Applied Digital Corp. 10-K

Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID # 688 ) 32 Consolidated Balance Sheets 34 Consolidated Statements of Operations 35 Consolidated Statements of Stockholders' Equity 36 Consolidated Statements of Cash Flows 37 Notes to Consolidated Financial Statements 38 See Accompanying Notes to the Consolidated Financial Statements 32 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Applied Blockchain Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Blockchain Inc. (the “Company”) as of May 31, 2022 and 2021, the related statements of operations, changes in stockholders’ deficit and cash flows for each of the two years in the period ended May 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Marcum LLP We have served as the Company’s auditor since 2020. New York, NY August 29, 2022 See Accompanying Notes to the Consolidated Financial Statements 33 APPLIED BLOCKCHAIN, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except number of shares and par value data) May 31, 2022 May 31, 2021 ASSETS Current Assets: Cash and cash equivalents $ 46,299 $ 11,750 Accounts receivable 227 — Utility deposits 1,450 — Prepaid expenses and other current assets 1,336 5 Total current assets 49,312 11,755 Right of use asset, net 6,408 — Deposit on equipment — 3,277 Property and equipment, net 64,260 20 TOTAL ASSETS $ 119,980 $ 15,052 LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 13,244 $ 249 Accrued dividends — 116 Current portion of lease liability 1,004 — Current portion of notes payable 1,333 — Related party notes payable — 2,135 Customer deposits 9,524 — Deferred revenue 3,877 — Other current liabilities 16 — Total current liabilities 28,998 2,500 Deferred tax liability 540 — Long-term portion of lease liability 5,310 — Long-term notes payable 5,897 — Total liabilities 40,745 2,500 Commitments and contingencies (Note 12) Mezzanine equity: Series C, convertible and redeemable preferred stock, $ .001 par value, 0 and 660,000 shares authorized, issued and outstanding, respectively $ — 15,135 Stockholders’ deficit: Series A, convertible preferred stock, $ .001 par value, authorized 70,000 shares, 0 and 27,195 shares issued and outstanding $ — $ 3,370 Series B convertible preferred stock, $ .001 par value, authorized 50,000 shares, 0 and 17,087 shares issued and outstanding — 1,849 Common stock, $ .001 par value, 166,666,667 shares authorized, 97,837,798 and 1,511,061 issued and outstanding, respectively 98 2 Additional paid in capital 128,293 13,881 Treasury stock, 36,300 shares, at cost ( 62 ) ( 62 ) Accumulated deficit ( 56,070 ) ( 21,623 ) Total stockholders’ equity (deficit) attributable to Applied Blockchain, Inc. 72,259 ( 2,583 ) Noncontrolling interest 6,976 — Total Mezzanine equity and stockholders' deficit 79,235 12,552 TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY $ 119,980 $ 15,052 See Accompanying Notes to the Consolidated Financial Statements 34 APPLIED BLOCKCHAIN, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data) Fiscal Year Ended May 31, 2022 May 31, 2021 Hosting revenue $ 8,549 $ — Cost of revenues $ 9,506 $ — Gross loss $ ( 957 ) $ — Costs and expenses: Selling, general and administrative $ 7,555 $ 332 Stock-based compensation 12,337 — Depreciation and amortization 49 — Total costs and expenses $ 19,941 $ 332 Operating loss $ ( 20,898 ) $ ( 332 ) Other (expense) income: Interest expense $ ( 112 ) $ ( 236 ) Gain on extinguishment of accounts payable 406 — Loss on extinguishment of debt ( 1,342 ) — Total other expense $ ( 1,048 ) $ ( 236 ) Net loss from continuing operations before income tax expenses ( 21,946 ) ( 568 ) Income tax expenses ( 540 ) — Net loss from continuing operations $ ( 22,486 ) $ ( 568 ) Net loss from discontinued operations, net of income taxes $ ( 1,044 ) $ — Net loss including noncontrolling interests ( 23,530 ) ( 568 ) Net loss attributable to noncontrolling interests 10 — Net loss attributable to Applied Blockchain $ ( 23,520 ) $ ( 568 ) Basic and diluted net loss per share: Continuing operations $ ( 0.39 ) $ ( 0.38 ) Discontinued operations $ ( 0.02 ) $ — Basic and diluted net loss per share $ ( 0.41 ) $ ( 0.38 ) Basic and diluted weighted average number of shares outstanding 57,121,096 1,511,061 See Accompanying Notes to the Consolidated Financial Statements 35 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the Years Ended May 31, 2022 and 2021 (In thousands, except per share data) Series C Convertible Preferred Stock Series D Convertible Preferred Stock Total Mezzanine Equity Series A Convertible Preferred Stock Series B Convertible Preferred Stock Common Stock Additional Paid in Capital Treasury Stock Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Balance, May 31, 2020 — $ — — $ — $ — 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 2 $ 13,881 $ ( 62 ) $ ( 21,055 ) $ ( 2,015 ) $ — $ ( 2,015 ) Issuance of Series C preferred stock 660,000 16,500 — — 16,500 — — — — — — — — — — $ 16,500 Issuance costs of Series C preferred stock — ( 1,365 ) — — ( 1,365 ) — — — — — — — — — — — ( 1,365 ) Net Loss — — — — — — — — — — — — — $ ( 568 ) ( 568 ) — ( 568 ) Balance, May 31, 2021 660,000 $ 15,135 — $ — $ 15,135 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 2 $ 13,881 $ ( 62 ) $ ( 21,623 ) $ ( 2,583 ) $ — $ 12,552 Extinguishment of debt — — — — — — — — — 5,083,828 5 3,473 — — 3,478 — $ 3,478 Issuance of dividends to preferred stock — — — — — 60,822 6,082 29,772 2,979 — — — — ( 8,946 ) 115 — $ 115 Conversion of series A and B preferred stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 29 14,251 — — — — $ — Service agreement stock compensation — — — — — — — — — 18,036,723 18 12,319 — — 12,337 — $ 12,337 Issuance of Series D preferred stock — — 1,380,000 34,500 34,500 — — — — — — — — — — — $ 34,500 Issuance Costs of Series D preferred Stock — — — ( 2,927 ) ( 2,927 ) — — — — — — — — — — — $ ( 2,927 ) Preferred Stock Dividends Accrued 25,633 641 53,587 1,340 1,981 — — — — — — — — ( 1,981 ) ( 1,981 ) — $ — Conversion of Series C and D preferred stock ( 685,633 ) ( 15,776 ) ( 1,433,587 ) ( 32,913 ) ( 48,689 ) — — — — 36,440,783 36 48,653 — — 48,689 — $ — Initial public offering of common stock — — — — — — — — — 8,000,000 8 39,992 — — 40,000 — $ 40,000 Offering costs of initial public offering — — — — — — — — — — — ( 4,276 ) — — ( 4,276 ) — $ ( 4,276 ) Contributions by noncontrolling interest — — — — — — — — — — — — — — — 6,986 $ 6,986 Net Loss — — — — — — — — — — — — — ( 23,520 ) ( 23,520 ) ( 10 ) $ ( 23,530 ) Balance, May 31, 2022 — — — — — — — — — 97,837,703 98 128,293 ( 62 ) ( 56,070 ) 72,259 6,976 79,235 See Accompanying Notes to the Consolidated Financial Statements 36 APPLIED BLOCKCHAIN INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands of dollars) Fiscal Years Ended May 31, 2022 May 31, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss attributable to Applied Blockchain, Inc. $ ( 23,520 ) $ ( 568 ) Net Loss from discontinued operations ( 1,044 ) — Net Loss attributable to noncontrolling interest ( 10 ) — Net Loss from continuing operations ( 22,486 ) ( 568 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,009 1 Accrued paid in kind interest — 236 Loss on extinguishment of debt 1,342 — Gain on extinguishment of accounts payable ( 406 ) — Stock-Based compensation for service agreement 12,337 — Amortization of right of use asset 111 — Deferred tax 540 — Changes in operating assets and liabilities — Accounts receivable ( 227 ) — Utility deposits ( 1,450 ) — Prepaid expenses and other current assets ( 1,331 ) — Customer deposits 9,524 — Deferred revenue 3,877 — Accounts payable and accrued liabilities 6,745 248 Payments of operating leases ( 310 ) — Net cash provided by operating activities of continuing operations 9,275 ( 83 ) Net cash used in operating activities of discontinued operations ( 10,147 ) — NET CASH PROVIDED BY OPERATING ACTIVITIES ( 872 ) ( 83 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment ( 58,251 ) ( 20 ) Deposit on equipment 3,277 ( 3,282 ) Net cash used in investing activities of continuing operations ( 54,974 ) ( 3,302 ) Net cash provided by investing activities of discontinued operations 9,103 — NET CASH USED IN INVESTING ACTIVITIES ( 45,871 ) ( 3,302 ) CASH FLOWS FROM FINANCING ACTIVITIES Initial public offering of common stock 40,000 — Issuance of preferred stock 34,500 16,500 Issuance costs for preferred stock ( 2,927 ) ( 1,365 ) Issuance costs for common stock ( 4,276 ) — Repayment of finance leases ( 221 ) — Proceeds from issuance of term loan 7,324 — Issuance costs for term loan ( 94 ) — Contributions by noncontrolling interest 6,986 — Net cash provided by financing activities of continuing operations 81,292 15,135 Net cash provided by financing activities of discontinued operations — — NET CASH PROVIDED BY FINANCING ACTIVITIES 81,292 15,135 NET INCREASE IN CASH AND CASH EQUIVALENTS 34,549 11,750 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,750 — CASH AND CASH EQUIVALENTS, END OF YEAR 46,299 11,750 Less: Cash and cash equivalents of discontinued operations — — Cash and cash equivalents of continuing operations $ 46,299 $ 11,750 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid $ 112 $ 236 Taxes Paid $ — $ — SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Non-cash dividends paid in-kind $ 11,042 $ — Right-of-use asset obtained by lease obligation $ 8,879 $ — Fixed assets in accounts payable $ 6,998 $ — See Accompanying Notes to the Consolidated Financial Statements 37 Notes to the Consolidated Financial Statements 1. BUSINESS AND ORGANIZATION Applied Blockchain, Inc. (the “Company”) is a builder and operator of next-generation data centers across North America, which provide substantial computing power to blockchain infrastructure and support Bitcoin mining. The Company has a colocation business model where customers place hardware they own into the Company’s facilities and the Company provides full operational and maintenance services for a fixed fee. The Company typically enters into long term fixed rate contracts with our customers. In the third quarter of the fiscal year ended May 31, 2022, the Company approved plans to sell all crypto mining equipment and cease all crypto mining operations. The results of these operations, financial position, and cash flows have been presented as discontinued operations and the related assets and liabilities. Refer to Note 14 – Discontinued Operations for additional information, including accounting policies, about the Company’s discontinued operations. The Company was originally incorporated in Nevada in May 2001. Effective April 14, 2021, the Company’s name was changed to Applied Blockchain, Inc. from Applied Science Products, Inc. During the year ended May 31, 2021, the Company formed two subsidiaries, Shanghai Sparkly Ore Tech, Ltd and Applied Blockchain, Ltd. Shanghai Sparkly Ore Tech, Ltd is a wholly owned foreign entity in China. Applied Blockchain, Ltd., a Cayman limited company, managed the Company’s digital wallet. During the year ending May 31, 2022, the Company formed five new wholly-owned subsidiaries, APLD Hosting, LLC, Applied Talent Resources LLC, APLD-JTND Phase II, LLC, APLD-Rattlesnake Den I, LLC, and APLD-Rattlesnake Den II, LLC. In June 2021, we formed APLD Hosting, LLC, in Nevada. APLD Hosting is entering into agreements to own and operate our co-hosting facilities. On November 2, 2021, we formed Applied Talent Resources LLC in Nevada to employ and manage our employees, employee staffing among our entities and projects and employment related plans and policies. On November 8, 2021, we formed APLD-JTND Phase II, LLC and on November 15, 2021, we formed APLD-Rattlesnake Den I, LLC and APLD-Rattlesnake Den II, LLC, each of which is a Delaware limited liability company formed to build and operate a co-hosting facility. In the third quarter of the fiscal year ending May 31, 2022, the Company entered into a joint venture agreement to form 1.21 Gigawatts, LLC (“the joint venture entity”), with Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies. Applied Blockchain and Antpool intend to leverage their combined resources and expertise to initially build up to 1.5 Gigawatts (GW) of datacenter hosting capacity over the next 24 months. The Company has a majority interest in the joint venture entity and therefore the results of the joint venture entity will be consolidated in the Company’s financial statements. Reverse Stock Split The Company’s board of directors approved a reverse split of shares of the Company’s common stock on a one-for-six basis, which was effected on April 12, 2022 (the “Reverse Stock Split”). All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share. Initial Public Offering On April 13, 2022, the Company announced its initial public offering of 8,000,000 shares of its common stock at $ 5.00 per share. The shares began trading on The Nasdaq Global Select Market on April 13, 2022, under the ticker symbol “APLD.”The net proceeds received by the Company from the offering (after deducting underwriting discounts and commission and estimated offering expenses) were approximately $ 36 million. The Company intends to use the net proceeds to lease or purchase additional property on which to build additional co-hosting facilities, to construct those facilities, to enter into additional energy service agreements for each additional site and for funding its working capital and general corporate purposes. 38 2. LIQUIDITY AND FINANCIAL CONDITION As of May 31, 2022, the Company had approximate cash and cash equivalents of $ 46.3 million and working capital of $ 20.3 million. In April 2022, the Company raised $ 40.0 million in gross proceeds from our initial public offering of Common Stock. Historically, the Company has incurred losses and has relied on equity financings to fund its operations. Based on analysis of cash flows, current net working capital, and expected operations revenues, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued. 3. 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, Ltd, Applied Blockchain, Ltd., APLD-JTND Phase II, LLC, APLD-Rattlesnake Den I LLC, APLD-Rattlesnake Den II LLC, APLD Hosting, LLC, Applied Talent Resources LLC, as well the Company’s majority interest in 1.21 Gigawatts, LLC. Use of Estimates The preparation of 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 estimate inherent in the preparation of the Company’s financial statements is the valuation allowance associated with the Company’s deferred tax assets. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Hosting revenue is recorded monthly in fixed amounts, net of credits, based on the terms of the hosting agreements. Customer contracts include advance payment terms. Advanced payments are recorded as deferred revenue until the related service is provided. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Our cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although we believe they are subject to minimal risk. The Company has restricted cash related to its letter of credit totally $ 7.5 million. The company is required to keep this balance in a separate account for the duration of the letter of credit agreement, which lasts through January 2024. The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of May 31, 2022, and May 31, 2021 39 (in thousands) May 31, 2022 May 31, 2021 Cash and Cash Equivalents $ 38,798 $ 11,750 Restricted Cash $ 7,501 $ — Total Cash and Cash Equivalents $ 46,299 $ 11,750 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 improvements that extend the life of an asset are capitalized. 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 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 an initial 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. Income Taxes ASC Topic 740, Income Taxes, (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. 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 most 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. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure, and transition. 40 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. Recent Accounting Pronouncements The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. In August 2020, the FASB issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures. In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of June 1, 2023. Early adoption will continue to be permitted. We are currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of May 31, 2022 and 2021: 41 (in thousands) Estimated Useful Life May 31, 2022 May 31, 2021 Hosting Equipment Electric Generation and Transformers 15 years 4,338 — Other Equipment and Fixtures 5 - 7 years 588 21 Construction in Progress 18,305 — Information Systems and Software 5 years 9,608 — Land & Building Land 1,074 — Land Improvements 15 years 1,180 — Building 39 years 30,176 — Total cost of property and equipment 65,269 21 Accumulated Depreciation ( 1,009 ) ( 1 ) Property Plant and Equipment, Net $ 64,260 $ 20 Depreciation expense totaled $ 1.0 million and $ 1,000 for the years ended May 31, 2022 and 2021, respectively. Depreciation is computed on the straight-line basis for the period assets are in service. 5. REVENUE FROM CONTRACTS WITH CUSTOMERS The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration to which the Company expects to be received in exchange for those services. The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue. Below is a summary of the Company’s revenue concentration by major customer for the year ended May 31, 2022 and 2021. Year Ended May 31, Customer 2022 2021 Customer A 41 % — % Customer B 16 % — % Customer C 15 % — % Customer D 15 % — % Customer E 13 % — % Remaining Performance Obligations As of May 31, 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. Deferred Revenue Changes in the Company's deferred revenue balances for the years ended May 31, 2022 and 2021, respectively, are shown in the following table: 42 (in thousands) Balance at June 1, 2020 $ — Advance billings $ — Revenue recognized $ — Other adjustments $ — Balance at May 31, 2021 $ — Advance billings $ 12,426 Revenue recognized $ ( 8,549 ) Other adjustments $ — Balance at May 31, 2022 $ 3,877 Customer Deposits Changes in the Company's customer deposits balances for the years ended May 31, 2022 and 2021, respectively, are shown in the following table: (in thousands) Balance at June 1, 2020 $ — Customer deposits received $ — Customer deposits refunded $ — Balance at May 31, 2021 $ — Customer deposits received $ 9,524 Customer deposits refunded $ — Balance at May 31, 2022 $ 9,524 6. RELATED PARTY TRANSACTIONS Related Party Policy Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. Related Party Note Payable A related party note payable was held by the CEO of the Company during the years ended May 31, 2022, and 2021. Pursuant to an exchange agreement effective June 12, 2021, the outstanding debt principal of $ 470,000 and accrued interest of $ 1.6 million was converted to 5.1 million shares of Common Stock with a fair value of $ 0.75 per share which resulted in a loss on extinguishment of $ 1.3 million. Upon the consummation of the Exchange Agreement, the note payable was surrendered and cancelled; all rights including rights to accrued interest due were extinguished. Related Party Revenue 43 One of the Company's major customers is an entity that is an affiliate of the minority member of the 1.21 Gigawatts joint venture. The Company recognized $ 3.5 million and $ 0 of revenue from this customer for the year ended May 31, 2022 and 2021, respectively. The Company had $ 1.7 million and $ 0 of advance billings from this customer and $ 1.7 million and $ 0 of deposits from this customer as of May 31, 2022 and 2021, respectively. 7. DEBT Letter of Credit As of May 31, 2022, the Company had a letter of credit totaling $ 7.5 million. As discussed in Footnote 3, the Company is required to maintain this amount in a separate cash balance, and therefore the cash is restricted. The Company did not have a letter of credit as of May 31, 2021. Further, the Company has no unused lines of credit as of May 31, 2022 or May 31, 2021, respectively. Term Loan On March 11, 2022, the Company and Applied Hosting, LLC (“Hosting”), a wholly-owned subsidiary of the Company, entered into a term loan agreement (the “VBT Loan Agreement”) by and among Hosting, as the borrower, Vantage Bank Texas, as lender (the “VBT Lender”) and the Company as guarantor. Pursuant to the Loan Agreement, on March 11, 2022, Hosting entered into a promissory note agreement (the “ VBT Note”) and borrowed $ 7.5 million for a five . ( 5 ) year term with an interest rate of five percent ( 5 %) per annum (the “VBT Term Loan”). The proceeds of the VBT Term Loan were used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota (the "Property"). The VBT Loan Agreement and VBT Note contain customary representations and warranties and events of default. In addition, the VBT Note contains certain affirmative and negative covenants and other terms and conditions for a facility of this type. The effective interest rate for the VBT Note was 5.6 % and 0 % for the years ended May 31, 2022 and 2021, respectively. Below is a summary of the remaining principal payments due over the life of the VBT note as of May 31, 2022 Year Principal Payments (in thousands) FY23 $ 1,333 FY24 1,409 FY25 1,490 FY26 1,576 FY27 1,382 Total VBT Term Loan Remaining Payments $ 7,190 Also on March 11, 2022, the Company entered into a continuing guaranty agreement (the “VBT Guaranty Agreement”) with the VBT Lender, pursuant to which the Company agreed to guaranty Hosting’s indebtedness and obligations under the VBT Loan Agreement. The VBT Term Loan is secured by a mortgage on the Property pursuant to a Mortgage, Security Agreement and Fixture Financing Statement (the “VBT Mortgage”), dated March 11, 2022, by and between Hosting and the VBT Lender, and a security interest in the all accounts receivable, rents and servicing agreements relating to the property and equipment as set forth in or required by the VBT Loan Agreement. In connection with the VBT Note, the Company incurred debt issuance costs of $ 93,939 . Below is a summary of total debt, including current debt and deferred financing fees related to the VBT Note, for the year ended May 31, 2022, and 2021. 44 (in thousands) Year ended Year ended May 31, 2022 May 31, 2021 Term Loan Balance $ 7,324 $ — Less: Deferred Issuance Costs ( 94 ) — Less: Current portion of Term Loan ( 1,333 ) — Long-term Portion of Term Loan $ 5,897 $ — 8. INCOME TAXES The Company recorded income tax expense of $ 540 ,000 for the year ended May 31, 2022, compared to no expense for the year ended May 31, 2021. The Company’s effective tax rate was ( 2.4 %) and 0 % for the year ended May 31, 2022 and 2021, respectively. The following table presents current and deferred tax expense for the year ended May 31, 2022, and 2021 Year ended Year ended May 31, 2022 May 31, 2021 Current expense (benefit) Federal $ — $ — Foreign — — State — — Total current benefit $ — $ — Deferred expense (benefit) Federal $ 540 $ — Foreign — — State — — Total deferred expense $ 540 — Total income tax expense $ 540 $ — The following table reconciles the statutory rate to our effective tax rate:: May 31, 2022 May 31, 2021 Expected income tax expense (benefit) at U.S. statutory rate 21.0 % 21 % Federal income tax benefit 0.6 % — % Permanent differences ( 0.9 %) — % Current and deferred state taxes 3.9 % — % Change in valuation allowance ( 27.0 %) ( 21.0 %) Income Tax Expense / (Benefit) ( 2.4 %) 0 % Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that gave rise to the Company’s deferred tax assets and liabilities are as follows for the year 45 ended May 31, 2022, and 2021: May 31, 2022 May 31, 2021 Deferred Tax Assets: Intangibles $ 78 $ — Lease Adjustment 2,080 — Federal Net Operating Loss 9,158 175 Charitable Contributions 17 — Passthrough Entities 13 — Valuation Allowance ( 6,393 ) ( 175 ) Total Net Deferred Tax Asset $ 4,953 $ — Deferred Tax Liability Property, Plant, and Equipment $ ( 3,407 ) $ — Lease Adjustment ( 2,086 ) — Total Net Deferred Tax Asset $ ( 5,493 ) $ — Deferred Tax Liability, Net $ ( 540 ) $ — The Company had federal tax net operating losses of $ 35.6 million and $ 568 ,000 at May 31, 2022 and 2021, respectively. The May 31, 2021 and May 31, 2022 losses can both be carried forward indefinitely. A valuation allowance is provided when it is more likely than not that some portion or the entire net deferred tax asset will not be realized. The Company has recorded an increase in the valuation allowance of $ 6.2 million and $ 120 ,000 as of May 31, 2022 and 2021, respectively. The Company has provided a valuation allowance for the portion of the deferred tax assets that it has determined are not more likely than not to be recognized. The valuation allowance is primarily attributable to deferred tax assets for net operating losses that management believes are more likely than not to expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. Management believes that it is not likely that the results of future operations will generate sufficient taxable income to realize its deferred tax assets. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income. The Company did not have any unrecognized tax benefits for the years ended May 31, 2022, and 2021, respectively. The Company recognizes interest expense related to unrecognized tax benefits in income tax expense. The Company did not have any interest expense or expense for penalties related to unrecognized tax benefits for the reported periods. The Company is subject to U.S. federal income tax. Tax years ending May 31, 2020 through May 31, 2022 are open to examination by the major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in these years may still be adjusted upon examination by the Internal Revenue Service (IRS) or other authorities if they have or will be used in a future period. The Company is not currently under examination by the IRS or any other taxing jurisdictions for any tax years. 9. REDEEMABLE EQUITY 46 Series C Preferred Stock As of May 31, 2021, 660,000 shares of Series C Preferred Stock were outstanding. The shares of Series C Preferred Stock were convertible into shares of Common Stock. These shares were offered and sold to certain “accredited investors” in a private placement without registration of the shares under Rule 506 of the Securities Act and the rules and regulations promulgated thereunder. The Series C Preferred Stock was entitled to participate on an as-converted basis in any dividends paid to the holders of Common Stock. The Series C Preferred Stock was entitled to Paid-in-kind (“PIK”) Dividends which accrued based on a percentage of the Stated Value, which ranged from 10 - 15 % per annum, depending on when the Company filed a registration statement for its common stock, and when the registration statement was declared effective by the SEC and the common stock began trading on a public market. The Company accrued PIK dividends at 12 % per annum of the Stated Value from December 15, 2021, until April 12, 2022, when the Company's registration statement was declared effective by the SEC. The Series C Preferred Stock did not accrue any other PIK Dividends. The Series C Preferred Stock was subject to automatic conversion on the date on which the Company's registration statement was declared effective by the SEC (the “Conversion Date”), at which point all outstanding shares of Series C Preferred Stock were automatically converted (without payment of additional consideration) into such number of fully paid and non-assessable shares of common stock as determined by dividing the Stated Value of such shares by the Conversion Price of $ 0.75 in effect on the Conversion Date. All rights with respect to the Series C Preferred Stock terminated on the Conversion Date. Pursuant to the automatic conversion provision, 685,633 Shares of Series C Preferred Shares, which included 25,633 shares issued to settle PIK dividends, were converted to Common Stock on April 12, 2022. Upon conversion, the Company issued 22,865,857 shares of Common Stock to the holders of Series C Preferred Stock. Series D Preferred Stock 1,380,000 Shares of Series D Preferred Stock were issued during the year ended May 31, 2022 for gross proceeds of $ 34,500 . The Company incurred $ 2,927 of issuance costs related to the Series D Preferred Stock. The shares of Series D Preferred Stock were convertible into shares of Common Stock. These shares were offered and sold to certain “accredited investors” and non-U.S. Persons in a private placement without registration of the shares under Regulation D and Regulation S of the Securities Act. The Series D Preferred stock ranked pari passu with the Series C Preferred Stock. The Series D Preferred Stock accrued PIK dividends under the same terms as the Series C Preferred Stock. The Company accrued PIK dividends at 12 % of the stated value of the Series D Preferred Stock from December 15, 2021 to April 12, 2022, when the Company's registration statement was declared effective. The Series D Preferred Stock was subject to automatic conversion on the Conversion Date. All shares of Series D Preferred Stock were automatically converted (without payment of additional consideration) into such number of fully paid and non-assessable shares of Common Stock as determined by dividing the Stated Value by the Conversion Price of $ 2.64 in effect on such Conversion Date. All rights with respect to the Series D Preferred Stock terminated on the Conversion Date. Pursuant to the automatic conversion provision, 1,433,587 Shares of Series D Preferred Shares, which included 53,587 shares issued to settle PIK dividends, were converted to Common Stock on April 12, 2022. Upon conversion, the Company issued 13,575,634 shares of Common Stock to the holders of Series D Preferred Stock. As of May 31, 2022, there are no shares of Series D or Series C Preferred Stock outstanding. 47 10. STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock The Company is authorized to issue 166,666,667 shares of Common Stock at 0.001 par value per share. As of May 31, 2022 and 2021, 97,837,798 and 1,511,061 shares of Common Stock were outstanding, respectively. Equity Compensation On January 18, 2022, the Company issued (i) an aggregate of 600,000 shares of restricted stock, consisting of 100,000 shares to each of its non-employee directors and (ii) an aggregate of 766,666 shares of restricted stock to three executives, in all cases as compensatory grants for services rendered to the Board or the Company. Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of common stock comprising the stock award with the Securities and Exchange Commission (the “SEC”). The Company will recognize the cost of the restricted stock based on the grant date fair value of the awards over the related vesting terms using a straight-line method when it is probable that the performance condition of an effective registration statement for the reserved underlying shares will be met. The fair value of the restricted stock was estimated to be $ 11.0 million. The Company's restricted stock shares are considered to be nonvested share awards. On January 14, 2022, the Company granted an aggregate of 1,791,666 restricted stock units (“RSUs”) to three consultants, in all cases as compensatory grants for consulting services rendered to the Company which contain performance conditions that affect vesting. The performance conditions specify that the RSUs are achieved based on specific thresholds of power to become available in the Company’s colocation hosting facility and also upon the occurrence of an effective registration statement covering the resale of the shares of common stock comprising the stock award shares with the SEC. The Company will recognize the cost of these RSUs based on the grant date fair value of the awards when it is probable that the performance conditions will be achieved over the related vesting terms. The fair value of these RSUs was estimated to be $ 14.4 million. The fair value of the shares of common stock underlying equity compensation has been determined by using a third-party valuation specialist to assist management in its determination. Management determines the fair value of the Company’s Common Stock by considering a number of objective and subjective factors including: the valuation of comparable companies, sales of redeemable convertible preferred stock to unrelated third parties, the Company’s operating and financial performance, and general and industry specific economic outlook, amongst other factors. The Company estimated the fair value of the Common Stock at issuance date using a Probability Weighted Expected Return Method (“PWERM”). The PWERM estimated the fair value assuming two possible outcomes, for which each discrete outcome is probability weighted to arrive at a weighted-average value. The Company weighted two different scenarios as follow: Scenario Weight Public Company scenario (“listing scenario”) 95 % Remain a private Company scenario (“private scenario”) 5 % As the performance condition of an effective registration statement covering the resale of the shares of common stock comprising the restricted stock and RSUs to officers, non-employee directors, and consultants has not been met as of May 31, 2022, no expense has been recognized for the year ended May 31, 2022. Share-Based Compensation In March 2021, the Company entered into service agreements collectively with GMR Limited, Xsquared Holding Limited (“SparkPool”), and Valuefinder to provide cryptocurrency mining management, equipment, and other services to assist with the mining operation of the Company during 2021 and 2022. In exchange, the Company 48 agreed to issue Common Stock shares as shown below and included in the agreement. All shares were issued in June 2021. Service Provider Common Stock Shares Committed Valuefinder 3,156,427 SparkPool 7,440,148 GMR 7,441,648 Total 18,038,223 The fair value of the share-based compensation issued was calculated using the fair value of outstanding equity using the option pricing method, weighted as shown below. All shares issued under the agreement were vested immediately. Class of Stock Option Pricing Fair Value Weight Common Stock $ 0.402 8 % Conversion Price of Series C Shares 0.780 92 % Weighted-average fair value $ 0.750 Series A Convertible Preferred Stock Each share of Series A Convertible Preferred Stock (“Series A Preferred Stock”) had a liquidating value of $ 100 per share, was convertible into 1,429 shares of Common Stock of the Company (subject to adjustment) and paid a cash dividend of 8 % or a dividend in kind of 10 %. The dividends accrued quarterly and were based on the original purchase price of the Series A Preferred Stock. All shares of Series A Preferred Stock were converted, effective June 12, 2021, to shares of Common Stock. 6,809,833 shares of Common Stock were issued in exchange for the Series A Convertible Preferred Stock upon this conversion. Series B Convertible Preferred Stock Each share of Series B Convertible Preferred Stock (“Series B Preferred Stock”) has a liquidating value of $ 100 per share, is convertible into 1,000 shares of Common Stock of the Company (subject to adjustment) and pays a cash dividend of 8 % or a dividend in kind of 10 %. The dividends are accrued quarterly and are based on the original purchase price of the Series B Preferred Stock. All shares of Series B Preferred Stock were converted, effective June 12, 2021, to shares of Common Stock. 6,809,833 shares of Common Stock were issued in exchange for the Series B Convertible Preferred Stock upon this conversion. Series C Convertible Preferred Stock Each share of Series C Convertible Preferred Stock (“Series C Preferred Stock”) has a liquidating value of $ 25 per share, is convertible into 1,000 shares of Common Stock of the Company (subject to adjustment) and pays a dividend in kind of 10 %. The dividends are accrued quarterly and are based on the original purchase price of the Series C Preferred Stock. All shares of Series C Preferred Stock were converted, effective April 12, 2022, to shares of Common Stock. 22,865,857 shares of Common Stock were issued in exchange for the Series C Convertible Preferred Stock upon this conversion. 49 Series D Convertible Preferred Stock Each share of Series D Convertible Preferred Stock (“Series D Preferred Stock”) has a liquidating value of $ 25 per share, is convertible into 1,000 shares of Common Stock of the Company (subject to adjustment) and pays a dividend in kind of 10 %. The dividends are accrued quarterly and are based on the original purchase price of the Series D Preferred Stock. All shares of Series D Preferred Stock were converted, effective April 12, 2022, to shares of Common Stock. 13,575,634 shares of Common Stock were issued in exchange for the Series D Convertible Preferred Stock upon this conversion. Equity Plan Approval On October 9, 2021, our Board approved two equity incentive plans, which our stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in our SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to our employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in our SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date. As of May 31, 2022, no awards had been granted under either plan. 11. LEASES As of May 31, 2022, the Company had an operating lease liability and right of use asset for its office space that expires in October 2026. The Company also entered into several finance leases for equipment and land as of May 31, 2022. As of May 31, 2022, the Company did have one significant finance lease balance related to a land lease related to the Company's Garden City, TX facility. The Company has elected the short-term lease exception and therefore, only recognized lease liabilities and right of use assets for leases longer than one year. The Company has also elected the practical expedient of not separating lease components from non-lease components for its real estate leases. As of May 31, 2022, and May 31, 2021, the balance of the right of use assets were $ 6.4 million and $ 0 , respectively, and the balance of the lease liability is $ 6.3 million and $ 0 , respectively, for the Company’s office lease, land lease, and its leased equipment. The calculation of these lease assets and liabilities includes minimum lease payments over the remaining lease term. Any variable lease payments are excluded from the amounts and are recognized in the period in which those obligations are incurred. Operating lease assets are included as right of use assets, net on the Balance Sheet. The current portion of lease liabilities are presented as current portion of lease liability on the Balance Sheet with the remainder included as long-term portion of lease liability on the Balance Sheet. 50 Balance sheet presentation of lease assets and liabilities, net is as follows: Lease Type Consolidated Balance Sheet Presentation May 31, 2022 Operating Lease Assets Right of use asset, net $ 1,110 Finance lease assets Right of use asset, net 5,298 Total lease assets $ 6,408 Operating Lease liabilities Current portion of operating lease liability 191 Operating Lease liabilities Long-term portion of lease Liability 936 Total Operating Lease Liabilities $ 1,127 Finance lease liabilities Current portion of lease liability $ 813 Finance Lease liabilities Long-term portion of lease liability 4,374 Total Finance Lease Liabilities $ 5,187 Total lease liabilities $ 6,314 The Company presents lease costs under ASC 842 is as follows: Lease Type Consolidated Statements of Operations Presentation Year Ended May 31, 2022 Operating lease expense Selling, General and Administrative $ 328 Finance lease expense: Amortization of ROU assets related to revenue production Cost of Sales 85 Amortization of ROU assets not related to revenue production Depreciation and Amortization Expense 26 Interest on finance leases Interest Expense 50 Short-term lease expense Selling, General and Administrative 126 Variable lease expense Selling, General and Administrative — Total Lease Cost $ 615 The following table represents the Company’s future minimum operating lease payments as of May 31, 2022, under ASC 842 (in thousands): Year Operating Leases Finance Leases Total FY23 $ 318 $ 1,189 $ 1,507 FY24 326 1,193 1,519 FY25 334 558 892 FY26 342 169 511 FY27 144 174 318 Beyond — 87,324 87,324 Total $ 1,464 $ 90,607 $ 92,071 Present value of lease liabilities $ 1,127 $ 5,187 $ 6,314 Less: Current portion of lease liability $ 191 $ 813 $ 1,004 Long-term portion of lease liability $ 936 $ 4,374 $ 5,310 51 Supplemental cash flow and other information related to leases is as follows: Operating Leases Finance Leases Weighted-average years remaining 4 years 57 years Weighted-average discount rate 12.50 % 7.98 % Cash paid for the amounts included in the measurement of lease liabilities: Operating cash flows $ 310 $ 50 Financing cash flows $ — $ 221 12. COMMITMENTS AND CONTINGENCIES Commitments As of May 31, 2022, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Term Loan and Note 11 - Leases , respectively. The Company also has a commitment of approximately $ 24.2 million related to the energy services agreement for its first cohosting facility as of May 31, 2022. The minimum term of this agreement is five years , and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination. The commitment is fully due within the next fiscal year, as the company commits to specific power consumption on an annual basis as part of the energy services agreement. The Company purchased approximately $ 8.1 million and $ 0 in power under the energy services agreement for the fiscal years ended May 31, 2022 and May 31, 2021, respectively. The Company has no other commitments or contingencies as of May 31, 2022. 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 May 31, 2022 and 2021, 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. 13. 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 Note 9 - Redeemable Equity for details on outstanding classes of preferred shares. Earnings per share for the year ended May 31, 2022 and 2021 are shown in the following table: 52 Basic and diluted income (loss) per share: Year Ended May 31, 2022 May 31, 2021 Net loss from continuing operations $ ( 22,486 ) $ ( 568 ) Net loss from discontinued operations, net of income taxes ( 1,044 ) — Net Loss including noncontrolling interests ( 23,530 ) ( 568 ) Net Loss attributable to noncontrolling interest 10 — Net loss attributable to Applied Blockchain $ ( 23,520 ) $ ( 568 ) Continuing operations $ ( 0.39 ) $ ( 0.38 ) Discontinued operations $ ( 0.02 ) $ — Basic and diluted net loss per share $ ( 0.41 ) $ ( 0.38 ) Basic and diluted weighted average number of shares outstanding 57,121,096 1,511,061 14. DISCONTINUED OPERATIONS During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment. The assets sold were reflective of the entire mining reportable segment. As the Company completed the sale of the assets shortly after the quarter ended February 28, 2022, the Company used the sale price and actual costs to sale to determine actual carrying value of the assets held for sale, and recorded a loss to write the assets down to their fair value. On March 9, 2022, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. Total proceeds from the sale of the equipment were $ 1.6 million. The Company has no plans to return to crypto mining operations in the future as the Company grows. Operating results of discontinued operations are summarized below: Year Ended May 31, 2022 May 31, 2021 Cryptoasset Mining Revenue 3,038 — Mining Revenue Pool Fees 51 — Cryptoasset Mining Revenue, Net 2,987 — Cost of Sales 1,611 — Gross Profit 1,376 — Impairment of Cryptocurrency Assets ( 393 ) — Gain on Sale of Fixed Assets 1,229 — Loss on Asset Reclass to Discontinued Operations ( 3,256 ) — Net Loss from Discontinued Operations ( 1,044 ) — The Company recognizes revenue at the spot price of the cryptoasset when mined. The Company then tracks any gain or loss from the time the cryptoasset was mined to the time when it was ultimately sold or converted. The sale or conversion generally results in a realized gain or loss at the time of sale or conversion. The sale or conversion of cryptoassets results in the receipt of cash consideration. As of May 31, 2022 and 2021, the Company did not hold any cryptoassets. For the year ended May 31, 2022, and 2021, the Company recorded impairment expense of $ 393 ,000 and $ 0 , respectively. The following table presents a summary of cryptoasset activity for the year ended May 31, 2022. 53 Year Ended Beginning Balance - May 31, 2021 $ — Cryptoassets earned through mining 3,038 Mining pool operating fees ( 51 ) Cryptoassets sold or converted ( 3,380 ) Impairment of Cryptocurrency Assets 393 Ending Balance - May 31, 2022 $ — Additional Cryptomining Accounting Policies Cryptoassets Cryptoassets are included in current assets in the accompanying consolidated balance sheets. Cryptoassets are classified as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles — Goodwill and Other, and are accounted for in connection with the Company’s revenue recognition policy detailed above and in Note 5 - Revenue from Contracts with Customers . Management will evaluate market conditions on a quarterly basis. When events or circumstance identified through this process indicate that cryptoassets may be impaired, they are tested for impairment. Impairment, if any, is recognized for the difference between the fair value of the underlying cryptoasset and the carrying amount of the cryptoasset. Fair value is measured using the quoted price of the cryptoasset at the time its fair value is being measured. Cryptoassets awarded to the Company through its mining activities are included within the operating activities in the accompanying consolidated statements of cash flows. Gains from the sales of cryptoassets are recorded in other income (expense) in the accompanying consolidated statements of operations. The Company accounts for its gains in accordance with the first in, first out (“FIFO”) method of accounting. Cryptoasset mining revenue The Company had entered into cryptoasset mining pools by executing contracts with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a theoretical fractional share of the cryptoasset award the mining pool operator receives (less service fees to the mining pool operator which are recorded as a reduction of revenue) for successfully adding a block to the blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power in cryptoasset transaction verification services is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators and is satisfied over the time it takes to mine each block. The transaction consideration the Company receives, if any, is noncash consideration, which the Company receives on a daily basis and measures at fair value on the date received using the average price of the cryptoasset during the date, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because validation awards are not known until a block is placed, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. It is not probable that a significant reversal of revenue will occur. Fair value of the cryptoasset award received is determined using the quoted price on the Company’s primary exchange of the related cryptoasset. As noted above, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment in service on March 9, 2022. 54 15. SUBSEQUENT EVENTS Sparkpool Share Cancellation On June 6, 2022, through a letter agreement between the Company and Sparkpool, Sparkpool agreed to forfeit to the Company shares of Common Stock that had been issued pursuant to the service agreement executed on March 19, 2021, which is described in Note 10 - Stockholders' Equity (Deficit) . Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered. As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and canceled by the Company, reducing the number of shares of Common Stock outstanding. Marathon Digital Hosting Agreement On July 12, 2022, the Company entered into a five-year hosting contract with Marathon Digital Holdings, Inc. ("Marathon") for 200 -Megawatts ("MW") of mining capacity. As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility in Texas and at least 110 MW of hosting capacity at its second facility in North Dakota. As part of this agreement, the Company has also provided Marathon with the option to increase hosting capacity utilizing up to an additional 70 MW in North Dakota, which would increase the total amount of hosting across all of the Company's facilities to 270 megawatts if the option is exercised. New Term Loan Agreement On July 25, 2022, Hosting entered into a Loan Agreement with Starion Bank (“Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”). The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $ 15 million with a maturity date of July 25, 2027. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. Advances on the Starion Term Loan shall not exceed the principal total of $ 15 million. The first advance on the Starion Term Loan was made at the time the Starion Loan Agreement was entered into and was not to exceed 80 % of the total principal amount of the Loan, or $ 12 million. The remaining 20 % balance of this Loan shall be available for advance following Hosting's proof of 100 % intended operating capacity at the Property. The Starion Loan Agreement provides for an interest rate of 6.50 % per annum. The City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund provides a multimillion-dollar economic development program, available to assist with expanding or relocating businesses. As part of financial packages, the Jamestown Stutsman Development Corporation (JSDC) makes direct loans, equity investments, and interest buy-downs to businesses. Contingent upon such incentives, the Company expects the effective interest rate of the Starion Term Loan to be less than 6.50 % per annum after different state funds are applied to the Loan, pending final approval. Deferred financing costs related to the Starion Term Loan totals $ 10 ,000. The Loan is secured by a mortgage on the Property, and a security interest in the substantially all of the assets of Hosting as set forth in the Security Agreement dated as of July 25, 2022 by and between Hosting and the Starion Lender and a security interest in the form of a collateral assignment of the Company’s rights and interests in a master hosting agreement related to the Property and records and data relating thereto as set forth in the Security Agreement dated as of July 25, 2022 by and among Hosting, the Company as Grantor and the Starion Lender. In addition, the Company unconditionally guaranteed Hosting's obligations to the Starion Lender, including under the Starion Term Loan, pursuant to an Unlimited Commercial Corporate Guaranty of the Company dated as of July 25, 2022. VBT Term Loan Repayment 55 On August 5, 2022, the VBT Term Loan was paid off in full and the VBT Term Loan Agreement and the associated VBT Mortgage were terminated. Land Purchase On August 8, 2022, the Company completed the purchase of 40 acres of land ("the Land") in Ellendale, North Dakota, for a total cost of $ 1 million. The Company took possession of the Land on August 15, 2022, and plans to build a 200 MW datacenter on the Land, with completion scheduled for the first quarter of calendar 2023. 56 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None