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Item 7. Management’s Discussion and Analysis

2024-08-30 compared with 2023-08-02 · 457 added, 311 removed, 67 unchanged (92% of the section changed)

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You should read the sections titled “Risk Factors” and “Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we,” “us,” “our,” and “the Company” are intended to mean the business and operations of Applied Digital Corporation and its subsidiaries.

Business Overview

We are a designer, builder and operator of next-generation digital infrastructure.

We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.

We are a U.S.

designer, developer, and operator of next-generation digital infrastructure across North America.

We provide digital infrastructure solutions and Cloud services to the rapidly growing industries of High-Performance Computing ("HPC") and Artificial Intelligence ("AI").

We operate in three distinct business segments, including, Blockchain data center hosting (the "Data Center Hosting Business"), cloud services through a wholly owned subsidiary (the "Cloud Services Business") and HPC data center hosting (the "HPC Hosting Business"), as further discussed below.

Business Update

AI Cloud Services

Our AI cloud services business operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.

On May 15, 2023, we announced the formal launch of our AI Cloud services business through Sai Computing.

On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period.

The customer will make a significant prepayment as part of the agreement.

On June 23, 2023, we announced that Sai Computing had secured its second AI customer with an agreement worth up to $460 million over 36 months.

We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services.

Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

HPC Datacenter Hosting

Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

We are in the process of constructing a 9 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota.

This separate and unique building, designed and purpose-built for Graphics Processing Units (“GPUs”), will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments.

This facility is expected to be brought online in the second half of calendar year 2023.

During early calendar year 2023, we began testing HPC hosting at this facility.

The systems in this facility passed initial testing in the second calendar quarter of 2023.

In June, the Company expanded its commitment for up to 26,000 GPUs for the Company's AI Cloud services business.

The Company has received and deployed an initial production cluster of 1,024 GPUs.

We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.

Crypto Datacenter Hosting

Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers.

Jamestown, North Dakota Datacenter

We purchased property in Jamestown, North Dakota on which we constructed our first co-hosting facility.

Construction of our first co-hosting facility began in September 2021.

On February 2, 2022, we brought our first facility online and it has been fully operational since that date.

As of May 31, 2023, the facility had approximately 105 MW of capacity, which is fully contracted with our customers.

Garden City, Texas Datacenter

On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility in Garden City, Texas.

On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, Texas, with the intent to build our second datacenter facility on this site.

On April 25, 2022, we began construction on this site.

This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers.

The facility is expected to begin operating in the second half of calendar 2023 and the 200 MW capacity is fully contracted with our customers.

Ellendale, North Dakota Datacenter

On August 8, 2022, we completed the purchase of 40 acres of land in Ellendale, North Dakota, for a total cost of $1 million.

We took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023.

The facility is fully energized and the facility will have approximately 180 MW of capacity, which is fully contracted with our customers

Public Offering and Changes to Equity

On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement, with Craig-Hallum Capital Group LLC ("Craig-Hallum Capital"), pursuant to which the Company may sell up to $125 million in shares of our common stock, par value $.001 per share (the "Common Stock").

The Company has sold approximately 7.9 million shares.

Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.

Data Center Hosting Business

Our Data Center Hosting Business operates data centers to provide energized space to crypto mining customers.

Our 106 MW facility in Jamestown, North Dakota operated at full capacity during the fiscal year ended May 31, 2024;

however, our 180 MW facility in Ellendale, North Dakota experienced a power outage starting in January 2024.

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.

We have successfully procured new transformers and related components from North American manufacturers.

As of the date of this report, the HPC Ellendale Facility is operating at full capacity.

Additionally, during fiscal year 2024, we increased our energy capacity at our 200 MW Garden City, Texas facility up to 132 MW.

During the third quarter of fiscal year 2024, we entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with Mara Garden City LLC ("Mara"), a Delaware limited liability company and a subsidiary of Marathon Digital Holdings, Inc.

("Marathon"), pursuant to which we and related subsidiaries agreed to sell to Mara the Garden City hosting facility ("the Transaction") for total cash consideration of up to of $87.3 million and additional consideration of approximately $10.0 million in connection with the surrender of certain of Marathon’s revenue prepayments under its existing service agreements with us, payable at the closing of the Transaction, which occurred on April 1, 2024 (the "Closing").

We recognized a loss of approximately $15.4 million in connection with the Closing.

In addition, pursuant to the terms and conditions of the Purchase and Sale Agreement, in the event the full intended additional megawatt energization for the Garden City hosting facility is not conditionally approved by the applicable regulatory authority within 120 days of the Closing, the total cash consideration was subject to a reduction of up to $34.0 million ($25 million of which was held in escrow), depending on the amount of the additional megawatt energization that is not conditionally approved.

On July 30, 2024, we announced that it has met the conditional approval requirements related to the release of the escrowed funds from the sale of our Garden City hosting facility.

As of the date of this report, we have received the remaining $25 million of the purchase price held in escrow pending such conditional approval.

Cloud Services Business

Applied Digital’s Cloud Services Business provides high-performance computing power for AI and machine learning applications.

In the fiscal fourth quarter, we successfully brought approximately four clusters online.

We continue to seek and sign additional customers and we believe that the pipeline remains robust.

Near the end of the fiscal third quarter 2024,

equipment began generating revenue from two customers, with the Company recognizing $29.0 million from this business segment during fiscal year 2024.

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

During the fiscal second quarter 2024, we broke ground on our first 100 MW HPC data center facility in Ellendale, North Dakota.

The new 369,000-square-foot building is expected to provide ultra-low cost and highly efficient liquid-cooled infrastructure for HPC applications.

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

On July 26, 2024, the Company extended the initial exclusivity period under the previously announced letter of intent with the U.S.

based hyperscaler.

The Company is in advanced discussions with traditional financing counterparties, to facilitate construction activities, for this investment-grade tenant.

Public Offerings and Changes to Equity

Craig-Hallum ATM

During the fiscal year ended May 31, 2024, we completed sales of common stock under an "at the market" sale agreement with Craig-Hallum Capital Group LLC pursuant to which we could sell up to $125 million in aggregate proceeds of common stock.

We sold approximately 18.9 million shares for net proceeds of approximately $121.2 million in total.

Commission and legal fees related to the issuance totaled $4.0 million for the fiscal year ended May 31, 2024.

The at the market offering was completed in December 2023.

Extinguishment of Noncontrolling Interest

On August 31, 2023, pursuant to the joint venture agreement, the minority partner in 1.21 Gigawatts LLC exercised the option to exchange their interest in the joint venture for approximately 1.5 million shares, or a value of $9.8 million, of the Company’s common stock.

We are now the sole member of 1.21 Gigawatts LLC and will report all activity as attributable to the Company in future periods.

AI Bridge Warrants

On April 26, 2024, we entered into Amendment No.

2 (the “AI Amendment”) to the AI Bridge Loan pursuant to which the Company issued warrants to purchase up to 3,000,000 shares of common stock subject to certain adjustments to AI Bridge Funding LLC (the “AI Warrants”).

The AI Warrants are exercisable upon payment of the applicable exercise price in cash or through cashless exercise for a period of five years.

1,500,000 AI Warrants have an exercise price of $10.00 per share of common stock and 1,500,000 AI Warrants have an exercise price of $7.50 per share of common stock.

The AI Warrants were measured at fair value (see "Note 9 - Stockholders' Equity" for further discussion) and we recorded a loss on the fair value of the AI Warrants of $5.7 million in the consolidated statements of operations for the fiscal year ended May 31, 2024.

Series E Preferred Stock

On May 16, 2024, we entered into a Dealer Manager Agreement (the “Dealer Manager Agreement”) with Preferred Capital Securities, LLC (the “Dealer Manager”), pursuant to which the Dealer Manager has agreed to serve as the Company’s agent and dealer manager for our offering of up to 2,000,000 shares of Series E Redeemable Preferred Stock, par value $0.001 (the “Series E Preferred Stock”).

Each share of Series E Preferred Stock is being offered at a public offering price of $25.00 per share (the “Stated Value”).

Subject to the terms, conditions and limitations described in the Dealer Manager Agreement, we are required to pay to the Dealer Manager a dealer manager fee in an amount equal to 2% of the Stated Value per share of Series E Preferred Stock sold in the Offering and a selling commission of up to 6% of the Stated Value per share of Series E Preferred Stock sold in the Offering.

As of May 31, 2024, there were no shares sold of the Series E Preferred Stock.

Roth Capital Partners LLC

During the month ended May 31, 2024, we began sales of common stock under a new "at the market" sale agreement with Roth Capital Partners, LLC pursuant to which we could sell up to $25 million in aggregate proceeds of common stock.

As of May 31, 2024, we sold approximately 2.7 million shares for net proceeds of approximately $9.6 million in total.

Commission and legal fees related to the issuance totaled $0.3 million for the fiscal year ended May 31, 2024.

The at the market offering was completed in June 2024.

Debt Financing

Starion Term Loan

On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Starion Loan Agreement”).

The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $15 million with a maturity date of July 25, 2027.

The Starion Term Loan is secured by the Jamestown hosting facility, a security interest in the substantially all of the assets of the APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility.

The Starion Loan Agreement provides for an interest rate of 6.50% per annum.

The Starion Loan Agreement contains customary covenants, representations and warranties and events of default.

The Company is not subject to financial covenants until May 31, 2024.

At that time, the Company will be subject to a debt service coverage ratio.

Deferred financing costs related to the Starion Term Loan total $0.1 million.

On July 25, 2022, APLD Hosting, LLC, our wholly owned subsidiary, entered into a loan agreement with Starion Bank and the Company as Guarantor (the “Starion Term Loan Agreement”).

The Starion Term Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $15.0 million with a maturity date of July 25, 2027.

The Starion Term Loan is secured by the Jamestown hosting facility, a security interest in substantially all of the assets of APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility.

The Starion Term Loan Agreement provides for an interest rate of 6.50% per annum.

The Starion Term Loan Agreement contains customary covenants, representations and warranties and events of default.

We also became subject to a debt service coverage ratio on May 31.

The City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund provides a multimillion-dollar economic development program, available to assist with expanding or relocating businesses.

As part of financial packages, the Jamestown Stutsman Development Corporation (JSDC) makes direct loans, equity investments, and interest buy-downs to businesses.

The Company has entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5% for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”).

We have entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5% for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”).

The loan totals $0.2 million and bears an interest rate of 2%, and the bond totals $0.5 million.

In connection with the Starion Loan Agreement, the Company repaid all of the outstanding balance on the March 11, 2022 agreement between the Company and Vantage Bank Texas.

This agreement included a promissory note agreement for $7.5 million for a five year term with an interest rate of 5% per annum.

Vantage Garden City Loan

On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement (the “Vantage Garden City Loan Agreement”) with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan ("The Vantage Garden City Loan") in the principal amount of $15 million .

The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for Rattlesnake Den I, LLC's datacenter in Garden City, Texas, with each installment not exceeding approximately $0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”).

The unpaid principal amount of the Vantage Garden City Loan Agreement will bear interest at a fixed rate of 6.15% per annum, and the Borrower may prepay the Vantage Garden City Loan Agreement, in whole or in part, without the payment of any fee or penalty.

The Loan is secured by the leasehold interest on the Garden City Facility, a security interest in substantially all of the assets of the Rattlesnake Den I, LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in the master hosting agreements related to the Garden City Facility and records and data relating thereto.The Vantage Garden City Loan Agreement matures April 26, 2028.

On November 7, 2022, APLD – Rattlesnake Den I, LLC, our wholly owned subsidiary, entered into a loan agreement (the “Vantage Garden City Loan Agreement”) with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan (the "Vantage Garden City Loan") in the principal amount of $15.0 million.

The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for Rattlesnake Den I, LLC's data center in Garden City, Texas, with each installment not exceeding approximately $0.9 million for the costs and expenses of a building at our hosting facility in Garden City, Texas (the “Garden City Facility”).

The unpaid principal amount of the Vantage Garden City Loan Agreement bears interest at a fixed rate of 6.15% per annum, and the Borrower may prepay the Vantage Garden City Loan Agreement, in whole or in part, without the payment of any fee or penalty.

The Loan is secured by the leasehold interest on the Garden City Facility, a security interest in substantially all of the assets of the Rattlesnake Den I, LLC, and a security interest in the form of a collateral assignment of our rights and interests in the master hosting agreements related to the Garden City Facility and records and data relating thereto.

The Vantage Garden City Loan Agreement matures April 26, 2028.

The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default.

As of May 31, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement, with the outstanding principal balance totaling $10.1 million.

Total deferred costs related to the issuance of this loan total are $0.2 million.

Total deferred costs related to the issuance of this loan total were $0.2 million.

During the third quarter of fiscal year 2024, we approved plans to sell its Garden City facility.

In accordance with the original loan agreement, the sale of the Garden City facility would cause the associated loan to become immediately callable by the lender as those assets were pledged as collateral for the loan.

As such, the outstanding balance on the loan of $12.8 million was due immediately.

The transaction closed on April 1, 2024.

We repaid the total balance of the Vantage Garden City Loan in connection with the closing of the transaction on April 1, 2024.

Starion Ellendale Loan

On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”).

On February 16, 2023, APLD ELN-01 LLC, our wholly owned subsidiary, entered into a loan agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”).

The Ellendale Loan Agreement provides for a term loan (The "Ellendale Loan") in the principal amount of $20.0 million with a maturity date of February 3, 2028.

The Ellendale Loan Agreement contains customary covenants, representations and warranties and events of default.

The Ellendale Loan is secured by the Ellendale hosting facility, a security interest in the substantially all of the assets of the APLD ELN-01 LLC, and interests in all master hosting agreements related to the Ellendale hosting facility.

The Ellendale Loan Agreement provides for an interest rate of 7.48% per annum.

The proceeds of the Loan will be used to fund expansion on the Ellendale hosting datacenter.

Total deferred costs related to the issuance of this loan total are $0.2 million.

As of May 31, 2023, the total balance outstanding under the Ellendale Loan Agreement was $19.7 million.

On May 23, 2023, SAI Computing LLC, a wholly-owned subsidiary of the Company ("Sai"), entered into a Loan and Security Agreement (the "B.

Riley Loan") with B.

The Ellendale Loan is secured by the

Ellendale facility, a security interest in substantially all of the assets of APLD ELN-01 LLC, and a security interest in the form of a collateral assignment of Company’s rights and interests in all master hosting agreements related to the Ellendale Facility and records and data relating thereto.

As of May 31, 2024, deferred costs related to the issuance of this loan totaled $0.1 million.

As of May 31, 2024, the total balance outstanding under the Ellendale Loan Agreement was $16.1 million.The proceeds of the loan under the Ellendale Loan Agreement were used to fund expansion of the Ellendale, North Dakota hosting data center.

AI Bridge Loan

On January 30, 2024, we issued an Unsecured Promissory Note (the “AI Bridge Loan”) payable to AI Bridge Funding LLC (the “Lender”), providing for an unsecured loan in the aggregate principal amount of up to $20.0 million, of which $15.0 million was available immediately and funded upon the execution of the AI Bridge Loan.

The obligation of the Lender to advance the remaining $5.0 million shall be in the Lender’s sole discretion.

The AI Bridge Loan will mature on January 30, 2026 and bears interest at a rate of 12.5% per annum.

Additionally, upon the receipt by us or any of our subsidiaries of any cash proceeds from either the incurrence of any indebtedness (other than the AI Bridge Loan) or the issuance of any equity interests in the Company, which net proceeds total more than $35.0 million, we shall apply such net proceeds toward the prepayment of the outstanding principal of the AI Bridge Loan.

Pursuant to the terms of the AI Bridge Loan, we are obligated to pay to the Lender a repayment fee in an amount sufficient for the Lender to receive an aggregate amount equal to 1.25x the aggregate principal amount funded as loans by the Lender to us.

We elected to recognize the entire note at fair value under ASC 815, Derivatives and Hedging .

During the fiscal year ended May 31, 2024, we recognized a $13.8 million loss on change in fair value of debt related to the AI Bridge Loan which is included in our consolidated statements of operations.

During the fiscal fourth quarter 2024, the principal balance of the note, $20.0 million as of May 1, 2024, was converted into common stock pursuant to the terms of the AI Bridge Loan resulting in the Company issuing 8,421,146 in common stock to the Lender.

Accordingly, the AI Bridge Loan and the reserve of shares for issuance thereunder have been extinguished.

See "Note 9 - Stockholders' Equity" for further discussion on the Company’s fair value considerations of the warrants issued.

Affiliates of the Lender are both an investor in B.

Riley Financial, Inc.

and also an investment management client of B.

Riley Asset Management.

As previously disclosed, our Chairman and Chief Executive Officer, served as the President of B.

Riley Asset Management, and effective February 5, 2024, resigned from that position.

Vantage Transformer Loan

On February 8, 2024, APLD ELN-02 LLC, our wholly owned subsidiary, entered into a loan agreement with Vantage Bank and the Company as Guarantor (the “Vantage Transformer Loan”).

The Vantage Transformer Loan provides for a term loan in the principal amount of $3.7 million with a maturity date of February 8, 2029.

The Loan Agreement contains customary covenants, representations, warranties and events of default.

The Vantage Transformer Loan provides for an interest rate of 6.50% per annum.

The Vantage Transformer Loan is secured by a mortgage, security agreement and fixture financing statement covering certain real property situated in Dicey County, North Dakota.

The proceeds of the Vantage Transformer Loan were used to fund a transformer for its HPC location in Ellendale.

As of May 31, 2024, there was $3.6 million outstanding under the Vantage Transformer Loan.

As of the date of this report, the Vantage Transformer Loan has been repaid in full.

On May 23, 2023, Sai Computing LLC, one of our subsidiaries, entered into a Loan and Security Agreement (the “B.

Riley Loan and Security Agreement”) with B.

Riley Commercial Capital, LLC and B.

Riley Securities, Inc (collectively "B.

with the Company as Guarantor.

Riley Loan provides for a term loan of up to $50 million in the principal amount of 9.00% per annum.

Riley Securities, with the Company as Guarantor.

Riley Loan and Security Agreement provides for a term loan of up to $50 million in the principal with an interest rate of 9.00% per annum (the “B.

Riley Loan”).

The proceeds of the B.

Riley Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud services platform and datacenters by Sai, and for general corporate purposes and working capital.

Riley Loan contains events of default and covenants customary for such an agreement.

Riley Loan is secured by a security interest in substantially all of the assets of SAI as set forth in the B.

Riley Loan and a security interest in any proceeds of Sai's operations.

Pursuant to the B.

Riley Loan agreement, the Company unconditionally guaranteed Sai’s obligations to B.

Riley Loan contains initial fees of approximately $1.5 million that were reduced from the initial funds remitted to Sai.

Riley Loan also contains a term fee of $1 million that is due upon the Company's initial principal payment.

Finally, the B.

Riley Loan and Security agreement contains a commitment fee of 3% on any balance outstanding as of each quarter end beginning with the calendar quarter ending September 30, 2023.

As of May 31, 2023, the total outstanding balance under the B.

Riley Loan was $36.5 million.

The Company repaid the total balance of the B.

Riley Loan on July 17, 2023.

Riley Loan were used to help fund the buildout of our Cloud Services Business and data centers, and for general corporate purposes and working capital.

During the fiscal year ended May 31, 2024, we borrowed an additional $8.0 million and early repaid the total outstanding balance of $44.5 million.

Interest expense and deferred issuance cost amortization associated with the loan was

$0.7 million for the fiscal year ended May 31, 2024.

We recognized a $2.5 million loss on debt extinguishment associated with the early repayment of the outstanding balance for the fiscal year ended May 31, 2024.

On February 5, 2024, we entered into a Termination of Loan and Security Letter (the “Termination Letter”) with B.

Riley Commercial Capital, LLC and B.

Riley Securities, Inc.

which terminated the B.

Riley Loan and Security Agreement dated as of May 23, 2023, as amended, among the parties.

At the time of the Termination Letter, all principal, interest and fees under the B.

Riley Loan and Security Agreement had been paid in full.

No early termination penalty was paid in connection with the Termination Letter.

Cornerstone Bank Loan

On February 28, 2024, APLD GPU-01, LLC, our wholly owned subsidiary, entered into a Loan Agreement with Cornerstone Bank and the Company as Guarantor (the “Cornerstone Bank Loan”).

The Cornerstone Bank Loan provides for a term loan in the principal amount of $16.0 million with a maturity date of March 1, 2029.

The Cornerstone Bank Loan contains customary covenants, representations, warranties and events of default.

The Cornerstone Bank Loan provides for an interest rate of 8.59% per annum.

The Cornerstone Bank Loan is secured by a security interest in multiple Terms of Service Agreements for HPC based systems related to AI Cloud Computing Services, which are to be serviced at the Jamestown hosting facility.

The proceeds of the Cornerstone Bank Loan will be used to finance, in part, existing improvements to real property.

As of May 31, 2024, there was $15.6 million outstanding under the Cornerstone Bank Loan.

Yorkville Convertible Debt

On March 27, 2024, we entered into the March PPA with YA.

In accordance with the terms of the March PPA, YA Fund agreed to advance up to $50 million to us pursuant to two convertible unsecured promissory notes (as amended, the “Initial YA Notes”).

We issued the first Promissory Note on March 27, 2024, in the principal amount of $40 million, less a five percent original issue discount.

The second Promissory Note was issued in the principal amount of $10 million, less a five percent original issue discount, within two trading days after a resale registration statement described below is declared effective, which declaration occurred on April 23, 2024.

The Initial YA Notes are convertible into shares of the common stock.

Pursuant to the terms of the Initial YA Notes, and except as set forth below, beginning on May 1, 2024, and so long as there is an outstanding balance under the Initial YA Notes, the YA Fund may, by providing a written conversion notice to the Company, convert a portion of the Initial YA Notes at a price per share equal to the lower of:

(a) $6.00 and (b) 95% of the lowest daily volume weighted average price of the common stock during the five trading days immediately prior to the date of such conversion, subject to a floor price of $3.00, which floor price may be reduced from time to time by us or as provided in the Consent (as defined below).

As of the date of this report, $26.0 million of the Initial YA Notes had been converted into approximately 7.4 million shares of common stock.

On May 24, 2024, we entered into the May PPA with YA Fund.

In accordance with the terms of the May PPA, YA Fund agreed to advance $42.1 million, less a five percent original issue discount, to the Company pursuant to a convertible unsecured promissory note (as amended, the “May Note” and together with the Initial YA Notes, the "YA Notes").

In connection with the May PPA, we and YA Fund agreed to amend certain terms of the YA Notes, including amending the Monthly Maximum Amount (as defined in the YA Notes) to $16.0 million per month, in the aggregate, across the YA Notes.

The May Note is convertible into shares of the Company’s common stock.

Pursuant to the terms of the May Note, so long as there is an outstanding balance under the May Note, YA Fund may, by providing a written conversion notice to the Company, convert a portion of the May Note at a price per share equal to the lower of:

(a) $8.00 and (b) 95% of the lowest daily volume weighted average price of the common stock during the five trading days immediately prior to the date of such conversion, subject to a floor price of $3.00, which floor price may be reduced from time to time by us or as provided in the Consent.

As of the date of this report, $38.0 million of the May Note had been converted into approximately 8.8 million shares of common stock.

The YA Notes bear interest at an annual rate of zero percent (0%), provided, however, that for so long as an Event of Default (as defined in the YA Notes) has occurred and remains uncured, the interest on the principal outstanding balance under the outstanding Promissory Notes shall accrue at an annual rate of eighteen percent (18%).

The Initial YA Notes

mature on April 8, 2025 and the May Note matures on June 6, 2025.

We incurred issuance costs and original issuance discounts totaling approximately $7.7 million associated with the issuance of the YA Notes.

We have elected to present the Yorkville Convertible Debt at fair value in the consolidated balance sheets (see "Note 10 - Fair Value Measurements" for further discussion).

The aggregate principal amount outstanding under the YA Notes as of the date of this report is $28.1 million.

Recent Developments

Series E Preferred Stock

The Company has closed on several offerings of the Series E Preferred Stock subsequent to May 31, 2024.

As of the date of this report, we sold approximately 301,673 shares of Series E Preferred Stock for net proceeds of approximately $6.9 million in total.

CIM Arrangement

On June 7, 2024, APLD Holdings 2 LLC (“APLD Holdings 2”), one of our subsidiaries, entered into a promissory note (the “CIM Promissory Note”) with CIM APLD Lender Holdings, LLC (the “CIM Lender”).

The CIM Promissory Note provides for an initial borrowing of $15 million, which was drawn on June 7, 2024, and subsequent borrowings of up to $110 million, which will be available subject to the satisfaction of certain conditions as outlined in the CIM Promissory Note.

In addition to the initial borrowing, the Note includes an accordion feature that allows for up to an additional $75 million of borrowings.

Principal amounts repaid under the Note will not be available for reborrowing.

As of the date of this report, the total balance outstanding under the CIM Promissory Note is approximately $105 million.

As partial consideration for the CIM Promissory Note, we issued warrants to purchase up to 9,265,366 shares of common stock to the CIM Lender in a registered direct offering.

On August 11, 2024, we and the CIM Lender entered into a Waiver Agreement (the “Waiver”), whereby the CIM Lender agreed to waive the satisfaction of certain conditions for the subsequent borrowings, allowing us to draw an additional $20 million (net of original discount and fees) of borrowings under the CIM Promissory Note.

As partial consideration for the Waiver, we issued warrants to the CIM Lender to purchase up to 2,964,917 shares of common stock in a private placement pursuant to Section 4(a)(2) of the Securities Act.

Yorkville Amendment

In connection with the CIM Promissory Note, we also entered into a Consent, Waiver and First Amendment to Prepaid Advance Agreements (the “Consent”) with YA Fund.

In exchange for YA's consent to the transaction with the CIM Lender, we agreed to issue an aggregate of 100,000 shares of common stock to YA Fund and to conditionally lower the floor price from $3.00 to $2.00 so long as the daily VWAP is less than $3.00 per share of common stock for five out of seven trading days.

We further agreed to deliver a security agreement whereby our subsidiary, Applied Digital Cloud Corporation, would grant a springing lien on substantially all of its assets subject to customary carve-outs to secure the promissory notes issued in favor of YA Fund.

Pursuant to the Consent, YA Fund also consented to future project-level financing at the HPC Ellendale Facility.

In addition, pursuant to the terms of the Consent, certain provisions of the March PPA and the May PPA were amended as follows:

if (i) the Registration Statement on Form S-3 filed by the Company on April 15, 2024 (the “April Registration Statement”) becomes ineffective, (ii) the Registration Statement on Form S-1 filed by the Company on May 31, 2024 (the “May Registration Statement”) is not declared effective by the SEC by July 8, 2024 (the “Effectiveness Deadline”), or (iii) the May Registration Statement becomes ineffective, then starting on the Effectiveness Deadline and continuing until the earlier of (i) the date on which the YA Notes are no longer outstanding, and (ii) the date on which (A) if the May Note is outstanding, the May Registration Statement is effective, and (B) if the Initial Notes are outstanding, the April Registration Statement is effective, we are obligated to prepay the YA Notes (on a pro rata basis) in equal weekly installments of either $2.5 million in cash or $5.0 million in shares of common stock as determined by YA Fund in its sole discretion.

If YA Fund elects to make such prepayments in shares of common stock, YA Fund will receive a number of shares of common stock equal to (x) $5 million, divided by (y) an amount equal to 95% of the lowest daily VWAP during the five trading day period ending on the trading day immediately before the payment date.

Increase In Authorized Shares

On June 11, 2024, we filed a Certificate of Amendment to our Second Amended and Restated Articles of Incorporation, as amended (the “Certificate of Amendment”).

Pursuant to the Certificate of Amendment, the number of authorized shares of common stock was increased to 300,000,000.

The Certificate of Amendment became effective upon filing on June 11, 2024.

At-the-Market Sales Agreement

On July 9, 2024, we entered into the Sales Agreement.

Up to $125,000,000 of shares of our common stock may be issued if and when sold pursuant to the Sales Agreement.

As of the date of this report, approximately 2.9 million shares of our common stock have been issued and sold under the Sales Agreement for approximate proceeds to us of $16.4 million.

Garden City Release of Escrow Funds

On July 30, 2024, we announced that the conditional approval requirements related to the release of the escrowed funds from the sale of our Garden City hosting facility have been met.

As of the date of this report, we have received the remaining $25 million of the purchase price, previously held in escrow pending such conditional approval.

On August 28, 2024, the Company entered into the SEPA, which was amended on August 29, 2024.

Pursuant to the SEPA, subject to certain conditions and limitations, the Company has the option, but not the obligation, to sell to YA Fund, and YA Fund must subscribe for, an aggregate amount of up to $250.0 million of common stock, at the Company’s request any time during the commitment period commencing on September 30, 2024, and terminating on the first day of the month next following the 36-month anniversary of September 30, 2024, as further described in Item 9B(a) below.

In connection with the execution of the SEPA, the Company agreed to pay a structuring fee (in cash) to YA Fund in the amount of $25,000.

Additionally, the Company agreed to pay a commitment fee of $2,125,000 to YA Fund, payable on the date of the SEPA, in the form of the issuance of 456,287 shares of common stock (the “Commitment Shares”), representing $2,125,000 divided by the average of the daily VWAPs of the common stock during the three trading days immediately prior to August 28, 2024.

Pursuant to the SEPA, the Company agreed to file a registration statement with the SEC for the resale under the Securities Act by YA Fund of the common stock issued under the SEPA, including the Commitment Shares.

The Company shall not have the ability to request any advances under the SEPA until such resale registration statement is declared effective by the SEC.

Results of Operations

Results of Operations for the fiscal year ended May 31, 2024 compared to fiscal year ended May 31, 2023

The following table sets forth key components of the results of operations of Applied Digital Corporation during the three months and fiscal year ended May 31, 2023 and 2022 (in thousands).

Three Months Ended Year Ended

May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022

Hosting revenue $ 22,038 $ 7,523 $ 55,392 $ 8,549

Cost of revenues $ 15,950 $ 7,433 $ 44,388 $ 9,506

Gross profit 6,088 90 11,004 (957)

The following table sets forth key components of the results of operations of Applied Digital Corporation during the fiscal year ended May 31, 2024 and 2023 (in thousands).

Fiscal Year Ended

May 31, 2024 May 31, 2023

Revenue $ 150,814 $ 40,984

Related party revenue 14,761 14,408

Total revenue 165,575 55,392

Costs and expenses:

Cost of revenues 148,340 44,388

Selling, general and administrative (1)

98,461 55,059

Loss on classification as held for sale 15,417 —

Loss from legal settlement 2,380 —

Total costs and expenses 264,598 99,447

Operating loss (99,023) (44,055)

Other income (expense):

Interest Expense $ (855) $ (112) $ (1,980) $ (112)

Gain on extinguishment of accounts payable — — — 406

Interest expense, net (2)

Loss on change in fair value of debt 7,401 —

Loss on change in fair value of related party debt 13,812 —

Loss on extinguishment of debt (3)

Total other expense, net (855) (112) (2,074) (1,048)

Net loss from continuing operations before income tax expenses (7,099) (4,378) (46,129) (21,946)

Income tax benefit (expense) 243 (266) 523 (540)

Net loss from continuing operations (6,856) (4,643) (45,606) (22,486)

Net loss from discontinued operations, net of income taxes — 1,826 — (1,044)

Net loss including noncontrolling interests (6,856) (2,817) (45,606) (23,530)

Net loss before income tax expenses (149,575) (46,129)

Income tax expense (benefit) 96 (523)

Net loss (149,671) (45,606)

Net loss attributable to noncontrolling interest (397) (960)

Net loss attributable to Applied Digital Corporation $ (149,274) $ (44,646)

Basic and diluted net (loss) gain per share:

Continuing Operations $ (0.07) $ (0.06) $ (0.49) $ (0.39)

Discontinued Operations $ — $ 0.02 $ — $ (0.02)

Basic and diluted net loss per share $ (0.07) $ (0.04) $ (0.49) $ (0.41)

Basic and diluted net loss per share attributable to Applied Digital Corporation $ (1.31) $ (0.48)

Basic and diluted weighted average number of shares outstanding 114,061,414 93,976,233

Adjusted Amounts (a)

Adjusted Operating Loss from Continuing Operations 293 (3,933) (7,320) (6,222)

Adjusted Operating Margin from Continuing Operations 1 % (52) % (13) % (73) %

Adjusted Net Loss from Continuing Operations (319) (4,311) (8,871) (7,810)

Other Financial Data (a)

Adjusted Amounts (4)

Adjusted operating (loss) income $ (50,991) $ (7,320)

Adjusted operating margin (31) % (13) %

Adjusted net (loss) income attributable to Applied Digital Corporation $ (77,522) $ (7,912)

Adjusted net (loss) income attributable to Applied Digital Corporation per diluted share $ (0.68) $ (0.08)

Other Financial Data (4)

EBITDA $ (42,986) $ (35,922)

2 unchanged sentences

as a percentage of revenues 15 % 1 %

Adjusted Gross Profit 7,827 1,100 15,438 113

as a percentage of revenues 36 % 15 % 28 % 1 %

(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 May 31, 2023 compared to the three months ended May 31, 2022

Hosting revenues increased by $14.5 million, or 193%, from $7.5 million for the three months ended May 31, 2022 to $22.0 million for the three months ended May 31, 2023.

The increase in hosting revenues was driven by the increase in energized capacity with the Company's Ellendale, North Dakota facility energizing during the three months ended May 31, 2023.

Cost of Revenues

Cost of revenues increased by $8.6 million, or 116%, from $7.4 million for the three months ended May 31, 2022 to $16.0 million for the three months ended May 31, 2023.

The increase in cost of revenues was primarily driven by the energization of the Company's Ellendale, North Dakota facility during the three months ended May 31, 2023.

The primary drivers of the change to cost of revenues for the three months ended May 31, 2023 were:

• approximately $6.7 million increase in energy costs used to generate hosting revenues;

• approximately $0.9 million increase in personnel expenses directly attributable to generating hosting revenues;

• approximately $0.7 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues;

• approximately $0.3 million increase in other expenses directly attributable to generating hosting revenues.

Operating Expenses

Selling, general and administrative expenses increased by $7.9 million, or 181%, from $4.4 million for the three months ended May 31, 2022 to $12.3 million for the three months ended May 31, 2023.

The primary drivers of the change to selling, general and administrative expense for the three months ended May 31, 2023 were:

• approximately $5.2 million increase in stock-based compensation expense;

• approximately $0.9 million increase in depreciation and amortization expense not directly attributable to property and equipment supporting hosting revenues;

• approximately $0.9 million increase in employee salaries and benefits expense not directly attributable to revenues;

• approximately $0.6 million increase in insurance expense;

• approximately $1.1 million increase in other selling, general, and administrative expenses such as computer and software expenses.

These factors are partially offset by an approximately $0.8 million decrease in professional service expense, which is attributable to the increase in full time employees that have replaced previously outsourced professional services.

Other Expense

Interest expense increased $0.8 million, or approximately 681% , from interest expense of $0.1 million for the three months ended May 31, 2022 to $0.9 million for the three months ended May 31, 2023.

The increase was driven by the increase in finance leases and in the Company’s debt obligations between periods.

Income tax benefit (expense)

The income tax benefit increased by $0.5 million or 191% from a $0.3 million expense for the three months ended May 31, 2022 to a $0.2 million benefit for the three months ended May 31, 2023.

This change was driven by a change in valuation allowance for the three months ended May 31, 2023 compared to the three months ended May 31, 2022.

Loss from Discontinued Operations

Gain from discontinued operations decreased by $1.8 million, or 100%, from $1.8 million for the three months ended May 31, 2022 to zero for the three months ended May 31, 2023.

The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.

Commentary on Results of Operations Comparative Results for the fiscal year ended May 31, 2023 compared to the fiscal year ended May 31, 2022

Hosting revenues increased by $46.9 million, or 548%, from $8.5 million for the year ended May 31, 2022 to $55.4 million for the year ended May 31, 2023.

The increase in hosting revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.

(1) Includes related party selling, general and administrative expense of $0.6 million and $0.1 million for the fiscal years ended May 31, 2024 and May 31, 2023, respectively.

(2) Includes related party interest expense of $5.7 million and $0.1 million for the fiscal years ended May 31, 2024 and May 31, 2023, respectively.

(3) Amounts included in the fiscal year ended May 31, 2024 are related to the extinguishment of related party debt.

(4) 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 Management's Discussion and Analysis.

Commentary on Results of Operations for the fiscal year ended May 31, 2024 compared to the fiscal year ended May 31, 2023

Revenue increased $109.8 million, or 268%, from $41.0 million for the fiscal year ended May 31, 2023 to $150.8 million for the fiscal year ended May 31, 2024, which increase was primarily driven by increased capacity across the Company’s three Data Center Hosting facilities between the periods, as well as the Company beginning to recognize revenue from its Cloud Services Business segment in the third quarter of the fiscal year ended May 31, 2024 as a result of the launch of services provided by the Cloud Services Business during that year.

Related party revenue increased $0.4 million, or 2%, from $14.4 million for the fiscal year ended May 31, 2023 to $14.8 million for the fiscal year ended May 31, 2024, primarily driven by increased uptime at the Company’s Jamestown, North Dakota facility throughout the period.

Cost of revenues

Cost of revenues increased by $104.0 million, or 234%, from $44.4 million for the fiscal year ended May 31, 2023 to $148.3 million for the fiscal year ended May 31, 2024.

The increase in cost of revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.

The primary drivers of the change to cost of revenues for the fiscal year ended May 31, 2023 were:

• approximately $28.5 million increase in energy costs used to generate hosting revenues;

• approximately $2.7 million increase in personnel expenses directly attributable to generating hosting revenues;

• approximately $3.2 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues;

• approximately $0.5 million increase in other expenses directly attributable to generating hosting revenues.

Operating Expenses

Selling, general and administrative expenses increased by $35.2 million, or 176%, from $19.9 million for the fiscal year ended May 31, 2022 to $55.1 million for the fiscal year ended May 31, 2023.

The primary drivers of the change to selling, general and administrative expense for the fiscal year ended May 31, 2023 were:

• approximately $19.7 million increase in stock-based compensation expense;

• approximately $2.9 million increase in depreciation and amortization expense not directly attributable to property and equipment supporting hosting revenues;

• approximately $4.0 million increase in employee salaries and benefits expense not directly attributable to revenues;

• approximately $2.9 million increase in insurance expense;

• approximately $1.5 million increase in professional service expenses incurred as the Company experienced a full year of greater administrative needs;

• approximately $4.2 million increase in other selling, general, and administrative expenses such as computer and software expenses.

Other Expense

Interest expense increased $1.9 million, or 1,666% , from $0.1 million for the fiscal year ended May 31, 2022 to $2.0 million for the fiscal year ended May 31, 2023.

The change is driven by the increase in finance leases and change in the Company’s debt obligations between periods.

Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million for the fiscal year ended May 31, 2022 to $0.1 million for the fiscal year ended May 31, 2023.

This decrease was driven by the lack of extinguishment of our related party notes payable by conversion to common stock, which occurred during the fiscal year ended May 31, 2022, compared to a smaller extinguishment of term debt that was recognized in the fiscal year ended May 31, 2023.

Income tax benefit (expense)

Income tax benefit increased $1.0 million or approximately 193% from a $0.5 million expense for the year ended May 31, 2022 to approximately $0.5 million benefit for the fiscal year ended May 31, 2023.

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 fiscal year ended May 31, 2023.

The changes in cost of revenues are categorized as follows:

• approximately $42.9 million increase in energy costs;

• approximately $40.1 million increase in depreciation and amortization expense due to an increase in owned and leased assets;

• approximately $7.9 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount due to the growth in the business;

• approximately $5.9 million increase in lease and related expenses for the use of data center space to support the Company’s Cloud Services Business;

• approximately $7.2 million increase in other expenses directly attributable to revenue generation.

Selling, general and administrative expense

Selling, general and administrative expense increased by $43.4 million, or 79%, from $55.1 million for the fiscal year ended May 31, 2023 to $98.5 million for the fiscal year ended May 31, 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 $27.7 million increase in depreciation and amortization expense due to an increase in owned and leased assets that are not yet being used to generate revenue;

• approximately $13.0 million increase in other expenses such as operating leases expense for data center space not yet being used to generate revenue;

• approximately $9.0 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 $6.8 million increase in personnel expenses largely driven by increases in headcount to support the business;

• approximately $4.0 million increase in other selling, general, and administrative expense such as insurance premiums and computer and software expenses.

Loss on classification of held for sale

Loss on classification of held for sale was $15.4 million for the fiscal year ended May 31, 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 fiscal year ended May 31, 2024 primarily due to a settlement agreement entered into by the Company with respect to employment-related claims by a former executive.

The terms of the confidential 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 $24.9 million, or 1255% , from $2.0 million for the fiscal year ended May 31, 2023 to $26.8 million for the fiscal year ended May 31, 2024 primarily driven by increases in finance leases and debt obligations between periods.

Loss on change in fair value of debt

Loss on change in fair value of debt was $7.4 million for the fiscal year ended May 31, 2024 due to the valuation associated with the Company’s borrowings under the Yorkville Advisors Loan.

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

Loss on change in fair value of related party debt

Loss on change in fair value of related party debt was $13.8 million for the fiscal year ended May 31, 2024.

Approximately $8.1 million was due to the valuation associated with the Company’s borrowings under the AI Bridge Loan and $5.7 million was due to the valuation associated with warrants issued to AI Bridge Funding LLC.

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

Loss on extinguishment of debt

Loss on extinguishment of debt increased $2.4 million from $0.1 million for the fiscal year ended May 31, 2023 to $2.5 million for the fiscal year ended May 31, 2024.

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

Riley related party loan during the fiscal year ended May 31, 2024.

Income tax benefit

Income tax benefit decreased $0.6 million, or 118%, from a $0.5 million benefit for the fiscal year ended May 31, 2023 to a $0.1 million expense for the fiscal year ended May 31, 2024.

This change was driven by a change in valuation allowance for the fiscal year ended May 31, 2024 compared to the fiscal year ended May 31, 2023.

Loss from Discontinued Operations

Loss from discontinued operations decreased $1.0 million, or 100%, from $1.0 million for the fiscal year ended May 31, 2022 to zero for the year ended May 31, 2023.

The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.

Non-GAAP Measures

Adjusted Operating Loss and Adjusted Net Loss

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represent operating loss and net loss, respectively, from continuing operations excluding stock-based compensation and nonrecurring 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, Applied Digital’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.

Applied Digital’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.

Applied Digital 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 Applied Digital’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 financial 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 Annual Report on Form 10-K 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 fiscal third quarter of 2024, the Company updated its presentation of non-GAAP financial 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 attributable to Applied Digital Corporation, Adjusted net loss attributable to Applied Digital Corporation per diluted share, and Adjusted EBITDA.

EBITDA, Adjusted EBITDA, Adjusted net loss attributable to Applied Digital Corporation, and Adjusted net loss attributable to Applied Digital Corporation per diluted share are non-GAAP financial 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 financial measures that represent operating loss and net loss, respectively, excluding stock-based compensation, non-recurring repair expenses, diligence, acquisition, disposition and integration expenses, litigation expenses, non-recurring research and development expenses, loss on classification of held for sale, accelerated depreciation and amortization, and loss on legal settlement.

Adjusted Net Loss is Adjusted Operating Loss further adjusted for the losses associated with changes in fair value of debt, related party debt and warrants issued to to related parties, as well as 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, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs, one-time costs related to electricity set up, 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 Applied Digital’s performance that is neither required by, nor presented in accordance with, GAAP.

Applied Digital 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, Applied Digital may incur future expenses similar to those excluded when calculating these measures.

In addition, Applied Digital’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.

Applied Digital’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.

Applied Digital 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 Applied Digital’s business.

Adjusted Gross Profit

“Adjusted Gross Profit” is a non-GAAP measure that represents gross profit adjusted for depreciation expense and one-time charges related to electricity set up within cost of revenues.

We believe this is a useful metric as it provides additional information regarding gross profit aside from significant non-cash expense in depreciation.

However, Applied Digital’s presentation of this measure should not be construed as an inference that its future results will be unaffected by other factors within cost of revenues.

Applied Digital’s computation of Adjusted Gross Profit may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Gross Profit in the same fashion.

Because of these limitations, Adjusted Gross Profit should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Applied Digital compensates for these limitations by relying primarily on its GAAP results and using Adjusted Gross Profit on a supplemental basis.

You should review the reconciliation of gross profit to Adjusted Gross Profit above and not rely on any single financial measure to evaluate Applied Digital’s business.

Non-GAAP Measures

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, non-recurring repair expenses, diligence, acquisition, disposition and integration expenses, litigation expenses, non-recurring research and development expenses, loss on classification as held for sale, accelerated depreciation and amortization, the losses associated with changes in fair value of debt, related party debt and warrants issued to related parties, as well as the loss on extinguishment of debt and the loss on legal settlement.

Reconciliation of GAAP to Non-GAAP Measures

Three Months Ended Fiscal Year Ended

$ in thousands May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022

Fiscal Year Ended

$ in thousands May 31, 2024 May 31, 2023

Adjusted operating loss

Operating Loss from Continuing Operations (GAAP) $ (6,244) $ (4,266) $ (44,055) $ (20,898)

Operating loss (GAAP) $ (99,023) $ (44,055)

Stock-based compensation 17,108 32,072

Gain on Extinguishment of Accounts Payable — — — (406)

Loss on Extinguishment of Debt — — 94 1,342

Non-recurring professional service costs 727 240 2,164 1,310

One-time electricity charges — — 114 —

Other non-recurring expenses 615 93 2,290 93

Adjusted Operating Loss from Continuing Operations (Non-GAAP) $ 293 $ (3,933) $ (7,320) $ (6,222)

Adjusted operating margin from Continuing Operations 1 % (52) % (13) % (73) %

Adjusted net income (loss)

Net Loss from Continuing Operations (GAAP) $ (6,856) $ (4,643) $ (45,606) $ (22,486)

Non-recurring repair expenses (a)

Diligence, acquisition, disposition and integration expenses (b)

Litigation expenses (c)

Research and development expenses (d)

Loss on classification as held for sale

Accelerated depreciation and amortization (e)

Loss on legal settlement

Other non-recurring expenses (f)

Adjusted operating loss (Non-GAAP) $ (50,991) $ (7,320)

Adjusted operating margin (31) % (13) %

Adjusted net loss attributable to Applied Digital Corporation

Net loss attributable to Applied Digital Corporation (GAAP) $ (149,274) $ (44,646)

Stock-based compensation 17,108 32,072

Gain on Extinguishment of Accounts Payable — — — (406)

Non-recurring repair expenses (a)

Diligence, acquisition, disposition and integration expenses (b)

Litigation costs (c)

Research and development expenses (d)

Loss on classification as held for sale

Accelerated depreciation and amortization (e)

Loss on change in fair value of debt 7,401 —

Loss on change in fair value of related party debt 8,116 —

Loss on fair value of warrants issued to related parties

Loss on extinguishment of debt

Non-recurring professional service costs 727 240 2,164 1,310

One-time electricity charges — — 114 —

Other non-recurring expenses 615 93 2,290 93

Adjusted net loss from Continuing Operations (Non-GAAP) $ (319) $ (4,310) $ (8,871) $ (7,810)

Loss on legal settlement

Other non-recurring expenses (f)

Adjusted net loss attributable to Applied Digital Corporation (Non-GAAP) $ (77,522) $ (7,912)

Adjusted net loss attributable to Applied Digital Corporation per diluted share (Non-GAAP) $ (0.68) $ (0.08)

EBITDA and Adjusted EBITDA

Net Loss from Continuing Operations (GAAP) $ (6,856) $ (4,643) $ (45,606) $ (22,486)

Interest Expense 855 112 1,980 112

Income Tax Benefit (Expense) (242) 266 (523) 540

Depreciation and Amortization 2,636 875 7,267 1,120

Net loss attributable to Applied Digital Corporation (GAAP) $ (149,274) $ (44,646)

Interest expense, net 26,832 1,980

Income tax expense (benefit) 96 (523)

Depreciation and amortization (e)

EBITDA (Non-GAAP) $ (42,986) $ (35,922)

Stock-based compensation 17,108 32,072

Gain on Extinguishment of Accounts Payable — — — (406)

Non-recurring repair expenses (a)

Diligence, acquisition, disposition and integration expenses (b)

Litigation expenses (c)

Research and development expenses (d)

Loss on classification as held for sale

Loss on change in fair value of debt 7,401 —

Loss on change in fair value of related party debt 8,116 —

Loss on fair value of warrants issued to related parties

Loss on extinguishment of debt

Non-recurring professional service costs 727 240 2,164 1,310

One-time electricity charges — — 114 —

Other non-recurring expenses 615 93 2,290 93

Loss on legal settlement

Other non-recurring expenses (f)

Adjusted EBITDA (Non-GAAP) $ 24,459 $ 812

Adjusted Gross Profit

Gross profit (GAAP) $ 6,088 $ 90 $ 11,004 $ (957)

Depreciation and amortization in cost of revenues 1,739 1,010 4,320 1,070

One-time electricity charges — — 114 —

Adjusted Gross Profit (Non-GAAP) $ 7,827 $ 1,100 $ 15,438 $ 113

Sources of Liquidity

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 prepayments from hosting customers.

The Company's primary term loans are noted below.

On July 25, 2022, the Company entered into the Starion Loan Agreement.

The Starion Loan Agreement provides for the Starion Term Loan which has a total principal balance of $15.0 million, with an interest rate per annum of 6.50%.

Approximately $7.1 million of the proceeds were used to pay down the remaining Vantage term loan balance that was entered into on March 11, 2022.

The remaining proceeds of the term loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.

On November 7, 2022, the Company entered into the Vantage Garden City Loan Agreement, with a maximum total principal value of $15 million, and an interest rate per annum of 6.15%.

As of February 28, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement.

The proceeds of the Vantage Garden City Loan will be used for the costs and expenses of a building at the Garden City Facility.

On February 16, 2023, the Company entered into the Starion Ellendale Loan Agreement with Starion Bank.

This agreement provides for a term loan in the principal amount of $20 million with a maturity date of February 3, 2028.

The loan provides for an interest rate of 7.48% per annum.

The proceeds of the loan will be used to fund expansion on the Ellendale Facility.

On March 30, 2023, the Company received funding for the Starion Ellendale Loan.

(a) Represents costs incurred in the repair and replacement of equipment at the Company's Ellendale data center hosting facility as a result of the previously disclosed power outage.

(b) Represents legal, accounting and consulting costs incurred in association with certain discrete transactions and projects.

(c) Represents non-recurring litigation expense 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.

(d) Represents specific non-recurring research and development activities related to the Company’s business expansion that the Company does not expect to incur on a regular basis.

(e) 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 of Adjusted EBITDA.

(f) Represents expenses that are not representative of the Company’s expected ongoing costs and is presented for comparative purposes only.

Sources of Liquidity and Capital Resources

As of May 31, 2024, we had unrestricted cash and cash equivalents of $3.3 million and negative working capital of $355.3 million, inclusive of assets held for sale.

Historically we have incurred losses and have relied on equity and debt financings to fund our 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 6 - Related Party Transactions" and "Note 7 - Debt" in the notes to the consolidated financial statements included in this Annual Report on Form 10-K for more information on our term and related party loans.

On May 23, 2023, we received funding of $36.5 million, net of issuance fees, pursuant to the B.

Riley Loan and Security Agreement.

During the fiscal year ended May 31, 2024, we borrowed an additional $8.0 million and early repaid the total outstanding balance of $44.5 million.

Interest expense and deferred issuance cost amortization associated with the loan was $0.7 million for the fiscal year ended May 31, 2024.

We recognized a $2.5 million loss on debt extinguishment associated with the early repayment of the outstanding balance for the fiscal year ended May 31, 2024.

See “Note 6 - Related Party Transactions” and “Note 6 – Related Party Transactions” for further discussion of the B.

Riley Loan and Security Agreement.

On June 27, 2023, we began issuing and selling common stock under an "at the market" sales agreement, with Craig-Hallum Capital, pursuant to which we may sell up to $125 million in aggregate proceeds from sales of common stock.

During the fiscal year ended May 31, 2024, we sold approximately 18.9 million shares in total.

Net proceeds, less commission and legal fees of approximately $4.0 million, were approximately $121.2 million.

The at the market offering was completed in December 2023.

On January 30, 2024, we issued the AI Bridge Loan and received $15 million, net of issuance fees.

See “Note 6 –Related Party Transactions” for further discussion of the AI Bridge Loan.

On February 8, 2024, we received funding of $3.6 million, net of issuance fees, pursuant to the Vantage Transformer Loan.

The proceeds of the Vantage Transformer Loan were used to fund a transformer for our HPC location in Ellendale.

See “Note 7 – Debt” for further discussion of the Vantage Transformer Loan.

On March 14, 2024, APLD – Rattlesnake Den I LLC, our subsidiary, 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 data center facility located in Garden City, Texas.

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

In addition, as of the date of this report, we have received the remaining $25 million of the purchase price held in escrow.

During the fiscal year ended May 31, 2024, we received $148.1 million in payments for future data center hosting services.

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

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

On May 23, 2023, the Company entered into the B.

Riley Loan and Security Agreement with B.

Riley Commercial Capital, LLC and B.

Riley Securities.

Riley Loan and Security Agreement provides for a term loan in the principal amount of up to $50 million, with an interest rate of 9.00% per annum.

The proceeds of the Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud platform and datacenters by the Company, and for general corporate purposes and working capital.

The Company was initially advanced $34.9 million in funding, net of issuance fees of $1.6 million.

The Company repaid the total balance of the B.

Riley Loan on July 17, 2023.

See Note 7 - Debt to the consolidated financial statements included in this Annual Report on Form 10-K for more information on our term 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 shares of Common Stock.

The Company has sold approximately 7.9 million shares.

Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.

During the fiscal year ended May 31, 2023, we received $100.1 million in payments for future hosting services.

During the fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations.

During the fiscal year ended May 31, 2023, we have generated revenue from co-hosting, but incurred net losses from operations.

As of May 31, 2023 and May 31, 2022, we had cash and cash equivalents of $29.0 million and $38.8 million, respectively, and an accumulated deficit of $100.7 million and $56.1 million, respectively.

See "Note 7 - Debt" for further discussion of the Cornerstone Bank Loan.

On March 27, 2024, we entered into the March PPA with YA Fund .

In accordance with the terms of the March PPA, on March 27, 2024, YA Fund agreed to advance to us up to $50 million, pursuant to the Initial YA Notes.

On May 24, 2024, we entered into the May PPA with YA Fund.

In accordance with the terms of the May PPA, YA Fund agreed to advance $42.1 million, less a five percent original issue discount, to the Company pursuant the May Note.

On May 16, 2024, we entered into the Dealer Manager Agreement with the “Dealer Manager, pursuant to which the Dealer Manager has agreed to serve as our agent and dealer manager for our offering of up to 2,000,000 shares of Series E Preferred Stock.

As of the date of this report, we sold approximately 301,673 shares of Series E Preferred Stock for net proceeds of approximately $6.9 million in total.

During the month ended May 31, 2024, we began sales of common stock under a new “at the market” sale agreement with Roth Capital Partners, LLC pursuant to which we could sell up to $25 million in aggregate proceeds of common stock.

As of the date of this report, we have sold approximately 2.7 million shares for net proceeds of approximately $9.6 million in total.

Commission and legal fees related to the issuance totaled $0.3 million.

The at the market offering was completed in June 2024.

Funding Requirements

We have experienced net losses through the periods ended May 31, 2023.

Our transition to profitability is dependent on the successful operation of our hosting facilities.

We believe that amounts we received from proceeds from our term loans, proceeds from stock offerings, and payments we have received from our hosting operations 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.

We have experienced net losses through the period ended May 31, 2024.

Our transition to profitability is dependent on the successful operation of our three lines of business.

We expect 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 and meet our working capital needs for at least the next 12 months and all of our known requirements and plans for cash.

However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our ongoing operations and development plans.

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 and as we bear the costs of being a public company.

We believe that the significant investments in property and equipment continue during calendar 2023 as we continue to grow our AI cloud services business.

We also expect that our revenues will increase as we continue to bring online additional capacity at existing datacenter facilities and as we begin to provide services to AI cloud services and HPC customers.

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.

Summary of Cash Flows

The following table provides information about Applied Digital’s net cash flow for the fiscal years ended May 31, 2023 and May 31, 2022.

The following table provides information about the Company’s net cash flow for the fiscal year ended May 31, 2024 and May 31, 2023, respectively.

Fiscal Year Ended

$ in thousands May 31, 2024 May 31, 2023

Net cash provided by (used in) operating activities $ 58,735 $ (872)

Net cash provided by operating activities $ 13,793 $ 58,735

Net cash used in investing activities (172,436) (132,088)

Net cash provided by financing activities 146,757 70,628

Net change in cash, cash equivalents, and restricted cash (2,725) $ 34,549

Cash, cash equivalents, and restricted cash at beginning of period 46,299 $ 11,750

Net decrease in cash and cash equivalents (11,886) (2,725)

Cash, cash equivalents, and restricted cash at beginning of year 43,574 46,299

Cash, cash equivalents, and restricted cash at end of period $ 31,688 $ 43,574

Commentary on cash flows for the fiscal year ended May 31, 2023

Operating Activities

The net cash provided by operating activities of $58.7 million for the fiscal year ended May 31, 2023 consisted primarily of the following:

• $32.1 million non-cash adjustment for stock-based compensation expense;

• $26.8 million increase in customer deposits due to the Company executing new contracts during the period;

• $44.8 million increase in deferred revenue due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.

The above factors were partially offset by the $45.6 million loss from continuing operations

Investing Activities

The net cash used in investing activities of $132.1 million for the fiscal year ended May 31, 2023 was driven by the increase of purchases of property and equipment and other assets related to the construction of the Company’s Garden City, Texas and Ellendale, North Dakota hosting facilities, as well as deposit payments on equipment.

Financing Activities

The net cash provided by financing activities of $70.6 million for the fiscal year ended May 31, 2023 was primarily driven by the following factors:

• $45.7 million in proceeds from term loans

• $36.5 million in proceeds from the related party loan;

• $4.1 million in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.

These above factors were partially offset by the extinguishment of the Vantage term loan totaling $7.1 million.

Commentary on cash flows for the fiscal year ended May 31, 2022

Commentary on the change in cash flows between the Fiscal Years Ended May 31, 2024 and May 31, 2023

Operating Activities

The net cash used in operating activities of $0.9 million for the fiscal year ended May 31, 2022 consisted primarily of the following:

• $22.5 million in loss from continuing operations;

• $1.0 million in loss from discontinued operations

These above factors were partially offset by the following

• $12.3 million non-cash expense adjustment for stock-based compensation expense;

• $6.4 million increase in accounts payable and accrued liabilities due to the timing of payments;

• $9.5 million increase in customer deposits due to the Company executing new contracts during the period;

• $3.9 million increase in deferred revenue due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.

The net cash provided by operating activities decreased by $44.9 million, or 77%, from $58.7 million for the fiscal year ended May 31, 2023 to $13.8 million for the fiscal year ended May 31, 2024.

The primary reasons for the change were a decrease in revenue prepayments received relative to revenue earned during the fiscal year ended May 31, 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 of $45.9 million for the fiscal year ended May 31, 2022 consisted of:

• $55.0 million in purchases of property and equipment related to the construction of the Company’s Jamestown, ND facility;

• $9.1 million in the sale of equipment related to the Company’s discontinued operations.

The net cash used in investing activities increased by $40.3 million, from $132.1 million for the fiscal year ended May 31, 2023 to $172.4 million for the fiscal year ended May 31, 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 fiscal year ended May 31, 2024.This increase was partially offset by a decrease in investments in property and equipment during the fiscal year ended May 31, 2024 as the Company’s payments in the comparative periods for construction of the Ellendale, North Dakota and Garden City, Texas data center hosting facilities outpaced current period construction payments for the Garden City hosting facility and the Company’s HPC data centers.

Financing Activities

The net cash provided by financing activities of $81.3 million for the fiscal year ended May 31, 2022 consisted primarily of:

• $34.5 million in proceeds from the issuance of preferred stock , partially offset by issuance costs of $2.9 million.

• $40.0 million in proceeds from the issuance of Common Stock from the April 2022 initial public offering, partially offset by issuance costs of $4.3 million

• $7.3 million in proceeds from the issuance of term loans;

• $7.0 million in contributions in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.

The net cash provided by financing activities increased by $76.1 million, or 108%, from $70.6 million for the fiscal year ended May 31, 2023 to $146.8 million for the fiscal year ended May 31, 2024.

The primary reasons for the change were the receipt of net proceeds from the Company’s common stock offerings, the YA Notes 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 fiscal year ended May 31, 2024.

Off Balance Sheet Arrangements

Significant Accounting Pronouncements

Recent Accounting Pronouncements

For a discussion of recently issued financial accounting standards, refer to "Note 2 - Basis of Presentation and Significant Accounting Policies", in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Estimates

Our 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.

Critical Accounting Estimates and Significant Judgements

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S.

In connection with the preparation of our consolidated 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 consolidated financial statements are prepared.

1 unchanged sentence

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.

While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

We have identified three reportable business segments:

data center hosting (“Data Center Hosting Business”), cloud services (“Cloud Services Business”) and high-performance compute hosting (“HPC Hosting Business”).

Intercompany transactions between segments are excluded for management reporting purposes.

The Data Center Hosting Business operates data centers to provide energized space to crypto mining customers.

Customer-owned hardware is installed in our facilities and we provide operational and maintenance services for a fixed fee.

The Cloud Services Business operates through our wholly owned subsidiary, Applied Digital Cloud, and provides cloud services to customers, such as AI and machine learning developers, to develop their advanced products.

Customers pay us a fixed rate in exchange for an energized space supported by Company-provided equipment primarily at facilities owned and operated by third parties.

The HPC Hosting Business designs, builds, and operates data centers which are designed to support HPC applications using advanced and sophisticated infrastructures to provide services to customers.

Revenue Recognition

Data Center Hosting Revenue

We provide energized space to customers who locate their hardware within our co-hosting facility.

All Data Center Hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations.

Customers pay us a fixed rate in exchange for an energized space supported by customer-provided equipment.

Revenue is recognized based on the contractual fixed rate, net of any credits for non-performance, over the term of the agreements.

Any ancillary revenue for other services is generally recognized at a point in time when the services are complete.

Customer contracts include advance payment terms.

All advanced service payments are recorded as deferred revenue and are recognized as revenue once the related service is provided.

Cloud Services Revenue

We also provide managed cloud infrastructure services to customers, such as AI and machine learning developers, to help develop their advanced products.

Customers pay us a fixed rate in exchange for managed cloud services supported by Company-provided equipment.

Revenues are recognized based on the fixed rate, net of any credits for non-performance, over the term of the agreements.

Revenue by segment (excluding the HPC Hosting Business as that segment has no revenue) was as follows (in thousands):

Fiscal year ended

Data Center Hosting Business

$ 136,618 $ 55,392

Cloud Services Business

Total revenue

$ 165,575 $ 55,392

Stock-based Compensation

We account for stock-based compensation with performance conditions by recognizing expense ratably over the requisite service period once the Company concludes that it is probable that the performance conditions will be achieved.

The Company's conclusion as to the probability of achievement is complex and requires judgment.

In addition, the Company makes estimates around the service period for certain performance awards that are probable of being achieved.

The Company may revise its estimate when it determines that it is probable that the performance condition will be achieved within a different time period.

The Company reassesses the probability related to vesting and the requisite service period at each reporting period, and recognizes a cumulative catch up adjustment for such changes in its probability assessment in subsequent reporting periods.

The Company's determination of probability is based on historical metrics, future projections, and the Company's historical performance against such projections.

We account for stock-based compensation with performance conditions by recognizing expense ratably over the requisite service period once we conclude that it is probable that the performance conditions will be achieved.

Our conclusion as to the probability of achievement is complex and requires judgment.

In addition, we make estimates around the service period for certain performance awards that are probable of being achieved.

We may revise our estimate when we determine that it is probable that the performance condition will be achieved within a different time period.

We reassess the probability related to vesting and the requisite service period at each reporting period, and recognize a cumulative catch up adjustment for such changes in our probability assessment in subsequent reporting periods.

Our determination of probability is based on historical metrics, future projections, and our historical performance against such projections.

Fair Value Measurements

We measure the AI Warrants issued to AI Bridge Funding LLC (See “Note 9 - Stockholders' Equity” for further discussion) at fair value.

We engaged a third party valuation specialist to assist management in its determination of the fair value of the AI Warrants using a Black-Scholes Option Pricing model.

Inherent in pricing models are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield, which are considered Level 3 inputs.

Yorkville Convertible Debt

The fair value of the YA Notes was calculated on an as-converted basis using quoted market prices of our outstanding common stock as of May 31, 2024.

In assuming full conversion of the outstanding debt balance, we used the same terms as the YA Notes, including a 5% discount on the lowest daily volume weighted average price for the 5 days preceding May 31, 2024.

Using a conversion price of $4.01 per share, we estimated the number of shares that would need to be issued to settle the debt to be 18,969,939 shares.

Applying the stock price on close of market May 31, 2024 of $4.23 per share, management determined the fair value of the YA Notes to be $80.2 million.

The Company recorded a loss on the change in fair value of debt of $7.4 million in its consolidated statements of operations.

Impairment of Long-Lived Assets

Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

We also evaluate the period of depreciation and amortization of long-lived assets to determine whether events or circumstances warrant revised estimates of useful lives.

When indicators of impairment are present, we determine the recoverability of our long-lived assets by comparing the carrying value of our long-lived assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition.

If the estimated future undiscounted cash flows demonstrate the long-lived assets are not recoverable, an impairment loss would be calculated based on the excess of the carrying amounts of the long-lived assets over their fair value.

The Company recorded impairment expense on long-lived assets of $0.5 million and $0.2 million for the fiscal years ended May 31, 2024 and 2023, respectively.

Going Concern

On a quarterly basis, we assess going concern uncertainty for our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date our consolidated financial statements are issued or are available to be issued (the “look-forward period”).

Based on conditions that are known and reasonably knowable to us, we consider various scenarios, forecasts, projections, and estimates, and we make certain key assumptions, including the timing and nature of projected cash expenditures or programs, among other factors, and our ability to delay or curtail those expenditures or programs within the look-forward period, if necessary.

When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast substantial doubt upon the Company’s ability to continue as a going concern those uncertainties are disclosed.

Income taxes are accounted for under the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences that exist between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as tax attributes such as net operating loss, capital loss and tax credits carryforwards on a taxing jurisdiction basis.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected more likely than not to be realized in the future.

A tax benefit from an uncertain income tax position may be recognized in the financial statements only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority's widely understood administrative practices and precedents.

Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized.

Any subsequent changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis