Applied Digital Corp. 10-K

Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID # 688 ) 65 Consolidated Balance Sheets 66 Consolidated Statements of Operations 67 Consolidated Statements of Stockholders' Equity 68 Consolidated Statements of Cash Flows 69 Notes to Consolidated Financial Statements 71 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Applied Digital Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Applied Digital Corporation (the “Company”) as of May 31, 2024 and 2023, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended May 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. 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. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 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 Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2020. New York, NY August 30, 2024 65 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and par value data) May 31, 2024 May 31, 2023 ASSETS Current assets: 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 assets, net 153,611 1,290 Finance lease right of use assets, net 218,683 14,303 Other assets 19,930 4,545 TOTAL ASSETS $ 762,867 $ 263,957 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: 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 debt 10,082 7,950 Current portion of debt, at fair value 35,836 — Customer deposits 13,819 32,560 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 Long-term portion of operating lease liability 109,740 1,005 Long-term portion of finance lease liability 63,288 8,334 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 Other long-term related party liabilities — 1,000 Total liabilities 638,037 194,278 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 144 101 Treasury stock, 5,032,802 shares at May 31, 2024 and 5,001,728 shares at May 31, 2023, at cost ( 62 ) ( 62 ) Additional paid in capital 374,738 160,194 Accumulated deficit ( 249,990 ) ( 100,716 ) Total stockholders’ equity attributable to Applied Digital Corporation 124,830 59,517 Noncontrolling interest — 10,162 Total stockholders' equity including noncontrolling interest 124,830 69,679 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 762,867 $ 263,957 See accompanying notes to the consolidated financial statements 66 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share data) Fiscal Year Ended May 31, 2024 May 31, 2023 Revenue: 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 ) Interest expense, net (2) 26,832 1,980 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) 2,507 94 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 attributable to Applied Digital Corporation $ ( 1.31 ) $ ( 0.48 ) Basic and diluted weighted average number of shares outstanding 114,061,414 93,976,233 (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. 67 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity For the Years Ended May 31, 2024 and 2023 (In thousands, except per share data) Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity 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 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 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 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 See accompanying notes to the consolidated financial statements 68 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Fiscal Year Ended May 31, 2024 May 31, 2023 CASH FLOW FROM OPERATING ACTIVITIES 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 Stock-based compensation 17,362 32,072 Lease expense 13,944 — Deferred income taxes — ( 540 ) Loss on extinguishment of debt 2,507 94 Loss on legal settlement 2,380 — Non cash interest expense 5,214 410 Loss on classification as held for sale 15,417 — 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 ) 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 ) 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 ) 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 Repayment of finance leases ( 59,967 ) ( 3,353 ) 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 ( 284 ) — Tax payments for restricted stock upon vesting ( 861 ) ( 168 ) Noncontrolling interest contributions — 4,146 CASH FLOW PROVIDED BY FINANCING ACTIVITIES 146,757 70,628 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 69 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 Interest paid $ 17,782 $ 1,118 Income taxes paid $ 5 $ — SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Operating right-of-use assets obtained by lease obligation $ 159,153 $ — Finance right-of-use assets obtained by lease obligation $ 227,047 $ 8,693 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 70 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2024 1. Business and Organization 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. 2. Basis of Presentation and Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly owned and controlled subsidiaries. Intercompany investments, balances and transactions have been eliminated in the consolidated financial statements. Use of Estimates 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: • Level 1: Quoted prices in active markets for identical assets or liabilities. • Level 2: Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace. 71 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2024 • Level 3: 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. Segments 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. 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, 72 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 21,349 14,575 Restricted cash included in other assets 7,000 — Total Cash, Cash Equivalents, and Restricted Cash $ 31,688 $ 43,574 Liquidity 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 (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. The Company leases office space and colocation space under operating leases and equipment under finance leases. If a lease is 73 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 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 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 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. The benefit of a tax position is recognized in the financial statements in the period during which based on all available evidence, management believes it is most likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. 74 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. For further information on income taxes, see "Note 8 - Income Taxes" below. Recent Accounting Pronouncements 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. 3. Property and Equipment Property and equipment, net consisted of the following as of May 31, 2024 and 2023 (in thousands): Estimated Useful Life May 31, 2024 May 31, 2023 Networking equipment, electrical equipment, and software 5 years $ 32,517 $ 21,173 Electric generation and transformers 15 years 9,933 4,655 Land and building Building 39 years 103,990 63,350 Land 6,205 2,152 Land improvements 15 years 1,380 1,293 Leasehold improvements 3 years - 7 years 1,051 — Construction in progress 190,162 108,784 Other equipment and fixtures 5 years - 7 years 9,552 1,684 Total cost of property and equipment 354,790 203,091 Accumulated depreciation ( 14,409 ) ( 4,940 ) Property and equipment, net $ 340,381 $ 198,151 Depreciation expense totaled $ 15.8 million and $ 3.9 million for the fiscal years ended May 31, 2024 and 2023, respectively. 75 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2024 4. Revenue from Contracts with Customers 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 % Customer B — % 20 % Customer C — % 19 % Customer D — % 14 % Customer E — % 12 % Customer F — % 11 % Customer G 12 % — % Deferred Revenue 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 Revenue recognized ( 165,028 ) ( 55,392 ) Other adjustments 7,571 135 Less: 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, 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 applied ( 12,633 ) — Other adjustments ( 11,764 ) ( 135 ) Less: Related party balances ( 1,549 ) ( 3,810 ) Balance, end of period $ 13,819 $ 32,559 5. 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 76 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 $ 87,329 Less: Conditional Amount ( 34,000 ) Cash Consideration 53,329 Lease Liabilities Assumed 3,207 Deferred Revenue Released 9,971 Implied Fair Value 66,507 Less: Estimated Costs to Sell ( 1,200 ) Total fair value less costs to sell $ 65,307 Loss calculation Carrying value of assets sold $ 87,030 Less: Fair value less costs to sell 65,307 Less: Purchase price accounting adjustments 6,306 Loss on classification of held for sale $ 15,417 6. Related Party Transactions Related Party Revenue 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 77 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2024 Related Party Sublease Income The Company receives sublease income from B. Riley Asset Management, which is also a wholly-owned subsidiary of B. Riley Financial, Inc. 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 B. Riley Loan 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. The B. 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. 78 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. 7. Debt 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 297 354 Deferred financing costs, net of amortization ( 501 ) ( 1,770 ) Less: 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 Weighted-average interest rate 2.7 % 13.4 % Remaining Principal Payments 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 FY26 55,487 FY27 11,935 FY28 8,512 FY29 3,845 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 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 79 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 (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. 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 (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 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. 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. 80 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. (“YA Fund”). 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). 8. Income Taxes 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 Current expense (benefit) Federal $ — $ — Foreign — — State 96 18 Total current expense 96 18 Deferred expense (benefit) Federal — ( 540 ) Foreign — — State — — Total deferred (benefit) expense — ( 540 ) Total income tax (benefit) expense $ 96 $ ( 523 ) The following table reconciles the statutory rate to our effective tax rate for the fiscal years ended May 31, 2024 and 2023: 81 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 rate at the U.S. statutory rate 21.0 % 21.0 % Stock-based compensation 2.0 % ( 6.0 ) % 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 ) % 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 for the fiscal years ended May 31, 2024 and 2023 are as follows (in thousands): May 31, 2024 May 31, 2023 Deferred tax assets: Net operating loss $ 42,810 $ 15,137 Stock-based compensation 2,758 3,068 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 Deferred tax assets, gross 87,732 21,337 Less: valuation allowance ( 47,005 ) ( 15,697 ) Total deferred tax assets, net 40,727 5,640 Deferred tax liabilities: Property and equipment ( 6,202 ) ( 3,712 ) Right of use assets ( 34,525 ) ( 1,929 ) Other — — 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. The remaining carryforward amounts expire at varying dates beginning in 2028. A valuation allowance is provided when it is more likely than not that some portion or the entire net deferred tax asset will not be realized. The Company has recorded an increase in the valuation allowance of $ 31.3 million and $ 6.4 million as of May 31, 2024 and 2023, respectively. The Company has provided a valuation allowance for the portion of the deferred tax assets that it has determined are not more likely than not to be recognized. The valuation allowance is primarily attributable to deferred tax assets for net operating losses that management believes are more likely than not to expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. 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 82 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 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. 9. Stockholders' Equity Equity Plans 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, 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 The following is a summary of the activity and balances for unvested restricted stock awards granted for the fiscal year ended May 31, 2024: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2023 380,955 $ 2.22 Granted 716,726 4.09 Vested ( 391,416 ) 2.30 Forfeited ( 67,370 ) 4.75 Outstanding as of May 31, 2024 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 The following is a summary of the activity and balances for unvested restricted stock units granted for the fiscal year ended May 31, 2024: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2023 12,465,935 $ 2.53 Granted 2,890,900 6.02 Vested ( 6,361,996 ) 2.67 Forfeited ( 639,759 ) 3.77 Outstanding as of May 31, 2024 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. 83 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”). 84 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. 10. 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): May 31, 2024 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) $ 76,132 Conversion price $ 4.01 Number of shares to be issued 18,969,939 Stock price on May 31, 2024 $ 4.23 Fair Value as of May 31, 2024 (in thousands) $ 80,243 The Company recorded a loss on the change in fair value of debt of $ 7.4 million in its consolidated statements of operations. 11. Leases 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, with the liabilities split between current and long-term, respectively. 85 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 $ 16,700 $ 347 Short-term lease expense 57 187 Total operating lease cost 16,757 534 Finance lease expense: Amortization of right-of-use assets (1) 63,930 3,336 Interest on lease liabilities 10,597 773 Total finance lease cost 74,527 4,109 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 FY26 32,035 65,829 97,864 FY27 32,697 14 32,711 FY28 33,453 1 33,454 FY29 25,240 — 25,240 Thereafter 3,536 — 3,536 Total lease payments 157,951 186,411 344,362 Less: imputed interest ( 26,506 ) ( 15,440 ) ( 41,946 ) Total lease liabilities 131,445 170,971 302,416 Less: Current portion of lease liability ( 21,705 ) ( 107,683 ) ( 129,388 ) Long-term portion of lease liability $ 109,740 $ 63,288 $ 173,028 Supplemental cash flow and other information related to leases is as follows: Fiscal year ended May 31, 2024 May 31, 2023 Weighted-average years remaining (in years): Finance leases 1.6 years 22.0 years Operating leases 3.5 years 3.0 years Weighted-average discount rate: Finance leases 10.5 % 8.0 % Operating leases 7.8 % 11.0 % 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. 86 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2024 12. Commitments and Contingencies Commitments 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. The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's Chief Financial Officer, have been named as defendants in a putative securities class action lawsuit in the matter styled, McConnell v. Applied Digital Corporation, et al. , Case No. 3:23-cv-1805, filed in August 2023 in the U.S. District Court for the Northern District of Texas (the “Securities Lawsuit”). Specifically, the complaint asserts claims pursuant to Section 10(b) 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. , Case No. A-23-881629-C in the District Court of Clark County, Nevada. The Weich complaint names as defendants certain members of the Company’s Board of Directors and its Chief Executive Officer Wesley Cummins and purports to name Chief Financial Officer David Rench as a defendant. The complaint asserts claims for 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. 87 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. 13. 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 28,957 — 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 ) Other (2) ( 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. 88 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 57,883 154 HPC Hosting Business 1,233 59 Other (1) 296 29 Total depreciation and amortization (2) $ 79,360 $ 7,267 Capital expenditures: Data Center Hosting Business $ 38,266 $ 135,946 Cloud Services Business 80,082 390 HPC Hosting Business 207,299 9,813 Other (1) $ 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 Other (1) 22,781 25,434 Total assets $ 762,867 $ 263,957 (1) Other includes corporate related items not allocated to reportable segments. 14. Earnings Per Share 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 $ ( 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 attributable to Applied Digital Corporation $ ( 1.31 ) $ ( 0.48 ) Basic and diluted weighted average number of shares outstanding 114,061,414 93,976,233 89 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. 15. Subsequent Events 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. al. , No. 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. 90 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 91 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. 92 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.