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Item 1. Financial Statements

2023-04-06 compared with 2023-01-10 · 188 added, 163 removed, 317 unchanged (53% of the section changed)

3 unchanged sentences

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

November 30, 2022 May 31, 2022

February 28, 2023 May 31, 2022

Current Assets:

5 unchanged sentences

Right of use asset, net 12,911 6,408

Utility deposits

Other Assets 3,030 1,450

TOTAL ASSETS $ 207,607 $ 119,980

13 unchanged sentences

Commitments and contingencies

Stockholders' equity (deficit):

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

Additional paid in capital 150,695 128,293

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

Stockholders' equity:

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 99,471,127 shares issued and 94,469,399 shares outstanding at February 28, 2023, and 97,837,702 shares issued and 97,801,406 shares outstanding at May 31, 2022

Treasury stock, 5,001,728 shares at February 28, 2023 and 36,296 shares at May 31, 2022, at cost

( 62 ) ( 62 )

Additional paid in capital 155,055 128,293

Accumulated deficit ( 94,243 ) ( 56,070 )

1 unchanged sentence

Noncontrolling interest 10,545 6,976

Total Stockholders' equity (deficit) including noncontrolling interest $ 71,970 $ 79,235

Total Stockholders' equity including noncontrolling interest $ 71,395 $ 79,235

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 207,607 $ 119,980

3 unchanged sentences

(In thousands, except per share data)

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022

Hosting revenue $ 14,090 $ 1,026 $ 33,354 $ 1,026

3 unchanged sentences

Selling, general and administrative $ 10,514 $ 1,370 $ 42,727 $ 15,585

Depreciation and amortization 703 174 1,001 177

Total costs and expenses $ 10,514 $ 1,370 $ 42,727 $ 15,585

2 unchanged sentences

Interest Expense $ ( 384 ) $ — $ ( 1,125 ) $ —

Gain on extinguishment of accounts payable — 80 — 405

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

14 unchanged sentences

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

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

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

Three Months Ended February 28, 2023

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

Shares Amount Shares Amount

Balance, November 30, 2022 98,948,081 $ 99 ( 5,001,728 ) $ ( 62 ) $ 150,690 $ ( 87,218 ) $ 63,509 $ 8,461 $ 71,970

Issuance of common stock - vesting of restricted stock units 523,046 1 — — ( 115 ) — ( 114 ) — ( 114 )

Stock-based compensation — — — — 4,480 — 4,480 — 4,480

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

Net Loss — — — — — ( 7,025 ) ( 7,025 ) ( 316 ) ( 7,341 )

Balance, February 28, 2023 99,471,127 $ 100 ( 5,001,728 ) $ ( 62 ) $ 155,055 $ ( 94,243 ) $ 60,850 $ 10,545 $ 71,395

Three Months Ended February 28, 2022

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

Capital Accumulated

Deficit Total Stockholders Equity

Shares Amount Shares Amount Amount Shares Amount Shares Amount

Balance, November 30, 2021 660,000 $ 15,135 1,380,000 $ 31,574 $ 46,709 53,396,920 $ 320 ( 36,296 ) $ ( 62 ) $ 43,657 $ ( 44,837 ) $ ( 922 )

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 )

Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — $ — — ( 1,242 ) ( 1,242 )

Net Loss — — — — — — — — $ — — ( 6,445 ) ( 6,445 )

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

Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 $ 47,951 53,396,920 $ 320 ( 36,296 ) $ ( 62 ) $ 43,657 $ ( 52,524 ) $ ( 8,609 )

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

Consolidated Statements of Changes in Stockholders’ Equity (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

Nine Months Ended February 28, 2023

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

Shares Amount Shares Amount

Balance, May 31, 2022 97,837,702 $ 98 ( 36,296 ) $ ( 62 ) $ 128,293 $ ( 56,070 ) $ 72,259 $ 6,976 $ 79,235

Issuance of common stock - vesting of restricted stock units 1,633,425 2 — — ( 116 ) — ( 114 ) — ( 114 )

Stock-based compensation — — — — 26,878 — 26,878 — 26,878

Capital contribution to noncontrolling interest — — — — — — — 4,146 4,146

Stock Cancellation ( 4,965,432 ) ( 5 ) 5 — — — — —

Common stock forfeited — — ( 4,965,432 ) — — — — — —

Net Loss — — — — — ( 38,173 ) ( 38,173 ) ( 577 ) ( 38,750 )

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

Balance, February 28, 2023 99,471,127 $ 100 ( 5,001,728 ) $ ( 62 ) $ 155,055 $ ( 94,243 ) $ 60,850 $ 10,545 $ 71,395

Nine Months Ended February 28, 2022

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

Stock Series B Convertible Preferred

Stock Common Stock Additional Paid in

Capital Treasury Stock Accumulated

Deficit Total Stockholders Deficit Total Equity

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount

Stock Common Stock Treasury Stock Additional Paid in

Capital Accumulated

Deficit Total Stockholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Shares Amount

Balance, May 31, 2021 660,000 $ 15,135 — $ — $ 15,135 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 ( 36,296 ) $ ( 62 ) $ 13,874 $ ( 21,623 ) $ ( 2,583 )

5 unchanged sentences

Issuance Costs of Preferred Stock — — — ( 2,926 ) ( 2,926 ) — — — — — — — — — — —

Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — — — — — — ( 1,242 ) ( 1,242 )

Net Loss — — — — — — — — — — — — — — $ ( 20,713 ) ( 20,713 )

Balance, 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

Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 $ 47,951 — $ — — $ — 53,396,920 $ 320 ( 36,296 ) $ ( 62 ) $ 43,657 $ ( 52,524 ) $ ( 8,609 )

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

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

Six Months Ended

November 30, 2022 November 30, 2021

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

Nine Months Ended

February 28, 2023 February 28, 2022

CASH FLOW FROM OPERATING ACTIVITIES

2 unchanged sentences

Net loss attributable to noncontrolling interest ( 577 ) —

Net Income (loss) from continuing operations ( 31,409 ) ( 15,949 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Net loss from continuing operations ( 38,750 ) ( 17,843 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and Amortization 4,631 245

Gain on extinguishment of accounts payable — ( 405 )

Loss on extinguishment of debt 94 1,342

9 unchanged sentences

Sales and use tax payable 1,563 —

Interest on finance leases ( 104 ) —

Lease Assets and Liabilities ( 796 ) ( 233 )

4 unchanged sentences

Purchases of property and equipment ( 96,214 ) ( 28,180 )

Deposit on equipment — ( 23,230 )

Investments in private companies ( 100 ) —

Net cash used in investing activities of continuing operations ( 96,314 ) ( 28,180 )

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

Net cash used in investing activities of discontinued operations — ( 7,408 )

NET CASH USED IN INVESTING ACTIVITIES ( 96,314 ) ( 35,588 )

CASH FLOW FROM FINANCING ACTIVITIES

Issuance of preferred stock — 34,500

6 unchanged sentences

Payments of employee restricted stock tax withholdings ( 114 ) —

Equity contributions to subsidiaries 1,747 —

Noncontrolling interest contributions 4,147 —

Net cash provided by financing activities of continuing operations 18,792 31,571

14 unchanged sentences

Notes to Condensed Consolidated Financial Statements (unaudited)

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

For the Three and Nine Month Periods Ended February 28, 2023

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”), is a builder and operator of Next-Gen 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.

3 unchanged sentences

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 and the affected holder received cash in lieu of such fractional 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.

2 unchanged sentences

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.

In the Quarterly Report on Form 10-Q filed for the quarter ended November 30, 2022, Company had disclosed a firm commitment of $ 0.6 million to Highland Digital.

During the period ended February 28, 2023, the Company’s obligation to fulfill that commitment was relieved, and the Company no longer has such commitment.

On February 17, 2023, the Company entered into a letter of credit agreement with Frost Bank for $ 7.0 million to secure the Company’s power contract at the Ellendale, North Dakota facility.

The agreement runs through February 2024.

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.

As of February 28, 2023, the Company had approximate cash and cash equivalents of $ 22.9 million and negative working capital of $ 84.2 million.

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

Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued.

3 unchanged sentences

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,

The condensed consolidated balance sheet as of May 31, 2022 has been derived from the audited consolidated financial statements as of that date, but does not

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 the Three and Nine Month Period Ended February 28, 2023

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.

There were no material changes in the Company’s significant accounting policies for the three and nine months ended February 28, 2023 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.

1 unchanged sentence

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.

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

Cash and Cash Equivalents

1 unchanged sentence

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

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

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 has restricted cash related to its letters of credit that it holds with Vantage Bank and Frost Bank.

The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which last through January 2024 and February 2024, respectively.

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

The 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

The following table reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of February 28, 2023 and May 31, 2022.

(in thousands) February 28, 2023 May 31, 2022

Net Cash & Equivalents $ 8,421 $ 38,798

6 unchanged sentences

Notes to Consolidated Financial Statements

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

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,

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

Reclassifications

Within the Condensed Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current period presentation.

These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.

PROPERTY AND EQUIPMENT AND DEPOSITS ON EQUIPMENT

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

(in thousands) Estimated Useful Life February 28,

Hosting Equipment

7 unchanged sentences

Building 39 years 33,008 30,176

Deposits on Equipment 7,816 —

Total cost of property and equipment 170,865 65,269

Accumulated Depreciation ( 3,590 ) ( 1,009 )

Property 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.

Property and Equipment, Net $ 167,276 $ 64,260

Depreciation expense from continuing operations totaled $ 0.9 million and $ 0.2 million and for the three months ended February 28, 2023 and 2022, respectively.

Depreciation expense from continuing operations totaled $ 2.6 million and $ 0.2 million and for the nine months ended February 28, 2023 and 2022, respectively.

Construction in progress as of February 28, 2023 represents assets not placed into service at the Company’s Garden City, Texas and Ellendale, North Dakota locations, which were not operational as of February 28, 2023.

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 recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration which the Company expects to be received in exchange for those services.

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

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

Three Months Ended November 30,

Below is a summary of the Company’s revenue concentration by major customer for the three and nine months ended February 28, 2023 and 2022, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Three Months Ended February 28,

Customer 2023 2022

4 unchanged sentences

Customer E 13 % 13 %

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,

Others 7 % — %

Nine Months Ended February 28,

Customer 2023 2022

4 unchanged sentences

Customer E 13 % 13 %

Others 3 % — %

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.

As of February 28, 2023, the Company had $ 47.6 million in deferred revenue, which represents the Company’s remaining performance obligations.

The Company expects to recognize the entire $ 47.6 million within the next 12 months.

Deferred Revenue

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

Changes in the Company's deferred revenue balances from hosting operations for the three and nine months ended February 28, 2023 and 2022, 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 $ —

Three Months Ended February 28, 2023 Three Months Ended February 28, 2022

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

Advance billings $ 32,315 Advance billings $ 3,909

1 unchanged sentence

Other adjustments $ — Other adjustments $ —

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

Balance at February 28, 2023 $ 47,619 Balance at February 28, 2022 $ 2,883

(in thousands) (in thousands)

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

Nine Months Ended February 28, 2023 Nine Months Ended February 28, 2022

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

2 unchanged sentences

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:

Balance at February 28, 2023 $ 47,619 Balance at February 28, 2022 $ 2,883

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

Customer Deposits

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

(in thousands) (in thousands)

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

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

Three Months Ended February 28, 2023 Three Months Ended February 28, 2022

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

Customer deposits received $ 11,681 Customer deposits received $ 5,645

1 unchanged sentence

Other adjustments $ — Other adjustments $ —

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

Balance at February 28, 2023 $ 36,370 Balance at February 28, 2022 $ 5,645

(in thousands) (in thousands)

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

Nine Months Ended February 28, 2023 Nine Months Ended February 28, 2022

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

2 unchanged sentences

Other adjustments $ ( 135 ) Other adjustments $ —

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

Balance at February 28, 2023 $ 36,370 Balance at February 28, 2022 $ 5,645

RELATED PARTY TRANSACTIONS

4 unchanged sentences

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 the period ended February 28, 2022, a related party note payable was held by the CEO of the Company.

During this period, the outstanding debt principal of $ 0.5 million and accrued interest of $ 1.6 million were converted to 5.1 million shares of Common Stock with a fair value of $ 0.75 per share which resulted in a loss on extinguishment of $ 1.3 million.

Upon the consummation of an exchange agreement, the note payable was surrendered and cancelled, and all rights including rights to accrued interest due were extinguished.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Related Party Revenue

2 unchanged sentences

Company B became a related party during September 2022.

The following tables illustrate related party revenue for the three and six months ended November 30, 2022 and November 30, 2021.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The following tables illustrate related party revenue for the three and nine months ended February 28, 2023 and February 28, 2022.

Revenue for the Three Months ended

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

(in thousands) February 28, 2023 February 28, 2022

Customer A $ 3,700 $ 634

Customer B $ 5,828 $ 392

Revenue for the Six Months ended

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

Revenue for the Nine Months ended

(in thousands) February 28, 2023 February 28, 2022

Customer A $ 10,169 $ 634

Customer B $ 14,450 $ 392

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

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

Customer A Balances as of

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

(in thousands) February 28, 2023 May 31, 2022

Deferred revenue $ 1,616 $ 1,721

1 unchanged sentence

Customer B Balances as of

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

(in thousands) February 28, 2023 May 31, 2022

Deferred revenue $ 2,997 $ 1,150

1 unchanged sentence

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.

As of February 28, 2023 and May 31, 2022, the Company had letters of credit with Vantage Bank and Frost Bank that together total $ 14.5 million.

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

Further, the Company had no unused lines of credit as of February 28, 2023 or May 31, 2022, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Starion Term 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”).

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

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

2 unchanged sentences

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

At that time, the Company will

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.

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

Deferred financing costs related to the Starion Term Loan total $ 0.1 million.

1 unchanged sentence

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

The loan totals $ 0.2 million and bears an interest rate of 2 %, and the bond totals $ 0.5 million.

2 unchanged sentences

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”).

On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Vantage Bank Texas 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”).

2 unchanged sentences

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.

As of February 28, 2023, an aggregate amount of $ 10.3 million has been advanced under the Vantage Garden City Loan Agreement.

Total deferred costs related to the issuance of this loan total are $ 0.2 million.

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.

Starion Ellendale Loan

On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”).

The Ellendale Loan Agreement provides for a term loan in the principal amount of $ 20 million with a maturity date of February 3, 2028.

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

The Loan Agreement provides for an interest rate of 7.48 % per annum.

The proceeds of the Loan will be used to fund expansion on the Ellendale hosting datacenter.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

As of February 28, 2023, the Company had not received funding from the Ellendale Loan Agreement, and accordingly no amounts have been included in the tables below.

Remaining Principal Payments and Term Loan Balances

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

Year Principal Payments (in thousands)

1 unchanged sentence

Total Term Loan Remaining Payments $ 24,051

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

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

(in thousands) February 28, 2023 May 31, 2022

Term Loan Balance $ 24,051 $ 7,324

2 unchanged sentences

Long-term Portion of Term Loan $ 18,862 $ 5,897

STOCKHOLDERS’ EQUITY (DEFICIT)

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

As of 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.

STOCKHOLDERS’ EQUITY

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

Share Amounts As Of

February 28, 2023 May 31, 2022

Authorized to Issue 166,666,667 166,666,667

Issued 99,471,127 97,837,702

Outstanding 94,469,399 97,801,406

Restricted Stock Awards

1 unchanged sentence

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:

The Company will recognize the cost of the restricted stock-based on the grant date fair value of the awards over the

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

Number of Shares Weighted Average Grant Date Fair Value Per Share

3 unchanged sentences

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.

Outstanding as of February 28, 2023 395,833 $ 8.04

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

Restricted Stock Units

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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.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date.

As of November 30, 2022, the Company had issued approximately 8.0 million awards under the plans.

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

As of February 28, 2023, 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 nine months ended February 28, 2023:

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Number of Shares Weighted Average Grant Date Fair Value Per Share

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Forfeited ( 473,748 ) $ 7.32

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.

Outstanding as of February 28, 2023 8,585,296 $ 3.01

As of February 28, 2023, total remaining expense to be recognized related to these awards was $ 13.3 million and the weighted average remaining recognition period for the unvested awards was 20 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.

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

Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered.

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

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

As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and returned to the Company and placed in treasury.

During the nine months ended February 28, 2023, the Company entered into twenty-five new leases, bringing the total number of leases to 44 .

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

The weighted average term of the leases is 30 months and the weighted average discount rate of the leases is 7.87 %.

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

Total ROU assets entered into during the nine months ended February 28, 2023 totaled $ 8.7 million.

COMMITMENTS AND CONTINGENCIES

As of November 30, 2022, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 9 - Leases, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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 Company also has an annual minimum commitment of approximately $ 24.2 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility as of February 28, 2023.

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

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

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.

As of February 28, 2023 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.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

EARNINGS PER SHARE

2 unchanged sentences

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:

The table below shows the calculation for 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

Three Months Ended Nine Months Ended

February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022

Net loss from continuing operations $ ( 7,341 ) $ ( 2,397 ) $ ( 38,750 ) $ ( 17,843 )

8 unchanged sentences

Basic and diluted weighted average number of shares outstanding 94,119,944 53,396,920 93,545,687 50,546,048

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

DISCONTINUED OPERATIONS

4 unchanged sentences

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

Three Months Ended Nine Months Ended

in thousands February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022

Cryptoasset mining revenue, net $ — $ 907 $ — $ 2,945

2 unchanged sentences

Impairment of cryptocurrency assets — ( 225 ) — ( 390 )

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.

Loss on the sale of fixed assets $ — ( 578 ) $ — ( 582 )

Loss on the reclassification of fixed assets ( 3,524 ) ( 3,254 )

Net loss from discontinued operations $ — $ ( 4,048 ) $ — $ ( 2,870 )

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

As of February 28, 2023 and May 31, 2022, the Company did not hold any cryptoassets.

SUBSEQUENT EVENTS

On March 30, 2023, the Company received funding for the Starion Ellendale Loan.

The funding, net of issuance fees, totaled $ 19.8 million.

See full discussion over Starion Ellendale Loan in in Note 7 - Debt.

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

What changed 10-Q

Item 1. Financial Statements