What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-06 compared with 2023-01-10 · 128 added, 101 removed, 217 unchanged (51% of the section changed)

26 unchanged sentences

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.

During the quarter ended February 28, 2023, we have tested hosting other high-compute applications at our first facility.

On March 7, 2023, we announced the energizing of the 180 MW facility in Ellendale, ND.

Once fully energized, this location will bring the Company to 280 MW of total hosting capacity across its facilities in North Dakota, all of which are contracted out to customers on multi-year terms.

In addition to this facility, we have substantially completed construction on our facility in Garden City,

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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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 has over 90 MW online as of November 30, 2022.

The entire 100 MW of capacity has been fully contracted on multi-year contracts with our customers, providing revenue visibility for

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

The facility began energizing in late January 2022 and has over 90 MW online as of February 28, 2023.

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

1 unchanged sentence

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.

There have been no reductions or interruptions in service since that time and February 28, 2023.

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

1 unchanged sentence

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.

Marathon has subsequently added 39.6 MW of additional capacity at the Company’s Jamestown, North Dakota facility.

Discontinued Operations

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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 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 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:

The facility is substantially complete and the 200 MW capacity is fully contracted with customers.

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

The Company took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023.

Once fully energized, this location will bring the Company to 280 MW of total hosting capacity across its facilities in North Dakota, all of which are contracted out to customers on multi-year terms.

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

DLR) and Equinix, Inc.

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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.

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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.

The Company has an 98% ownership interest in SAI and consolidates 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.

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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

Results of Operations Comparative Results for the Three and Nine Months Ended February 28, 2023 and 2022:

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

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

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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)

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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.

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

Hosting revenues increased by $13.1 million, or 1273%, from $1.0 million for the three months ended February 28, 2022 to $14.1 million for the three months ended February 28, 2023.

The increase in hosting revenues was driven by a full three months of operation at our first hosting facility in Jamestown, North Dakota.

Cost of Revenues

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 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.

Cost of revenues increased by $8.4 million, or 407%, from $2.1 million for the three months ended February 28, 2022 to $10.5 million for the three months ended February 28, 2023.

The increase in cost of revenues was primarily driven by driven by a full three months of operation at our first hosting facility in Jamestown, North Dakota.

The primary drivers of the change to cost of revenues for the three months ended February 28, 2023 were:

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

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

• approximately $0.9 million increase in personnel expenses for employees directly working at the Jamestown, North Dakota hosting facility.

Operating Expenses

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.

Selling, general and administrative expenses increased by $9.3 million, or 782%, from $1.2 million for the three months ended February 28, 2022 to $10.5 million for the three months ended February 28, 2023.

The primary drivers of the change to selling, general and administrative expense for the three months ended February 28, 2023 were:

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

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

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

• approximately $1.0 million increase in depreciation and amortization expense not directly attributable to the Jamestown, North Dakota hosting facility;

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

Other Expense

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.

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.

Interest expense increased $0.4 million, or 100% , from zero for the three months ended February 28, 2022 to $0.4 million for the three months ended February 28, 2023.

The increase was driven by the increase in finance leases and change in the Company’s debt obligations between periods.

Loss on extinguishment of debt for the three months ended February 28, 2022 and for the three months ended February 28, 2023 was zero for both periods.

Income tax benefit

The income tax benefit decreased $0.1 million or 100% from a $0.1 million expense for the three months ended February 28, 2022 to a zero for the three months ended February 28, 2023.

This change was driven by a change in valuation allowance for the three months ended February 28, 2023 compared to the three months ended February 28, 2022.

Loss from Discontinued Operations

Loss from discontinued operations decreased $4.0 million, or 100%, from $4.0 million for the three months ended February 28, 2022 to zero for the three months ended February 28, 2023.

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

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

Hosting revenues increased by $32.3 million, or 3150%, from $1.0 million for the nine months ended February 28, 2022 to $33.4 million for the nine months ended February 28, 2023.

The increase in hosting revenues was driven by a full nine months of operations at our first hosting facility in Jamestown, North Dakota.

Cost of Revenues

Cost of revenues increased by $26.3 million, or 1270%, from $2.1 million for the nine months ended February 28, 2022 to $28.4 million for the nine months ended February 28, 2023.

The increase in cost of revenues was driven by a full nine months of operations at our first hosting facility in Jamestown, North Dakota.

The primary drivers of the change to cost of revenues for the nine months ended February 28, 2023 were:

• approximately $2.5 million increase in depreciation and amortization expense attributable to the property and equipment at the Jamestown, North Dakota hosting facility;

• approximately $21.9 million increase in energy costs used to generate the hosting revenues;

• approximately $1.9 million increase in personnel expenses for employees directly working at the Jamestown, North Dakota hosting facility.

Operating Expenses

Selling, general and administrative expenses increased by $27.1 million, or 174%, from $15.6 million for the nine months ended February 28, 2022 to $42.7 million for the nine months ended February 28, 2023.

The primary drivers of the change to selling, general and administrative expense for the nine months ended February 28, 2023 were:

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

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

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

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

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

Other Expense

Interest expense increased $1.1 million, or 100% , from zero for the nine months ended February 28, 2022 to $1.1 million for the nine months ended February 28, 2023.

The change is driven by the increase in finance leases and change in the Company’s debt obligations between periods.

Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million for the nine months ended February 28, 2022 to $0.1 million for the nine months ended February 28, 2023.

This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the nine months ended February 28, 2022, compared to a smaller extinguishment of term debt that was recognized in the nine months ended February 28, 2023.

Income tax benefit (expense)

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 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 $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.

Income tax benefit increased $0.6 million or 202% from a $0.3 million expense for the nine months ended February 28, 2022 to approximately $0.3 million benefit for the nine months ended February 28, 2023.

This change was driven by a change in valuation allowance for the nine months ended February 28, 2023 compared to the nine months ended February 28, 2022.

Loss from Discontinued Operations

Loss from discontinued operations decreased $2.9 million, or 100%, from $2.9 million for the nine months ended February 28, 2022 to zero for the nine months ended February 28, 2023.

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

Non-GAAP Measures

11 unchanged sentences

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.

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.

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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

Three Months Ended Nine Months Ended

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

Adjusted operating loss

35 unchanged sentences

Adjusted Gross Profit (Non-GAAP) $ 4,435 $ (987) $ 7,611 $ (987)

The Sources of Liquidity

Sources of Liquidity

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.

4 unchanged sentences

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

On November 7, 2022, 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.

On November 7, 2022, the Company entered into the Vantage Garden City Loan Agreement.

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

The proceeds of the Vantage Garden City Loan will be used for the costs and expenses of a building at the Garden City Facility.

See Note 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.

On February 16, 2023, the Company entered into a Starion Ellendale Loan Agreement with Starion Bank.

This agreement provides for a term loan in the principal amount of $20,000,000 with a maturity date of February 3, 2028.

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

The proceeds of the loan will be used to fund expansion on the Ellendale Facility.

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

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

During the three and nine months ended February 28, 2023, we received $32.3 million and $77.0 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.

During the three and nine months ended February 28, 2023, we have generated revenue from co-hosting, but have incurred net losses from operations.

As of February 28, 2023 and May 31, 2022, we had cash of $22.9 million and $46.3 million, respectively, and an accumulated deficit of $94.2 million and $56.1 million, respectively.

Funding Requirements

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

We have experienced net losses through the periods ended February 28, 2023.

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

We believe that amounts we received from proceeds from our term loans, proceeds from our initial public offering, 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 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.

We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all.

Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We believe that the significant investments in property and equipment will begin to decrease during 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.

Summary of Cash Flows

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

The following table provides information about Applied Digital’s net cash flow (in thousands) for the nine months ended February 28, 2023.

Nine Months Ended

$ in thousands February 28, 2023 February 28, 2022

Net cash provided by operating activities $ 54,144 $ 4,228

4 unchanged sentences

Cash and cash equivalents at end of period $ 22,921 $ 11,961

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.

Commentary on cash flows for the nine months Ended February 28, 2023

Operating Activities

The net cash provided by operating activities of $54.1 million for the nine months ended February 28, 2023 consisted primarily of the following:

• $26.9 million non-cash adjustment for stock-based compensation expense;

• $26.8 million increase in customer deposits due to the Company executing new contracts during the period;

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

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

Investing Activities

The net cash used in investing activities of $96.3 million for the nine months ended February 28, 2023 was driven by the increase of purchases of property and equipment related to the construction of the Company’s Garden City, Texas and Ellendale, North Dakota facilities.

Financing Activities

The net cash provided by financing activities of $18.8 million for the nine months ended February 28, 2023 was primarily driven by:

• $25.6 million in proceeds from the Starion Term Loan and the Vantage Garden City Loan;

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

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

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

Operating Activities

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

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

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

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

• $2.1 million increase in customer deposits;

• $2.9 million increase in deferred revenue.

These above factors were partially offset by:

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

• $17.8 million in loss from continuing operations

Investing Activities

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

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

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

Financing Activities

The net cash provided by financing activities of $31.6 million for the nine months ended February 28, 2022 represents proceeds from the issuance of preferred stock $34.5 million, partially offset by issuance costs of $2.9 million.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis