What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-01-16 compared with 2023-10-10 · 170 added, 127 removed, 136 unchanged (69% of the section changed)

21 unchanged sentences

Business Overview

We are a designer, builder, and operator of next generation digital infrastructure providing cost-competitive solutions to customers in High-Performance Compute (“HPC”), artificial intelligence cloud service (“Cloud services”), and datacenter hosting (“Hosting”) industries.

We are a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers in high-performance compute hosting (“HPC hosting”), cloud service (“Cloud services”), and datacenter hosting (“Datacenter hosting”) industries.

Trends and Other Factors Affecting Our Business

25 unchanged sentences

Cloud Services

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

In June 2023, the Company expanded its commitment for up to 26,000 GPUs for the Company's Cloud services business.

During the three months ended August 31, 2023, the Company received and deployed an initial production cluster of 1,024 GPUs, and began recognizing revenue on our first cloud services contract.

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.

Our Cloud services business operates through our Sai Computing brand and provides cloud services to customers, such as artificial intelligence and machine learning developers, to develop their advanced products.

During the six months ended November 30, 2023, the Company received and deployed an initial production cluster of 1,024 GPUs, and began recognizing revenue on our first cloud services contract.

Our HPC hosting business designs, builds, and operates datacenters which are designed to support high-compute applications using advanced and sophisticated infrastructures to provide services to customers.

The Company is in process of constructing a facility next to the Company’s currently operating facilities in Jamestown, North Dakota, and Ellendale, North Dakota.

On January 15, 2024, the Company entered into a conditional agreement to provide HPC datacenter capacity at its Ellendale, North Dakota campus, subject to finalization of definitive lease documents.

The conditional agreement is for a total of 100 MWs for a term of 10 years, with a total value of approximately $2.2 billion over such 10 year term.

The conditional agreement is conditioned upon each party securing satisfactory financing for the completion of construction, with the ability of each party to terminate within 45 days, without penalty, if the condition is not satisfied.

Datacenter Hosting

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

As of August 31, 2023, the Company’s 106 MW facility in Jamestown, North Dakota and 180 MW facility in Ellendale, North Dakota were fully operational.

The Company’s 200 MW facility in Garden City, Texas is expected to energize during the fourth quarter of calendar 2023.

On September 8, 2023, the Company entered into a Facility Extension Agreement with Oncor Electricity Delivery Company LLC for the transmission and metering of power to the Company’s Garden City facility.

With this in place, metering and telemetry equipment will be installed onsite by Oncor and once installed, the site will be energized.

Our Datacenter hosting business operates datacenters to provide energized space to crypto mining customers.

As of November 30, 2023, the Company’s 106 MW facility in Jamestown, North Dakota and 180 MW facility in Ellendale, North Dakota were fully operational.

During the quarter ended November 30, 2023, the Company entered into a long term

Retail Electric Service Agreement with TerraForm Power to provide energy to the Company’s 200 MW Garden City, Texas facility and the Company began energizing the facility.

Results of Operations

Comparative Results for the Three Months Ended August 31, 2023 and 2022:

The following table sets forth key components of the results of operations (in thousands) during the three months ended August 31, 2023 and 2022.

Three Months Ended

August 31, 2023 August 31, 2022

Hosting revenue $ 29,987 $ 4,338

Comparative Results for the Three and Six Months Ended November 30, 2023 and 2022:

The following table sets forth key components of the results of operations (in thousands) during the three and six months ended November 30, 2023 and 2022.

Three Months Ended Six Months Ended

November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022

Datacenter hosting revenue $ 34,119 $ 8,747 $ 64,106 $ 13,086

Cloud services revenue 4,450 — 6,602 —

Related party hosting revenue 4,184 2,586

Related party datacenter hosting revenue 3,634 3,593 7,819 6,178

Total revenue 42,203 12,340 78,527 19,264

2 unchanged sentences

Selling, general and administrative 21,075 27,226 38,127 32,245

Loss from legal settlement

Total costs and expenses 50,377 39,038 94,127 50,150

2 unchanged sentences

Loss on extinguishment of debt — — 2,353 94

Loss from legal settlement

Net loss before income taxes (10,529) (27,062) (22,383) (31,689)

3 unchanged sentences

Net loss attributable to Applied Digital Corporation $ (10,529) $ (26,617) $ (21,986) $ (31,148)

Basic and diluted net (loss) gain per share:

Basic and diluted net loss per share $ (0.10) $ (0.28) $ (0.21) $ (0.33)

3 unchanged sentences

Adjusted operating margin (7) % (30) % (1) % (35) %

Adjusted Net Income (Loss)

Adjusted net loss $ (5,155) $ (3,773) $ (5,470) $ (7,151)

Basic and diluted net loss per share $ (0.05) $ (0.04) $ (0.05) $ (0.08)

6 unchanged sentences

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 Months Ended August 31, 2023 compared to the Three Months Ended August 31, 2022

Total revenue increased by $29.4 million, or 425%, from $6.9 million for the three months ended August 31, 2022 to $36.3 million for the three months ended August 31, 2023.

The increase in revenue was driven by an increase in online

capacity from the Ellendale, North Dakota facility being operational, and revenue from the Company’s first cloud services contract, which started during the three months ended August 31, 2023.

Commentary on Results of Operations Comparative Results for the Three Months Ended November 30, 2023 compared to the Three Months Ended November 30, 2022

Datacenter hosting revenue increased $25.4 million, or 290%, from $8.7 million for the three months ended November 30, 2022 to $34.1 million for the three months ended November 30, 2023 driven primarily by a full quarter of revenue generation from the Company’s Ellendale facility as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024.

Cloud services revenue increased $4.5 million, or 100%, from zero for the three months ended November 30, 2022 to $4.5 million for the three months ended November 30, 2023 driven by a full quarter of revenue generation as the Company began providing service to its cloud services customers during the first quarter of fiscal year 2024.

Related party datacenter hosting revenue was $3.6 million for the three months ended November 30, 2023 which was comparable to $3.6 million for the three months ended November 30, 2022.

Cost of revenues

Cost of revenues increased $18.3 million, or 300%, from $6.1 million for the three months ended August 31, 2022 to $24.4 million for the three months ended August 31, 2023.

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

• approximately $12.8 million increase in energy costs used to generate hosting revenue;

Cost of revenues increased $17.4 million, or 147%, from $11.8 million for the three months ended November 30, 2022 to $29.2 million for the three months ended November 30, 2023.

The increase was primarily driven by the growth in the business as more facilities were energized compared to the three months ended November 30, 2022.

The change in cost of revenues are categorized as follows:

• approximately $8.2 million increase in energy costs used to generate revenue;

• approximately $7.7 million increase in depreciation and amortization expense attributable to owned and leased assets directly supporting revenue;

• approximately $1.2 million increase in personnel expenses for employees directly attributable to generating hosting revenue;

• approximately $0.4 million increase in other expenses directly attributable to generating hosting revenue.

Operating Expenses

Selling, general and administrative expenses increased $12.1 million, or 241%, from $5.0 million for the three months ended August 31, 2022 to $17.1 million for the three months ended August 31, 2023.

The primary drivers of the increase in selling, general and administrative expense for the three months ended August 31, 2023 were:

• approximately $1.0 million increase in personnel expenses for employees directly attributable to generating revenue;

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

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $6.1 million, or 23%, from $27.2 million for the three months ended November 30, 2022 to $21.1 million for the three months ended November 30, 2023.

The primary driver of the decrease was a $17.0 million decrease in stock based compensation expense, as the Company recognized a cumulative catch-up of expense in stock based compensation expense in the comparative period upon the Company’s registration statement for the award shares being declared effective.

This decrease was partially offset by the following increases:

• approximately $5.0 million increase in depreciation and amortization expense attributable to owned and leased assets that do not directly support revenue;

• approximately $2.0 million increase in employee salaries and benefits expense not directly attributable to revenues;

• approximately $1.9 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses;

• approximately $1.5 million increase in colocation lease expenses, incurred prior to services being provided, due to the growth of the business;

• approximately $0.5 million increase in professional service expenses incurred to support the growth of the business.

Other expenses

Interest expense, net increased $2.0 million, or 547%, from $0.4 million for the three months ended November 30, 2022 to $2.4 million for the three months ended November 30, 2023.

The increase was driven by an increase in finance leases and interest-bearing loans between periods.

Income tax benefit

The income tax benefit decreased $0.3 million, or 100%, from a $0.3 million benefit for the three months ended November 30, 2022 to zero for the three months ended November 30, 2023.

This change was driven by a change in

valuation allowance for the three months ended November 30, 2023 compared to the three months ended November 30, 2022.

Commentary on Results of Operations Comparative Results for the Six Months Ended November 30, 2023 compared to the Six Months Ended November 30, 2022

Datacenter hosting revenues increased $51.0 million, or 390%, from $13.1 million for the six months ended November 30, 2022 to $64.1 million for the six months ended November 30, 2023.

The increase in datacenter hosting revenues was driven by a full six months of operations at our Ellendale, North Dakota facility as well as as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024.

Cloud services revenue increased $6.6 million, or 100%, from zero for the six months ended November 30, 2022 to $6.6 million for the six months ended November 30, 2023 due to revenue from the Company’s first cloud services contract, which started during the first quarter of fiscal year 2024.

Related party datacenter hosting revenue increased $1.6 million, or 27%, from $6.2 million for the six months ended November 30, 2022 to $7.8 million for the six months ended November 30, 2023 driven by increased uptime at the Company’s Jamestown, North Dakota facility.

Cost of revenues

Cost of revenues increased by $35.7 million, or 199%, from $17.9 million for the six months ended November 30, 2022 to $53.6 million for the six months ended November 30, 2023.

The increase is primarily driven by the growth in the business as more facilities were energized compared to the six months ended November 30, 2022.

The change in cost of revenues are categorized as follows:

• approximately $21.1 million increase in energy costs used to generate revenue;

• approximately $11.6 million increase in depreciation and amortization expense attributable to owned and leased assets directly supporting revenue;

• approximately $2.1 million increase in personnel expenses for employees directly attributable to generating revenue;

• approximately $0.9 million increase in other expenses directly attributable to generating revenue.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $5.9 million, or 18%, from $32.2 million for the six months ended November 30, 2022 to $38.1 million for the six months ended November 30, 2023.

The primary drivers of the change to selling, general and administrative expense for the six months ended November 30, 2023 were:

• approximately $7.8 million increase in depreciation and amortization expense not attributable to owned and leased assets directly supporting revenue;

• approximately $3.8 million increase in employee salaries and benefits expense not directly attributable to revenues;

• approximately $3.7 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses;

• approximately $5.1 million increase in stock based compensation expense.

The increase was driven by an increase in awards to be expensed between the periods.

Other Expense

Interest expense increased $1.7 million, or 483%, from $0.4 million for the three months ended August 31, 2022 to $2.1 million for the three months ended August 31, 2023.

The increase was driven by the increase in finance leases and interest-bearing loans between periods.

Loss on extinguishment of debt increased $2.3 million, or 2403%, from $0.1 million for the three months ended August 31, 2022 to $2.4 million for the three months ended August 31, 2023.The increase was driven by the termination fees to extinguish the B.

Riley loan during the three the three months ended August 31, 2023.

Loss from legal settlement was $2.3 million for the three months ended August 31, 2023 due to a settlement agreement entered into by the Company in respect to employment-related claims by a former executive.

The terms of the settlement include payment to the claimant of $2.3 million, which was included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.

• approximately $1.9 million increase in colocation lease expenses, incurred prior to services being provided, due to the growth of the business;

• approximately $0.7 million increase in professional service expenses incurred to support the growth of the business.

These increases were partially offset by a $12.0 million decrease in stock based compensation expense, as the Company recognized a cumulative catch-up of expense in stock based compensation expense in the comparative period upon the Company’s registration statement for the award shares being declared effective.

Loss from Legal Settlement

Loss from legal settlement was $2.4 million for the six months ended November 30, 2023 primarily due to a settlement agreement entered into by the Company in respect to employment-related claims by a former executive.

The terms of the settlement include payment to the claimant of $2.3 million.

Other expenses

Interest expense, net increased $3.7 million, or 525% , from $0.7 million for the six months ended November 30, 2022 to $4.4 million for the six months ended November 30, 2023 driven by an increase in finance leases and change in the Company’s debt obligations between periods.

Loss on extinguishment of debt increased $2.3 million, or 2403%, from $0.1 million for the six months ended November 30, 2022 to $2.4 million for the six months ended November 30, 2023.

The increase was driven by the termination fees to extinguish the B.

Riley loan during the six months ended November 30, 2023.

Income tax benefit

The income tax expense decreased $32 thousand, or 100%, from a $32 thousand expense for the three months ended August 31, 2022 to zero for the three months ended August 31, 2023.

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

Commentary on Segments Revenue

The following table sets forth segment revenue (excluding HPC as that segment has no revenue) (in thousands) during the three months ended August 31, 2023 and 2022:

Three Months Ended

August 31, 2023 August 31, 2022

Cloud services segment

Hosting segment

Total revenue $ 36,323 $ 6,924

Cloud Services Revenue

Cloud services revenue increased $2.2 million, or 100%, from zero for the three months ended August 31, 2022 to $2.2 million for the three months ended August 31, 2023.

The increase is due the Company beginning to provide services within the Cloud services segment during three months ended August 31, 2023.

Hosting Revenue

Hosting revenue increased $27.2 million, or 394%, from $6.9 million for the three months ended August 31, 2022 to $34.2 million for the three months ended August 31, 2023.

The increase is due to the full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota facilities during the three months ended August 31, 2023, compared to the Company providing limited capacity at only the Jamestown, North Dakota facility during the three months ended August 31, 2022.

Commentary on Segments Operating Profit and Loss

The following table sets forth the Company’s operating profit for each of our segments for the three months ended August 31, 2023 and 2022 (in thousands):

Three Months Ended

August 31, 2023 August 31, 2022

Segment Operating (Loss) Profit:

Income tax benefit decreased $0.3 million or 100% from a $0.3 million benefit for the six months ended November 30, 2022 to zero for the six months ended November 30, 2023.

This change was driven by a change in valuation allowance for the six months ended November 30, 2023 compared to the six months ended November 30, 2022.

Comparative Segment Data for the Three and Six Months Ended November 30, 2023 and 2022:

The following table sets forth the Company’s operating profit for each of our segments for the three and six months ended November 30, 2023 and 2022 (in thousands):

Three Months Ended Six Months Ended

November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022

Segment Operating Profit (Loss):

Datacenter hosting segment 10,846 (14,236) 19,804 (15,101)

Cloud services segment

$ (11,719) $ — $ (19,129) $ —

Hosting segment

HPC hosting segment (908) — (1,662) —

Total segment profit $ (1,781) $ (14,236) $ (987) $ (15,101)

Cloud Services Operating Loss

Cloud services operating loss increased $7.4 million, or 100% from zero for the three months ended August 31, 2022 to $7.4 million for the three months ended August 31, 2023 as the Company began providing cloud services during the first quarter of fiscal year 2024.

The change from the three months ended August 31, 2022 is driven by the segment expanding operations during the current period.

The operating loss is primary driven by amortization expense on finance leases on computing equipment, stock-based compensation expense attributable to the segment, and the segment only generating revenue for part of the period.

Hosting Operating Profit

Hosting operating profit increased $9.7 million, or 1,462% from a loss of $0.7 million for the three months ended August 31, 2022 to a profit of $9.0 million for the three months ended August 31, 2023.

The change is driven by full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota facilities during the three months ended August 31, 2023, relative to operations only at the Company’s Jamestown facility during the the three months ended August 31, 2022 and the Jamestown facility operating at less than full capacity for a portion of the comparative period.

HPC Hosting Operating Loss

High performance compute hosting operating loss increased $0.7 million, or 100% from zero to $0.7 million due to the Company launching the segment during the current period.

Commentary on Segment Data Comparative Results for the Three Months Ended November 30, 2023 compared to the Three Months Ended November 30, 2022

Datacenter Hosting Segment

Operating Profit

Datacenter hosting operating profit increased $25.1 million, or 176% from a loss of $14.2 million for the three months ended November 30, 2022 to a profit of $10.8 million for the three months ended November 30, 2023.

The change is driven by full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota facilities during the three months ended November 30, 2023, relative to operations only at the Company’s Jamestown facility during the the three months ended November 30, 2022.

The change is also driven by a decrease in stock-based compensation between the periods.

Cloud Services Segment

Operating Loss

Cloud services operating loss increased $11.7 million, from zero for the three months ended November 30, 2022 to $11.7 million for the three months ended November 30, 2023.

The operating loss is primarily driven by amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense attributable to the segment.

HPC Hosting Segment

Operating Loss

HPC hosting operating loss increased $0.9 million, or 100% from zero to $0.9 million due to the Company launching the segment during the current period.

The loss is largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases in the HPC hosting buildout.

Commentary on Segment Data Comparative Results for the Six Months Ended November 30, 2023 compared to the Six Months Ended November 30, 2022

Datacenter Hosting Segment

Operating Profit

Datacenter hosting operating profit increased $34.9 million, or 231% from a loss of $15.1 million for the six months ended November 30, 2022 to a profit of $19.8 million for the six months ended November 30, 2023.

The change is driven by a full six months of operations at our Ellendale, North Dakota facility as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024.

The change is also driven by a decrease in stock-based compensation between the periods.

Cloud Services Segment

Operating Loss

Cloud services operating loss increased $19.1 million, from zero for the six months ended November 30, 2022 to $19.1 million for the six months ended November 30, 2023 primarily driven by amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense attributable to the segment.

HPC Hosting Segment

Operating Loss

HPC hosting operating loss increased $1.7 million, or 100% from zero to $1.7 million due to the Company launching the segment during the current period.

The loss is largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases in the HPC hosting buildout.

Non-GAAP Measures

Adjusted Operating Loss and Adjusted Net Loss

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

“Adjusted Operating Loss” is a non-GAAP measure that represents operating loss excluding stock-based compensation, loss from legal settlement, non-recurring professional service costs and other non-recurring expenses.

“Adjusted Net Loss” is a non-GAAP measure that represents net loss excluding stock-based compensation, loss on extinguishment of debt, loss on legal settlement, non-recurring professional services costs and other non-recurring 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.

However, the Company’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.

The Company’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.

The Company 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 the Company’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, loss on extinguishment of debt, one-time professional service costs, and other nonrecurring costs.

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.

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, loss on extinguishment of debt, loss from legal settlement, non-recurring professional service costs, 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 the Company’s performance that is neither required by, nor presented in accordance with, GAAP.

The Company 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.

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

In addition, the Company’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.

the Company’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.

The Company 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 the Company’s business.

Reconciliation of GAAP to Non-GAAP Measures

Three Months Ended

$ in thousands August 31, 2023 August 31, 2022

Three Months Ended Six Months Ended

$ in thousands November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022

Adjusted operating loss

1 unchanged sentence

Stock-based compensation 4,799 21,819 10,440 22,398

Non-recurring professional service costs 592 408

Other non-recurring expenses 653 200

Adjusted operating income (loss) (Non-GAAP) $ 1,759 $ (2,990)

Adjusted operating margin 4.8 % (43.2) %

Adjusted net income (loss)

Net loss attributable to Applied Digital Corporation (GAAP)

Loss from legal settlement

Non-recurring professional service costs (a)

495 664 1,087 1,072

Other non-recurring expenses (b)

— 494 653 694

Adjusted operating loss (Non-GAAP) $ (2,800) $ (3,721) $ (1,040) $ (6,722)

Adjusted operating margin (7) % (30) % (1) % (35) %

Adjusted net loss

Net loss (GAAP) $ (10,529) $ (26,750) $ (22,383) $ (31,409)

Stock-based compensation 4,799 21,819 10,440 22,398

1 unchanged sentence

Loss from legal settlement

Non-recurring professional service costs 592 408

Other non-recurring expenses 653 200

Adjusted net income (loss) (Non-GAAP) $ 82 $ (3,250)

Adjusted net income (loss) per share (Non-GAAP) $ — $ (0.03)

EBITDA and Adjusted EBITDA

Net loss attributable to Applied Digital Corporation (GAAP)

Non-recurring professional service costs (a)

495 664 1,087 1,072

Interest expense 2,074 356

Other non-recurring expenses (b)

— 494 653 694

Adjusted net loss (Non-GAAP) $ (5,155) $ (3,773) $ (5,470) $ (7,151)

Adjusted net loss per share (Non-GAAP) $ (0.05) $ (0.04) $ (0.05) $ (0.08)

EBITDA and Adjusted EBITDA

Net loss (GAAP) $ (10,529) $ (26,750) $ (22,383) $ (31,409)

Interest expense, net 2,355 364 4,430 709

Income tax benefit (expense) — (312) — (280)

4 unchanged sentences

Loss from legal settlement

Non-recurring professional service costs 592 408

Other non-recurring expenses 653 200

Non-recurring professional service costs (a)

495 664 1,087 1,072

Other non-recurring expenses (b)

— 494 653 694

Adjusted EBITDA (Non-GAAP) $ 10,624 $ (2,153) $ 20,244 $ (4,018)

(a) Non-recurring professional service costs represents legal, accounting, and other professional services costs related to non-recurring transactions.

(b) Other non-recurring expenses include expenses related to non-recurring research and development activities, asset abandonment charges, and other expenses that are not representative of the Company’s expected ongoing costs.

Sources of Liquidity

As of August 31, 2023, the Company had approximate cash and cash equivalents of $5.9 million and negative working capital of $118.1 million.

As of November 30, 2023, the Company had unrestricted cash and cash equivalents of $9.2 million and negative working capital of $166.0 million.

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

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

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 payments from customers.

See Note 6 - Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q 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.

As of August 31, 2023, the Company has sold approximately 7.9 million shares.

As of November 30, 2023, the Company has sold approximately 14.8 million shares.

Net proceeds, less commission and legal fees of approximately $3.3 million, were approximately $97.9 million.

The Company received an additional $2.7 million in proceeds subsequent to August 31, 2023.

During the three months ended August 31, 2023, we received $39.5 million in payments for future hosting services.

On September 13, 2023, Sai Computing borrowed an additional $5.0 million under the remaining capacity from the existing B.

Riley Loan that the Company entered into in May 2023.

The Company has also received prepayments from new cloud services customers totaling $9.6 million for future services.

The Company received an additional $23.1 million in proceeds subsequent to November 30, 2023.

The at the market offering is now complete.

During the six months ended November 30, 2023, we received $81.8 million in payments for future datacenter hosting services.

Further, during December 2023, the Company received payments from cloud services customers totaling $8.1 million and $3.0 million from datacenter hosting customers for future services.

Funding Requirements

We have experienced net losses through the period ended August 31, 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 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.

We have experienced net losses through the period ended November 30, 2023.

Our transition to profitability is dependent on the successful operation of our three lines of business.

The Company expects to have sufficient liquidity, including cash on hand, payments from customers, and access to public capital markets, to support ongoing operations.

We believe these activities 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 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 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 remain throughout during calendar 2023 as we continue construction of our HPC facilities and acquire assets to support our cloud services business.

We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations.

We believe that the significant investments in property and equipment will remain throughout fiscal year 2024 as we continue construction of our HPC hosting facilities and acquire assets to support our cloud services business.

We also expect that our revenues will increase as we continue to bring online additional capacity at our Garden City, Texas location and within our cloud services contracts.

Summary of Cash Flows

The following table provides information about Applied Digital’s net cash flow (in thousands) for the three months ended August 31, 2023 and August 31, 2022, respectively.

Three Months Ended

$ in thousands August 31, 2023 August 31, 2022

The following table provides information about the Company’s net cash flow (in thousands) for the six months ended November 30, 2023 and November 30, 2022, respectively.

Six Months Ended

$ in thousands November 30, 2023 November 30, 2022

Net cash provided by operating activities $ 9,056 $ 27,979

4 unchanged sentences

Cash, cash equivalents, and restricted cash at end of period $ 34,633 $ 18,074

Commentary on the change in cash flows between the Three Months Ended August 31, 2023 and Three Months Ended August 31, 2022

Commentary on the change in cash flows between the Six Months Ended November 30, 2023 and Six Months Ended November 30, 2022

Operating Activities

The net cash provided by operating activities decreased by $12.8 million, or 74%, from $17.3 million for the three months ended August 31, 2022 to $4.5 million for the three months ended August 31, 2023.

The primary reason for the change was decrease in revenue prepayments received relative to revenue earned during the three months ended August 31, 2023.

The net cash provided by operating activities decreased by $18.9 million, or 68%, from $28.0 million for the six months ended November 30, 2022 to $9.1 million for the six months ended November 30, 2023.

The primary reason for the change was a decrease in revenue prepayments received relative to revenue earned during the six months ended November 30, 2023 as well as an increase in payments associated with our operating leases.

Investing Activities

The net cash used in investing activities increased by $8.9 million, or 28%, from $31.7 million for the three months ended August 31, 2022 to $40.5 million for the three months ended August 31, 2023.

The primary reason for the change was finance lease prepayments made for leases on hosting equipment to support the Company’s cloud services business during the three months ended August 31, 2023.

The net cash used in investing activities decreased by $4.7 million, from $70.3 million for the six months ended November 30, 2022 to $65.6 million for the six months ended November 30, 2023.

The primary reason for the change was a reduction in investments in property, plant, and equipment as the Company had completed most of the Ellendale, North Dakota and Garden City, Texas facilities as of the beginning of the current period.

This reduction was partially offset by an

increase in finance lease prepayments made for leases on hosting equipment to support the Company’s cloud services business during the six months ended November 30, 2023.

Financing Activities

The net cash provided by financing activities increased by $14.8 million, or 166%, from $8.9 million for the three months ended August 31, 2022 to $23.7 million for the three months ended August 31, 2023.

The primary reason for the change

was receipt of net proceeds from the Company’s common stock offering the three months ended August 31, 2023 which was partially offset by an increase in term lease payments during the three months ended August 31, 2023.

The net cash provided by financing activities increased by $33.5 million, or 238%, from $14.1 million for the six months ended November 30, 2022 to $47.6 million for the six months ended November 30, 2023.

The primary reason for the change was the receipt of net proceeds from the Company’s common stock offering which was partially offset by an increase in debt repayments and an increase in finance lease payments during the six months ended November 30, 2023.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis