What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-08-02 compared with 2022-08-29 · 301 added, 204 removed, 77 unchanged (87% of the section changed)

4 unchanged sentences

Business Overview

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

Our first facility was constructed in North Dakota with 100 MW of capacity.

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

We provide energized space for customers to host computing equipment.

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

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

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

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

Trends and Uncertainties

Regulatory Matters

Our customers’ businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax.

Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies.

As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.

federal, state and local and international jurisdictions.

These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another.

Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions.

To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations.

As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S.

Congress and certain U.S.

agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets.

Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry.

For instance, on September 24, 2021, China imposed a ban on all crypto transactions and mining.

Ongoing and future regulatory actions could effectively prevent our customers’ mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete.

Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.

Hosting Operation Highlights

On January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies Holding Company, entered into a joint venture in the form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8 million and $2 million, respectively, and will initially own 80% and 20% of 1.21 Gigawatts, respectively.

1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with initially up to 1.5GW of capacity for hosting blockchain infrastructure.

We are the managing member of 1.21 Gigawatts and are responsible for all site development, construction and operations of the datacenters.

However, certain activities of 1.21 Gigawatts and its subsidiaries, if any, require the vote of 90% of the then outstanding units of each such entity.

As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts.

1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member.

Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of other members to purchase some or all of such units.

Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our Common Stock equal to the capital contributions by Antpool in connection with the acquisition of such units divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts.

On February 2, 2022, we brought our first North Dakota facility online as to the initial 55 MW, and as of May 31, 2022, there was approximately 90 MW of power online at this facility.

Sale of Crypto Mining Equipment

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

Total proceeds from the sale of the equipment were $1.6 million.

We recognized a loss of $2.9 million in the sale of the equipment during the quarter and year ended May 31, 2022.

We have no plans to return to crypto mining operations in the future as we grow our co-hosting operations.

The results of our crypto mining operations have been accounted for as discontinued operations in our consolidated financial statements as of and for the year ended May 31, 2022.

This decision may decrease liquidity and our available capital resources, which may adversely affect us.

Expansion Opportunities

On November 24, 2021, we entered into a letter of intent to develop a facility in Texas using 200 MW of wind power.

On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, TX, with the intent to build our second datacenter facility on this site.

On April 25, 2022 the Company began construction on this site.

We are a designer, builder and operator of next-generation digital infrastructure.

We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.

Business Update

AI Cloud Services

Our AI cloud services business operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.

On May 15, 2023, we announced the formal launch of our AI Cloud services business through Sai Computing.

On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period.

The customer will make a significant prepayment as part of the agreement.

On June 23, 2023, we announced that Sai Computing had secured its second AI customer with an agreement worth up to $460 million over 36 months.

We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services.

Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

HPC Datacenter Hosting

Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

We are in the process of constructing a 9 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota.

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

This facility is expected to be brought online in the second half of calendar year 2023.

During early calendar year 2023, we began testing HPC hosting at this facility.

The systems in this facility passed initial testing in the second calendar quarter of 2023.

In June, the Company expanded its commitment for up to 26,000 GPUs for the Company's AI Cloud services business.

The Company has received and deployed an initial production cluster of 1,024 GPUs.

We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.

Crypto Datacenter Hosting

Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers.

Jamestown, North Dakota Datacenter

We purchased property in Jamestown, North Dakota on which we constructed our first co-hosting facility.

Construction of our first co-hosting facility began in September 2021.

On February 2, 2022, we brought our first facility online and it has been fully operational since that date.

As of May 31, 2023, the facility had approximately 105 MW of capacity, which is fully contracted with our customers.

Garden City, Texas Datacenter

On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility in Garden City, Texas.

On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, Texas, with the intent to build our second datacenter facility on this site.

On April 25, 2022, we began construction on this site.

This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers.

The facility is expected to begin operating in calendar Q4 of 2022 and the 200 MW capacity is fully contracted with our customers.

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

DLR) and Equinix, Inc.

EQIX), each of which is a traditional datacenter operator and Innovative Industrial Properties, Inc.

IIPR), a specialty REIT that similarly services a new growth industry.

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

The facility is expected to begin operating in the second half of calendar 2023 and the 200 MW capacity is fully contracted with our customers.

Ellendale, North Dakota Datacenter

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

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

The facility is fully energized and the facility will have approximately 180 MW of capacity, which is fully contracted with our customers

Public Offering and Changes to Equity

On August 13, 2021, the Company filed a registration statement for the resale by certain selling stockholders of shares of Common Stock with the SEC (Reg.

333-258818) (the “Resale Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022.

On November 22, 2021, the Company filed a registration statement for the sale by the Company of shares of Common Stock with the SEC (Reg.

333-261278) (the “IPO Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022.

On April 11, 2022, the Company filed a registration statement for the Common Stock

under the Securities Exchange Act of 1934, as amended, with the SEC which became effective automatically on April 12, 2022.

On April 12, 2022, concurrent with receipt of the notice of effectiveness for the Resale Registration Statement, all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were automatically converted (without payment of additional consideration) into fully paid and non-assessable shares of Common Stock, consistent with the Series C and Series D Preferred Stock terms.

All rights with respect to the Series C and Series D Preferred Stock terminated upon conversion.

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

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

No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split.

Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share.

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

On April 13, 2022, the Company announced its initial public offering of 8 million shares of its Common Stock at $5.00 per share.

The shares began trading on the Nasdaq Global Select Market on April 13, 2022, under the ticker symbol “APLD.”

On April 18, 2022, the Company completed its initial public offering.

The net proceeds received by the Company from the offering (after deducting underwriting discounts and commission and estimated offering expenses) were approximately $36 million.

The Company intends to use the net proceeds to lease or purchase additional property on which to build additional co-hosting facilities, to construct those facilities, to enter into additional energy service agreements for each additional site and for funding its working capital and general corporate purposes.

On March 11, 2022, the Company and Applied Hosting, LLC (“Hosting”), a wholly-owned subsidiary of the Company, entered into a term loan agreement (the “VBT Loan Agreement”) by and among Hosting, as the borrower, Vantage Bank Texas, as lender (the “VBT Lender”) and the Company as guarantor.

Pursuant to the Loan Agreement, on March 11, 2022, Hosting entered into a promissory note agreement (the “ VBT Note”) and borrowed $7.50 million for a five (5)) year term with an interest rate of five percent (5%) per annum (the “VBT Term Loan”).

The proceeds of the VBT Term Loan were used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota (the "Property").

The VBT Loan Agreement and VBT Note contain customary representations and warranties and events of default.

In addition, the VBT Note contains certain affirmative and negative covenants and other terms and conditions for a facility of this type.

Also on March 11, 2022, the Company entered into a continuing guaranty agreement (the “VBT Guaranty Agreement”) with the VBT Lender, pursuant to which the Company agreed to guaranty Hosting’s indebtedness and obligations under the VBT Loan Agreement.

The VBT Term Loan is secured by a mortgage on the Property pursuant to a Mortgage, Security Agreement and Fixture Financing Statement (the “VBT Mortgage”), dated March 11, 2022, by and between Hosting and the VBT Lender, and a security interest in the all accounts receivable, rents and servicing agreements relating to the property and equipment as set forth in or required by the VBT Loan Agreement.

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

The Starion Loan Agreement provides for a term loan (the “Starion Loan”) in the principal amount of $15.0 million with a maturity date of July 25, 2027.

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

Advances on the Starion Loan shall not exceed the principal total of $15.0 million.

The first advance on the Starion Loan was made at the time the Loan was entered into and was not to exceed 80% of the total principal amount of the Loan, or $12.0 million.

The remaining 20% balance of this Loan shall be available for advance following Borrower's proof of 100% intended operating capacity of the Property.

On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement, with Craig-Hallum Capital Group LLC ("Craig-Hallum Capital"), pursuant to which the Company may sell up to $125 million in shares of our common stock, par value $.001 per share (the "Common Stock").

The Company has sold approximately 7.9 million shares.

Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.

Debt Financing

Starion Term Loan

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.

The Starion Term Loan is secured by the Jamestown hosting facility, a security interest in the substantially all of the assets of the APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility.

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

The proceeds of the Starion Loan will be used for (i) repayment of existing indebtedness under the VBT Loan Agreement and (ii) working capital needs and general corporate purposes.

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 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.

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

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

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

On August 5, 2022, the VBT Term Loan was paid off in full and the VBT Term Loan Agreement and the associated VBT Mortgage were terminated.

Results of Operations for the fiscal year ended May 31, 2022 (fiscal year 2022) compared to fiscal year ended May 31, 2021

Fiscal Year Ended

May 31, 2022 May 31, 2021

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.

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, a wholly-owned subsidiary of the Company, entered into a Loan Agreement (the “Vantage Garden City Loan Agreement”) with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan ("The Vantage Garden City Loan") in the principal amount of $15 million .

The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for Rattlesnake Den I, LLC'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 Loan is secured by the leasehold interest on the Garden City Facility, a security interest in substantially all of the assets of the Rattlesnake Den I, LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in the master hosting agreements related to the Garden City Facility and records and data relating thereto.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 May 31, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement, with the outstanding principal balance totaling $10.1 million.

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

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 (The "Ellendale Loan") in the principal amount of $20 million with a maturity date of February 3, 2028.

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

The Ellendale Loan is secured by the Ellendale hosting facility, a security interest in the substantially all of the assets of the APLD ELN-01 LLC, and interests in all master hosting agreements related to the Ellendale hosting facility.

The Ellendale 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.

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

As of May 31, 2023, the total balance outstanding under the Ellendale Loan Agreement was $19.7 million.

On May 23, 2023, SAI Computing LLC, a wholly-owned subsidiary of the Company ("Sai"), entered into a Loan and Security Agreement (the "B.

Riley Loan") with B.

Riley Commercial Capital, LLC and B.

Riley Securities, Inc (collectively "B.

with the Company as Guarantor.

Riley Loan provides for a term loan of up to $50 million in the principal amount of 9.00% per annum.

The proceeds of the B.

Riley Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud services platform and datacenters by Sai, and for general corporate purposes and working capital.

Riley Loan contains events of default and covenants customary for such an agreement.

Riley Loan is secured by a security interest in substantially all of the assets of SAI as set forth in the B.

Riley Loan and a security interest in any proceeds of Sai's operations.

Pursuant to the B.

Riley Loan agreement, the Company unconditionally guaranteed Sai’s obligations to B.

Riley Loan contains initial fees of approximately $1.5 million that were reduced from the initial funds remitted to Sai.

Riley Loan also contains a term fee of $1 million that is due upon the Company's initial principal payment.

Finally, the B.

Riley Loan and Security agreement contains a commitment fee of 3% on any balance outstanding as of each quarter end beginning with the calendar quarter ending September 30, 2023.

As of May 31, 2023, the total outstanding balance under the B.

Riley Loan was $36.5 million.

The Company repaid the total balance of the B.

Riley Loan on July 17, 2023.

Results of Operations for the fiscal year ended May 31, 2023 compared to fiscal year ended May 31, 2022

The following table sets forth key components of the results of operations of Applied Digital Corporation during the three months and fiscal year ended May 31, 2023 and 2022 (in thousands).

Three Months Ended Year Ended

May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022

Hosting revenue $ 22,038 $ 7,523 $ 55,392 $ 8,549

Cost of revenues $ 15,950 $ 7,433 $ 44,388 $ 9,506

Gross loss $ (957) $ —

Gross profit 6,088 90 11,004 (957)

Costs and expenses:

Selling, general and administrative $ 12,332 $ 4,356 $ 55,059 $ 19,941

Stock-based compensation 12,337 —

Depreciation and amortization 49 —

Total costs and expenses $ 12,332 $ 4,356 $ 55,059 $ 19,941

Operating loss $ (6,244) $ (4,266) $ (44,055) $ (20,898)

Other (expense) income:

Other income (expense):

Interest Expense $ (855) $ (112) $ (1,980) $ (112)

1 unchanged sentence

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

Total other expense $ (1,048) $ (236)

Total other expense, net (855) (112) (2,074) (1,048)

Net loss from continuing operations before income tax expenses (7,099) (4,378) (46,129) (21,946)

Income tax expenses (540) —

Income tax benefit (expense) 243 (266) 523 (540)

Net loss from continuing operations (6,856) (4,643) (45,606) (22,486)

2 unchanged sentences

Net loss attributable to noncontrolling interest (383) (10) (960) (10)

Net loss attributable to Applied Blockchain (23,520) (568)

Net loss attributable to Applied Digital Corporation $ (6,473) $ (2,807) $ (44,646) $ (23,520)

Basic and diluted net (loss) gain per share:

Continuing Operations $ (0.07) $ (0.06) $ (0.49) $ (0.39)

Discontinued Operations $ — $ 0.02 $ — $ (0.02)

Basic and diluted net loss per share $ (0.07) $ (0.04) $ (0.49) $ (0.41)

Basic and diluted weighted average number of shares outstanding 95,146,122 76,631,835 93,976,233 57,121,096

Adjusted Amounts (a)

7 unchanged sentences

as a percentage of revenues 13 % (41) % — % (71) %

Adjusted Gross Profit 7,827 1,100 15,438 113

as a percentage of revenues 36 % 15 % 28 % 1 %

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

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

Hosting revenues increased $8.5 million, or 100%, from the year ended May 31, 2021 to May 31, 2022.

Hosting revenues for the quarter-ended May 31, 2021 were $0, compared to $7.5 million for the quarter-ended May 31, 2022 The increase in hosting revenues was driven by our completion of our first hosting facility in Jamestown, North Dakota, which was brought online in phases between the third and fourth fiscal quarters of fiscal year 2022.

Commentary on Results of Operations Comparative Results for the three months Ended May 31, 2023 compared to the three months ended May 31, 2022

Hosting revenues increased by $14.5 million, or 193%, from $7.5 million for the three months ended May 31, 2022 to $22.0 million for the three months ended May 31, 2023.

The increase in hosting revenues was driven by the increase in energized capacity with the Company's Ellendale, North Dakota facility energizing during the three months ended May 31, 2023.

Cost of Revenues

Cost of revenues increased $9.5 million, or 100%, from the year ended May 31, 2021 to May 31, 2022.

The increase in cost of revenues was primarily driven by the initiation of our Co-hosting business in fiscal year 2022, which represent all of our continuing operations.

Cost of revenues for the year ended May 31, 2022 consists of $986,000 of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, ND

hosting facility, $8.1 million of energy costs used to generate our hosting revenues, and $414,000 of personnel expenses for employees directly working at the hosting facility.

Cost of revenues increased by $8.6 million, or 116%, from $7.4 million for the three months ended May 31, 2022 to $16.0 million for the three months ended May 31, 2023.

The increase in cost of revenues was primarily driven by the energization of the Company's Ellendale, North Dakota facility during the three months ended May 31, 2023.

The primary drivers of the change to cost of revenues for the three months ended May 31, 2023 were:

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

• approximately $0.9 million increase in personnel expenses directly attributable to generating hosting revenues;

• approximately $0.7 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues;

• approximately $0.3 million increase in other expenses directly attributable to generating hosting revenues.

Operating Expenses

Selling, general and administrative expense increased $7.2 million, or 2177%, from the year ended May 31, 2021 to May 31, 2022.

This increase is driven by the initiation of our co-hosting business in fiscal year 2022, which represents our sole continuing operations.

The two primary drivers of Selling, general and administrative expense are $2.3 million of employee salaries and benefits expense, and $2.4 million of professional service expenses incurred to support the growth of the business.

Stock-based compensation for service agreement increased $12.3 million, or 100%, from the year ended May 31, 2021 to May 31, 2022.

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

These services were fully rendered within the first quarter of fiscal year 2022.

Selling, general and administrative expenses increased by $7.9 million, or 181%, from $4.4 million for the three months ended May 31, 2022 to $12.3 million for the three months ended May 31, 2023.

The primary drivers of the change to selling, general and administrative expense for the three months ended May 31, 2023 were:

• approximately $5.2 million increase in stock-based compensation expense;

• approximately $0.9 million increase in depreciation and amortization expense not directly attributable to property and equipment supporting hosting revenues;

• approximately $0.9 million increase in employee salaries and benefits expense not directly attributable to revenues;

• approximately $0.6 million increase in insurance expense;

• approximately $1.1 million increase in other selling, general, and administrative expenses such as computer and software expenses.

These factors are partially offset by an approximately $0.8 million decrease in professional service expense, which is attributable to the increase in full time employees that have replaced previously outsourced professional services.

Other Expense

Interest expense decreased by $124,000, or 52%, from the year ended May 31, 2021 to May 31, 2022.

This decrease was driven by the change in our debt obligations.

Interest expense for the year ended May 31, 2021 was incurred on related party notes, which bore interest at a annual rate of 16%.

These notes were extinguished through a conversion to common stock which occurred on June 12, 2021.

Interest expense in fiscal year 2022 relates to our VBT Term Loan which we entered into on March 11, 2022.

Loss on extinguishment of debt increased $1.3 million, or 100% from the year ended May 31, 2021 to May 31, 2022.

This increase was driven by the extinguishment of our related party notes payable by conversion to common stock.

The extinguishment loss reflects the difference in the carrying value of the notes and accrued interest and the fair value of the common stock issued in exchange for the debt.

Income tax expense increased by $540,000, or 100% from the year ended May 31, 2021 to May 31, 2022.

This increase is a result of the commencement of our hosting operations in the third quarter of fiscal year 2022.

Interest expense increased $0.8 million, or approximately 681% , from interest expense of $0.1 million for the three months ended May 31, 2022 to $0.9 million for the three months ended May 31, 2023.

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

Income tax benefit (expense)

The income tax benefit increased by $0.5 million or 191% from a $0.3 million expense for the three months ended May 31, 2022 to a $0.2 million benefit for the three months ended May 31, 2023.

This change was driven by a change in valuation allowance for the three months ended May 31, 2023 compared to the three months ended May 31, 2022.

Loss from Discontinued Operations

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

In fiscal year 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.

Loss from discontinued operations totaled $1.0 million for the year-ended May 31, 2022, and consists of $3.0 million of mining revenues and a $1.2 million gain on the purchase and subsequent resale of miners, offset by $1.6 million of recurring mining costs and $393,000 in cryptocurrency impairment charges, and losses of $2.9 million and $327,000 in the write-down of mining assets and assets purchased from Bitmain, respectively, as a result of presenting these assets as held-for sale within discontinued operations.

As of May 31, 2022, the Company no longer generates revenues from mining operations.

Gain from discontinued operations decreased by $1.8 million, or 100%, from $1.8 million for the three months ended May 31, 2022 to zero for the three months ended May 31, 2023.

The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.

Commentary on Results of Operations Comparative Results for the fiscal year ended May 31, 2023 compared to the fiscal year ended May 31, 2022

Hosting revenues increased by $46.9 million, or 548%, from $8.5 million for the year ended May 31, 2022 to $55.4 million for the year ended May 31, 2023.

The increase in hosting revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.

Cost of Revenues

Cost of revenues increased by $34.9 million, or 367%, from $9.5 million for the fiscal year ended May 31, 2022 to $44.4 million for the fiscal year ended May 31, 2023.

The increase in cost of revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.

The primary drivers of the change to cost of revenues for the fiscal year ended May 31, 2023 were:

• approximately $28.5 million increase in energy costs used to generate hosting revenues;

• approximately $2.7 million increase in personnel expenses directly attributable to generating hosting revenues;

• approximately $3.2 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues;

• approximately $0.5 million increase in other expenses directly attributable to generating hosting revenues.

Operating Expenses

Selling, general and administrative expenses increased by $35.2 million, or 176%, from $19.9 million for the fiscal year ended May 31, 2022 to $55.1 million for the fiscal year ended May 31, 2023.

The primary drivers of the change to selling, general and administrative expense for the fiscal year ended May 31, 2023 were:

• approximately $19.7 million increase in stock-based compensation expense;

• approximately $2.9 million increase in depreciation and amortization expense not directly attributable to property and equipment supporting hosting revenues;

• approximately $4.0 million increase in employee salaries and benefits expense not directly attributable to revenues;

• approximately $2.9 million increase in insurance expense;

• approximately $1.5 million increase in professional service expenses incurred as the Company experienced a full year of greater administrative needs;

• approximately $4.2 million increase in other selling, general, and administrative expenses such as computer and software expenses.

Other Expense

Interest expense increased $1.9 million, or 1,666% , from $0.1 million for the fiscal year ended May 31, 2022 to $2.0 million for the fiscal year ended May 31, 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 fiscal year ended May 31, 2022 to $0.1 million for the fiscal year ended May 31, 2023.

This decrease was driven by the lack of extinguishment of our related party notes payable by conversion to common stock, which occurred during the fiscal year ended May 31, 2022, compared to a smaller extinguishment of term debt that was recognized in the fiscal year ended May 31, 2023.

Income tax benefit (expense)

Income tax benefit increased $1.0 million or approximately 193% from a $0.5 million expense for the year ended May 31, 2022 to approximately $0.5 million benefit for the fiscal year ended May 31, 2023.

This change was driven by a change in valuation allowance for the fiscal year ended May 31, 2023 compared to the fiscal year ended May 31, 2022.

Loss from Discontinued Operations

Loss from discontinued operations decreased $1.0 million, or 100%, from $1.0 million for the fiscal year ended May 31, 2022 to zero for the year ended May 31, 2023.

The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.

Non-GAAP Measures

Fiscal Year Ended Quarter Ended

Adjusted Operating Loss and Adjusted Net Loss

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represent operating loss and net loss, respectively, from continuing operations excluding stock-based compensation and nonrecurring expenses.

We believe these are useful metrics as they provide additional information regarding factors and trends affecting our business and provide perspective on results absent one-time or significant non-cash items.

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

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

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

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

You should review the reconciliation of operating loss to Adjusted Operating Loss and net loss to Adjusted Net Loss above and not rely on any single financial measure to evaluate Applied Digital’s business.

EBITDA and Adjusted EBITDA

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

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs, one-time costs related to electricity set up, and other non-recurring expenses.

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

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

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

We also believe EBITDA and Adjusted EBITDA are useful metrics to investors because they provide additional information regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of their importance as measures of underlying operating performance, as the primary compensation performance measure under certain programs and plans.

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

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

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

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

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

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

Adjusted Gross Profit

“Adjusted Gross Profit” is a non-GAAP measure that represents gross profit adjusted for depreciation expense and one-time charges related to electricity set up within cost of revenues.

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

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

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

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

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

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

Non-GAAP Measures

Reconciliation of GAAP to Non-GAAP Measures

Three Months Ended Fiscal Year Ended

$ in thousands May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022

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Operating Loss from Continuing Operations (GAAP) $ (6,244) $ (4,266) $ (44,055) $ (20,898)

Stock-based compensation for service agreement 12,337 — — —

Stock-based compensation 5,195 — 32,074 12,337

Gain on Extinguishment of Accounts Payable — — — (406)

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Non-recurring professional service costs 727 240 2,164 1,310

One-time electricity charges — — 114 —

Other non-recurring expenses 615 93 2,290 93

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Adjusted operating margin from Continuing Operations 1 % (52) % (13) % (73) %

Adjusted Net Loss

Adjusted net income (loss)

Net Loss from Continuing Operations (GAAP) $ (6,856) $ (4,643) $ (45,606) $ (22,486)

Stock-based compensation for service agreement 12,337 — — —

Stock-based compensation 5,195 — 32,074 12,337

Gain on Extinguishment of Accounts Payable — — — (406)

1 unchanged sentence

Non-recurring professional service costs 727 240 2,164 1,310

One-time electricity charges — — 114 —

Other non-recurring expenses 615 93 2,290 93

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Interest Expense 855 112 1,980 112

Income tax expense 540 — 266 —

Income Tax Benefit (Expense) (242) 266 (523) 540

Depreciation and Amortization 2,636 875 7,267 1,120

EBITDA (Non-GAAP) $ (3,607) $ (3,390) $ (36,881) $ (20,714)

Stock-based compensation for service agreement 12,337 — — —

Stock-based compensation 5,195 — 32,074 12,337

Gain on Extinguishment of Accounts Payable — — — (406)

1 unchanged sentence

Non-recurring professional service costs 727 240 2,164 1,310

One-time electricity charges — — 114 —

Other non-recurring expenses 615 93 2,290 93

Adjusted EBITDA (Non-GAAP) $ 2,930 $ (3,057) $ (146) $ (6,038)

EBITDA and Adjusted EBITDA

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

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs not directly related to the company’s offering and therefore not deferred under the guidance in ASC 340 and SAB Topic 5A, and other one-time expenses.

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

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

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

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

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

Applied Blockchain’s computation of Adjusted EBITDA may not be comparable to

other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

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

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

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

Liquidity and Capital Resources

Adjusted Gross Profit

Gross profit (GAAP) $ 6,088 $ 90 $ 11,004 $ (957)

Depreciation and amortization in cost of revenues 1,739 1,010 4,320 1,070

One-time electricity charges — — 114 —

Adjusted Gross Profit (Non-GAAP) $ 7,827 $ 1,100 $ 15,438 $ 113

Sources of Liquidity

We have generated cash from the sale of our equity securities, the sale of Ether generated from our discontinued mining operations, and the receipt of contractual deposits, revenue and pre-payments from hosting customers, and proceeds from loans.

Since December 2020, when we began planning to acquire or build an operational business, we have raised aggregate gross proceeds of $51 million from issuances of our convertible preferred stock.

On April 15, 2021, we received $16.5 million in gross proceeds from the issuance of our Series C Convertible Redeemable Preferred Stock and on July 30, 2021, we received $34.5 million in gross proceeds from the issuance of our Series D Preferred Stock.

On April 18, 2022, we received $40.0 million in gross proceeds from the issuance of 8 million shares of the Company’s Common Stock in conjunction with the closing of our initial public offering.

During the year ended May 31, 2021, we did not generate any revenue from crypto mining, co-hosting or otherwise.

We have incurred net losses from operations.

In June 2021, as a result of commencement of our crypto mining operations, we began to generate revenue.

As of May 31, 2022 and May 31, 2021, we had cash of $46.3 million and $11.8 million respectively, and an accumulated deficit of $56.1 million and $21.6 million, respectively.

On March 11, 2022, we entered into the VBT Loan Agreement for $7.5 million for a term of five years with an interest rate of 5% per annum.

On August 5, 2022, the VBT Term Loan was paid off in full and the VBT Term Loan Agreement and the associated VBT Mortgage were terminated.

On July 25, 2022, Hosting entered into the Starion Loan Agreement.

The Starion Loan Agreement provides for the Starion Loan in the principal amount of $15 million with a maturity date of July 25, 2027.

The Starion Loan Agreement contains customary covenants, representations and warranties and events of default, and provides for an interest rate of 6.50% per annum.

We have primarily generated cash in the last 12 months from the proceeds of our term loans, issuance of common stock, and the receipt of contractual deposits and revenue prepayments from hosting customers.

The Company's primary term loans are noted below.

On July 25, 2022, the Company entered into the Starion Loan Agreement.

The Starion Loan Agreement provides for the Starion Term Loan which has a total principal balance of $15.0 million, with an interest rate per annum of 6.50%.

Approximately $7.1 million of the proceeds were used to pay down the remaining Vantage term loan balance that was entered into on March 11, 2022.

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

On November 7, 2022, the Company entered into the Vantage Garden City Loan Agreement, with a maximum total principal value of $15 million, and an interest rate per annum of 6.15%.

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.

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

This agreement provides for a term loan in the principal amount of $20 million 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.

On May 23, 2023, the Company entered into the B.

Riley Loan and Security Agreement with B.

Riley Commercial Capital, LLC and B.

Riley Securities.

Riley Loan and Security Agreement provides for a term loan in the principal amount of up to $50 million, with an interest rate of 9.00% per annum.

The proceeds of the Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud platform and datacenters by the Company, and for general corporate purposes and working capital.

The Company was initially advanced $34.9 million in funding, net of issuance fees of $1.6 million.

The Company repaid the total balance of the B.

Riley Loan on July 17, 2023.

See Note 7 - Debt to the consolidated financial statements included in this Annual Report on Form 10-K for more information on our term loans.

On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sales agreement, with Craig-Hallum Capital, pursuant to which the Company may sell up to $125 million in shares of Common Stock.

The Company has sold approximately 7.9 million shares.

Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.

During the fiscal year ended May 31, 2023, we received $100.1 million 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 fiscal year ended May 31, 2023, we have generated revenue from co-hosting, but incurred net losses from operations.

As of May 31, 2023 and May 31, 2022, we had cash and cash equivalents of $29.0 million and $38.8 million, respectively, and an accumulated deficit of $100.7 million and $56.1 million, respectively.

Funding Requirements

Having ceased our operations in 2014, we have experienced net losses through our fiscal year ended May 31, 2022.

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

We believe that amounts we received from our April 2021 and July 2021 sales of convertible preferred stock, from our crypto mining operations, prior to cessation of such operations on March 9, 2022, proceeds from term loan, proceeds from our initial public offering, and revenue we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online as to 92MW as of May 31, 2022, after planned expenditures to build our co-hosting operations, will be sufficient to meet our working capital needs for at least the next 12 months.

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

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

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

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

Because of the numerous risks and uncertainties associated with the crypto mining industry, we are unable to estimate the amount of increased

capital we may need to raise to continue to build additional co-hosting facilities and we may use our available capital sooner that we currently expect.

We believe that 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.

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.

We have experienced net losses through the periods ended May 31, 2023.

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

We believe that amounts we received from proceeds from our term loans, proceeds from stock offerings, and payments we have received from our hosting operations 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.

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.

For the year ended May 31, 2022, we used $0.9 million in cash from operating activities from continuing operations.

Significant reconciling items between our net loss and our net cash inflows from operations include the $12.3 million stock-based operating expense described above, and our $1.3 million loss incurred upon the conversion of our related party notes payable to common stock.

Our working capital also fluctuated, with accounts receivable and prepaid expenses increasing by $227,000 and $1.3 million, respectively , and accounts payable and accrued expenses increasing by $6.7 million.

These fluctuations were the result of the normal timing differences accrual-basis revenue & expenses and cash payments and receipts.

In addition, cash outflows related to our discontinued operations were $10.1 million.

For the year ended May 31, 2022, we had $45.9 million of cash outflows from investing activities from continuing operations, which primarily consisted of $58.3 million of cash paid for property, plant, and equipment for our hosting facilities, partially offset by $3.3 million of a decrease in deposits on equipment as these were applied against equipment purchases.

These are partially offset by $9.1 million in net inflows related to our discontinued operations, which consist of sales of mining equipment and Ether.

For the year ended May 31, 2022, we had $81.3 million of cash inflows from financing activities, which primarily consisted of inflows of $40.0 million from our initial public offering of common stock, $34.5 million from the placement of Class D preferred stock, and $7.3 million from term loan proceeds, less issuance costs of $2.9 million and $4.3 million related to these equity offerings.

For the year ended May 31, 2021, cash outflows from operating activities was $83,000 , which was primarily driven by accrued paid in kind interest and changes in accounts payable and accrued liabilities.

Net cash outflows from investing activities was $3.3 million, which was primarily driven by payments for deposits on equipment.

Net cash outflows from financing activities was $15.1 million, which was primarily driven by the issuance of preferred stock, partially offset by issuance costs for preferred stock.

We believe that the significant investments in property and equipment continue during calendar 2023 as we continue to grow our AI cloud services business.

We also expect that our revenues will increase as we continue to bring online additional capacity at existing datacenter facilities and as we begin to provide services to AI cloud services and HPC customers.

Summary of Cash Flows

The following table provides information about Applied Digital’s net cash flow for the fiscal years ended May 31, 2023 and May 31, 2022.

Fiscal Year Ended

$ in thousands May 31, 2023 May 31, 2022

Net cash provided by (used in) operating activities $ 58,735 $ (872)

Net cash used in investing activities (132,088) (45,871)

Net cash provided by financing activities 70,628 81,292

Net change in cash, cash equivalents, and restricted cash (2,725) $ 34,549

Cash, cash equivalents, and restricted cash at beginning of period 46,299 $ 11,750

Cash, cash equivalents, and restricted cash at end of period $ 43,574 $ 46,299

Commentary on cash flows for the fiscal year ended May 31, 2023

Operating Activities

The net cash provided by operating activities of $58.7 million for the fiscal year ended May 31, 2023 consisted primarily of the following:

• $32.1 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;

• $44.8 million increase in deferred revenue 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 $45.6 million loss from continuing operations

Investing Activities

The net cash used in investing activities of $132.1 million for the fiscal year ended May 31, 2023 was driven by the increase of purchases of property and equipment and other assets related to the construction of the Company’s Garden City, Texas and Ellendale, North Dakota hosting facilities, as well as deposit payments on equipment.

Financing Activities

The net cash provided by financing activities of $70.6 million for the fiscal year ended May 31, 2023 was primarily driven by the following factors:

• $45.7 million in proceeds from term loans

• $36.5 million in proceeds from the related party 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 fiscal year ended May 31, 2022

Operating Activities

The net cash used in operating activities of $0.9 million for the fiscal year ended May 31, 2022 consisted primarily of the following:

• $22.5 million in loss from continuing operations;

• $1.0 million in loss from discontinued operations

These above factors were partially offset by the following

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

• $6.4 million increase in accounts payable and accrued liabilities due to the timing of payments;

• $9.5 million increase in customer deposits due to the Company executing new contracts during the period;

• $3.9 million increase in deferred revenue due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.

Investing Activities

The net cash used in investing activities of $45.9 million for the fiscal year ended May 31, 2022 consisted of:

• $55.0 million in purchases of property and equipment related to the construction of the Company’s Jamestown, ND facility;

• $9.1 million in the sale of equipment related to the Company’s discontinued operations.

Financing Activities

The net cash provided by financing activities of $81.3 million for the fiscal year ended May 31, 2022 consisted primarily of:

• $34.5 million in proceeds from the issuance of preferred stock , partially offset by issuance costs of $2.9 million.

• $40.0 million in proceeds from the issuance of Common Stock from the April 2022 initial public offering, partially offset by issuance costs of $4.3 million

• $7.3 million in proceeds from the issuance of term loans;

• $7.0 million in contributions in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.

Off Balance Sheet Arrangements

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Recent Accounting Pronouncements

We continually assess any new accounting pronouncements to determine their applicability.

When it is determined that a new accounting pronouncement affects our financial reporting, we undertake 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 our consolidated financial statements properly reflect the change.

In August 2020, the FASB issued ASU No.

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

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

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

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

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

This update permits the use of either the modified retrospective or fully retrospective method of transition.

We are currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

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

Measurement of Credit Losses on Financial Instruments.

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

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

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

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

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

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

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

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

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

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

Early adoption will continue to be permitted.

We are currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

For a discussion of recently issued financial accounting standards, refer to Note 3 - Basis of Presentation and Significant Accounting Policies, in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Estimates

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However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 3 – Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Stock-based Compensation

We account for stock-based compensation with performance conditions by recognizing expense ratably over the requisite service period once the Company concludes that it is probable that the performance conditions will be achieved.

The Company's conclusion as to the probability of achievement is complex and requires judgment.

In addition, the Company makes estimates around the service period for certain performance awards that are probable of being achieved.

The Company may revise its estimate when it determines that it is probable that the performance condition will be achieved within a different time period.

The Company reassesses the probability related to vesting and the requisite service period at each reporting period, and recognizes a cumulative catch up adjustment for such changes in its probability assessment in subsequent reporting periods.

The Company's determination of probability is based on historical metrics, future projections, and the Company's historical performance against such projections.

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-K

Item 7. Management’s Discussion and Analysis