UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~February 28,~~August 31, 2023


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ and __________

Commission file number 001-31968

________________________

APPLIED DIGITAL CORPORATION

(Exact name of registrant as specified in its charter)

________________________


Nevada			95-4863690
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3811 Turtle Creek, Blvd., Suite 2100, Dallas, TX			75219
(Address of Principal Executive Offices)			(Zip Code)

(214) 556-2465

Registrant's telephone number, including area code

~~(Former name, former address and former fiscal year, if changed since last report)~~

~~________________________~~

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	APLD	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

~~APPLICABLE ONLY TO CORPORATE ISSUERS:~~

As of ~~April 6,~~October 9, 2023, ~~94,901,529~~106,300,245 shares of Common Stock, $0.001 par value, were outstanding.

Table of Contents


		Page
Part I - Financial Information

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of ~~February 28,~~August 31, 2023 and May 31, ~~2022~~2023 (unaudited)	1
	Condensed Consolidated Statements of Operations for the three ~~and~~ ~~nine~~ ~~month~~s months ended F ~~ebruary 28,~~August 31, 2023 and ~~February 28,~~August 31, 2022 (unaudited)	2
	Condensed Consolidated Statements of ~~Consolidated Statements of~~ Changes in Stockholders’ Equity (~~Deficit~~) for the three ~~month~~s months ended ~~February 28,~~August 31, 2023 and ~~February 28,~~August 31, 2022 (unaudited)	3
	~~Condensed Consolidated Statements of Consolidated Statements of Changes in Stockholders’ Equity~~ ~~(Deficit)~~ ~~for the~~ ~~nine~~ ~~month~~s ~~ended~~ ~~February 28, 2023 and February 28, 2022 (unaudited)~~	4
	Condensed Consolidated Statements of Cash Flows for the ~~nine~~ ~~month~~s three months ended ~~February 28,~~August 31, 2023 and ~~February 28,~~August 31, 2022 (unaudited)	54
	Notes to the Condensed Consolidated Financial Statements (unaudited)	65
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1314
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2522
Item 4.	Controls and Procedures	2522

Part II - Other Information

Item 1.	Legal Proceedings	2723
Item 1A.	Risk Factors	2723
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2823
Item 3.	Defaults Upon Senior Securities	2823
Item 4.	Mine Safety Disclosures	2823
Item 5.	Other Information	2823
Item 6.	Exhibits	2924
Signatures		3025

Part I - Financial Information

Item 1. Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

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


		February 28, 2023		May 31, 2022			August 31, 2023		May 31, 2023
ASSETS	ASSETS					ASSETS
Current Assets:
Current assets:						Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	22,921	$	46,299	Cash and cash equivalents	$	5,942	$	28,999
Restricted cash						Restricted cash	25,271		14,575
Accounts receivable	Accounts receivable	82		227		Accounts receivable	27		82
Prepaid expenses and other current assets	Prepaid expenses and other current assets	1,387		1,336		Prepaid expenses and other current assets	2,308		2,103

Total current assets	Total current assets	24,390		47,862		Total current assets	33,548		45,759
Property and equipment, net	Property and equipment, net	167,276		64,260		Property and equipment, net	222,666		195,593
Right of use asset, net		12,911		6,408
Operating lease right of use assets, net						Operating lease right of use assets, net	11,183		1,290
Finance lease right of use assets, net						Finance lease right of use assets, net	55,691		14,303

Other Assets		3,030		1,450
Other assets						Other assets	26,065		7,012
TOTAL ASSETS	TOTAL ASSETS	$	207,607	$	119,980	TOTAL ASSETS	$	349,153	$	263,957

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	14,000	$	13,260
Current portion of lease liability		4,193		1,004

Current portion of term loan		4,855		1,333
LIABILITIES AND STOCKHOLDERS' EQUITY						LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:						Current liabilities:
Accounts payable						Accounts payable	$	16,229	$	6,446
Accrued liabilities						Accrued liabilities	12,743		8,330
Current portion of operating lease liability						Current portion of operating lease liability	1,807		320
Current portion of finance lease liability						Current portion of finance lease liability	23,471		5,722
Current portion of debt						Current portion of debt	9,163		7,950
Customer deposits	Customer deposits	36,370		9,524		Customer deposits	32,559		32,559
Current deferred revenue		47,619		3,877
Related party customer deposits						Related party customer deposits	3,811		3,811
Deferred revenue						Deferred revenue	50,863		47,168
Related party deferred revenue						Related party deferred revenue	971		1,524
Sales and use tax payable	Sales and use tax payable	1,563		—		Sales and use tax payable	62		1,630
Total current liabilities	Total current liabilities	108,600		28,998		Total current liabilities	151,679		115,460
Deferred tax liability		260		540

Long-term portion of lease liability		8,490		5,310
Long-term term loan		18,862		5,897
Long-term portion of operating lease liability						Long-term portion of operating lease liability	9,573		1,005
Long-term portion of finance lease liability						Long-term portion of finance lease liability	25,071		8,334
Long-term debt						Long-term debt	34,882		33,222
Long-term related party loan						Long-term related party loan	—		35,257
Other long-term related party liabilities						Other long-term related party liabilities	—		1,000
Total liabilities	Total liabilities	$	136,212	$	40,745	Total liabilities	221,205		194,278
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Common stock, $0.001 par value, 166,666,667 shares authorized, 99,471,127 shares issued and 94,469,399 shares outstanding at February 28, 2023, and 97,837,702 shares issued and 97,801,406 shares outstanding at May 31, 2022		$	100	$	98
Treasury stock, 5,001,728 shares at February 28, 2023 and 36,296 shares at May 31, 2022, at cost		(62)		(62)
Common stock, $0.001 par value, 166,666,667 shares authorized, 110,850,885 shares issued and 105,849,157 shares outstanding at August 31, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023						Common stock, $0.001 par value, 166,666,667 shares authorized, 110,850,885 shares issued and 105,849,157 shares outstanding at August 31, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023	110		101
Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost						Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost	(62)		(62)
Additional paid in capital	Additional paid in capital	155,055		128,293		Additional paid in capital	240,073		160,194
Accumulated deficit	Accumulated deficit	(94,243)		(56,070)		Accumulated deficit	(112,173)		(100,716)
Total stockholders’ equity attributable to Applied Digital Corporation	Total stockholders’ equity attributable to Applied Digital Corporation	60,850		72,259		Total stockholders’ equity attributable to Applied Digital Corporation	127,948		59,517
Noncontrolling interest	Noncontrolling interest	10,545		6,976		Noncontrolling interest	—		10,162
Total Stockholders' equity including noncontrolling interest		$	71,395	$	79,235
Total stockholders' equity including noncontrolling interest						Total stockholders' equity including noncontrolling interest	127,948		69,679
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	207,607	$	119,980	TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	349,153	$	263,957

See ~~Accompanying Notes~~accompanying notes to the ~~Financial Statements~~condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


		Three Months Ended				Nine Months Ended					Three Months Ended
		February 28, 2023		February 28, 2022		February 28, 2023		February 28, 2022			August 31, 2023		August 31, 2022
Revenues:
Revenue:										Revenue:
Hosting revenue	Hosting revenue	$	14,090	$	1,026	$	33,354	$	1,026	Hosting revenue	$	29,987	$	4,338

Cloud services revenue										Cloud services revenue	2,152		—
Related party hosting revenue										Related party hosting revenue	4,184		2,586
Total revenue										Total revenue	36,323		6,924
Costs and expenses:										Costs and expenses:
Cost of revenues	Cost of revenues	$	10,533	$	2,073	$	28,438	$	2,073	Cost of revenues	24,398		6,093
Gross profit		3,557		(1,047)		4,916		(1,047)

Costs and expenses:
Selling, general and administrative	Selling, general and administrative	$	10,514	$	1,370	$	42,727	$	15,585	Selling, general and administrative	17,052		5,008

Total costs and expenses	Total costs and expenses	$	10,514	$	1,370	$	42,727	$	15,585	Total costs and expenses	41,450		11,101
Operating loss	Operating loss	$	(6,957)	$	(2,417)	$	(37,811)	$	(16,632)	Operating loss	(5,127)		(4,177)

Other income (expense):
Interest Expense	Interest Expense	$	(384)	$	—	$	(1,125)	$	—	Interest Expense	2,074		356
Gain on extinguishment of accounts payable		—		80		—		405
Loss on extinguishment of debt	Loss on extinguishment of debt	—		—		(94)		(1,342)		Loss on extinguishment of debt	2,353		94
Total other expense, net		(384)		80		(1,219)		(937)
Net loss from continuing operations before income tax expenses		(7,341)		(2,337)		(39,030)		(17,569)
Income tax benefit (expense)		—		(60)		280		(274)
Net loss from continuing operations		(7,341)		(2,397)		(38,750)		(17,843)
Net gain from discontinued operations, net of income taxes		—		(4,048)		—		(2,870)
Net loss including noncontrolling interests		(7,341)		(6,445)		(38,750)		(20,713)
Loss from legal settlement										Loss from legal settlement	2,300		—
Net loss before income tax expenses										Net loss before income tax expenses	(11,854)		(4,627)
Income tax expense										Income tax expense	—		32
Net loss										Net loss	(11,854)		(4,659)
Net loss attributable to noncontrolling interest	Net loss attributable to noncontrolling interest	(316)		—		(577)		—		Net loss attributable to noncontrolling interest	(397)		(128)
Net loss attributable to Applied Digital Corporation	Net loss attributable to Applied Digital Corporation	$	(7,025)	$	(6,445)	$	(38,173)	$	(20,713)	Net loss attributable to Applied Digital Corporation	$	(11,457)	$	(4,531)

Basic and diluted net (loss) gain per share:	Basic and diluted net (loss) gain per share:									Basic and diluted net (loss) gain per share:
Continuing Operations		$	(0.08)	$	(0.04)	$	(0.41)	$	(0.35)
Discontinued Operations		$	—	$	(0.08)	$	—	$	(0.06)
Basic and diluted net loss per share	Basic and diluted net loss per share	$	(0.08)	$	(0.12)	$	(0.41)	$	(0.41)	Basic and diluted net loss per share	$	(0.12)	$	(0.05)
Basic and diluted weighted average number of shares outstanding	Basic and diluted weighted average number of shares outstanding	94,119,944		53,396,920		93,545,687		50,546,048		Basic and diluted weighted average number of shares outstanding	100,521,673		93,105,835

See ~~Accompanying Notes~~accompanying notes to the ~~Financial Statements~~condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity ~~(Deficit) (Unaudited)~~

For the Three Months Ended August 31, 2023 and August 31, 2022

(In thousands, except share data)

Three Months Ended February 28, 2023
Common Stock Treasury Stock Additional Paid in Capital Accumulated deficit Total Stockholders Equity Noncontrolling Interest Total Equity
Shares Amount Shares Amount
Balance, November 30, 2022 98,948,081 $ 99 (5,001,728) $ (62) $ 150,690 $ (87,218) $ 63,509 $ 8,461 $ 71,970
Issuance of common stock - vesting of restricted stock units 523,046 1 — — (115) — (114) — (114)
Stock-based compensation — — — — 4,480 — 4,480 — 4,480
Capital contribution to noncontrolling interest — — — — — — — 2,400 2,400
Net Loss — — — — — (7,025) (7,025) (316) (7,341)
Balance, February 28, 2023 99,471,127 $ 100 (5,001,728) $ (62) $ 155,055 $ (94,243) $ 60,850 $ 10,545 $ 71,395
(Unaudited)


	Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated Deficit		Stockholders’ Equity		Noncontrolling interest		Total Equity
	Shares	Amount		Shares	Amount
Balance, May 31, 2023	100,927,358	$	101	(5,001,728)	$	(62)	$	160,194	$	(100,716)	$	59,517	$	10,162	$	69,679
Shares issued in offering, net of costs	7,908,528	8		—	—		64,474		—		64,482		—		64,482
Shares issued from award vestings	530,732	—		—	—		—		—		—		—		—
Stock-based compensation	—	—		—	—		5,641		—		5,641		—		5,641
Net loss	—	—		—	—		—		(11,457)		(11,457)		(397)		(11,854)
Extinguishment of noncontrolling interest	1,484,267	1		—	—		9,764		—		9,765		(9,765)		—
Balance, August 31, 2023	110,850,885	$	110	(5,001,728)	$	(62)	$	240,073	$	(112,173)	$	127,948	$	—	$	127,948

Three Months Ended February 28, 2022
Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Common Stock Treasury Stock Additional Paid in
Capital Accumulated
Deficit Total Stockholders Equity
Shares Amount Shares Amount Amount Shares Amount Shares Amount
Balance, November 30, 2021 660,000 $ 15,135 1,380,000 $ 31,574 $ 46,709 53,396,920 $ 320 (36,296) $ (62) $ 43,657 $ (44,837) $ (922)
Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — $ — — (1,242) (1,242)
Net Loss — — — — — — — — $ — — (6,445) (6,445)
Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 $ 47,951 53,396,920 $ 320 (36,296) $ (62) $ 43,657 $ (52,524) $ (8,609)


	Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated Deficit		Stockholders’ Equity		Noncontrolling interest		Total Equity
	Shares	Amount		Shares	Amount
Balance, May 31, 2022	97,837,703	$	98	(36,296)	$	(62)	$	128,293	$	(56,070)	$	72,259	$	6,976	$	79,235
Stock-based compensation	—	—		—	—		579		—		579		—		579
Capital contribution to noncontrolling interest	—	—		—	—		—		—		—		1,746		1,746
Common stock forfeited	—	—		(4,965,432)	—		—		—		—		—		—
Net loss	—	—		—	—		—		(4,531)		(4,531)		(128)		(4,659)
Balance, August 31, 2022	97,837,703	$	98	(5,001,728)	$	(62)	$	128,872	$	(60,601)	$	68,307	$	8,594	$	76,901

See ~~Accompanying Notes~~accompanying notes to the ~~Financial Statements~~condensed consolidated financial statements

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)~~

~~(In thousands, except per share data)~~

Nine Months Ended February 28, 2023
Common Stock Treasury Stock Additional Paid in Capital Accumulated deficit Total Stockholders Equity Noncontrolling Interest Total Equity
Shares Amount Shares Amount
Balance, May 31, 2022 97,837,702 $ 98 (36,296) $ (62) $ 128,293 $ (56,070) $ 72,259 $ 6,976 $ 79,235
Issuance of common stock - vesting of restricted stock units 1,633,425 2 — — (116) — (114) — (114)
Stock-based compensation — — — — 26,878 — 26,878 — 26,878
Capital contribution to noncontrolling interest — — — — — — — 4,146 4,146
Common stock forfeited — — (4,965,432) — — — — — —
Net Loss — — — — — (38,173) (38,173) (577) (38,750)
Balance, February 28, 2023 99,471,127 $ 100 (5,001,728) $ (62) $ 155,055 $ (94,243) $ 60,850 $ 10,545 $ 71,395

Nine Months Ended February 28, 2022
Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred
Stock Series B Convertible Preferred
Stock Common Stock Treasury Stock Additional Paid in
Capital Accumulated
Deficit Total Stockholders Deficit
Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Shares Amount
Balance, May 31, 2021 660,000 $ 15,135 — $ — $ 15,135 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 (36,296) $ (62) $ 13,874 $ (21,623) $ (2,583)
Extinguishment of Debt — — — — — — — — — 5,083,828 31 — — 3,446 — 3,477
Issuance of Dividends to Preferred Stock — — — — — 60,822 6,082 29,772 2,979 — — — — — (8,946) 115
Conversion of Preferred Stock — — — — — (88,017) (9,452) (46,859) (4,828) 28,765,308 172 — — 14,108 — —
Service agreement stock compensation — — — — — — — — — 18,036,723 108 — — 12,229 — 12,337
Issuance of Preferred Stock — — 1,380,000 34,500 34,500 — — — — — — — — — — —
Issuance Costs of Preferred Stock — — — (2,926) (2,926) — — — — — — — — — — —
Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — — — — — — (1,242) (1,242)
Net Loss — — — — — — — — — — — — — — $ (20,713) (20,713)
Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 $ 47,951 — $ — — $ — 53,396,920 $ 320 (36,296) $ (62) $ 43,657 $ (52,524) $ (8,609)

~~See Accompanying Notes to the Financial Statements~~

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)
Nine Months Ended
February 28, 2023 February 28, 2022
CASH FLOW FROM OPERATING ACTIVITIES
Net loss attributable to Applied Digital Corporation $ (38,173) $ (20,713)
Net loss from discontinued operations, net of income taxes — (2,870)
Net loss attributable to noncontrolling interest (577) —
Net loss from continuing operations (38,750) (17,843)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and Amortization 4,631 245
Gain on extinguishment of accounts payable — (405)
Loss on extinguishment of debt 94 1,342
Stock-Based Compensation 26,878 12,337
Lease Expense 246 136
Deferred Tax (280) 274
Changes in assets and liabilities:
Accounts receivable 145 12
Prepaid expenses and other current assets (51) (2,091)
Customer deposits 26,846 2,126
Deferred revenue 43,742 2,883
Accounts payable and accrued liabilities (10,020) 4,479
Sales and use tax payable 1,563 —
Interest on finance leases (104) —
Lease Assets and Liabilities (796) (233)
Net cash provided by operating activities of continuing operations 54,144 3,262
Net cash provided by operating activities of discontinued operations — 966
NET CASH PROVIDED BY OPERATING ACTIVITIES 54,144 4,228
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment (96,214) (28,180)
Investments in private companies (100) —
Net cash used in investing activities of continuing operations (96,314) (28,180)
Net cash used in investing activities of discontinued operations — (7,408)
NET CASH USED IN INVESTING ACTIVITIES (96,314) (35,588)
Issuance of preferred stock — 34,500
Repayment of finance leases (1,635) (2)
Preferred issuance costs — (2,927)
Term loan payoff (7,056) —
Proceeds from issuance of term loan 25,567 —
Term Loan Issuance Costs (333) —
Loan Payments (1,784) —
Payments of employee restricted stock tax withholdings (114) —
Noncontrolling interest contributions 4,147 —
Net cash provided by financing activities of continuing operations 18,792 31,571
Net cash provided by financing activities of discontinued operations — —
CASH FLOW PROVIDED BY FINANCING ACTIVITIES 18,792 31,571
NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS (23,378) 211
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,299 11,750
CASH AND CASH EQUIVALENTS, END OF PERIOD 22,921 11,961
Less: cash and cash equivalents of discontinued operations — —
Cash and cash equivalents of continuing operations $ 22,921 $ 11,961
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 1,118 $ —
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Right-of-use asset obtained by lease obligation $ 8,693 $ 1,207
Fixed assets in accounts payable $ 9,384 $ 12,156


	Three Months Ended
	August 31, 2023		August 31, 2022
CASH FLOW FROM OPERATING ACTIVITIES
Net loss	$	(11,854)	$	(4,659)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	7,860		1,136
Stock-based compensation	5,641		579
Deferred income taxes	—		32
Loss on extinguishment of debt	2,353		94
Loss from legal settlement	2,300		—
Amortization of debt issuance costs	235		—
Loss on abandonment of assets	173		—
Changes in operating assets and liabilities:
Accounts receivable	55		177
Prepaid expenses and other current assets	(205)		(164)
Customer deposits	—		4,042
Related party customer deposits	—		545
Current deferred revenue	3,695		15,316
Current related party deferred revenue	(553)		—
Accounts payable	205		196
Accrued liabilities	2,113		—
Lease assets and liabilities	39		—
Sales and use tax payable	(1,568)		—
Other assets	(5,972)		—
CASH FLOW PROVIDED BY OPERATING ACTIVITIES	4,517		17,294
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment and other assets	(32,591)		(31,673)


Finance lease prepayments	(7,560)		—
Purchases of investments	(390)		—
CASH USED IN INVESTING ACTIVITIES	(40,541)		(31,673)
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of finance leases	(4,849)		(209)
Borrowings of long-term debt	3,750		15,000
Borrowings of related party debt	3,000		—
Repayments of long-term debt	(3,463)		(7,488)
Repayment of related party debt	(39,257)		—
Payment of deferred financing costs	—		(140)

Noncontrolling interest contributions	—		1,747
Proceeds from issuance of common stock	64,482		—
CASH FLOW PROVIDED BY FINANCING ACTIVITIES	23,663		8,910

NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(12,361)		(5,469)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD	43,574		46,299
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	31,213	$	40,830

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	1,839	$	356

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Operating right-of-use assets obtained by lease obligation	$	10,272	$	—
Finance right-of-use assets obtained by lease obligation	$	46,952	$	922
Property and equipment in accounts payable	$	6,729	$	8,352
Conversion of non-controlling interest	$	9,765	$	—
Loss from legal settlement	$	2,300	$	—

See ~~Accompanying Notes~~accompanying notes to the ~~Financial Statements~~condensed consolidated financial statements

Table of Contents

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (unaudited)

For the Three ~~and Nine Month Periods~~Months Ended ~~February 28,~~August 31, 2023

1.~~BUSINESS AND ORGANIZATION~~ Business and Organization

Applied Digital Corporation ~~f/k/a Applied Blockchain, Inc.~~ (the “Company”), is a designer, builder, and operator of ~~Next-Gen data centers across North America, which provide substantial computing power~~next generation digital infrastructure providing cost-competitive solutions to ~~high power computing applications such as blockchain infrastructure, nature language processing,~~customers in High-Performance Compute (“HPC”), artificial intelligence cloud service (“Cloud services”), and ~~artificial intelligence.~~datacenter hosting (“Hosting”) industries. 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~~three reportable segments. Financial information for ~~a fixed fee. The Company typically enters into long term fixed rate contracts with its customers.~~

On September 1, 2022, Company entered into a joint venture agreement with GMR Limited (“GMR”) to form Highland Digital Holdings, LLC (“Highland Digital”), which may acquire mining hardware and digital infrastructure assets. The Company and GMR each have a 50% ownership stake in Highland Digital. GMR is the controlling partner and will consolidate the results of Highland Digital in its financial statements. The Company will not consolidate Highland Digital in its financial statements, but will account for the entity under the equity method. In the Quarterly Report on Form 10-Q filed for the quarter ended November 30, 2022, Company had disclosed a firm commitment of $0.6 million to Highland Digital. During the period ended February 28, 2023, the Company’s obligation to fulfill that commitment was relieved, and the Company no longer has such commitment.

On February 17, 2023, the Company entered into a letter of credit agreement with Frost Bank for $7.0 million to secure the Company’s power contract at the Ellendale, North Dakota facility. The agreement runs through February 2024.Note 10 - Business Segments.

2.~~LIQUIDITY AND FINANCIAL CONDITION~~

As Basis of ~~February 28, 2023, the Company had approximate cash~~Presentation and cash equivalents of $22.9 million and negative working capital of $84.2 million. Historically the Company has incurred losses and has relied on equity and debt financings to fund its operations. Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued.

3.~~BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES~~Significant Accounting Policies

Principles of ~~Consolidation:~~Consolidation

The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of May 31, ~~2022~~2023 has been derived from the audited consolidated financial statements as of that date, but does not

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

include all disclosures required for audited annual financial statements.

In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. For further information, please refer to and read these interim unaudited condensed ~~Consolidated Financial Statements~~consolidated financial statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, ~~2022~~2023 filed with the SEC on August ~~29, 2022.~~2, 2023.

Significant Accounting Policies and Use of ~~Estimates:~~Estimates

There were no material changes in the Company’s significant accounting policies for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 as compared to the year ended May 31, ~~2022.~~2023. See Note 3 - Property and Equipment to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, ~~2022,~~2023, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates of the valuation allowance associated with the Company’s deferred tax assets.

Revenue Recognition

~~Cash and Cash Equivalents~~The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers.

Hosting Revenue

The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment. Hosting revenues are recorded monthly in fixed amounts, net of credits for non-performance, based on the terms of the agreements. Any ancillary revenue for maintenance or installation services is at a point in time when the customer has received the full service. As these services support the hosting operation as a whole, this revenue is captured within the hosting revenue caption. Customer contracts include advance payment terms. Advanced payments are recorded as deferred revenue until the related service is provided.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Cloud Services Revenue

The Company ~~considers~~also provides cloud services applicable to artificial intelligence. Customers pay a rate to the Company in exchange for managed services supported by Company-provided equipment. Revenues are recorded based on the fixed rate, net of any credits for non-performance, based on the terms of the agreements.

Segments

The Company has identified three reportable segments: artificial intelligence cloud services (“Cloud services”), high performance computing (“HPC”) datacenter hosting, and datacenter hosting (“Hosting”). Our chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on these three reportable segments. Intercompany transactions between segments are excluded for management reporting purposes.

The Cloud services segment operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment.

The HPC datacenter segment designs, builds, and operates next generation datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

The Hosting segment provides infrastructure, including energized space, and colocation services to crypto mining customers. Customers place hardware they own into the Company’s facilities and the Company provides operational and maintenance services for a fixed fee.

Recent Accounting Pronouncements

We reviewed all ~~highly liquid investments with an original maturity~~recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements.

Reclassifications

We have reclassified certain prior period revenue amounts from hosting revenue to cloud services revenue and related party revenue on our condensed consolidated statements of ~~three months~~operations. We have also reclassified amounts from accounts payable and accrued expenses and prepaid expenses and other current assets to accounts payable, accrued expenses, prepaid expenses, and other current assets as well as from customer deposits and deferred revenue to the associated related party caption lines in our condensed consolidated balance sheets to conform to our current period presentation. These reclassifications had no impact on reported net income, cash flows, or ~~less at the date of acquisition to be cash equivalents. The Company’s~~total assets and liabilities.

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in ~~excess~~the consolidated statements of ~~federally insured limits potentially subject us to concentrations~~cash flows as of ~~credit risk, although the Company believes it is subject to minimal risk.~~August 31, 2023 and August 31, 2022 were as follows (in thousands):


	August 31, 2023		May 31, 2023
Net Cash & Equivalents	$	5,942	$	28,999
Restricted Cash	25,271		14,575
Total Cash & Cash Equivalents	$	31,213	$	43,574

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

3. Property and Equipment

Property and equipment consisted of the following as of August 31, 2023, and May 31, 2023 (in thousands):


	Estimated Useful Life	August 31, 2023		May 31, 2023
Hosting equipment
Electric generation and transformers	15 years	$	7,763	$	4,655

Other equipment and fixtures	5 years - 7 years	3,101		1,684
Construction in progress		97,280		106,226
Information systems and software	5 years	27,570		21,173
Land and building
Land		2,152		2,152
Land improvements	15 years	1,296		1,293
Building	39 years	88,346		63,350
Leasehold improvements	3 years - 6 years	2,299		—
Total cost of property and equipment		229,807		200,533
Accumulated depreciation		(7,141)		(4,940)
Property and equipment, net		$	222,666	$	195,593

Depreciation expense totaled $2.2 million and $0.8 million and for the three months ended August 31, 2023 and 2022, respectively.

4. Revenue from Contracts with Customers

Below is a summary of the Company’s revenue concentration by major customers for the three months ended August 31, 2023 and 2022, respectively.


	Three Months Ended August 31,
	2023		2022
Customer A	68	%	—	%
Customer B	10	%	12	%
Customer C	—	%	36	%
Customer D	—	%	21	%
Customer E	—	%	17	%
Customer F	—	%	14	%

Deferred Revenue

As of August 31, 2023, the Company had $51.8 million in deferred revenue, which represents the Company’s remaining performance obligations, and expects to recognize the entire balance within the next 12 months. Changes in the Company's deferred revenue balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following tables (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Balance, beginning of period	$	48,692	$	3,877
Advance billings	39,465		22,240
Revenue recognized	(36,323)		(6,924)

Balance, end of period	$	51,834	$	19,193

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Customer Deposits

Changes in the Company's customer deposits balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following table (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Balance, beginning of period	$	36,370	$	9,524
Customer deposits received	—		4,587


Balance, end of period	$	36,370	$	14,111

5. Related Party Transactions

Related Party Revenue

The following table illustrates related party revenue for the three months ended August 31, 2023 and August 31, 2022 (in thousands):


	Three Months Ended August 31,
	2023		2022
Customer D*	$	2,332	$	1,450
Customer E**	$	1,852	$	1,136

*Customer D is a subsidiary of an entity which is deemed to beneficially own over 5% of the Company's outstanding common stock

**Customer E is 60% owned by an individual who is deemed to beneficially own over 5% of the Company's outstanding common stock

The following table illustrates related party deferred revenue and deposits balances as of August 31, 2023 and May 31, 2023 (in thousands):


	Customer D balances as of				Customer E balances as of
	August 31, 2023		May 31, 2023		August 31, 2023		May 31, 2023
Deferred revenue	$	923	$	1,474	$	48	$	50
Customer Deposits	$	2,450	$	2,450	$	1,361	$	1,361

Related Party Sublease Income

For three months ended August 31, 2023 and August 31, 2022, the Company received sublease income of $23 thousand and $27 thousand, respectively, from B. Riley Asset Management, which is also a wholly-owned subsidiary of B. Riley Financial, Inc. Mr. Cummins, the CEO of the Company, is also the President of B. Riley Asset Management.

6. Debt

Long-term debt consisted of the following components (in thousands):


	August 31, 2023		May 31, 2023
6.50% Starion term loan	$	12,109	$	12,786
6.15% Vantage Garden City loan	13,154		10,074
7.48% Starion Ellendale loan	18,859		19,728
Other long-term debt	386		354
Debt issuance costs, net of amortization	(463)		(3,012)
Less: Current portion of term loan	(9,163)		(7,950)
Long-term debt, net	$	34,882	$	31,980

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Letters of Credit

As of August 31, 2023, the Company had letters of credit totaling $25.3 million. As of May 31, 2023, the Company had letters of credit totaling $14.5 million. The Company has restricted cash related to its letters of credit ~~that it holds with Vantage Bank~~ and ~~Frost Bank. The Company~~ is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which ~~last through January 2024 and February 2024, respectively. The Company also has restricted cash related to its Starion Term Loan Buy-Down (as defined below). The~~all have terms ending within the 12 months following ~~table reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of February 28, 2023 and May~~August 31, ~~2022.~~

(in thousands) February 28, 2023 May 31, 2022
Net Cash & Equivalents $ 8,421 $ 38,798
Restricted Cash $ 14,500 $ 7,501
Total Cash & Cash Equivalents $ 22,921 $ 46,299

~~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.

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

~~Reclassifications~~

Within the Condensed Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current period presentation. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.

4.~~PROPERTY AND EQUIPMENT AND DEPOSITS ON EQUIPMENT~~

~~Property and equipment consisted of the following as of February 28, 2023, and May 31, 2022:~~

(in thousands) Estimated Useful Life February 28,
2023 May 31,
2022
Hosting Equipment
Electric Generation and Transformers 15 years $ 4,520 $ 4,338
Other Equipment and Fixtures 5 years-7 years 1,034 588
Construction in Progress 109,822 18,305
Information Systems and Software 5 years 11,229 9,608
Land & Building
Land 2,152 1,074
Land Improvements 15 years 1,285 1,180
Building 39 years 33,008 30,176
Deposits on Equipment 7,816 —
Total cost of property and equipment 170,865 65,269
Accumulated Depreciation (3,590) (1,009)
Property and Equipment, Net $ 167,276 $ 64,260

Depreciation expense from continuing operations totaled $0.9 million and $0.2 million and for the three months ended February 28, 2023 and 2022, respectively. Depreciation expense from continuing operations totaled $2.6 million and $0.2 million and for the nine months ended February 28, 2023 and 2022, respectively. Construction in progress as of February 28, 2023 represents assets not placed into service at the Company’s Garden City, Texas and Ellendale, North Dakota locations, which were not operational as of February 28, 2023.

5.~~REVENUE FROM CONTRACTS WITH CUSTOMERS~~

The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration 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 three and nine months ended February 28, 2023 and 2022, respectively.~~

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

Three Months Ended February 28,
Customer 2023 2022
Customer A 26 % 62 %
Customer B 25 % — %
Customer C 16 % 16 %
Customer D 13 % 9 %
Customer E 13 % 13 %
Others 7 % — %

Nine Months Ended February 28,
Customer 2023 2022
Customer A 31 % 62 %
Customer B 23 % — %
Customer C 17 % 16 %
Customer D 14 % 9 %
Customer E 13 % 13 %
Others 3 % — %

~~Remaining Performance Obligations~~

As of February 28, 2023, the Company had $47.6 million in deferred revenue, which represents the Company’s remaining performance obligations. The Company expects to recognize the entire $47.6 million within the next 12 months.

~~Deferred Revenue~~

~~Changes in the Company's deferred revenue balances from hosting operations for the three and nine months ended February 28, 2023 and 2022, respectively, are shown in the following table:~~

(in thousands) (in thousands)
Three Months Ended February 28, 2023 Three Months Ended February 28, 2022
Balance at November 30, 2022 $ 29,394 Balance at November 30, 2021 $ —
Advance billings $ 32,315 Advance billings $ 3,909
Revenue recognized $ (14,090) Revenue recognized $ (1,026)
Other adjustments $ — Other adjustments $ —
Balance at February 28, 2023 $ 47,619 Balance at February 28, 2022 $ 2,883

(in thousands) (in thousands)
Nine Months Ended February 28, 2023 Nine Months Ended February 28, 2022
Balance at May 31, 2022 $ 3,877 Balance at May 31, 2021 $ —
Advance billings $ 76,961 Advance billings $ 3,909
Revenue recognized $ (33,354) Revenue recognized $ (1,026)
Other adjustments $ 135 Other adjustments $ —
Balance at February 28, 2023 $ 47,619 Balance at February 28, 2022 $ 2,883

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

~~Customer Deposits~~

~~Changes in the Company's customer deposits balances for the three and nine months ended February 28, 2023 and 2022, respectively, are shown in the following table:~~

(in thousands) (in thousands)
Three Months Ended February 28, 2023 Three Months Ended February 28, 2022
Balance at November 30, 2022 $ 24,689 Balance at November 30, 2021 $ —
Customer deposits received $ 11,681 Customer deposits received $ 5,645
Customer deposits refunded $ — Customer deposits refunded $ —
Other adjustments $ — Other adjustments $ —
Balance at February 28, 2023 $ 36,370 Balance at February 28, 2022 $ 5,645

(in thousands) (in thousands)
Nine Months Ended February 28, 2023 Nine Months Ended February 28, 2022
Balance at May 31, 2022 $ 9,524 Balance at May 31, 2021 $ —
Customer deposits received $ 26,980 Customer deposits received $ 5,645
Customer deposits refunded $ — Customer deposits refunded $ —
Other adjustments $ (135) Other adjustments $ —
Balance at February 28, 2023 $ 36,370 Balance at February 28, 2022 $ 5,645

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 material related party transactions.

~~Related Party Note Payable~~

During the period ended February 28, 2022, a related party note payable was held by the CEO of the Company. During this period, the outstanding debt principal of $0.5 million and accrued interest of $1.6 million were 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 an exchange agreement, the note payable was surrendered and cancelled, and all rights including rights to accrued interest due were extinguished.

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

~~Related Party Revenue~~

The Company has material transactions with two related parties Company A is a customer and is also the parent company of the minority member of the 1.21 Gigawatts joint venture.. Company B is a customer and is also the controlling member of the Highland Digital joint venture. Company B became a related party during September 2022. The following tables illustrate related party revenue for the three and nine months ended February 28, 2023 and February 28, 2022.

Revenue for the Three Months ended
(in thousands) February 28, 2023 February 28, 2022
Customer A $ 3,700 $ 634
Customer B $ 5,828 $ 392

Revenue for the Nine Months ended
(in thousands) February 28, 2023 February 28, 2022
Customer A $ 10,169 $ 634
Customer B $ 14,450 $ 392

~~The following tables illustrate related party deferred revenue and deposits balances as of February 28, 2023 and May 31, 2022.~~

Customer A Balances as of
(in thousands) February 28, 2023 May 31, 2022
Deferred revenue $ 1,616 $ 1,721
Customer Deposits $ 1,584 $ 1,719

Customer B Balances as of
(in thousands) February 28, 2023 May 31, 2022
Deferred revenue $ 2,997 $ 1,150
Customer Deposits $ 7,214 $ 5,048

7.~~DEBT~~

~~Letter of Credit~~

As of February 28, 2023 and May 31, 2022, the Company had letters of credit with Vantage Bank and Frost Bank that together total $14.5 million. As discussed in Footnote 3, the Company is required to maintain theses amount in separate cash balance, and therefore the cash is restricted. Further, the Company had no unused lines of credit as of February 28, 2023 or May 31, 2022, respectively.

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

~~Starion Term~~B. Riley Loan

On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank 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 provides for an interest rate of 6.50% per annum. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. The Company is not subject to financial covenants until May ~~31, 2024. At that time, the Company will be subject to a debt service coverage ratio. Deferred financing costs related to the Starion Term Loan total $0.1 million.~~

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. The Company has entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5% for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”). The loan totals $0.2 million and bears an interest rate of 2%, and the bond totals $0.5 million.

In connection with the Starion Loan Agreement, the Company repaid all of the outstanding balance on the March 11, 2022 agreement between the Company and Vantage Bank Texas. This agreement included a promissory note agreement for $7.5 million for a five year term with an interest rate of 5% per annum.

~~Vantage Garden City Loan~~

~~On November 7, 2022, APLD – Rattlesnake Den I,~~23, 2023, Sai Computing LLC, a wholly-owned subsidiary of the Company (“SAI”), entered into a Loan and Security Agreement (the "B. Riley Loan") with ~~Vantage Bank Texas~~B. Riley Commercial Capital, LLC and B. Riley Securities, with the Company as ~~guarantor, which agreement~~Guarantor. The B. Riley Loan provides for a term loan of up to $50 million in the principal amount of $15 million (the “Vantage Garden City Loan Agreement”). The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for the Borrower’s datacenter in Garden City, Texas, with each installment not exceeding approximately $0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”). The unpaid principal amount of the Vantage Garden City Loan Agreement will bear interest at a fixed rate of 6.15% per annum, and the Borrower may prepay the Vantage Garden City Loan Agreement, in whole or in part, without the payment of any fee or penalty. The Vantage Garden City Loan Agreement matures April 26, 2028. The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default. As of February 28, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement. Total deferred costs related to the issuance of this loan total are $0.2 million.

~~Starion Ellendale Loan~~

On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”). The Ellendale Loan Agreement provides for a term loan in the principal amount of $20 million with a maturity date of February 3, 2028. The Loan Agreement contains customary covenants, representations and warranties and events of default. The Loan Agreement provides for an interest rate of ~~7.48%~~9.00% per ~~annum.~~annum and a 3% commitment fee on outstanding balances as of each quarter. The proceeds of the B. Riley Loan ~~will be~~are being used to provide additional liquidity to help fund ~~expansion on~~ the ~~Ellendale hosting datacenter.~~

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For~~buildout of the ~~Three~~Company’s recently announced cloud services platform and ~~Nine Month Period Ended February 28, 2023~~

datacenters by the Company, and for general corporate purposes and working capital. As of ~~February 28,~~August 31, 2023, the Company had ~~not received funding from~~repaid all balances on the ~~Ellendale~~loans. Total remaining unused capacity on the B. Riley Loan ~~Agreement, and accordingly no amounts have been included in the tables below.~~

as of August 31, 2023 was $10.5 million.

Remaining Principal Payments ~~and Term Loan Balances~~

Below is a summary of the remaining principal payments due over the life of the term loans as of ~~February 28, 2023.~~

August 31, 2023 (in thousands):


~~Year~~	~~Principal Payments (in thousands)~~
~~FY23~~Remainder of FY24	$	~~901~~
~~FY24~~	~~5,502~~6,930
FY25	~~5,887~~9,831
FY26	~~6,231~~10,508
FY27	~~5,004~~11,221
~~Thereafter~~FY28	~~526~~6,018

Total ~~Term Loan Remaining Payments~~	$	~~24,051~~44,508

~~Below is a summary of the Company’s term loan balances, including current debt and deferred financing fees as of February 28, 2023 and May 31, 2022.~~

(in thousands) February 28, 2023 May 31, 2022
Term Loan Balance $24,051 $7,324
Less: Deferred Issuance Costs (333) (94)
Less: Current portion of Term Loan (4,855) (1,333)
Long-term Portion of Term Loan $18,862 $5,897

~~8. STOCKHOLDERS’ EQUITY~~

~~Common Stock~~

~~The table below illustrates the Company’s common stock balances as February 28, 2023 and May 31, 2022.~~

Share Amounts As Of
February 28, 2023 May 31, 2022
Authorized to Issue 166,666,667 166,666,667
Issued 99,471,127 97,837,702
Outstanding 94,469,399 97,801,406

~~Restricted Stock Awards~~

The Company has granted restricted stock awards to officers and directors. 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

~~APPLIED DIGITAL CORPORATION AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~For the Three and Nine Month Period Ended February 28, 2023~~

~~related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met.~~

~~The following is a summary of the activity and balances for unvested restricted stock awards granted for the nine months ended February 28, 2023:~~

Number of Shares Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2022 1,366,666 $ 8.04
Granted 77,500 $ 2.04
Vested (1,048,333) $ 7.60
Forfeited — $ —
Outstanding as of February 28, 2023 395,833 $ 8.04

As of February 28, 2023, total remaining expense to be recognized related to these awards was $0.2 million and the weighted average remaining recognition period for the unvested awards was one month.

~~Restricted Stock Units~~

The Company has granted restricted stock unit awards (“RSUs”) to certain consultants, in all cases as compensatory grants for consulting services rendered to the Company, which contain performance conditions that affect vesting. 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.7. Stockholders' Equity

Equity Plans

On October 9, 2021, the Company’s ~~board~~Board of ~~directors~~Directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s 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 ~~February 28,~~August 31, 2023, the Company had issued awards for approximately ~~8.0~~13.8 million ~~awards~~shares of common stock of the Company (the “Common Stock”) under the plans.

Restricted Stock Awards

As of August 31, 2023, total remaining expense to be recognized related to these awards was $0.3 million and the weighted average remaining recognition period for the unvested awards was 0.2 years.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Restricted Stock Units

The Company has granted restricted stock unit awards (“RSUs”) to certain consultants and full-time employees. The following is a summary of the activity and balances for unvested restricted stock units granted for the ~~nine~~three months ended ~~February 28,~~August 31, 2023:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2023	12,465,935	$	2.53
Granted	1,311,900	7.79
Vested	(573,428)	2.69
Forfeited	(286,699)	2.21
Outstanding as of August 31, 2023	12,917,708	$	3.06

As of August 31, 2023, total remaining expense to be recognized related to these awards was $32.3 million and the weighted average remaining recognition period for the unvested awards was 1.9 years.

Public Offering

During the three months ended August 31, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement pursuant to which the Company may sell up to $125 million in shares of Common Stock. As of August 31, 2023, the Company has sold approximately 7.9 million shares. Net proceeds, less commission and legal fees of approximately $2.2 million, were approximately $64.5 million.

Extinguishment of Noncontrolling Interest

On August 31, 2023, pursuant to the joint venture agreement, the minority partner in 1.21 Gigawatts LLC exercised the option to exchange their interest in the joint venture for approximately 1.5 million shares for a value of $9.8 million of the Company’s common stock. The Company is now the sole member of 1.21 Gigawatts LLC and will report all activity as attributable to the Company in future periods.

8. Leases

The Company enters into leases for hosting equipment, office space, and land. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively.

Components of lease expense were as follows (in thousands):


	Three months ended
	August 31, 2023		August 31, 2022
Operating lease cost:
Operating lease expense	$	485	$	82
Short-term lease expense	82		63
Total operating lease cost	567		145
Finance lease expense:
Amortization of right-of-use assets(1)	5,630		298
Interest on lease liabilities	1,082		109

Total finance lease cost	6,712		407
Sublease Income	(23)		(27)
Total net lease cost	$	7,256	$	525

(1) Amortization of right-of-use assets is included within depreciation expense, and is recorded within cost of revenues and selling, general and administrative expense in the condensed consolidated statements of operations.

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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three ~~and Nine Month Period~~Months Ended ~~February 28,~~August 31, 2023

Number of Shares Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2022 1,791,666 $ 8.04
Granted 7,897,907 $ 2.32
Vested (630,529) $ 5.33
Forfeited (473,748) $ 7.32
Outstanding as of February 28, 2023 8,585,296 $ 3.01
The following table represents the Company’s future minimum lease payments as of May 31, 2023:


	Operating Leases		Finance Leases		Total
Remainder of FY24	$	1,921	$	20,185	$	22,106
FY25	2,681		25,678		28,359
FY26	2,782		4,339		7,121
FY27	2,536		188		2,724
FY28	2,336		180		2,516
Thereafter	1,398		89,944		91,342
Total lease payments	13,654		140,514		154,168
Less: imputed interest	(2,274)		(91,972)		(94,246)
Total lease liabilities	11,380		48,542		59,922
Less: Current portion of lease liability	(1,807)		(23,471)		(25,278)
Long-term portion of lease liability	$	9,573	$	25,071	$	34,644

~~As of February 28, 2023, total remaining expense to be recognized~~Supplemental cash flow and other information related to ~~these awards was $13.3~~leases is as follows:


	Three Months Ended
	August 31, 2023		August 31, 2022
Weighted-average years remaining (in years):
Finance leases	8.4 years		51.0 years
Operating leases	5.0 years		4.2 years

Weighted-average discount rate:
Finance leases	8.5	%	8.0	%
Operating leases	7.7	%	12.5	%

The Company has entered into operating leases which are executed but not yet commenced with total minimum payments of approximately $143.4 million ~~and~~to support the ~~weighted average remaining recognition period~~Company's Cloud service business. The payments are for ~~the unvested awards was 20~~various leases with various lease terms ranging from 60 months to 84 months.

~~Share Forfeiture~~

On June 6, 2022, through an agreement between the Company and Xsquared Holding Limited (“Sparkpool”), Sparkpool agreed to forfeit 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 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 returned to the Company and placed in treasury.

9. ~~LEASES~~

During the nine months ended February 28, 2023, the Company entered into twenty-five new leases, bringing the total number of leases to 44. The Company considered the nature of the leases under ASC 842 ~~Leases~~Commitments and determined each of these leases represent finance leases. The weighted average term of the leases is 30 months and the weighted average discount rate of the leases is 7.87%. Total ROU assets entered into during the nine months ended February 28, 2023 totaled $8.7 million.

~~10. COMMITMENTS AND CONTINGENCIES~~

~~Commitments~~

~~As of February 28, 2023, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 9 - Leases, respectively.~~

Contingencies

Energy Commitment

The Company also has ~~an annual~~a minimum commitment of approximately ~~$24.2~~$95.7 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility with a remaining term of approximately 3.5 years as of ~~February 28,~~August 31, 2023. 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 year, as the Company commits to specific power consumption on an annual basis as part of the energy services agreement.

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.

On August 12, 2023, a putative securities class action complaint, captioned McConnell v. Applied Digital Corporation, Wesley Cummins and David Rench, No. 3:23-cv-1805, was filed in the U.S. District Court for the Northern District of Texas, Dallas Division against Applied Digital Corporation (the “Company”) and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act. The complaint alleges that the defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleges that the Company overstated the profitability of its datacenter hosting business and its ability to successfully transition into a low-

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules.

The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable.

As of ~~February 28,~~August 31, 2023 and May 31, ~~2022,~~2023, there were no other 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.

Settlement of Potential Claim

Subsequent to August 31, 2023, the Company entered into a settlement agreement in respect of employment-related claims by a former executive. The terms of the settlement include payment to the claimant of $2.3 million, which was included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.

10. Business Segments

Revenue by segment (excluding HPC as that segment has no revenue) was as follows (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Cloud services segment	$	2,152	$	—
Hosting segment	34,171		6,924

Total revenue	$	36,323	$	6,924

Segment profit and a reconciliation to net income (loss) before income tax expenses is as follows (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Segment Profit:
Cloud services segment	$	(7,434)	$	—
Hosting segment	8,958		(658)
HPC hosting segment	(730)		—
Total segment profit	794		(658)
Other (1)	(8,221)		(3,519)
Interest expense	2,074		356
Loss on debt extinguishment	2,353		94
Income before income taxes	$	(11,854)	$	(4,627)

(1) Other includes corporate related items not allocated to reportable segments.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three ~~and Nine Month Period~~Months Ended ~~February 28,~~August 31, 2023

We also provide the following additional segment disclosures (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Depreciation and amortization:
Cloud services segment	$	4,508	$	—
Hosting segment	3,199		1,115
HPC hosting segment	126		—
Other (1)	27		21
Total depreciation and amortization	$	7,860	$	1,136
Capital expenditures:
Cloud services segment	$	45,717	$	—
Hosting segment	18,298		33,097
HPC hosting segment	11,644		—
Total capital expenditures	$	75,659	$	33,097

(1) Other includes corporate related items not allocated to reportable segments.

Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands):


	August 31, 2023		May 31, 2023
Cloud services segment	$	68,075	$	3,127
Hosting segment	232,451		224,447
HPC hosting segment	23,449		10,949
Total segment assets	323,975		238,523
Other (1)	25,178		25,434
Total assets	$	349,153	$	263,957

(1) Other includes corporate related items not allocated to reportable segments.

11. ~~EARNINGS PER SHARE~~Earnings Per Share

Basic net income (loss) per share (“EPS”) of ~~Common Stock~~common stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of ~~Common Stock~~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~~common stock were exercised or converted into ~~Common Stock~~common stock or resulted in the issuance of ~~Common Stock~~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. The table below shows the calculation for earnings per share:

Basic and diluted loss per share: Three Months Ended Nine Months Ended
February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022
Net loss from continuing operations $ (7,341) $ (2,397) $ (38,750) $ (17,843)
Net loss from discontinued operations, net of income taxes — (4,048) — (2,870)
Net loss including noncontrolling interests (7,341) (6,445) (38,750) (20,713)
Net loss attributable to noncontrolling interest (316) — (577) —
Net loss attributable to Applied Digital Corporation $ (7,025) $ (6,445) $ (38,173) $ (20,713)
Basic and diluted net (loss) gain per share:
Continuing Operations $ (0.08) $ (0.04) $ (0.41) $ (0.35)
Discontinued Operations $ — $ (0.08) $ — $ (0.06)
Basic and diluted net loss per share $ (0.08) $ (0.12) $ (0.41) $ (0.41)
Basic and diluted weighted average number of shares outstanding 94,119,944 53,396,920 93,545,687 50,546,048

~~12. DISCONTINUED OPERATIONS~~

During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment. The Company ceased all crypto mining operations and completed the sale of the assets during the year ended May 31, 2022. The Company has no plans to return to crypto mining operations in the future as the Company grows. The results of these operations have been displayed as discontinued operations.Operating results of discontinued operations are summarized below:

Three Months Ended Nine Months Ended
in thousands February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022
Cryptoasset mining revenue, net $ — $ 907 $ — $ 2,945
Cost of sales — 628 — 1,589
Gross profit — 279 — 1,356
Impairment of cryptocurrency assets — (225) — (390)
Loss on the sale of fixed assets $ — (578) $ — (582)
Loss on the reclassification of fixed assets (3,524) (3,254)
Net loss from discontinued operations $ — $ (4,048) $ — $ (2,870)


	Three Months Ended
	August 31, 2023		August 31, 2022
Net loss	$	(11,854)	$	(4,659)
Net loss attributable to noncontrolling interest	(397)		(128)
Net loss attributable to Applied Digital Corporation	$	(11,457)	$	(4,531)

Basic and diluted net (loss) gain per share:
Basic and diluted net loss per share	$	(0.12)	$	(0.05)
Basic and diluted weighted average number of shares outstanding	100,521,673		93,105,835

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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three ~~and Nine Month Period~~Months Ended ~~February 28,~~August 31, 2023

~~As of February 28, 2023 and May 31, 2022,~~12. Subsequent Events

B. Riley Loan

SAI borrowed an additional $5.0 million under the remaining capacity from the existing B. Riley Loan that the Company ~~did not hold any cryptoassets.~~

~~13. SUBSEQUENT EVENTS~~

~~On March 30, 2023, the Company received funding for the Starion Ellendale Loan. The funding, net of issuance fees, totaled $19.8 million. See full discussion over Starion Ellendale Loan~~entered into in ~~in Note 7 - Debt.~~May 2023.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.

Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

•

• labor and other workforce shortages and challenges;

•our dependence on principal customers;

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

•our 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; and

•equipment failures, power or other supply disruptions.

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,~~2023, which was filed on August ~~29, 2022,~~2, 2023, 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 unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

Business Overview

We ~~design, build,~~are a designer, builder, and ~~operate Next-Gen datacenters which are designed~~operator of next generation digital infrastructure providing cost-competitive solutions to ~~provide massive computing power and support high-compute applications. Our first facility was constructed~~customers in ~~Jamestown, North Dakota with 100 Megawatts~~High-Performance Compute (“~~MW”~~HPC”) 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 serving the Bitcoin network, but these facilities can also host hardware for other applications such as, artificial intelligence ~~protein sequencing, drug discovery, machine learning~~cloud service (“Cloud services”), and ~~additional blockchain networks and applications. During the quarter ended February 28, 2023, we have tested~~datacenter hosting other high-compute applications at our first facility. On March 7, 2023, we announced the energizing of the 180 MW facility in Ellendale, ND. Once fully energized, this location will bring the Company to 280 MW of total hosting capacity across its facilities in North Dakota, all of which are contracted out to customers on multi-year terms. In addition to this facility, we have substantially completed construction on our facility in Garden City,

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Texas. 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.

(“Hosting”) industries.

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

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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 unaudited condensed 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 unaudited condensed 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~~critical accounting policies and estimates are ~~discussed~~identified and described in ~~Note 3 – Basis of Presentation~~our annual consolidated financial statements and ~~Significant Accounting Policies, of~~ the ~~Notes to Consolidated Financial Statements of the Company's~~related notes included in our 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 Digital’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

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~~the Company. Additionally, the facility is powered through a five-year energy services agreement with a local utility.~~

~~The facility began energizing in late January 2022~~ and ~~has over 90 MW online as of February 28, 2023. 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. There have been no ~~reductions or interruptions in service~~material changes since ~~that time~~the filing of our Annual Report.

Business Update

Cloud Services

Our Cloud services business operates through our Sai Computing brand and ~~February 28, 2023.~~provides cloud services applicable to artificial intelligence.

~~On July 12, 2022,~~In June 2023, the Company ~~entered into a five-year hosting contract with Marathon Digital Holdings, Inc. ("Marathon")~~expanded its commitment for ~~270 MW of mining capacity. As a result of this arrangement,~~up to 26,000 GPUs for the Company's Cloud services business. During the three months ended August 31, 2023, the Company ~~will supply Marathon with 90 MW~~received and deployed an initial production cluster of ~~hosting capacity at its facility in Texas~~1,024 GPUs, and ~~180 MW of hosting capacity at its second facility in North Dakota. Marathon has subsequently added 39.6 MW of additional capacity at the Company’s Jamestown, North Dakota facility.~~began recognizing revenue on our first cloud services contract.

HPC Datacenter Hosting

~~Discontinued Operations~~

~~During the fourth quarter of our last fiscal year, the Company ceased all crypto mining operations~~Our HPC datacenter business designs, builds, and ~~completed the sale of all crypto mining equipment. The results of the crypto mining operations~~operates next-gen datacenters which are ~~accounted for as discontinued operations in our unaudited condensed 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, Texas, 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 expecteddesigned to provide ~~200 MW of~~massive computing power ~~to hosting customers. The facility is substantially complete~~ and ~~the 200 MW capacity is fully contracted with customers.~~support high-compute applications within a cost-effective model.

On August 8, 2022, the Company completed the purchase of 40 acres of land in Ellendale, North Dakota, for a total cost of $1 million. The Company took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023. Once fully energized, this location will bring the Company to 280 MW of total hosting capacity across its facilities in North Dakota, all of which are contracted out to customers on multi-year terms.

As our hosting operations expand, we believe our business structure may become conducive to a real estate investment trust (“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.

On October 13, 2022, the Company entered into a joint venture agreement with Foundry Technologies, Inc. (“Foundry”) to form SAI Computing, LLC (“SAI”). SAI will provide artificial intelligence and machine learning application customers with access to machines and a hosting environment. The Company is ~~currently expanding capacity at the Jamestown, North Dakota datacenter facility to provide access to SAI and its customers. The Company has an 98% ownership interest~~ in ~~SAI and consolidates the entity.~~

~~On December 14, 2022, the Company began construction~~process of ~~its latest specialized processing center,~~constructing a ~~5 MW~~ facility next to the Company’s currently operating ~~100-MW~~facilities in Jamestown, North Dakota, and Ellendale, North Dakota.

Datacenter Hosting

Our datacenter hosting business provides infrastructure and colocation services to crypto mining customers.

As of August 31, 2023, the Company’s 106 MW facility in Jamestown, North ~~Dakota. This separate~~Dakota and ~~unique building, designed~~180 MW facility in Ellendale, North Dakota were fully operational. The Company’s 200 MW facility in Garden City, Texas is expected to energize during the fourth quarter of calendar 2023. On September 8, 2023, the Company entered into a Facility Extension Agreement with Oncor Electricity Delivery Company LLC for the transmission and ~~purpose-built for Graphics Processing Units (“GPUs”), will sit separate from~~metering of power to the Company’s ~~current buildings~~Garden City facility. With this in place, metering and ~~plans to host more traditional high performance computing (“HPC”) applications, such as natural language processing, machine learning,~~telemetry equipment will be installed onsite by Oncor and ~~additional HPC developments.~~once installed, the site will be energized.

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~~Changes to Equity~~

On April 12, 2022, the Company effected a one-for-six (1:6) reverse split (the “Reverse Stock Split”) of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). All references to Common Stock, options to purchase Common Stock, restricted stock units, share data, per share data and related information contained in the unaudited 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. On January 14, 2022, the Company granted restricted stock awards to directors and officers and restricted stock units to certain consultants. Each of these awards and units contained a vesting condition of an effective registration statement covering the resale of the Common Stock underlying these awards. On October 11, 2022, the Securities and Exchange Commission declared the Company’s registration statement covering these awards to be effective. In conjunction with this registration statement being declared effective, awards for approximately 1.1 million shares of Common Stock vested.

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Results of Operations

Comparative Results for the Three ~~and Nine~~ Months Ended ~~February 28,~~August 31, 2023 and 2022:

The following table sets forth key components of the results of operations (in thousands) ~~of Applied Digital~~ during the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023 and 2022.


		Three Months Ended						Nine Months Ended							Three Months Ended
		February 28, 2023			February 28, 2022			February 28, 2023			February 28, 2022				August 31, 2023			August 31, 2022
Revenues:
Revenues														Revenues
Hosting revenue	Hosting revenue	$	14,090		$	1,026		$	33,354		$	1,026		Hosting revenue	$	29,987		$	4,338

Cloud services revenue														Cloud services revenue	2,152			—
Related party hosting revenue														Related party hosting revenue	4,184			2,586
Total revenue														Total revenue	36,323			6,924
Costs and expenses:														Costs and expenses:
Cost of revenues	Cost of revenues	$	10,533		$	2,073		$	28,438		$	2,073		Cost of revenues	24,398			6,093
Gross profit		3,557			(1,047)			4,916			(1,047)

Costs and expenses:
Selling, general and administrative	Selling, general and administrative	$	10,514		$	1,370		$	42,727		$	15,585		Selling, general and administrative	17,052			5,008

Total costs and expenses	Total costs and expenses	$	10,514		$	1,370		$	42,727		$	15,585		Total costs and expenses	41,450			11,101
Operating loss	Operating loss	$	(6,957)		$	(2,417)		$	(37,811)		$	(16,632)		Operating loss	(5,127)			(4,177)

Other income (expense):
Interest Expense		$	(384)		$	—		$	(1,125)		$	—
Gain on extinguishment of accounts payable		—			80			—			405
Interest expense, net														Interest expense, net	2,074			356
Loss on extinguishment of debt	Loss on extinguishment of debt	—			—			(94)			(1,342)			Loss on extinguishment of debt	2,353			94
Total other expense, net		(384)			80			(1,219)			(937)
Net loss from continuing operations before income tax expenses		(7,341)			(2,337)			(39,030)			(17,569)
Income tax benefit (expense)		—			(60)			280			(274)
Net loss from continuing operations		(7,341)			(2,397)			(38,750)			(17,843)
Net loss from discontinued operations, net of income taxes		—			(4,048)			—			(2,870)
Net loss including noncontrolling interests		(7,341)			(6,445)			(38,750)			(20,713)
Loss from legal settlement														Loss from legal settlement	2,300			—
Net loss before income taxes														Net loss before income taxes	(11,854)			(4,627)
Income tax expenses														Income tax expenses	—			32
Net loss														Net loss	(11,854)			(4,659)
Net loss attributable to noncontrolling interest	Net loss attributable to noncontrolling interest	(316)			—			(577)			—			Net loss attributable to noncontrolling interest	(397)			(128)
Net loss attributable to Applied Digital Corporation	Net loss attributable to Applied Digital Corporation	$	(7,025)		$	(6,445)		$	(38,173)		$	(20,713)		Net loss attributable to Applied Digital Corporation	$	(11,457)		$	(4,531)

Basic and diluted net (loss) gain per share:	Basic and diluted net (loss) gain per share:													Basic and diluted net (loss) gain per share:
Continuing Operations		$	(0.08)		$	(0.04)		$	(0.41)		$	(0.35)
Discontinued Operations		$	—		$	(0.08)		$	—		$	(0.06)
Basic and diluted net loss per share	Basic and diluted net loss per share	$	(0.08)		$	(0.12)		$	(0.41)		$	(0.41)		Basic and diluted net loss per share	$	(0.12)		$	(0.05)
Basic and diluted weighted average number of shares outstanding	Basic and diluted weighted average number of shares outstanding	94,119,944			53,396,920			93,545,687			50,546,048			Basic and diluted weighted average number of shares outstanding	100,521,673			93,105,835

Adjusted Amounts (a)	Adjusted Amounts (a)													Adjusted Amounts (a)
Adjusted Operating Loss from Continuing Operations		(1,017)			(2,064)			(7,613)			(2,289)
Adjusted Operating Margin from Continuing Operations		(7)		%	(201)		%	(23)		%	(223)		%
Adjusted Net Loss from Continuing Operations		(1,401)			(2,044)			(8,552)			(3,500)
Adjusted Operating Loss														Adjusted Operating Loss	1,759			(2,990)
Adjusted Operating Margin														Adjusted Operating Margin	5		%	(42)		%
Adjusted Net Income (Loss)														Adjusted Net Income (Loss)	82			(3,378)
Basic and diluted net loss per share														Basic and diluted net loss per share	$	—		$	(0.03)
Other Financial Data (a)	Other Financial Data (a)													Other Financial Data (a)
EBITDA	EBITDA	(5,030)			(2,092)			(33,274)			(17,324)			EBITDA	(1,523)			(3,135)
as a percentage of revenues	as a percentage of revenues	(36)		%	(204)		%	(100)		%	(1688)		%	as a percentage of revenues	(4)		%	(45)		%
Adjusted EBITDA	Adjusted EBITDA	910			(1,739)			(3,076)			(2,981)			Adjusted EBITDA	10,016			(1,854)
as a percentage of revenues	as a percentage of revenues	6		%	(169)		%	(9)		%	(291)		%	as a percentage of revenues	28		%	(27)		%
Adjusted Gross Profit		4,435			(987)			7,611			(987)
as a percentage of revenues		31		%	(96)		%	23		%	(96)		%

(a)

~~(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.

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Commentary on Results of Operations Comparative Results for the ~~three months~~Three Months Ended ~~February 28,~~August 31, 2023 compared to the ~~three months ended February 28,~~Three Months Ended August 31, 2022

~~Revenues~~Revenue

~~Hosting revenues~~Total revenue increased by ~~$13.1~~$29.4 million, or ~~1273%~~425%, from ~~$1.0~~$6.9 million for the three months ended ~~February 28,~~August 31, 2022 to ~~$14.1~~$36.3 million for the three months ended ~~February 28,~~August 31, 2023. The increase in ~~hosting revenues~~revenue was driven by ~~a full~~an increase in online

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capacity from the Ellendale, North Dakota facility being operational, and revenue from the Company’s first cloud services contract, which started during the three months ~~of operation at our first hosting facility in Jamestown, North Dakota.~~

ended August 31, 2023.

Cost of ~~Revenues~~revenues

Cost of revenues increased ~~by $8.4~~$18.3 million, or ~~407%~~300%, from ~~$2.1~~$6.1 million for the three months ended ~~February 28,~~August 31, 2022 to ~~$10.5~~$24.4 million for the three months ended ~~February 28,~~August 31, 2023. ~~The increase in cost of revenues was primarily driven by driven by a full three months of operation at our first hosting facility in Jamestown, North Dakota.~~ The primary drivers of the change to cost of revenues for the three months ended ~~February 28,~~August 31, 2023 were:

•approximately ~~$0.8 million increase in depreciation and amortization expense directly attributable to the property and equipment at the Jamestown, North Dakota hosting facility;~~

•~~approximately $6.7~~$12.8 million increase in energy costs used to generate ~~our~~ hosting ~~revenues; and~~revenue;

•approximately ~~$0.9~~$3.9 million increase in depreciation and amortization expense attributable to owned and leased assets directly supporting revenue;

•approximately $1.2 million increase in personnel expenses for employees directly ~~working at the Jamestown, North Dakota~~attributable to generating hosting ~~facility.~~revenue; and

•approximately $0.4 million increase in other expenses directly attributable to generating hosting revenue.

Operating Expenses

Selling, general and administrative expenses increased ~~by $9.3~~$12.1 million, or ~~782%~~241%, from ~~$1.2~~$5.0 million for the three months ended ~~February 28,~~August 31, 2022 to ~~$10.5~~$17.1 million for the three months ended ~~February 28,~~August 31, 2023. The primary drivers of the ~~change to~~increase in selling, general and administrative expense for the three months ended ~~February 28,~~August 31, 2023 were:

•approximately ~~$0.8~~$1.8 million increase in employee salaries and benefits expense not directly attributable to revenues;

•approximately ~~$0.3~~$0.2 million increase in professional service expenses incurred to support the growth of the business;

•approximately ~~$4.5 million increase in stock-based compensation expense;~~

•~~approximately $1.0~~$2.8 million increase in depreciation and amortization expense not ~~directly~~ attributable to ~~the Jamestown, North Dakota hosting facility;~~owned and leased assets directly supporting revenue;

•approximately ~~$2.7~~$2.2 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software ~~expenses, which is directly related to the growth of the Company.~~expenses; and

•approximately $5.1 million increase in stock based compensation expense. The increase was driven by an increase in awards to be expensed between the periods.

Other Expense

Interest expense increased ~~$0.4~~$1.7 million, or ~~100%~~ 483%, from ~~zero for the three months ended February 28, 2022 to~~ $0.4 million for the three months ended ~~February 28,~~August 31, 2022 to $2.1 million for the three months ended August 31, 2023. The increase was driven by the increase in finance leases and ~~change in the Company’s debt obligations~~interest-bearing loans between periods.

Loss on extinguishment of debt increased $2.3 million, or 2403%, from $0.1 million for the three months ended ~~February 28,~~August 31, 2022 ~~and~~to $2.4 million for the three months ended ~~February 28,~~August 31, 2023.The increase was driven by the termination fees to extinguish the B. Riley loan during the three the three months ended August 31, 2023.

Loss from legal settlement was $2.3 million for the three months ended August 31, 2023 due to a settlement agreement entered into by the Company in respect to employment-related claims by a former executive. The terms of the settlement include payment to the claimant of $2.3 million, which was ~~zero for both periods.~~

included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.

Income tax benefit

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The income tax ~~benefit~~expense decreased ~~$0.1 million~~$32 thousand, or 100%, from a ~~$0.1 million~~$32 thousand expense for the three months ended ~~February 28,~~August 31, 2022 to a zero for the three months ended ~~February 28,~~August 31, 2023. This change was driven by a change in valuation allowance for the three months ended ~~February 28,~~August 31, 2023 compared to the three months ended ~~February 28,~~August 31, 2022.

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~~Loss from Discontinued Operations~~

Commentary on Segments Revenue

~~Loss from discontinued operations decreased $4.0~~The following table sets forth segment revenue (excluding HPC as that segment has no revenue) (in thousands) during the three months ended August 31, 2023 and 2022:


	Three Months Ended
	August 31, 2023		August 31, 2022
Cloud services segment	$	2,152	$	—
Hosting segment	34,171		6,924

Total revenue	$	36,323	$	6,924

Cloud Services Revenue

Cloud services revenue increased $2.2 million, or 100%, from ~~$4.0~~zero for the three months ended August 31, 2022 to $2.2 million for the three months ended ~~February 28,~~August 31, 2023. The increase is due the Company beginning to provide services within the Cloud services segment during three months ended August 31, 2023.

Hosting Revenue

Hosting revenue increased $27.2 million, or 394%, from $6.9 million for the three months ended August 31, 2022 to $34.2 million for the three months ended August 31, 2023. The increase is due to the full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota facilities during the three months ended August 31, 2023, compared to the Company providing limited capacity at only the Jamestown, North Dakota facility during the three months ended August 31, 2022.

Commentary on Segments Operating Profit and Loss

The following table sets forth the Company’s operating profit for each of our segments for the three months ended August 31, 2023 and 2022 (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Segment Operating (Loss) Profit:
Cloud services segment	$	(7,434)	$	—
Hosting segment	8,958		(658)
HPC hosting segment	(730)		—
Total segment profit	794		(658)

Cloud Services Operating Loss

Cloud services operating loss increased $7.4 million, or 100% from zero for the three months ended ~~February 28, 2023. The change was due~~August 31, 2022 to ~~the fact that the Company no longer generates revenues from mining operations.~~

~~Commentary on Results of Operations Comparative Results for the nine months Ended February 28, 2023 compared to the nine months ended February 28, 2022~~

~~Revenues~~

~~Hosting revenues increased by $32.3 million, or 3150%, from $1.0~~$7.4 million for the ~~nine~~three months ended ~~February 28, 2022 to $33.4 million for~~August 31, 2023 as the ~~nine~~Company began providing cloud services during the first quarter of fiscal year 2024. The change from the three months ended ~~February 28, 2023. The increase in hosting revenues was~~August 31, 2022 is driven by ~~a full nine months of~~the segment expanding operations ~~at our first hosting facility in Jamestown, North Dakota.~~

~~Cost of Revenues~~

~~Cost of revenues increased by $26.3 million, or 1270%, from $2.1 million for~~during the ~~nine months ended February 28, 2022 to $28.4 million for the nine months ended February 28, 2023.~~current period. The ~~increase in cost of revenues was~~operating loss is primary driven by ~~a full nine months of operations at our first hosting facility in Jamestown, North Dakota. The primary drivers of the change to cost of revenues for the nine months ended February 28, 2023 were:~~

•~~approximately $2.5 million increase in depreciation and~~ amortization expense on finance leases on computing equipment, stock-based compensation expense attributable to the ~~property~~segment, and ~~equipment at~~ the segment only generating revenue for part of the period.

Hosting Operating Profit

Hosting operating profit increased $9.7 million, or 1,462% from a loss of $0.7 million for the three months ended August 31, 2022 to a profit of $9.0 million for the three months ended August 31, 2023. The change is driven by full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota ~~hosting facility;~~

•~~approximately $21.9 million increase in energy costs used~~facilities during the three months ended August 31, 2023, relative to ~~generate the hosting revenues; and~~

•~~approximately $1.9 million increase in personnel expenses for employees directly working~~operations only at the Company’s Jamestown ~~North Dakota hosting facility.~~

~~Operating Expenses~~

~~Selling, general and administrative expenses increased by $27.1 million, or 174%, from $15.6 million for~~facility during the ~~nine~~the three months ended ~~February 28,~~August 31, 2022 ~~to $42.7 million~~and the Jamestown facility operating at less than full capacity for ~~the nine months ended February 28, 2023. The primary drivers~~a portion of the ~~change to selling, general and administrative expense for the nine months ended February 28, 2023 were:~~

•~~approximately $2.9 million increase in employee salaries and benefits expense not directly attributable to revenues;~~

•~~approximately $2.4 million increase in professional service expenses incurred to support the growth of the business;~~

•~~approximately $14.5 million increase in of stock-based compensation expense;~~

•~~approximately $1.9 million increase in depreciation and amortization expense not directly attributable to the Jamestown, North Dakota hosting facility; and~~comparative period.

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•approximately $5.4 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses, which is directly related to the growth of the Company.HPC Hosting Operating Loss

~~Other Expense~~

~~Interest expense~~High performance compute hosting operating loss increased ~~$1.1~~$0.7 million, or 100% , from zero ~~for the nine months ended February 28, 2022~~ to ~~$1.1~~$0.7 million ~~for the nine months ended February 28, 2023. The change is driven by the increase in finance leases and change in the Company’s debt obligations between periods.~~

Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million for the nine months ended February 28, 2022 to $0.1 million for the nine months ended February 28, 2023. This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the nine months ended February 28, 2022, compared to a smaller extinguishment of term debt that was recognized in the nine months ended February 28, 2023.

~~Income tax benefit (expense)~~

Income tax benefit increased $0.6 million or 202% from a $0.3 million expense for the nine months ended February 28, 2022 to approximately $0.3 million benefit for the nine months ended February 28, 2023. This change was driven by a change in valuation allowance for the nine months ended February 28, 2023 compared to the nine months ended February 28, 2022.

~~Loss from Discontinued Operations~~

~~Loss from discontinued operations decreased $2.9 million, or 100%, from $2.9 million for the nine months ended February 28, 2022 to zero for the nine months ended February 28, 2023. The change was~~ due to the ~~fact that~~Company launching the ~~Company no longer generates revenues from mining operations.~~segment during the current period. The loss is largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases in the HPC hosting buildout.

Non-GAAP Measures

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 Digital’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 Digital’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 Digital 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 Digital’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.~~other nonrecurring costs. These costs have been adjusted as they are not indicative of business operations. Adjusted EBITDA is intended as a

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supplemental measure of Applied Digital’s performance that is neither required by, nor presented in accordance with, GAAP. Applied Digital 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 Digital may incur future expenses similar to those excluded when calculating these measures. In addition, Applied Digital’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 Digital’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 Digital 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 Digital’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 Digital’s presentation of this measure should not be construed as an inference that its future results will be unaffected by other factors within cost of revenues. Applied Digital’s computation of Adjusted Gross Profit may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Gross Profit in the same fashion.

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 Digital 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 Digital’s business.

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Reconciliation of GAAP to Non-GAAP Measures
Three Months Ended Nine Months Ended
$ in thousands February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022
Adjusted operating loss
Operating Loss from Continuing Operations (GAAP) $ (6,957) $ (2,417) $ (37,811) $ (16,632)
Add: Stock-based compensation 4,481 — 26,879 12,337
Add: Gain on Extinguishment of Accounts Payable — (80) — (405)
Add: Loss on Extinguishment of Debt — — 94 1,342
Add: Non-recurring professional service costs 365 433 1,437 1,069
Add: One-time electricity charges — — 114 —
Add: Other non-recurring expenses 1,094 — 1,675 —
Adjusted Operating Loss from Continuing Operations (Non-GAAP) $ (1,017) $ (2,064) $ (7,613) $ (2,289)
Adjusted operating margin from Continuing Operations (7.2) % (201.2) % (22.8) % (223.1) %
Adjusted net income (loss)
Net Loss from Continuing Operations (GAAP) $ (7,341) $ (2,397) $ (38,750) $ (17,843)
Add: Stock-based compensation 4,481 — 26,879 12,337
Add: Gain on Extinguishment of Accounts Payable — (80) — (405)
Add: Loss on Extinguishment of Debt — — 94 1,342
Add: Non-recurring professional service costs 365 433 1,437 1,069
Add: One-time electricity charges — — 114 —
Add: Other non-recurring expenses 1,094 — 1,675 —
Adjusted net loss from Continuing Operations (Non-GAAP) $ (1,401) $ (2,044) $ (8,552) $ (3,500)
EBITDA and Adjusted EBITDA
Net Loss from Continuing Operations (GAAP) $ (7,341) $ (2,397) $ (38,750) $ (17,843)
Add: Interest Expense 384 — 1,125 —
Add: Income Tax Benefit (Expense) — 60 (280) 274
Add: Depreciation and Amortization 1,927 245 4,631 245
EBITDA (Non-GAAP) $ (5,030) $ (2,092) $ (33,274) $ (17,324)
Add: Stock-based compensation 4,481 — 26,879 12,337
Add: Gain on Extinguishment of Accounts Payable — (80) — (405)
Add: Loss on Extinguishment of Debt — — 94 1,342
Add: Non-recurring professional service costs 365 433 1,437 1,069
Add: One-time electricity charges — — 114 —
Add: Other non-recurring expenses 1,094 — 1,675 —
Adjusted EBITDA (Non-GAAP) $ 910 $ (1,739) $ (3,076) $ (2,981)
Adjusted Gross Profit
Gross profit (GAAP) $ 3,557 $ (1,047) $ 4,916 $ (1,047)
Add: Depreciation and amortization in cost of revenues 878 60 2,581 60
Add: One-time electricity charges — — 114 —
Adjusted Gross Profit (Non-GAAP) $ 4,435 $ (987) $ 7,611 $ (987)
Reconciliation of GAAP to Non-GAAP Measures


	Three Months Ended
$ in thousands	August 31, 2023			August 31, 2022
Adjusted operating loss
Operating loss (GAAP)	$	(5,127)		$	(4,177)
Stock-based compensation	5,641			579
Non-recurring professional service costs	592			408

Other non-recurring expenses	653			200
Adjusted operating income (loss) (Non-GAAP)	$	1,759		$	(2,990)
Adjusted operating margin	4.8		%	(43.2)		%

Adjusted net income (loss)
Net loss attributable to Applied Digital Corporation (GAAP)	$	(11,457)		$	(4,531)
Stock-based compensation	5,641			579
Loss on extinguishment of debt	2,353			94
Loss from legal settlement	2,300			—
Non-recurring professional service costs	592			408

Other non-recurring expenses	653			200
Adjusted net income (loss) (Non-GAAP)	$	82		$	(3,250)
Adjusted net income (loss) per share (Non-GAAP)	$	—		$	(0.03)

EBITDA and Adjusted EBITDA
Net loss attributable to Applied Digital Corporation (GAAP)	$	(11,457)		$	(4,531)
Interest expense	2,074			356
Income tax benefit (expense)	—			32
Depreciation and amortization	7,860			1,136
EBITDA (Non-GAAP)	$	(1,523)		$	(3,007)
Stock-based compensation	5,641			579
Loss on extinguishment of debt	2,353			94
Loss from legal settlement	2,300			—
Non-recurring professional service costs	592			408

Other non-recurring expenses	653			200
Adjusted EBITDA (Non-GAAP)	$	10,016		$	(1,726)

Sources of Liquidity

As of August 31, 2023, the Company had approximate cash and cash equivalents of $5.9 million and negative working capital of $118.1 million. Historically the Company has incurred losses and has relied on equity and debt financings to fund its operations. Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued. We have primarily generated cash in the last 12 months from the proceeds of our term loans, ~~proceeds from our initial public offering,~~issuance of common stock, and the receipt of contractual deposits and revenue ~~prepayments~~payments from ~~hosting~~ customers. On April 18, 2022, we received approximately $36 million in net proceeds from the issuance of 8 million shares of Common Stock in conjunction with the closing of our initial public offering. On July 25, 2022, the Company entered into the Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Term Loan. A portion of the proceeds were used to pay down the Vantage term loan that was entered into on March 11, 2022.

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~~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.~~

On November 7, 2022, the Company entered into the Vantage Garden City Loan Agreement. As of February 28, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement. The proceeds of the Vantage Garden City Loan will be used for the costs and expenses of a building at the Garden City Facility.

See Note 76 - Debt to the ~~unaudited~~ condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on ~~the Starion Term Loan and Vantage Garden City Loan.~~

our term loans.

On ~~February 16,~~June 27, 2023, the Company ~~entered into a Starion Ellendale Loan Agreement~~began issuing and selling common stock under an "at the market" sales agreement, with ~~Starion Bank. This agreement provides for a term loan~~Craig-Hallum Capital, pursuant to which the Company may sell up to $125 million in ~~the principal amount~~shares of ~~$20,000,000 with a maturity date~~common stock. As of ~~February 3, 2028. The loan provides for an interest rate of 7.48% per annum. The proceeds of the loan will be used to fund expansion on the Ellendale Facility. On March 30,~~August 31, 2023, the Company has sold approximately 7.9 million shares. Net proceeds, less commission and legal fees of approximately $2.2 million, were approximately $64.5 million. The Company received ~~funding for the Starion Ellendale Loan. The funding, net~~an additional $2.7 million in proceeds subsequent to August 31, 2023.

Table of ~~issuance fees, totaled $19.8 million.~~Contents

During the three ~~and nine~~ months ended ~~February 28,~~August 31, 2023, we received ~~$32.3~~$39.5 million ~~and $77.0 million, respectively,~~ in payments for future hosting services. ~~During~~

On September 13, 2023, Sai Computing borrowed an additional $5.0 million under the ~~fiscal year ended~~remaining capacity from the existing B. Riley Loan that the Company entered into in May ~~31, 2022, we generated revenue~~2023.

The Company has also received prepayments from crypto mining and co-hosting, but we have incurred net losses from operations. During the three and nine months ended February 28, 2023, we have generated revenue from co-hosting, but have incurred net losses from operations. As of February 28, 2023 and May 31, 2022, we had cash of $22.9new cloud services customers totaling $9.6 million ~~and $46.3 million, respectively, and an accumulated deficit of $94.2 million and $56.1 million, respectively.~~

for future services.

Funding Requirements

We have experienced net losses through the ~~periods~~period ended ~~February 28,~~August 31, 2023. Our transition to profitability is dependent on the successful operation of our co-hosting facilities. We believe that amounts we received from proceeds from our term loans, proceeds from ~~our initial public offering,~~stock offerings, and ~~revenue~~ payments we have ~~begun to achieve in~~received from our ~~co-hosting~~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 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.

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 believe that the significant investments in property and equipment will begin ~~to decrease~~remain throughout during calendar 2023 as we ~~complete~~continue construction of ~~additional capacity.~~our HPC facilities and acquire assets to support our cloud services business. We also expect that our revenues will increase as we continue to bring online additional capacity at our ~~Jamestown, North Dakota,~~ Garden City, Texas location and ~~Ellendale, North Dakota locations.~~within our cloud services contracts.

~~Table of Contents~~

Summary of Cash Flows

The following table provides information about Applied Digital’s net cash flow (in thousands) for the ~~nine~~three months ended ~~February 28, 2023.~~August 31, 2023 and August 31, 2022, respectively.


		Nine Months Ended					Three Months Ended
$ in thousands	$ in thousands	February 28, 2023		February 28, 2022		$ in thousands	August 31, 2023		August 31, 2022

Net cash provided by operating activities	Net cash provided by operating activities	$	54,144	$	4,228	Net cash provided by operating activities	$	4,517	$	17,294
Net cash used in investing activities	Net cash used in investing activities	(96,314)		(35,588)		Net cash used in investing activities	(40,541)		(31,673)
Net cash provided by financing activities	Net cash provided by financing activities	18,792		31,571		Net cash provided by financing activities	23,663		8,910
Net change in cash and cash equivalents		(23,378)		$	211
Cash and cash equivalents at beginning of year		46,299		$	11,750
Cash and cash equivalents at end of period		$	22,921	$	11,961
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(12,361)		(5,469)
Cash, cash equivalents, and restricted cash at beginning of year						Cash, cash equivalents, and restricted cash at beginning of year	43,574		46,299
Cash, cash equivalents, and restricted cash at end of period						Cash, cash equivalents, and restricted cash at end of period	$	31,213	$	40,830

Commentary on the change in cash flows ~~for~~between the ~~nine months~~Three Months Ended ~~February 28,~~August 31, 2023

and Three Months Ended August 31, 2022

Operating Activities

The net cash provided by operating activities ~~of $54.1~~decreased by $12.8 million, or 74%, from $17.3 million for the ~~nine~~three months ended ~~February 28, 2023 consisted primarily of~~August 31, 2022 to $4.5 million for the ~~following:~~

• ~~$26.9 million non-cash adjustment~~three months ended August 31, 2023. The primary reason for ~~stock-based compensation expense;~~

• ~~$26.8 million increase~~the change was decrease in ~~customer deposits due~~revenue prepayments received relative to ~~the Company executing new contracts~~revenue earned during the ~~period; and~~

• ~~$43.7 million increase in deferred revenue due to prepayments due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.~~

~~The above factors were partially offset by the $38.8 million loss from continuing operations~~

three months ended August 31, 2023.

Investing Activities

The net cash used in investing activities ~~of $96.3~~increased by $8.9 million, or 28%, from $31.7 million for the ~~nine~~three months ended ~~February 28, 2023~~August 31, 2022 to $40.5 million for the three months ended August 31, 2023. The primary reason for the change was ~~driven by the increase of purchases of property and~~finance lease prepayments made for leases on hosting equipment ~~related~~ to ~~the construction of~~support the Company’s ~~Garden City, Texas and Ellendale, North Dakota facilities.~~

cloud services business during the three months ended August 31, 2023.

Financing Activities

The net cash provided by financing activities ~~of $18.8~~increased by $14.8 million, or 166%, from $8.9 million for the ~~nine~~three months ended ~~February 28, 2023 was primarily driven by:~~

•~~$25.6~~August 31, 2022 to $23.7 million ~~in proceeds from~~for the ~~Starion Term Loan and~~three months ended August 31, 2023. The primary reason for the ~~Vantage Garden City Loan; and~~

•~~$4.1 million in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.~~

~~These above factors were partially offset by the extinguishment of the Vantage term loan totaling $7.1 million.~~

change

2421

Table of Contents

~~Commentary on cash flows for the nine months Ended February 28, 2022~~

~~Operating Activities~~

~~The~~was receipt of net ~~cash provided by operating activities of $4.2 million for the nine months ended February 28, 2022 consisted primarily of:~~

•~~$12.3 million non-cash expense adjustment for stock-based compensation expense;~~

•~~$1.3 million non-cash adjustment for loss on the extinguishment of debt;~~

•~~$4.5 million increase in accounts payable and accrued liabilities due to the timing of payments;~~

•~~$2.1 million increase in customer deposits; and~~

•~~$2.9 million increase in deferred revenue.~~

~~These above factors were partially offset by:~~

•~~$2.1 million increase to prepaid expense and other current assets due to the timing of payments; and~~

•~~$17.8 million in loss from continuing operations~~

~~Investing Activities~~

~~The net cash used in investing activities of $35.6 million for the nine months ended February 28, 2022 consisted of:~~

•~~$28.2 million in purchases of property and equipment related to the construction of the Company’s Jamestown, ND facility; and~~

•~~$7.4 million in purchases of equipment related to the Company’s discontinued operations.~~

~~Financing Activities~~

~~The net cash provided by financing activities of $31.6 million for the nine months ended February 28, 2022 represents~~ proceeds from the ~~issuance of preferred~~Company’s common stock ~~$34.5 million,~~offering the three months ended August 31, 2023 which was partially offset by ~~issuance costs of $2.9 million.~~

an increase in term lease payments during the three months ended August 31, 2023.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, and as a result of the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~February 28,~~August 31, 2023, our disclosure controls and procedures were not effective at the reasonable assurance level.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.

~~Table of Contents~~

~~In connection with our initial public offering, we~~We have identified the following material weaknesses in the design of our internal ~~controls, which could adversely affect:~~controls:

•~~Our ability~~We have not designed and implemented controls to ensure we can record, process, summarize, and report financial data.

•We have not yet designed and implemented user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel.

•We did not design and maintain effective controls associated with related party transactions and disclosures. Controls in place were not designed or implemented at a sufficient level of precision or rigor to effectively identify related party relationships and disclose their related transactions in our financial statements.

•We also do not have a properly designed internal control system that identifies critical processes and key controls.

In order to remediate these material weaknesses, we are taking the following steps, among others:

1.continued hiring of additional qualified accounting and financial reporting personnel to support division of responsibilities;

2.improving and updating our systems;

3.developing IT general controls to manage access and program changes across our key systems and the execution of improvements to application controls within our systems; and

4.implementing processes and controls to better identify and manage segregation of duties.

We will not be able to fully remediate the material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting, other than the remediation steps described above that are in process, that occurred during the three months ended ~~February 28,~~August 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2622

Table of Contents

Part II - Other Information

Item 1. Legal Proceedings

~~None.~~The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's Chief Financial Officer, have been named as a defendants in a class action lawsuit that was filed in August 2023 in the Northern District of Texas (McConnell v. Applied Digital Corporation et al., Case No. 3:23-cv-1805). The case is in an early stage and the class has not yet been certified. The Company has not yet responded to the complaint. At this time, the Company is unable to estimate potential losses, if any, related to this action. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of this action to have a material adverse effect on our results of operations or financial position. However, this matter is subject to uncertainties, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows.

Item 1A. Risk Factors

~~The following~~A description of the risk factors ~~supplement~~associated with our business is contained in the ~~Risk Factors disclosed in Item 1A~~“Risk Factors” section of our Annual ~~Report on Form 10-K for the fiscal year ended May 31, 2022.~~

~~We have not yet determined if or when we may elect to be taxed as a REIT.~~

Our board of directors (the “Board”) has not yet determined whether we will elect to be taxed as a REIT and/or when any such election would be effective. In addition, even if we do make an election to be taxed as a REIT, our Board may revoke or otherwise terminate the REIT election of the Company, without the approval of holders of the common stock, if the board determines that it is no longer in the best interest of the stockholders to continue to qualify as a REIT. We can make no assurance that we will ever elect to be taxed as a REIT or, if we do make such an election, that such REIT election will be in place during a stockholder’s entire holding period of our stock. Our Board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks our stockholders face.

Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets, and other tests imposed by the Code. If we fail to quality as a REIT after electing to be taxed as a REIT, we would generally be disqualified from qualifying as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. To qualify for REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income, determined without regard for any deduction for distributions paid and excluding any net capital gain to our stockholders. If we do not qualify as a REIT (either because we choose not to elect to be taxed as a REIT or because we failed to so qualify after having made a REIT election), this would reduce our net earnings available for distribution and would adversely affect the timing, amount, and character of distributions to our common stockholders. If we do not elect to be taxed as a REIT or fail to maintain REIT status, we will continue to be subject to federal income tax at regular corporate rates.

~~If we elect REIT status, the REIT ownership and distribution requirements may inhibit opportunities or have an impact on the Company.~~

If we elect to be taxed as a REIT, then in order to qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, ownership requirements, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. For example, in order for us to qualify as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year after the first year for which we elect to qualify as a REIT. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed as a REIT). Additionally, as typical for REITs, our Board would likely pursue an amendment of our Articles to restrict any person from owning more than 9.8% by value of our outstanding capital stock. These ownership limits could delay or prevent a transaction or a change in control of our company that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.

If we elect to be taxed as a REIT and we do not have other funds available to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement, we could be

subject to corporate income tax and the 4% excise tax in a particular year. To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income tax purposes, at the end of any REIT taxable year. Such non-REIT earnings and profits generally will include any accumulated earnings and profits of any corporations acquired by us (or whose assets we acquire), which, for this purpose, would include any earnings and profits we have in a taxable year in which we were taxed as a C corporation prior to the taxable year in which our REIT election is effective.

We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.

We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.

~~Accounting for our power purchase agreements could cause variability in the results we report.~~

With respect to certain of our power purchase agreements, it is both possible and probable that we will net settle them, meaning that we have the ability and intent to sell power back into the grid in lieu of taking full physical delivery of all of the contracted power. Accordingly, these agreements will meet the definition of an accounting derivative. This means that these agreements will be accounted for at fair value at each quarterly measurement period, and these values may fluctuate significantly. As a result, our consolidated financial statements and results of operations may fluctuate quarterly based on factors outside of our control. We could have substantial variability in our financial results and disclosures, which, if material, could affect our operating results and in turn could impact our stock price. Investors should consider such derivative accounting matters when evaluating our financial resultsReport.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

2823

Item 6. Exhibits

EXHIBIT INDEX


Exhibit Number						Description of Document
1.1*						Sales Agreement, dated June 26, 2023, by and between the Company and Craig-Hallum Capital Group LLC
3.1*						~~Third~~Second Amended and Restated Articles of Incorporation, as amended to date.
31.1*						Chief Executive O fficer’s Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Chief Financial Officer’s Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*						Inline XBRL Instance Document.
101.SCH*						Inline XBRL Taxonomy Extension Schema Document.
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith.

** Furnished herewith.

2924

Signatures

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

APPLIED DIGITAL CORPORATION

Date: ~~April 6,~~

October 10, 2023

By:

/s/ Wesley Cummins

Wesley Cummins Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)

Date: ~~April 6,~~

October 10, 2023

By:

/s/ David Rench

David Rench Chief Financial Officer (Principal Financial Officer)

3025


Three Months Ended February 28, 2023
	Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated deficit		Total Stockholders Equity		Noncontrolling Interest		Total Equity
	Shares	Amount		Shares	Amount
Balance, November 30, 2022	98,948,081	$	99	(5,001,728)	$	(62)	$	150,690	$	(87,218)	$	63,509	$	8,461	$	71,970
Issuance of common stock - vesting of restricted stock units	523,046	1		—	—		(115)		—		(114)		—		(114)
Stock-based compensation	—	—		—	—		4,480		—		4,480		—		4,480

Capital contribution to noncontrolling interest	—	—		—	—		—		—		—		2,400		2,400

Net Loss	—	—		—	—		—		(7,025)		(7,025)		(316)		(7,341)
Balance, February 28, 2023	99,471,127	$	100	(5,001,728)	$	(62)	$	155,055	$	(94,243)	$	60,850	$	10,545	$	71,395


Three Months Ended February 28, 2022
	Series C Convertible Redeemable Preferred Stock			Series D Convertible Redeemable Preferred Stock			Total Mezzanine Equity		Common Stock	Treasury Stock			Additional Paid in Capital	Accumulated Deficit		Total Stockholders Equity
	Shares	Amount		Shares	Amount		Amount			Shares	Amount		Shares	Amount
Balance, November 30, 2021	660,000	$	15,135	1,380,000	$	31,574	$	46,709		53,396,920	$	320	(36,296)	$	(62)	$	43,657	$	(44,837)	$	(922)
Preferred Stock Dividends Accrued	16,086	402		33,624	840		1,242			—	—		—	$	—	—		(1,242)		(1,242)
Net Loss	—	—		—	—		—			—	—		—	$	—	—		(6,445)		(6,445)
Balance, February 28, 2022	676,086	$	15,537	1,413,624	$	32,414	$	47,951		53,396,920	$	320	(36,296)	$	(62)	$	43,657	$	(52,524)	$	(8,609)


Nine Months Ended February 28, 2023
	Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated deficit		Total Stockholders Equity		Noncontrolling Interest		Total Equity
	Shares	Amount		Shares	Amount
Balance, May 31, 2022	97,837,702	$	98	(36,296)	$	(62)	$	128,293	$	(56,070)	$	72,259	$	6,976	$	79,235
Issuance of common stock - vesting of restricted stock units	1,633,425	2		—	—		(116)		—		(114)		—		(114)
Stock-based compensation	—	—		—	—		26,878		—		26,878		—		26,878

Capital contribution to noncontrolling interest	—	—		—	—		—		—		—		4,146		4,146
Common stock forfeited	—	—		(4,965,432)	—		—		—		—		—		—
Net Loss	—	—		—	—		—		(38,173)		(38,173)		(577)		(38,750)
Balance, February 28, 2023	99,471,127	$	100	(5,001,728)	$	(62)	$	155,055	$	(94,243)	$	60,850	$	10,545	$	71,395


Nine Months Ended February 28, 2022
	Series C Convertible Redeemable Preferred Stock			Series D Convertible Redeemable Preferred Stock			Total Mezzanine Equity		Series A Convertible Preferred Stock			Series B Convertible Preferred Stock			Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated Deficit		Total Stockholders Deficit
	Shares	Amount		Shares	Amount		Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance, May 31, 2021	660,000	$	15,135	—	$	—	$	15,135	27,195	$	3,370	17,087	$	1,849	1,511,061	$	9	(36,296)	$	(62)	$	13,874	$	(21,623)	$	(2,583)
Extinguishment of Debt	—	—		—	—		—		—	—		—	—		5,083,828	31		—	—		3,446		—		3,477
Issuance of Dividends to Preferred Stock	—	—		—	—		—		60,822	6,082		29,772	2,979		—	—		—	—		—		(8,946)		115
Conversion of Preferred Stock	—	—		—	—		—		(88,017)	(9,452)		(46,859)	(4,828)		28,765,308	172		—	—		14,108		—		—
Service agreement stock compensation	—	—		—	—		—		—	—		—	—		18,036,723	108		—	—		12,229		—		12,337
Issuance of Preferred Stock	—	—		1,380,000	34,500		34,500		—	—		—	—		—	—		—	—		—		—		—
Issuance Costs of Preferred Stock	—	—		—	(2,926)		(2,926)		—	—		—	—		—	—		—	—		—		—		—
Preferred Stock Dividends Accrued	16,086	402		33,624	840		1,242		—	—		—	—		—	—		—			—		(1,242)		(1,242)
Net Loss	—	—		—	—		—		—	—		—	—		—	—		—	—		—		$	(20,713)	(20,713)
Balance, February 28, 2022	676,086	$	15,537	1,413,624	$	32,414	$	47,951	—	$	—	—	$	—	53,396,920	$	320	(36,296)	$	(62)	$	43,657	$	(52,524)	$	(8,609)


(in thousands)	February 28, 2023		May 31, 2022
Net Cash & Equivalents	$	8,421	$	38,798
Restricted Cash	$	14,500	$	7,501
Total Cash & Cash Equivalents	$	22,921	$	46,299


(in thousands)	Estimated Useful Life	February 28, 2023		May 31, 2022
Hosting Equipment
Electric Generation and Transformers	15 years	$	4,520	$	4,338

Other Equipment and Fixtures	5 years-7 years	1,034		588
Construction in Progress		109,822		18,305
Information Systems and Software	5 years	11,229		9,608
Land & Building
Land		2,152		1,074
Land Improvements	15 years	1,285		1,180
Building	39 years	33,008		30,176
Deposits on Equipment		7,816		—
Total cost of property and equipment		170,865		65,269
Accumulated Depreciation		(3,590)		(1,009)
Property and Equipment, Net		$	167,276	$	64,260


	Three Months Ended February 28,
Customer	2023		2022
Customer A	26	%	62	%
Customer B	25	%	—	%
Customer C	16	%	16	%
Customer D	13	%	9	%
Customer E	13	%	13	%
Others	7	%	—	%


	Nine Months Ended February 28,
Customer	2023		2022
Customer A	31	%	62	%
Customer B	23	%	—	%
Customer C	17	%	16	%
Customer D	14	%	9	%
Customer E	13	%	13	%
Others	3	%	—	%


	Revenue for the Three Months ended
(in thousands)	February 28, 2023		February 28, 2022
Customer A	$	3,700	$	634
Customer B	$	5,828	$	392


	Revenue for the Nine Months ended
(in thousands)	February 28, 2023		February 28, 2022
Customer A	$	10,169	$	634
Customer B	$	14,450	$	392


	Customer A Balances as of
(in thousands)	February 28, 2023		May 31, 2022
Deferred revenue	$	1,616	$	1,721
Customer Deposits	$	1,584	$	1,719


	Customer B Balances as of
(in thousands)	February 28, 2023		May 31, 2022
Deferred revenue	$	2,997	$	1,150
Customer Deposits	$	7,214	$	5,048


	Share Amounts As Of
	February 28, 2023	May 31, 2022
Authorized to Issue	166,666,667	166,666,667
Issued	99,471,127	97,837,702
Outstanding	94,469,399	97,801,406


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2022	1,366,666	$	8.04
Granted	77,500	$	2.04
Vested	(1,048,333)	$	7.60
Forfeited	—	$	—
Outstanding as of February 28, 2023	395,833	$	8.04


Basic and diluted loss per share:	Three Months Ended				Nine Months Ended
	February 28, 2023		February 28, 2022		February 28, 2023		February 28, 2022
Net loss from continuing operations	$	(7,341)	$	(2,397)	$	(38,750)	$	(17,843)
Net loss from discontinued operations, net of income taxes	—		(4,048)		—		(2,870)
Net loss including noncontrolling interests	(7,341)		(6,445)		(38,750)		(20,713)
Net loss attributable to noncontrolling interest	(316)		—		(577)		—
Net loss attributable to Applied Digital Corporation	$	(7,025)	$	(6,445)	$	(38,173)	$	(20,713)

Basic and diluted net (loss) gain per share:
Continuing Operations	$	(0.08)	$	(0.04)	$	(0.41)	$	(0.35)
Discontinued Operations	$	—	$	(0.08)	$	—	$	(0.06)
Basic and diluted net loss per share	$	(0.08)	$	(0.12)	$	(0.41)	$	(0.41)
Basic and diluted weighted average number of shares outstanding	94,119,944		53,396,920		93,545,687		50,546,048


	Three Months Ended				Nine Months Ended
in thousands	February 28, 2023		February 28, 2022		February 28, 2023		February 28, 2022
Cryptoasset mining revenue, net	$	—	$	907	$	—	$	2,945
Cost of sales	—		628		—		1,589
Gross profit	—		279		—		1,356
Impairment of cryptocurrency assets	—		(225)		—		(390)
Loss on the sale of fixed assets	$	—	(578)		$	—	(582)
Loss on the reclassification of fixed assets			(3,524)				(3,254)
Net loss from discontinued operations	$	—	$	(4,048)	$	—	$	(2,870)