Applied Digital Corp. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements 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 “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. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. 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. 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, 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; • our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies; • our ability to continue to grow sales in our hosting business; • volatility of cryptoasset prices; and • uncertainties of cryptoasset regulation policy. 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. 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 The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Business Overview 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 28 Table of Contents ("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 Regulatory Environment 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. The U.S. 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”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. 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 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. 29 Table of Contents Business Update Data Center Hosting Business Our Data Center Hosting Business operates data centers to provide energized space to crypto mining customers. 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 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 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”), 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 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, 30 Table of Contents 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. Yorkville 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 31 Table of Contents 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 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, 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 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 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 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. SEPA 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 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 (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. 32 Table of Contents Series E 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 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 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 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. 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 Directors. 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). 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 33 Table of Contents 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, 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. 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. 34 Table of Contents Results of Operations 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: Revenue 63,868 38,569 122,646 70,708 Related party revenue — 3,634 1,926 7,819 Total revenue 63,868 42,203 124,572 78,527 Costs and expenses: Cost of revenues 52,361 29,769 113,421 54,990 Selling, general and administrative (1) 29,789 20,266 44,129 36,437 Loss/(gain) on classification as held for sale (2) 192 — (24,616) — Loss on abandonment of assets 141 — 769 — Loss from legal settlement — 80 — 2,380 Total costs and expenses 82,483 50,115 133,703 93,807 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 debt — — — 2,353 Net loss before income tax expenses (138,725) (10,529) (142,972) (22,383) Income tax expense (benefit) 1 — 1 — Net loss (138,726) (10,529) (142,973) (22,383) Net loss attributable to noncontrolling interest — — — (397) Preferred dividends (629) — (673) — Net loss attributable to Common Stockholders (139,355) (10,529) (143,646) (21,986) 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 $ (5,082) $ (2,338) $ (19,406) $ (730) Adjusted operating margin (8) % (6) % (16) % (1) % Adjusted net loss attributable to Applied Digital Corporation $ (12,565) $ (4,955) $ (34,197) $ (5,083) Adjusted net loss attributable to Applied Digital Corporation per diluted share $ (0.06) $ (0.05) $ (0.19) $ (0.05) Other Financial Data (4) EBITDA $ (104,798) $ 5,536 $ (67,376) $ 4,224 as a percentage of revenues (164) % 13 % (54) % 5 % Adjusted EBITDA $ 21,363 $ 11,086 $ 41,355 $ 20,950 as a percentage of revenues 33 % 26 % 33 % 27 % (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 35 Table of Contents 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 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. (4) Adjusted Amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of Management’s Discussion and Analysis. Commentary on Results of Operations Comparative Results for the Three Months Ended November 30, 2024 compared to the Three Months Ended November 30, 2023 Revenue 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 $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 $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; and • approximately $1.1 million increase in other expenses directly attributable to generating revenue. 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 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 $3.2 million increase in personnel expenses for employee costs attributable to supporting the growth of the business; and • 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. 36 Table of Contents 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 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; and • 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; 37 Table of Contents • 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; and • 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 $24.6 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 $0.8 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 $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 $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. 38 Table of Contents 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 Business $ 12,550 $ 10,896 $ 48,401 $ 19,897 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 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 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 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. 39 Table of Contents 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. 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. 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 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 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 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 our business. Change in Presentation 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. 40 Table of Contents 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, 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. 41 Table of Contents Reconciliation of GAAP to Non-GAAP Measures 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 Non-recurring repair expenses (1) 139 — 170 — 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) — — 36 184 Loss on abandonment of assets 142 — 769 — Loss/(gain) on classification of held for sale 192 — (24,616) — Accelerated depreciation and amortization (5) — 24 45 177 Loss on legal settlement — 80 — 2,380 Other non-recurring expenses (6) 213 (49) 251 258 Adjusted operating loss (Non-GAAP) $ (5,082) $ (2,338) $ (19,406) $ (730) Adjusted operating margin (8) % (6) % (16) % (1) % Adjusted net loss attributable to Applied Digital Corporation Net loss attributable to Applied Digital Corporation (GAAP) $ (138,726) $ (10,529) $ (142,973) $ (21,986) Stock-based compensation 3,308 4,799 236 10,440 Non-recurring repair expenses (1) 139 — 170 — 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) — — 36 184 Loss/(gain) on classification of held for sale 192 — (24,616) — Accelerated depreciation and amortization (5) — 24 45 177 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 Loss on legal settlement — 80 — 2,380 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) Adjusted net loss attributable to Applied Digital Corporation per diluted share (Non-GAAP) $ (0.06) $ (0.05) $ (0.19) $ (0.05) EBITDA and Adjusted EBITDA Net loss attributable to Applied Digital Corporation (GAAP) $ (138,726) $ (10,529) $ (142,973) $ (21,986) Interest expense, net 7,482 2,617 14,790 4,750 Income tax expense 1 — 1 — Depreciation and amortization (5) 26,445 13,448 60,806 21,460 EBITDA (Non-GAAP) $ (104,798) $ 5,536 $ (67,376) $ 4,224 Stock-based compensation 3,308 4,799 236 10,440 42 Table of Contents Non-recurring repair expenses (1) 139 — 170 — 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) — — 36 184 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 Loss on legal settlement — 80 — 2,380 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 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 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 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, 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. 43 Table of Contents 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. 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 3.0 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. 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. 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 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. 44 Table of Contents 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 November 30, 2024. Our transition to profitability is dependent on the successful operation of our three lines of business. We expect to have sufficient liquidity, including cash on hand, payments from customers, access to debt financing, and access to public capital markets, to support ongoing operations and meet our working capital needs for at least the next 12 months and all of our known requirements and plans for cash. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our ongoing operations and development plans. 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. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations. We believe that the significant investments in property and equipment will remain throughout fiscal year 2025 as we continue construction of our HPC hosting facilities and acquire assets to support our Cloud Services Business. Summary of Cash Flows The following table provides information about 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 Net cash used in investing activities (207,539) (65,606) Net cash provided by financing activities 618,584 47,611 Net increase (decrease) in cash and cash equivalents 282,891 (8,941) Cash, cash equivalents, and restricted cash at beginning of year 31,688 43,574 Cash, cash equivalents, and restricted cash at end of period $ 314,579 $ 34,633 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 $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 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. 45 Table of Contents Financing Activities 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. 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 six months ended November 30, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.