Applied Digital Corp. 10-Q

Item 1. Legal Proceedings The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's Chief Financial Officer, have been named as defendants in a putative securities class action lawsuit in the matter styled, McConnell v. Applied Digital Corporation, et al. , Case No. 3:23-cv-1805, filed in August 2023 in the U.S. District Court for the Northern District of Texas (the “Securities Lawsuit”). Specifically, the complaint asserts claims pursuant to Section 10(b) of the Securities and Exchange Act of 1934 based on allegedly false or misleading statements regarding the company’s business, operations, and compliance policies, including claims that the Company overstated the profitability of its Datacenter hosting business and its ability to successfully transition into a low-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules. The case is in an early stage, and the Court has not appointed a lead plaintiff nor has any class been certified. The Company has not yet responded to the complaint and no response is currently due. At this time, the Company is unable to estimate potential losses, if any, related to this action. While it is not possible to predict the outcome of these matters with certainty, we do not currently expect this action to have a material adverse effect on our results of operations or financial position. However, this matter is subject to uncertainties, and we could ultimately incur judgments or enter into settlements of claims that could have a material adverse effect our financial position, results of operations or cash flows. On November 15, 2023, a derivative action was filed in the matter styled, Weich v. Cummins, et al. , Case No. A-23-881629-C in the District Court of Clark County, Nevada. The Weich complaint names as defendants certain members of the Company’s Board of Directors and its Chief Executive Officer Wesley Cummins and purports to name chief Financial Officer David Rench as a defendant. The complaint asserts claims for breaches of fiduciary duties, unjust enrichment, and corporate waste against the individual defendants largely based on the same fact allegations as the Securities Lawsuit. On February 27, 2024, the plaintiff filed an amended complaint, asserting the same causes of action against the same defendants as the original complaint. The deadline to file or otherwise respond to the amended complaint is April 12, 2024. At this time, the Company is unable to estimate potential losses, if any, related to this action. While it is not possible to predict the outcome of these matters with certainty, we do not currently expect the results of this action to have a material adverse effect on our results of operations or financial position. However, this matter is subject to uncertainties, and we could incur judgments or enter into settlements of claims that could have a material adverse effect on our financial position, results of operations or cash flows.