What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-01-10 compared with 2022-10-12 · 171 added, 134 removed, 147 unchanged (67% of the section changed)

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• equipment failures, power or other supply disruptions;

• the lack of final approval of funding initiatives to be made by the City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund in favor of the Company, the application of which funding initiatives would decrease the interest rate of the Company’s repayment of the Starion Term Loan (as defined below).

You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended May 31, 2022, which was filed on August 29, 2022, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

Executive Overview

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

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, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications.

Our first facility was constructed in North Dakota with 100 Megawatts (“MW”) of capacity.

Our first facility was constructed in Jamestown, North Dakota with 100 Megawatts (“MW”) of capacity.

We signed an energy services agreement with a utility to power this facility.

We provide energized space for customers to host computing equipment.

Initially, these datacenters primarily hosted servers securing the Bitcoin network, but these facilities can also host hardware for other applications such as artificial intelligence, protein sequencing, drug discovery, machine learning and additional blockchain networks and applications.

We are mid-construction on our second facility in Garden City, Texas, and are in the development stage of the Company's third facility, also located in North Dakota.

We have a colocation business

model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a fixed fee.

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 and additional blockchain networks and applications.

During the quarter ended November 30, 2022, we began tests for hosting other high-compute applications at our first facility.

In addition to this facility, we have substantially completed construction on our second facility in Garden City, Texas, and are mid-construction on our third facility, which is located in Ellendale, North Dakota.

We have a colocation business model where our customers place

hardware they own into our facilities and we provide full operational and maintenance services for a fixed fee.

We typically enter into long-term fixed rate contracts with our customers.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

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 consolidated financial statements are prepared.

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.

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Hosting Operation Highlights

Applied Blockchain’s first facility is in Jamestown, North Dakota with capacity of 100 MW.

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 the Company.

Additionally, the facility is powered through a five-year energy services agreement

with a local utility, providing visibility into the cost structure as a stable pricing mechanism for energy costs has been negotiated.

The facility began energizing in late January 2022 and had over 90 MW online as of June 2022.

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

utility, providing visibility into the cost structure as a stable pricing mechanism for energy costs has been negotiated.

The facility began energizing in late January 2022 and has over 90 MW online as of November 30, 2022.

As previously reported in a Current Report on Form 8-K filed by the Company on July 18, 2022, there was an unexpected equipment failure at the substation powering the facility, resulting in a partial outage of approximately 50%.

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The Jamestown facility was not damaged and remains fully operational and capable of hosting the entire 100 MW of capacity.

There were no reductions or interruptions in service for the three months ended November 30, 2022.

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

("Marathon") for 270 MW of mining capacity.

As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility in Texas and at least 110 MW of hosting capacity at its second facility in North Dakota.

As part of this agreement, the Company has also provided Marathon with the option to increase hosting capacity utilizing up to an additional 70 MW in North Dakota, which would increase the total amount of hosting across all of the Company's facilities to 270 megawatts if the option is exercised.

As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility in Texas and 180 MW of hosting capacity at its second facility in North Dakota.

Discontinued Operations

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

The Company has no plans to return to crypto mining operations in the future as we grow our co-hosting operations.

The results of the crypto mining operations are accounted for as discontinued operations in our consolidated financial statements.

During the fourth quarter of our last fiscal year, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment.

The results of the crypto mining operations 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, TX, with the intent to build our second datacenter facility on this site.

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 expected to provide 200 MW of power to hosting customers.

The facility is expected to begin operating in calendar fourth quarter of 2022 and the 200 MW capacity is fully contracted with our customers.

The facility is nearing completion and is expected to begin operating in the first calendar quarter of 2023.

The 200 MW capacity is fully contracted with customers.

On August 8, 2022, the Company completed the purchase of 40 acres of land ("the Land") in Ellendale, North Dakota, for a total cost of $1 million.

The Company took possession of the Land on August 15, 2022, and plans to build a 200 MW datacenter on the Land, with completion scheduled for the first quarter of calendar 2023.

As our hosting operations expand, we believe our business structure will become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE:

The Company took possession of the Land on August 15, 2022, and is process of building a 180 MW datacenter on the Land, with completion scheduled for the first calendar quarter of 2023.

As our hosting operations expand, we believe our business structure will become conducive to a real estate investment trust (“REIT”) structure, comparable to Digital Realty Trust (NYSE:

DLR) and Equinix, Inc.

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We have begun to investigate the possibility, costs and benefits of converting to a REIT structure.

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.

Both the Company and GMR have a 50% ownership stake in Highland Digital.

GMR is the controlling partner and will consolidate the results of Highland Digital.

Therefore, the Company will not consolidate the Highland in their financial statements, but will report results based on the Company’s ownership percentage in 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.

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

This separate and unique building, designed and purpose-built for Graphics Processing Units (“GPUs”), will sit separate from the Company’s current buildings and plans to host more traditional high performance computing (“HPC”) applications, such as natural language processing, machine learning, and additional HPC developments.

Changes to Equity

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

All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

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.

Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share.

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

Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to

compensate for future services that will not be rendered.

As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and canceled by the Company.

Results of Operations Comparative Results for the Three Months Ended August 31, 2022 and 2021:

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

Three Months Ended

August 31, 2022 August 31, 2021

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.

Results of Operations Comparative Results for the Three and Six Months Ended November 30, 2022 and 2021:

The following table sets forth key components of the results of operations (in thousands) of Applied Digital during the three and six months ended November 30, 2022 and 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 $ —

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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

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

Gain on extinguishment of accounts payable — 40

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

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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)

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:

Continuing Operations $ (0.29) $ (0.03) $ (0.34) $ (0.32)

Discontinued Operations $ — $ 0.03 $ — $ 0.03

Basic and diluted net loss per share $ (0.29) $ — $ (0.34) $ (0.29)

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

Adjusted Amounts (a)

Adjusted Operating Loss from Continuing Operations (3,700) (1,004) (6,596) (403)

as a percentage of revenues (42) % — %

Adjusted Operating Margin from Continuing Operations (30) % — % (34) % — %

Adjusted Net Loss from Continuing Operations (3,773) (1,218) (7,151) (1,959)

as a percentage of revenues (49) % — %

Other Financial Data (a)

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(a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.

A reconciliation of reported amounts to adjusted amounts can be found in the section titled "Non-GAAP Measures and Reconciliation".

Hosting revenues increased from $0 to $6.9 million, from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

The increase in hosting revenues was driven by our completion of our first hosting facility in Jamestown, North Dakota, which was brought online in phases during the six months ended May 31, 2022.

A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A.

Commentary on Results of Operations Comparative Results for the Three and Six Months Ended November 30, 2022 and 2021

Hosting revenues increased by $12.3 million, or 100%, from zero for the three months ended November 30, 2021 to $12.3 million for the three months ended November 30, 2022.

Hosting revenues increased by $19.3 million, or 100%, from zero for the six months ended November 30, 2021 to $19.3 million for the six months ended November 30, 2022.

The increase in hosting revenues was driven by our completion of our first hosting facility in Jamestown, North Dakota, which was brought online in phases during the final six months of the fiscal year ended May 31, 2022.

Cost of Revenues

Cost of revenues increased from $0 to $6.1 million, from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

Cost of revenues increased by $11.8 million, or 100%, from zero for the three months ended November 30, 2021 to $11.8 million for the three months ended November 30, 2022.

Cost of revenues increased by $17.9 million, or 100%, from zero for the six months ended November 30, 2021 to $17.9 million for the six months ended November 30, 2022.

The increase in cost of revenues was primarily driven by the initiation of our co-hosting business in late fiscal year ended May 31, 2022, which represents all of our continuing operations.

Cost of revenues for the three month period ending August 31, 2022 consists of $836,000 of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, ND hosting facility, $4.9 million of energy costs used to generate our hosting revenues, and $360,000 of personnel expenses for employees directly working at the hosting facility.

Cost of revenues for the three months ended November 30, 2022 consists of $0.9 million of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, North Dakota hosting facility, $10.3 million of energy costs used to generate our hosting revenues, and $0.7 million of personnel expenses for employees directly working at the hosting facility.

Cost of revenues for the six months ended November 30, 2022 consists of $1.7 million of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, North Dakota hosting facility, $15.1 million of energy costs used to generate our hosting revenues, and $1.1 million of personnel expenses for employees directly working at the hosting facility.

Operating Expenses

Selling, general and administrative expenses increased by $3.4 million, or 492%, from $698,000 for the three month period ended August 31, 2021 to $4.1 million for the three month period ending August 31, 2022.

The two primary drivers of Selling, general and administrative expense are $1.3 million of employee salaries and benefits expense, and $1.4 million of professional service expenses incurred to support the growth of the business.

Stock-based compensation for service agreement decreased $11.8 million, or 95%, from $12.3 million for the three month period ended August 31, 2021 to $579,000 for the three month period ending August 31, 2022.

The expense was related to our service agreements with strategic partners, who provided advisory and consulting services in exchange for shares of common stock we issued to them.

These services were fully rendered within the three month period ending August 31, 2021.

The Company did recognize expenses related to stock compensation agreements for the three month period ending August 31, 2022, but the number of shares granted under these agreements, and therefore the related expense, was much smaller relative to the number of shares granted under the service agreements as described above.

Depreciation and amortization expense not attributable to costs of sales increased $295,000 or 9,838%, from $3,000 for the three month period ended August 31, 2021 to $298,000 for the three month period ending August 31, 2022.

The change was driven by a significant increase in assets placed in service between periods to support the growth of the business.

Selling, general and administrative expenses increased by $25.3 million, or 2,142%, from $1.2 million for the three months ended November 30, 2021 to $26.5 million for the three months ended November 30, 2022.

The three primary drivers of selling, general and administrative expense for the three months ended November 30, 2022 were $1.5 million of employee salaries and benefits expense not directly attributable to revenues, $1.2 million of professional service expenses incurred to support the growth of the business, and stock-based compensation expense of $21.8 million.

The stock-based compensation expense is primarily driven by restricted stock award and restricted stock unit grants made to directors, officers, and consultants in January 2022 that contained a vesting condition related to an effective registration statement of shares covering the resale of the shares of Common Stock underlying the awards.

The registration statement covering the resale of these shares was deemed effective during the three months ended November 30, 2022, leading to a catch-up of expense as required by ASC 718.

There was no stock-based compensation expense recognized during the three months ended November 30, 2021.

Selling, general and administrative expenses increased by $17.0 million, or 120%, from $14.2 million for the six months ended November 30, 2021 to $31.2 million for the six months ended November 30, 2022.

The three primary drivers of selling, general and administrative expense for the six months ended November 30, 2022 were $2.8 million of employee salaries and benefits expense not directly attributable to revenues, $2.3 million of professional service expenses incurred to support the growth of the business, and stock-based compensation expense of $22.4 million.

The stock-based compensation expense is primarily driven by restricted stock award

and restricted stock unit grants made to directors, officers, and consultants in January 2022 that contained a vesting condition related to an effective registration statement of shares covering the resale of the shares of Common Stock underlying the awards.

The registration statement covering the resale of these shares was deemed effective during the six months ended November 30, 2022, leading to a catch-up of expense as required by ASC 718.

During the six months ended November 30, 2021, the Company recognized stock-based compensation expense related to our service agreements with strategic partners, who provided advisory and consulting services in exchange for shares of common stock we issued to them.

The awards were granted in June 2021 and vested immediately, as the services were fully rendered during the month of June 2021.

Depreciation and amortization expense not attributable to costs of sales increased $0.5 million, or 304%, from $0.2 million for the three months ended November 30, 2021 to $0.7 million for the three months ended November 30, 2022.

Depreciation and amortization expense not attributable to costs of sales increased $0.8 million or 304%, from $0.2 million for the six months ended November 30, 2021 to $1.0 million for the six months ended November 30, 2022.

Both changes were driven by a significant increase in assets placed in service between periods to support the growth of the business.

Other Expense

Interest expense increased from $0 to $356,000, from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

This increase was driven by the increase in finance leases and change in the company’s debt obligations between periods, as the Company has entered into the Starion Loan agreement in the three month period ending August 31, 2022, and previously entered into a term loan agreement with Vantage Bank, which was subsequently extinguished.

Interest expense increased $0.4 million, or 100% , from zero for the three months ended November 30, 2021 to $0.4 million for the three months ended November 30, 2022.

Interest expense increased $0.7 million, or 100% , from zero for the six months ended November 30, 2021 to $0.7 million for the six months ended November 30, 2022.

Both increases were driven by the increase in finance leases and change in the company’s debt obligations between periods, as APLD Hosting, LLC (“Hosting”), a wholly-owned subsidiary of Applied Digital Corporation, entered into the Loan Agreement with Starion Bank (“Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”) for a term loan (the “Starion Term Loan”) in the three months ended November 30, 2022, and had previously entered into a term loan agreement with Vantage Bank, which was subsequently extinguished.

The Starion Loan Agreement provides for an interest rate of 6.50% per annum.

The Starion Term Loan is secured by a mortgage on the Company’s Jamestown, North Dakota property, and a security interest in substantially all of the assets of the Company as set forth in the Security Agreement dated as of July 25, 2022 by and between Hosting and the Starion Lender and a security interest in the form of a collateral assignment of the Company’s rights and interests in a master hosting agreement related to the Company’s Jamestown, North Dakota property and records and data relating thereto as set forth in the Security Agreement dated as of July 25, 2022 by and among Hosting, the Company as Grantor and the Starion Lender.

In addition, the Company unconditionally guaranteed the Company’s obligations to the Starion Lender, including under the Starion Term Loan, pursuant to an Unlimited Commercial Corporate Guaranty of the Company dated as of July 25, 2022.

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.

upon such incentives, the Company expects the effective interest rate of the Starion Term Loan to be less than 6.50% per annum after different state funds are applied to the Loan, pending final approval.

The Loan is secured by a mortgage on the Property, and a security interest in substantially all of the assets of the Company as set forth in the Security Agreement dated as of July 25, 2022 by and between Hosting and the Starion Lender and a security interest in the form of a collateral assignment of the Company’s rights and interests in a master hosting agreement related to the Property and records and data relating thereto as set forth in the Security Agreement dated as of July 25, 2022 by and among Hosting, the Company as Grantor and the Starion Lender.

Loss on extinguishment of debt decreased $1.25 million, or (93)% from the three month period ended August 31, 2021 to the three month period ended August 31, 2022.

This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the three month period ended August 31, 2021, compared to a smaller extinguishment of debt that was recognized in the three month period ended August 31, 2022.

Income tax expense

Income tax expense increased from $0 to $32,000 from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

This increase was driven by a change in valuation allowance for three month period ending August 31, 2022.

The Company has entered into an agreement with JDSC and Starion Bank which 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.

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 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 (the “Garden City Facility”), with each installment not exceeding $0.9 million for the costs and expenses of a building at the Garden City Facility.

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.

Loss on extinguishment of debt for the three months ended November 30, 2021 and for the three months ended November 30, 2022 was zero for both periods.

Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million for the six months ended November 30, 2021 to $0.1 million for the six months ended November 30, 2022.

This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the six months ended November 30, 2021, compared to a smaller extinguishment of term debt that was recognized in the six months ended November 30, 2022.

Income tax benefit (expense)

The income tax benefit increased $0.5 million or 246% from a $0.2 million expense for the three months ended November 30, 2021 to a $0.3 million benefit for the three months ended November 30, 2022.

Income tax benefit increased $0.5 million or 231% from a $0.2 million expense for the six months ended November 30, 2021 to approximately $0.3 million benefit for the six months ended November 30, 2022.

This change was driven by a change in valuation allowance for the periods ended November 30, 2022 compared to the periods ended November 30, 2021.

Gain from Discontinued Operations

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

In fiscal year ended May 31, 2022, we made the strategic decision to discontinue our mining operations and focus on hosting operations in the future.

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

In the fiscal year ended May 31, 2022, we made the strategic decision to discontinue our mining operations and focus on hosting operations in the future.

As a result of this strategic shift, our mining operations were reclassified as discontinued operations.

Gain from discontinued operations decreased $243,000 or 100% from the three month period ended August 31, 2021 to the three month period ending August 31, 2022.

Gain from discontinued operations decreased $1.4 million, or 100%, from the three months ended November 30, 2021 to zero for the three months ended November 30, 2022.

Gain from discontinued operations decreased $1.7 million, or 100%, from the six months ended November 30, 2021 to zero the six months ended November 30, 2022.

The decrease was due to the fact that the Company no longer generates revenues from mining operations.

Non-GAAP Measures and Reconciliation

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

Three Months Ended

$ in thousands August 31, 2022 August 31, 2021

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.

These costs have been adjusted as they are not indicative of business operations.

Adjusted EBITDA is intended as a 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.

Reconciliation of GAAP to Non-GAAP Measures

Three Months Ended Six Months Ended

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

Adjusted operating loss

Operating Loss from Continuing Operations (GAAP) $ (26,677) $ (1,355) $ (30,854) $ (14,393)

Stock-based compensation for service agreement 579 12,337

Stock-based compensation 21,819 — 22,398 12,337

Gain on Extinguishment of Accounts Payable — (285) — (325)

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Non-recurring professional service costs 664 636 1,072 636

One-time electricity charges 114 — 114 —

Other non-recurring expenses 380 — 580 —

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Adjusted operating margin from Continuing Operations (30.0) % — % (34.2) % — %

Adjusted net loss

Adjusted net income (loss)

Net Loss from Continuing Operations (GAAP) $ (26,750) $ (1,569) $ (31,409) $ (15,949)

Stock-based compensation for service agreement 579 12,337

Stock-based compensation 21,819 — 22,398 12,337

Gain on Extinguishment of Accounts Payable — (285) — (325)

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Non-recurring professional service costs 664 636 1,072 636

One-time electricity charges 114 — 114 —

Other non-recurring expenses 380 — 580 —

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Interest Expense 385 — 741 —

Income Tax Expense 32 —

Depreciation 1,136 3

Income Tax Benefit (Expense) (312) 214 (280) 214

Depreciation and Amortization 1,568 174 2,704 177

EBITDA (Non-GAAP) $ (25,109) $ (1,181) $ (28,244) $ (15,558)

Stock-based compensation for service agreement 579 12,337

Stock-based compensation 21,819 — 22,398 12,337

Gain on Extinguishment of Accounts Payable — (285) — (325)

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Non-recurring professional service costs 664 636 1,072 636

One-time electricity charges 114 — 114 —

Other non-recurring expenses 380 — 580 —

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Gross profit (GAAP) $ 528 $ — $ 1,359 $ —

Depreciation in cost of revenues 836 —

Adjusted Profit (Non-GAAP) $ 1,667 $ —

Adjusted Operating Loss and Adjusted Net Loss

However, Applied Blockchain’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items.

Applied Blockchain’s computation of Adjusted Operating Loss and Adjusted Net Loss may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Operating Loss and Adjusted Net Loss in the same fashion.

Because of these limitations, Adjusted Operating Loss and Adjusted Net Loss should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Applied Blockchain compensates for these limitations by relying primarily on its GAAP results and using Adjusted Operating Loss and Adjusted Net Loss on a supplemental basis.

EBITDA and Adjusted EBITDA

“EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization.

These costs have been adjusted as they are not indicative of business operations.

Adjusted EBITDA is intended as a supplemental measure of Applied Blockchain’s performance that is neither required by, nor presented in accordance with, GAAP.

Applied Blockchain believes that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors.

However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Blockchain may incur future expenses similar to those excluded when calculating these measures.

In addition, Applied Blockchain’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items.

Applied Blockchain’s computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Applied Blockchain compensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis.

You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA above and not rely on any single financial measure to evaluate Applied Blockchain’s business.

Adjusted Gross Profit

“Adjusted Gross Profit” is a non-GAAP measure that represents gross profit adjusted for depreciation expense within cost of revenues.

We believe this is a useful metric as it provides additional information regarding gross profit aside from significant non-cash expense in depreciation.

However, Applied Blockchain’s presentation of this measure should not be construed as an inference that its future results will be unaffected by other factors

within cost of revenues.

Applied Blockchain’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 Blockchain compensates for these limitations by relying primarily on its GAAP results and using Adjusted Gross Profit on a supplemental basis.

You should review the reconciliation of gross profit to Adjusted Gross Profit above and not rely on any single financial measure to evaluate Applied Blockchain’s business.

Depreciation and amortization in cost of revenues 867 — 1,703 —

One-time electricity charges 114 — 114 —

Adjusted Gross Profit (Non-GAAP) $ 1,509 $ — $ 3,176 $ —

The Sources of Liquidity

We have primarily generated cash in the last 12 months from the proceeds of our term loan, proceeds from our initial public offering, and the receipt of contractual deposits and revenue prepayments from hosting customers.

On April 18, 2022, we received $36 million in net proceeds from the issuance of 8 million shares of the Company’s Common Stock in conjunction with the closing of our initial public offering.

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

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

The Starion Loan Agreement contains customary covenants, representations and warranties and events of default.

The Starion Loan Agreement provides for an interest rate of 6.50% per annum.

We have primarily generated cash in the last 12 months from the proceeds of our term loans, proceeds from our initial public offering, and the receipt of contractual deposits and revenue prepayments 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.

The remaining proceeds of the term loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.

See Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the Starion Term Loan.

During the three month period ended August 31, 2022, we received $22.2 million in payments for future hosting services.

During fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations.

As of August 31, 2022 and May 31, 2022, we had cash of $40.8 million and $46.3 million respectively, and an accumulated deficit of $60.6 million and $56.1 million, respectively.

On November 7, 2022, APLD – Rattlesnake Den I, LLC (the “Borrower”), a wholly-owned subsidiary of the Company, entered into the Vantage Garden City Loan Agreement.

As of the date of this report, an aggregate amount of $6.6 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 7 - 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.

During the three and six months ended November 30, 2022, we received $22.4 million and $44.6 million, respectively, in payments for future hosting services.

During the fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations.

During the three and six months ended November 30, 2022, we have generated revenue from co-hosting, but have incurred net losses from operations.

As of November 30, 2022 and May 31, 2022, we had cash of $18.1 million and $46.3 million, respectively, and an accumulated deficit of $87.2 million and $56.1 million, respectively.

Funding Requirements

We have experienced net losses through our fiscal year ended May 31, 2022.

We have experienced net losses through the periods ended November 30, 2022.

Our transition to profitability is dependent on the successful operation of our co-hosting facilities.

We believe that amounts we received from our proceeds from our term loan, proceeds from our initial public offering, and revenue payments we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online in February 2022, after planned expenditures with respect to the items described in the section titled “ Expansion Opportunities” above , will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash.

We believe that amounts we received from proceeds from our term loans, proceeds from our initial public offering, and revenue payments we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online in February 2022, after planned expenditures with respect to the items described in the section titled “ Expansion Opportunities” above, will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash.

We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company.

We expect significant increases in our investment in property and equipment as we expand our co-hosting capacity.

We also expect that our revenues will increase as we continue to bring online additional capacity at our Jamestown, ND, Garden City, TX, and Ellendale, ND locations.

We expect to need additional capital to fund continued growth, which we may obtain through one or more equity offerings, debt financings or other third-party funding.

Because of the numerous risks and uncertainties associated with the Company’s concentration of customers in the crypto mining industry, we are unable to estimate the amount of increased capital we may need to raise to continue to build additional co-hosting facilities and we may use our available capital sooner that we currently expect.

We believe that the significant investments in property and equipment will begin to decrease into calendar 2023 as we complete construction of additional capacity.

We also expect that our revenues will increase as we continue to bring online additional capacity at our Jamestown, North Dakota, Garden City, Texas, and Ellendale, North Dakota locations.

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

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Summary of Cash Flows

The following table provides information about Applied Blockchain’s net cash flow (in thousands) for the three months ended August 31, 2022 and 2021.

Three Months Ended

$ in thousands August 31, 2022 August 31, 2021

The following table provides information about Applied Digital’s net cash flow (in thousands) for the six months ended November 30, 2022 and 2021.

Six Months Ended

$ in thousands November 30, 2022 November 30, 2021

Net cash provided by operating activities $ 27,979 $ 2,334

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Cash and cash equivalents at end of period $ 18,074 $ 14,045

The net cash generated by operating activities of $17.3 million for the three month period ending August 31, 2022 consisted primarily of an increase in customer deposits of $4.6 million and an increase in deferred revenue of $15.3 million, offset by a loss from continuing operations of $4.7 million.

Both customer deposits and deferred revenue increased during the three month period ending August 31, 2022 due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.

The net cash used in operating activities of $1.4 million for the three month period ending August 31, 2021 consisted primarily of non-cash expenses of stock based compensation charges of $12.3 million and loss on extinguishment of debt of $1.3 million, as well as an increase in accounts payable of $0.4 million, offset by losses from continuing operations of $14.3 million.

The net cash used in investing activities of $31.7 million for the three month period ending August 31, 2022 represents purchases of property and equipment.

The net cash used in investing activities of $11.3 million for the three month period ending August 31, 2021 represents purchases of property and equipment.

The net cash provided by financing activities of $8.9 million for the three month period ending August 31, 2022 is primarily driven by the proceeds from the Starion term loans which total $15.0 million, as well as by equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest of $1.7 million , partially offset by the extinguishment of the Vantage term loan totaling $7.1 million

The net cash provided by financing activities of $29.9 million for the three month period ending August 31, 2021 represents proceeds from the issuance of preferred stock $32.6 million offset by issuance costs of $2.7 million.

The net cash generated by operating activities of $28.0 million for the six months ended November 30, 2022 consisted primarily of the non-cash expense adjustment for stock-based compensation totaling $22.4 million, and changes in customer deposits of $15.2 million and deferred revenue of $25.5 million, offset by a loss from continuing operations of $31.4 million and a decrease in accounts payable and accrued liabilities of $5.7 million.

Both customer deposits and deferred revenue increased during the six months ended November 30, 2022 due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.

The net cash generated by operating activities of $2.3 million for the six months ended November 30, 2021 consisted primarily of non-cash expense adjustment for stock-based compensation totaling $12.3 million, increase of accounts payable and accrued liabilities of $5.3 million, and loss on extinguishment of debt of $1.3 million, partially offset by an increase to prepaid expense and other current assets of $1.6 million, losses from continuing operations of $15.9 million and net cash used in operating activities of discontinued operations of $0.6 million.

The net cash used in investing activities of $70.3 million for the six months ended November 30, 2022 represents purchases of property and equipment.

The net cash used in investing activities of $31.6 million for the six months ended November 30, 2021 consists of purchases of property and equipment of $10.3 million and deposits on equipment of $23.2 million, partially offset by net cash provided by investing activities of discontinued operations of $1.9 million.

The net cash provided by financing activities of $14.1 million for the six months ended November 30, 2022 is primarily driven by the proceeds from the Starion Term Loan and the Vantage Garden City Loan, which total $21.7 million, as well as by equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest of $1.7 million , partially offset by the extinguishment of the Vantage term loan totaling $7.1 million.

The net cash provided by financing activities of $31.6 million for the six months ended November 30, 2021 represents proceeds from the issuance of preferred stock $34.5 million, partially offset by issuance costs of $2.9 million.

Quantitative and Qualitative Disclosures About Market Risk

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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 2. Management’s Discussion and Analysis