Applied Digital Corp. 10-Q

Item 1. Financial Statements APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except number of shares and par value data) November 30, 2022 May 31, 2022 ASSETS Current Assets: Cash and cash equivalents $ 18,074 $ 46,299 Accounts receivable 276 227 Prepaid expenses and other current assets 2,397 1,336 Total current assets 20,747 47,862 Property and equipment, net 132,893 64,260 Right of use asset, net 12,353 6,408 Utility deposits 1,450 1,450 TOTAL ASSETS $ 167,443 $ 119,980 LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 7,472 $ 13,260 Current portion of lease liability 3,664 1,004 Current portion of term loan 4,122 1,333 Customer deposits 24,689 9,524 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 portion of lease liability 8,631 5,310 Long-term term loan 16,376 5,897 Total liabilities $ 95,473 $ 40,745 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 $ 94 $ 98 Additional paid in capital 150,695 128,293 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 Digital Corporation 63,509 72,259 Noncontrolling interest 8,461 6,976 Total Stockholders' equity (deficit) including noncontrolling interest $ 71,970 $ 79,235 TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 167,443 $ 119,980 and use t See Accompanying Notes to the Financial Statements 1 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended Six Months Ended November 30, 2022 November 30, 2021 November 30, 2022 November 30, 2021 Revenues: Hosting revenue $ 12,340 $ — $ 19,264 $ — Cost of revenues $ 11,812 $ — $ 17,905 $ — Gross profit 528 — 1,359 — Costs and expenses: Selling, general and administrative $ 26,502 $ 1,181 $ 31,212 $ 14,216 Depreciation and amortization 703 174 1,001 177 Total costs and expenses $ 27,205 $ 1,355 $ 32,213 $ 14,393 Operating loss $ ( 26,677 ) $ ( 1,355 ) $ ( 30,854 ) $ ( 14,393 ) Other income (expense): Interest Expense $ ( 385 ) $ — $ ( 741 ) $ — Loss on extinguishment of debt — — ( 94 ) ( 1,342 ) Total other expense, net ( 385 ) — ( 835 ) ( 1,342 ) Net loss from continuing operations before income tax expenses ( 27,062 ) ( 1,355 ) ( 31,689 ) ( 15,735 ) 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 — 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 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 See Accompanying Notes to the Financial Statements 2 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (In thousands, except share data) 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 3 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 Stock-based compensation 1,110,379 1 22,397 — — 22,398 — 22,398 Capital contribution to noncontrolling interest — — — — — — 1,746 1,746 Stock Cancellation ( 4,965,432 ) ( 5 ) 5 — — — — — Net Loss — — — — ( 31,148 ) ( 31,148 ) ( 261 ) ( 31,409 ) 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 Stock Series B Convertible Preferred Stock Common Stock Additional Paid in Capital Treasury Stock Accumulated Deficit Total Stockholders Deficit Total Equity Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Balance, May 31, 2021 660,000 $ 15,135 — $ — $ 15,135 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 1 $ 13,882 $( 62 ) $( 21,623 ) $( 2,583 ) $ 12,552 Extinguishment of Debt — — — — — — — — — 5,083,828 5 3,473 — — 3,478 3,478 Issuance of Dividends to Preferred Stock — — — — — 60,822 6,082 29,772 2,979 — — — — ( 8,946 ) 115 115 Conversion of Preferred Stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 29 14,251 — — — — Service agreement stock compensation — — — — — — — — — 18,036,723 18 12,319 — — 12,337 12,337 Issuance of Preferred Stock — — 1,380,000 34,500 34,500 — — — — — — — — — — 34,500 Issuance Costs of Preferred Stock — — — ( 2,926 ) ( 2,926 ) — — — — — — — — — — ( 2,926 ) Net Loss — — — — — — — — — — — — — ( 14,268 ) ( 14,268 ) ( 14,268 ) 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 4 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 Digital Corporation $ ( 31,148 ) $ ( 14,268 ) Net loss from discontinued operations, net of income taxes — 1,681 Net Loss attributable to noncontrolling interest ( 261 ) — Net Income (loss) from continuing operations ( 31,409 ) ( 15,949 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and Amortization 2,704 177 Loss on extinguishment of debt 94 1,342 Stock-Based Compensation 22,398 12,337 Lease Expense 97 28 Deferred Tax ( 280 ) 214 Changes in assets and liabilities: Accounts receivable ( 49 ) — Prepaid expenses and other current assets ( 1,061 ) ( 1,644 ) Customer deposits 15,165 — Deferred revenue 25,517 — Accounts payable and accrued liabilities ( 5,745 ) 5,254 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 OPERATING ACTIVITIES 27,979 2,334 CASH FLOW FROM INVESTING ACTIVITIES Purchases of property and equipment ( 70,305 ) ( 10,314 ) Deposit on equipment — ( 23,230 ) Net cash used in investing activities of continuing operations ( 70,305 ) ( 33,544 ) Net cash provided by investing activities of discontinued operations — 1,931 NET CASH USED IN INVESTING ACTIVITIES ( 70,305 ) ( 31,613 ) CASH FLOW FROM FINANCING ACTIVITIES Issuance of preferred stock — 34,500 Repayment of finance leases ( 778 ) — Preferred issuance costs — ( 2,926 ) Term loan payoff ( 7,056 ) — Proceeds from issuance of term loan 21,711 — Term Loan Issuance Costs ( 378 ) — Loan Payments ( 1,102 ) — Payments of employee restricted stock tax withholdings ( 43 ) — Equity contributions to subsidiaries 1,747 — Net cash provided by financing activities of continuing operations 14,101 31,574 Net cash provided by financing activities of discontinued operations — — CASH FLOW PROVIDED BY FINANCING ACTIVITIES 14,101 31,574 NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS ( 28,225 ) 2,295 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,299 11,750 CASH AND CASH EQUIVALENTS, END OF PERIOD 18,074 14,045 Less: cash and cash equivalents of discontinued operations — — Cash and cash equivalents of continuing operations $ 18,074 $ 14,045 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid $ 707 $ — SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Right-of-use asset obtained by lease obligation $ 6,925 $ 1,291 Fixed assets in accounts payable $ 3,466 $ 513 See Accompanying Notes to the Financial Statements 5 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) For the Three and Six Month Periods Ended November 30, 2022 1. BUSINESS AND ORGANIZATION 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. 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. No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share. On 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. 2. LIQUIDITY AND FINANCIAL CONDITION 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 an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued. 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of May 31, 6 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 the valuation allowance associated with the Company’s deferred tax assets. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. 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. 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 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 Restricted Cash $ 7,562 $ 7,501 Total Cash & Cash Equivalents $ 18,074 $ 46,299 Recent Accounting Pronouncements The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. 7 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Three and Six Month Period Ended November 30, 2022 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of November 30, 2022, and May 31, 2022: (in thousands) Estimated Useful Life November 30, 2022 May 31, 2022 Hosting Equipment Electric Generation and Transformers 15 years $ 4,519 $ 4,338 Other Equipment and Fixtures 5 years- 7 years 718 588 Construction in Progress 83,290 18,305 Information Systems and Software 5 years 11,116 9,608 Land & Building Land 2,152 1,074 Land Improvements 15 years 1,259 1,180 Building 39 years 32,519 30,176 Total cost of property and equipment 135,572 65,269 Accumulated Depreciation ( 2,679 ) ( 1,009 ) Property Plant and Equipment, Net $ 132,893 $ 64,260 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. 5. REVENUE FROM CONTRACTS WITH CUSTOMERS The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration to which the Company expects to be received in exchange for those services. The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue. Below is a summary of the Company’s revenue concentration by major customer for the three and 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 % — % 8 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Three and Six Month Period Ended November 30, 2022 Six Months Ended November 30, Customer 2022 2021 Customer A 33.7 % — % Customer B 21.5 % — % Customer C 17.9 % — % Customer D 14.2 % — % Customer E 12.7 % — % 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 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 $ — Advance billings 44,646 Advance billings — Revenue recognized ( 19,264 ) Revenue recognized — Other adjustments $ 135 Other adjustments $ — 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 and six months ended November 30, 2022 and 2021, respectively, are shown in the following table: 9 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 $ — Customer deposits received 15,300 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 $ — 6. RELATED PARTY TRANSACTIONS Related Party Policy Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all material related party transactions. Related Party Note Payable During the period ended 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 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. 10 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 7. DEBT Letter of Credit 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 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. The Starion Loan Agreement provides for an interest rate of 6.50 % per annum. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. The Company is not subject to financial covenants until May 31, 2024. At that time, the Company will 11 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 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) FY23 $ 1,537 FY24 5,415 FY25 5,783 FY26 4,033 FY27 3,373 Thereafter 526 Total Term Loan Remaining Payments $ 20,667 12 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 Less: Deferred Issuance Costs ( 240 ) ( 94 ) Less: Current portion of Term Loan ( 4,076 ) ( 1,333 ) Long-term Portion of Term Loan $ 16,351 $ 5,897 8. STOCKHOLDERS’ EQUITY (DEFICIT) Common Stock The Company is authorized to issue 166,666,667 shares of Common Stock at $ 0.001 par value per share. 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 The Company has granted restricted stock awards to officers and directors. Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of Common Stock comprising the stock award with the Securities and Exchange Commission (the “SEC”). The Company will recognize the cost of the restricted stock-based on the grant date fair value of the awards over the related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met. The following is a summary of the activity and balances for unvested restricted stock awards granted for the six months ended November 30, 2022: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2022 $ 1,366,666 $ 8.04 Granted 77,500 $ 2.04 Vested ( 952,500 ) $ 7.55 Forfeited — $ — 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 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. 13 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Three and Six Month Period Ended November 30, 2022 Equity Plans 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 Outstanding as of May 31, 2022 1,791,666 $ 8.04 Granted 7,897,907 $ 2.32 Vested ( 179,166 ) $ 8.04 Forfeited ( 445,749 ) $ 7.65 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 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. 9. 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 entered into during the six months ended November 30, 2022 totaled $ 6.9 million. 10. COMMITMENTS AND CONTINGENCIES Commitments 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. 14 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 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 $ 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 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. 11. EARNINGS PER SHARE Basic net income (loss) per share (“EPS”) of Common Stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for this quarter’s earnings per share: Basic and diluted loss per share: 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 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 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 11 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Three and Six Month Period Ended November 30, 2022 12. DISCONTINUED OPERATIONS During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment. The Company ceased all crypto mining operations and completed the sale of the assets during the year ended May 31, 2022. The Company has no plans to return to crypto mining operations in the future as the Company grows. The results of these operations have been displayed as discontinued operations. Operating results of discontinued operations are summarized below: Three Months Ended 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 Cost of sales — 433 — 782 Gross profit — 993 — 1,256 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 November 30, 2022 and May 31, 2022, the Company did not hold any cryptoassets. 12 Table of Contents