APPLIED BLOCKCHAIN, INC. – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations – InsuranceNewsNet

You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and the related notes appearing elsewhere in this Annual Report on form 10-K.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this Annual Report, including information with respect to our plans
and strategy for our business, includes forward-looking statements that involve
risks and uncertainties. You should read the sections titled "Risk Factors" and
"Forward-Looking Statements" for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis.
Business 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 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 will primarily host 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, located in North Dakota. We have a colocation business
model where our customers place hardware they own into our facilities and we
provide full operational and maintenance services for a fixed fee. We typically
enter into long-term fixed rate contracts with our customers.

Trends and Uncertainties
Regulatory Matters

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.


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Hosting highlights

On January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate
of Bitmain Technologies Holding Company, entered into a joint venture in the
form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8
million and $2 million, respectively, and will initially own 80% and 20% of 1.21
Gigawatts, respectively. 1.21 Gigawatts will develop, acquire, construct,
finance, operate, maintain and own one or more Next-Gen datacenters with
initially up to 1.5GW of capacity for hosting blockchain infrastructure. We are
the managing member of 1.21 Gigawatts and are responsible for all site
development, construction and operations of the datacenters. However, certain
activities of 1.21 Gigawatts and its subsidiaries, if any, require the vote of
90% of the then outstanding units of each such entity. As long as Antpool owns
10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool
may appoint an individual with industry expertise to serve as an advisor to 1.21
Gigawatts. 1.21 Gigawatts will pay fees to such advisor as reasonably determined
by us as managing member. Transfers by members of units of 1.21 Gigawatts are
prohibited without approval of 90% of units then outstanding, which consent may
be granted or withheld for any reason and transfers of such units to
non-affiliates, after obtaining consent, are subject to a right of first refusal
of other members to purchase some or all of such units. Additionally, Antpool
has the right at any time to convert all or any portion of its 1.21 Gigawatts
units into a number of shares of our Common Stock equal to the capital
contributions by Antpool in connection with the acquisition of such units
divided by $7.50, which will result in an increase in our ownership percentage
of 1.21 Gigawatts.

On February 2, 2022, we brought our first North Dakota facility online as to the
initial 55 MW, and as of May 31, 2022, there was approximately 90 MW of power
online at this facility.

Sale of Crypto Mining Equipment
On March 9, 2022, we 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. We recognized a loss of $2.9 million in the sale of
the equipment during the quarter and year ended May 31, 2022. We have no plans
to return to crypto mining operations in the future as we grow our co-hosting
operations. The results of our crypto mining operations have been accounted for
as discontinued operations in our consolidated financial statements as of and
for the year ended May 31, 2022. This decision may decrease liquidity and our
available capital resources, which may adversely affect us.

Expansion possibilities

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 Q4 of 2022 and the 200 MW
capacity is fully contracted with our customers.

As our hosting operations expand, we believe our business structure will become
conducive to a REIT structure, akin 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.

Public issue and changes in equity

On August 13, 2021, the Company filed a registration statement for the resale by
certain selling stockholders of shares of Common Stock with the SEC (Reg. No.
333-258818) (the "Resale Registration Statement") and received a notice of
effectiveness for such registration statement on April 12, 2022. On November 22,
2021, the Company filed a registration statement for the sale by the Company of
shares of Common Stock with the SEC (Reg. No. 333-261278) (the "IPO Registration
Statement") and received a notice of effectiveness for such registration
statement on April 12, 2022. On April 11, 2022, the Company filed a registration
statement for the Common Stock
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under the Securities Exchange Act of 1934, as amended, with SEC which became
is activated automatically 12 April 2022.

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

The Company's board of directors approved a reverse split of shares of the
Company's common stock on a one-for-six basis, which was effected on April 12,
2022 (the "Reverse Stock Split"). All references to Common Stock, options to
purchase common stock, restricted stock units, share data, per share data and
related information contained in the condensed consolidated financial statements
have been retrospectively adjusted to reflect the effect of the Reverse Stock
Split for all periods presented. No fractional shares of the Company's common
stock were issued in connection with the Reverse Stock Split. Any fractional
share resulting from the Reverse Stock Split was rounded down to the nearest
whole share and the affected holder received cash in lieu of such fraction
share. Any fractional share resulting from the Reverse Stock Split was rounded
down to the nearest whole share.

On April 13, 2022, the Company announced its initial public offering of 8
million shares of its Common Stock at $5.00 per share. The shares began trading
on the Nasdaq Global Select Market on April 13, 2022, under the ticker symbol
"APLD."

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

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 $7.50 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.

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.

On July 25, 2022, Hosting entered into a Loan Agreement with Starion Bank (the
"Starion Lender") and the Company as Guarantor (the "Starion Loan Agreement").
The Starion Loan Agreement provides for a term loan (the "Starion Loan") in the
principal amount of $15.0 million with a maturity date of July 25, 2027. The
Starion Loan Agreement contains customary covenants, representations and
warranties and events of default.
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Advances on the Starion loan must not exceed the principal of $15.0
million. The first advance on the Starion loan was made at the time the loan was due
entered into and should not exceed 80% of the total principal
Loan, or $12.0 million. The remaining 20% ​​of this loan must be
available for advance upon borrower’s proof of 100% planned operation
the property’s capacity.

The Starion Loan Agreement provides for an interest rate of 6.50% per annum. The
proceeds of the Starion Loan will be used for (i) repayment of existing
indebtedness under the VBT Loan Agreement and (ii) working capital needs and
general corporate purposes.

The City of Jamestown, North Dakota and Stutsman County'sEconomic 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 Loan to be
less than 6.50% per annum after different state funds are applied to the Loan,
pending final approval.

The Starion 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 (the "Hosting Starion Security Agreement") and a security
interest in the form of a collateral assignment of 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
(the "Company Starion Security Agreement"). In addition, the Company
unconditionally guaranteed Hosting's obligations to the Starion Lender,
including under the Starion Loan, pursuant to an Unlimited Commercial Corporate
Guaranty of the Company dated as of July 25, 2022.

On 5 August 2022The VBT Term Loan was repaid in full and the VBT Term Loan
The agreement and associated VBT Mortgage were terminated.

Operating results for the closed financial year 31 May 2022 (fiscal year 2022)
compared to the closed financial year 31 May 2021

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                                                                                         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 interest                                10                    -
Net loss attributable to Applied Blockchain                                (23,520)                (568)

Adjusted Amounts (a)
Adjusted Operating Loss from Continuing Operations                           $(6,222)$(332)
Adjusted Operating Margin from Continuing Operations                         (72.8) %                 -  %
Adjusted Net Loss from Continuing Operations                                 $(7,810)$(568)
Other Financial Data (a)
EBITDA                                                                      $(20,714)$(332)
as a percentage of revenues                                                 (242.3) %                 -  %
Adjusted EBITDA                                                              $(6,038)$(332)
as a percentage of revenues                                                  (70.6) %                 -  %


(a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.
A reconciliation of reported amounts to adjusted amounts can be found in the
"Non-GAAP Measures and Reconciliation" section of the MD&A.

Income

Hosting revenues increased $8.5 million, or 100%, from the year ended May 31,
2021 to May 31, 2022. Hosting revenues for the quarter-ended May 31, 2021 were
$0, compared to $7.5 million for the quarter-ended May 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 between the third
and fourth fiscal quarters of fiscal year 2022.

Cost of revenue

Cost of revenues increased $9.5 million, or 100%, from the year ended May 31,
2021 to May 31, 2022. The increase in cost of revenues was primarily driven by
the initiation of our Co-hosting business in fiscal year 2022, which represent
all of our continuing operations. Cost of revenues for the year ended May 31,
2022 consists of $986,000 of depreciation and amortization expense attributable
to the property, plant and equipment at our Jamestown, ND
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host facility, 8.1 million dollars of the energy costs used to generate our hosting
income, and $414,000 of personnel expenses for employees who work directly on
the host plant.

Operating Expenses

Selling, general and administrative expense increased $7.2 million, or 2177%,
from the year ended May 31, 2021 to May 31, 2022. This increase is driven by the
initiation of our co-hosting business in fiscal year 2022, which represents our
sole continuing operations. The two primary drivers of Selling, general and
administrative expense are $2.3 million of employee salaries and benefits
expense, and $2.4 million of professional service expenses incurred to support
the growth of the business.

Stock-based compensation for service agreement increased $12.3 million, or 100%,
from the year ended May 31, 2021 to May 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 first quarter of fiscal year 2022.

Other expenses

Interest expense decreased by $124,000, or 52%, from the year ended May 31, 2021
to May 31, 2022. This decrease was driven by the change in our debt obligations.
Interest expense for the year ended May 31, 2021 was incurred on related party
notes, which bore interest at a annual rate of 16%. These notes were
extinguished through a conversion to common stock which occurred on June 12,
2021. Interest expense in fiscal year 2022 relates to our VBT Term Loan which we
entered into on March 11, 2022.

Loss on extinguishment of debt increased $1.3 million, or 100% from the year
ended May 31, 2021 to May 31, 2022. This increase was driven by the
extinguishment of our related party notes payable by conversion to common stock.
The extinguishment loss reflects the difference in the carrying value of the
notes and accrued interest and the fair value of the common stock issued in
exchange for the debt.

The tax cost increased by $540,000or 100% from the year ended May 31st,
2021 to 31 May 2022. This increase is a result of the start of spring
hosting operation in the third quarter of the financial year 2022.

Loss from discontinued operations

Beginning in the quarter ended August 31, 2021 (the first quarter of fiscal year
2022), we began cryptoasset mining operations, using Nvidia GPU miners which we
hosted at a facility operated by Coinmint. In fiscal year 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.

Loss from discontinued operations totaled $1.0 million for the year-ended May
31, 2022, and consists of $3.0 million of mining revenues and a $1.2 million
gain on the purchase and subsequent resale of miners, offset by $1.6 million of
recurring mining costs and $393,000 in cryptocurrency impairment charges, and
losses of $2.9 million and $327,000 in the write-down of mining assets and
assets purchased from Bitmain, respectively, as a result of presenting these
assets as held-for sale within discontinued operations. As of May 31, 2022, the
Company no longer generates revenues from mining operations.











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Non-GAAP Measures
                                                     Fiscal Year Ended                                      Quarter Ended
$ in thousands                              May 31, 2022             May 31, 2021               May 31, 2022               May 31, 2021
Adjusted Operating Loss
Operating loss from continuing
operations (GAAP)                                  $(20,898)$(332)$(4,266)$(332)
Add: Stock-based compensation for
service agreement                                     12,337                       -                             -                       -
Add: Gain on extinguishment of accounts
payable                                                (406)                       -                             -                       -
Add: Loss on extinguishment of debt                    1,342                       -                             -                       -
Add: Non-recurring professional service
costs                                                  1,310                       -                           240                       -
Add: Other non-recurring expenses                         93                       -                            93                       -
Adjusted Operating Loss from continuing
operations (Non-GAAP)                               $(6,222)$(332)$(3,933)$(332)
Adjusted operating margin from
continuing operations                               (72.8) %                    -  %                      (52.3) %                    -  %

Adjusted Net Loss
Net loss from continuing operations
(GAAP)                                             $(22,486)$(568)$(4,643)$(345)
Add: Stock-based compensation for
service agreement                                     12,337                       -                             -                       -
Add: Gain on extinguishment of accounts
payable                                                (406)                       -                             -                       -
Add: Loss on extinguishment of debt                    1,342                       -                             -                       -
Add: Non-recurring professional service
costs                                                  1,310                       -                           240                       -
Add: Other non-recurring expenses                         93                       -                            93                       -
Adjusted Net Loss from continuing
operations (Non-GAAP)                               $(7,810)$(568)$(4,310)$(345)

EBITDA and Adjusted EBITDA
Net loss from continuing operations
(GAAP)                                             $(22,486)$(568)$(4,643)$(345)
Add: Interest expense                                    112                     236                           112                      13
Add: Income tax expense                                  540                       -                           266                       -
Add: Depreciation and amortization                     1,120                       -                           875                       -
EBITDA (non-GAAP)                                  $(20,714)$(332)$(3,390)$(332)
Add: Stock-based compensation for
service agreement                                     12,337                       -                             -                       -
Add: Gain on extinguishment of accounts
payable                                                (406)                       -                             -                       -
Add: Loss on extinguishment of debt                    1,342                       -                             -                       -
Add: Non-recurring professional service
costs                                                  1,310                       -                           240                       -
Add: Other non-recurring expenses                         93                       -                            93                       -
Adjusted EBITDA (Non-GAAP)                          $(6,038)$(332)$(3,057)$(332)



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, 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, and other one-time expenses. 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. 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
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other similar title targets calculated by other companies, because all
companies cannot calculate adjusted EBITDA in the same way.

Because of these limitations, EBITDA and Adjusted EBITDA should not be
considered in isolation or as a substitute for performance measures calculated
in accordance with GAAP. Applied Blockchain compensates for these limitations by
relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a
supplemental basis. You should review the reconciliation of net loss to EBITDA
and Adjusted EBITDA below and not rely on any single financial measure to
evaluate Applied Blockchain's business.

Liquidity and capital resources

Sources of liquidity

We have generated cash from the sale of our equity securities, the sale of Ether
generated from our discontinued mining operations, and the receipt of
contractual deposits, revenue and pre-payments from hosting customers, and
proceeds from loans. Since December 2020, when we began planning to acquire or
build an operational business, we have raised aggregate gross proceeds of $51
million from issuances of our convertible preferred stock. On April 15, 2021, we
received $16.5 million in gross proceeds from the issuance of our Series C
Convertible Redeemable Preferred Stock and on July 30, 2021, we received $34.5
million in gross proceeds from the issuance of our Series D Preferred Stock.

On April 18, 2022, we received $40.0 million in gross proceeds from the issuance
of 8 million shares of the Company's Common Stock in conjunction with the
closing of our initial public offering. During the year ended May 31, 2021, we
did not generate any revenue from crypto mining, co-hosting or otherwise. We
have incurred net losses from operations. In June 2021, as a result of
commencement of our crypto mining operations, we began to generate revenue. As
of May 31, 2022 and May 31, 2021, we had cash of $46.3 million and $11.8 million
respectively, and an accumulated deficit of $56.1 million and $21.6 million,
respectively. On March 11, 2022, we entered into the VBT Loan Agreement for $7.5
million for a term of five years with an interest rate of 5% per annum. 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.

On 25 July 2022, Hosting entered into the Starion loan agreement. The Starion
The loan agreement provides the Starion loan for the principal amount $15
million with due date on 25 July 2027. The Starion Loan Agreement
contains customary covenants, representations and warranties and incidents of
default, and gives an interest rate of 6.50% per annum.

Funding requirements

Having ceased our operations in 2014, 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 April 2021 and July 2021 sales of convertible preferred
stock, from our crypto mining operations, prior to cessation of such operations
on March 9, 2022, proceeds from term loan, proceeds from our initial public
offering, and revenue we have begun to achieve in our co-hosting operations
since our first co-hosting facility was brought online as to 92MW as of May 31,
2022, after planned expenditures to build our co-hosting operations, will be
sufficient to meet our working capital needs for at least the next 12 months.

We expect that our general and administrative expenses and our operating
expenditures will continue to increase as we continue to expand our operations
and as we bear the costs of being a public company. We 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, particularly at our Jamestown, ND,
and Garden City, TX 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 crypto mining industry, we are unable to
estimate the amount of increased
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capital we may need to raise to continue building additional co-hosting
facilities and we may use our available capital earlier than we expect.

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. 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.

Cash flows

For the year ended May 31, 2022, we used $0.9 million in cash from operating
activities from continuing operations. Significant reconciling items between our
net loss and our net cash inflows from operations include the $12.3 million
stock-based operating expense described above, and our $1.3 million loss
incurred upon the conversion of our related party notes payable to common stock.
Our working capital also fluctuated, with accounts receivable and prepaid
expenses increasing by $227,000 and $1.3 million, respectively , and accounts
payable and accrued expenses increasing by $6.7 million. These fluctuations were
the result of the normal timing differences accrual-basis revenue & expenses and
cash payments and receipts. In addition, cash outflows related to our
discontinued operations were $10.1 million.

For the year ended May 31, 2022, we had $45.9 million of cash outflows from
investing activities from continuing operations, which primarily consisted of
$58.3 million of cash paid for property, plant, and equipment for our hosting
facilities, partially offset by $3.3 million of a decrease in deposits on
equipment as these were applied against equipment purchases. These are partially
offset by $9.1 million in net inflows related to our discontinued operations,
which consist of sales of mining equipment and Ether.

For the year ended May 31, 2022, we had $81.3 million of cash inflows from
financing activities, which primarily consisted of inflows of $40.0 million from
our initial public offering of common stock, $34.5 million from the placement of
Class D preferred stock, and $7.3 million from term loan proceeds, less issuance
costs of $2.9 million and $4.3 million related to these equity offerings.

For the year ended May 31, 2021, cash outflows from operating activities was
$83,000 , which was primarily driven by accrued paid in kind interest and
changes in accounts payable and accrued liabilities. Net cash outflows from
investing activities was $3.3 million, which was primarily driven by payments
for deposits on equipment. Net cash outflows from financing activities was
$15.1 million, which was primarily driven by the issuance of preferred stock,
partially offset by issuance costs for preferred stock.

Off-balance sheet events

No.

Important accounting statements

No.

Recent financial statements

We continually assess any new accounting pronouncements to determine their
applicability. When it is determined that a new accounting pronouncement affects
our financial reporting, we undertake 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 our consolidated financial statements
properly reflect the change.


                                       29

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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. We are 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 January 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.

Critical accounting 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 principles are discussed in note 3 – Basis for
Presentation and significant accounting principles for the notes to the group
Accounts for this annual report on Form 10-K.