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Item 8. Financial Statements and Supplementary Data

2024-08-30 compared with 2023-08-02 · 719 added, 394 removed, 261 unchanged (81% of the section changed)

7 unchanged sentences

Notes to Consolidated Financial Statements

See Accompanying Notes to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

9 unchanged sentences

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

1 unchanged sentence

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provides a reasonable basis for our opinion.

Critical Audit Matters

5 unchanged sentences

August 30, 2024

See Accompanying Notes to the Consolidated Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except number of shares and par value data)

(In thousands, except share and par value data)

May 31, 2024 May 31, 2023

1 unchanged sentence

Cash and cash equivalents $ 3,339 $ 28,999

Restricted cash 21,349 14,575

Accounts receivable 3,847 82

Prepaid expenses and other current assets 1,343 2,012

Current assets held for sale 384 —

Total current assets 30,262 45,668

Property and equipment, net 340,381 198,151

Operating lease right of use asset, net 1,290 1,110

Finance lease right of use asset, net 14,303 5,298

Operating lease right of use assets, net 153,611 1,290

Finance lease right of use assets, net 218,683 14,303

Other assets 19,930 4,545

2 unchanged sentences

Current liabilities:

Accounts payable and accrued liabilities $ 14,776 $ 13,260

Accounts payable $ 116,117 $ 6,446

Accrued liabilities 26,282 9,960

Current portion of operating lease liability 21,705 320

Current portion of finance lease liability 107,683 5,722

Current portion of term loan 7,950 1,333

Current portion of debt 10,082 7,950

Current portion of debt, at fair value

Customer deposits 13,819 32,560

Current deferred revenue 48,692 3,877

Sales and use tax payable 1,630 —

Related party customer deposits 1,549 3,810

Deferred revenue 37,674 47,168

Related party deferred revenue 1,692 1,524

Due to customer 13,002 —

Other current liabilities 96 —

Total current liabilities 385,537 115,460

Deferred tax liability — 540

Long-term portion of operating lease liability 109,740 1,005

Long-term portion of finance lease liability 63,288 8,334

Long-term portion of term loan 33,222 5,897

Long-term debt ($ 44,407 as of May 31, 2024, and $ 0 as of May 31, 2023 at fair value)

79,472 33,222

Long-term related party loan — 35,257

1 unchanged sentence

Total liabilities 638,037 194,278

Commitments and contingencies (Note 11)

Stockholders’ deficit:

Commitments and contingencies

Stockholders' equity:

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 144,083,944 shares issued and 139,051,142 shares outstanding at May 31, 2024, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023

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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$ 762,867 $ 263,957

See accompanying notes to the consolidated financial statements

4 unchanged sentences

May 31, 2024 May 31, 2023

Hosting revenue $ 55,392 $ 8,549

Cost of revenues $ 44,388 $ 9,506

Gross profit 11,004 ( 957 )

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 $ ( 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 ( 2,074 ) ( 1,048 )

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

Income tax benefit (expense) 523 ( 540 )

Net loss from continuing operations ( 45,606 ) ( 22,486 )

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

Net loss including noncontrolling interests ( 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 per share:

Continuing Operations $ ( 0.49 ) $ ( 0.39 )

Discontinued Operations $ — $ ( 0.02 )

Basic and diluted net loss per share $ ( 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

See Accompanying Notes to the Consolidated Financial Statements

(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.

See accompanying notes to the consolidated financial statements and, specifically, Note 6 - Related Party Transactions for further discussion of related party transactions.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended May 31, 2024 and 2023

(In thousands, except per share data)

Preferred Stock Series D Convertible Preferred Stock Total Mezzanine Equity Series A Convertible Preferred Stock Series B Convertible Preferred Stock Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Shares Amount

Common Stock Treasury Stock Additional

Stockholders’

Noncontrolling interest

Shares Amount Shares Amount

Balance, May 31, 2022 97,837,703 $ 98 ( 36,296 ) $ ( 62 ) $ 128,293 $ ( 56,070 ) $ 72,259 $ 6,976 $ 79,235

Extinguishment of debt — — — — — — — — — 5,083,828 5 — — 3,473 — 3,478 — $ 3,478

Issuance of dividends to preferred stock — — — — — 60,822 6,082 29,772 2,979 — — — — — ( 8,946 ) 115 — $ 115

Conversion of series A and B preferred stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 29 — — 14,251 — — — $ —

Service agreement stock compensation — — — — — — — — — 18,036,723 18 — — 12,319 — 12,337 — $ 12,337

Issuance of Series D preferred stock — — 1,380,000 34,500 34,500 — — — — — — — — — — — — $ 34,500

Issuance Costs of Series D preferred Stock — — — ( 2,927 ) ( 2,927 ) — — — — — — — — — — — — $ ( 2,927 )

Preferred Stock Dividends Accrued 25,633 641 53,587 1,340 1,981 — — — — — — — — — ( 1,981 ) ( 1,981 ) — $ —

Conversion of Series C and D preferred stock ( 685,633 ) ( 15,776 ) ( 1,433,587 ) ( 32,913 ) ( 48,689 ) — — — — 36,440,783 36 — — 48,653 — 48,689 — $ —

Initial public offering of common stock — — — — — — — — — 8,000,000 8 — — 39,992 — 40,000 — $ 40,000

Offering costs of initial public offering — — — — — — — — — — — — — ( 4,276 ) — ( 4,276 ) — $ ( 4,276 )

Contributions by noncontrolling interest — — — — — — — — — — — — — — — — 6,986 $ 6,986

Issuance of common stock from stock plans 3,089,655 3 — — ( 3 ) — — — —

Tax payments for restricted stock upon vesting — — — — ( 168 ) — ( 168 ) — ( 168 )

Stock-based compensation — — — — 32,072 — 32,072 — 32,072

Capital contribution to noncontrolling interest — — — — — — — 4,146 4,146

Common stock forfeited — — ( 4,965,432 ) — — — — — —

Net loss — — — — — ( 44,646 ) ( 44,646 ) ( 960 ) ( 45,606 )

Balance, May 31, 2023 100,927,358 101 ( 5,001,728 ) ( 62 ) 160,194 ( 100,716 ) 59,517 10,162 69,679

Issuance of common stock - vesting of awards — — — — — — — — — 2,615,550 3 — — ( 171 ) — ( 168 ) — $ ( 168 )

Issuance of common stock - restricted stock awards — — — — — — — — — 474,105 — — — — — — — $ —

Shares issued in offering, net of costs 21,600,722 23 — — 130,826 — 130,849 — 130,849

Issuance of common stock from stock plans 6,894,166 6 — — ( 6 ) — — — —

Tax payments for restricted stock upon vesting — — — — ( 861 ) — ( 861 ) — ( 861 )

Conversions of debt 13,213,727 13 — — 52,047 — 52,060 — 52,060

Issuance of warrants, at fair value — — — — 5,696 — 5,696 — 5,696

Share cancellations ( 36,296 ) — ( 31,074 ) — — — — — —

Stock-based compensation — — — — 17,362 — 17,362 — 17,362

Common stock forfeited — — — — — — — — — — — ( 4,965,432 ) — — — — — $ —

Capital contribution to noncontrolling interest — — — — — — — — — — — — — — — — 4,146 $ 4,146

Stock issuance costs

— — — — ( 284 ) — ( 284 ) — ( 284 )

Net loss — — — — — ( 149,274 ) ( 149,274 ) ( 397 ) ( 149,671 )

Extinguishment of noncontrolling interest 1,484,267 1 — — 9,764 — 9,765 ( 9,765 ) —

Balance, May 31, 2024 144,083,944 $ 144 ( 5,032,802 ) $ ( 62 ) $ 374,738 $ ( 249,990 ) $ 124,830 $ — $ 124,830

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CASH FLOW FROM OPERATING ACTIVITIES

Net loss attributable to Applied Digital Corporation $ ( 44,646 ) $ ( 23,520 )

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

Net loss attributable to noncontrolling interest ( 960 ) ( 10 )

Net loss from continuing operations ( 45,606 ) ( 22,486 )

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

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization 79,360 7,614

Gain on extinguishment of accounts payable — ( 406 )

Loss on extinguishment of debt 94 1,342

Stock-based compensation 17,362 32,072

Lease expense

Deferred income taxes — ( 540 )

Loss on extinguishment of debt 2,507 94

Loss on legal settlement 2,380 —

Non cash interest expense

Changes in assets and liabilities:

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 13,812 —

Changes in operating assets and liabilities:

Accounts receivable ( 3,765 ) 145

Prepaid expenses and other current assets 899 ( 766 )

Customer deposits 26,846 9,524

Deferred revenue 44,815 3,877

Deferred Tax ( 540 ) 540

Accounts payable and accrued liabilities ( 6,265 ) 6,417

Other assets 327 364

Accounts payable 41,840 ( 13,750 )

Accrued liabilities 21,601 7,485

Due to customer 13,002 —

Lease assets and liabilities ( 47,479 ) ( 446 )

Payments of operating leases ( 330 ) ( 310 )

Net cash provided by operating activities of continuing operations 58,735 9,275

Net cash used in operating activities of discontinued operations — ( 10,147 )

NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES 58,735 ( 872 )

Customer deposits

( 8,770 ) 24,584

Related party customer deposits ( 2,261 ) 2,261

Deferred revenue

( 9,494 ) 44,245

Related party deferred revenue 168 569

CASH FLOW PROVIDED BY OPERATING ACTIVITIES 13,794 58,735

CASH FLOW FROM INVESTING ACTIVITIES

Purchases of property and equipment and other assets ( 141,809 ) ( 131,278 )

Deposits on equipment ( 2,557 ) —

Investments in private companies ( 810 ) —

Net cash used in investing activities of continuing operations ( 132,088 ) ( 54,974 )

Net cash provided by investing activities of discontinued operations — 9,103

NET CASH USED IN INVESTING ACTIVITIES ( 132,088 ) ( 45,871 )

Proceeds from sale of investment securities — —

Proceeds from sale of assets 19,852 —

Finance lease prepayments ( 50,089 ) —

Purchases of investments ( 390 ) ( 810 )

CASH FLOW USED IN INVESTING ACTIVITIES ( 172,436 ) ( 132,088 )

CASH FLOW FROM FINANCING ACTIVITIES

Initial public offering of common stock — 40,000

Issuance of preferred stock — 34,500

Repayment of finance leases ( 59,967 ) ( 3,353 )

Preferred stock issuance costs — ( 2,927 )

Borrowings of long-term debt 116,554 45,650

Borrowings of related party debt 28,000 36,500

Repayment of long-term debt ( 21,714 ) ( 10,032 )

Repayment of related party debt ( 45,500 ) —

Payment of deferred financing costs ( 320 ) ( 567 )

Payment of related party deferred financing costs — ( 1,548 )

Proceeds from issuance of common stock, net of costs 130,849 —

Common stock issuance costs

Term loan payoff ( 7,056 ) —

Proceeds from issuance of term loan 45,650 7,324

Term Loan Issuance Costs ( 567 ) ( 94 )

Proceeds from issuance of related party term loan 36,500 —

Related party term Loan Issuance Costs ( 1,548 ) —

Loan Payments ( 2,977 ) —

Payments of employee restricted stock tax withholdings ( 168 ) —

Tax payments for restricted stock upon vesting ( 861 ) ( 168 )

Noncontrolling interest contributions — 4,146

Net cash provided by financing activities of continuing operations 70,628 81,292

Net cash provided by financing activities of discontinued operations — —

CASH FLOW PROVIDED BY FINANCING ACTIVITIES 146,757 70,628

NET (DECREASE ) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 2,725 ) 34,549

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD (See Note 3) 46,299 11,750

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD (See Note 3) $ 43,574 $ 46,299

cash, cash equivalents, and restricted cash of discontinued operations — —

Cash, cash equivalents, and restricted cash of continuing operations $ 43,574 $ 46,299

NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 11,885 ) ( 2,725 )

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD 43,574 46,299

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $ 31,689 $ 43,574

See accompanying notes to the consolidated financial statements

Consolidated Statements of Cash Flows (In thousands)

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (in thousands) continued

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Fiscal Year Ended

May 31, 2024 May 31, 2023

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid $ 17,782 $ 1,118

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SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Non-cash dividends paid in-kind $ — $ 11,042

Operating right-of-use assets obtained by lease obligation $ 159,153 $ —

Finance right-of-use assets obtained by lease obligation $ 227,047 $ 8,693

Fixed assets in accounts payable $ 7,399 $ 6,998

Property and equipment in accounts payable and accrued liabilities $ 85,019 $ 9,384

Extinguishment of non-controlling interest $ 9,765 $ —

Conversion of debt to common stock $ 52,060 $ —

Issuance of warrants, at fair value $ 5,696 $ —

See accompanying notes to the consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Business and Organization

Applied Digital Corporation, f/k/a Applied Blockchain, Inc.

(the “Company”) is a designer, builder and operator of next-generation digital infrastructure.

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

For the fiscal year ended May 31, 2023, the Company has only had operational activity in the crypto datacenter hosting business.

The Company was originally incorporated in Nevada in May 2001.

On November 14, 2022, the Company changed its corporate name from Applied Blockchain, Inc.

to Applied Digital Corporation.

LIQUIDITY AND FINANCIAL CONDITION

As of May 31, 2023, the Company had approximate cash and cash equivalents of $ 29.0 million and negative working capital of $ 69.7 million.

Historically the Company has incurred losses and has relied on equity and debt financings to fund its operations.

Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements were issued.

Applied Digital Corporation (the “Company”), is a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers.

The Company has three reportable segments.

Financial information for each segment is contained in "Note 13 - Business Segments".

All references to “Applied Digital Corporation,” “we,” “us,” “our” or the “Company” mean Applied Digital Corporation and its subsidiaries.

Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).

The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly owned and controlled subsidiaries.

Consolidated subsidiaries results are included from the date the subsidiary was formed or acquired.

Noncontrolling interests in consolidated subsidiaries in the consolidated financial statements represent non-controlling stockholders' proportionate share of the operations in such subsidiaries.

Intercompany investments, balances and transactions have been eliminated in the consolidated financial statements.

The Company’s consolidated operating subsidiaries include the Company's wholly-owned subsidiaries, the Company's interest in Highland Digital Holdings LLC, and the Company's majority interests in Sai Foundry Computing LLC, as well as 1.21 Gigawatts LLC.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods.

Actual results could differ significantly from those estimates.

The most significant accounting estimates inherent in the preparation of the Company’s financial statements are:

• The valuation allowance associated with the Company’s deferred tax assets.

• The probability assessment associated with performance conditions in share based payment awards

Cash and Cash Equivalents

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods.

On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents, income taxes, leases, stock-based compensation and contingencies.

Although these estimates are based on historical facts and various other assumptions that we believe are reasonable, actual results could differ from those estimates.

Revenue Recognition

Data Center Hosting Revenue

The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility.

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

Customers pay a fixed rate to the Company in exchange for an energized space.

Customer equipment (primarily servers) are installed and managed by Company personnel.

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

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

Customers pay a fixed rate to the Company 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.

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability.

Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:

Quoted prices in active markets for identical assets or liabilities.

Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company has identified three reportable segments:

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

The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on the basis of these three reportable segments.

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 the Company’s facilities and the Company provides operational and maintenance services for a fixed fee.

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

Customers pay a fixed rate to the Company in exchange for an energized space supported by Company-provided equipment.

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

Reclassifications

Balance Sheet

We have reclassified certain prior period amounts in our consolidated balance sheets to conform to our current period presentation.

Specifically, we have reclassified “Accounts payable and accrued expenses” to separate captions of “Accounts payable” and “Accrued expenses.” We have also reclassified the presentations of restricted cash from “Prepaid expenses and other current assets” to its own caption of “Restricted cash”, security deposits from “Prepaid expenses and other current assets” to “Other assets” and construction and asset deposits from “Other assets” to “Property and equipment, net.” Finally, we have condensed “Sales and use tax payable” into “Accrued expenses.”

Income Statement

We have reclassified certain prior period revenue amounts from “Revenue” to “Related party revenue” and have reclassified interest income from “Selling, general and administrative” expense to “Interest expense, net” in our consolidated statement of operations to conform to our current period presentation.

These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities .

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.

Our cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although we believe they are subject to minimal risk.

Restricted Cash

The Company has restricted cash related to its letters of credit totaling $ 14.6 million.

The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which last through the first quarter of calendar 2024 .

The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of May 31, 2023, and May 31, 2022.

(in thousands) May 31, 2023 May 31, 2022

The Company has restricted cash related to its letters of credit totaling $ 28.3 million, which is held in money market funds.

The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements,

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

which have terms of up to two years .

These letters of credit were issued in lieu of security deposits.

The Company considers the money market funds to be Level 1 which the Company believes approximates fair value.

Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of May 31, 2024 and May 31, 2023 were as follows (in thousands):

May 31, 2024 May 31, 2023

Cash and cash equivalents $ 3,339 $ 28,999

Restricted cash included in prepaid expenses and other current assets 14,575 —

Restricted cash 21,349 14,575

Restricted cash included in other assets 7,000 —

Total Cash, Cash Equivalents, and Restricted Cash $ 31,688 $ 43,574

As noted above, the Company had a working capital deficit of $ 355.3 million which raises substantial doubt about the Company's ability to continue as a going concern.

Based on an analysis of subsequent events which are disclosed in "Note 15 - Subsequent Events", the Company believes that substantial doubt to continue as a going concern has been alleviated.

Therefore, the Company has sufficient liquidity to meet its obligations as they become due for at least twelve months from the date these financial statements were issued.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

The cost of maintenance and repairs is charged to operations as incurred, whereas significant improvements that extend the life of an asset are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets (see "Note 3 - Property and Equipment").

Once an asset is identified for retirement or disposition, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is included in earnings.

Depreciation expense includes the amortization of assets recorded in association with our leases.

Leasehold improvements and assets recorded in association with our leases are amortized over the shorter of the expected lease term or the estimated useful life of the asset.

Construction in progress represents assets received but not placed into service as of May 31, 2024.

Impairment or Disposal 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’s estimates of fair values are based on the best information available and require the use of estimates, judgments, and projections.

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.

Assets Held For Sale

The Company generally considers assets to be held for sale when the following criteria are met:

(i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) management has initiated an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group, (iv) the sale of the property within one year is considered probable, (v) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value and (vi) significant changes to the plan to sell are not expected.

Property classified as held for sale is no longer depreciated and is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell in accordance with ASC 360, Property, Plant and Equipment - Impairment or Disposal of Long-Lived Assets .

Lease Accounting

The Company determines whether an arrangement contains a lease at the inception of the arrangement.

If a lease is determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor.

The Company’s assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain of not exercising, as well as periods covered by renewal options which the Company is reasonably certain of exercising.

The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.

For leases with a term exceeding 12 months, a lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of its fixed minimum payment obligations over the lease term.

A corresponding right-of-use (“ROU”) asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received.

For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in its leasing arrangements are typically not readily determinable.

The Company’s incremental borrowing rate reflects the rate it would pay to borrow and incorporates the term and economic environment of the associated lease.

For the Company’s operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term.

For leases with an initial term of 12 months or less, any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the Company’s consolidated balance sheet as an accounting policy election.

Leases qualifying for the short-term lease exception were insignificant.

Variable lease costs are recognized as incurred.

Assets and liabilities related to operating leases are presented in separate captions from those relating to finance leases.

For the Company's finance leases, expense is split between amortization and interest expense.

The Company leases office space and colocation space under operating leases and equipment under finance leases.

If a lease is

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

determined to exist, the term of such lease is assessed based on the date on which the underlying asset is made available for the Company’s use by the lessor, which is the commencement date.

For leases with renewal periods or early terminations at the Company’s option, the Company determines the expected lease term based on whether the exercise of any renewal options or early terminations are reasonably certain at the inception of the lease.

At the commencement date of a lease, we recognize a right-of-use asset representing our right to use the underlying asset during the lease term and a lease liability for the present value of the future lease payments.

As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments.

For operating leases, we recognize fixed lease expense on a straight-line basis over the lease term.

For finance leases, we recognize amortization expense on the right-of-use asset and interest expense on the lease liability over the lease term.

Variable lease costs are recognized as incurred.

Assets and liabilities related to finance leases are presented in separate captions from those relating to operating leases.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606").

The Company provides energized space to customers who locate their hardware within the Company’s co-

hosting facility.

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

Hosting revenue is recorded monthly in fixed amounts, net of credits for non-performance, based on the terms of the hosting agreements.

Any ancillary revenue for maintenance or installation services is at a point in time when the Customer has received the full service.

As these services support the hosting operation as a whole, all revenue is within the hosting revenue caption.

Customer contracts include advance payment terms.

Advanced payments are recorded as deferred revenue until the related service is provided.

Assets and liabilities related to finance leases are presented in separately from those relating to operating leases on our consolidated balance sheets.

We do not record lease contracts with a term of 12 months or less on our consolidated balance sheets.

Stock-based compensation

Restricted Stock Awards

The Company has granted restricted stock awards to officers and directors.

Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of Common Stock comprising the stock award with the Securities and Exchange Commission (the “SEC”).

The Company has recognized the cost of the restricted stock-based on the grant date fair value of the awards ratably over the related vesting terms as it is probable that the performance condition for the reserved underlying shares will be met.

Restricted Stock Units

The Company has granted restricted stock units (“RSUs”) to certain consultants and employees, in all cases as compensatory grants for services rendered to the Company, which contain performance conditions that affect vesting.

The Company has recognized the cost of these RSUs based on the grant date fair value ratably for each tranche, as applicable, based on the probability that the performance conditions will be achieved over the related vesting terms.

In addition, the Company has granted RSUs to employees as compensation for employment services.

The average term of the RSUs granted under the employee incentive plan is three years from grant date, and the only conditions for vesting are service conditions.

The Company has recognized the expense of the RSUs based on grant date fair value of the awards ratably over the service period.

The Company measures stock-based compensation cost at fair value on the date of grant for all share-based awards and recognizes compensation expense over the service period that the awards are expected to vest.

The Company has elected to recognize compensation cost for graded-vesting awards subject only to a service condition over the requisite service period of the entire award.

For performance awards, the Company recognizes expense in the period in which vesting becomes probable.

The Company accounts for forfeitures as they occur.

Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period.

Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock.

For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise of stock warrants, the conversion of existing debt agreements, and service-based and performance-based restricted stock units, respectively, determined using the treasury stock method.

Any anti-dilutive effect of equity awards outstanding is not included in the computation of diluted net income per share.

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.

ASC Topic 740, Income Taxes, (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

1 unchanged sentence

Tax positions taken are not offset or aggregated with other positions.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure, and transition.

The Company's policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and penalties as components of income tax expense.

Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements.

Segment Information

The Company’s chief operating decision maker, the chief executive officer, reviews discrete financial information presented on a consolidated basis for purposes of regularly making operating decisions, allocation of resources, and assessing financial performance.

Accordingly, the Company has one operating and reporting segment.

For further information on income taxes, see "Note 8 - Income Taxes" below.

Recent Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability.

When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company

undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.

The Company has determined that there are no recently issued pronouncements that are currently applicable to the Company.

Reclassifications

Within the Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current period presentation.

The Company has reclassified restricted cash from cash and cash equivalents to other assets.

In addition, the Company has reclassified utility deposits to other assets.

These reclassifications had no impact on reported operating income or net income;

cash flows from operations, investing, or financing activities;

or total assets and liabilities.

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting ("Topic 280"):

Improvements to Reportable Segment Disclosure .

The ASU is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The ASU is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024, with early adoption is permitted, and retrospective adoption required.

We are currently evaluating the extent of the impact of this ASU on disclosures in our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes ("Topic 740"):

Improvements to Income Tax Disclosures .

This ASU is intended to enhance the transparency and decision usefulness of income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction.

The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and can be applied either prospectively or retrospectively.

We are currently evaluating the impact of adopting this ASU on our disclosures.

We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements.

Property and Equipment

Property and equipment consisted of the following as of May 31, 2023 and 2022:

(in thousands) Estimated Useful Life May 31,

Hosting Equipment

Property and equipment, net consisted of the following as of May 31, 2024 and 2023 (in thousands):

Estimated Useful Life May 31,

Networking equipment, electrical equipment, and software

5 years $ 32,517 $ 21,173

Electric generation and transformers 15 years 9,933 4,655

Other Equipment and Fixtures 6 years 1,685 588

Construction in Progress 106,226 18,305

Information Systems and Software 5 years 21,173 9,608

Land & Building

Land and building

Building 39 years 103,990 63,350

Land 6,205 2,152

Land improvements 15 years 1,380 1,293

Building 39 years 63,350 30,176

Leasehold improvements 3 years - 7 years

Construction in progress 190,162 108,784

Other equipment and fixtures 5 years - 7 years

Total cost of property and equipment 354,790 203,091

1 unchanged sentence

Property and equipment, net $ 340,381 $ 198,151

Depreciation expense totaled $ 3.9 million and $ 1 million for the years ended May 31, 2023 and 2022, respectively.

Depreciation is computed on the straight-line basis for the period assets are in service.

Construction in progress represents assets received but not placed into service as of May 31, 2023.

Depreciation expense totaled $ 15.8 million and $ 3.9 million for the fiscal years ended May 31, 2024 and 2023, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Revenue from Contracts with Customers

Below is a summary of the Company’s revenue concentration by major customer for the years ended May 31, 2023 and 2022

Fiscal Year Ended

Customer May 31, 2023 May 31, 2022

Below is a summary of the Company’s revenue concentration by major customer for the fiscal years ended May 31, 2024 and 2023:

May 31, 2024 May 31, 2023

Customer A 62 % 24 %

4 unchanged sentences

Customer F — % 11 %

Total 100 % 100 %

Remaining Performance Obligations

As of May 31, 2023, the Company had $ 48.7 million in deferred revenue, which represents the Company’s remaining performance obligations.

The Company expects to recognize all of this revenue within the next 12 months.

Customer G 12 % — %

Deferred Revenue

Changes in the Company's deferred revenue balances for the years ended May 31, 2023 and 2022, respectively, are shown in the following table:

(in thousands)

Balance at May 31, 2021 $ —

Advance billings 12,426

Revenue recognized ( 8,549 )

Other adjustments —

Balance at May 31, 2022 $ 3,877

Changes in the Company's deferred revenue balances for the fiscal year ended May 31, 2024 and May 31, 2023, respectively, are shown in the following table (in thousands):

May 31, 2024 May 31, 2023

Balance, beginning of period $ 48,692 $ 3,877

Advance billings 148,131 100,072

1 unchanged sentence

Other adjustments 7,571 135

Balance at May 31, 2023 $ 48,692

Related party balances ( 1,692 ) ( 1,524 )

Balance, end of period $ 37,674 $ 47,168

Customer Deposits

Changes in the Company's customer deposits balances for the years ended May 31, 2023 and 2022, respectively, are shown in the following table:

(in thousands)

Balance at May 31, 2021 $ —

Customer deposits received $ 9,524

Customer deposits refunded —

Other adjustments —

Balance at May 31, 2022 $ 9,524

Changes in the Company's customer deposits balances for the years ended May 31, 2024 and 2023, respectively, are shown in the following table (in thousands):

May 31, 2024 May 31, 2023

Balance, beginning of period $ 36,370 $ 9,524

Customer deposits received 3,395 26,980

Customer deposits refunded —

Customer deposits applied

Other adjustments ( 11,764 ) ( 135 )

Balance at May 31, 2022 $ 36,370

Related party balances ( 1,549 ) ( 3,810 )

Balance, end of period $ 13,819 $ 32,559

Asset Disposition

On March 14, 2024, the Company entered into a purchase and sale agreement to sell the Garden City data center hosting facility for a total cash consideration of up to $ 87.3 million (the “Cash Purchase Price”).

As part of the agreement, a part of the Cash Purchase Price consists of contingent consideration in the amount of $ 25 million (held in escrow), in the event the Company is able to assist the buyer in receiving regulatory approval for additional megawatt energization for the Garden City data center hosting facility within 120 days after the transaction closing (the “Contingent Amount”).

Subsequent to the fiscal year end, the Contingent Amount was finalized.

See discussion in "Note 15 - Subsequent Events" .

The Company has calculated the loss on assets held for sale as of February 29, 2024 based on the agreed upon purchase price with Marathon on March 14, 2024.

The Company notes that the purchase agreement contains a $ 34.0 million “holdover” amount, which includes the Contingent Amount that is conditionally owed to the Company if additional energy capacity at the facility receives regulatory approval within 120 days of closing.

In the event the requisite regulatory approval is not received, however, the Company may be obligated to pay to the Marathon $ 34.0 million, inclusive of the Contingent Amount.

For purposes of applying the fair value as of February 29, 2024, the Company did not consider

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

achievement of this approval probable, and therefore has not considered any of the holdover amount when calculating the implied purchase price and fair value.

Further, the Company notes that Marathon will release approximately $ 10.0 million of deferred revenue held by the Company in conjunction with the closing of the transaction.

The Company also notes that Marathon will receive all assets related to the facility but is only assuming the ground lease liabilities, and the remaining $ 5.1 million of equipment lease liabilities are the responsibility of the Company to pay off at closing.

Accordingly, the Company has excluded these lease liabilities in its calculation of fair value below.

See below for the Company’s calculation of the implied transaction price and fair value and the resulting loss on the classification of assets as held for sale (in thousands):

Maximum Purchase Price

Conditional Amount

Cash Consideration

Lease Liabilities Assumed

Deferred Revenue Released

Implied Fair Value

Estimated Costs to Sell

Total fair value less costs to sell

Loss calculation

Carrying value of assets sold $ 87,030

Fair value less costs to sell

Purchase price accounting adjustments 6,306

Loss on classification of held for sale

Related Party Transactions

Related Party Notes Payable

See discussion below in Note 7 - Debt, regarding the Company's term loan agreement with B.

Riley Commercial Capital, LLC and B.

Riley Securities, Inc, both wholly-owned subsidiaries of B.

Riley Financial, Inc.

Bryant Riley, chairman of the board and co-chief executive officer, of B.

Riley Financial, Inc.

RILY), directly or indirectly through subsidiaries of RILY, held in excess of 5 % of our then outstanding Common Stock beginning in April 2023.

The following table illustrates the related party balances on this loan for the fiscal year ended May 31, 2023.

(in thousands)

Description May 31, 2023

Principal Outstanding $ 36,500

Other long-term liabilities 1,000

Accrued Interest Payable 81

Related Party Revenue

The Company has revenue transactions with two related party customers:

• Customer A is a subsidiary of an entity which is deemed to beneficially own over 5 % of the Company's outstanding common stock.

• Customer B is 60 % owned by an individual who is deemed to beneficially own over 5 % of the Company's outstanding stock.

The following tables illustrate related party revenue for fiscal years ended ended May 31, 2023 and May 31, 2022.

(in thousands) Related Party Revenue for the Fiscal Year Ended

Customer May 31, 2023 May 31, 2022

Customer A $ 8,007 $ 1,417

Customer B $ 6,401 $ 1,268

The following tables illustrate related party deferred revenue and deposits balances as of May 31, 2023 and May 31, 2022.

(in thousands) Customer A Balances as of

Caption May 31, 2023 May 31, 2022

Deferred revenue $ 1,474 $ 692

Customer Deposits $ 2,450 $ 2,059

(in thousands) Customer B Balances as of

Caption May 31, 2023 May 31, 2022

The following table illustrates related party revenue for the fiscal years ended May 31, 2024 and May 31, 2023 (in thousands):

May 31, 2024 May 31, 2023

Customer D* $ 8,005 $ 8,007

Customer E** $ 6,756 $ 6,401

*Customer D is a subsidiary of an entity which is deemed to beneficially own over 5 % of the Company's outstanding common stock.

**Customer E is 60 % owned by an individual who is deemed to beneficially own over 5 % of the Company's outstanding common stock.

As of July 25, 2024, the individual filed a Schedule 13G to report the fact that as of the date thereof, the individual has ceased to be a beneficial owner of more than 5 % of such class of securities.

However, during fiscal year 2024, as more than 5 % of the Company's outstanding common stock was held by the individual, the transactions were therefore considered related party transactions.

The following table illustrates related party deferred revenue and deposits balances as of May 31, 2024 and May 31, 2023 (in thousands):

Customer D balances as of Customer E balances as of

May 31, 2024 May 31, 2023 May 31, 2024 May 31, 2023

Deferred revenue $ 993 $ 1,474 $ 699 $ 50

Customer Deposits $ 895 $ 2,450 $ 654 $ 1,360

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Related Party Sublease Income

For the fiscal years ending May 31, 2023 and May 31, 2022, the Company received sublease income from B.

The Company receives sublease income from B.

Riley Asset Management, which is also a wholly-owned subsidiary of B.

Riley Financial, Inc.

Cummins, the CEO of the Company, is also the President of B.

Riley Asset Management.

(in thousands)

Description May 31, 2023 May 31, 2022

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

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

Sublease income is included in selling, general and administrative expenses in our consolidated statements of operations.

The following table illustrates related party sublease income for the fiscal years ended May 31, 2024 and May 31, 2023 (in thousands):

May 31, 2024 May 31, 2023

Sublease Income $ 70 $ 103

Below is a summary of the Company’s term loan balances, including current debt and deferred financing fees as of May 31, 2023 and 2022.

(in thousands) May 31, 2023 May 31, 2022

Total Outstanding Loan Balances 79,441 7,324

Deferred Issuance Costs ( 3,012 ) ( 94 )

Current portion of Term Loan ( 7,950 ) ( 1,333 )

Long-term related party loan ( 35,257 ) —

Long-term portion of Term Loan $ 33,222 $ 5,897

Below is the weighted-average interest rate for the Company's term loans as of May 31, 2023 and 2022.

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

Riley Loan and Security Agreement") with B.

Riley Commercial Capital, LLC and B.

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 were used to help fund the buildout of the Company’s Cloud Services Business and data centers, and for general corporate purposes and working capital.

During the fiscal year ended May 31, 2024, the Company 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.

The Company 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, the Company 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 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 of Loan and Security letter.

AI Bridge Loan

On January 30, 2024, the Company 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.

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

During the fiscal year ended May 31, 2024, the Company recognized a total of $ 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 shares of its 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.

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

As such, the Company recorded a total of $ 5.0 million in interest expense related to the AI Bridge Loan during the fiscal year ended May 31, 2024.

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, the Company’s Chairman and Chief Executive Officer, served as the President of B.

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

Other Related Party Transactions

Related party transactions included within selling, general, and administrative expense on the consolidated statement of operations during the fiscal years ended May 31, 2024 and 2023 include the following:

• construction and consulting costs of $ 0.3 million and $ 0.1 million, respectively, to a company owned by a family member of the Company’s Chief Financial Officer.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

• software license fees of $ 0.2 million and $ 0.1 million, respectively, to a company whose chairman is also a member of the Company’s Board of Directors.

• consulting fees of $ 43,000 to a Board of Director member for sales consulting work.

No such expenses were incurred during the fiscal year ended May 31, 2023.

Long-term debt consisted of the following components (in thousands):

Interest Rate Maturity Date May 31, 2024 May 31, 2023

Starion Term Loan

6.50 % July 2027 $ 10,021 $ 12,786

Vantage Garden City Loan 6.15 % April 2028 — 10,074

Starion Ellendale Loan 7.48 % February 2028 16,145 19,728

Vantage Transformer Loan 6.50 % February 2029 3,609 —

Cornerstone Bank Loan 8.59 % March 2029 15,576 —

Yorkville Convertible Debt 0.00 % April 2025 80,243 —

Other long-term debt

Deferred financing costs, net of amortization ( 501 ) ( 1,770 )

Current portion of debt ( 10,082 ) ( 7,950 )

Long-term debt, net $ 115,308 $ 33,222

Below is the weighted-average interest rate for the Company's term loans:

May 31, 2024 May 31, 2023

1 unchanged sentence

Remaining Principal Payments

Below is a summary of the remaining principal payments due over the life of the term loans as of May 31, 2023.

(in thousands)

Year Principal Payments

Total Term Loan Remaining Payments $ 79,441

Below is a summary of the remaining principal payments due over the life of the term loans as of May 31, 2024 (in thousands):

FY25 $ 46,111

Total $ 125,890

Letters of Credit

As of May 31, 2024, the Company had letters of credit totaling $ 28.3 million.

The Company has restricted cash related to its letters of credit and is required to keep these balances in separate accounts for the duration of the letter of credit agreements.

The Company presents all restricted cash amounts with letter of credit term of 12 months or less within the Restricted Cash caption within current assets and any amounts with a related letter of credit term of over 12 months in Other Assets.

Starion Term Loan

On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of the Company, 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 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 under the Starion Loan Agreement 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.

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”).

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 loan agreement between the Company and Vantage Bank Texas.

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

On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of the Company, 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 the 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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

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 became subject to a debt service coverage ratio.

Vantage Garden City Loan

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

The loan pursuant to the Vantage Garden City Loan Agreement will be advanced in 16 installments, 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 Garden City Facility will bear interest at a fixed rate of 6.15 % per annum, and the Company may prepay the Garden City Facility, in whole or in part, without the payment of any fee or penalty.

The Garden City Facility matures April 26, 2028.

On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned indirect 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 $ 15.0 million.

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

The Vantage Garden City Loan 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 balance totaling $ 10.1 million.

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

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

In accordance with the original loan agreement, the sale of the Garden City facility will 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 and paid during the fiscal fourth quarter of 2024.

The transaction closed on April 1, 2024.

The Company 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”).

The Ellendale Loan Agreement provides for a term loan in the principal amount of $ 20 million with a maturity date of February 3, 2028.

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

The proceeds of the loan under the Ellendale Loan Agreement will be used to fund expansion on the Ellendale, North Dakota hosting datacenter.

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

The Ellendale Loan is secured by the Ellendale facility, a security interest in the 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.

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

Riley Loan and Security Agreement") with B.

Riley Commercial Capital, LLC and B.

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 help fund the buildout of the Company’s recently announced AI cloud services platform and datacenters by the Company, and for general corporate purposes and working capital.

Riley Loan and Security Agreement contains initial fees of approximately $ 1.5 million that were reduced from the initial funds remitted to the Company.

Riley Loan and Security agreement 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 the date of May 31, 2023, the total outstanding balance of the B.

Riley Loan was $ 36.5 million.

The Company recorded income tax benefit of $ 0.5 million for the year ended May 31, 2023, compared to income tax expense of $ 0.5 million for the year ended May 31, 2022.

The Company’s effective tax rate was 1.2 % and ( 2.4 )%, for the years ended May 31, 2023 and 2022 respectively.

(in thousands) For the Fiscal Year Ended

The proceeds of the loan under the Ellendale Loan Agreement were used to fund expansion on the Ellendale, North Dakota hosting data center.

Vantage Transformer Loan

On February 8, 2024, APLD ELN-02 LLC, a wholly-owned subsidiary of the Company, 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 on the loan.

Cornerstone Bank Loan

On February 28, 2024, APLD GPU-01, LLC, a wholly-owned subsidiary of the Company, 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 Service Agreements for HPC based systems related to AI Cloud Computing Services.

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 on the loan.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Yorkville Convertible Debt

On March 27, 2024, the Company entered into a Prepaid Advance Agreement (the “March PPA”) with YA II PN, LTD.

In accordance with the terms of the March PPA, YA Fund agreed to advance up to $ 50 million, less a five percent original issue discount, to the Company pursuant to two convertible unsecured promissory notes (the “Initial YA Notes”).

On May 24, 2024, the Company entered into another Prepaid Advance Agreement with YA Fund (the “May PPA”) and together with the March PPA, the “Prepaid Advance.

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

The YA Notes are convertible into shares of the Company’s common stock.

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

(a) $ 6.00 (Initial YA Notes) or $ 8.00 (May Note) 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 the Company.

As of May 31, 2024, $ 16.0 million of the Initial YA Notes had been converted into approximately 4.8 million shares of common stock.

Subsequent to the fiscal year end, additional shares were issued.

See discussion in "Note 15 - Subsequent Events" .

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 YA 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.

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

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

Income tax expense for the fiscal years ended May 31, 2024 and 2023 consisted of the following (in thousands):

May 31, 2024 May 31, 2023

6 unchanged sentences

Total income tax (benefit) expense $ 96 $ ( 523 )

The following table reconciles the statutory rate to our effective tax rate:

The following table reconciles the statutory rate to our effective tax rate for the fiscal years ended May 31, 2024 and 2023:

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

May 31, 2024 May 31, 2023

Expected income tax expense (benefit) at U.S.

Expected income tax rate at the U.S.

statutory rate 21.0 % 21.0 %

1 unchanged sentence

State income taxes, net of federal tax benefit ( 0.1 ) % — %

Convertible debt instruments ( 2.1 ) % — %

Change in valuation allowance ( 19.8 ) % ( 13.0 ) %

Other, net ( 1.1 ) % ( 0.8 ) %

Income tax expense / (benefit) 1.2 % ( 2.4 ) %

Effective income tax rate ( 0.1 ) % 1.2 %

Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes.

The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities are as follows for the year ended May 31, 2023, and 2022:

(in thousands) May 31, 2023 May 31, 2022

The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities for the fiscal years ended May 31, 2024 and 2023 are as follows (in thousands):

May 31, 2024 May 31, 2023

Deferred tax assets:

2 unchanged sentences

Capitalized research and development 4,039 897

Interest expense 4,854 —

Convertible debt instruments 3,101 —

Lease liability 29,508 1,875

Other 662 360

Gross Deferred Tax Assets 21,337 14,298

Valuation Allowances ( 15,697 ) ( 9,346 )

Total Net Deferred Tax Asset $ 5,640 $ 4,953

Deferred tax assets, gross 87,732 21,337

valuation allowance ( 47,005 ) ( 15,697 )

Total deferred tax assets, net 40,727 5,640

Deferred tax liabilities:

Property, Plant, and Equipment $ ( 3,712 ) $ ( 3,407 )

Property and equipment ( 6,202 ) ( 3,712 )

Right of use assets ( 34,525 ) ( 1,929 )

Total Net Deferred Tax Liability ( 5,640 ) ( 5,493 )

Net deferred tax assets (liabilities) $ — $ ( 540 )

The Company had $ 114.8 million and $ 83.6 million of federal and state tax net operating losses at May 31, 2023 and 2022, respectively.

Total deferred tax liability, net ( 40,727 ) ( 5,640 )

Net deferred tax asset $ — $ —

The Company had $ 284.8 million and $ 114.8 million of federal and state tax net operating losses as of May 31, 2024 and 2023, respectively.

At May 31, 2024, $ 244.8 million is available indefinitely to offset future income.

7 unchanged sentences

Management believes that it is not likely that the results of future operations will generate sufficient taxable income to realize its deferred tax assets.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income.

Under the provisions of the Internal Revenue Code, certain substantial changes in the

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income.

The Company is subject to U.S.

federal income tax.

federal and various state and local income tax.

Tax years ending May 31, 2021 through May 31, 2024 are open to examination by the major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in these years may still be adjusted upon examination by the Internal Revenue Service ("IRS") or other authorities if they have or will be used in a future period.

The Company is not currently under examination by the IRS or any other taxing jurisdictions for any tax years.

STOCKHOLDERS’ EQUITY (DEFICIT)

Stockholders' Equity

On October 9, 2021, the Company’s board of directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022.

The two plans consist of the 2022 Incentive Plan, previously referred to

in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date.

As of May 31, 2023, the Company had issued approximately 0.6 million shares of restricted stock awards and approximately 12.4 million of restricted stock units under the plans.

The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan, which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date.

As of May 31, 2024, the Company had issued awards for approximately 16.1 million shares of common stock of the Company under the plans.

During the fiscal years ended May 31, 2024 and 2023, the Company recognized $ 17.3 million and $ 32.1 million in stock-based compensation, respectively.

Restricted Stock Awards

2 unchanged sentences

Outstanding as of May 31, 2023

380,955 $ 2.22

Granted 716,726 4.09

2 unchanged sentences

Outstanding as of May 31, 2024

As of May 31, 2023, total remaining expense to be recognized related to these awards was $ 0.8 million and the weighted average remaining recognition period for the unvested awards was 5 months.

638,895 $ 4.01

As of May 31, 2024, total remaining expense to be recognized related to these awards was $ 2.1 million and the weighted average remaining recognition period for the unvested awards was 2.1 years.

Restricted Stock Units

2 unchanged sentences

Outstanding as of May 31, 2023

12,465,935 $ 2.53

Granted 2,890,900 6.02

2 unchanged sentences

Outstanding as of May 31, 2024

As of May 31, 2023, total remaining expense to be recognized related to these awards was $ 31.5 million and the weighted average remaining recognition period for the unvested awards was 24 months.

Share Forfeiture

On June 6, 2022, through an agreement between the Company and Xsquared Holding Limited (“Sparkpool”), Sparkpool agreed to forfeit shares of Common Stock that had been issued to it pursuant to the service agreement executed on March 19, 2021.

Sparkpool had ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered.

As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and returned to the Company and placed in treasury.

The Company has entered into leases for hosting equipment, office space, and land.

8,355,080 $ 3.59

As of May 31, 2024, total remaining expense to be recognized related to these awards was $ 26.4 million and the weighted average remaining recognition period for the unvested awards was 1.8 years.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Public Offerings

Craig-Hallum Capital Group LLC

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

The Company 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.

Roth Capital Partners LLC

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

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

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

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.

The Company is the sole member of 1.21 Gigawatts LLC and has since August 31, 2023, reported all activity as attributable to the Company.

AI Bridge Warrants

On April 26, 2024, the Company entered into Amendment No.

2 (the “AI Amendment”) to the AI Bridge Loan pursuant to the 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 Loan (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 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.

The estimated fair value of the AI Warrants was based on the following significant inputs:

Expected term 5 years

Stock price $ 2.94

Volatility 105 %

Risk-free rate 4.63 %

Dividend yield — %

The fair value of the AI Warrants is disclosed in loss on fair value of warrants issued to related parties on the consolidated statements of operations.

The fair value of the $ 7.50 strike price and the $ 10.00 strike price AI Warrants was $ 1.96 and $ 1.84 per warrant, respectively.

As of May 31, 2024, the fair value of the AI Warrants was $ 5.7 million and was recorded in the statement of stockholders' equity.

The Company recorded a loss on the fair value on the date of issuance 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, the Company 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 the Company’s offering (the “Offering”) of up to 2,000,000 shares of its Series E Redeemable Preferred Stock, par value $ 0.001 (the “Series E Preferred Stock”).

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

The Series E Preferred Stock is registered with the Securities and Exchange Commission pursuant to a shelf registration statement on Form S-3 (File No.

333-279155) under the Securities Act of 1933, as amended (the “Registration Statement”), and will be offered and sold pursuant to a prospectus supplement dated May 16, 2024, and a base prospectus dated May 16, 2024, relating to the Registration Statement.

Each share of Series E Preferred Stock will be sold 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, the Company will 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.

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

Fair Value Measurements

The carrying values of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature.

The majority of the Company’s non-financial instruments, which include lease assets and property and equipment, are not required to be carried at fair value on a recurring basis.

However, if certain triggering events occur, a non-financial instrument is required to be evaluated for impairment.

If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value.

No such triggering events were identified during the fiscal year ended May 31, 2024.

Fair value of financial instruments is determined on a recurring basis, which results are summarized as follows (in thousands):

Debt instrument Fair Value Hierarchy Outstanding Principal Fair Value

Yorkville convertible debt Level 2

$ 76,132 $ 80,243

The fair value of the Yorkville convertible debt was calculated on an as-converted basis using quoted market prices of the Company's outstanding common stock as of May 31, 2024.

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

Outstanding Principal as of May 31, 2024 (in thousands)

Conversion price $ 4.01

Number of shares to be issued 18,969,939

Stock price on May 31, 2024

Fair Value as of May 31, 2024 (in thousands)

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

The Company enters into leases for equipment, office space and co-location space.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions.

The liabilities are split between current and long-term, respectively.

The Company presents lease costs as follows:

(in thousands) Fiscal Year Ended

Lease Type Consolidated Statements of Operations Presentation May 31, 2023 May 31, 2022

The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Components of lease expense were as follows (in thousands):

May 31, 2024 May 31, 2023

Operating lease cost:

Operating lease expense Selling, General and Administrative $ 347 $ 328

Short-term lease expense Selling, General and Administrative 187 126

Sublease Income Selling, General and Administrative ( 103 ) ( 159 )

Operating lease expense $ 16,700 $ 347

Short-term lease expense 57 187

Total operating lease cost 16,757 534

Finance lease expense:

Amortization of ROU assets related to revenue production Cost of Sales 554 85

Amortization of ROU assets not related to revenue production Depreciation and Amortization Expense 2,782 26

Interest on finance leases Interest Expense 773 50

Variable finance lease expense Selling, General and Administrative 3 —

Amortization of right-of-use assets (1)

Interest on lease liabilities 10,597 773

Total finance lease cost 74,527 4,109

Total Lease Cost $ 4,543 $ 456

The following table represents the Company’s future minimum lease payments as of May 31, 2023:

(in thousands)

Year Operating Leases Finance Leases Total

Variable lease cost 169 3

Sublease Income ( 70 ) ( 103 )

Total net lease cost $ 91,383 $ 4,543

(1) Amortization of right-of-use assets is included within cost of revenues and selling, general and administrative expense in the consolidated statements of operations.

The following table represents the Company’s future minimum lease payments as of May 31, 2024 (in thousands):

Operating Leases Finance Leases Total

FY25 $ 30,990 $ 120,567 $ 151,557

3 unchanged sentences

FY29 25,240 — 25,240

Beyond — 87,145 87,145

Total $ 1,580 $ 99,977 $ 101,557

Present value of lease liabilities $ ( 255 ) $ ( 85,921 ) $ ( 86,176 )

Thereafter 3,536 — 3,536

Total lease payments 157,951 186,411 344,362

imputed interest ( 26,506 ) ( 15,440 ) ( 41,946 )

Total lease liabilities 131,445 170,971 302,416

Current portion of lease liability ( 21,705 ) ( 107,683 ) ( 129,388 )

4 unchanged sentences

Weighted-average years remaining (in years):

Finance leases 22 57

Operating leases 3 4

Finance leases 1.6 years 22.0 years

Operating leases 3.5 years 3.0 years

Weighted-average discount rate:

1 unchanged sentence

Operating leases 7.8 % 11.0 %

The Company has entered into operating leases signed but not yet commenced with total minimum payments of approximately $ 83.1 million to support the Company's AI Cloud service business.

The payments are expected to be made over a total of 84 months.

The Company has entered into finance leases signed but not yet commenced with total minimum payments of approximately $ 8.5 million.

The payments are expected to be made over a total of 30 months.

The Company has entered into leases which are executed but not yet commenced with total minimum payments of approximately $ 13.2 million.

The payments are for various leases with terms ranging from 2 years to 4.8 years.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Commitments and Contingencies

As of May 31, 2023, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 10 - Leases , respectively.

The Company also has the following commitments:

Jamestown Energy Services Agreement

The Company has a commitment of approximately $ 28 million related to the energy services agreement for its Jamestown, North Dakota hosting facility.

The minimum term of this agreement is five years , and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination.

The commitment is fully due within the next fiscal year, as the company commits to specific power consumption on an annual basis as part of the energy services agreement.

The Company has other purchase commitments of approximately $ 10.2 million related to the buildout of its AI Cloud hosting services business and insurance premiums.

These commitments are expected to be fulfilled within twelve months of May 31, 2023.

The Company also has a commitment for 1,024 H100 GPUs to support its AI Cloud services business, which has been subsequently financed through an arrangement totaling approximately $ 41 million over 24 months as discussed in Note 14 - Subsequent Events .

Contingencies

Letter of Credit

As of May 31, 2023 and May 31, 2022, the Company had letters of credit outstanding totaling $ 14.5 million and $ 7.5 million, respectively.

As discussed in Note 3 - Basis of Presentation and Significant Accounting Policies , the Company is required to maintain these amounts in separate accounts, and therefore the cash is restricted.

Further, the Company had no unused lines of credit as of May 31, 2023 or May 31, 2022, respectively.

The Company has agreed to enter into mediation, tentatively scheduled for August 18, 2023, around the allegations previously announced by the Company on June 23, 2023.

The Company estimates the potential range of loss based on such allegations to be $ 0 to $ 1 million.

Energy Contracts

The Company has a minimum commitment of approximately $ 75.2 million related to the energy services agreement for its Jamestown, North Dakota co-hosting facility with a remaining term of approximately 2.7 years as of May 31, 2024.

Construction Contracts

The Company routinely engages with construction vendors for the construction of our facilities.

These engagements are governed by contracts containing standard terms and conditions, including certain milestones that obligate the Company to pay as work is completed.

In the event of termination of any of these contracts by the Company, the Company would be liable for all work that has been completed or in process, plus any applicable fees.

The Company generally has the right to cancel these open purchase orders prior to delivery or terminate the contracts without cause.

Claims and Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business.

As of May 31, 2023 and 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's Chief Financial Officer, have been named as defendants in a putative securities class action lawsuit in the matter styled, McConnell v.

Applied Digital Corporation, et al.

3:23-cv-1805, filed in August 2023 in the U.S.

District Court for the Northern District of Texas (the “Securities Lawsuit”).

Specifically, the complaint asserts claims pursuant to Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 based on allegedly false or misleading statements regarding the company’s business, operations, and compliance policies, including claims that the Company overstated the profitability of its Data Center Hosting Business and its ability to successfully transition into a low-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules.

On May 22, 2024, the court appointed Lead plaintiff and approved lead counsel, and on July 22, 2024, Lead Plaintiff filed an amended complaint which asserts the same claims based on similar allegations in the original complaint.

The Company’s response to the Complaint is due on September 20, 2024.

See discussion in "Note 15 - Subsequent Events" .

On July 22, 2024, the lead plaintiff filed an amended complaint and the Company has 60 days to respond.

The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action.

If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable.

On November 15, 2023, a derivative action was filed in the matter styled, Weich v.

Cummins, et al.

A-23-881629-C in the District Court of Clark County, Nevada.

The Weich complaint names as defendants certain members of the Company’s Board of Directors and its Chief Executive Officer Wesley Cummins and purports to name Chief Financial Officer David Rench as a defendant.

The complaint asserts claims for breach of fiduciary duties, corporate waste and unjust enrichment based upon allegations that the defendants caused or allowed the Company to make materially false and misleading statements regarding the Company’s business, operations, and compliance policies.

Specifically, the complaint alleged that the Company overstated the profitability of the Data Center Hosting Business and its ability to successfully transition into a low-cost cloud services provider and that the Board was not “independent” within the meaning of NASDAQ listing rules.

On February 27, 2024, the derivative plaintiff filed an amended complaint asserting the same claims as the original complaint.

On June 5, 2024, the Court entered an order granting the defendants’ motion to dismiss without prejudice and dismissing all claims against all defendants, including the Company.

See discussion in "Note 15 - Subsequent Events" for events after May 31, 2024.

As of May 31, 2024, there were no other pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

Settlement of Claim

During the second quarter of fiscal year 2024, the Company entered into a settlement agreement with respect to employment-related claims by a former executive.

The terms of the settlement included payment to the claimant of $ 2.3 million, which is included in loss on legal settlement on our consolidated statements of operations.

Business Segments

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

Fiscal year ended

May 31, 2024 May 31, 2023

Data Center Hosting Business

$ 136,618 $ 55,392

Cloud Services Business

Total revenue $ 165,575 $ 55,392

Segment profit (loss) and a reconciliation to net loss before income tax expenses is as follows (in thousands):

Fiscal year ended

May 31, 2024 May 31, 2023

Segment profit (loss)

Data Center Hosting Business (1)

$ 4,660 $ ( 18,252 )

Cloud Services Business

( 65,781 ) ( 1,091 )

HPC Hosting Business

( 4,817 ) ( 246 )

Total segment loss ( 65,938 ) ( 19,589 )

( 33,085 ) ( 24,466 )

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

Interest expense, net 26,832 1,980

Change in fair value of debt 7,401 —

Change in fair value of related party debt 13,812 —

Loss on debt extinguishment 2,507 94

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

(1) The fiscal year ended May 31, 2024 includes $ 21.7 million loss on held for sale classification related to the sale of the Garden City facility, as well as $ 2.8 million of accelerated depreciation and $ 1.4 million of accelerated amortization related to damaged transformers at the Company’s Ellendale facility that have been rendered obsolete.

See "Note 5 - Asset Disposition" and "Note 3 - Property and Equipment", respectively, for further discussion of these events.

(2) Other includes corporate related items not allocated to reportable segments.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

We also provide the following additional segment disclosures (in thousands):

Fiscal year ended

May 31, 2024 May 31, 2023

Depreciation and amortization:

Data Center Hosting Business

$ 19,948 $ 7,025

Cloud Services Business

HPC Hosting Business

Total depreciation and amortization (2)

$ 79,360 $ 7,267

Capital expenditures:

Data Center Hosting Business

$ 38,266 $ 135,946

Cloud Services Business

HPC Hosting Business

207,299 9,813

$ 4,291 $ ( 1,164 )

Total capital expenditures $ 329,938 $ 144,985

(1) Other includes corporate related items not allocated to reportable segments.

(2) Includes amortization of the finance lease right-of-use assets.

Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands):

Fiscal year ended

May 31, 2024 May 31, 2023

Data Center Hosting Business

$ 145,222 $ 224,447

Cloud Services Business

374,216 3,127

HPC Hosting Business

220,648 10,949

Total segment assets 740,086 238,523

22,781 25,434

Total assets $ 762,867 $ 263,957

(1) Other includes corporate related items not allocated to reportable segments.

Earnings Per Share

Basic net income (loss) per share (“EPS”) of Common Stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of Common Stock outstanding during the period.

Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity.

Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.

As of May 31, 2023, the Company had approximately 12.8 million shares of granted but unvested restricted stock and restricted stock units that would have a potentially dilutive effect on earnings per share.

Earnings per share for the year ended May 31, 2023 and 2022 are shown in the following table:

(in thousands, except for share and per share data) Fiscal Year Ended

The following is a reconciliation of the denominator of the basic and diluted net income per share computations for the periods presented:

Fiscal Year Ended

May 31, 2024 May 31, 2023

Net loss from continuing operations $ ( 45,606 ) $ ( 22,486 )

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

Net Loss including noncontrolling interests ( 45,606 ) ( 23,530 )

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 )

Continuing operations $ ( 0.49 ) $ ( 0.39 )

Discontinued operations $ — $ ( 0.02 )

Basic and diluted net loss per share $ ( 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

DISCONTINUED OPERATIONS

During the fiscal year ended May 31, 2022, the Company recognized a net loss from discontinued operations related to the Company's cryptocurrency mining operation.

The Company had no results from discontinued operations during the year ended May 31, 2023.

Operating results of discontinued operations are summarized below:

(in thousands) Fiscal Year Ended

Cryptoasset Mining Revenue $ 2,987

Cost of Sales 1,611

Gross Profit 1,376

Impairment of Cryptocurrency Assets ( 393 )

Gain on Sale of Fixed Assets 1,229

Loss on Asset Reclass to Discontinued Operations ( 3,256 )

Net Loss from Discontinued Operations $ ( 1,044 )

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

As of May 31, 2024 and 2023, the Company had approximately 9.0 million and 12.8 million shares, respectively, of granted but unvested restricted stock and restricted stock units that would have a potentially dilutive effect on earnings per share.

As of May 31, 2024, the Company had approximately 19.0 million shares associated with the Yorkville Convertible Debt which have been excluded from the calculation of earnings per share because the effect of those shares would be antidilutive.

Subsequent Events

Financing Arrangements

The Company entered into a finance arrangement for approximately $ 41 million over 24 months for 1,024 H100 GPUs in connection with its AI Cloud Services business.

Additional Debt Financing

The Company received an additional $ 3 million in funding from the B.

Riley Loan and Security Agreement, bringing the total outstanding loan principal balance to $ 39.5 million.

Subsequently, the Company repaid the entire outstanding loan principal balance, along with all outstanding interest and fees.

Common Stock Issuance

The Company began issuing common stock under an "at the market" sale agreement 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.

Customer Prepayment

The Company has confirmed receipt of a customer prepayment for its AI cloud services business of approximately $ 22.5 million.

Derivative Lawsuit; Applied Digital’s Motion to Dismiss Granted

As previously disclosed, on November 15, 2023, a lawsuit asserting derivative claims was filed in the District Court of Clark County, Nevada (the “Court”), on behalf of nominal defendant Applied Digital Corporation (the “Company”) against six members of our board of directors in a case captioned Robert Weich v.

Wes Cummins, et.

A-23-881629-B.

The complaint asserted claims for breach of fiduciary duty, unjust enrichment, and corporate waste arising from statements made by the Company concerning its cryptocurrency mining business segment and a loan that the Company’s subsidiary, SAI Computing LLC, received from B.

Riley Commercial Capital and B.

Riley Securities, as well as the early repayment of that loan.

On February 27, 2024, the plaintiff filed an amended complaint asserting the same claim as the original complaint.

On June 5, 2024, following a complete briefing and argument on the defendants’ motion to dismiss, the Court entered an order granting the defendants’ motion without prejudice and holding that the plaintiff failed to plead (1) demand futility as to each of plaintiff’s claims or (2) a claim for breach of fiduciary duty.

The order dismissed all claims against all defendants, including the Company.

The plaintiff has the ability to move for leave to file an amended complaint.

If plaintiff does not file such a motion or the court denies it, the plaintiff will have 30 days after notice of entry of the order granting the motion to dismiss to file a notice of appeal.

CIM Arrangement

On June 7, 2024, APLD Holdings 2 LLC (the “Borrower”), a subsidiary of the Company, entered into a promissory note (the “CIM Promissory Note”) with CIM APLD Lender Holdings, LLC, a Delaware limited liability company (the “Lender”).

The CIM Promissory Note provides for borrowings up to $ 125 million and includes an accordion feature that allows for up to an additional $ 75 million of borrowings.

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

The CIM Promissory Note is payable three years from issuance.

As partial consideration for the CIM Promissory Note, the Company 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, the Borrower and the Lender entered into a Waiver Agreement (the “Waiver”), whereby the Lender agreed to waive the satisfaction of certain conditions for the subsequent borrowings, allowing the Company 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, the Company issued warrants to the 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.

Repayment of Vantage Transformer Loan

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

Yorkville Amendment

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

In exchange for giving its consent to the transaction with the CIM Lender, the Company 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.

The Company further agreed to deliver a security agreement whereby its 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.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

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, the Company is 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 to Authorized Shares

On June 11, 2024, the Company filed a Certificate of Amendment to its 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, par value $ 0.001 per share, was increased to 300,000,000 .

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

Series E Preferred Stock Sales

Subsequent to May 31, 2024, the Company closed on three offerings of the Series E Preferred Stock.

The Company has sold total shares of 301,673 for proceeds of $ 6.9 million net of issuance costs of $ 0.6 million.

At-the-Market Sales Agreement

On July 9, 2024, the Company entered into a Sales Agreement (the “Sales Agreement”) with B.

Riley Securities, Inc., BTIG, LLC, Lake Street Capital Markets, LLC, Northland Securities, Inc.

and Roth Capital Partners, LLC (collectively, the “Agents”), pursuant to which the Company may offer and sell, from time to time, through the Agents, up to $ 125,000,000 of shares of the Company’s common stock.

As of the date of this report, approximately 2.9 million shares of the Company’s common stock has been issued and sold under the Sales Agreement for proceeds of $ 16.4 million net of issuance costs of $ 0.5 million.

Garden City Release of Escrow Funds

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

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

Yorkville Convertible Debt

Subsequent to May 31, 2024, $ 10.0 million of the Initial YA Notes has been converted into approximately 2.6 million shares of common stock as well as $ 38.0 million of the May Note has been converted into approximately 8.8 million shares of common stock.

Standby Equity Purchase Agreement ("SEPA")

On August 28, 2024, the Company entered into the SEPA with YA Fund, 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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

For the Fiscal Year Ended May 31, 2024

$ 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.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data