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Item 2. Management’s Discussion and Analysis

2025-01-14 compared with 2024-10-09 · 310 added, 183 removed, 231 unchanged (68% 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.

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.

You can identify these forward-looking statements through our use of words such as “will,” “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.

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• power or other supply disruptions and equipment failures;

• our dependence on principal customers;

• our dependence on principal customers, including our ability to execute leases with key customers;

• the addition or loss of significant customers or material changes to our relationships with these customers;

• delays or denials of entitlements or permits, including zoning, siting, utility and other permits, or other delays resulting from requirements of public agencies and utility companies;

• our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;

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• 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, 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.

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 supplemented by the Risk Factors included in Exhibit 99.2 to the Company’s Form 8-K filed with the SEC on November 5, 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.

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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.

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, 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

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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

As of November 30, 2024, our 106 MW facility in Jamestown, North Dakota and our 180 MW facility in Ellendale, North Dakota continue to operate at full capacity.

Cloud Services Business

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.

We believe that the pipeline to grow this segment remains robust.

Near the end of the fiscal year 2024, equipment began generating revenue resulting in us recognizing $27.7 million and $53.6 million from this business segment during the three and six months ended November 30, 2024, respectively.

We currently operate our Cloud Services Business in four states:

Colorado, Minnesota, Nevada and Utah, by renting space at third party colocation centers and providing our customers with Company-owned equipment to generate revenue.

As of November 30, 2024, this business segment had two customers and generated 43% of total revenue for the fiscal quarter ended November 30, 2024.

During the three months ended November 30, 2024, we renegotiated the majority of our computing equipment finance leases in the Cloud Services Business.

As a result of the negotiations, we extended the amortization period on these computing equipment finance leases to 5 years, which is better aligned with their expected useful life.

We anticipate commensurately reduced amortization expense in this segment going forward.

HPC Hosting Business

Our HPC Hosting Business designs, builds, and operates next-generation data centers, which are being 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

We continue negotiations with multiple US-based hyperscalers 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.

Management Updates

Effective October 15, 2024, Saidal Mohmand transitioned from his prior role of Executive Vice President of Finance to become the Chief Financial Officer of the Company, succeeding David Rench, who served as the Company’s Chief Financial Officer from March 2021 and who will continue with the Company in his new capacity as Chief Administrative Officer.

Debt and Equity 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.

On June 7, 2024, APLD Holdings 2 LLC (“APLD Holdings”), our subsidiary, 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”), 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.

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 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.

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.

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

The Initial Warrants were issued on June 17, 2024 and the Additional Warrants were issued August 11, 2024 (as consideration for entry into the Waiver Agreement).

During the quarter ended November 30,

2024, 7.0 million of the CIM Warrants were exercised in a cashless transaction for approximately 3.9 million shares of our common stock.

As of November 30, 2024, approximately 2.3 million of Additional Warrants remain outstanding.

On October 8, 2024, we entered into the First Amendment to the Promissory Note and Waiver Agreement (the “CIM Amendment”) with the CIM Lender, which amended the CIM Promissory Note to, among other things, extend the availability period thereunder, and draw the remaining $20 million (net of original discount and fees) of borrowings of the Subsequent Tranches available under the CIM Promissory Note.

On November 27, 2024, in connection with the issuance of the Macquarie Promissory Note (as defined and described below) and the receipt by us of the proceeds related thereto, we repaid the CIM Promissory Note in full, including all outstanding and unpaid principal, accrued interest, fees, and expenses.

During the fiscal year ended May 31, 2024, we entered into two prepaid advance agreements with YA II PN LTD (“YA Fund”) for promissory notes totaling $92.1 million (collectively, the “YA Notes”).

On October 29, 2024, we entered into certain amendments to the Prepaid Advance Agreement between us and YA Fund entered into on March 27, 2024 (the “March PPA”) and the promissory note issued in connection therewith (the “March Note”).

The amendments (i) provided consent to the Convertible Notes (as defined below) offering and share repurchase transactions, and (ii) removed certain prior restrictions on redemption of the March Note before January 1, 2025.

As of November 30, 2024, an aggregate of $71.3 million of the YA Notes had been converted, in exchange for the issuance by us of 19.1 million shares of our common stock to YA Fund, and the aggregate principal amount outstanding under the March Note was $4.8 million .

As YA Fund had converted the maximum amount of shares allowable under the Nasdaq rules and regulations, the remaining balance of $4.8 million was payable in cash.

Subsequent to the quarter end, the Company repaid the $4.8 million in full, including all outstanding and unpaid principal, accrued interest, fees, and expenses, as well as the $2.1 million Commitment Fee under the SEPA.

Convertible Notes

On November 4, 2024, we completed a private offering of 2.75% Senior Unsecured Convertible Notes due 2030 (the "Convertible Notes") to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

The aggregate principal amount of Convertible Notes sold in the offering was $450 million, which included $75 million aggregate principal amount issued pursuant to the initial purchasers' fully exercised option.

The Convertible Notes bear interest at a rate of 2.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2025.

The net proceeds from the sale of the Convertible Notes were approximately $435.2 million after deducting the initial purchasers' discounts, commissions, and estimated offering expenses.

We used approximately $84 million of the net proceeds to fund share repurchases of common stock in connection with the offering, including (i) $52.7 million to fund the cost of entering into prepaid forward repurchase transactions, and (ii) $31.3 million to repurchase shares of our common stock directly.

Additionally, approximately $51.8 million was used to pay the cost of the capped call transactions, which have a cap price of $14.72.

The remainder of the net proceeds will be used for general corporate purposes.

The initial conversion rate is 102.5 shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $9.75 per share of common stock).

Prior to March 1, 2030, the Convertible Notes are convertible only upon the occurrence of certain events.

On or after March 1, 2030 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at any time.

The Convertible Notes will be convertible into cash, shares of common stock, or a combination thereof, at our election, subject to certain restrictions.

Macquarie Promissory Note

On November 27, 2024, APLD ELN-02 Holdings LLC, our subsidiary, entered into a promissory note (the "Macquarie Promissory Note") with Macquarie Equipment Capital, Inc.

for a loan of $150 million.

The Macquarie Promissory Note has an 18-month term and bears interest at 0.25% per annum, with no commitment fee or original issue discount.

The Macquarie Promissory Note is subject to an initial minimum return hurdle of 1.11x within the first four months that scales

up to 1.35x over its term.

As partial consideration for the Macquarie Promissory Note, we issued warrants to purchase up to 1,035,197 shares of common stock at an exercise price of $9.66 per share.

The proceeds from the Macquarie Promissory Note were used to repay in full and terminate the CIM Promissory Note as well as all of our obligations under the March Note.

The refinancing eliminates the parent guarantee and removes encumbrances on assets of APLD Holdings 2, providing greater flexibility for future corporate and project-level debt financings.

The new structure is limited to Ellendale HPC project assets and avoids a costly increase to the minimum return hurdle that would have taken effect on December 7, 2024, under the CIM Promissory Note.

This strategic refinancing reduces our overall cost of capital for the Ellendale project while providing increased operational flexibility through the removal of parent guarantees and cross-collateralization requirements.

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.

On November 20, 2024, we filed an amendment to our Articles of Incorporation, increasing the number of shares of common stock authorized for issuance to 400,000,000 shares and the number of shares of preferred stock authorized for issuance to 10,000,000 shares.

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.

On May 6, 2024, we began sales of common stock under an "at the market" sale agreement with Roth Capital Partners, LLC pursuant to which we could sell up to $25 million in aggregate proceeds of common stock.

During the quarter ended August 31, 2024, 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.

This offering was completed as of August 31, 2024.

At-the-Market Sales Agreement

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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.

As of October 30, 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 net of issuance costs of $0.5 million.

On October 30, 2024, we terminated its Sales Agreement with the Agents.

Garden City Release of Escrow Funds

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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.

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 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.

Additionally, we agreed to pay a commitment fee of $2,125,000 to YA Fund (the “Commitment Fee”), in the form 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.

On October 16, 2024, we entered into a letter agreement with YA Fund, whereby we agreed to satisfy our obligations with respect to the Commitment Fee in cash by increasing the principal amount due under the March Note in an equivalent amount, instead of issuing the Commitment Shares.

The Commitment Fee has been paid in full subsequent to November 30, 2024 as part of our repayment of the March Note.

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 May 16, 2024, we entered into a 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 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”).

During the six months ended November 30, 2024, we closed on four offerings of the Series E Preferred Stock totaling 301,673 shares of Series E Preferred Stock for net proceeds of approximately $6.9 million.

The Series E Dealer Manager Agreement and the associated offering were terminated on August 9, 2024.

Series F Convertible 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%.

(“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 Convertible 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”).

Each outstanding share of Series F Convertible 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 8.0% of $1,000 per share of Series F Convertible 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.

In addition, each holder of Series F Convertible 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 Convertible Preferred Stock became convertible upon the receipt of shareholder approval on November 20,2024.

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

The Irrevocable Proxy became effective upon the receipt of shareholder approval on November 20, 2024.

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.

On November 22, 2024, we filed a registration statement on Form S-1/A (File No.

333-282707) for the resale of the common stock issuable upon conversion of the Series F Convertible Preferred Stock, which was declared effective by the SEC on November 26, 2024.

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

During the three months ended November 30, 2024, 10,191 shares of Series F Convertible Preferred Stock were converted into approximately 1.5 million shares of common stock.

Subsequent to the quarter ended November 30, 2024, the remaining 43,000 shares of Series F Convertible Preferred Stock were converted into approximately 6.1 million shares of common stock.

Private Placement

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 the Nasdaq Global Select Market 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).

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.

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, which was declared effective by the SEC on October 15, 2024.

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 62,500 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 $1,000 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.

During the three months ended November 30, 2024, we closed on two offerings of the Series E-1 Redeemable Preferred Stock in which we issued and sold 6,359 shares for gross proceeds of $6.4 million.

The Series E-1 Preferred Stock offering remains ongoing as of the date of this report.

Recent Developments

Management Update

On January 6, 2025, we welcomed Laura Laltrello as our Chief Operating Officer.

As an inducement to Ms.

Laltrello accepting this position, we granted her an employment inducement award of 600,000 RSUs, outside of the Company’s 2024 Omnibus Equity Incentive Plan, in accordance with Rule 5635(c)(4) of the Nasdaq Stock Market LLC.

Unit Purchase Agreement

On January 13, 2025, APLD HPC Holdings LLC (“APLDH”), our indirect wholly owned subsidiary, entered into a Unit Purchase Agreement (the “Unit Purchase Agreement” or “UPA”) for our HPC Hosting Business with MIP VI HPC Holdings, LLC, which is an affiliate of funds and investment vehicles managed by entities within Macquarie Asset Management (“MAM”).

Pursuant to the terms of the UPA, MAM will invest up to $900 million to fund the equity portion of the construction costs for our 400 MW Ellendale, North Dakota datacenter campus (the “Ellendale Campus”), with the initial investment of $225 million payable at closing, and the remaining $675 million payable in increments of $2.25 million for each executed lease of 1 MW of capacity.

MAM also has a right to invest up to an additional $4.1 billion in future HPC development projects.

MAM will receive preferred and common units for its investment.

The common units represent fifteen percent (15%) of APLDH’s fully diluted common equity.

The preferred units will accrue a dividend at a rate of 12.75% per annum, paid in stock or cash, at APLDH’s election, which will increase by 87.5 basis points on the fifth and sixth anniversaries of the closing, if still outstanding, and will carry a minimum 1.80x multiple of invested capital liquidation preference, inclusive of the value of the common equity.

The closing is conditioned upon, among other things, APLDH executing a lease with a hyperscaler for the first 100 MW on the Ellendale Campus, in a form acceptable to MAM, the parties finalizing and executing a limited liability company agreement for APLDH (the “LLCA”), for us and APLDH to carry out an internal restructuring to segregate the HPC Hosting Business’ assets and liabilities before closing, as well as other customary closing conditions.

In addition, the Unit Purchase Agreement provides that we will issue to MAM at closing two warrants to purchase 4,458,069 shares each, for a total of 8,916,138 shares of the Company’s common stock, at the exercise price of $8.29 per share.

The common shares issuable upon exercise of the warrants are subject to customary registration rights pursuant to a registration rights agreement to be executed and delivered at closing.

The LLCA is expected to contain customary provisions for transactions of this nature, including, for example, co-sale rights, transfer restrictions, governance rights, redemption rights, forced sale rights, and step-in rights.

The investment proceeds from MAM, will be used to complete the buildout of the Ellendale Campus, including our HPC 100 MW data center currently under construction (the “HPC Ellendale Facility”), repay the existing bridge debt, fund platform general and administrative expenses, and pay transaction expenses.

The proceeds will also fund, in conjunction with anticipated project financing, a distribution to us of over an estimated $300 million, to recover a portion of our equity investment in the Ellendale Campus.

Results of Operations

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

Comparative Results for the Three and Six Months Ended November 30, 2024 and November 30, 2023:

The following table sets forth key components of the results of operations (in thousands) during the three and six months ended November 30, 2024 and November 30, 2023.

Three Months Ended Six Months Ended

November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023

Revenue 63,868 38,569 122,646 70,708

5 unchanged sentences

29,789 20,266 44,129 36,437

Gain on classification as held for sale (2)

Loss/(gain) on classification as held for sale (2)

192 — (24,616) —

Loss on abandonment of assets 141 — 769 —

1 unchanged sentence

Total costs and expenses 82,483 50,115 133,703 93,807

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

Operating loss (18,615) (7,912) (9,131) (15,280)

Interest expense, net (3)

7,482 2,617 14,790 4,750

Loss on conversion of debt

25,410 — 33,612 —

Loss on change in fair value of debt 87,218 — 85,439 —

Loss on extinguishment of related party debt — 2,353

Loss on extinguishment of debt

Net loss before income tax expenses (138,725) (10,529) (142,972) (22,383)

4 unchanged sentences

Net loss attributable to Common Stockholders (139,355) (10,529) (143,646) (21,986)

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

Basic and diluted net loss per share attributable to common stockholders $ (0.66) $ (0.10) $ (0.80) $ (0.21)

Basic and diluted weighted average number of shares outstanding 209,560,339 109,663,030 179,119,398 105,067,375

Adjusted Amounts (4)

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

Adjusted operating loss $ (5,082) $ (2,338) $ (19,406) $ (730)

Adjusted operating margin (8) % (6) % (16) % (1) %

6 unchanged sentences

as a percentage of revenues 33 % 26 % 33 % 27 %

(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.

(1) Includes related party selling, general and administrative expense of $0.1 million and $0.2 million for the three months ended November 30, 2024 and November 30, 2023, respectively, and $0.1 million and $0.3 million for the six months

ended November 30, 2024 and November 30, 2023, respectively.

See Note 5 - Related Party Transactions for further discussion of related party transactions.

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

See Note 10 - 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.

(3) Includes related party interest expense of $0.7 million for the six months ended November 30, 2023.

There was no related party debt outstanding during the six months ended November 30, 2024 and as such, no interest expense was incurred related to related party debt.

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

1 unchanged sentence

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.

Commentary on Results of Operations Comparative Results for the Three Months Ended November 30, 2024 compared to the Three Months Ended November 30, 2023

Revenue increased $25.3 million, or 66%, from $38.6 million for the three months ended November 30, 2023 to $63.9 million for the three months ended November 30, 2024, primarily driven by continued growth of our Cloud Services Business during the three months ended November 30, 2024 due to the deployment of additional GPU clusters.

Related party revenue decreased $3.6 million, or 100%, from $3.6 million for the three months ended November 30, 2023 to $0.0 million for the three months ended November 30, 2024, driven by certain related parties terminating their contracts during the first fiscal quarter of fiscal year 2025.

Cost of revenues

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 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 August 31, 2023.

Cost of revenues increased $22.6 million, or 76%, from $29.8 million for the three months ended November 30, 2023 to $52.4 million for the three months ended November 30, 2024.

The increase was primarily driven by the growth in the business as more facilities were energized and additional services were provided to customers compared to the three months ended November 30, 2023.

The change in cost of revenues is categorized as follows:

• approximately $17.0 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 $4.2 million increase in lease and related expenses for the use of data center space to support our Cloud Services Business;

• approximately $3.1 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount;

• approximately $1.1 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.

These increases were partially offset by approximately $2.8 million decrease in energy costs due to more favorable pricing during the three months ended November 30, 2024.

Selling, general and administrative expense

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:

Selling, general and administrative expense increased $9.5 million, or 47%, from $20.3 million for the three months ended November 30, 2023 to $29.8 million for the three months ended November 30, 2024.

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

• approximately $9.4 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.

• approximately $3.2 million increase in personnel expenses for employee costs attributable to supporting the growth of the business;

• approximately $2.5 million increase in lease and related expenses primarily for operating leases of data center space not yet being used to generate revenue.

These increases were partially offset by a $4.0 million decrease in depreciation and amortization primarily due to GPU cluster deployments, which are now revenue generating and as such, the depreciation and amortization is now captured as a part of cost of revenues.

Also offsetting these increases was a $2.0 million decrease in stock-based compensation during the three months ended November 30, 2024 due to terminations during the period.

Interest expense, net

Interest expense, net increased $4.9 million, or 186%, from $2.6 million for the three months ended November 30, 2023 to $7.5 million for the three months ended November 30, 2024.

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

Loss on conversion of debt

Loss on conversion of debt was $25.4 million for the three months ended November 30, 2024 due to the difference in fair value to the price at which the YA Notes were converted.

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

Loss on change in fair value of debt

Loss on change in fair value of debt was $87.2 million for the three months ended November 30, 2024 primarily due to the change in fair value of the conversion option derivative of the 2.75% Senior Unsecured Convertible Note during the two week period in which the Company did not have sufficient authorized shares to settle such conversions fully in shares.

The loss on change in fair value of debt was also driven by adjustments to the fair value of the YA Notes.

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

Commentary on Results of Operations Comparative Results for the Six Months Ended November 30, 2024 compared to the Six Months Ended November 30, 2023

Revenue increased $51.9 million, or 73%, from $70.7 million for the six months ended November 30, 2023 to $122.6 million for the six months ended November 30, 2024, primarily driven by continued growth of our Cloud Services Business due to the deployment of additional GPU clusters between periods.

Related party revenue decreased $5.9 million, or 75%, from $7.8 million for the six months ended November 30, 2023 to $1.9 million for the six months ended November 30, 2024, driven by certain related parties terminating their contracts during the first fiscal quarter of fiscal year 2025.

Cost of revenues

Cost of revenues increased by $58.4 million, or 106%, from $55.0 million for the six months ended November 30, 2023 to $113.4 million for the six months ended November 30, 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 six months ended November 30, 2023.

The change in cost of revenues is categorized as follows:

• approximately $45.4 million increase in depreciation and amortization expense due to an increase in owned and leased assets directly supporting revenue;

• approximately $9.3 million increase in lease and related expenses for the use of data center space to support our Cloud Services Business;

• approximately $4.9 million increase in personnel expenses for employee costs directly attributable to generating revenue resulting from increased headcount;

• approximately $2.1 million increase in other expenses directly attributable to generating revenue.

These increases were partially offset by approximately $3.3 million decrease in energy costs due to more favorable pricing during the six months ended November 30, 2024.

Selling, general and administrative expense

Selling, general and administrative expense increased by $7.7 million, or 21%, from $36.4 million for the six months ended November 30, 2023 to $44.1 million for the six months ended November 30, 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 $14.2 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 $5.8 million increase in other expenses such as operating leases expense for data center space not yet being used to generate revenue;

• approximately $4.0 million increase in personnel expenses, related to an increase in salaries, wages and bonuses associated with the increase in headcount period over period;

• approximately $0.5 million increase in other selling, general, and administrative expense such as insurance premiums and computer and software expenses.

These increases were partially offset by a decrease of approximately $10.8 million in stock-based compensation due to the cancellation of certain performance based awards as well as terminations during the period resulting in a reversal of the expense previously recognized for the associated awards.

Also offsetting the increases was a decrease of approximately $5.9 million in depreciation and amortization expense due to additional owned and leased assets that are now being used to generate revenue for the six months ended November 30, 2024.

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.

Gain on classification of held for sale was $24.6 million for the six months ended November 30, 2024.

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

This was partially offset by $0.4 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 from Legal Settlement

Loss from legal settlement was $2.3 million for the six months ended November 30, 2023 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 included payment to the claimant of $2.3 million.

There were no such losses recorded in the current 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.

Loss on abandonment of assets was $0.8 million for the six months ended November 30, 2024, driven by the write down of assets to their fair value upon disposal.

Interest expense, net

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.

Interest expense, net increased $10.0 million, or 211%, from $4.8 million for the six months ended November 30, 2023 to $14.8 million for the six months ended November 30, 2024, primarily driven by increases in finance leases and debt obligations between periods.

Loss on conversion of debt

Loss on conversion of debt was $33.6 million for the six months ended November 30, 2024 due to the difference in fair value to the price at which the YA Notes were converted.

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

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

Loss on change in fair value of debt was $85.4 million for the six months ended November 30, 2024 primarily due to the change in fair value of the conversion option derivative of the 2.75% Senior Unsecured Convertible Note during the two week period in which the Company did not have sufficient authorized shares to settle such conversion fully in shares.

The loss on change in fair value of debt was also driven by adjustments to the fair value of the YA Notes.

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

Comparative Segment Data for the Three and Six Months Ended November 30, 2024 and November 30, 2023:

The following table sets forth our operating profit (loss) for each of our segments for the three and six months ended November 30, 2024 and November 30, 2023 (in thousands):

Three Months Ended Six Months Ended

November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023

Segment profit (loss)

Data center hosting segment 35,851 9,001

Cloud services segment

Data Center Hosting Business

$ 12,550 $ 10,896 $ 48,401 $ 19,897

HPC hosting segment (2,944) (754)

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

Cloud Services Business

(5,810) (11,559) (21,620) (18,964)

HPC Hosting Business

(5,839) (908) (8,784) (1,662)

Total segment profit (loss) $ 901 $ (1,571) $ 17,997 $ (729)

Commentary on Segment Data Comparative Results for the Three Months Ended November 30, 2024 compared to the Three Months Ended November 30, 2023

Data Center Hosting Business

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

Data Center Hosting Business operating profit increased $1.7 million, or 15%, from a profit of $10.9 million for the three months ended November 30, 2023 to a profit of $12.5 million for the three months ended November 30, 2024.

This increase was primarily due to operational performance improvements and favorable power prices.

Cloud Services Business

Operating Loss

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

Cloud Services Business operating loss decreased $5.7 million, from a loss of $11.6 million for the three months ended November 30, 2023 to a loss of $5.8 million for the three months ended November 30, 2024 primarily driven by increases in revenue due to the deployment of additional GPU clusters between periods, partially offset by increased 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 Business

Operating Loss

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.

HPC Hosting Business operating loss increased $4.9 million, or 543%, from a loss of $0.9 million for the three months ended November 30, 2023 to a loss of $5.8 million for the three months ended November 30, 2024.

The loss was largely comprised of legal expenses incurred in connection with discrete projects, stock-based compensation expense, payroll, and amortization expense related to finance leases as we ramp up our HPC Hosting Business operations.

Commentary on Segment Data Comparative Results for the Six Months Ended November 30, 2024 compared to the Six Months Ended November 30, 2023

Data Center Hosting Business

Operating Profit

Data Center Hosting Business operating profit increased $28.5 million, or 143%, from a profit of $19.9 million for the six months ended November 30, 2023 to a profit of $48.4 million for the six months ended November 30, 2024.

This increase was primarily due to operational performance improvements and more favorable power pricing.

Cloud Services Business

Operating Loss

Cloud Services Business operating loss increased $2.7 million, from a loss of $19.0 million for the six months ended November 30, 2023 to a loss of $21.6 million for the six months ended November 30, 2024, primarily due to amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense as we ramp up our Cloud Services Business operations.

HPC Hosting Business

Operating Loss

HPC Hosting Business operating loss increased $7.1 million, from a loss of $1.7 million for the six months ended November 30, 2023 to loss of $8.8 million for the six months ended November 30, 2024.

Non-GAAP Measures

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

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

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

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

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

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

Because of the non-standardized definitions of non-GAAP financial measures, we caution investors that the non-GAAP financial measures as used by us in this 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.

Further, investors should be aware that when evaluating these non-GAAP financial measures, these measures should not be construed as an inference that the Company’s future results will be unaffected by unusual or non-recurring items.

Further, investors should be aware that when evaluating these non-GAAP financial measures, these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

In addition, from time to time in the future there may be items that we may exclude for purposes of our non-GAAP financial measures and we may in the future cease to exclude items that we have historically excluded for purposes of our non-GAAP financial measures.

Likewise, we may determine to modify the nature of the adjustments to arrive at our non-GAAP financial measures.

Investors should review the non-GAAP reconciliations provided below and not rely on any single financial measure to evaluate the Company’s business.

Investors should review the non-GAAP reconciliations provided below and not rely on any single financial measure to evaluate our business.

Change in Presentation

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 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.

Beginning in the third quarter of 2024, we updated our presentation of non-GAAP measures.

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

EBITDA, Adjusted EBITDA, Adjusted operating loss, 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, Adjusted net loss attributable to Applied Digital Corporation, and Adjusted net loss attributable to Applied Digital Corporation per diluted share

“Adjusted Operating Loss” and “Adjusted net loss attributable to Applied Digital Corporation” are non-GAAP financial measures that represent operating loss and net loss attributable to Applied Digital Corporation, respectively.

Adjusted Operating Loss is Operating loss excluding stock-based compensation, non-recurring repair expenses, diligence, acquisition, disposition and integration expenses, litigation expenses, non-recurring research and development expenses, loss on abandonment of assets, loss/(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 attributable to Applied Digital Corporation is Adjusted Operating Loss further adjusted for the loss on conversion of debt, loss on change in fair value of debt and loss on the extinguishment of debt.

We define “Adjusted net loss attributable to Applied Digital Corporation per diluted share” as Adjusted net loss attributable to Applied Digital Corporation divided by weighted average diluted share count.

EBITDA and Adjusted EBITDA

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

“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, 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.

“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, loss/(gain) on classification of held for sale, loss on abandonment of assets, loss on conversion of debt, loss on change in the fair value of debt, loss on extinguishment of debt, and legal settlement as well as other non-recurring expenses that Management believes are not representative of our expected ongoing costs.

Reconciliation of GAAP to Non-GAAP Measures

Three Months Ended

$ in thousands August 31, 2024 August 31, 2023

Adjusted operating (loss) income

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

Three Months Ended Six Months Ended

$ in thousands November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023

Adjusted operating loss

Operating loss (GAAP) $ (18,615) $ (7,912) $ (9,131) $ (15,280)

Stock-based compensation 3,308 4,799 236 10,440

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Diligence, acquisition, disposition and integration expenses (2)

8,780 525 11,667 535

Litigation expenses (3)

759 195 1,167 576

Research and development expenses (4)

Loss on abandonment of assets 142 — 769 —

Gain on classification of held for sale

Loss/(gain) on classification of held for sale

192 — (24,616) —

Accelerated depreciation and amortization (5)

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Other non-recurring expenses (6)

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

213 (49) 251 258

Adjusted operating loss (Non-GAAP) $ (5,082) $ (2,338) $ (19,406) $ (730)

Adjusted operating margin (8) % (6) % (16) % (1) %

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Diligence, acquisition, disposition and integration expenses (2)

8,780 525 11,667 535

Litigation expenses (3)

759 195 1,167 576

Research and development expenses (4)

Gain on classification of held for sale

Loss/(gain) on classification of held for sale

192 — (24,616) —

Accelerated depreciation and amortization (5)

Loss on abandonment of assets 142 — 769 —

Loss on conversion of debt (7)

25,410 — 33,612 —

Loss on change in fair value of debt (8)

87,218 — 85,439 —

Loss on extinguishment of debt — — — 2,353

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Other non-recurring expenses (6)

213 (49) 251 258

Adjusted net loss attributable to Applied Digital Corporation (Non-GAAP) $ (12,565) $ (4,955) $ (34,197) $ (5,083)

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Interest expense, net 7,482 2,617 14,790 4,750

Income tax expense

Depreciation and amortization (5)

26,445 13,448 60,806 21,460

EBITDA (Non-GAAP) $ (104,798) $ 5,536 $ (67,376) $ 4,224

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Diligence, acquisition, disposition and integration expenses (2)

8,780 525 11,667 535

Litigation expenses (3)

759 195 1,167 576

Research and development expenses (4)

Gain on classification of held for sale

Loss/(gain) on classification of held for sale

192 — (24,616) —

Loss on abandonment of assets 142 — 769 —

Loss on conversion of debt (7)

25,410 — 33,612 —

Loss on change in fair value of debt (8)

87,218 — 85,439 —

Loss on extinguishment of debt — — — 2,353

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Other non-recurring expenses (6)

213 (49) 251 258

Adjusted EBITDA (Non-GAAP) $ 21,363 $ 11,086 $ 41,355 $ 20,950

(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.

(1) Represents costs incurred in the repair and replacement of equipment at our 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.

(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.

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

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

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

We do not expect to incur these expenses on a regular basis.

(4) Represents specific non-recurring research and development activities related to our business expansion that we do not expect to incur on a regular basis.

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

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

(6) Represents expenses that are not representative of our expected ongoing costs.

(7) Represents loss on conversion of debt due to the difference in fair value to the price at which the YA Notes were converted.

(8) Represents loss on change in fair value of debt due to the adjustments to the fair value of the 2.75% Senior Unsecured Convertible Notes, as well as adjustments to the fair value of the YA Notes.

Sources of Liquidity

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.

As of November 30, 2024, we had unrestricted cash and cash equivalents of $286.2 million and negative working capital of $96.0 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.

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, convertible bonds and debt facilities 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 and other debt instruments.

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

During the six months ended November 30, 2024, the total amount borrowed under the CIM Promissory Note was $125 million.

On November 27, 2024, in connection with the Macquarie Promissory Note, we repaid the CIM Promissory Note in full, including all outstanding and unpaid principal, accrued interest, fees, and expenses.

During the six months ended November 30, 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 six months ended November 30, 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.

This offering was completed as of August 31, 2024.

During the six months ended November 30, 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.

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

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

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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.

On September 5, 2024, we entered into the PIPE Purchase Agreement with the PIPE Purchasers, for 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 our common stock on the Nasdaq Global Select Market on September 4, 2024 for total gross proceeds to us of approximately $160 million, before deducting offering expenses.

On September 23, 2024, we entered into the Dealer Manager Agreement with the Dealer Manager pursuant to which the Dealer Manager agreed to serve as our agent and dealer manager for the offering of up to 62,500 shares of our Series E-1 Preferred Stock, at a price per share of $1,000 per share, pursuant to our Registration Statement on Form S-1, filed with the SEC on September 23, 2024.

During the three months ended November 30, 2024, we closed on two offerings of the Series E-1 Redeemable Preferred Stock in which we issued and sold 6,359 shares for gross proceeds of $6.4 million.

The Series E-1 Preferred Stock offering remains ongoing as of the date of this report.

On November 4, 2024, we completed a private offering of the Senior Unsecured Convertible Notes to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act.

The aggregate principal amount of notes sold in the offering was $450 million, which includes $75 million aggregate principal amount issued pursuant to the initial purchasers' fully exercised option.

The net proceeds from the sale of the Convertible Notes were approximately $435.2 million after deducting the initial purchasers' discounts and commissions and estimated offering expenses.

On November 27, 2024, APLD ELN-02 Holdings LLC, our subsidiary, entered into the Macquarie Promissory Note with Macquarie Equipment Capital, Inc.

for a loan of $150 million.

The proceeds from the Macquarie Promissory Note were used to repay in full and terminate the CIM Promissory Note as well as all obligations under the March Note.

As of November 30, 2024, an aggregate of $71.3 million of the YA Notes had been converted, in exchange for the issuance by us of 19.1 million shares of common stock to YA Fund, and the aggregate principal amount outstanding under the March Note was $6.9 million (consisting of the remaining principal amount of $4.8 million and the additional $2.1 million Commitment Fee), which was repaid in full subsequent to November 30, 2024, including all outstanding and unpaid principal, accrued interest, fees, and expenses.

During the six months ended November 30, 2024, we received $28.3 million in payments for future cloud services and $59.2 million in payments for future data center hosting services.

Funding Requirements

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

We have experienced net losses through the period ended November 30, 2024.

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

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Summary of Cash Flows

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

The following table provides information about our net cash flow for the six months ended November 30, 2024 and November 30, 2023, respectively.

Six Months Ended

$ in thousands November 30, 2024 November 30, 2023

Net cash (used in) provided by operating activities $ (128,154) $ 9,054

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Cash, cash equivalents, and restricted cash at end of period $ 314,579 $ 34,633

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

Commentary on the change in cash flows between the Six Months Ended November 30, 2024 and Six Months Ended November 30, 2023

Operating Activities

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.

The net cash (used in) provided by operating activities changed by $137.2 million, or 1515%, from net cash provided by operating activities of $9.1 million for the six months ended November 30, 2023 to net cash used in operating activities of $128.2 million for the six months ended November 30, 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 six months ended November 30, 2024, as well as an increase in payments associated with our operating leases.

Investing Activities

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.

The net cash used in investing activities increased by $141.9 million, from $65.6 million for the six months ended November 30, 2023 to $207.5 million for the six months ended November 30, 2024.

This increase was primarily due to an increase in investments in property and equipment during the six months ended November 30, 2024 as our payments in the current periods for construction of the Ellendale, North Dakota data center hosting facilities outpaced the comparative period construction payments for the Garden City hosting facility and our HPC data centers.

These increases were partially offset by 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 our Cloud Services Business during the six months ended November 30, 2024.

Financing Activities

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.

The net cash provided by financing activities increased by $571.0 million, or 1199%, from $47.6 million for the six months ended November 30, 2023 to $618.6 million for the six months ended November 30, 2024.

The primary reasons for the change were the receipt of net proceeds from offerings of our common and preferred stock, a convertible bond offering and net debt proceeds, as well as the receipt of cash for equity in the Company.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis