Applied Digital Corp. 10-Q

Item 1. Financial Statements APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and par value data) November 30, 2023 May 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 9,217 $ 28,999 Restricted cash 25,416 14,575 Accounts receivable 307 82 Prepaid expenses and other current assets 1,517 2,012 Total current assets 36,457 45,668 Property and equipment, net 258,508 195,593 Operating lease right of use assets, net 73,373 1,290 Finance lease right of use assets, net 95,199 14,303 Other assets 17,117 7,103 TOTAL ASSETS $ 480,654 $ 263,957 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,262 $ 6,446 Accrued liabilities 10,538 8,330 Current portion of operating lease liability 8,887 320 Current portion of finance lease liability 42,805 5,722 Current portion of debt 9,279 7,950 Customer deposits 36,833 32,559 Related party customer deposits 3,811 3,811 Deferred revenue 50,051 47,168 Related party deferred revenue 1,953 1,524 Sales and use tax payable 4 1,630 Total current liabilities 202,423 115,460 Long-term portion of operating lease liability 52,324 1,005 Long-term portion of finance lease liability 36,748 8,334 Long-term debt 33,501 33,222 Long-term related party loan — 35,257 Other long-term related party liabilities — 1,000 Total liabilities 324,996 194,278 Commitments and contingencies Stockholders' equity: Common stock, $ 0.001 par value, 166,666,667 shares authorized, 122,734,060 shares issued and 117,732,332 shares outstanding at November 30, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023 123 101 Treasury stock, 5,001,728 shares at November 30, 2023 and 5,001,728 shares at May 31, 2023, at cost ( 62 ) ( 62 ) Additional paid in capital 278,299 160,194 Accumulated deficit ( 122,702 ) ( 100,716 ) Total stockholders’ equity attributable to Applied Digital Corporation 155,658 59,517 Noncontrolling interest — 10,162 Total stockholders' equity including noncontrolling interest 155,658 69,679 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 480,654 $ 263,957 See accompanying notes to the condensed consolidated financial statements 1 Table of Conten ts APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended Six Months Ended November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Revenue: Datacenter hosting revenue $ 34,119 $ 8,747 $ 64,106 $ 13,086 Cloud services revenue 4,450 — 6,602 — Related party datacenter hosting revenue 3,634 3,593 7,819 6,178 Total revenue 42,203 12,340 78,527 19,264 Costs and expenses: Cost of revenues 29,222 11,812 53,620 17,905 Selling, general and administrative 21,075 27,226 38,127 32,245 Loss from legal settlement 80 — 2,380 — Total costs and expenses 50,377 39,038 94,127 50,150 Operating loss ( 8,174 ) ( 26,698 ) ( 15,600 ) ( 30,886 ) Interest expense, net 2,355 364 4,430 709 Loss on extinguishment of debt — — 2,353 94 Net loss before income tax expenses ( 10,529 ) ( 27,062 ) ( 22,383 ) ( 31,689 ) Income tax expense (benefit) — ( 312 ) — ( 280 ) Net loss ( 10,529 ) ( 26,750 ) ( 22,383 ) ( 31,409 ) Net loss attributable to noncontrolling interest — ( 133 ) ( 397 ) ( 261 ) Net loss attributable to Applied Digital Corporation $ ( 10,529 ) $ ( 26,617 ) $ ( 21,986 ) $ ( 31,148 ) Basic and diluted net loss per share attributable to Applied Digital Corporation $ ( 0.10 ) $ ( 0.28 ) $ ( 0.21 ) $ ( 0.33 ) Basic and diluted weighted average number of shares outstanding 109,663,030 93,422,427 105,067,375 93,263,266 See accompanying notes to the condensed consolidated financial statements 2 Table of Conten ts APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Three Months ended November 30, 2023 and November 30, 2022 (In thousands, except share data) (Unaudited) Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount Balance, August 31, 2023 110,850,885 $ 110 ( 5,001,728 ) $ ( 62 ) $ 240,073 $ ( 112,173 ) $ 127,948 $ — $ 127,948 Shares issued in offering, net of costs 6,879,070 8 — — 33,432 — 33,440 — 33,440 Shares issued from award vestings 5,004,105 5 — — ( 5 ) — — — — Stock-based compensation — — — — 4,799 — 4,799 — 4,799 Net loss — — — — — ( 10,529 ) ( 10,529 ) — ( 10,529 ) Balance, November 30, 2023 122,734,060 $ 123 ( 5,001,728 ) $ ( 62 ) $ 278,299 $ ( 122,702 ) $ 155,658 $ — $ 155,658 Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount Balance, August 31, 2022 97,837,703 $ 98 ( 5,001,728 ) $ ( 62 ) $ 128,872 $ ( 60,601 ) $ 68,307 $ 8,594 $ 76,901 Shares issued from award vestings 1,110,379 1 — — ( 1 ) — — — — Stock-based compensation — — — — 21,819 — 21,819 — 21,819 Net loss — — — — — ( 26,617 ) ( 26,617 ) ( 133 ) ( 26,750 ) Balance, November 30, 2022 98,948,082 $ 99 $ ( 5,001,728 ) $ ( 62 ) $ 150,690 $ ( 87,218 ) $ 63,509 $ 8,461 $ 71,970 See accompanying notes to the condensed consolidated financial statements 3 Table of Conten ts APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity For the Six Months Ended November 30, 2023 and November 30, 2022 (In thousands, except share data) (Unaudited) Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount Balance, May 31, 2023 100,927,358 $ 101 $ ( 5,001,728 ) $ ( 62 ) $ 160,194 $ ( 100,716 ) $ 59,517 $ 10,162 $ 69,679 Shares issued in offering, net of costs 14,787,598 16 — — 97,906 — 97,922 — 97,922 Shares issued from award vestings 5,534,837 5 — — ( 5 ) — — — — Stock-based compensation — — — — 10,440 — 10,440 — 10,440 Net loss — — — — — ( 21,986 ) ( 21,986 ) ( 397 ) ( 22,383 ) Extinguishment of noncontrolling interest 1,484,267 1 — — 9,764 — 9,765 ( 9,765 ) — Balance, November 30, 2023 122,734,060 $ 123 ( 5,001,728 ) $ ( 62 ) $ 278,299 $ ( 122,702 ) $ 155,658 $ — $ 155,658 Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount Balance, May 31, 2022 97,837,703 $ 98 ( 36,296 ) $ ( 62 ) $ 128,293 $ ( 56,070 ) $ 72,259 $ 6,976 $ 79,235 Shares issued from award vestings 1,110,379 1 — — ( 1 ) — — — — Stock-based compensation — — — — 22,398 — 22,398 — 22,398 Capital contribution to noncontrolling interest — — — — — — — 1,746 1,746 Common stock forfeited — — ( 4,965,432 ) — — — — — — Net loss — — — — — ( 31,148 ) ( 31,148 ) ( 261 ) ( 31,409 ) Balance, November 30, 2022 98,948,082 $ 99 ( 5,001,728 ) $ ( 62 ) $ 150,690 $ ( 87,218 ) $ 63,509 $ 8,461 $ 71,970 See accompanying notes to the condensed consolidated financial statements 4 Table of Conten ts APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended November 30, 2023 November 30, 2022 CASH FLOW FROM OPERATING ACTIVITIES Net loss $ ( 22,383 ) $ ( 31,409 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 21,284 2,704 Stock-based compensation 10,440 22,398 Deferred income taxes — ( 280 ) Loss on extinguishment of debt 2,353 94 Amortization of debt issuance costs 352 — Loss on abandonment of assets 189 — Changes in operating assets and liabilities: Accounts receivable ( 225 ) ( 49 ) Prepaid expenses and other current assets 495 ( 1,061 ) Customer deposits 4,274 14,784 Related party customer deposits — 381 Deferred revenue 2,883 25,147 Related party deferred revenue 429 370 Accounts payable 6,442 ( 6,844 ) Accrued liabilities 2,093 1,099 Lease assets and liabilities ( 16,904 ) ( 220 ) Sales and use tax payable ( 1,626 ) 865 Other assets ( 1,040 ) — CASH FLOW PROVIDED BY OPERATING ACTIVITIES 9,056 27,979 CASH FLOW FROM INVESTING ACTIVITIES Purchases of property and equipment and other assets ( 45,830 ) ( 70,305 ) Finance lease prepayments ( 19,388 ) — Purchases of investments ( 390 ) — CASH USED IN INVESTING ACTIVITIES ( 65,608 ) ( 70,305 ) CASH FLOW FROM FINANCING ACTIVITIES Repayment of finance leases ( 13,071 ) ( 778 ) Borrowings of long-term debt 4,732 21,711 Borrowings of related party debt 8,000 — Repayments of long-term debt ( 4,471 ) ( 8,158 ) Repayment of related party debt ( 45,500 ) — Payment of deferred financing costs — ( 378 ) Tax payments for restricted stock upon vesting — ( 43 ) Noncontrolling interest contributions — 1,747 Proceeds from issuance of common stock, net of costs 97,922 — CASH FLOW PROVIDED BY FINANCING ACTIVITIES 47,612 14,101 NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 8,940 ) ( 28,225 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD 43,574 46,299 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $ 34,634 $ 18,074 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 4,370 $ 707 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Operating right-of-use assets obtained by lease obligation $ 69,329 $ — Finance right-of-use assets obtained by lease obligation $ 96,946 $ 6,925 Property and equipment in accounts payable $ 23,572 $ 3,466 Conversion of non-controlling interest $ 9,765 $ — See accompanying notes to the condensed consolidated financial statements 5 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (unaudited) For the Three and Six Months Ended November 30, 2023 1. Business and Organization Applied Digital Corporation (the “Company”), is a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers. The Company has three reportable segments. Financial information for each segment is contained in Note 10 - Business Segments. 2. Basis of Presentation and Significant Accounting Policies Principles of Consolidation The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of May 31, 2023 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements. In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. For further information, please refer to and read these interim unaudited condensed consolidated financial statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2023 filed with the SEC on August 2, 2023. Significant Accounting Policies and Use of Estimates Use of Estimates The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates of the valuation allowance associated with the Company’s deferred tax assets. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers. Datacenter Hosting Revenue The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All datacenter hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by customer-provided equipment. Revenue is recognized based on the contractual fixed rate, net of any credits for non-performance, over the term of the agreements. Any ancillary revenue for maintenance or installation services is at a point in time when the maintenance or installation service is complete. As these services are directly attributable to the Company’s datacenter hosting service, this revenue is captured within the datacenter hosting revenue caption in our condensed consolidated statements of operations. Customer contracts include advance payment terms. All advanced service payments are recorded as deferred revenue and are recognized as revenue once the related service is provided. Cloud Services Revenue The Company also provides managed cloud infrastructure services to customers, such as artificial intelligence and machine learning developers, to help develop their advanced products. Customers pay a fixed rate to the Company in exchange for managed cloud services supported by Company-provided equipment. Revenues are recognized based on the fixed rate, net of any credits for non-performance, over the term of the agreements. 6 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 Segments The Company has identified three reportable segments: cloud services (“Cloud services”), high-performance compute hosting (“HPC hosting”), and datacenter hosting (“Datacenter hosting”). The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on the basis of these three reportable segments. Intercompany transactions between segments are excluded for management reporting purposes. The Datacenter hosting segment operates datacenters to provide energized space to crypto mining customers. Customer-owned hardware is installed in the Company’s facilities and the Company provides operational and maintenance services for a fixed fee. The Cloud services segment 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. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment. The HPC hosting segment designs, builds, and operates datacenters which are designed to support high-compute applications using advanced and sophisticated infrastructures to provide services to customers. See Note 3 - Basis of Presentation and Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2023, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates. Recent Accounting Pronouncements We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements. Reclassifications We have reclassified certain prior period revenue amounts from datacenter hosting revenue to related party datacenter hosting revenue on our condensed consolidated statements of operations. We have also reclassified amounts from accounts payable and accrued expenses and prepaid expenses and other current assets to accounts payable, accrued expenses, prepaid expenses, and other current assets as well as from customer deposits and deferred revenue to the associated related party caption lines and from prepaid expenses and other current assets to other assets in our condensed consolidated balance sheets to conform to our current period presentation. Lastly, we have reclassified interest income from selling, general and administrative to interest expense, net in our condensed consolidated statement of operations to conform to our current period presentation. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities. Cash, Cash Equivalents, and Restricted Cash Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of November 30, 2023 and May 31, 2023 were as follows (in thousands): November 30, 2023 May 31, 2023 Net Cash & Equivalents $ 9,217 $ 28,999 Restricted Cash 25,416 14,575 Total Cash & Cash Equivalents $ 34,633 $ 43,574 7 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 3. Property and Equipment Property and equipment consisted of the following as of November 30, 2023, and May 31, 2023 (in thousands): Estimated Useful Life November 30, 2023 May 31, 2023 Electric generation and transformers 15 years $ 13,169 $ 4,655 Other equipment and fixtures 5 years - 7 years 5,074 1,684 Construction in progress 70,846 106,226 Information systems and software 5 years 41,295 21,173 Land and building Land 6,213 2,152 Land improvements 15 years 1,391 1,293 Building 39 years 129,815 63,350 Leasehold improvements 3 years - 7 years 468 — Total cost of property and equipment 268,271 200,533 Accumulated depreciation ( 9,763 ) ( 4,940 ) Property and equipment, net $ 258,508 $ 195,593 Depreciation expense totaled $ 2.6 million and $ 4.9 million for the three and six months ended November 30, 2023 and $ 0.8 million and $ 1.7 million for the three and six months ended November 30, 2022. 4. Revenue from Contracts with Customers Below is a summary of the Company’s revenue concentration by major customers for the three and six months ended November 30, 2023 and 2022, respectively. Three Months Ended November 30, Six Months Ended November 30, 2023 2022 2023 2022 Customer A 70 % — % 69 % — % Customer B — % 27 % — % 22 % Customer C — % 33 % — % 34 % Customer D — % 16 % — % 18 % Customer E — % 13 % — % 14 % Customer F — % 12 % — % 13 % Customer G 11 % — % — % — % Deferred Revenue As of November 30, 2023, the Company had $ 52.0 million in deferred revenue (inclusive of related party deferred revenue), which represents the Company’s remaining performance obligations, and expects to recognize the entire balance 8 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 within the next 12 months. Changes in the Company's deferred revenue balances for the six months ended November 30, 2023 and 2022, respectively, are shown in the following tables (in thousands): Six Months Ended November 30, 2023 November 30, 2022 Balance, beginning of period $ 48,692 $ 3,877 Advance billings 81,839 44,646 Revenue recognized ( 78,527 ) ( 19,264 ) Other adjustments — 135 Less: Related party balances ( 1,953 ) ( 1,639 ) Balance, end of period $ 50,051 $ 27,755 Customer Deposits Changes in the Company's customer deposits balances for the six months ended November 30, 2023 and 2022, respectively, are shown in the following table (in thousands): Six Months Ended November 30, 2023 November 30, 2022 Balance, beginning of period $ 36,370 $ 9,524 Customer deposits received 4,274 15,300 Customer deposits refunded — — Other adjustments — ( 135 ) Less: Related party balances ( 3,811 ) ( 1,940 ) Balance, end of period $ 36,833 $ 22,749 5. Related Party Transactions Related Party Revenue The following table illustrates related party revenue for the three and six months ended November 30, 2023 and November 30, 2022 (in thousands): Three Months Ended November 30, Six Months Ended November 30, 2023 2022 2023 2022 Customer D* $ 1,986 $ 1,996 $ 4,319 $ 3,446 Customer E** $ 1,648 $ 1,596 $ 3,500 $ 2,732 * Customer D is a subsidiary of an entity which is deemed to beneficially own over 5 % of the Company's outstanding common stock ** Customer E is 60 % owned by an individual who is deemed to beneficially own over 5 % of the Company's outstanding common stock The following table illustrates related party deferred revenue and deposits balances as of November 30, 2023 and May 31, 2023 (in thousands): Customer D balances as of Customer E balances as of November 30, 2023 May 31, 2023 November 30, 2023 May 31, 2023 Deferred revenue $ 1,470 $ 1,474 $ 483 $ 50 Customer Deposits $ 2,450 $ 2,450 $ 1,361 $ 1,361 9 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 Related Party Sublease Income The Company receives sublease income from B. Riley Asset Management, which is also a wholly-owned subsidiary of B. Riley Financial, Inc. Mr. Cummins, the CEO of the Company, is also the President of B. Riley Asset Management. The following table illustrates related party revenue for the three and six months ended November 30, 2023 and November 30, 2022 (in thousands): Three Months Ended November 30, Six Months Ended November 30, 2023 2022 2023 2022 Sublease Income $ 24 $ 30 $ 47 $ 58 B. Riley Loan During the six months ended November 30, 2023, the Company borrowed an additional $ 8.0 million and repaid the outstanding balance of $ 44.5 million. Interest expense associated with the loan was $ 0.5 million for the six months ended November 30, 2023. Total remaining unused capacity on the B. Riley Loan as of November 30, 2023, was $ 5.5 million. 6. Debt Long-term debt consisted of the following components (in thousands): Interest Rate Maturity Date November 30, 2023 May 31, 2023 Starion term loan 6.50 % July 25, 2027 $ 11,428 $ 12,786 Vantage Garden City loan 6.15 % April 26, 2028 13,427 10,074 Starion Ellendale loan 7.48 % February 3, 2028 17,974 19,728 Other long-term debt 372 354 Deferred financing costs, net of amortization ( 421 ) ( 3,012 ) Less: Current portion of term loan ( 9,279 ) ( 7,950 ) Long-term debt, net $ 33,501 $ 31,980 Remaining Principal Payments Below is a summary of the remaining principal payments due over the life of the term loans as of November 30, 2023 (in thousands): Remainder of FY24 $ 4,645 FY25 9,768 FY26 10,441 FY27 11,150 FY28 7,197 Total $ 43,201 Letters of Credit As of November 30, 2023, the Company had letters of credit totaling $ 25.4 million. The Company has restricted cash related to its letters of credit and is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which all have terms ending within the 12 months following November 30, 2023. 7. Stockholders' Equity Equity Plans On October 9, 2021, the Company’s Board of Directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity 10 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date. As of November 30, 2023, the Company had issued awards for approximately 14.2 million shares of common stock of the Company (the “Common Stock”) under the plans. During the three and six months ended November 30, 2023 the Company recognized $ 4.8 million and $ 10.4 million in stock-based compensation. Restricted Stock Awards The following is a summary of the activity and balances for unvested restricted stock awards granted for the six months ended November 30, 2023: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2023 380,955 $ 2.22 Granted 202,110 4.75 Vested ( 380,955 ) 2.22 Forfeited — — Outstanding as of November 30, 2023 202,110 $ 4.75 As of November 30, 2023, total remaining expense to be recognized related to these awards was $ 0.9 million and the weighted average remaining recognition period for the unvested awards was 0.9 years. Restricted Stock Units The following is a summary of the activity and balances for unvested restricted stock units granted for the six months ended November 30, 2023: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2023 12,465,935 $ 2.53 Granted 1,564,400 7.38 Vested ( 5,377,778 ) 2.64 Forfeited ( 305,110 ) 2.43 Outstanding as of November 30, 2023 8,347,447 $ 3.42 As of November 30, 2023, total remaining expense to be recognized related to these awards was $ 29.2 million and the weighted average remaining recognition period for the unvested awards was 2.1 years. Public Offering During the six months ended November 30, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement pursuant to which the Company may sell up to $ 125 million in aggregate proceeds of Common Stock. 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. Extinguishment of Noncontrolling Interest On August 31, 2023, pursuant to the joint venture agreement, the minority partner in 1.21 Gigawatts LLC exercised the option to exchange their interest in the joint venture for approximately 1.5 million shares for a value of $ 9.8 million of the Company’s common stock. The Company is now the sole member of 1.21 Gigawatts LLC and will report all activity as attributable to the Company in future periods. 11 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 8. Leases The Company enters into leases for equipment, office space, and land. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively. Components of lease expense were as follows (in thousands): Three Months Ended Six Months Ended November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Operating lease cost: Operating lease expense $ 2,486 $ 82 $ 2,970 $ 164 Short-term lease expense 80 105 207 223 Total operating lease cost 2,566 187 3,177 387 Finance lease expense: Amortization of right-of-use assets (1) 10,860 735 16,490 1,033 Interest on lease liabilities 1,659 183 2,741 292 Total finance lease cost 12,519 918 19,231 1,325 Variable lease cost 40 — 77 — Sublease Income ( 24 ) ( 30 ) ( 47 ) ( 58 ) Total net lease cost $ 15,101 $ 1,075 $ 22,438 $ 1,654 (1) Amortization of right-of-use assets is included within depreciation expense, and is recorded within cost of revenues and selling, general and administrative expense in the condensed consolidated statements of operations. The following table represents the Company’s future minimum lease payments as of November 30, 2023: Operating Leases Finance Leases Total Remainder of FY24 $ 6,605 $ 24,341 $ 30,946 FY25 13,562 47,340 60,902 FY26 14,031 12,108 26,139 FY27 14,166 188 14,354 FY28 14,360 180 14,540 Thereafter 12,441 89,944 102,385 Total lease payments 75,165 174,101 249,266 Less: imputed interest ( 13,954 ) ( 94,548 ) ( 108,502 ) Total lease liabilities 61,211 79,553 140,764 Less: Current portion of lease liability ( 8,887 ) ( 42,805 ) ( 51,692 ) Long-term portion of lease liability $ 52,324 $ 36,748 $ 89,072 12 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 Supplemental cash flow and other information related to leases is as follows: Six Months Ended November 30, 2023 November 30, 2022 Weighted-average years remaining (in years): Finance leases 5.5 years 28.6 years Operating leases 5.7 years 3.9 years Weighted-average discount rate: Finance leases 8.8 % 8.0 % Operating leases 7.9 % 12.5 % The Company has entered into operating leases which are executed but not yet commenced with total minimum payments of approximately $ 130.4 million. The payments are for various leases with terms ranging from 2 years to 7 years. 9. Commitments and Contingencies Energy Commitment The Company also has a minimum commitment of approximately $ 89.2 million related to the energy services agreement for its Jamestown, North Dakota co-hosting facility with a remaining term of approximately 3.2 years as of November 30, 2023. Claims and Litigation From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. On August 12, 2023, a putative securities class action complaint, captioned McConnell v. Applied Digital Corporation, Wesley Cummins and David Rench , No. 3:23-cv-1805, was filed in the U.S. District Court for the Northern District of Texas, Dallas Division against Applied Digital Corporation (the “Company”) and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act. The complaint alleges that the defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleges that the Company overstated the profitability of its datacenter hosting business and its ability to successfully transition into a low-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules. On November 15, 2023, a putative securities complaint, captioned Robert Weich v. Wes Cummins, Chuck Hastings, Kelli McDonald, Douglas Miller, Virginia Moore, and Richard Nottenburg, No. A-23-881629-C, was filed in the U.S. District Court for Clark County, Nevada against certain members of Applied Digital Corporation’s Board of Directors and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting breaches of fiduciary duties and unjust enrichment from April 2022 through the present. The complaint alleges that the defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleges that the Company overstated the profitability of its datacenter hosting business and its ability to successfully transition into a low-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable. As of November 30, 2023, there were no other pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest. 13 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 Settlement of Potential Claim During the second quarter of fiscal year 2024, the Company entered into a settlement agreement with respect to employment-related claims by a former executive. The terms of the settlement included payment to the claimant of $ 2.3 million, which is included in Loss on legal settlement on our condensed consolidated statements of operations. 10. Business Segments Revenue by segment (excluding HPC hosting as that segment has no revenue) was as follows (in thousands): Three Months Ended Six Months Ended November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Datacenter hosting segment $ 37,753 $ 12,340 $ 71,925 $ 19,264 Cloud services segment 4,450 — 6,602 — Total revenue $ 42,203 $ 12,340 $ 78,527 $ 19,264 Segment profit (loss) and a reconciliation to net loss before income tax expenses is as follows (in thousands): Three Months Ended Six Months Ended November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Segment Profit (Loss): Datacenter hosting segment $ 10,846 $ ( 14,236 ) $ 19,804 $ ( 15,101 ) Cloud services segment ( 11,719 ) — ( 19,129 ) — HPC hosting segment ( 908 ) — ( 1,662 ) — Total segment loss ( 1,781 ) ( 14,236 ) ( 987 ) ( 15,101 ) Other (1) ( 6,393 ) ( 12,462 ) ( 14,613 ) ( 15,785 ) Interest expense, net 2,355 364 4,430 709 Loss on debt extinguishment — — 2,353 94 Net loss before income tax expenses $ ( 10,529 ) $ ( 27,062 ) $ ( 22,383 ) $ ( 31,689 ) (1) Other includes corporate related items not allocated to reportable segments. We also provide the following additional segment disclosures (in thousands): Three Months Ended Six Months Ended November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Depreciation and amortization: Datacenter hosting segment $ 4,365 $ 1,568 $ 7,564 $ 2,692 Cloud services segment 8,782 — 13,290 — HPC hosting segment 184 — 311 — Other (1) 93 — 119 12 Total depreciation and amortization $ 13,424 $ 1,568 $ 21,284 $ 2,704 (1) Other includes corporate related items not allocated to reportable segments. 11 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands): November 30, 2023 May 31, 2023 Datacenter hosting segment $ 232,747 $ 224,447 Cloud services segment 166,536 3,127 HPC hosting segment 54,748 10,949 Total segment assets 454,031 238,523 Other (1) 26,623 25,434 Total assets $ 480,654 $ 263,957 (1) Other includes corporate related items not allocated to reportable segments. 11. Earnings Per Share Basic net income (loss) per share (“EPS”) of common stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for earnings per share: Three Months Ended Six Months Ended November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Net loss $ ( 10,529 ) $ ( 26,750 ) $ ( 22,383 ) $ ( 31,409 ) Net loss attributable to noncontrolling interest — ( 133 ) ( 397 ) ( 261 ) Net loss attributable to Applied Digital Corporation $ ( 10,529 ) $ ( 26,617 ) $ ( 21,986 ) $ ( 31,148 ) Basic and diluted net loss per share attributable to Applied Digital Corporation $ ( 0.10 ) $ ( 0.28 ) $ ( 0.21 ) $ ( 0.33 ) Basic and diluted weighted average number of shares outstanding 109,663,030 93,422,427 105,067,375 93,263,266 12. Subsequent Events At-The-Market Common Stock Offering The Company completed sales of common stock under the “at the market” common stock sale agreement dated June 26, 2023. The Company sold approximately 4.2 million shares subsequent to November 30, 2023. Net proceeds from these sales, less commission fees of approximately $ 0.7 million, are approximately $ 23.1 million. Indemnification Agreements On January 13, 2024, the Company entered into an individual Indemnification Agreement with each member of its Board of Directors. The Indemnification Agreements generally provide that the Company will indemnify the indemnitees, to the fullest extent permitted by applicable law, against liabilities that may arise by reason of their status with, or service to, the Company. The Indemnification Agreements also generally provide that the Company advance expenses incurred by the indemnitees as a result of any proceeding related to such matters. Conditional Agreement 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 12 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three and Six Months Ended November 30, 2023 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. Other Agreements Subsequent to November 30, 2023, the Company entered into three additional agreements for services in our cloud services and datacenter hosting segments totaling a combined $ 104.4 million over a weighted average term of 32 months. 13 Table of Contents