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Item 1. Financial Statements

2023-01-10 compared with 2022-10-12 · 240 added, 186 removed, 240 unchanged (64% of the section changed)

Financial Statements

APPLIED BLOCKCHAIN, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

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

August 31, 2022 May 31, 2022

November 30, 2022 May 31, 2022

Current Assets:

14 unchanged sentences

Current deferred revenue 29,394 3,877

Sales and use tax payable 865 —

Total current liabilities 70,206 28,998

Deferred tax liability 260 540

Long-term deferred revenue 2,051 —

Long-term portion of lease liability 8,631 5,310

1 unchanged sentence

Total liabilities $ 95,473 $ 40,745

Commitments and contingencies (Note 12)

Shareholders' equity (deficit):

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 92,872,271 shares issued and 92,835,974 shares outstanding at August 31, 2022, and 97,837,703 shares issued and outstanding at May 31, 2022

Commitments and contingencies

Stockholders' equity (deficit):

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 93,982,650 shares issued and 93,946,353 shares outstanding at November 30, 2022, and 97,837,703 shares issued and 97,801,406 shares outstanding at May 31, 2022

Additional paid in capital 150,695 128,293

Treasury stock, 36,300 shares at August 31, 2022 and May 31, 2022, at cost

Treasury stock, 36,300 shares at November 30, 2022 and May 31, 2022, at cost

( 62 ) ( 62 )

Accumulated deficit ( 87,218 ) ( 56,070 )

Total stockholders’ equity attributable to Applied Blockchain, Inc.

68,307 72,259

Total stockholders’ equity attributable to Applied Digital Corporation 63,509 72,259

Noncontrolling interest 8,461 6,976

2 unchanged sentences

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

Three Months Ended

August 31, 2022 August 31, 2021

Three Months Ended Six Months Ended

November 30, 2022 November 30, 2021 November 30, 2022 November 30, 2021

Hosting revenue $ 12,340 $ — $ 19,264 $ —

3 unchanged sentences

Selling, general and administrative $ 26,502 $ 1,181 $ 31,212 $ 14,216

Stock-based compensation 579 12,337

Depreciation and amortization 703 174 1,001 177

3 unchanged sentences

Interest Expense $ ( 385 ) $ — $ ( 741 ) $ —

Gain on extinguishment of accounts payable — 40

Loss on extinguishment of debt — — ( 94 ) ( 1,342 )

1 unchanged sentence

Net loss from continuing operations before income tax expenses ( 27,062 ) ( 1,355 ) ( 31,689 ) ( 15,735 )

Income tax expenses ( 32 ) —

Income tax benefit (expense) 312 ( 214 ) 280 ( 214 )

Net loss from continuing operations ( 26,750 ) ( 1,569 ) ( 31,409 ) ( 15,949 )

2 unchanged sentences

Net loss attributable to noncontrolling interest ( 133 ) — ( 261 ) —

Net loss attributable to Applied Blockchain $ ( 4,531 ) $ ( 14,097 )

Net loss attributable to Applied Digital Corporation $ ( 26,617 ) $ ( 171 ) $ ( 31,148 ) $ ( 14,268 )

Basic and diluted net (loss) gain per share:

4 unchanged sentences

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

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

(In thousands, except share data)

Three Months Ended August 31, 2022

Common Stock Additional Paid in Capital Treasury Stock Accumulated deficit Total Shareholders Equity Noncontrolling Interest Total Equity

Three Months Ended November 30, 2022

Common Stock Additional Paid in Capital Treasury Stock Accumulated deficit Total Stockholders Equity Noncontrolling Interest Total Equity

Shares Amount

Balance, August 31, 2022 92,872,271 $ 93 $ 128,877 $( 62 ) $( 60,601 ) $ 68,307 $ 8,594 $ 76,901

Stock-based compensation 1,110,379 1 21,818 — — 21,819 — 21,819

Net Loss — — — — ( 26,617 ) ( 26,617 ) ( 133 ) ( 26,750 )

Balance, November 30, 2022 93,982,650 $ 94 $ 150,695 $( 62 ) $( 87,218 ) $ 63,509 $ 8,461 $ 71,970

Three Months Ended November 30, 2021

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Stockholders Equity Total Equity

Shares Amount Shares Amount Amount Shares Amount

Balance, August 31, 2021 660,000 15,135,000 1,304,000 29,902 45,037 53,396,920 53 43,925 ( 62 ) ( 44,666 ) ( 750 ) 44,287

Issuance of Preferred Stock — — 76,000 1,900 1,900 — — — — — — 1,900

Issuance Costs of Preferred Stock — — — ( 228 ) ( 228 ) — — — — — — ( 228 )

Net Loss — — — — — — — — — ( 171 ) ( 171 ) ( 171 )

Balance, November 30, 2021 660,000 15,135,000 1,380,000 31,574 46,709 53,396,920 $ 53 43,925 ( 62 ) ( 44,837 ) ( 921 ) 45,788

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except per share data)

Six Months Ended November 30, 2022

Common Stock Additional Paid in Capital Treasury Stock Accumulated deficit Total Stockholders Equity Noncontrolling Interest Total Equity

Shares Amount

Balance, May 31, 2022 97,837,703 $ 98 $ 128,293 $( 62 ) $( 56,070 ) $ 72,259 $ 6,976 $ 79,235

3 unchanged sentences

Net Loss — — — — ( 31,148 ) ( 31,148 ) ( 261 ) ( 31,409 )

Balance, August 31, 2022 92,872,271 93 128,877 ( 62 ) ( 60,601 ) 68,307 8,594 76,901

Three Months Ended August 31, 2021

Balance, November 30, 2022 93,982,650 $ 94 $ 150,695 $( 62 ) $( 87,218 ) $ 63,509 $ 8,461 $ 71,970

Six Months Ended November 30, 2021

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred

2 unchanged sentences

Capital Treasury Stock Accumulated

Deficit Total Shareholders Equity Total Equity

Deficit Total Stockholders Deficit Total Equity

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

7 unchanged sentences

Net Loss — — — — — — — — — — — — — ( 14,268 ) ( 14,268 ) ( 14,268 )

Balance, August 31, 2021 660,000 15,135 1,304,000 29,902 45,037 — — — — 53,396,920 $ 53 43,925 ( 62 ) ( 44,666 ) ( 750 ) 44,286

Balance, November 30, 2021 660,000 $ 15,135 1,380,000 $ 31,574 $ 46,709 — $ — — $ — 53,396,920 $ 53 $ 43,925 $ ( 62 ) $ ( 44,837 ) $( 921 ) $ 45,788

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands of dollars)

Three Months Ended

August 31, 2022 August 31, 2021

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)(In thousands of dollars)

Six Months Ended

November 30, 2022 November 30, 2021

CASH FLOW FROM OPERATING ACTIVITIES

Net loss attributable to Applied Blockchain $ ( 4,531 ) $ ( 14,097 )

Net gain from discontinued operations, net of income taxes — ( 243 )

Net loss attributable to Applied Digital Corporation $ ( 31,148 ) $ ( 14,268 )

Net loss from discontinued operations, net of income taxes — 1,681

Net Loss attributable to noncontrolling interest ( 261 ) —

2 unchanged sentences

Depreciation and Amortization 2,704 177

Gain on extinguishment of accounts payable — ( 40 )

Loss on extinguishment of debt 94 1,342

Stock-Based Compensation 22,398 12,337

Lease Expense 97 28

Deferred Tax ( 280 ) 214

1 unchanged sentence

Accounts receivable ( 49 ) —

Utility Deposits — ( 773 )

Prepaid expenses and other current assets ( 1,061 ) ( 1,644 )

2 unchanged sentences

Accounts payable and accrued liabilities ( 5,745 ) 5,254

Net cash provided by (used in) operating activities of continuing operations 17,294 ( 1,870 )

Sales and use tax payable 865 —

Lease Assets and Liabilities ( 317 ) ( 25 )

Net cash provided by operating activities of continuing operations 27,979 1,734

Net cash provided by operating activities of discontinued operations — 600

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 17,294 ( 1,435 )

NET CASH PROVIDED BY OPERATING ACTIVITIES 27,979 2,334

CASH FLOW FROM INVESTING ACTIVITIES

2 unchanged sentences

Net cash used in investing activities of continuing operations ( 70,305 ) ( 33,544 )

Net cash used in investing activities of discontinued operations — —

Net cash provided by investing activities of discontinued operations — 1,931

NET CASH USED IN INVESTING ACTIVITIES ( 70,305 ) ( 31,613 )

2 unchanged sentences

Repayment of finance leases ( 778 ) —

Preferred stock issuance costs — ( 2,698 )

Term loan paydown ( 7,056 ) —

Preferred issuance costs — ( 2,926 )

Term loan payoff ( 7,056 ) —

Proceeds from issuance of term loan 21,711 —

Term Loan Issuance Costs ( 378 ) —

Loan principal payments ( 432 ) —

Loan Payments ( 1,102 ) —

Payments of employee restricted stock tax withholdings ( 43 ) —

Equity contributions to subsidiaries 1,747 —

13 unchanged sentences

See Accompanying Notes to the Financial Statements

APPLIED BLOCKCHAIN INC.

AND Subsidiaries

Notes to Consolidated Financial Statements

For the Three Month Periods Ended August 31, 2022

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

For the Three and Six Month Periods Ended November 30, 2022

BUSINESS AND ORGANIZATION

Applied Blockchain, Inc.

(the “Company”) is a builder and operator of next-generation data centers across North America, which provide substantial computing power to blockchain infrastructure and support Bitcoin mining.

Applied Digital Corporation, f/k/a Applied Blockchain, Inc.

(the “Company”), is a builder and operator of next-generation data centers across North America, which provide substantial computing power to high power computing applications such as blockchain infrastructure, nature language processing, and artificial intelligence.

The Company has a colocation business model where customers place hardware they own into the Company’s facilities and the Company provides full operational and maintenance services for a fixed fee.

The Company typically enters into long term fixed rate contracts with its customers.

During the three month period ended August 31, 2022, the Company formed ELN-01, LLC, which is a Delaware limited liability company formed to build and operate a co-hosting facility.

Reverse Stock Split

The Company’s board of directors approved a reverse split of shares of the Company’s common stock on a one-for-six (1:6) basis , which was effected on April 12, 2022 (the “Reverse Stock Split”).

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 condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

1 unchanged sentence

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 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.

As of November 30, 2022, the Company had a firm commitment of $ 0.6 million to Highland Digital.

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 plans to consolidate the entity.

LIQUIDITY AND FINANCIAL CONDITION

As of August 31, 2022, the Company had approximate cash and cash equivalents of $ 40.8 million and negative working capital of $ 6.3 million.

As of November 30, 2022, the Company had approximate cash and cash equivalents of $ 18.1 million and negative working capital of $ 49.5 million.

Historically the Company has incurred losses and has relied on equity financings to fund its operations.

Based on analysis of cash flows, current net working capital, and expected operations 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.

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.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

The accompanying interim 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.

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 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements.

For further information, please refer to and read these interim 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 filed with the SEC on August 29, 2022.

Significant Accounting Policies and Use of Estimates:

There were no material changes in the Company’s significant accounting policies for the three months ended August 31, 2022 as compared to the year ended May 31, 2022.

See Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year-ended May

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

The condensed consolidated balance sheet as of May 31,

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

31, 2022, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

The preparation of the 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.

For the Three and Six Month Period Ended November 30, 2022

2022 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements.

For further information, please refer to and read these interim unaudited condensed 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 filed with the SEC on August 29, 2022.

Significant Accounting Policies and Use of Estimates:

There were no material changes in the Company’s significant accounting policies for the three and six months ended November 30, 2022 as compared to the year ended May 31, 2022.

See Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2022, 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 associated with asset valuations, and the valuation allowance associated with the Company’s deferred tax assets.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates the valuation allowance associated with the Company’s deferred tax assets.

Cash and Cash Equivalents

1 unchanged sentence

The Company’s cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although the Company believes it is subject to minimal risk.

The Company has restricted cash related to its letter of credit totaling $ 7.5 million.

The Company has restricted cash related to its letter of credit.

The Company is required to keep this balance in a separate account for the duration of the letter of credit agreement, which lasts through January 2024.

The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of August 31, 2022, and May 31, 2022.

(in thousands) August 31, 2022 May 31, 2022

The Company also has restricted cash related to its Starion Term Loan buy-down (as defined below).

The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of November 30, 2022, and May 31, 2022.

(in thousands) November 30, 2022 May 31, 2022

Net Cash & Equivalents $ 10,512 $ 38,798

4 unchanged sentences

When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.

In August 2020, the FASB issued ASU No.

2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP.

The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas.

This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

The Company has adopted ASU and determined that the adoption had no material impact on its financial statements and related disclosures.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities.

For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP;

and instead requires an entity to reflect its current estimate of all expected credit losses.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.

For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP;

however, this ASU requires that credit losses be presented as an allowance rather than as a write-down.

ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income.

The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.

ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of June 1, 2023.

Early adoption will continue to be permitted.

The Company is currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

For the Three and Six Month Period Ended November 30, 2022

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of August 31, 2022, and May 31, 2022:

(in thousands) Estimated Useful Life August 31,

Property and equipment consisted of the following as of November 30, 2022, and May 31, 2022:

(in thousands) Estimated Useful Life November 30,

Hosting Equipment

10 unchanged sentences

Property Plant and Equipment, Net $ 132,893 $ 64,260

Depreciation expense from continuing operations totaled $ 838 ,000 and $ 3 ,000 for the three-month periods ended August 31, 2022 and 2021, respectively.

Depreciation expense from continuing operations totaled $ 0.8 million and $ 0.2 million and for the three months ended November 30, 2022 and 2021, respectively.

Depreciation expense from continuing operations totaled $ 1.7 million and $ 0.2 million and for the six months ended November 30, 2022 and 2021, respectively.

REVENUE FROM CONTRACTS WITH CUSTOMERS

1 unchanged sentence

The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Below is a summary of the Company’s revenue concentration by major customer for the three and six months ended November 30, 2022 and 2021, respectively.

Three Months Ended November 30,

Customer 2022 2021

Customer A 32.6 % — %

Customer B 26.5 % — %

Customer C 16.2 % — %

Customer D 13.0 % — %

Customer E 11.8 % — %

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

Below is a summary of the Company’s revenue concentration by major customer for the three-month periods ended August 31, 2022 and 2021, respectively.

Three Months Ended August 31,

For the Three and Six Month Period Ended November 30, 2022

Six Months Ended November 30,

Customer 2022 2021

5 unchanged sentences

Remaining Performance Obligations

As of August 31, 2022, the Company had $ 19.2 million in deferred revenue, which represents the Company’s remaining performance obligations.

As of November 30, 2022, the Company had $ 29.4 million in deferred revenue, which represents the Company’s remaining performance obligations.

The Company expects to recognize $ 29.4 million within the next 12 months.

Deferred Revenue

Changes in the Company's deferred revenue balances from hosting operations for the three-month periods ended August 31, 2022 and 2021, respectively, are shown in the following table:

Changes in the Company's deferred revenue balances from hosting operations for the three and six months ended November 30, 2022 and 2021, respectively, are shown in the following table:

(in thousands) (in thousands)

Three Months Ended November 30, 2022 Three Months Ended November 30, 2021

Balance at August 31, 2022 $ 19,193 Balance at May 31, 2021 $ —

Advance billings 22,406 Advance billings —

Revenue recognized ( 12,340 ) Revenue recognized —

Other adjustments $ 135 Other adjustments $ —

Balance at November 30, 2022 $ 29,394 Balance at November 30, 2021 $ —

(in thousands) (in thousands)

Six Months Ended November 30, 2022 Six Months Ended November 30, 2021

Balance at May 31, 2022 3,877 Balance at May 31, 2021 $ —

2 unchanged sentences

Other adjustments $ 135 Other adjustments $ —

Balance at August 31, 2022 $ 19,193 Balance at August 31, 2021 $ —

Balance at November 30, 2022 $ 29,394 Balance at November 30, 2021 $ —

Customer Deposits

Changes in the Company's customer deposits balances for the three-month periods ended August 31, 2022 and 2021, respectively, are shown in the following table:

Changes in the Company's customer deposits balances for the three and six months ended November 30, 2022 and 2021, respectively, are shown in the following table:

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

(in thousands) (in thousands)

Three Months Ended November 30, 2022 Three Months Ended November 30, 2021

Balance at August 31, 2022 $ 14,111 Balance at August 31, 2021 $ —

Customer deposits received 10,713 Customer deposits received —

Customer deposits refunded — Customer deposits refunded —

Other adjustments $ ( 135 ) Other adjustments $ —

Balance at November 30, 2022 $ 24,689 Balance at November 30, 2021 $ —

(in thousands) (in thousands)

Six Months Ended November 30, 2022 Six Months Ended November 30, 2021

Balance at May 31, 2022 $ 9,524 Balance at May 31, 2021 $ —

1 unchanged sentence

Customer deposits refunded — Customer deposits refunded —

Balance at August 31, 2022 $ 14,111 Balance at August 31, 2021 $ —

Other adjustments $ ( 135 ) Other adjustments $ —

Balance at November 30, 2022 $ 24,689 Balance at November 30, 2021 $ —

RELATED PARTY TRANSACTIONS

3 unchanged sentences

The Company discloses all material related party transactions.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

Related Party Note Payable

During the three month period ended August 31, 2021, a related party note payable was held by the CEO of the Company.

During this period, the outstanding debt principal of $ 470,000 and accrued interest of $ 1.6 million was converted to 5.1 million shares of Common Stock with a fair value of $ 0.75 per share which resulted in a loss on extinguishment of $ 1.3 million.

Upon the consummation of the Exchange Agreement, the note payable was surrendered and cancelled;

all rights including rights to accrued interest due were extinguished.

During the period ended November 30, 2021, 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.

Related Party Revenue

One of the Company's major customers is an entity that is the parent company of the minority member of the 1.21 Gigawatts joint venture.

The Company recognized $ 2.5 million and no revenue from this customer for the three-month periods ended August 31, 2022 and 2021, respectively.

The Company had $ 2.0 million and no advance billings from this customer and $ 1.7 million and no deposits from this customer as of August 31, 2022 and May 31, 2022, respectively.

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 six months ended November 30, 2022 and November 30, 2021.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

Revenue for the Three Months ended

(in thousands) November 30, 2022 November 30, 2021

Customer A $ 4,016 $ —

Customer B $ 5,043 $ —

Revenue for the Six Months ended

(in thousands) November 30, 2022 November 30, 2021

Customer A $ 6,469 $ —

Customer B $ 8,622 $ —

The following tables illustrate related party deferred revenue and deposits balances as of November 30, 2022 and May 31, 2022.

Customer A Balances as of

(in thousands) November 30, 2022 May 31, 2022

Deferred revenue $ 700 $ 1,721

Customer Deposits $ 1,584 $ 1,719

Customer B Balances as of

(in thousands) November 30, 2022 May 31, 2022

Deferred revenue $ 2,279 $ 888

Customer Deposits $ 7,024 $ 6,508

Letter of Credit

As of August 31, 2022 and May 31, 2022, the Company had a letter of credit totaling $ 7.5 million.

As of November 30, 2022 and May 31, 2022, the Company had a letter of credit totaling $ 7.5 million.

As discussed in Footnote 3, the Company is required to maintain this amount in a separate cash balance, and therefore the cash is restricted.

Further, the Company has no unused lines of credit as of August 31, 2022 or May 31, 2022, respectively.

On July 25, 2022, the Company entered into a Loan Agreement with Starion Bank (“Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”).

Further, the Company has no unused lines of credit as of November 30, 2022 or May 31, 2022, respectively.

Starion Term Loan

On July 25, 2022, APLD Hosting, LLC (the “Borrower”), a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank (“Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”).

The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $ 15 million with a maturity date of July 25, 2027.

2 unchanged sentences

The Company is not subject to financial covenants until May 31, 2024.

At this time, the Company will be subject to a debt service coverage ratio.

Deferred financing costs related to the Starion Term Loan totals $ 142 ,000.

The effective interest rate was 7.0 % as of August 31, 2022.

Below is a summary of the term loan balance, including current debt and deferred financing fees as of August 31, 2022 and May 31, 2022.

(in thousands)

2022 May 31, 2022

Term Loan Balance $ 14,790 $ 7,324

Deferred Issuance Costs ( 140 ) ( 94 )

Current portion of Term Loan ( 2,587 ) ( 1,333 )

Long-term Portion of Term Loan $ 12,063 $ 5,897

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

At that time, the Company will

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

Below is a summary of the remaining principal payments due over the life of the Starion Loan Agreement note as of August 31, 2022.

For the Three and Six Month Period Ended November 30, 2022

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 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, LLC (the “Borrower”), a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Vantage Bank Texas (“Vantage Lender”) and the Company, as guarantor, which agreement provides for a term loan 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 the date of this report, an aggregate amount of $ 6.6 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.

Below is a summary of the remaining principal payments due over the life of the Starion Loan Agreement and Vantage Garden City Loan Agreement notes as of November 30, 2022.

Year Principal Payments (in thousands)

1 unchanged sentence

Total Term Loan Remaining Payments $ 20,667

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.

SHAREHOLDERS’ EQUITY (DEFICIT)

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

Below is a summary of Starion Loan Agreement Vantage Garden City Loan Agreement term loan balances, including current debt and deferred financing fees as of November 30, 2022 and May 31, 2022.

(in thousands) November 30, 2022 May 31, 2022

Term Loan Balance $ 20,667 $ 7,324

Deferred Issuance Costs ( 240 ) ( 94 )

Current portion of Term Loan ( 4,076 ) ( 1,333 )

Long-term Portion of Term Loan $ 16,351 $ 5,897

STOCKHOLDERS’ EQUITY (DEFICIT)

The Company is authorized to issue 166,666,667 shares of Common Stock at $ 0.001 par value per share.

As of August 31, 2022, 92,872,271 shares of Common Stock were issued and 92,835,974 shares were outstanding and as of May 31, 2022, 97,837,703 shares of Common Stock were issued and outstanding.

Note that all shares of Common Stock in this disclosure reflect the one-for-six reverse stock split disclosed in Note 1 - Business and Organization.

As of November 30, 2022, 93,982,650 shares of Common Stock were issued and 93,946,353 shares were outstanding and as of May 31, 2022, 97,837,703 shares of Common Stock were issued and 97,801,406 shares were outstanding.

All shares of Common Stock in this report reflect the one-for-six reverse stock split disclosed in Note 1 - Business and Organization.

Restricted Stock Awards

2 unchanged sentences

The Company will recognize the cost of the restricted stock-based on the grant date fair value of the awards over the related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met.

The following is a summary of the activity and balances for unvested restricted stock awards granted:

The following is a summary of the activity and balances for unvested restricted stock awards granted for the six months ended November 30, 2022:

Number of Shares Weighted Average Grant Date Fair Value Per Share

1 unchanged sentence

Granted 77,500 $ 2.04

Vested ( 952,500 ) $ 7.55

Forfeited — $ —

Outstanding as of August 31, 2022 1,366,665 $ 8.04

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

Outstanding as of November 30, 2022 491,666 $ 8.04

As of November 30, 2022, total expense to be recognized related to these awards was $ 0.9 million and the weighted average remaining recognition period for the unvested awards was 3 months.

Restricted Stock Units

The Company has granted restricted stock awards 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 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.

The following is a summary of the activity and balances for unvested restricted stock units granted:

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

On October 9, 2021, the Company’s board of 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 November 30, 2022, the Company had issued approximately 8.0 million awards under the plans.

The following is a summary of the activity and balances for unvested restricted stock units granted for the six months ended November 30, 2022:

Number of Shares Weighted Average Grant Date Fair Value Per Share

1 unchanged sentence

Granted 7,897,907 $ 2.32

Vested ( 179,166 ) $ 8.04

Forfeited ( 445,749 ) $ 7.65

Outstanding as of August 31, 2022 1,880,830 $ 7.18

Stock-Based Compensation Expense

Total stock based compensation expense for the respective periods is listed below

in thousands As of

August 31, 2022 August 31, 2021

Stock-based compensation expense $ 579 $ 12,337

At August 31, 2022, there was $ 23.9 million of unrecognized stock compensation expense, which the Company expects to recognize over a weighted-average period of 8.5 months as the performance conditions are met.

Outstanding as of November 30, 2022 9,064,658 $ 3.07

As of November 30, 2022, total expense to be recognized related to these awards was $ 17.7 million and the weighted average remaining recognition period for the unvested awards was 23 months.

Share Forfeiture

On June 6, 2022, through an agreement between the Company and Sparkpool, Sparkpool agreed to forfeit to the Company shares of Common Stock that had been issued pursuant to the service agreement executed on March 19, 2021.

On June 6, 2022, through an agreement between the Company and 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 canceled by the Company.

Equity Plan Approval

On October 9, 2021, the Company’s board of directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

for deferral of cash and stock compensation if such deferral provisions are activated at a future date.

As of August 31, 2022, no awards had been granted under either plan.

During the three months ended August 31, 2022, the Company added 11 leases.

The Company considered the nature of the leases under ASC 842 Leases and determined each of these leases represents finance leases.

During the six months ended November 30, 2022, the Company entered into 18 new leases, bringing the total number of leases to 39 .

The Company considered the nature of the leases under ASC 842 Leases and determined each of these leases represent finance leases.

The weighted average term of the leases is 31 months and the weighted average discount rate of the leases is 7.50 %.

Total ROU assets and lease liabilities added during the period totaled $ 922 ,000.

Total ROU assets entered into during the six months ended November 30, 2022 totaled $ 6.9 million.

COMMITMENTS AND CONTINGENCIES

As of August 31, 2022, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Term Loan and Note 11 - Leases, respectively.

As of November 30, 2022, 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.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

Energy Commitment

The Company also has a commitment of approximately $ 24.2 million related to the energy services agreement for its first cohosting facility as of August 31, 2022.

The Company also has a commitment of approximately $ 24.2 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility as of November 30, 2022.

The minimum term of this agreement is five years , and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination.

The commitment is fully due within the next year, as the Company commits to specific power consumption on an annual basis as part of the energy services agreement.

The Company purchased approximately $ 4.9 million and $ 0 in power under the energy services agreement during the the three-month periods ended August 31, 2022 and 2021, respectively

The Company purchased approximately $ 10.3 million and zero in power under the energy services agreement during the three months ended November 30, 2022 and 2021, respectively.

The Company purchased approximately $ 15.1 million and zero in power under the energy services agreement during the six months ended November 30, 2022 and 2021, respectively.

Claims and Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business.

As of August 31, 2022 and May 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

As of November 30, 2022 and May 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

2 unchanged sentences

Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity.

APPLIED BLOCKCHAIN INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Month Period Ended August 31, 2022

Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

Refer to Footnote 9 for details on outstanding classes of preferred shares.

The table below shows the calculation for this quarter’s earnings per share:

Basic and diluted loss per share:

Quarterly Period Ended

August 31, 2022 August 31, 2021

Three Months Ended Six Months Ended

November 30, 2022 November 30, 2021 November 30, 2022 November 30, 2021

Net loss from continuing operations $ ( 26,750 ) $ ( 1,569 ) $ ( 31,409 ) $ ( 15,949 )

Net gain from discontinued operations, net of income taxes — 243

Net loss from discontinued operations, net of income taxes — 1,398 — 1,681

Net loss including noncontrolling interests ( 26,750 ) ( 171 ) ( 31,409 ) ( 14,268 )

Net loss attributable to noncontrolling interest ( 133 ) — ( 261 ) —

Net loss attributable to Applied Blockchain $ ( 4,531 ) $ ( 14,097 )

Net loss attributable to Applied Digital Corporation $ ( 26,617 ) $ ( 171 ) $ ( 31,148 ) $ ( 14,268 )

Basic and diluted net (loss) gain per share:

3 unchanged sentences

Basic and diluted weighted average number of shares outstanding 93,422,427 53,396,920 93,263,266 49,143,981

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

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 shortly during the year ended May 31, 2022.

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.

1 unchanged sentence

Operating results of discontinued operations are summarized below:

Three Months Ended

August 31, 2022 August 31, 2021

Three Months Ended Six Months Ended

in thousands November 30, 2022 November 30, 2021 November 30, 2022 November 30, 2021

Cryptoasset mining revenue, net $ — $ 1,426 $ — $ 2,038

2 unchanged sentences

Impairment of cryptocurrency assets — ( 145 ) — ( 165 )

Gain on Extinguishment of Accounts Payable — 285 — 325

Gain on Sale of Fixed Assets 265 265

Net gain from discontinued operations $ — $ 1,398 $ — $ 1,681

As of August 31, 2022 and May 31, 2022, the Company did not hold any cryptoassets.

As of November 30, 2022 and May 31, 2022, the Company did not hold any cryptoassets.

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

What changed 10-Q

Item 1. Financial Statements