APPLIED BLOCKCHAIN, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements (Form 10-Q)

0
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 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;
•concentration of customers in the crypto mining industry, which customer base
may decline due to price volatility and uncertainties around regulation policy
of cryptoasset prices;
•equipment failures, power or other supply disruptions; and
•the lack of final approval of funding initiatives to be made by the City of
Jamestown, North Dakota and Stutsman County's Economic Development Fund in favor
of the Company, the application of which funding initiatives would decrease the
interest rate of the Company's repayment of the Starion Term Loan (as defined
below).

You should carefully review the risks described in Item 1A of the Company's
Annual Report on Form 10-K for the year-ended May 31, 2022, which was filed on
August 29, 2022, as well as any other cautionary language in this Quarterly
Report on Form 10-Q, 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 related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

Company overview

We design, build, and operate Next-Gen datacenters which are designed to provide
massive computing power and support high-compute applications. Our first
facility was constructed in North Dakota with 100 Megawatts ("MW") of capacity.
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 hosted servers securing the Bitcoin network, but
these facilities can also host hardware for other applications such as
artificial intelligence, protein sequencing, drug discovery, machine learning
and additional blockchain networks and applications. We are mid-construction on
our second facility in Garden City, Texas, and are in the development stage of
the Company's third facility, also located in North Dakota. We have a colocation
business
                                       12
--------------------------------------------------------------------------------
  Table of Contents
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
We have a material concentration of customers in the crypto mining industry. 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.

Critical Accounting Policies and Estimates
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 the Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 2022 filed with the SEC on August 29, 2022

Hosting Operation Highlights

Applied Blockchain's first facility is in Jamestown, North Dakota with capacity
of 100 MW. The entire 100 MW of capacity has been fully contracted on multi-year
contracts with our customers, providing revenue visibility for the Company.
Additionally, the facility is powered through a five-year energy services
agreement
                                       13
--------------------------------------------------------------------------------
  Table of Contents
with a local utility, providing visibility into the cost structure as a stable
pricing mechanism for energy costs has been negotiated.

The facility began energizing in late January 2022 and had over 90 MW online as
of June 2022. As previously reported in a Current Report on Form 8-K filed by
the Company on July 18, 2022, there was an unexpected equipment failure at the
substation powering the facility, resulting in a partial outage of approximately
50%. The power provider completed the required repairs in mid-August, fully
restoring power capacity to Jamestown ahead of the schedule for early September.
The Jamestown facility was not damaged and remains fully operational and capable
of hosting the entire 100 MW of capacity.

On July 12, 2022, the Company entered into a five-year hosting contract with
Marathon Digital Holdings, Inc. ("Marathon") for 200 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.

Discontinued Operations

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

On November 24, 2021, we entered into a letter of intent to develop a facility
in Texas using 200 MW of wind power. On April 13, 2022, the Company entered into
a 99-year ground lease in Garden City, TX, with the intent to build our second
datacenter facility on this site. On April 25, 2022 the Company began
construction on this site. This facility is collocated with a wind farm and upon
completion is expected to provide 200 MW of power to hosting customers. The
facility is expected to begin operating in calendar fourth quarter of 2022 and
the 200 MW capacity is fully contracted with our customers.

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.

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. (NASDAQ: EQIX), each of which is a traditional datacenter
operator and Innovative Industrial Properties, Inc. (NYSE: 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.
Changes to Equity
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 June 6, 2022, through an agreement between the Company and Sparkpool,
Sparkpool agreed to forfeit to the Company shares of Common Stock that had been
issued pursuant to the service agreement executed on March 19, 2021. Sparkpool
ceased providing the contracted services for the Company, and agreed to forfeit
shares to
                                       14

————————————————– ——————————

Contents

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.


Results of operations Comparative results for the three months ended August 31, 2022 and 2021:

The following table sets forth key components of the results of operations (in
thousands) of Applied Blockchain during the three months ended August 31, 2022
and 2021.

                                                                                             Three Months Ended
                                                                        August 31, 2022         August 31, 2021
Revenues:
Hosting revenue                                                       $        6,924          $            -

Cost of revenues                                                      $        6,093          $            -
Gross profit                                                                     831                       -

Costs and expenses:
Selling, general and administrative                                   $        4,131          $          698
Stock-based compensation                                                         579                  12,337
Depreciation and amortization                                                    298                       3
Total costs and expenses                                              $        5,008          $       13,038
Operating loss                                                        $     

(4,177) $(13,038)

Other income (expense):
Interest Expense                                                      $         (356)         $            -
Gain on extinguishment of accounts payable                                         -                      40
Loss on extinguishment of debt                                                   (94)                 (1,342)
Total other expense, net                                                        (450)                 (1,302)
Net loss from continuing operations before income tax expenses                (4,627)                (14,340)
Income tax expenses                                                              (32)                      -
Net loss from continuing operations                                           (4,659)                (14,340)
Net gain from discontinued operations, net of income taxes                         -                     243
Net loss including noncontrolling interests                                   (4,659)                (14,097)
Net loss attributable to noncontrolling interest                                (128)                      -
Net loss attributable to Applied Blockchain                           $     

(4,531) ($14,097)

Adjusted Amounts (a)
Adjusted Operating Loss from Continuing Operations                    $       (2,896)         $          601
as a percentage of revenues                                                      (42) %                    -  %
Adjusted Net Loss from Continuing Operations                          $       (3,378)         $         (701)
as a percentage of revenues                                                      (49) %                    -  %
Other Financial Data (a)
EBITDA                                                                $       (3,135)         $      (14,337)
as a percentage of revenues                                                      (45) %                    -  %
Adjusted EBITDA                                                       $       (1,854)         $         (698)
as a percentage of revenues                                                      (27) %                    -  %
Adjusted Gross Profit                                                 $        1,667          $            -
as a percentage of revenues                                                       24  %                    -  %



                                       15
--------------------------------------------------------------------------------
  Table of Contents
(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
section titled "Non-GAAP Measures and Reconciliation".


Revenue

Hosting revenues increased from $0 to $6.9 million, from the three month period
ended August 31, 2021 to the three month period ending August 31, 2022. The
increase in hosting revenues was driven by our completion of our first hosting
facility in Jamestown, North Dakota, which was brought online in phases during
the six months ended May 31, 2022.

Cost of Revenues
Cost of revenues increased from $0 to $6.1 million, from the three month period
ended August 31, 2021 to the three month period ending August 31, 2022. The
increase in cost of revenues was primarily driven by the initiation of our
co-hosting business in late fiscal year ended May 31, 2022, which represents all
of our continuing operations. Cost of revenues for the three month period ending
August 31, 2022 consists of $836,000 of depreciation and amortization expense
attributable to the property, plant and equipment at our Jamestown, ND hosting
facility, $4.9 million of energy costs used to generate our hosting revenues,
and $360,000 of personnel expenses for employees directly working at the hosting
facility.

Operating Expenses
Selling, general and administrative expenses increased by $3.4 million, or 492%,
from $698,000 for the three month period ended August 31, 2021 to $4.1 million
for the three month period ending August 31, 2022. The two primary drivers of
Selling, general and administrative expense are $1.3 million of employee
salaries and benefits expense, and $1.4 million of professional service expenses
incurred to support the growth of the business.

Stock-based compensation for service agreement decreased $11.8 million, or 95%,
from $12.3 million for the three month period ended August 31, 2021 to $579,000
for the three month period ending August 31, 2022. The expense was related to
our service agreements with strategic partners, who provided advisory and
consulting services in exchange for shares of common stock we issued to them.
These services were fully rendered within the three month period ending
August 31, 2021. The Company did recognize expenses related to stock
compensation agreements for the three month period ending August 31, 2022, but
the number of shares granted under these agreements, and therefore the related
expense, was much smaller relative to the number of shares granted under the
service agreements as described above.

Depreciation and amortization not attributable to cost of sales increased $295,000 i.e. 9,838%, of $3,000 for the three-month period ended
August 31, 2021 at $298,000 for the three-month period ending August 31, 2022. This change is explained by a significant increase in assets commissioned between periods to support business growth.

Other Expense
Interest expense increased from $0 to $356,000, from the three month period
ended August 31, 2021 to the three month period ending August 31, 2022. This
increase was driven by the increase in finance leases and change in the
company's debt obligations between periods, as the Company has entered into the
Starion Loan agreement in the three month period ending August 31, 2022, and
previously entered into a term loan agreement with Vantage Bank, which was
subsequently extinguished. 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
                                       16
--------------------------------------------------------------------------------
  Table of Contents
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.

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

Loss on extinguishment of debt decreased $1.25 million, or (93)% from the three
month period ended August 31, 2021 to the three month period ended August 31,
2022. This decrease was driven by the extinguishment of our related party notes
payable by conversion to common stock during the three month period ended
August 31, 2021, compared to a smaller extinguishment of debt that was
recognized in the three month period ended August 31, 2022.

Income tax expense
Income tax expense increased from $0 to $32,000 from the three month period
ended August 31, 2021 to the three month period ending August 31, 2022. This
increase was driven by a change in valuation allowance for three month period
ending August 31, 2022.

Gain from Discontinued Operations
Beginning in the quarter ended August 31, 2021 (the first quarter of fiscal year
ended May 31, 2022), we began cryptoasset mining operations, using Nvidia GPU
miners which we hosted at a facility operated by Coinmint. In fiscal year ended
May 31, 2022, we made the strategic decision to discontinue our mining
operations and focus on hosting operations in the future. As a result of this
strategic shift, our mining operations were reclassified as discontinued
operations.

Gain from discontinued operations decreased $243,000 or 100% from the end of the three-month period August 31, 2021 at the three-month period ending August 31, 2022. The decrease is explained by the fact that the Company no longer generates revenue from mining operations.

Non-GAAP Measures and Reconciliation
The reconciliations of (1) adjusted operating loss from continuing operations to
operating loss from continuing operations, (2) adjusted net loss from continuing
operations to net loss from continuing operations, (3) EBITDA and Adjusted
EBITDA to net loss from continuing operations, and (4) adjusted gross profit to
gross profit, is as follows:
                                       17

————————————————– ——————————

  Table of Contents

                                                                        Three Months Ended
$ in thousands                                                August 31, 2022         August 31, 2021
Adjusted operating loss
Operating Loss from Continuing Operations (GAAP)             $       (4,177)         $      (13,038)
Add: Stock-based compensation for service agreement                     579                  12,337
Add: Gain on Extinguishment of Accounts Payable                           -                     (40)
Add: Loss on Extinguishment of Debt                                      94                   1,342
Add: Non-recurring professional service costs                           408
Add: Other non-recurring expenses                                       200                       -

Adjusted operating loss from continuing operations (non-GAAP)

                                                   $       (2,896)         $          601
Adjusted operating margin from Continuing Operations                  (41.8) %                    -  %

Adjusted net loss
Net Loss from Continuing Operations (GAAP)                           (4,659)                (14,340)
Add: Stock-based compensation for service agreement                     579                  12,337
Add: Gain on Extinguishment of Accounts Payable                           -                     (40)
Add: Loss on Extinguishment of Debt                                      94                   1,342
Add: Non-recurring professional service costs                           408
Add: Other non-recurring expenses                                       200                       -

Adjusted net loss from continuing operations (non-GAAP) ($3,378) (701) $

EBITDA and Adjusted EBITDA
Net Loss from Continuing Operations (GAAP)                   $       (4,659)         $      (14,340)
Add: Interest Expense                                                   356                       -
Add: Income Tax Expense                                                  32                       -
Add: Depreciation                                                     1,136                       3
EBITDA (Non-GAAP)                                            $       (3,135)         $      (14,337)
Add: Stock-based compensation for service agreement                     579                  12,337
Add: Gain on Extinguishment of Accounts Payable                           -                     (40)
Add: Loss on Extinguishment of Debt                                      94                   1,342
Add: Non-recurring professional service costs                           408
Add: Other non-recurring expenses                                       200                       -
Adjusted EBITDA (Non-GAAP)                                   $       (1,854)         $         (698)

Adjusted Gross Profit
Gross profit (GAAP)                                          $          831          $            -
Add: Depreciation in cost of revenues                                   836                       -
Adjusted Profit (Non-GAAP)                                   $        1,667          $            -



                                       18
--------------------------------------------------------------------------------
  Table of Contents
Adjusted Operating Loss and Adjusted Net Loss
"Adjusted Operating Loss" and "Adjusted Net Loss" are non-GAAP measures that
represents operating loss and net loss, respectively, from continuing operations
excluding stock-based compensation and nonrecurring expenses. We believe these
are useful metrics as they provide additional information regarding factors and
trends affecting our business and provide perspective on results absent one-time
or significant non-cash items. However, 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 Operating Loss and Adjusted Net Loss may not be
comparable to other similarly titled measures computed by other companies,
because all companies may not calculate Adjusted Operating Loss and Adjusted Net
Loss in the same fashion.

Because of these limitations, Adjusted Operating Loss and Adjusted Net Loss
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 Adjusted
Operating Loss and Adjusted Net Loss on a supplemental basis. You should review
the reconciliation of operating loss to Adjusted Operating Loss and net loss to
Adjusted Net Loss above and not rely on any single financial measure to evaluate
Applied Blockchain's business.

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. These costs 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. We also believe EBITDA and Adjusted EBITDA are useful
metrics to investors because they provide additional information regarding
factors and trends affecting our business, which are used in the business
planning process to understand expected operating performance, to evaluate
results against those expectations, and because of their importance as measures
of underlying operating performance, as the primary compensation performance
measure under certain programs and plans. 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 above and not rely on any single financial measure to
evaluate Applied Blockchain's business.

Adjusted gross profit

"Adjusted Gross Profit" is a non-GAAP measure that represents gross profit
adjusted for depreciation expense within cost of revenues. We believe this is a
useful metric as it provides additional information regarding gross profit aside
from significant non-cash expense in depreciation. However, Applied Blockchain's
presentation of this measure should not be construed as an inference that its
future results will be unaffected by other factors
                                       19

————————————————– ——————————

Contents

within the cost of revenue. Blockchain applied the calculation of Adjusted Gross Margin may not be comparable to other similarly titled measures calculated by other companies, as all companies may not calculate Adjusted Gross Margin in the same way.

Because of these limitations, Adjusted Gross Profit 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 Adjusted Gross Profit on a supplemental
basis. You should review the reconciliation of gross profit to Adjusted Gross
Profit above and not rely on any single financial measure to evaluate Applied
Blockchain's business.

The Sources of Liquidity

We have primarily generated cash in the last 12 months from the proceeds of our
term loan, proceeds from our initial public offering, and the receipt of
contractual deposits and revenue prepayments from hosting customers. On April
18, 2022, we received $36 million in net proceeds from the issuance of 8 million
shares of the Company's Common Stock in conjunction with the closing of our
initial public offering. On July 25, 2022, the Company entered into a Loan
Agreement with Starion Bank ("Starion Lender") and the Company as Guarantor (the
"Starion Loan Agreement"). The Starion Loan Agreement provides for a term loan
(the "Starion Term Loan") in the principal amount of $15 million with a maturity
date of July 25, 2027. The Starion Loan Agreement contains customary covenants,
representations and warranties and events of default. The Starion Loan Agreement
provides for an interest rate of 6.50% per annum. A portion of the proceeds were
used to pay down the Vantage term loan that was entered into on March 11, 2022.
The remaining 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.
See Note 7 to the consolidated financial statements included in this Quarterly
Report on Form 10-Q for more information on the Starion Term Loan.

During the three month period ended August 31, 2022, we received $22.2 million
in payments for future hosting services. During fiscal year ended May 31, 2022,
we generated revenue from crypto mining and co-hosting, but we have incurred net
losses from operations. As of August 31, 2022 and May 31, 2022, we had cash of
$40.8 million and $46.3 million respectively, and an accumulated deficit of
$60.6 million and $56.1 million, respectively.

Funding Requirements
We have experienced net losses through our fiscal year ended May 31, 2022. Our
transition to profitability is dependent on the successful operation of our
co-hosting facilities. We believe that amounts we received from our proceeds
from our term loan, proceeds from our initial public offering, and revenue
payments we have begun to achieve in our co-hosting operations since our first
co-hosting facility was brought online in February 2022, after planned
expenditures with respect to the items described in the section titled
"Expansion Opportunities" above, will be sufficient to meet our working capital
needs for at least the next 12 months and all of the Company's known
requirements and plans for cash.

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 expect significant
increases in our investment in property and equipment as we expand our
co-hosting capacity. We also expect that our revenues will increase as we
continue to bring online additional capacity at our Jamestown, ND, Garden City,
TX, and Ellendale, ND locations. 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 Company's concentration of customers in 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.

                                       20

————————————————– ——————————

  Table of Contents
We believe that our existing cash, together with the anticipated revenues from
current operations and debt funding opportunities, will enable us to fund our
operating expense requirements through at least 12 months as well as all of the
Company's known requirements and plans for cash. 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.

© Edgar Online, source Previews

Share.

Comments are closed.