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 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; • 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 the high-performance compute hosting (“HPC hosting”), cloud services (“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. 21 Table of Contents Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions. To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations. As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets. Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry. For instance, on September 24, 2021, China imposed a ban on all crypto transactions and mining. Ongoing and future regulatory actions could effectively prevent our customers’ mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete. Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations. 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 on Form 10-K and our subsequent Quarterly Reports on Form 10-Q. Business Update Datacenter Hosting Our Datacenter hosting business operates datacenters to provide energized space to crypto mining customers. 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. 22 Table of Contents 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. HPC Hosting 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. 23 Table of Contents Results of Operations 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 Revenues 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 Costs and expenses: 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 — Total costs and expenses 99,170 21,079 193,296 71,229 Operating loss (55,822) (6,989) (71,420) (37,875) 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) — — 2,353 94 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) Net loss attributable to noncontrolling interest — (316) (397) (577) Net loss attributable to Applied Digital Corporation $ (62,838) $ (7,025) $ (84,824) $ (38,173) 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 (5) Adjusted operating loss $ (24,507) $ (1,017) $ (26,021) $ (7,613) Adjusted operating margin (57) % (7) % (21) % (23) % Adjusted net loss $ (28,911) $ (1,401) $ (34,857) $ (8,552) 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) as a percentage of revenues (74) % (36) % (24) % (100) % Adjusted EBITDA $ (2,346) $ 909 $ 17,423 $ (3,076) as a percentage of revenues (5) % 6 % 14 % (9) % (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. 24 Table of Contents (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 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 $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 $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; and • approximately $1.2 million increase in other expenses directly attributable to generating revenue. 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; and • 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. 25 Table of Contents 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. 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 Revenues 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 $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 $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; and • approximately $1.9 million increase in other expenses directly attributable to generating revenue. 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; and • 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. 26 Table of Contents 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 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. 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 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 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) Cloud services segment $ (21,565) $ (741) $ (40,694) $ (741) HPC hosting segment (1,445) (18) (3,106) (18) 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 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 27 Table of Contents 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 $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 $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 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 $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 $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 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 28 Table of Contents 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, 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. 29 Table of Contents Reconciliation of GAAP to Non-GAAP Measures Three Months Ended Nine Months Ended $ in thousands February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023 Adjusted operating loss Operating loss (GAAP) $ (55,822) $ (6,989) $ (71,420) $ (37,875) Stock-based compensation 3,194 4,480 13,634 26,878 Non-recurring professional service costs (a) 2,355 365 3,442 1,437 Non-recurring research and development costs (b) — 778 — 893 Loss on classification as held for sale 21,723 — 21,723 — Accelerated depreciation and amortization (c) 4,043 — 4,220 — Loss on legal settlement — — 2,380 — Other non-recurring costs (d) — 349 — 1,054 Adjusted operating loss (Non-GAAP) $ (24,507) $ (1,017) $ (26,021) $ (7,613) Adjusted operating margin (57) % (7) % (21) % (23) % Adjusted net loss Net loss (GAAP) $ (62,838) $ (7,341) $ (85,221) $ (38,750) Stock-based compensation 3,194 4,480 13,634 26,878 Non-recurring professional service costs (a) 2,355 365 3,442 1,437 Non-recurring research and development costs (b) — 778 — 893 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 — — 2,353 94 Loss on legal settlement — — 2,380 — Other non-recurring costs (d) — 317 — 896 Adjusted net loss (Non-GAAP) $ (28,911) $ (1,401) $ (34,857) $ (8,552) Adjusted net loss per diluted share (Non-GAAP) $ (0.24) $ (0.01) $ (0.32) $ (0.09) EBITDA and Adjusted EBITDA Net loss (GAAP) $ (62,838) $ (7,341) $ (85,221) $ (38,750) Interest expense, net 4,404 352 8,836 1,061 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 Non-recurring professional service costs (a) 2,355 365 3,442 1,437 Non-recurring research and development costs (b) — 778 — 893 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 — — 2,353 94 Loss on legal settlement — — 2,380 — Other non-recurring costs (d) — 348 — 960 Adjusted EBITDA (Non-GAAP) $ (2,346) $ 909 $ 17,423 $ (3,076) (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. 30 Table of Contents (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 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 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. 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 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 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, 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. 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 2025 as we continue construction of our HPC hosting facilities and acquire assets to support our Cloud services business. 31 Table of Contents Summary of Cash Flows 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 Net cash used in investing activities (122,518) (96,314) Net cash provided by financing activities 72,028 18,792 Net decrease in cash and cash equivalents (2,594) (23,378) Cash, cash equivalents, and restricted cash at beginning of year 43,574 46,299 Cash, cash equivalents, and restricted cash at end of period $ 40,980 $ 22,921 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 $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 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 $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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.