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Item 2. Management’s Discussion and Analysis

2024-10-09 compared with 2024-04-11 · 303 added, 247 removed, 111 unchanged (83% of the section changed)

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This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties.

In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words.

You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.

Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions, or state other “forward-looking” information.

Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false.

These statements are based on our management’s beliefs and assumptions, which are based on currently available information.

These assumptions could prove inaccurate.

Our actual results, and the assumptions on which we relied, could prove materially different from our expectations.

You are cautioned not to place undue reliance on forward-looking statements.

Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

There are a number of important factors that could cause our actual results to differ materially from those expressed in any forward-looking statement made by us.

These factors include, but are not limited to:

• our ability to complete construction of the Ellendale HPC data center;

• availability of financing to continue to grow our business;

• labor and other workforce shortages and challenges;

• power or other supply disruptions and equipment failures;

• our dependence on principal customers;

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• our ability to continue to grow sales in our hosting business;

• concentration of customers in the crypto mining industry, which customer base may decline due to price volatility and uncertainties around regulation policy of cryptoasset prices;

• volatility of cryptoasset prices

• uncertainties of cryptoasset regulation policy;

• equipment failures, power or other supply disruptions.

You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended May 31, 2023, which was filed on August 2, 2023, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended May 31, 2024, which was filed with the SEC on August 30, 2024, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

Moreover, we operate in an evolving environment.

New risk factors and uncertainties emerge from time to time, and it is not possible for our management to predict all risk factors and uncertainties, nor are we able to assess the impact of all of these risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements.

These risks are not exhaustive.

Executive Overview

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Business Overview

We are a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers in the high-performance compute hosting (“HPC hosting”), cloud services (“Cloud services”), and datacenter hosting (“Datacenter hosting”) industries.

We are a U.S.

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

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

We operate in three distinct business segments, including, Blockchain data

center hosting (the "Data Center Hosting Business"), cloud services through a wholly-owned subsidiary (the "Cloud Services Business") and HPC data center hosting (the "HPC Hosting Business"), as further discussed below.

Trends and Other Factors Affecting Our Business

Regulatory Environment

We have a material concentration of customers in the crypto mining industry.

Our customers’ businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax.

Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies.

As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.

federal, state and local and international jurisdictions.

These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another.

Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions.

To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations.

As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S.

Congress and certain U.S.

agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets.

Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry.

For instance, on September 24, 2021, China imposed a ban on all crypto transactions and mining.

Ongoing and future regulatory actions could effectively prevent our customers’ mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete.

Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.

Critical Accounting Policies and Estimates

The regulatory landscape surrounding HPC, cloud, and blockchain hosting services is evolving rapidly, and we anticipate increased scrutiny and potential regulation in the near and long term.

These developments may significantly impact our business and operations in ways that are difficult to predict.

In the realm of cloud computing, there are growing concerns about the ethical implications and potential misuse of these technologies, particularly in association with AI and machine learning.

Governments and regulatory bodies are considering measures to ensure the responsible development and deployment of AI systems, including transparency, accountability, and fairness guidelines.

The amount of energy used for crypto mining and co-location services has recently received increased attention.

In January 2024, the U.S.

Energy Information Administration conducted an emergency survey of electricity consumption data from cryptocurrency mining companies in the U.S.

This indicates that more focus is being placed on the energy usage of these activities.

It is unclear how the information collected will be used for future regulations, but it is expected that energy efficiency and sustainability will become more critical factors regulating this industry.

Furthermore, using digital assets, including Bitcoin, in illicit financial activities has become a significant concern for regulators and lawmakers.

Leaders in the U.S.

House Financial Services Committee and U.S.

Senate Banking Committee expressed interest in passing legislation to provide additional regulatory authority to address these risks.

Treasury Department has also requested additional authorities to combat using digital assets in illegal activities.

While there is currently insufficient support for any particular proposal, we expect that regulatory efforts in this area will continue to evolve and potentially impact our business.

We also closely follow developments related to regulating digital asset markets and financial services.

In January 2024, the SEC approved a series of spot Bitcoin exchange-traded funds (ETFs), marking a significant milestone in the mainstream adoption of digital assets.

However, the regulatory landscape for digital asset markets remains complex and uncertain, with various agencies and lawmakers proposing different approaches to oversight and regulation.

As a company operating at the intersection of data center, cloud and HPC hosting services, we are committed to maintaining a proactive and adaptive approach to regulatory compliance.

We closely monitor legislative and regulatory developments and engage in dialogue with relevant stakeholders to ensure our business practices align with the evolving legal and regulatory framework.

Despite the uncertainties posed by the changing regulatory landscape, we remain committed to delivering innovative and responsible solutions in the data center, cloud and HPC hosting markets while prioritizing compliance and risk management.

However, if we fail to comply with applicable laws and regulations, we may be subject to significant liabilities, including fines and penalties, and our business, financial condition, or results of operations could be adversely affected.

Critical Accounting Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

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However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q.

Our critical accounting estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q.

Business Update

Datacenter Hosting

Our Datacenter hosting business operates datacenters to provide energized space to crypto mining customers.

The Company’s 100 MW facility in Jamestown, North Dakota operated at full capacity during the quarter ended February 29, 2024;

however, the Company’s 180 MW facility in Ellendale, North Dakota experienced a power outage starting in January.

In response to these challenges, our utility provider installed transformers to enable us to selectively power-down the affected portions of our site.

Upon re-energization we have determined the failures were due to transformers not meeting industry standards.

The Company has successfully procured new transformers and related components from North American manufacturers.

As of the date of this report, the Ellendale facility has begun energization and has been re-energized to approximately 14% of its full capacity, or 25 MW.

In addition, the Company anticipates that as new transformers are received and installed, the Ellendale facility will target operating capacity of approximately 65%-75% of full capacity by the end of May 2024.

During the quarter ended February 29, 2024, the Company increased its energy capacity at its 200 MW Garden City, Texas facility up to 132 MW.

As of February 29, 2024, the Company determined the Garden City facility met the criteria for classification as held for sale.

On March 14, 2024, the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Mara Garden City LLC, a Delaware limited liability company and a subsidiary of Marathon Digital Holdings, Inc.

(“Marathon”), pursuant to which the Company and related subsidiaries agreed to sell to Mara Garden City LLC the Garden City hosting facility (“the Transaction”) for total cash consideration of up to of $87.3 million.

The Company will also receive approximately $10.0 million in additional consideration at the closing of the Transaction (the “Closing”) in connection with the surrender of certain of Marathon’s revenue prepayments under its existing service agreements with the Company.

The Company recognized a loss of approximately $21.7 million in connection with the classification of assets held for sale to recognize the assets at fair value less costs to sell, which was less than the asset’s carrying value at February 29, 2024.

The Purchase and Sale Agreement contains customary representations and warranties made by the parties, covenants and agreements, and Closing conditions and post-Closing obligations.

In addition, in the event the full intended additional megawatt energization for the Facility is not conditionally approved by the applicable regulatory authority within 120 days of the Closing, the total cash consideration is subject to a reduction of up to $34.0 million, depending on the amount of the additional megawatt energization that is not conditionally approved.

Data Center Hosting Business

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

As of August 31, 2024, our 106 MW facility in Jamestown, North Dakota and our 180 MW facility in Ellendale, North Dakota are operating at full capacity.

During the third quarter of fiscal year 2024, we entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with Mara Garden City LLC ("Mara"), a Delaware limited liability company and a subsidiary of Marathon Digital Holdings, Inc., pursuant to which we and related subsidiaries agreed to sell to Mara the Garden City hosting facility for total cash consideration of up to of $87.3 million.

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

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

During the three months ended August 31, 2024, we received the remaining $25 million of the purchase price held in escrow pending such conditional approval, which is included in gain on classification of held for sale on our unaudited condensed consolidated statements of operations.

Cloud Services

Applied Digital’s Cloud Services business provides high-performance computing power for artificial intelligence and machine learning applications.

The Company continues to seek and sign additional customers and the pipeline remains robust.

Near the end of the quarter, equipment began generating revenue, which the Company expects will make a positive impact on the financial performance of this segment in the fiscal fourth quarter.

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

During the fiscal second quarter, the Company broke ground on its first 100 MW high-performance compute facility in Ellendale, North Dakota.

The new 342,000-square-foot building will provide ultra-low cost and highly efficient liquid-cooled infrastructure for HPC applications.

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

The Company is in advanced discussions with traditional financing counterparties for this investment-grade tenant.

The exclusive negotiation period with the initial HPC anchor tenant identified for our Ellendale campus expired at the end of March.

Our Cloud Services Business provides high-performance computing power for artificial intelligence and machine learning applications.

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

Near the end of the fiscal year 2024, equipment began generating revenue resulting in the Company recognizing $25.9 million from this business segment during fiscal quarter ended August 31, 2024.

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

During the prior fiscal year, we broke ground on our first 100 MW HPC facility in Ellendale, North Dakota.

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

We continue the negotiations (although exclusivity has recently expired) with a US-based hyperscaler for a 400 MW capacity lease, inclusive of our current 100 MW facility under construction and two forthcoming buildings in Ellendale, North Dakota.

We also are in advanced discussions with traditional financing counterparties to facilitate construction activities for this investment-grade tenant.

Public Offerings and Changes to Equity

CIM Arrangement

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

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

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

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

As consideration for the CIM Promissory Note, we agreed to issue to the CIM Lender warrants to purchase up to an aggregate of 9,265,366 shares of Common Stock.

The warrants were issuable in two tranches, (i) for the purchase of up to 6,300,449 shares of Common Stock (the “Initial Warrant”), and (ii) for the purchase of up to 2,964,917 shares of Common Stock (the “Warrant”).

The Initial Warrant was issued on June 17, 2024.

On August 11, 2024, we and the CIM Lender entered into a waiver agreement (the “Waiver Agreement”), whereby the CIM Lender agreed to waive the satisfaction of certain conditions for the subsequent borrowings, allowing us to draw an

additional $20 million (net of original discount and fees) of borrowings under the CIM Promissory Note.

As consideration for the Waiver Agreement, we issued the Warrant to the CIM Lender.

Yorkville Amendments

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

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

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

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

In addition, pursuant to the terms of the Consent, the Prepaid Advance Agreement entered into between us and YA Fund on March 27, 2024 (the “March PPA”) and the Prepaid Advance Agreement entered into between us and YA Fund on May 24, 2024 (the “May PPA” and, together with the March PPA, the “Prepaid Advance Agreements”) were amended to provide for prepayment of the convertible unsecured promissory note in the amount of up to $42.1 million issued pursuant to the May PPA (the “May Note” and together with the two convertible unsecured promissory notes in the amount of up to $50 million issued pursuant to the March PPA (the “Initial YA Notes”), the “YA Notes”), in pro rata weekly installments of $2.5 million in cash or (at YA Fund’s sole election) $5.0 million in Common Stock, commencing on July 8, 2024, for so long as either the Registration Statement on Form S-3 filed by us on April 15, 2024 or the Registration Statement on Form S-1 filed by us on May 31, 2024 (the “May Registration Statement”) is ineffective, or if the SEC does not declare the May Registration Statement effective by such date.

If elected to be paid in Common Stock, such shares would be issued at 95% of the lowest daily VWAP during the five trading day period immediately preceding the prepayment date.

As of August 31, 2024, an aggregate of $64.0 million of the YA Notes had been converted, in exchange for the issuance by us of 16.2 million shares of common stock to YA Fund, and the aggregate principal amount outstanding under the Initial YA Notes was $6.2 million.

In connection with the Series F Offering (as defined below), we entered into a Second Amendment (“Amendment No.

2”) and a Third Amendment (“Amendment No.

3”) to the March PPA and the May PPA.

Pursuant to the terms of Amendment No.

2, the March PPA and the May PPA, and the Optional Redemption provisions set forth in the YA Notes, were amended such that we may only redeem early a portion or all amounts outstanding under the YA Notes in cash after January 1, 2025.

Pursuant to Amendment No.

3, the March PPA and the May PPA were amended to eliminate the $16.0 million per month conversion limitation that exists in the aggregate across the YA Notes.

Increase In Authorized Shares

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

Pursuant to the Certificate of Amendment, the number of authorized shares of Common Stock was increased to 300,000,000.

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

As of the date of this report, the Company has 110 shareholders of record of Common Stock and 2 shareholders of record of Preferred Stock.

Roth Capital Partners LLC

On May 6, 2024, the Company began sales of common stock under an "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.

During the quarter ended August 31, 2024, the Company sold approximately 3.1 million shares for net proceeds of approximately $14.6 million with commission and legal fees related to the issuance of approximately $0.5 million.

As of August 31, 2024, this offering was completed.

At-the-Market Sales Agreement

On July 9, 2024, we entered into a Sales Agreement with B.

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

and Roth Capital Partners, LLC (the “Sales Agreement”).

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

As of August 31, 2024,

approximately 2.9 million shares of our Common Stock have been issued and sold under the Sales Agreement for approximate proceeds to us of $16.4 million.

As of August 31, 2024, this offering was no longer active.

Garden City Release of Escrow Funds

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

During the quarter ended August 31, 2024, we received the remaining $25 million of the purchase price, previously held in escrow pending such conditional approval.

On August 28, 2024, we entered into a Standby Equity Purchase Agreement with YA Fund, as amended on August 29, 2024 (the “SEPA”).

Pursuant to the SEPA, subject to certain conditions and limitations, we have 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 our 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.

The shares of common stock issuable pursuant to the SEPA will be offered and sold pursuant to Section 4(a)(2) of the Securities Act.

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

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

Pursuant to the SEPA, we 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.

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

Series E Preferred Stock

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

We have closed on several offerings of the Series E Preferred Stock, subsequent to May 31, 2024.

As of August 31, 2024, we sold 301,673 shares of Series E Preferred Stock for net proceeds of approximately $6.9 million in total.

The Series E Dealer Manager Agreement was terminated upon the termination of the Series E Preferred Stock offering on August 9, 2024.

Series F Preferred Stock

On August 29, 2024, we entered into a securities purchase agreement (the “Series F Purchase Agreement”) with YA II PN, LTD.

(“YA Fund”) for the private placement (the “Series F Offering”) of 53,191 shares of Series F Convertible Preferred Stock of the Company, par value $0.001 per share (the “Series F Preferred Stock”), including 3,191 shares representing an original issue discount of 6%.

The transaction closed on August 30, 2024, for total proceeds of $50.0 million, prior to fees paid to Northland Securities, Inc.

for their role as placement agent in an amount equal to 3.5% of the total proceeds.

Each outstanding share of Series F Preferred Stock is entitled to receive, in preference to our common stock, cumulative dividends (“Preferential Dividends”), payable quarterly in arrears, at an annual rate of 9.0% of $1,000.00 per share of Series F Preferred Stock (the “Series F Stated Value”).

At our discretion, the Preferential Dividends shall be payable either in cash or in kind or accrue and compound in an amount equal to 8.0% multiplied by the Series F Stated Value.

In addition, each holder of Series F Preferred Stock will be entitled to receive dividends equal to, on an as-converted to shares of our Common Stock basis, and in the same form as, dividends actually paid on shares of our Common Stock when, as, and if such dividends are paid on shares our Common Stock.

The Series F Preferred Stock will initially be non-convertible and will only become convertible upon, and subject to, the receipt of shareholder approval.

If shareholder approval is not obtained for any reason, the Series F Preferred Stock will remain non-convertible.

We filed the Certificate of Designation of the Series F Preferred Stock with the Secretary of State of the State of Nevada on August 30, 2024.

Pursuant to the Series F Purchase Agreement, YA Fund executed an Irrevocable Proxy, dated August 30, 2024, appointing the Company as proxy to vote in all matters submitted to our stockholders for a vote of all shares of the Series F Preferred Stock beneficially owned, directly or indirectly, by YA Fund in accordance with the recommendation of our Board of

The Irrevocable Proxy will be effective upon the receipt of shareholder approval.

If we do not receive such shareholder approval, the Irrevocable Proxy will be null and void.

We and YA Fund also entered into a registration rights agreement (the “Series F Registration Rights Agreement”), pursuant to which we agreed to prepare and file with the SEC a Registration Statement on Form S-1, registering the resale of the shares, within 45 days of signing the Series F Registration Rights Agreement (subject to certain exceptions).

Additionally, in connection with the Series F Offering, we agreed to eliminate the $16.0 million per month conversion limitation that exists in the aggregate across the YA Notes.

Recent Developments

On September 5, 2024, we entered into a securities purchase agreement (the “PIPE Purchase Agreement”) with the purchasers named therein (the “PIPE Purchasers”), for the private placement of 49,382,720 shares of our Common Stock, at a purchase price of $3.24 per share, representing the last closing price of the Common Stock on Nasdaq on September 4, 2024.

The private placement closed on September 9, 2024, with aggregate gross proceeds to us of approximately $160 million, before deducting offering expenses.

We and the PIPE Purchasers also entered into a registration rights agreement (the “PIPE Registration Rights Agreement”), pursuant to which we agreed to prepare and file with the SEC a Registration Statement on Form S-1, registering the resale of the shares, within 30 days of signing the PIPE Registration Rights Agreement (subject to certain exceptions).

On October 4, 2024, we filed a registration statement on Form S-1 (File No.

333-282518) with the SEC for the resale under the Securities Act by the PIPE Purchasers of the Common Stock issued pursuant to the PIPE Purchase Agreement.

Yorkville Debt Conversions

Subsequent to the quarter ended August 31, 2024 and as of the date of this report, $17.8 million of the Initial YA Notes were converted into approximately 5.8 million shares of common stock as well as the remainder of the May Note, $4.1 million, was converted into approximately 1.4 million shares of common stock.

As of the date of this report, following the above referenced conversions, approximately $6.2 million remains outstanding across all the YA Notes.

Series E-1 Preferred Stock

On September 23, 2024, we entered into the Dealer Manager Agreement with Preferred Capital Securities, LLC (the “Dealer Manager”) pursuant to which the Dealer Manager agreed to serve as our agent and dealer manager for the offering of up to 2,500,000 shares of our Series E-1 Redeemable Preferred Stock, par value $0.001 per share (“Series E-1 Preferred Stock”), at a price per share of $25.00 per share, pursuant to our Registration Statement on Form S-1, filed with the SEC on September 23, 2024.

CIM Arrangement

On October 8, 2024, the Company received the final $20.0 million of funding associated with the CIM Promissory Note.

As of the date of this report, the total balance outstanding under the CIM Promissory Note was $125 million.

Results of Operations

Comparative Results for the Three and Nine Months Ended February 29, 2024 and February 28, 2023:

The following table sets forth key components of the results of operations (in thousands) during the three and nine months ended February 29, 2024 and February 28, 2023.

Three Months Ended Nine Months Ended

February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023

Comparative Results for the Three Months Ended August 31, 2024 and August 31, 2023:

The following table sets forth key components of the results of operations (in thousands) during the three months ended August 31, 2024 and August 31, 2023.

Three Months Ended

August 31, 2024 August 31, 2023

Revenue $ 58,778 $ 32,139

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Cost of revenues 61,060 25,221

47,061 10,533 102,051 28,450

Selling, general and administrative (1)

14,341 16,170

Loss on classification as held for sale

21,723 — 21,723 —

Gain on classification as held for sale (2)

Loss on abandonment of assets

Loss from legal settlement — 2,300

Total costs and expenses 51,221 43,691

Operating loss (55,822) (6,989) (71,420) (37,875)

Operating income (loss) 9,483 (7,368)

Interest expense, net (3)

4,404 352 8,836 1,061

Loss on change in fair value of related party debt 2,612 — 2,612 —

Loss on extinguishment of debt (4)

Loss on change in fair value of debt 6,422 —

Loss on extinguishment of related party debt — 2,353

Net loss before income tax expenses (4,247) (11,854)

Income tax benefit — — — (280)

Income tax expense (benefit) — —

Net loss (4,247) (11,854)

Net loss attributable to noncontrolling interest — (397)

Net loss attributable to Applied Digital Corporation $ (62,838) $ (7,025) $ (84,824) $ (38,173)

Preferred dividends (44) —

Net loss attributable to Common Stockholders $ (4,291) $ (11,457)

Basic and diluted net loss per share attributable to Applied Digital Corporation $ (0.03) $ (0.11)

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Adjusted Amounts (4)

Adjusted operating loss $ (24,507) $ (1,017) $ (26,021) $ (7,613)

Adjusted operating (loss) income $ (14,323) $ 1,607

Adjusted operating margin (24) % 4 %

Adjusted net loss $ (28,911) $ (1,401) $ (34,857) $ (8,552)

Adjusted net loss per diluted share $ (0.24) $ (0.01) $ (0.32) $ (0.09)

Adjusted net loss attributable to Applied Digital Corporation $ (21,631) $ (129)

Adjusted net loss attributable to Applied Digital Corporation per diluted share $ (0.15) $ —

Other Financial Data (4)

3 unchanged sentences

as a percentage of revenues 33 % 27 %

(1) Includes cost of revenues attributable to related party revenues of $2.5 million and $3.1 million for the three months ended February 29, 2024 and February 28, 2023, respectively, and $6.6 million and $8.8 million for the nine months ended February 29, 2024 and February 28, 2023, respectively.

(2) Includes related party selling, general and administrative expense of $0.1 million and $0.5 million for the three and nine months ended February 29, 2024, respectively.

There was no related party selling, general and administrative expense incurred during the three and nine months ended February 28, 2023.

(3) Includes related party interest expense of $0.2 million and $0.8 million for the three months ended and nine months ended February 29, 2024, respectively.

There was no related party debt issued during three and nine months ended February 28, 2023 and as such, no interest expense was incurred related to related party debt.

(4) Amounts included in the nine months ended February 29, 2024 are related to the extinguishment of related party debt.

(1) Includes related party selling, general and administrative expense of $0.2 million and $0.3 million for the three months ended August 31, 2024 and August 31, 2023, respectively.

See note Note 5 - Related Party Transactions for further discussion.

(2) Includes $25 million received in connection with the sale of our Garden City facility.

See Note 11 - Commitments and Contingencies for further discussion.

(3) Includes related party interest expense of $0.7 million for the three months ended August 31, 2023.

There was no related party debt outstanding during the three months ended August 31, 2024 and as such, no interest expense was incurred related to related party debt.

See note Note 5 - Related Party Transactions for further discussion.

(4) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.

A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of MD&A.

Commentary on Results of Operations Comparative Results for the Three Months Ended February 29, 2024 compared to the Three Months Ended February 28, 2023

Revenue increased $30.2 million, or 301%, from $10.1 million for the three months ended February 28, 2023 to $40.3 million for the three months ended February 29, 2024 driven by increased capacity across the Company’s three Datacenter hosting facilities between periods as well as the Company recognizing revenue under its Cloud services segment during the three months ended February 29, 2024 due to the launch of the service during the current fiscal year.

Related party revenue decreased $.9 million, or 24%, from $4.0 million for the three months ended February 28, 2023 to $3.1 million for the three months ended February 29, 2024 driven by reduced uptime and pricing compared to the prior year comparable period.

A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of Management’s Discussion and Analysis.

Commentary on Results of Operations Comparative Results for the Three Months Ended August 31, 2024 compared to the Three Months Ended August 31, 2023

Revenue increased $26.6 million, or 83%, from $32.1 million for the three months ended August 31, 2023 to $58.8 million for the three months ended August 31, 2024, primarily driven by increased capacity across our data center hosting facilities between periods, as well as the Company recognizing revenue under our Cloud Services business during the three months ended August 31, 2024 due to the launch of the service during the fourth fiscal quarter of fiscal year 2024.

Related party revenue decreased $2.3 million, or 54%, from $4.2 million for the three months ended August 31, 2023 to $1.9 million for the three months ended August 31, 2024, primarily driven by certain related parties terminating their contracts during the first fiscal quarter of fiscal year 2025.

Cost of revenues

Cost of revenues increased $36.5 million, or 347%, from $10.5 million for the three months ended February 28, 2023 to $47.1 million for the three months ended February 29, 2024.

The increase was primarily driven by the growth in the business as more facilities were energized and as additional services were provided to customers compared to the three months ended February 28, 2023.

Cost of revenues increased $35.8 million, or 142%, from $25.2 million for the three months ended August 31, 2023 to $61.1 million for the three months ended August 31, 2024.

The change in cost of revenues is categorized as follows:

• approximately $18.3 million increase in energy costs used to generate revenue;

• approximately $28.4 million increase in depreciation and amortization expense due to an increase in owned and leased assets in-service directly supporting revenue;

• approximately $5.1 million increase in lease and related expenses for the use of data center space to support the Company’s cloud services business;

• approximately $1.8 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount supporting revenue;

• approximately $1.2 million increase in lease and related expenses for the use of datacenter space to support the Company’s cloud services business;

• approximately $1.0 million increase in other expenses directly attributable to generating revenue.

These increases were partially offset by approximately $0.5 million decrease in energy costs due to more favorable pricing during the three months ended August 31, 2024.

Selling, general and administrative expense

Selling, general and administrative expense increased $19.9 million, or 188%, from $10.5 million for the three months ended February 28, 2023 to $30.4 million for the three months ended February 29, 2024.

The increase was primarily due to the overall growth in the business.

The change in selling, general and administrative expense is categorized as follows:

• approximately $10.4 million increase in depreciation and amortization expense due to an increase in owned and leased assets that are not currently being used to generate revenue;

• approximately $4.5 million increase in lease and related expenses for datacenter space not yet being used to generate revenue;

• approximately $3.9 million increase in professional service expenses incurred related to legal services provided on discrete transactions and projects as well as general support of the business;

• approximately $0.7 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses;

Selling, general and administrative expense decreased by $1.8 million, or 11%, from $16.2 million for the three months ended August 31, 2023 to $14.3 million for the three months ended August 31, 2024.

The decreases were primarily due to an $8.8 million decrease in stock based compensation expense and a $2.0 million decrease in depreciation and amortization during the three months ended August 31, 2024 as compared to the three months ended August 31, 2023, partially offset by:

• approximately $4.8 million increase in professional service expenses primarily related to legal services provided on discrete transactions and projects as well as general support of the business;

• approximately $3.3 million increase in lease and related expenses primarily for operating leases of data center space;

• approximately $0.8 million increase in personnel expense to support the growth of the business.

Loss on classification of held for sale

Loss on classification of held for sale was $21.7 million for the three months ended February 29, 2024 due to the write down of the Garden City assets to their fair market value as a result of the planned sale of that facility.

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

Interest expense, net

Interest expense, net increased $4.1 million, or 1151%, from $0.4 million for the three months ended February 28, 2023 to $4.4 million for the three months ended February 29, 2024.

The increase was driven by an increase in finance leases and interest-bearing loans between periods.

Loss on change in fair value of related party debt

Loss on change in fair value of related party debt was $2.6 million for the three months ended February 29, 2024 due to the valuation associated with the Company’s borrowings under the AI Bridge Loan.

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

Commentary on Results of Operations Comparative Results for the Nine Months Ended February 29, 2024 compared to the Nine Months Ended February 28, 2023

Revenue increased $87.9 million, or 380%, from $23.1 million for the nine months ended February 28, 2023 to $111.0 million for the nine months ended February 29, 2024 driven by increased capacity across the Company’s three Datacenter hosting facilities between periods as well as the Company recognizing revenue under its Cloud services segment due to the launch of the service during the current fiscal year.

Related party revenue increased $0.7 million, or 7%, from $10.2 million for the nine months ended February 28, 2023 to $10.9 million for the nine months ended February 29, 2024 driven by increased uptime at the Company’s Jamestown, North Dakota facility throughout the period.

Cost of revenues

Cost of revenues increased by $73.6 million, or 259%, from $28.4 million for the nine months ended February 28, 2023 to $102.1 million for the nine months ended February 29, 2024.

The increase was primarily driven by the growth in the business as more facilities were energized and more services were provided to customers compared to the nine months ended February 28, 2023.

The changes in cost of revenues are categorized as follows:

• approximately $39.3 million increase in energy costs used to generate revenue;

• approximately $24.8 million increase in depreciation and amortization expense due to an increase in owned and leased assets directly supporting revenue;

• approximately $5.0 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount supporting revenue;

• approximately $2.7 million increase in lease and related expenses for the use of datacenter space to support the Company’s cloud services business;

• approximately $1.9 million increase in other expenses directly attributable to generating revenue.

Selling, general and administrative expense

Selling, general and administrative expense increased by $24.4 million, or 57%, from $42.8 million for the nine months ended February 28, 2023 to $67.1 million for the nine months ended February 29, 2024.

The increase was primarily due to the overall growth in the business.

The change in selling, general and administrative expense is categorized as follows:

• approximately $18.3 million increase in depreciation and amortization expense due to an increase in owned and leased assets that are not currently being used to generate revenue;

• approximately $6.6 million increase in other expenses such as operating leases expense for datacenter space not yet being used to generate revenue;

• approximately $4.6 million increase in professional service expenses related to legal services provided on discrete transactions and projects as well as general support of the business;

• approximately $3.6 million increase in other selling, general, and administrative expense such as insurance premiums and computer and software expenses.

This increase was partially offset by a decrease of approximately $8.6 million in personnel expenses largely driven by a decrease stock-based compensation expense, as the Company recognized a cumulative catch-up in stock-based compensation expense in the comparative period upon the Company’s registration statement for the award shares being declared effective.

Loss on classification of held for sale

Loss on classification of held for sale was $21.7 million for the nine months ended February 29, 2024 due to the write down of the Garden City assets to their fair market value as part of the planned sale of that facility.

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

Loss from Legal Settlement

Loss from legal settlement was $2.4 million for the nine months ended February 29, 2024 primarily due to a settlement agreement entered into by the Company in respect to employment-related claims by a former executive.

The terms of the settlement include payment to the claimant of $2.3 million.

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

Gain on classification of held for sale

Gain on classification of held for sale was $24.8 million for the three months ended August 31, 2024.

This was primarily due to the receipt of $25.0 million released from escrow funds in association with the sale of our Garden City facility.

This increase was partially offset by $0.2 million in loss on assets held for sale associated with writing down certain assets to their fair market value.

There was no such activity recorded in the prior year comparative period.

Loss on abandonment of assets

Loss on abandonment of assets was $0.6 million during the three months ended August 31, 2024 due to the abandonment of assets associated with projects that are no longer viable.

There was no such activity recorded in the prior year comparative period.

Interest expense, net

Interest expense, net increased $7.8 million, or 733% , from $1.1 million for the nine months ended February 28, 2023 to $8.8 million for the nine months ended February 29, 2024 driven by increases in finance leases and debt obligations between periods.

Loss on change in fair value of related party debt

Loss on change in fair value of related party debt was $2.6 million for the nine months ended February 29, 2024 due to the valuation associated with the Company’s borrowings under the AI Bridge Loan.

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

Loss on extinguishment of debt

Loss on extinguishment of debt increased $2.3 million, or 2401%, from $0.1 million for the nine months ended February 28, 2023 to $2.4 million for the nine months ended February 29, 2024.

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

Riley related party loan during the nine months ended February 29, 2024.

Income tax benefit

Income tax benefit decreased $0.3 million or 100% from a $0.3 million benefit for the nine months ended February 28, 2023 to zero for the nine months ended February 29, 2024.

This change was driven by a change in valuation allowance for the nine months ended February 29, 2024 compared to the nine months ended February 28, 2023.

Comparative Segment Data for the Three and Nine Months Ended February 29, 2024 and February 28, 2023:

The following table sets forth the Company’s operating profit for each of our segments for the three and nine months ended February 29, 2024 and February 28, 2023 (in thousands):

Three Months Ended Nine Months Ended

February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023

Segment loss:

Datacenter hosting segment (24,443) (3,117) (4,647) (18,218)

Interest expense, net increased $5.2 million, or 243%, from $2.1 million for the three months ended August 31, 2023 to $7.3 million for the three months ended August 31, 2024.

The increase was primarily driven by an increase in finance leases and interest-bearing loans between periods.

Loss on change in fair value of debt

Loss on change in fair value of debt was $6.4 million for the three months ended August 31, 2024 due to the adjustments to the fair value of the Yorkville Convertible Debt recorded during the three months ended August 31, 2024.

Comparative Segment Data for the Three Months Ended August 31, 2024 and August 31, 2023:

The following table sets forth the Company’s operating profit (loss) for each of our segments for the three months ended August 31, 2024 and August 31, 2023 (in thousands):

Three Months Ended

August 31, 2024 August 31, 2023

Segment profit (loss)

Data center hosting segment 35,851 9,001

Cloud services segment

1 unchanged sentence

HPC hosting segment (2,944) (754)

Total segment loss $ (47,453) $ (3,876) $ (48,447) $ (18,977)

Commentary on Segment Data Comparative Results for the Three Months Ended February 29, 2024 compared to the Three Months Ended February 28, 2023

Datacenter Hosting Segment

Operating Loss

Datacenter hosting operating loss increased $21.3 million, or 684% from a loss of $3.1 million for the three months ended February 28, 2023 to a loss of $24.4 million for the three months ended February 29, 2024.

The change was primarily driven by the loss on classification of held for sale which the Company recognized in association with the planned sale of the Garden City facility, as well as accelerated depreciation and amortization recognized in relation to outage incidents at

the Ellendale, North Dakota facility.

This loss was partially offset by an increase in MW capacity across the Company’s three Datacenter hosting facilities during the three months ended February 29, 2024, compared to operations only at the Company’s Jamestown facility during the the three months ended February 28, 2023, as well as a decrease in stock-based compensation between the periods.

Cloud Services Segment

Operating Loss

Cloud services operating loss increased $20.8 million, from a loss of $0.7 million for the three months ended February 28, 2023 to a loss of $21.6 million for the three months ended February 29, 2024 primarily driven by amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and an increase stock-based compensation expense attributable to the segment as the Company ramps up its Cloud services operations.

HPC Hosting Segment

Operating Loss

HPC hosting operating loss increased $1.4 million, or 7928% from a loss of $18 thousand to a loss of $1.4 million.

The loss was largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases as the Company ramps up its HPC hosting operations.

Commentary on Segment Data Comparative Results for the Nine Months Ended February 29, 2024 compared to the Nine Months Ended February 28, 2023

Datacenter Hosting Segment

Operating Loss

Datacenter hosting operating loss decreased $13.6 million, or 74% from a loss of $18.2 million for the nine months ended February 28, 2023 to a loss of $4.6 million for the nine months ended February 29, 2024.

The change was driven by a full nine months of operations at our Ellendale, North Dakota facility as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024, as well as a decrease in stock-based compensation between the periods.

These changes were partially offset by the loss on classification of held for sale which the Company recognized in association with the sale of the Garden City facility, and by accelerated depreciation and amortization in relation to outage incidents at the Ellendale, North Dakota facility.

Total segment profit $ 17,096 $ 842

Commentary on Segment Data Comparative Results for the Three Months Ended August 31, 2024 compared to the Three Months Ended August 31, 2023

Data Center Hosting Segment

Operating Profit

Data Center Hosting operating profit increased $26.9 million, or 298% from a profit of $9.0 million for the three months ended August 31, 2023 to a profit of $35.9 million for the three months ended August 31, 2024.

This increase was primarily due to the receipt of $25.0 million released from escrow funds in association with the sale of our Garden City facility as well as an overall reduction in expenses due to the sale of the Garden City facility.

Cloud Services Segment

Operating Loss

Cloud services operating loss increased $40.0 million, from a loss of $0.7 million for the nine months ended February 28, 2023 to a loss of $40.7 million for the nine months ended February 29, 2024 primarily due to amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense as the Company ramps up its Cloud services operations.

Cloud services operating loss increased $8.4 million, from a loss of $7.4 million for the three months ended August 31, 2023 to a loss of $15.8 million for the three months ended August 31, 2024 primarily driven by amortization expense on finance leases of computing equipment, occupancy costs from operating leases, and an increase stock-based compensation expense attributable to the segment due to headcount increasing year over year.

HPC Hosting Segment

Operating Loss

HPC hosting operating loss increased $3.1 million, or 17156% from a loss of $18 thousand to loss of $3.1 million.

HPC hosting operating loss increased $2.2 million, or 290% from a loss of $0.8 million to a loss of $2.9 million.

The loss was largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases as the Company ramps up its HPC hosting operations.

Non-GAAP Measures

To supplement our consolidated financial statements presented under GAAP, we are presenting certain non-GAAP financial measures.

We are providing these non-GAAP financial measures to disclose additional information to facilitate the comparison of past and present operations by providing perspective on results absent one-time or significant non-cash items.

To supplement our unaudited condensed consolidated financial statements presented under GAAP, we are presenting certain non-GAAP financial measures.

We are providing these non-GAAP financial measures to disclose additional

information to facilitate the comparison of past and present operations by providing perspective on results absent one-time or significant non-cash items.

We utilize these measures in the business planning process to understand expected operating performance and to evaluate results against those expectations.

We believe that these non-GAAP financial measures, when considered together with our GAAP financial results, provide management and investors with an additional understanding of our business

operating results regarding factors and trends affecting our business and provide a reasonable basis for comparing our ongoing results of operations .

We believe that these non-GAAP financial measures, when considered together with our GAAP financial results, provide management and investors with an additional understanding of our business operating results regarding factors and trends affecting our business and provide a reasonable basis for comparing our ongoing results of operations .

These non-GAAP financial measures are provided as supplemental measures to the Company’s performance measures calculated in accordance with GAAP and therefore, are not intended to be considered in isolation or as a substitute for comparable GAAP measures.

Further, these non-GAAP measures have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles.

Further, these non-GAAP financial measures have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles.

Because of the non-standardized definitions of non-GAAP financial measures, we caution investors that the non-GAAP financial measures as used by us in this Quarterly Report on Form 10-Q have limits in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies.

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Beginning in the third quarter of 2024, the Company updated its presentation of non-GAAP measures.

As a result of this updated presentation, the Company no longer excludes start-up costs as an adjustment to Operating loss, Net loss, or EBITDA in our calculation of Adjusted operating loss, Adjusted net loss, Adjusted net loss per diluted share, and Adjusted EBITDA.

EBITDA, Adjusted EBITDA, Adjusted net loss, and Adjusted net loss per diluted share are non-GAAP measures and are defined below.

Adjusted Operating Loss, Adjusted Net Loss, and Adjusted Net Loss per Diluted Share

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represent operating loss and net loss, respectively, excluding stock-based compensation, litigation expenses, non-recurring professional service costs, non-recurring research and development costs, loss on classification of held for sale, loss on abandonment of assets, and loss on legal settlement.

Adjusted net loss is further adjusted for the loss on the change in fair value of related party debt and the loss on extinguishment of debt.

As a result of this updated presentation, the Company no longer excludes start-up costs as an adjustment to Operating income (loss), Net loss, or EBITDA in our calculation of Adjusted operating (loss) income, Adjusted net loss attributable to Applied Digital Corporation, Adjusted net loss attributable to Applied Digital Corporation per diluted share, and Adjusted EBITDA.

EBITDA, Adjusted EBITDA, Adjusted net loss attributable to Applied Digital Corporation, and Adjusted net loss attributable to Applied Digital Corporation per diluted share are non-GAAP measures and are defined below.

Adjusted Operating (Loss) Income, Adjusted Net Loss, and Adjusted Net Loss per Diluted Share

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP financial measures that represent operating loss and net loss, respectively, excluding stock-based compensation, non-recurring repair expenses, diligence, acquisition, disposition and integration expenses, litigation expenses, non-recurring research and development expenses, gain on classification of held for sale, accelerated depreciation and amortization, loss on legal settlement, as well as other non-recurring expenses that Management believes are not representative of the Company’s expected ongoing costs.

Adjusted Net Loss is Adjusted Operating Loss further adjusted for the losses associated with the abandonment of assets, changes in fair value of debt and loss on extinguishment of debt.

We define “Adjusted Net Loss per Diluted Share” as Adjusted Net Loss divided by weighted average diluted share count.

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“EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization.

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, litigation expenses, non-recurring professional service costs, non-recurring research and development costs, loss on classification of of held for sale, loss on abandonment of assets, loss on the change in fair value of related party debt, loss of extinguishment of debt, and loss on legal settlement.

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, non-recurring repair expenses, diligence, acquisition, disposition and integration expenses, litigation expenses, research and development expenses, gain on classification of held for sale, the losses associated with the abandonment of assets, changes in fair value of debt, debt extinguishment, as well as the loss on legal settlement and other non-recurring expenses that Management believes are not representative of the Company’s expected ongoing costs.

Reconciliation of GAAP to Non-GAAP Measures

Three Months Ended Nine Months Ended

$ in thousands February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023

Adjusted operating loss

Operating loss (GAAP) $ (55,822) $ (6,989) $ (71,420) $ (37,875)

Three Months Ended

$ in thousands August 31, 2024 August 31, 2023

Adjusted operating (loss) income

Operating income (loss) (GAAP) $ 9,483 $ (7,368)

Stock-based compensation (3,072) 5,641

Non-recurring professional service costs (a)

2,355 365 3,442 1,437

Non-recurring research and development costs (b)

Loss on classification as held for sale

21,723 — 21,723 —

Accelerated depreciation and amortization (c)

4,043 — 4,220 —

Non-recurring repair expenses (1)

Diligence, acquisition, disposition and integration expenses (2)

Litigation expenses (3)

Research and development expenses (4)

Loss on abandonment of assets

Gain on classification of held for sale

Accelerated depreciation and amortization (5)

Loss on legal settlement — 2,300

Other non-recurring costs (d)

— 349 — 1,054

Adjusted operating loss (Non-GAAP) $ (24,507) $ (1,017) $ (26,021) $ (7,613)

Other non-recurring expenses (6)

Adjusted operating (loss) income (Non-GAAP) $ (14,323) $ 1,607

Adjusted operating margin (24) % 4 %

Adjusted net loss

Net loss (GAAP) $ (62,838) $ (7,341) $ (85,221) $ (38,750)

Adjusted net loss attributable to Applied Digital Corporation

Net loss attributable to Applied Digital Corporation (GAAP) $ (4,247) $ (11,457)

Stock-based compensation (3,072) 5,641

Non-recurring professional service costs (a)

2,355 365 3,442 1,437

Non-recurring research and development costs (b)

Loss on classification as held for sale

21,723 — 21,723 —

Accelerated depreciation and amortization (c)

4,043 — 4,220 —

Loss on change in fair value of related party debt 2,612 — 2,612 —

Non-recurring repair expenses (1)

Diligence, acquisition, disposition and integration expenses (2)

Litigation expenses (3)

Research and development expenses (4)

Gain on classification of held for sale

Accelerated depreciation and amortization (5)

Loss on abandonment of assets

Loss on change in fair value of debt

Loss on extinguishment of debt — 2,353

Loss on legal settlement — 2,300

Other non-recurring costs (d)

Adjusted net loss (Non-GAAP) $ (28,911) $ (1,401) $ (34,857) $ (8,552)

Adjusted net loss per diluted share (Non-GAAP) $ (0.24) $ (0.01) $ (0.32) $ (0.09)

Other non-recurring expenses (6)

Adjusted net loss attributable to Applied Digital Corporation (Non-GAAP) $ (21,631) $ (129)

Adjusted net loss attributable to Applied Digital Corporation per diluted share (Non-GAAP) $ (0.15) $ —

EBITDA and Adjusted EBITDA

Net loss (GAAP) $ (62,838) $ (7,341) $ (85,221) $ (38,750)

Net loss attributable to Applied Digital Corporation (GAAP) $ (4,247) $ (11,457)

Interest expense, net 7,308 2,133

Income tax benefit — — — (280)

Depreciation and amortization (c)

26,204 1,927 47,664 4,631

Depreciation and amortization (5)

EBITDA (Non-GAAP) $ 37,422 $ (1,312)

Stock-based compensation (3,072) 5,641

Non-recurring professional service costs (a)

2,355 365 3,442 1,437

Non-recurring research and development costs (b)

Loss on classification as held for sale

21,723 — 21,723 —

Loss on change in fair value of related party debt 2,612 — 2,612 —

Non-recurring repair expenses (1)

Diligence, acquisition, disposition and integration expenses (2)

Litigation expenses (3)

Research and development expenses (4)

Gain on classification of held for sale

Loss on abandonment of assets

Loss on change in fair value of debt

Loss on extinguishment of debt — 2,353

Loss on legal settlement — 2,300

Other non-recurring costs (d)

Other non-recurring expenses (6)

Adjusted EBITDA (Non-GAAP) $ 19,993 $ 9,864

(a) Non-recurring professional service costs represents legal, accounting, and consulting services costs related to discrete transactions and projects, as well as legal fees associated with the Company’s defense of class action lawsuits and legal fees related to matters with certain former employees.

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

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

(3) Represents non-recurring litigation expense associated with the Company’s defense of class action lawsuits and legal fees related to matters with certain former employees.

The Company does not expect to incur these expenses on a regular basis.

(b) Non-recurring research and development costs represents specific research and development activities related to the Company’s business expansion that the Company does not expect to incur on a regular basis.

(c) Accelerated depreciation and amortization represents the acceleration of expense related to transformers that were abandoned by the Company due to operational failure or other reasons.

Depreciation and amortization in this amount is included in Depreciation and Amortization expense within the Company’s calculation of EBITDA, and therefore is not added back as a management adjustment in the Company’s calculation Adjusted EBITDA.

(d) Other non-recurring costs represent expenses that are not representative of the Company’s expected ongoing costs.

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

(5) Represents the acceleration of expense related to assets that were abandoned by the Company due to operational failure or other reasons.

(6) Represents expenses that are not representative of the Company’s expected ongoing costs.

Sources of Liquidity

As of February 29, 2024, the Company had unrestricted cash and cash equivalents of $4.4 million and negative working capital of $243.5 million, inclusive of assets held for sale.

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

We have primarily generated cash in the last 12 months from the proceeds of our term and related party loans, issuance of common stock, and the receipt of contractual deposits and revenue payments from customers.

See Note 5 - Related Party Transactions and Note 6 - Debt in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on our term and related party loans.

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

During the nine months ended February 29, 2024, the Company sold approximately 18.9 million shares in total.

Net proceeds, less commission and legal fees of approximately $4.0 million, were approximately $121.0 million.

The at the market offering was completed in December 2023.

On March 14, 2024, APLD – Rattlesnake Den I LLC, a Delaware limited liability company and a subsidiary of the Company, entered into a purchase and sale agreement with Mara Garden City LLC, a Delaware limited liability company and a subsidiary of Marathon Digital Holdings, Inc., pursuant to which Rattlesnake Den I agreed to sell to Mara Garden City LLC its datacenter facility located in Garden City, Texas.

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

During the nine months ended February 29, 2024, we received $129.0 million in payments for future datacenter hosting services.

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

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

See Note 6 - Debt for further discussion of the Cornerstone Bank Loan.

As of August 31, 2024, we had unrestricted cash and cash equivalents of $58.2 million and negative working capital of $302.6 million, inclusive of assets held for sale.

Historically, we have incurred losses and have relied on equity and debt financings to fund our operations.

We have primarily generated cash in the last 12 months from the proceeds of our term and related party loans, issuance of common stock, preferred stock, convertible promissory notes and the receipt of contractual deposits and revenue payments from customers.

See Note 6 - Debt in the notes to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on our term loans.

On June 7, 2024, we entered into a promissory note with CIM APLD Lender Holdings, LLC for borrowings up to $125 million and an accordion feature that allows for up to an additional $75 million of borrowings.

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

As of the date of this report, we have borrowed $125 million under the CIM Promissory Note.

During the quarter ended August 31, 2024, Applied Digital Cloud Corporation, our wholly-owned subsidiary, entered into two Simple Agreement for Future Equity (“SAFE”) agreements totaling $12.0 million with an investor.

During the quarter ended August 31, 2024, under the “at the market” sale agreement with Roth Capital Partners, LLC, we sold approximately 3.1 million shares for net proceeds of approximately $14.6 million with commission and legal fees related to the issuance of approximately $0.5 million.

During the quarter ended August 31, 2024, we closed on three offerings of the Series E Preferred Stock in which we sold total shares of 301,673 for proceeds of $6.9 million net of issuance costs of $0.6 million.

On July 9, 2024, we entered into a 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 we may offer and sell, from time to time, through the Agents, up to $125,000,000 shares of our common stock.

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

This offering is no longer active.

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

During the quarter ended August 31, 2024, we received the remaining $25 million of the purchase price, previously held in escrow pending such conditional approval.

On August 28, 2024, we entered into the SEPA with YA Fund, which was amended on August 29, 2024.

On August 29, 2024, we entered into a securities purchase agreement with YA II PN, LTD.

for the private placement of 53,191 shares of Series F Convertible Preferred Stock of the Company, par value $0.001 per share with a Stated Value of $1,000 per share.

The transaction closed on August 30, 2024, for total proceeds to us of $50.0 million, prior to fees paid to Northland Securities, Inc.

for their role as placement agent in an amount equal to 3.5% of the total proceeds.

On September 5, 2024, we entered into the PIPE Purchase Agreement with the PIPE Purchasers, for the private placement (the “Private Placement”) of 49,382,720 shares of our common stock, par value $0.001 per share, at a purchase price of $3.24 per share, representing the last closing price of the Common Stock on the Nasdaq Global Select Market on September 4, 2024.

As of the date of this report, the Private Placement closed with aggregate gross proceeds to us of approximately $160 million, before deducting offering expenses.

During the three months ended August 31, 2024, we received $17.4 million in payments for future cloud services and $26.9 million in payments for future data center hosting services.

Funding Requirements

We have experienced net losses through the period ended February 29, 2024.

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

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

The Company expects to have sufficient liquidity, including cash on hand, payments from customers, access to debt financing, and access to public capital markets, to support ongoing operations.

We believe these activities will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash.

We expect to have sufficient liquidity, including cash on hand, payments from customers, access to debt financing, and access to public capital markets, to support ongoing operations and meet our working capital needs for at least the next 12 months and all of our known requirements and plans for cash.

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

We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all.

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Summary of Cash Flows

The following table provides information about the Company’s net cash flow for the nine months ended February 29, 2024 and February 28, 2023, respectively.

Nine Months Ended

$ in thousands February 29, 2024 February 28, 2023

Net cash provided by operating activities $ 47,896 $ 54,144

The following table provides information about our net cash flow for the three months ended August 31, 2024 and August 31, 2023, respectively.

Three Months Ended

$ in thousands August 31, 2024 August 31, 2023

Net cash (used in) provided by operating activities $ (75,890) $ 4,517

Net cash used in investing activities (32,606) (40,541)

Net cash provided by financing activities 163,365 23,663

Net decrease in cash and cash equivalents (2,594) (23,378)

Net increase (decrease) in cash and cash equivalents 54,869 (12,361)

Cash, cash equivalents, and restricted cash at beginning of year 31,688 43,574

Cash, cash equivalents, and restricted cash at end of period $ 86,557 $ 31,213

Commentary on the change in cash flows between the Nine Months Ended February 29, 2024 and Nine Months Ended February 28, 2023

Commentary on the change in cash flows between the Three Months Ended August 31, 2024 and Three Months Ended August 31, 2023

Operating Activities

The net cash provided by operating activities decreased by $6.2 million, or 12%, from $54.1 million for the nine months ended February 28, 2023 to $47.9 million for the nine months ended February 29, 2024.

The primary reasons for the change were a decrease in revenue prepayments received relative to revenue earned during the nine months ended February 29, 2024 as well as an increase in payments associated with our operating leases, partially offset by a large increase in accounts payable.

The net cash (used in) provided by operating activities changed by $80.4 million, or 1780%, from net cash provided by operating activities of $4.5 million for the three months ended August 31, 2023 to net cash used in operating activities of $75.9 million for the three months ended August 31, 2024.

The primary reasons for the change were a large increase in accounts payable, a decrease in revenue prepayments received relative to revenue earned during the three months ended August 31, 2024, as well as an increase in payments associated with our operating leases.

Investing Activities

The net cash used in investing activities increased by $26.2 million, from $96.3 million for the nine months ended February 28, 2023 to $122.5 million for the nine months ended February 29, 2024.

The primary reason for the change was an increase in lease prepayments made for leases on hosting equipment to support the Company’s Cloud services business during the nine months ended February 29, 2024.This increase was partially offset by a decrease in investments in property and equipment during the nine months ended February 29, 2024 as the Company’s payments in the comparative periods for construction of the Ellendale, North Dakota and Garden City, Texas datacenter hosting facilities outpaced current period construction payments for the Garden City hosting facility and the Company’s HPC datacenters.

The net cash used in investing activities decreased by $7.9 million, from $40.5 million for the three months ended August 31, 2023 to $32.6 million for the three months ended August 31, 2024.

This decrease was primarily due to the receipt of $25.0 million of funds that were released from escrow in association with the sale of our Garden City facility as well as a decrease in lease prepayments made for leases of hosting equipment to support the our Cloud Services Business during the three months ended August 31, 2024.

These changes were partially offset by an increase in investments in property and equipment during the three months ended August 31, 2024 as our payments in the current periods for construction of the Ellendale, North Dakota data center hosting facilities outpaced comparative period construction payments for the Garden City hosting facility and our HPC data centers.

Financing Activities

The net cash provided by financing activities increased by $53.2 million, or 283%, from $18.8 million for the nine months ended February 28, 2023 to $72.0 million for the nine months ended February 29, 2024.

The primary reasons for the change was the receipt of net proceeds from the Company’s common stock offering and the increase in related party debt proceeds, which were partially offset by an increase in debt repayments and an increase in finance lease payments during the nine months ended February 29, 2024.

The net cash provided by financing activities increased by $139.7 million, or 590%, from $23.7 million for the three months ended August 31, 2023 to $163.4 million for the three months ended August 31, 2024.

The primary reasons for the change were the receipt of net proceeds from the Company’s common and preferred stock offerings and net debt proceeds as well as the receipt of cash for equity in the Company.

These increases were partially offset by an increase in debt repayments and the payment of debt financing and stock issuance costs as well as an increase in finance lease payments during the three months ended August 31, 2024.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis