the aviation related technologies offset by plasma research and development expenses of $152,597.

Other income:

Other income for the nine month period ending February 28, 2009 relates to the disposition of several vehicles and surplus equipment.

Interest income, net:

Interest income, net for the three and nine months ended February 28, 2009 decreased as a result of the reduction in cash available for investment in interest bearing investments and accounts and interest on debt attributable to the CFP acquisition.

Provision for income taxes:

The tax provision relates to Idaho state income tax on CFP results.

Dividends on preferred stock:

Preferred stock dividends were accrued from date of receipt of investors' funds through the end of our fiscal quarter.

The dividends are anticipated to be paid in kind and not in cash.

Liquidity and Capital Resources

Our sources of liquidity have been primarily from government contracts and equity financings.

We have undertaken several actions to mitigate the liquidity issue.

We have suspended all research and development activities on our related aviation technologies, as we currently do not have the funds to continue such efforts.

In the event third party funding becomes available for this effort we will re-evaluate the resumption of such activities.

In addition, our maritime contracts were terminated as a result of the resignation of the employee who specialized in such research and development.

The maritime contracts were the Company's sole source of revenue in all periods presented.

This lack of funding has had an adverse impact on our ability to develop our current aviation and security related technologies.

As a result we have undertaken to diversify our technology base by identifying other technologies to reduce our reliance on our current technologies.

As a result of this diversification effort, on September 10, 2008, we finalized our licensing agreement with the University of Tennessee Research Foundation 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 payment for the UTRF license agreement consists of our issuance of 260,417 shares of our common stock to UTRF and on-going royalties which we believe are generally in line with the market for this type of license.

The UTRF license agreement is filed as Exhibit 10.6 to this Report on Form 10-Q without certain information proprietary to UTRF that it has required us to redact.

We believe this technology can be applied to produce products used for, among other things, the sterilization or cleaning of a wide variety of objects and substances, such as medical instruments and air.

Commercialization of this technology will require final product development and for certain applications may require regulatory approval.

Additionally, in a related transaction on August 28, 2008, we purchased the assets of the previous licensee of this technology.

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

The payment to the prior licensee for the assets was $125,000 cash and $200,000 paid by the issuance of 289,436 shares of our common stock.

We have also hired two senior executives to manage the newly acquired technology and oversee the overall growth plan for the Company, due to their experience in growing early stage companies.

As of September 2008, we started incurring additional operating costs relating to this new business.

The Company's previous senior management had since resigned.

To develop products under the licensed technology and bring products to market, we estimate that we will require approximately $2.5 million of new working capital.

We are looking to obtain this working capital with proceeds from one or more private placements of our securities, some type of financial transaction or a combination of both.

On January 14, 2009, we completed a series of transactions in order to generate a portion of the required additional working capital, including the acquisition of a potato packing business located in Idaho known as Cummins Family Produce Inc., an Idaho corporation.

Reference is made to Notes 1, 9 and 10 to the consolidated financial statements herein, and to Item 5 of this Report on Form 10-Q, where we describe these transactions and their anticipated impact on us and we refer the reader to Item 5 which must be read as a continuation of this discussion of our liquidity and capital resources.

Qualitative and Quantitative Disclosures About Market Risk

Gross Profit (1,047) — (1,047) —

Costs and expenses:

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

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

Depreciation 14 — 14 —

Total costs and expenses 1,370 0 15,585 0

Operating loss (2,417) — (16,632) 0

Other income (expense):

Interest Expense — (77) — (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)

Adjusted Amounts (a)

Adjusted Operating Loss from Continuing Operations $ (2,064) $ — $ (2,289) $ —

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

Adjusted Net Loss from Continuing Operations $ (2,044) $ (77) $ (3,500) $ (223)

Other Financial Data (a)

EBITDA $ (2,092) $ — $ (17,324) $ —

as a percentage of revenues (203.9) % — % (1688.5) % — %

Adjusted EBITDA $ (1,739) $ — $ (2,981) $ —

as a percentage of revenues (169.5) % — % (290.6) % — %

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

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

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

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

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

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

Costs and expenses

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

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

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

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

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

Other income and expense :

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

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

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

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

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

Costs and expenses:

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

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

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

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

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

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

Other Expenses:

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

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

Three Months Ended

Nine Months Ended

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

Adjusted operating loss

Operating Loss from Continuing Operations (GAAP) $ (2,417) $ — $ (16,632) $ —

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

Gain on Extinguishment of Accounts Payable (80) — (405) —

Loss on Extinguishment of Debt — — 1,342 —

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

Adjusted Operating Loss from Continuing Operations (Non-GAAP) $ (2,064) $ — $ (2,289) $ —

Adjusted operating margin from Continuing Operations (201.2) % — % (223.1) % — %

Adjusted net income (loss)

Net Loss from Continuing Operations (GAAP) $ (2,397) $ (77) $ (17,843) $ (223)

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

Gain on Extinguishment of Accounts Payable (80) — (405) —

Loss on Extinguishment of Debt — — 1,342 —

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

Adjusted net loss from Continuing Operations (Non-GAAP) $ (2,044) $ (77) $ (3,500) $ (223)

EBITDA and Adjusted EBITDA

Net Loss from Continuing Operations (GAAP) $ (2,397) $ (77) $ (17,843) $ (223)

Interest Expense — 77 — 223

Income Tax Expense 60 — 274 —

Depreciation 245 — 245 —

EBITDA (Non-GAAP) $ (2,092) $ — $ (17,324) $ —

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

Gain on Extinguishment of Accounts Payable (80) — (405) —

Loss on Extinguishment of Debt — — 1,342 —

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

Adjusted EBITDA (Non-GAAP) $ (1,739) $ — $ (2,981) $ —

EBITDA and Adjusted EBITDA

“EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization.

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

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

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

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

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

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

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

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

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

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

The Sources of Liquidity

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

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

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

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

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

We have incurred net losses from operations.

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

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

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

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

Funding Requirements

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

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

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

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

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

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

party funding.

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

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

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

Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

Summary of Cash Flows

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

Nine Months Ended February 28,

$ in thousands 2022 2021

Net cash provided by operating activities $ 4,113 $ —

Net cash used in investing activities (35,588) $ —

Net cash provided by financing activities 31,686 $ —

Net change in cash and cash equivalents 211 $ —

Cash and cash equivalents at beginning of year 11,750 $ —

Cash and cash equivalents at end of period $ 11,961 $ —

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

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

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

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

Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis