What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-11 compared with 2024-01-16 · 213 added, 161 removed, 145 unchanged (72% of the section changed)

13 unchanged sentences

• the addition or loss of significant customers or material changes to our relationships with these customers;

• our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;

• our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies;

6 unchanged sentences

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.

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

Trends and Other Factors Affecting Our Business

6 unchanged sentences

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.

our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions.

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

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

12 unchanged sentences

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.

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 on Form 10-K and our subsequent Quarterly Reports on Form 10-Q.

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.

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

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.

The Company’s 100 MW facility in Jamestown, North Dakota operated at full capacity during the quarter ended February 29, 2024;

however, the Company’s 180 MW facility in Ellendale, North Dakota experienced a power outage starting in January.

In response to these challenges, our utility provider installed transformers to enable us to selectively power-down the affected portions of our site.

Upon re-energization we have determined the failures were due to transformers not meeting industry standards.

The Company has successfully procured new transformers and related components from North American manufacturers.

As of the date of this report, the Ellendale facility has begun energization and has been re-energized to approximately 14% of its full capacity, or 25 MW.

In addition, the Company anticipates that as new transformers are received and installed, the Ellendale facility will target operating capacity of approximately 65%-75% of full capacity by the end of May 2024.

During the quarter ended February 29, 2024, the Company increased its energy capacity at its 200 MW Garden City, Texas facility up to 132 MW.

As of February 29, 2024, the Company determined the Garden City facility met the criteria for classification as held for sale.

On March 14, 2024, the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Mara Garden City LLC, a Delaware limited liability company and a subsidiary of Marathon Digital Holdings, Inc.

(“Marathon”), pursuant to which the Company and related subsidiaries agreed to sell to Mara Garden City LLC the Garden City hosting facility (“the Transaction”) for total cash consideration of up to of $87.3 million.

The Company will also receive approximately $10.0 million in additional consideration at the closing of the Transaction (the “Closing”) in connection with the surrender of certain of Marathon’s revenue prepayments under its existing service agreements with the Company.

The Company recognized a loss of approximately $21.7 million in connection with the classification of assets held for sale to recognize the assets at fair value less costs to sell, which was less than the asset’s carrying value at February 29, 2024.

The Purchase and Sale Agreement contains customary representations and warranties made by the parties, covenants and agreements, and Closing conditions and post-Closing obligations.

In addition, in the event the full intended additional megawatt energization for the Facility is not conditionally approved by the applicable regulatory authority within 120 days of the Closing, the total cash consideration is subject to a reduction of up to $34.0 million, depending on the amount of the additional megawatt energization that is not conditionally approved.

Cloud Services

Applied Digital’s Cloud Services business provides high-performance computing power for artificial intelligence and machine learning applications.

The Company continues to seek and sign additional customers and the pipeline remains robust.

Near the end of the quarter, equipment began generating revenue, which the Company expects will make a positive impact on the financial performance of this segment in the fiscal fourth quarter.

Applied Digital’s HPC hosting business designs, builds, and operates next-generation data centers, which are designed to provide massive computing power and support high-performance computing applications within a cost-effective model.

During the fiscal second quarter, the Company broke ground on its first 100 MW high-performance compute facility in Ellendale, North Dakota.

The new 342,000-square-foot building will provide ultra-low cost and highly efficient liquid-cooled infrastructure for HPC applications.

The Company has entered into exclusivity and executed an letter of intent with a US-based hyperscaler for a 400 MW capacity lease, inclusive of our current 100 MW facility and two forthcoming buildings in Ellendale, North Dakota.

The Company is in advanced discussions with traditional financing counterparties for this investment-grade tenant.

The exclusive negotiation period with the initial HPC anchor tenant identified for our Ellendale campus expired at the end of March.

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

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

Comparative Results for the Three and Nine Months Ended February 29, 2024 and February 28, 2023:

The following table sets forth key components of the results of operations (in thousands) during the three and nine months ended February 29, 2024 and February 28, 2023.

Three Months Ended Nine Months Ended

February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023

Revenue $ 40,284 $ 10,054 $ 110,993 $ 23,139

Related party revenue 3,064 4,036 10,883 10,215

Total revenue 43,348 14,090 121,876 33,354

1 unchanged sentence

Cost of revenues (1)

47,061 10,533 102,051 28,450

Selling, general and administrative (2)

30,386 10,546 67,142 42,779

Loss on classification as held for sale

21,723 — 21,723 —

Loss from legal settlement — — 2,380 —

2 unchanged sentences

Interest expense, net (3)

4,404 352 8,836 1,061

Loss on change in fair value of related party debt 2,612 — 2,612 —

Loss on extinguishment of debt (4)

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

Income tax expenses — (312) — (280)

Net loss before income tax expenses (62,838) (7,341) (85,221) (39,030)

Income tax benefit — — — (280)

Net loss (62,838) (7,341) (85,221) (38,750)

1 unchanged sentence

Net loss attributable to Applied Digital Corporation $ (62,838) $ (7,025) $ (84,824) $ (38,173)

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

Basic and diluted net loss per share attributable to Applied Digital Corporation $ (0.52) $ (0.07) $ (0.77) $ (0.41)

Basic and diluted weighted average number of shares outstanding 121,426,622 94,119,944 110,500,556 93,545,687

Adjusted Amounts (a)

Adjusted Amounts (5)

Adjusted operating loss $ (24,507) $ (1,017) $ (26,021) $ (7,613)

1 unchanged sentence

Adjusted net loss $ (28,911) $ (1,401) $ (34,857) $ (8,552)

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

Other Financial Data (a)

Adjusted net loss per diluted share $ (0.24) $ (0.01) $ (0.32) $ (0.09)

Other Financial Data (5)

EBITDA $ (32,230) $ (5,062) $ (28,721) $ (33,338)

2 unchanged sentences

as a percentage of revenues (5) % 6 % 14 % (9) %

(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.

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.

(1) Includes cost of revenues attributable to related party revenues of $2.5 million and $3.1 million for the three months ended February 29, 2024 and February 28, 2023, respectively, and $6.6 million and $8.8 million for the nine months ended February 29, 2024 and February 28, 2023, respectively.

(2) Includes related party selling, general and administrative expense of $0.1 million and $0.5 million for the three and nine months ended February 29, 2024, respectively.

There was no related party selling, general and administrative expense incurred during the three and nine months ended February 28, 2023.

(3) Includes related party interest expense of $0.2 million and $0.8 million for the three months ended and nine months ended February 29, 2024, respectively.

There was no related party debt issued during three and nine months ended February 28, 2023 and as such, no interest expense was incurred related to related party debt.

(4) Amounts included in the nine months ended February 29, 2024 are related to the extinguishment of related party debt.

(5) 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 MD&A.

Commentary on Results of Operations Comparative Results for the Three Months Ended February 29, 2024 compared to the Three Months Ended February 28, 2023

Revenue increased $30.2 million, or 301%, from $10.1 million for the three months ended February 28, 2023 to $40.3 million for the three months ended February 29, 2024 driven by increased capacity across the Company’s three Datacenter hosting facilities between periods as well as the Company recognizing revenue under its Cloud services segment during the three months ended February 29, 2024 due to the launch of the service during the current fiscal year.

Related party revenue decreased $.9 million, or 24%, from $4.0 million for the three months ended February 28, 2023 to $3.1 million for the three months ended February 29, 2024 driven by reduced uptime and pricing compared to the prior year comparable period.

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:

Cost of revenues increased $36.5 million, or 347%, from $10.5 million for the three months ended February 28, 2023 to $47.1 million for the three months ended February 29, 2024.

The increase was primarily driven by the growth in the business as more facilities were energized and as additional services were provided to customers compared to the three months ended February 28, 2023.

The change in cost of revenues is categorized as follows:

• approximately $18.3 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;

• approximately $13.8 million increase in depreciation and amortization expense due to an increase in owned and leased assets in-service directly supporting revenue;

• approximately $2.0 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount supporting revenue;

• approximately $1.2 million increase in lease and related expenses for the use of datacenter space to support the Company’s cloud services business;

• approximately $1.2 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;

Selling, general and administrative expense

Selling, general and administrative expense increased $19.9 million, or 188%, from $10.5 million for the three months ended February 28, 2023 to $30.4 million for the three months ended February 29, 2024.

The increase was primarily due to the overall growth in the business.

The change in selling, general and administrative expense is categorized as follows:

• approximately $10.4 million increase in depreciation and amortization expense due to an increase in owned and leased assets that are not currently being used to generate revenue;

• approximately $4.5 million increase in lease and related expenses for datacenter space not yet being used to generate revenue;

• approximately $3.9 million increase in professional service expenses incurred related to legal services provided on discrete transactions and projects as well as general support of the business;

• approximately $0.7 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.

• approximately $0.3 million increase in personnel expense to support the growth of the business.

Loss on classification of held for sale

Loss on classification of held for sale was $21.7 million for the three months ended February 29, 2024 due to the write down of the Garden City assets to their fair market value as a result of the planned sale of that facility.

There were no such losses recorded in the prior year comparative period.

Interest expense, net

Interest expense, net increased $4.1 million, or 1151%, from $0.4 million for the three months ended February 28, 2023 to $4.4 million for the three months ended February 29, 2024.

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.

Loss on change in fair value of related party debt

Loss on change in fair value of related party debt was $2.6 million for the three months ended February 29, 2024 due to the valuation associated with the Company’s borrowings under the AI Bridge Loan.

There were no such losses recorded in the prior year comparative period.

Commentary on Results of Operations Comparative Results for the Nine Months Ended February 29, 2024 compared to the Nine Months Ended February 28, 2023

Revenue increased $87.9 million, or 380%, from $23.1 million for the nine months ended February 28, 2023 to $111.0 million for the nine months ended February 29, 2024 driven by increased capacity across the Company’s three Datacenter hosting facilities between periods as well as the Company recognizing revenue under its Cloud services segment due to the launch of the service during the current fiscal year.

Related party revenue increased $0.7 million, or 7%, from $10.2 million for the nine months ended February 28, 2023 to $10.9 million for the nine months ended February 29, 2024 driven by increased uptime at the Company’s Jamestown, North Dakota facility throughout the period.

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:

Cost of revenues increased by $73.6 million, or 259%, from $28.4 million for the nine months ended February 28, 2023 to $102.1 million for the nine months ended February 29, 2024.

The increase was primarily driven by the growth in the business as more facilities were energized and more services were provided to customers compared to the nine months ended February 28, 2023.

The changes in cost of revenues are categorized as follows:

• approximately $39.3 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 $24.8 million increase in depreciation and amortization expense due to an increase in owned and leased assets directly supporting revenue;

• approximately $5.0 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount supporting revenue;

• approximately $2.7 million increase in lease and related expenses for the use of datacenter space to support the Company’s cloud services business;

• approximately $1.9 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;

• 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.

Selling, general and administrative expense

Selling, general and administrative expense increased by $24.4 million, or 57%, from $42.8 million for the nine months ended February 28, 2023 to $67.1 million for the nine months ended February 29, 2024.

The increase was primarily due to the overall growth in the business.

The change in selling, general and administrative expense is categorized as follows:

• approximately $18.3 million increase in depreciation and amortization expense due to an increase in owned and leased assets that are not currently being used to generate revenue;

• approximately $6.6 million increase in other expenses such as operating leases expense for datacenter space not yet being used to generate revenue;

• approximately $4.6 million increase in professional service expenses related to legal services provided on discrete transactions and projects as well as general support of the business;

• approximately $3.6 million increase in other selling, general, and administrative expense such as insurance premiums and computer and software expenses.

This increase was partially offset by a decrease of approximately $8.6 million in personnel expenses largely driven by a decrease stock-based compensation expense, as the Company recognized a cumulative catch-up in stock-based compensation expense in the comparative period upon the Company’s registration statement for the award shares being declared effective.

Loss on classification of held for sale

Loss on classification of held for sale was $21.7 million for the nine months ended February 29, 2024 due to the write down of the Garden City assets to their fair market value as part of the planned sale of that facility.

There were no such losses recorded in the prior year comparative period.

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.

Loss from legal settlement was $2.4 million for the nine months ended February 29, 2024 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.

There were no such losses recorded in the prior year comparative period.

Interest expense, net

Interest expense, net increased $7.8 million, or 733% , from $1.1 million for the nine months ended February 28, 2023 to $8.8 million for the nine months ended February 29, 2024 driven by increases in finance leases and debt obligations between periods.

Loss on change in fair value of related party debt

Loss on change in fair value of related party debt was $2.6 million for the nine months ended February 29, 2024 due to the valuation associated with the Company’s borrowings under the AI Bridge Loan.

There were no such losses recorded in the prior year comparative period.

Loss on extinguishment of debt

Loss on extinguishment of debt increased $2.3 million, or 2401%, from $0.1 million for the nine months ended February 28, 2023 to $2.4 million for the nine months ended February 29, 2024.

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

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

Riley related party loan during the nine months ended February 29, 2024.

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):

Income tax benefit decreased $0.3 million or 100% from a $0.3 million benefit for the nine months ended February 28, 2023 to zero for the nine months ended February 29, 2024.

This change was driven by a change in valuation allowance for the nine months ended February 29, 2024 compared to the nine months ended February 28, 2023.

Comparative Segment Data for the Three and Nine Months Ended February 29, 2024 and February 28, 2023:

The following table sets forth the Company’s operating profit for each of our segments for the three and nine months ended February 29, 2024 and February 28, 2023 (in thousands):

Three Months Ended Nine Months Ended

February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023

Segment loss:

Datacenter hosting segment (24,443) (3,117) (4,647) (18,218)

2 unchanged sentences

HPC hosting segment (1,445) (18) (3,106) (18)

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

Total segment loss $ (47,453) $ (3,876) $ (48,447) $ (18,977)

Commentary on Segment Data Comparative Results for the Three Months Ended February 29, 2024 compared to the Three Months Ended February 28, 2023

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.

Operating Loss

Datacenter hosting operating loss increased $21.3 million, or 684% from a loss of $3.1 million for the three months ended February 28, 2023 to a loss of $24.4 million for the three months ended February 29, 2024.

The change was primarily driven by the loss on classification of held for sale which the Company recognized in association with the planned sale of the Garden City facility, as well as accelerated depreciation and amortization recognized in relation to outage incidents at

the Ellendale, North Dakota facility.

This loss was partially offset by an increase in MW capacity across the Company’s three Datacenter hosting facilities during the three months ended February 29, 2024, compared to operations only at the Company’s Jamestown facility during the the three months ended February 28, 2023, as well as 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.

Cloud services operating loss increased $20.8 million, from a loss of $0.7 million for the three months ended February 28, 2023 to a loss of $21.6 million for the three months ended February 29, 2024 primarily driven by amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and an increase stock-based compensation expense attributable to the segment as the Company ramps up its Cloud services operations.

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

HPC hosting operating loss increased $1.4 million, or 7928% from a loss of $18 thousand to a loss of $1.4 million.

The loss was largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases as the Company ramps up its HPC hosting operations.

Commentary on Segment Data Comparative Results for the Nine Months Ended February 29, 2024 compared to the Nine Months Ended February 28, 2023

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.

Operating Loss

Datacenter hosting operating loss decreased $13.6 million, or 74% from a loss of $18.2 million for the nine months ended February 28, 2023 to a loss of $4.6 million for the nine months ended February 29, 2024.

The change was driven by a full nine 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, as well as a decrease in stock-based compensation between the periods.

These changes were partially offset by the loss on classification of held for sale which the Company recognized in association with the sale of the Garden City facility, and by accelerated depreciation and amortization in relation to outage incidents at the Ellendale, North Dakota facility.

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.

Cloud services operating loss increased $40.0 million, from a loss of $0.7 million for the nine months ended February 28, 2023 to a loss of $40.7 million for the nine months ended February 29, 2024 primarily due to amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense as the Company ramps up its Cloud services operations.

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.

HPC hosting operating loss increased $3.1 million, or 17156% from a loss of $18 thousand to loss of $3.1 million.

The loss was largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases as the Company ramps up its HPC hosting operations.

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.

To supplement our consolidated financial statements presented under GAAP, we are presenting certain non-GAAP financial measures.

We are providing these non-GAAP financial measures to disclose additional information to facilitate the comparison of past and present operations by providing perspective on results absent one-time or significant non-cash items.

We utilize these measures in the business planning process to understand expected operating performance and to evaluate results against those expectations.

We believe that these non-GAAP financial measures, when considered together with our GAAP financial results, provide management and investors with an additional understanding of our business

operating results regarding factors and trends affecting our business and provide a reasonable basis for comparing our ongoing results of operations .

These non-GAAP financial measures are provided as supplemental measures to the Company’s performance measures calculated in accordance with GAAP and therefore, are not intended to be considered in isolation or as a substitute for comparable GAAP measures.

Further, these non-GAAP measures have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles.

Because of the non-standardized definitions of non-GAAP financial measures, we caution investors that the non-GAAP financial measures as used by us in this Quarterly Report on Form 10-Q have limits in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies.

Further, investors should be aware that when evaluating these non-GAAP financial measures, these measures should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items.

In addition, from time to time in the future there may be items that we may exclude for purposes of our non-GAAP financial measures and we may in the future cease to exclude items that we have historically excluded for purposes of our non-GAAP financial measures.

Likewise, we may determine to modify the nature of the adjustments to arrive at our non-GAAP financial measures.

Investors should review the non-GAAP reconciliations provided below and not rely on any single financial measure to evaluate the Company’s business.

Change in Presentation

Beginning in the third quarter of 2024, the Company updated its presentation of non-GAAP measures.

As a result of this updated presentation, the Company no longer excludes start-up costs as an adjustment to Operating loss, Net loss, or EBITDA in our calculation of Adjusted operating loss, Adjusted net loss, Adjusted net loss per diluted share, and Adjusted EBITDA.

EBITDA, Adjusted EBITDA, Adjusted net loss, and Adjusted net loss per diluted share are non-GAAP measures and are defined below.

Adjusted Operating Loss, Adjusted Net Loss, and Adjusted Net Loss per Diluted Share

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represent operating loss and net loss, respectively, excluding stock-based compensation, litigation expenses, non-recurring professional service costs, non-recurring research and development costs, loss on classification of held for sale, loss on abandonment of assets, and loss on legal settlement.

Adjusted net loss is further adjusted for the loss on the change in fair value of related party debt and the loss on extinguishment of debt.

We define “Adjusted Net Loss per Diluted Share” as Adjusted net loss divided by weighted average diluted share count.

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

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.

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, litigation expenses, non-recurring professional service costs, non-recurring research and development costs, loss on classification of of held for sale, loss on abandonment of assets, loss on the change in fair value of related party debt, loss of extinguishment of debt, and loss on legal settlement.

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

Three Months Ended Nine Months Ended

$ in thousands February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023

Adjusted operating loss

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Stock-based compensation 3,194 4,480 13,634 26,878

Loss from legal settlement

Non-recurring professional service costs (a)

2,355 365 3,442 1,437

Other non-recurring expenses (b)

Non-recurring research and development costs (b)

Loss on classification as held for sale

21,723 — 21,723 —

Accelerated depreciation and amortization (c)

4,043 — 4,220 —

Loss on legal settlement

Other non-recurring costs (d)

— 349 — 1,054

Adjusted operating loss (Non-GAAP) $ (24,507) $ (1,017) $ (26,021) $ (7,613)

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Stock-based compensation 3,194 4,480 13,634 26,878

Loss on extinguishment of debt — — 2,353 94

Loss from legal settlement

Non-recurring professional service costs (a)

2,355 365 3,442 1,437

Other non-recurring expenses (b)

Non-recurring research and development costs (b)

Loss on classification as held for sale

21,723 — 21,723 —

Accelerated depreciation and amortization (c)

4,043 — 4,220 —

Loss on change in fair value of related party debt 2,612 — 2,612 —

Loss on extinguishment of debt

Loss on legal settlement

Other non-recurring costs (d)

Adjusted net loss (Non-GAAP) $ (28,911) $ (1,401) $ (34,857) $ (8,552)

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

Adjusted net loss per diluted share (Non-GAAP) $ (0.24) $ (0.01) $ (0.32) $ (0.09)

EBITDA and Adjusted EBITDA

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Interest expense, net 4,404 352 8,836 1,061

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

Depreciation and amortization 13,424 1,568 21,284 2,704

Income tax benefit — — — (280)

Depreciation and amortization (c)

26,204 1,927 47,664 4,631

EBITDA (Non-GAAP) $ (32,230) $ (5,062) $ (28,721) $ (33,338)

Stock-based compensation 3,194 4,480 13,634 26,878

Loss on extinguishment of debt — — 2,353 94

Loss from legal settlement

Non-recurring professional service costs (a)

2,355 365 3,442 1,437

Other non-recurring expenses (b)

Non-recurring research and development costs (b)

Loss on classification as held for sale

21,723 — 21,723 —

Loss on change in fair value of related party debt 2,612 — 2,612 —

Loss on extinguishment of debt

Loss on legal settlement

Other non-recurring costs (d)

Adjusted EBITDA (Non-GAAP) $ (2,346) $ 909 $ 17,423 $ (3,076)

(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.

(a) Non-recurring professional service costs represents legal, accounting, and consulting services costs related to discrete transactions and projects, as well as legal fees associated with the Company’s defense of class action lawsuits and legal fees related to matters with certain former employees.

The Company does not expect to incur these expenses on a regular basis.

(b) Non-recurring research and development costs represents specific research and development activities related to the Company’s business expansion that the Company does not expect to incur on a regular basis.

(c) Accelerated depreciation and amortization represents the acceleration of expense related to transformers that were abandoned by the Company due to operational failure or other reasons.

Depreciation and amortization in this amount is included in Depreciation and Amortization expense within the Company’s calculation of EBITDA, and therefore is not added back as a management adjustment in the Company’s calculation Adjusted EBITDA.

(d) Other non-recurring costs represent 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.

As of February 29, 2024, the Company had unrestricted cash and cash equivalents of $4.4 million and negative working capital of $243.5 million, inclusive of assets held for sale.

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.

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

See Note 5 - Related Party Transactions and Note 6 - Debt in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on our term and related party 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 aggregate proceeds from sales of common stock.

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

During the nine months ended February 29, 2024, the Company sold approximately 18.9 million shares in total.

Net proceeds, less commission and legal fees of approximately $4.0 million, were approximately $121.0 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.

The at the market offering was completed in December 2023.

On March 14, 2024, APLD – Rattlesnake Den I LLC, a Delaware limited liability company and a subsidiary of the Company, entered into a purchase and sale agreement with Mara Garden City LLC, a Delaware limited liability company and a subsidiary of Marathon Digital Holdings, Inc., pursuant to which Rattlesnake Den I agreed to sell to Mara Garden City LLC its datacenter facility located in Garden City, Texas.

The Garden City Transaction closed on April 1, 2024 and the Company received net cash proceeds of approximately $61.1 million.

During the nine months ended February 29, 2024, we received $129.0 million in payments for future datacenter hosting services.

Further, during March 2024, the Company received funding under the Cornerstone Bank Loan.

The funding, net of issuance fees, totaled $15.7 million.

See Note 6 - Debt for further discussion of the Cornerstone Bank Loan.

Funding Requirements

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

We have experienced net losses through the period ended February 29, 2024.

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.

The Company expects to have sufficient liquidity, including cash on hand, payments from customers, access to debt financing, 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.

3 unchanged sentences

We believe that the significant investments in property and equipment will remain throughout fiscal year 2025 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

The following table provides information about the Company’s net cash flow for the nine months ended February 29, 2024 and February 28, 2023, respectively.

Nine Months Ended

$ in thousands February 29, 2024 February 28, 2023

Net cash provided by operating activities $ 47,896 $ 54,144

4 unchanged sentences

Cash, cash equivalents, and restricted cash at end of period $ 40,980 $ 22,921

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

Commentary on the change in cash flows between the Nine Months Ended February 29, 2024 and Nine Months Ended February 28, 2023

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.

The net cash provided by operating activities decreased by $6.2 million, or 12%, from $54.1 million for the nine months ended February 28, 2023 to $47.9 million for the nine months ended February 29, 2024.

The primary reasons for the change were a decrease in revenue prepayments received relative to revenue earned during the nine months ended February 29, 2024 as well as an increase in payments associated with our operating leases, partially offset by a large increase in accounts payable.

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

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.

The net cash used in investing activities increased by $26.2 million, from $96.3 million for the nine months ended February 28, 2023 to $122.5 million for the nine months ended February 29, 2024.

The primary reason for the change was an increase in lease prepayments made for leases on hosting equipment to support the Company’s Cloud services business during the nine months ended February 29, 2024.This increase was partially offset by a decrease in investments in property and equipment during the nine months ended February 29, 2024 as the Company’s payments in the comparative periods for construction of the Ellendale, North Dakota and Garden City, Texas datacenter hosting facilities outpaced current period construction payments for the Garden City hosting facility and the Company’s HPC datacenters.

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.

The net cash provided by financing activities increased by $53.2 million, or 283%, from $18.8 million for the nine months ended February 28, 2023 to $72.0 million for the nine months ended February 29, 2024.

The primary reasons for the change was the receipt of net proceeds from the Company’s common stock offering and the increase in related party debt proceeds, which were partially offset by an increase in debt repayments and an increase in finance lease payments during the nine months ended February 29, 2024.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis