Applied Digital Corp. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to: • labor and other workforce shortages and challenges; • our dependence on principal customers; • the addition or loss of significant customers or material changes to our relationships with these customers; • our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies; • our ability to continue to grow sales in our hosting business; • concentration of customers in the crypto mining industry, which customer base may decline due to price volatility and uncertainties around regulation policy of cryptoasset prices; and • equipment failures, power or other supply disruptions. You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended May 31, 2023, which was filed on August 2, 2023, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows. Executive Overview The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Business Overview 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 Regulatory Environment We have a material concentration of customers in the crypto mining industry. 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 14 Table of Contents 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. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. 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 critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report, and there have been no material changes since the filing of our Annual Report. Business Update Cloud Services 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. HPC Hosting 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 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 15 Table of Contents 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 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 Revenues 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 taxes (10,529) (27,062) (22,383) (31,689) Income tax expenses — (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 $ (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 Adjusted Amounts (a) Adjusted operating loss $ (2,800) $ (3,721) $ (1,040) $ (6,722) Adjusted operating margin (7) % (30) % (1) % (35) % 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) Other Financial Data (a) EBITDA $ 5,250 $ (25,130) $ 3,331 $ (28,276) as a percentage of revenues 12 % (204) % 4 % (147) % Adjusted EBITDA $ 10,624 $ (2,153) $ 20,244 $ (4,018) as a percentage of revenues 25 % (17) % 26 % (21) % (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. 16 Table of Contents Commentary on Results of Operations Comparative Results for the Three Months Ended November 30, 2023 compared to the Three Months Ended November 30, 2022 Revenue 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 $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 $1.0 million increase in personnel expenses for employees directly attributable to generating revenue; and • 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; and • 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 17 Table of Contents 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 Revenues 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; and • 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 $1.9 million increase in colocation lease expenses, incurred prior to services being provided, due to the growth of the business; and • 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. 18 Table of Contents 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 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) $ — HPC hosting segment (908) — (1,662) — Total segment profit $ (1,781) $ (14,236) $ (987) $ (15,101) 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. 19 Table of Contents 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” 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, 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. 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, loss from legal settlement, non-recurring professional service costs, and other non-recurring expenses. These costs have been adjusted as they are not 20 Table of Contents 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, 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. 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. 21 Table of Contents Reconciliation of GAAP to Non-GAAP Measures Three Months Ended Six Months Ended $ in thousands November 30, 2023 November 30, 2022 November 30, 2023 November 30, 2022 Adjusted operating loss Operating loss (GAAP) $ (8,174) $ (26,698) $ (15,600) $ (30,886) Stock-based compensation 4,799 21,819 10,440 22,398 Loss from legal settlement 80 — 2,380 — 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 Loss on extinguishment of debt — — 2,353 94 Loss from legal settlement 80 — 2,380 — Non-recurring professional service costs (a) 495 664 1,087 1,072 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) Depreciation and amortization 13,424 1,568 21,284 2,704 EBITDA (Non-GAAP) $ 5,250 $ (25,130) $ 3,331 $ (28,276) Stock-based compensation 4,799 21,819 10,440 22,398 Loss on extinguishment of debt — — 2,353 94 Loss from legal settlement 80 — 2,380 — 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 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. 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. 22 Table of Contents 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 aggregate proceeds from sales 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. 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 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. 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 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 Net cash used in investing activities (65,608) (70,305) Net cash provided by financing activities 47,611 14,101 Net decrease in cash and cash equivalents (8,941) (28,225) Cash, cash equivalents, and restricted cash at beginning of year 43,574 46,299 Cash, cash equivalents, and restricted cash at end of period $ 34,633 $ 18,074 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 $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 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 23 Table of Contents 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 $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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.