Applied Digital Corp. 10-K

Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID # 199 ) 67 Report of Independent Registered Public Accounting Firm (PCAOB ID # 688 ) 69 Consolidated Balance Sheets 70 Consolidated Statements of Operations 71 Consolidated Statements of Changes in Temporary Equity and Stockholders’ Equity 72 Consolidated Statements of Cash Flows 74 Notes to Consolidated Financial Statements 76 66 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Applied Digital Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Applied Digital Corporation (the “Company”) as of May 31, 2025, the related consolidated statements of operations, changes in temporary equity and stockholders’ equity and cash flows for the year ended May 31, 2025, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2025, and the results of its operations and its cash flows for the year ended May 31, 2025, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of May 31, 2025, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated July 30, 2025 , expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of a material weakness. Retrospective Application of a Change in Accounting Principle We also have audited the adjustments to the 2024 and 2023 financial statements to retrospectively apply the change in accounting due to the adoption of ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) discussed in Note 2 and Note 16 and discontinued operations and held for sale presentation discussed in Note 2 and Note 5. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2024 and 2023 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2024 and 2023 financial statements taken as a whole. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Prior Period Financial Statements The financial statements of the Company as of May 31, 2024 and for the years ended May 31, 2024 and 2023, were audited by Marcum LLP, whose report dated August 30, 2024, expressed an unmodified opinion on those statements. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. 67 /s/ CBIZ CPAs P.C. CBIZ CPAs P.C. We have served as the Company’s auditor since 2021 (such date takes into account the acquisition of the attest business of Marcum LLP by CBIZ CPAs P.C. effective November 1, 2024). New York, NY July 30, 2025 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Applied Digital Corporation Opinion on the Financial Statements We have audited, before the effects of the retrospective adjustments for the adoption of ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) discussed in Note 2 and Note 16 and discontinued operations and held for sale presentation discussed in Note 2 and Note 5 to the consolidated financial statements, the accompanying consolidated balance sheet of Applied Digital Corporation (the “Company”) as of May 31, 2024, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended May 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the 2024 and 2023 financial statements, before the effects of the retrospective adjustment for the adoption of ASU 2023-07 discussed in Note 2 and Note 16 and discontinued operations and held for sale presentation discussed in Note 2 and Note 5, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2024, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 2024, in conformity with accounting principles generally accepted in the United States of America. We were not engaged to audit, review, or apply any procedures to the retrospective adjustments for the adoption of ASU 2023-07 discussed in Note 2 and Note 16 and discontinued operations and held for sale presentation discussed in Note 2 and Note 5 to the consolidated financial statements, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by CBIZ CPAs, P.C. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2021 through June 18, 2025. New York, NY August 30, 2024 69 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and par value data) May 31, 2025 May 31, 2024 ASSETS Current assets: Cash and cash equivalents $ 41,552 $ 3,339 Restricted cash: Funds for construction 41,026 — Letters of credit 31,342 21,349 Accounts receivable 3,043 3,847 Prepaid expenses and other current assets 9,430 1,010 Current assets held for sale 304,200 374,599 Total current assets 430,593 404,144 Property and equipment, net 1,275,841 329,103 Operating lease right of use assets, net 960 1,521 Finance lease right of use assets, net 17,820 8,750 Other assets 144,876 19,349 TOTAL ASSETS $ 1,870,090 $ 762,867 LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 247,528 $ 104,528 Accrued liabilities 29,549 24,702 Current portion of operating lease liability 692 604 Current portion of finance lease liability 13,633 5,283 Current portion of debt 10,331 10,082 Current portion of debt, at fair value — 35,836 Customer deposits 16,125 13,819 Related party customer deposits — 1,549 Deferred revenue — 6,496 Related party deferred revenue — 1,692 Due to customer 4,807 13,002 Current liabilities held for sale 216,047 336,423 Other current liabilities 19,432 96 Total current liabilities 558,144 554,112 Long-term portion of operating lease liability 381 1,072 Long-term portion of finance lease liability 15 3,381 Long-term debt 677,825 79,472 Total liabilities 1,236,365 638,037 Commitments and contingencies (Note 15) Temporary equity Series E preferred stock, 0.001 par value, 2,000,000 shares authorized, 301,673 shares issued and outstanding at May 31, 2025, and no shares authorized, issued or outstanding at May 31, 2024 6,932 — Series E-1 preferred stock, $ 0.001 par value, 62,500 shares authorized, 62,500 shares issued and 62,485 shares outstanding at May 31, 2025, and no shares authorized, issued or outstanding at May 31, 2024 57,011 — Series G preferred stock, 0.001 par value, 156,000 shares authorized, 78,000 shares issued and outstanding at May 31, 2025, and no shares authorized, issued or outstanding at May 31, 2024 72,094 — Stockholders' equity: Common stock, $ 0.001 par value, 400,000,000 shares authorized, 234,200,868 shares issued and 224,909,669 shares outstanding at May 31, 2025, and 144,083,944 shares issued and 139,051,142 shares outstanding at May 31, 2024 230 144 Treasury stock, 9,291,199 shares at May 31, 2025 and 5,032,802 shares at May 31, 2024, at cost ( 31,400 ) ( 62 ) Additional paid in capital 1,009,913 374,738 Accumulated deficit ( 481,055 ) ( 249,990 ) Total stockholders’ equity attributable to Applied Digital Corporation 497,688 124,830 TOTAL LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY $ 1,870,090 $ 762,867 See accompanying notes to the consolidated financial statements 70 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share and per share data) Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 Revenue: Revenue $ 142,267 $ 121,857 $ 40,984 Related party revenue 1,926 14,761 14,408 Total revenue 144,193 136,618 55,392 Costs and expenses: Cost of revenues 101,451 106,653 44,388 Selling, general and administrative (1) 83,065 45,020 53,915 (Gain) loss on classification as held for sale (2) ( 24,616 ) 15,417 — Loss on abandonment of assets 1,138 — — Loss from legal settlement — 2,380 — Total costs and expenses 161,038 169,470 98,303 Operating loss ( 16,845 ) ( 32,852 ) ( 42,911 ) Interest expense, net (3) 14,739 17,708 2,006 Loss on conversion of debt 33,612 — — Loss on change in fair value of debt 85,439 7,401 — Loss on change in fair value of related party debt — 8,116 — Loss on extinguishment of debt 1,177 — 94 Loss on extinguishment of related party debt — 2,507 — Loss on change in fair value of warrants 6,421 — — Loss on change in fair value of related party warrants — 5,696 — Net loss from continuing operations before income tax expenses ( 158,233 ) ( 74,280 ) ( 45,011 ) Income tax expense (benefit) 102 96 ( 523 ) Net loss from continuing operations ( 158,335 ) ( 74,376 ) ( 44,488 ) Net loss from discontinued operations ( 72,730 ) ( 75,295 ) ( 1,118 ) Net loss ( 231,065 ) ( 149,671 ) ( 45,606 ) Net loss attributable to noncontrolling interest — ( 397 ) ( 960 ) Preferred dividends ( 2,615 ) — — Net loss attributable to common stockholders $ ( 233,680 ) $ ( 149,274 ) $ ( 44,646 ) Net loss attributable to common stockholders Continuing operations $ ( 160,950 ) $ ( 73,979 ) $ ( 43,528 ) Discontinued operations ( 72,730 ) ( 75,295 ) ( 1,118 ) Net loss $ ( 233,680 ) $ ( 149,274 ) $ ( 44,646 ) Basic and diluted net loss per share attributable to common stockholders Continuing operations $ ( 0.80 ) $ ( 0.65 ) $ ( 0.46 ) Discontinued operations ( 0.36 ) ( 0.66 ) ( 0.01 ) Basic and diluted net loss per share $ ( 1.16 ) $ ( 1.31 ) $ ( 0.47 ) Basic and diluted weighted average number of shares outstanding 201,194,451 114,061,414 93,976,233 (1) Includes related party selling, general and administrative expense of $ 0.3 million, $ 0.6 million, and $ 0.1 million for the fiscal years ended May 31, 2025, May 31, 2024, and May 31, 2023 respectively . (2) Includes $ 25 million received in connection with the sale of our Garden City facility once conditional approval requirements were met and escrowed funds were released during the fiscal years ended May 31, 2025. The fiscal year ended May 31, 2024 includes $ 15.4 million loss on classification of held for sale related to the sale of the Garden City facility. (3) For the fiscal years ended May 31, 2024 and May 31, 2023, amount includes related party interest expense of $ 5.7 million and $ 0.1 million, respectively. See accompanying notes to the consolidated financial statements and, specifically, Note 6 - Related Party Transactions for further discussion of related party transactions. 71 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity For the Years Ended May 31, 2025, 2024, and 2023 (In thousands, except per share data) Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount Balance, June 1, 2022 97,837,703 $ 98 ( 36,296 ) $ ( 62 ) $ 128,293 $ ( 56,070 ) $ 72,259 $ 6,976 $ 79,235 Issuance of common stock from stock plans 3,089,655 3 — — ( 3 ) — — — — Tax payments for restricted stock upon vesting — — — — ( 168 ) — ( 168 ) — ( 168 ) Stock-based compensation — — — — 32,072 — 32,072 — 32,072 Capital contribution to noncontrolling interest — — — — — — — 4,146 4,146 Common stock forfeited — — ( 4,965,432 ) — — — — — — Net loss — — — — — ( 44,646 ) ( 44,646 ) ( 960 ) ( 45,606 ) Balance, May 31, 2023 100,927,358 101 ( 5,001,728 ) ( 62 ) 160,194 ( 100,716 ) 59,517 10,162 69,679 Shares issued in offering, net of costs 21,600,722 23 — — 130,826 — 130,849 — 130,849 Issuance of common stock from stock plans 6,894,166 6 — — ( 6 ) — — — — Tax payments for restricted stock upon vesting — — — — ( 861 ) — ( 861 ) — ( 861 ) Conversions of debt 13,213,727 13 — — 52,047 — 52,060 — 52,060 Issuance of warrants, at fair value — — — — 5,696 — 5,696 — 5,696 Share cancellations ( 36,296 ) — ( 31,074 ) — — — — — — Stock-based compensation — — — — 17,362 — 17,362 — 17,362 Common stock issuance costs — — — — ( 284 ) — ( 284 ) — ( 284 ) Net loss — — — — — ( 149,274 ) ( 149,274 ) ( 397 ) ( 149,671 ) Extinguishment of noncontrolling interest 1,484,267 1 — — 9,764 — 9,765 ( 9,765 ) — Balance, May 31, 2024 144,083,944 $ 144 ( 5,032,802 ) $ ( 62 ) $ 374,738 $ ( 249,990 ) $ 124,830 $ — $ 124,830 See accompanying notes to the consolidated financial statements 72 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity (continued) For the Years Ended May 31, 2025, 2024, and 2023 (In thousands, except per share data) Temporary Equity Permanent Equity Series E Redeemable Preferred Stock Series F Convertible Preferred Stock Series E-1 Redeemable Preferred Stock Series G Convertible Preferred Stock Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance, June 1, 2024 — $ — — $ — — $ — — $ — 144,083,944 $ 144 ( 5,032,802 ) $ ( 62 ) $ 374,738 $ ( 249,990 ) $ 124,830 Shares issued in offering, net of costs — — — — — — — — 55,506,938 55 — — 180,711 — 180,766 Issuance of common stock from stock compensation plans — — — — — — — — 2,427,273 3 — — ( 3 ) — — Tax payments for restricted stock upon vesting — — — — — — — — — — — — ( 4,116 ) — ( 4,116 ) Conversions of debt — — — — — — — — 19,050,204 19 — — 104,926 — 104,945 Issuance of other common stock — — — — — — — — 628,541 1 — — 518 — 519 Issuance of warrants, at fair value — — — — — — — — — — — — 136,292 — 136,292 Exercise of warrants — — — — — — — — 4,905,256 5 — — ( 5 ) — — Issuance of Preferred Stock, net of costs 301,673 6,932 53,191 48,350 62,500 57,026 78,000 72,094 — — — — 6 — 6 Preferred Stock Dividends — — — — — — — — — — — — ( 2,615 ) — ( 2,615 ) Conversion of preferred stock — — ( 53,191 ) ( 48,350 ) — — — — 7,598,712 7 — — 48,343 — 48,350 Redemption of preferred stock — — — — ( 15 ) ( 15 ) — — — — — — — — — Stock-based compensation — — — — — — — — — — — — 22,704 — 22,704 Share repurchase — — — — — — — — — ( 4 ) ( 4,258,397 ) ( 31,338 ) — — ( 31,342 ) Purchase of capped call options — — — — — — — — — — — — ( 51,750 ) — ( 51,750 ) Purchase of prepaid forward contract — — — — — — — — — — — — ( 52,736 ) — ( 52,736 ) Reclass of debt conversion option — — — — — — — — — — — — 252,900 — 252,900 Net loss — — — — — — — — — — — — — ( 231,065 ) ( 231,065 ) Balance, May 31, 2025 301,673 $ 6,932 — $ — 62,485 $ 57,011 78,000 $ 72,094 234,200,868 $ 230 ( 9,291,199 ) $ ( 31,400 ) $ 1,009,913 $ ( 481,055 ) $ 497,688 See accompanying notes to the consolidated financial statements 73 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 CASH FLOW FROM OPERATING ACTIVITIES Net loss $ ( 231,065 ) $ ( 149,671 ) $ ( 45,606 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 97,945 79,360 7,614 Stock-based compensation 22,704 17,362 32,072 Lease expense 31,661 13,944 — Deferred income taxes — — ( 540 ) Loss on extinguishment of debt 1,177 — 94 Loss on extinguishment of related party debt — 2,507 — Loss on legal settlement — 2,380 — Amortization of debt issuance costs 9,563 5,214 410 (Gain) loss on classification of held for sale ( 24,616 ) 15,417 — Loss on conversion of debt 33,612 — — Loss on change in fair value of debt 85,439 7,401 — Loss on change in fair value of related party debt — 13,812 — Loss on change in fair value of warrants issued 6,421 — — Loss on abandonment of assets 1,138 — — Changes in operating assets and liabilities: Accounts receivable ( 2,934 ) ( 3,765 ) 145 Prepaid expenses and other current assets ( 8,309 ) 899 ( 766 ) Other assets 2,979 327 364 Customer deposits 2,306 ( 8,770 ) 24,584 Related party customer deposits ( 1,549 ) ( 2,261 ) 2,261 Deferred revenue ( 34,080 ) ( 9,494 ) 44,245 Related party deferred revenue ( 1,692 ) 168 569 Accounts payable ( 78,256 ) 41,840 ( 13,750 ) Accrued liabilities ( 12,127 ) 21,601 7,485 Due to customer ( 8,195 ) 13,002 — Lease assets and liabilities ( 7,524 ) ( 47,479 ) ( 446 ) CASH FLOW (USED IN) PROVIDED BY OPERATING ACTIVITIES ( 115,402 ) 13,794 58,735 CASH FLOW FROM INVESTING ACTIVITIES Purchases of property and equipment and other assets ( 681,603 ) ( 141,809 ) ( 131,278 ) Proceeds from sale of assets 25,000 19,852 — Finance lease prepayments ( 6,178 ) ( 50,089 ) — Purchases of investments ( 4,873 ) ( 391 ) ( 810 ) CASH FLOW USED IN INVESTING ACTIVITIES ( 667,654 ) ( 172,437 ) ( 132,088 ) CASH FLOW FROM FINANCING ACTIVITIES Repayment of finance leases ( 125,073 ) ( 59,967 ) ( 3,353 ) Borrowings of long-term debt 650,083 116,554 45,650 Borrowings of related party debt — 28,000 36,500 Repayment of long-term debt ( 293,045 ) ( 21,714 ) ( 10,032 ) Repayment of related party debt — ( 45,500 ) — Payment of deferred financing costs ( 42,398 ) ( 320 ) ( 567 ) Payment of related party deferred financing costs — — ( 1,548 ) Tax payments for restricted stock upon vesting ( 4,116 ) ( 861 ) ( 168 ) Proceeds from issuance of common stock 191,590 130,849 — Common stock issuance costs ( 10,305 ) ( 284 ) — Proceeds from issuance of preferred stock 198,205 — — Preferred stock issuance costs ( 13,812 ) — — 74 Dividends issued on preferred stock ( 2,615 ) — — Proceeds from issuance of SAFE agreement included in long-term debt 12,000 — — Repurchase of shares ( 31,342 ) — — Proceeds from convertible notes 450,000 — — Purchase of capped call options ( 51,750 ) — — Purchase of prepaid forward contract ( 52,736 ) — — Noncontrolling interest contributions — — 4,146 CASH FLOW PROVIDED BY FINANCING ACTIVITIES 874,686 146,757 70,628 NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 91,630 ( 11,886 ) ( 2,725 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD, INCLUDING CASH FROM DISCONTINUED OPERATIONS 31,688 43,574 46,299 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD, INCLUDING CASH FROM DISCONTINUED OPERATIONS 123,318 31,688 43,574 Less: CASH, CASH EQUIVALENTS, AND RESTRICTED CASH FROM DISCONTINUED OPERATIONS 2,398 — — CASH, CASH EQUIVALENTS, AND RESTRICTED CASH FROM CONTINUING OPERATIONS $ 120,920 $ 31,688 $ 43,574 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 62,712 $ 17,782 $ 1,118 Income taxes paid $ 105 $ 5 $ — SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Operating right-of-use assets obtained by lease obligation $ 20,280 $ 159,153 $ — Finance right-of-use assets obtained by lease obligation $ 113,674 $ 227,047 $ 8,693 Property and equipment in accounts payable and accrued liabilities $ 246,472 $ 85,019 $ 9,384 Extinguishment of non-controlling interest $ — $ 9,765 $ — Conversion of debt to common stock $ 104,945 $ 52,060 $ — Conversion of preferred stock to common stock $ 48,350 $ — $ — Loss on legal settlement $ — $ 2,380 $ — Issuance of warrants, at fair value $ 136,292 $ 5,696 $ — Conversion of warrants $ 5 $ — $ — See accompanying notes to the consolidated financial statements 75 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 1. Business and Organization Applied Digital Corporation (the “Company”), is a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers. The Company has two reportable segments. Financial information for each segment is contained in "Note 16 - Business Segments." All references to “Applied Digital Corporation,” “we,” “us,” “our” or the “Company” mean Applied Digital Corporation and its subsidiaries. 2. Basis of Presentation and Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly owned and controlled subsidiaries. Intercompany investments, balances and transactions have been eliminated in the consolidated financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. On an on-going basis, we evaluate our estimates, including those related to stock-based compensation, specifically the likelihood of timing and achievement of performance conditions to our performance stock units, and contingencies. Although these estimates are based on historical facts and various other assumptions that we believe are reasonable, actual results could differ from those estimates. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers. Data Center Hosting Revenue The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. Performance obligations are achieved over the term of the agreements by providing the hosting environment for the customer's operations. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by customer-provided equipment. Revenue is recognized based on the contractual fixed rate, net of any credits for non-performance, over the term of the agreements. Any ancillary revenue for other services is generally recognized at a point in time when the services are complete. Customer contracts include advance payment terms. All advanced service payments are recorded as deferred revenue and are recognized as revenue once the related service is provided. Fair Value Measurements Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows: • Level 1: Quoted prices in active markets for identical assets or liabilities. • Level 2: Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace. • Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. 76 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Segments The Company has identified two reportable segments: data center hosting (“Data Center Hosting Business”) and high-performance compute hosting (“HPC Hosting Business”). These segments represent management's view of the business for which separate financial information is available and evaluated regularly by the Chief Operating Decision Maker (CODM), which is the Company’s Chief Executive Officer. The Company's CODM evaluates performance and makes operating decisions primarily based on revenue and segment profit (loss), on a consolidated basis and for each of the Company's reportable segments. Operating results by segment include costs or expenses directly attributable to each segment, which include selling, general, and administrative expenses, (gain) loss on classification of held for sale, (gain) loss on sale of assets, and (gain) loss from legal settlement. The Company does not allocate loss on conversion of debt, loss on change in fair value of debt, loss on change in fair value of related party debt, loss on change in fair value of warrants, loss on change in fair value of related party warrants, loss on legal settlement, or income tax expense to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance. The Data Center Hosting Business operates data centers to provide energized space to crypto mining customers. Customer-owned hardware is installed in the Company’s facilities and the Company provides operational and maintenance services for a fixed fee. The HPC Hosting Business designs, builds, and operates data centers which are designed to support high-compute applications using advanced technologies and sophisticated infrastructures to provide services to customers. Reclassification Income Statement We have reclassified certain prior period amounts in our consolidated statements of operations to conform to our current period presentation. Specifically, we have reclassified certain amounts of "Loss on change in fair value of related party debt" to "Loss on change in fair value of related party warrants." Additionally, we have reclassified certain amounts of “Selling, general and administrative” expenses to “Interest expense, net.” This reclassification has no impact on reported net loss or cash flows. Cash, Cash Equivalents, and Restricted Cash The Company’s restricted cash balances consist of funds for construction and letters of credit. The funds for construction are held in a construction reserve account to fund the construction of the Company’s 400 MW Ellendale, North Dakota data center campus ("Polaris Forge 1"), in accordance with the SMBC Credit Agreement (as defined below). See further discussion in "Note 7 - Debt" . Additionally, the Company has letters of credit totaling $ 38.3 million presented on our consolidated balance sheets within restricted cash and other assets. The Company is required to keep these balances, which are held in money market funds, in separate accounts for the duration of the letter of credit agreements, which have terms of up to two years . The letters of credit were issued in lieu of security deposits. The Company considers the money market funds to be Level 1 which approximates fair value. 77 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of May 31, 2025 and May 31, 2024 were as follows (in thousands): May 31, 2025 May 31, 2024 Cash and cash equivalents $ 41,552 $ 3,339 Restricted cash - funds for construction 41,026 — Restricted cash - letters of credit 31,342 21,349 Restricted cash included in other assets 7,000 7,000 Total Cash, Cash Equivalents, and Restricted Cash $ 120,920 $ 31,688 Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (see "Note 3 - Property and Equipment"). Once an asset is identified for retirement or disposition, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is included in earnings. Depreciation expense includes the amortization of assets recorded in association with our leases. Leasehold improvements and assets recorded in association with our leases are amortized over the shorter of the expected lease term or the estimated useful life of the asset. Construction in progress represents assets received but not placed into service as of May 31, 2025. Impairment or Disposal of Long-Lived Assets Our long-lived assets are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We also evaluate the period of depreciation and amortization of long-lived assets to determine whether events or circumstances warrant revised estimates of useful lives. When indicators of impairment are present, we determine the recoverability of our long-lived assets by comparing the carrying value of our long-lived assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the estimated future undiscounted cash flows demonstrate the long-lived assets are not recoverable, an impairment loss would be calculated based on the excess of the carrying amounts of the long-lived assets over their fair value. The Company’s estimates of fair values are based on the best information available and require the use of estimates, judgments, and projections. The Company recorded impairment expense on long-lived assets of $ 0.5 million and $ 0.2 million for the fiscal years ended May 31, 2024 and 2023, respectively. Assets Held For Sale The Company generally considers assets to be held for sale when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) management has initiated an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group, (iv) the sale of the property within one year is considered probable, (v) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value and (vi) significant changes to the plan to sell are not expected. Property classified as held for sale is no longer depreciated and is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell in accordance with ASC 360, Property, Plant and Equipment - Impairment or Disposal of Long-Lived Assets . As of May 31, 2025, the Company deemed its Cloud Services Business met the held for sale criteria and was classified as such on the consolidated balance sheet . Discontinued Operations The Company deems it appropriate to classify a business as a discontinued operation if the related disposal group meets all the following criteria: (i) the disposal group is a component of the Company, (ii) the component meets the held-for-sale criteria, and (iii) the disposal of the component represents a strategic shift that has a major effect on the Company's operations and financial results. As of May 31, 2025, the Company deemed its Cloud Services Business to be discontinued operations due to the disposal group meeting all three criteria. 78 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Lease Accounting The Company determines whether an arrangement contains a lease at the inception of the arrangement. The Company leases office space under operating leases and equipment under finance leases. If a lease is determined to exist, the term of such lease is assessed based on the commencement date, which is the date on which the underlying asset is made available for the Company’s use by the lessor. For leases with renewal periods or early terminations at the Company’s option, the Company determines the expected lease term based on whether the exercise of any renewal option or early termination is reasonably certain at the inception of the lease. At the commencement date of a lease, we recognize a right-of-use asset representing our right to use the underlying asset during the lease term and a lease liability for the present value of the future lease payments. As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. For operating leases, we recognize fixed lease expense on a straight-line basis over the lease term. For finance leases, we recognize amortization expense on the right-of-use asset and interest expense on the lease liability over the lease term. Variable lease costs are recognized as incurred. Assets and liabilities related to finance leases are presented separately from those relating to operating leases on our consolidated balance sheets. We do not record lease contracts with a term of 12 months or less on our consolidated balance sheets. Stock-based Compensation The Company measures stock-based compensation cost at fair value on the date of grant for all share-based awards and recognizes compensation expense over the service period that the awards are expected to vest. The Company has elected to recognize compensation cost for graded-vesting awards subject only to a service condition over the requisite service period of the entire award. For performance awards, the Company begins recognizing expense in the period in which vesting becomes probable. The Company accounts for forfeitures as they occur. Earnings per Share Basic earnings per share is computed by dividing income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise of stock warrants, the conversion of existing debt agreements, and service-based and performance-based restricted stock units, respectively, determined using the treasury stock method. Any anti-dilutive effect of equity awards outstanding is not included in the computation of diluted net income (loss) per share. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences that exist between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as tax attributes such as net operating loss, capital loss and tax credits carryforwards on a taxing jurisdiction basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected, more likely than not, to be realized in the future. A tax benefit from an uncertain income tax position may be recognized in the financial statements only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority's widely understood administrative practices and precedents. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Any subsequent changes in recognition or measurement are reflected in the period in which the change in judgment occurs. ASC Topic 740, Income Taxes, (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it 79 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure, and transition. The Company's policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest and penalties as components of income tax expense. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements. For further information on income taxes, see "Note 9 - Income Taxes" below. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Improvements to Reportable Segment Disclosures. This new guidance is designed to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The Company adopted this ASU in the fourth quarter of fiscal year 2025 on a retrospective basis, effective for the Company’s fiscal year that began on June 1, 2024 and for interim periods in the fiscal year beginning June 1, 2025. See "Note 16 - Business Segments" below. In December 2023, the FASB issued ASU 2023-09, Income Taxes ("Topic 740"): Improvements to Income Tax Disclosures. This ASU is intended to enhance the transparency and decision usefulness of income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and can be applied either prospectively or retrospectively. The Company is currently evaluating the impact of adopting this ASU on its disclosures and plans to adopt this pronouncement beginning with its fiscal year beginning June 1, 2025. In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU is intended to enhance transparency of income statement disclosures primarily through additional disaggregation of relevant expense captions. The standard is effective for annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027, with prospective or retrospective application permitted. The Company is currently evaluating the impact of this ASU on its financial statement presentation and disclosures and plans to adopt this pronouncement beginning with its fiscal year beginning June 1, 2027. In November 2024, the FASB issued ASU 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20). The amendments in this Update clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. The amendments in this Update are effective for all entities for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities that have adopted the amendments in Update 2020-06. The amendments in this Update permit an entity to apply the new guidance on either a prospective or a retrospective basis. The Company is currently evaluating the impact of this ASU on its financial statements and plans to adopt this pronouncement beginning with its fiscal year beginning June 1, 2026. 80 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 3. Property and Equipment Property and equipment, net consisted of the following as of May 31, 2025 and 2024 (in thousands): Estimated Useful Life May 31, 2025 May 31, 2024 Networking equipment, electrical equipment, and software 3 years - 5 years $ 32,938 $ 32,185 Electric generation and transformers 15 years 9,914 9,933 Land and building Building 39 years 109,672 103,990 Land 20,047 6,205 Land improvements 15 years 1,423 1,380 Leasehold improvements 3 years - 7 years 444 444 Construction in progress 1,123,156 186,869 Other equipment and fixtures 5 years - 7 years 2,126 1,760 Total cost of property and equipment 1,299,720 342,766 Accumulated depreciation ( 23,879 ) ( 13,663 ) Property and equipment, net $ 1,275,841 $ 329,103 Depreciation expense totaled $ 10.6 million, $ 15.1 million, and $ 3.9 million for the fiscal years ended May 31, 2025, 2024, and 2023, respectively. 4. Revenue from Contracts with Customers Below is a summary of the Company’s revenue concentration by major customer for the fiscal years ended May 31, 2025 and 2024: May 31, 2025 May 31, 2024 May 31, 2023 Customer A 93 % 75 % 24 % Customer B — % — % 14 % Customer C — % — % 12 % Customer H — % — % 20 % Customer I — % — % 19 % Customer J — % — % 11 % Deferred Revenue Changes in the Company's deferred revenue balances for the fiscal year ended May 31, 2025 and May 31, 2024, respectively, are shown in the following table (in thousands): May 31, 2025 May 31, 2024 Balance, beginning of period $ 8,188 $ 48,692 Advance billings 131,546 87,996 Revenue recognized ( 143,995 ) ( 136,071 ) Other adjustments 4,261 7,571 Less: Related party balances — ( 1,692 ) Balance, end of period $ — $ 6,496 81 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Customer Deposits Changes in the Company's customer deposits balances for the years ended May 31, 2025 and 2024, respectively, are shown in the following table (in thousands): May 31, 2025 May 31, 2024 Balance, beginning of period $ 15,367 $ 36,370 Customer deposits received 5,698 3,395 Customer deposits applied ( 1,567 ) ( 12,633 ) Customer deposit adjustments ( 3,373 ) ( 11,764 ) Less: Related party balances — ( 1,549 ) Balance, end of period $ 16,125 $ 13,819 5. Discontinued Operations During the year ended May 31, 2025, the Company determined that the Cloud Services Business met the criteria to be classified as “held for sale,” as the Board of Directors approved further plans for the sale of the segment. The potential sale of the Cloud Services Business represents a strategic shift in the Company’s operations and financial results. As such, the Company reported the Cloud Services Business as discontinued operations for the fiscal year ended May 31, 2025 in accordance with ASC 205-20, Discontinued Operations. The Company expects the sale of the Cloud Services Business to occur within 12 months from the date it met the held for sale criteria. The financial results of the Cloud Services Business are presented as net loss from discontinued operations on the consolidated statements of operations. The following table presents the major components of the financial results of the Cloud Services Business for the periods presented (in thousands): Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 Revenue $ 84,376 $ 28,957 $ — Cost of revenues 115,308 41,687 — Selling, general and administrative 24,813 52,756 1,091 (Gain) on abandonment of assets ( 414 ) — — Operating loss from discontinued operations ( 55,331 ) ( 65,486 ) ( 1,091 ) Interest expense 17,399 9,809 27 Net loss from discontinued operations before income tax expense ( 72,730 ) ( 75,295 ) ( 1,118 ) Income tax expense — — — Net loss from discontinued operations $ ( 72,730 ) $ ( 75,295 ) $ ( 1,118 ) 82 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 As of May 31, 2025, the assets and liabilities of the Cloud Services Business are classified as current in our consolidated balance sheets, as it is probable that the sale will occur within one year. The following table represents the aggregated carrying amounts of classes of assets and liabilities that are classified as held for sale on the consolidated balance sheets for the periods presented (in thousands): Fiscal Year Ended May 31, 2025 May 31, 2024 Assets: Cash and cash equivalents $ 2,398 $ — Accounts receivable 3,788 — Prepaid expenses and other current assets 223 333 Property and equipment, net 10,922 11,278 Operating lease right of use asset, net 91,374 152,090 Finance lease right of use asset, net 195,495 209,933 Other assets — 581 Total current assets held for sale 304,200 374,215 Liabilities: Accounts payable 3,962 11,589 Accrued liabilities 572 1,580 Current portion of operating lease liability 16,093 21,101 Current portion of finance lease liability 133,406 102,400 Current deferred revenue 3,594 31,178 Long-term portion of operating lease liability 58,420 108,668 Long-term portion of finance lease liability — 59,907 Total current liabilities held for sale $ 216,047 $ 336,423 The following table presents significant non-cash items and capital expenditures of discontinued operations for the periods presented (in thousands): Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 Depreciation and amortization $ 80,656 $ 57,883 $ 154 Stock-based compensation ( 1,463 ) 10,135 — Purchases of property and equipment and other assets ( 190 ) ( 10,600 ) ( 260 ) Finance lease prepayments 1,190 ( 46,378 ) — Operating right-of-use assets obtained by lease obligation 20,280 158,508 — Finance right-of-use assets obtained by lease obligation 64,358 217,818 3,021 Property and equipment in AP and accrued liabilities 1,387 1,172 — 83 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 6. Related Party Transactions Related Party Revenue The following table illustrates related party revenue for the fiscal years ended May 31, 2025, May 31, 2024, and May 31, 2023 (in thousands): May 31, 2025 May 31, 2024 May 31, 2023 Customer B* $ 1,244 $ 8,005 $ 8,007 Customer C** $ 682 $ 6,756 $ 6,401 *Customer B is a subsidiary of an entity which, during the first quarter of fiscal year 2025, was deemed to beneficially own over 5 % of the Company's outstanding common stock. As of July 25, 2024, the controlling individual of the entity filed a Schedule 13G to report the fact that as of the date thereof, the entity had ceased to be a beneficial owner of more than 5 % of such class of securities. **Customer C is 60 % owned by an individual who, during the first quarter of fiscal year 2025, was deemed to beneficially own over 5 % of the Company's outstanding common stock. As of July 25, 2024, the individual filed a Schedule 13G to report the fact that as of the date thereof, the individual had ceased to be a beneficial owner of more than 5 % of such class of securities. The following table illustrates related party deferred revenue and deposits balances as of May 31, 2025 and May 31, 2024 (in thousands): Customer B balances as of Customer C balances as of May 31, 2025 May 31, 2024 May 31, 2025 May 31, 2024 Deferred revenue $ — $ 993 $ — $ 699 Customer Deposits $ — $ 895 $ — $ 654 Other Related Party Transactions Related party transactions included within selling, general and administrative expense on the consolidated statement of operations include the following: • consulting costs of $ 0.3 million and $ 0.1 million during the fiscal years ended May 31, 2024 and May 31, 2023, respectively, were incurred with a company owned by a family member of the Company’s former Chief Administrative Officer. • software license fees of $ 0.3 million, $ 0.2 million, and $ 0.1 million during the fiscal years ended May 31, 2025, May 31, 2024, and May 31, 2023, respectively, were incurred with a company whose chairman is also a member of the Company’s Board of Directors. • consulting fees of $ 43 thousand during the fiscal year ended May 31, 2024 were incurred with a former member of the Company's Board of Directors for sales consulting work. 84 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 7. Debt Long-term debt consisted of the following components (in thousands): Interest Rate Maturity Date May 31, 2025 May 31, 2024 Convertible Notes, senior unsecured 2.75 % June 2030 $ 450,000 $ — SMBC Loan (1) See below August 2026 375,000 — Starion Ellendale Loan (2) 7.48 % February 2028 12,283 16,145 Vantage Transformer Loan 6.50 % February 2029 — 3,609 Cornerstone Bank Loan (3) 8.59 % March 2029 12,866 15,576 Yorkville Convertible Debt — % April and June 2025 — 80,243 Starion Term Loan (4) 6.50 % July 2027 7,061 10,021 Other long-term debt (5) 12,275 297 Deferred financing costs, net of amortization ( 181,329 ) ( 501 ) Less: Current portion of debt ( 10,331 ) ( 45,918 ) Long-term debt, net $ 677,825 $ 79,472 (1) The SMBC Loan is guaranteed by APLD HPC TopCo LLC, a wholly-owned subsidiary of the Company, and is secured by a continuing security interest in all of the membership interests of the borrower, APLD HPC Holdings LLC, including a mortgage on certain properties as defined in the collateral agency, security and depositary agreement. (2) The Starion Ellendale Loan is guaranteed by APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, and is secured by the first 100 MW HPC facility at Polaris Forge 1, a security interest in substantially all of the assets of APLD ELN-01 LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in all master hosting agreements related to Polaris Forge 1. (3) The Cornerstone Bank Loan is guaranteed by APLD GPU-01, LLC, a wholly-owned subsidiary of the Company, and is secured by a security interest in multiple Terms of Service Agreements for HPC based systems related to AI Cloud Computing Services, which are to be serviced at the Jamestown hosting facility. (4) The Starion Term Loan is guaranteed by APLD Hosting, LLC, a wholly-owned subsidiary of the Company, and is secured by the Jamestown hosting facility, a security interest in substantially all of the assets of APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility. (5) Inclusive in this number is $ 12.0 million of proceeds from the issuance of two SAFE agreements which were accounted for as liabilities. See further discussion below. Interest Expense Interest and related amortization of debt issuance costs and discounts recognized during construction projects are capitalized and included in the cost of project. Interest expense, net of amounts capitalized, recognized for the years ended May 31, 2025, May 31, 2024, and May 31, 2023 consisted of the following (in thousands): May 31, 2025 May 31, 2024 May 31, 2023 Long term debt obligations 45,233 10,803 1,132 Long term debt obligations - related party — 5,664 — Amortization of debt issuance costs and discounts 26,577 117 87 Finance lease obligations 1,758 1,140 784 Interest income ( 3,117 ) ( 931 ) ( 176 ) Other interest and amortization 1,459 — 915 — 179 Total interest costs 71,910 17,708 2,006 Capitalized interest ( 57,171 ) — — Total interest expense 14,739 17,708 2,006 85 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Below is the weighted-average interest rate for the Company's term loans: May 31, 2025 May 31, 2024 Weighted-average interest rate 1.7 % 2.7 % Remaining Principal Payments Below is a summary of the remaining principal payments due over the life of the term loans as of May 31, 2025 (in thousands): FY26 $ 10,468 FY27 386,126 FY28 7,677 FY29 3,206 FY30 8 Thereafter 462,000 Total $ 869,485 Letters of Credit As of May 31, 2025, the Company had letters of credit totaling $ 38.3 million. The Company has restricted cash related to its letters of credit and is required to keep these balances in separate accounts for the duration of the letter of credit agreements. The Company presents all restricted cash amounts with letter of credit term of 12 months or less within the Restricted Cash caption within current assets and any amounts with a related letter of credit term of over 12 months in Other Assets. Starion Term Loan On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of the Company, entered into a loan agreement with Starion Bank and the Company as Guarantor (the “Starion Term Loan Agreement”). The Starion Term Loan Agreement provides for a term loan (the "Starion Term Loan") in the principal amount of $ 15.0 million with a maturity date of July 25, 2027. The Starion Term Loan Agreement contains customary covenants, representations and warranties and events of default. The Company is subject to a debt service coverage ratio. Yorkville Convertible Debt During the fiscal year ended May 31, 2024, the Company entered into two prepaid advance agreements with YA II PN, LTD. (“YA Fund”) for promissory notes totaling $ 92.1 million (collectively the “YA Notes”), issued on March 27, 2024 (the “March Note”), April 24, 2024, and May 24, 2024 (the “May PPA”). The YA Notes were convertible into shares of the Company’s common stock. During the fiscal year ended May 31, 2025, the Company recognized a gain on fair value of debt of $ 4.1 million associated with the YA Notes which is included on the consolidated statements of operations. Also during the fiscal year ended May 31, 2025, $ 71.3 million of the YA Notes were converted into approximately 19.1 million shares of common stock. The Company recorded a loss on conversion of debt of $ 33.6 million during the fiscal year ended May 31, 2025, in its consolidated statements of operations. The fair value of the YA Notes was calculated on an as-converted basis using quoted market prices of the Company's outstanding common stock; however, YA Fund had converted the maximum amount of shares allowable under Nasdaq rules and regulations and as such, the remaining balance of $ 4.8 million under the March Note was payable in cash. During the fiscal year ended May 31, 2025, 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 SEPA (as defined below). CIM Arrangement On June 7, 2024, APLD Holdings 2 LLC (the “Borrower”), a subsidiary of the Company, entered into a promissory note (the “CIM Promissory Note”) with CIM APLD Lender Holdings, LLC, a Delaware limited liability company (the “Lender”). The CIM Promissory Note provided for borrowings up to $ 125 million. The total amount borrowed under the 86 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 CIM Promissory Note was $ 125 million. Pursuant to the CIM Promissory Note, the Company issued warrants to purchase up to 9,265,366 shares of common stock (the “CIM Warrants”). See further discussion of the CIM Warrants in "Note 11 - Warrants." On November 27, 2024, in connection with the issuance of the Macquarie Promissory Note and receipt by the Company of the proceeds related thereto (as described below), the Company repaid the CIM Promissory Note in full, including all outstanding and unpaid principal, accrued interest, fees, and expenses. The associated extinguishment costs were capitalized directly into Construction in Progress (CIP), as the CIM Promissory Note was tied to the ELN-02 Project and was therefore considered part of the construction cost. As of May 31, 2025, the CIP balance includes $ 9.4 million related to the extinguishment of the CIM Promissory Note. Yorkville Amendments In connection with the CIM Promissory Note, the Company also entered into a Consent, Waiver and First Amendment to the Prepaid Advance Agreements (the “Consent”) with YA Fund. In exchange for giving its consent to the transaction with the CIM Lender, the Company agreed to issue an aggregate of 100,000 shares of common stock to YA Fund and to conditionally lower the floor price from $ 3.00 to $ 2.00 so long as the daily Volume Weighted Average Price (“VWAP”) is less than $ 3.00 per share of common stock for five out of seven trading days. The Company further agreed to deliver a security agreement whereby its subsidiary, Applied Digital Cloud Corporation, would grant a springing lien on substantially all of its assets subject to customary carve-outs to secure the YA notes issued in favor of YA Fund. Pursuant to the Consent, YA Fund also consented to future project-level financing at Polaris Forge 1. In addition, pursuant to the terms of the Consent, certain provisions of the March PPA and the May PPA were amended. Upon issuance of the 100,000 shares, the Company recorded the value of the shares at their grant date fair value as an increase of $ 0.5 million in the loss on change in fair value of debt caption on the consolidated statements of operations. On October 16, 2024, the Company entered into a letter agreement with YA Fund, whereby the Company agreed to satisfy its obligations with respect to the Commitment Fee (as defined below) in cash by increasing the principal amount due under the March Note in an equivalent amount, instead of issuing the Commitment Shares (as defined below). The Commitment Fee was paid in full during the fiscal year ended May 31, 2025 as part of the repayment by the Company of the March Note. On October 29, 2024, the Company entered into certain amendments to the March prepaid advance agreement and the March Note. The amendments (i) provided consent to the Convertible Notes (as defined below) offering and share repurchase transactions (as described below) and (ii) removed certain prior restrictions on redemption of the March Note before January 1, 2025. SAFE In the first fiscal quarter of 2025, Applied Digital Cloud Corporation (“ADCC”), a wholly-owned subsidiary of the Company, entered into two SAFE agreements totaling $ 12.0 million with an investor (the “Investor”). Under the terms of the SAFE agreements, the Investor has the right to certain shares of ADCC’s preferred stock. If an equity financing transaction is completed by ADCC before the termination of the SAFE agreements, the SAFE agreements will automatically convert into the number of shares of preferred stock equal to the purchase amount divided by the discount price, which will be the lowest price per share of the preferred stock sold in the equity financing transaction multiplied by the discount rate ( 90 %). If there is a liquidity event before the termination of the SAFE agreements, the Investor will automatically be entitled to receive a portion of proceeds, due and payable to the Investor immediately prior to, or concurrent with, the occurrence of such liquidity event, equal to the greater of (i) the purchase amount or (ii) the amount payable on the number of shares of common stock equal to the purchase amount divided by the liquidity price (the price per share equal to the fair market value of the common stock at the time of the liquidity event, as determined by reference to the purchase price payable in connection with such liquidity event, multiplied by the discount rate). If there is a dissolution event before the termination of the SAFE agreements, the Investor will automatically be entitled to receive a portion of proceeds equal to the purchase amount, due and payable to the Investor immediately prior to the occurrence of the dissolution event. In a liquidity or dissolution event, the SAFE agreements are intended to operate like standard non-participating preferred stock. The Investor’s right to receive the purchase amount is junior to payments for outstanding indebtedness and creditor 87 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 claims, on par with payments for other SAFE agreements and preferred stock, and senior to payments for common stock. The SAFE agreements will automatically terminate immediately following the earliest to occur of: (i) the issuance of capital stock to the Investor pursuant to the automatic conversion of the SAFE agreements; or (ii) the payment, or setting aside for payment, of amounts due the Investor. The Investor shall have the right, but not the obligation, to purchase up to its Pro Rata Share (the ratio of (i) the purchase amount of the SAFE agreements to (ii) the aggregate purchase amounts of all SAFE agreements issued by ADCC prior to the equity financing transaction) of the securities issued in the equity financing transaction, on the same terms, conditions and pricing afforded to the other investors participating in the equity financing transaction. The SAFE agreements were accounted in accordance with ASC 480: Distinguishing Liabilities from Equity. Per the SAFE agreements, as the underlying share class has not been issued yet and as such, equity classification cannot be determined based on redemption rights, these agreements were classified as liabilities and included in long-term debt at their face value on the Company’s consolidated balance sheets. Convertible Notes, senior unsecured On November 4, 2024, the Company issued $ 450.0 million aggregate principal amount of 2.75 % Convertible Senior Notes due 2030 (the “Convertible Notes”). The net proceeds from the sale of the Convertible Notes was approximately $ 435.2 million after deducting the initial purchasers’ discounts and commissions and estimated offering expenses payable by the Company. The Company used approximately $ 84 million of the net proceeds from the offering to fund share repurchases of common stock in connection with the offering including (i) $ 52.7 million to fund the cost of entering into a prepaid forward repurchase transaction (as described below) and (ii) $ 31.3 million to repurchase shares of common stock with which the Company repurchased approximately 4.3 million shares at $ 7.36 a share, the stock price on October 30, 2024, the trading day preceding the transaction close. In addition, approximately $ 51.8 million of the net proceeds from the offering were used to pay the cost of the capped call transactions (as described below) and the remainder of the net proceeds were used for general corporate purposes. Also on November 4, 2024, the Company entered into an indenture with respect to the Convertible Notes with Wilmington Trust, National Association, as trustee (the “Indenture”). The Convertible Notes are senior unsecured obligations of the Company and 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 Convertible Notes will mature on June 1, 2030, unless earlier converted, redeemed or repurchased in accordance with terms described below. 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 of the Convertible Notes, holders may convert the Convertible Notes at any time (the “Conversion Option”). The Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, subject to certain restrictions. The initial conversion rate is $102.54 shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 9.75 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments. In addition, following certain events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or notice of redemption. Prior to December 1, 2027, the Company may not redeem the Convertible Notes. On or after December 1, 2027, the Company may redeem for cash all or any portion of the Convertible Notes, at its option, if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company undergoes a “fundamental change,” as defined in the Indenture, prior to maturity, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Convertible Notes to be repurchased, 88 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Indenture contains customary terms and covenants, including certain events of default. In accounting for the issuance of the Convertible Notes, the Conversion Option of the Convertible Notes was deemed an embedded derivative requiring bifurcation from the Convertible Notes (the “host contract”) and separate accounting as an embedded derivative liability, resulting from the Company not having the necessary number of authorized but unissued shares of its common stock available to settle the Conversion Option of the Convertible Notes in shares on the date of issuance. The proceeds from the Convertible Notes were first allocated to the embedded derivative liability and the remaining proceeds were then allocated to the host contract. On November 4, 2024, the issuance date, the fair value of the embedded derivative liability representing the Conversion Option was $ 149.9 million and the remaining $ 286.6 million was allocated to the host contract. As such, the Company recognized a $ 13.5 million gain on change in fair value of debt at issuance. Subsequently, on November 20, 2024, the stockholders of the Company approved an increase to the number of authorized shares of common stock to an amount sufficient to settle the Conversion Option of the Convertible Notes fully in shares. As a result of the increase to the number of authorized shares of common stock, the Company revalued the Conversion Option to its fair value as of November 20, 2024 of $ 252.9 million and reclassified the embedded derivative to additional paid-in capital on its consolidated balance sheets. In doing so, the Company recognized a $ 103.0 million loss on change in fair value of debt as of November 20, 2024. This loss combined with the gain recognized at issuance resulted in a total loss on fair value of debt of $ 89.6 million which is included on the consolidated statements of operations. As of May 31, 2025, the embedded Conversion Option derivative is included in additional paid-in capital in the consolidated balance sheets and is not required to be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met. As of May 31, 2025, the net carrying amount for the Convertible Notes was $ 273.3 million and the remaining unamortized deferred financing costs related to the issuance of the Convertible Notes was $ 176.7 million. Prepaid Forward Repurchase Transaction In connection with the offering of the Convertible Notes, the Company entered into a privately negotiated prepaid forward repurchase transaction (the “Prepaid Forward”) with one of the initial purchasers (the “Forward Counterparty”). Pursuant to the Prepaid Forward and the Indenture, the Company used approximately $ 52.7 million of the net proceeds from the offering of the Convertible Notes to fund the Prepaid Forward. The initial aggregate number of shares of common stock underlying the Prepaid Forward was approximately 7.2 million shares of common stock based on a forward price of $ 7.36 . The maturity date for the Prepaid Forward is November 3, 2025, although it may be settled earlier in whole or in part. As of May 31, 2025, the purchase price of the Prepaid Forward is included in additional paid-in capital in the consolidated balance sheets and is not required to be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met. Capped Call Transaction In connection with the offering of the Convertible Notes, the Company entered into privately negotiated capped call transactions (the “Base Capped Call Transactions”) with certain financial institutions (the “Option Counterparties”). In addition, in connection with the initial purchasers’ exercise of their option to purchase additional Convertible Notes, the Company entered into additional capped call transactions (the “Additional Capped Call Transactions,” and, together with the Base Capped Call Transactions, the “Capped Call Transactions”) with each of the Option Counterparties. The Company used approximately $ 51.8 million of the net proceeds from the offering of the Convertible Notes to pay the cost of the Capped Call Transactions. The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the aggregate number of shares of common stock that initially underlie the Convertible Notes, and are expected generally to reduce potential dilution to the common stock upon any conversion of the Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions, which is defined as $ 14.72 . The Capped Call Transactions are separate transactions entered into by the Company and are not part of the terms of the Convertible Notes. 89 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 As of May 31, 2025, the purchase price of the Capped Call Transaction is included in additional paid-in capital in the consolidated balance sheets and is not required to be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met. Macquarie Promissory Note On November 27, 2024, APLD ELN-02 Holdings LLC, a wholly-owned subsidiary of the Company, entered into a promissory note with Macquarie Equipment Capital, Inc. (the “Macquarie Promissory Note”). The Macquarie Promissory Note provided for a loan of $ 150 million and matures on the earlier of (i) the date of acceleration of the loan or (ii) May 27, 2026. However, to the extent that the ELN-02 Project (as defined therein) was not completed by December 6, 2025, the Company must repay the full outstanding principal balance of the Macquarie Promissory Note together with accrued interest and any other amounts then due and payable. Additionally, the Macquarie Promissory Note had a multiple on invested capital (“MOIC”) of (i) 1.11 to 1.00 if such prepayment occurred on or prior to the date that is four months after the closing date, (ii) 1.20 to 1.00 if such prepayment occurred after the date that is four months after the closing date but on or prior to the date that is seven months after the closing date, or (iii) 1.35 to 1.00 if such prepayment occurred after the date that is seven months after the closing date. The same 1.35 x return hurdle applied to repayment at maturity. The Company recorded a MOIC liability of $ 16.5 million, representing the value of the MOIC liability the day after the closing date. Proceeds of the loan under the Macquarie Promissory Note were used, in part, to repay in full and terminate the CIM Promissory Note. Commensurate with the use of proceeds associated with construction from the Macquarie Promissory Note, the Company will capitalize approximately 90 % of the interest expense recognized each period. Additionally, proceeds were used to satisfy remaining obligations of the Company under the March Note. As partial consideration for the Macquarie Promissory Note, the Company issued warrants (the “Macquarie Warrants”) to purchase up to 1,035,197 shares of the Company’s common stock. See further discussion of the Macquarie Warrants in "Note 11 - Warrants." On February 11, 2025, in connection with the Company’s entry into the SMBC Credit Agreement (as defined below) and receipt by the Company of the proceeds related thereto (as described below), the Company repaid the Macquarie Promissory Note in full, including all outstanding and unpaid principal, accrued interest, and multiple on invested capital. As a result, there was a loss on the extinguishment of the Macquarie Promissory Note of $ 11.8 million. Commensurate with the use of proceeds associated with construction from the Macquarie Promissory Note, the Company capitalized approximately 90 %, or $ 10.6 million, to CIP and the remainder, 10 %, or $ 1.2 million, was recorded to loss on extinguishment of debt in the consolidated statements of operations. SMBC Credit Agreement On February 11, 2025, APLD HPC Holdings LLC, a wholly-owned subsidiary of the Company, entered into a credit and guaranty agreement (the “SMBC Credit Agreement”) with Sumitomo Mitsui Banking Corporation (“SMBC”). The SMBC Credit Agreement provides for an aggregate of $ 375 million of term loans, which includes base rate loans and SOFR loans, and matures 18 months after the closing date. Base rate loans bear interest at the base rate plus (i) 2.50 % from the closing date until the six month anniversary of the closing date, (ii) 3.50 % after the six month anniversary of the closing date until the one year anniversary of the closing date, and (iii) 4.50 % after the one year anniversary of the closing date while SOFR loans bear interest at the daily simple SOFR plus (i) 3.50 % from the closing date until the six month anniversary of the closing date, (ii) 4.50 % after the six month anniversary of the closing date until the one year anniversary of the closing date, and (iii) 5.50 % after the one year anniversary of the closing date. For the year ended May 31, 2025, the average SOFR was 7.82 %. As of May 31, 2025, remaining unamortized deferred financing costs related to the issuance of the loan was $ 4.4 million. The Company may voluntarily prepay all or any part of the loans at any time or from time to time without premium or penalty with no less than three business days’ notice. Additionally, as more particularly described in the credit agreement and the certain collateral agency, security and depositary agreement, the Company is required to prepay all or a part of the loans under certain circumstances. Amounts repaid under the Loans will not be available to be re-borrowed. The Company used the proceeds of the loans to (i) prepay in full the Macquarie Promissory Note, (ii) pay for certain data center project development costs at Polaris Forge 1, and (iii) fund the Interest Reserve Account as defined in the SMBC Credit Agreement. Remaining proceeds have been deposited into a separate bank account for future construction costs at 90 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Polaris Forge 1. Commensurate with the use of proceeds associated with construction, the Company will capitalize 100 % of the interest expense recognized each period. 8. Balance Sheet Components Certain balance sheet components are as follows (in thousands): May 31, 2025 May 31, 2024 Other assets Lease incentive $ 84,416 $ — Deferred construction costs 33,600 5,200 Restricted cash: letters of credit 7,000 7,000 Deferred lease costs 8,811 1,538 Investments in other companies 6,073 1,200 Other 4,976 4,411 Total Other assets $ 144,876 $ 19,349 May 31, 2025 May 31, 2024 Other current liabilities Construction retainer $ 19,338 $ — Other 94 96 Total Other current liabilities $ 19,432 $ 96 9. Income Taxes Income tax expense for the fiscal years ended May 31, 2025, 2024, and 2023 consisted of the following (in thousands): May 31, 2025 May 31, 2024 May 31, 2023 Current expense (benefit) Federal $ — $ — $ — Foreign — — — State 102 96 18 Total current expense 102 96 18 Deferred expense (benefit) Federal — — ( 540 ) Foreign — — — State — — — Total deferred (benefit) expense — — ( 540 ) Total income tax (benefit) expense $ 102 $ 96 $ ( 523 ) 91 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 The following table reconciles the statutory rate to our effective tax rate for the fiscal years ended May 31, 2025, 2024, and 2023: May 31, 2025 May 31, 2024 May 31, 2023 Expected income tax rate at the U.S. statutory rate 21.0 % 21.0 % 21.0 % Stock-based compensation ( 0.9 ) % 2.0 % ( 6.0 ) % State income taxes, net of federal tax benefit — % ( 0.1 ) % — % Convertible debt instruments ( 12.1 ) % ( 2.1 ) % — % Change in valuation allowance ( 7.5 ) % ( 19.8 ) % ( 13.0 ) % Other, net ( 0.5 ) % ( 1.1 ) % ( 0.8 ) % Effective income tax rate — % ( 0.1 ) % 1.2 % Deferred income taxes reflect the temporary differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts utilized for tax purposes. The primary components of the temporary differences that gave rise to the Company's deferred tax assets and liabilities for the fiscal years ended May 31, 2025 and 2024 are as follows (in thousands): May 31, 2025 May 31, 2024 Deferred tax assets Net operating loss $ 59,963 $ 42,810 Stock-based compensation 2,006 2,758 Capitalized research and development 13,088 4,039 Interest expense 12,759 4,854 Convertible debt instruments — 3,101 Lease liability 17,587 29,508 Other 824 662 Deferred tax assets, gross 106,227 87,732 Less: valuation allowance ( 65,856 ) ( 47,005 ) Total deferred tax assets, net 40,371 40,727 Deferred tax liabilities Property and equipment ( 18,887 ) ( 6,202 ) Right of use assets ( 21,484 ) ( 34,525 ) Other — — Total deferred tax liability, net ( 40,371 ) ( 40,727 ) Net deferred tax asset $ — $ — The Company had $ 399.6 million, $ 284.8 million, and $ 114.8 million of federal and state tax net operating losses as of May 31, 2025, 2024, and 2023, respectively. At May 31, 2025, $ 346.5 million is available indefinitely to offset future income. The remaining carryforward amounts expire at varying dates beginning in 2028. A valuation allowance is provided when it is more likely than not that some portion or the entire net deferred tax asset will not be realized. The Company has recorded an increase in the valuation allowance of $ 18.9 million and $ 31.3 million as of May 31, 2025 and 2024, respectively. The valuation allowance is primarily attributable to deferred tax assets for net operating losses that management believes are more likely than not to expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e., capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the scheduled reversals of deferred tax liabilities and the history of positive taxable income in evaluating the realizability of the deferred tax assets. Management believes that it is not likely that the results of future operations will generate sufficient taxable income to 92 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 realize its deferred tax assets. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards that could be used annually to offset future taxable income. The Company is subject to U.S. federal and various state and local income tax. Tax years ending May 31, 2022 through May 31, 2025 are open to examination by the major taxing jurisdictions to which the Company is subject, as carryforward attributes generated in these years may still be adjusted upon examination by the Internal Revenue Service ("IRS") or other authorities if they have or will be used in a future period. The Company is not currently under examination by the IRS or any other taxing jurisdictions for any tax years. 10. Stockholders' Equity Common Stock Increases In Authorized Shares On June 11, 2024, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to its 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. Additionally, on November 20, 2024, the Company filed an amendment to its 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. At-the-Market Sales Agreement On July 9, 2024, the Company entered into a Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc., BTIG, LLC, Lake Street Capital Markets, LLC, Northland Securities, Inc. and Roth Capital Partners, LLC (collectively, the “Agents”), pursuant to which the Company could offer and sell, from time to time, through the Agents, up to $ 125.0 million in shares of the Company’s common stock. During the fiscal quarter ended August 31, 2024, approximately 3.0 million shares of the Company’s common stock were issued and sold under the Sales Agreement for proceeds of $ 16.4 million net of issuance costs of $ 0.5 million. On October 30, 2024, the Company terminated its Sales Agreement with the Agents. Standby Equity Purchase Agreement ("SEPA") On August 28, 2024, the Company entered into the SEPA with YA Fund, which was amended on August 29, 2024. Pursuant to the SEPA, subject to certain conditions and limitations, the Company had the option, but not the obligation, to sell to YA Fund, and YA Fund was obligated to purchase, an aggregate amount of up to $ 250.0 million of common stock, at the Company’s request any time during the commitment period commencing on September 30, 2024, and terminating on October 1, 2027. In connection with the execution of the SEPA, the Company agreed to pay a structuring fee (in cash) to YA Fund in the amount of $ 25,000 . Additionally, the Company agreed to pay a commitment fee of $ 2,125,000 to YA Fund, (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, the Company entered into a letter agreement with YA Fund, whereby the Company agreed to satisfy its 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 was 93 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 paid in full during the quarter ended May 31, 2025 as part of the repayment by the Company of the March Note. The SEPA was terminated on April 30, 2025. Private Placement On September 5, 2024, the Company entered into a securities purchase agreement with a group of institutional and accredited investors, NVIDIA and Related Companies, for the private placement (the “Private Placement”) of 49,382,720 shares of the Company’s 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. The Private Placement closed during the three months ended November 30, 2024, with aggregate gross proceeds to the Company of approximately $ 160 million, before deducting offering expenses. 11. Warrants A summary of warrant activity for the year ended May 31, 2025 is presented below: Warrants Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years) Outstanding at June 1, 2024 3,000,000 $ 8.75 4.90 Granted 24,363,084 6.41 7.40 Forfeited — — — Exercised ( 9,265,366 ) 4.80 — Outstanding at May 31, 2025 18,097,718 $ 7.63 8.52 AI Warrants The Company issued warrants to purchase up to 3,000,000 shares of Common Stock related to the AI Bridge Loan during the fiscal year ended May 31, 2024 (the “AI Warrants”). The AI Warrants are exercisable upon payment of the applicable exercise price in cash or through cashless exercise for a period of five years . 1,500,000 AI Warrants have an exercise price of $ 10.00 per share of Common Stock and 1,500,000 AI Warrants have an exercise price of $ 7.50 per share of Common Stock. As of May 31, 2025, all of the AI Warrants were outstanding. CIM Warrants Pursuant to the CIM Promissory Note discussed above, the Company issued warrants to purchase up to 9,265,366 shares of common stock. The CIM Warrants were issued in two tranches: for the purchase of up to 6,300,449 Common Shares (the “Initial Warrants”), issued on June 17, 2024, and 2,964,917 Common Shares (the “Additional Warrants”), issued on August 11, 2024. The CIM Warrants were exercisable upon issuance and had a five-year term and an exercise price of $ 4.8005 per share. The CIM Warrants were measured at fair value using the Black-Scholes Option Pricing model. Inherent in pricing models are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield, which are considered Level 3 inputs. The estimated fair value of the CIM Warrants was based on the following significant inputs: Initial Warrants Additional Warrants Warrant issue date June 17, 2024 August 11, 2024 Contractual term 5 years 5 years Volatility 105 % 110 % Risk-free rate 4.25 % 3.76 % Dividend yield — % — % The fair value of the Initial Warrants and Additional Warrants was $ 4.36 and $ 3.04 per warrant, respectively. The total fair value of the CIM Warrants was $ 36.5 million and was recorded in the consolidated statements of changes in temporary equity and stockholders’ equity. The Company deferred the recognition of the fair value of the Initial and Additional Warrants as a reduction in the net carrying amount of the CIM Promissory Note. After the repayment of the CIM 94 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Promissory Note, the remaining value of the CIM Warrants recorded as a reduction of the CIM Promissory Note was capitalized to CIP. During the fiscal year ended May 31, 2025, all 9,265,366 of the CIM Warrants were exercised on a cashless basis for approximately 4.9 million shares of the Company’s common stock in a net settlement transaction. Macquarie Warrants On November 27, 2024, as partial consideration for the Macquarie Promissory Note, the Company issued warrants to purchase up to 1,035,197 shares of the Company’s common stock. The Macquarie Warrants are exercisable from and after the date that is six months following the date of issuance thereof and will have a five and one-half-year term and an exercise price of $ 9.66 per share, which exercise price must be paid in cash. The Macquarie Warrants were measured at fair value using the Black-Scholes Option Pricing model. Inherent in pricing models are assumptions related to expected share-price volatility, contractual term, risk-free interest rate and dividend yield, which are considered Level 3 inputs. The estimated fair value of the Macquarie Warrants was based on the following significant inputs: Macquarie Warrants Contractual term 5.5 years Volatility 95 % Risk-free rate 4.08 % Dividend yield — % The fair value of the Macquarie Warrants was $ 7.38 per warrant, totaling $ 7.6 million which was recorded as additional paid-in capital on the Company’s consolidated balance sheets. The Company deferred the recognition of the fair value of the Macquarie Warrants as a reduction in the net carrying amount of the Macquarie Promissory Note and subsequently amortized this balance into interest expense or CIP, as noted above, using the effective interest rate method. The Macquarie Warrants survived the termination of the Macquarie Promissory Note and remain outstanding as of May 31, 2025. STB Warrant Issuance On February 27, 2025, the Company issued a warrant to STB Applied Holdings LLC to purchase 1,000,000 shares of the Company’s common stock at the exercise price of $ 7.83 per share (the “STB Warrant”) for consideration of $ 50,000 . The warrant is exercisable beginning on February 27, 2027 (the “Initial Exercise Date”), upon payment of the applicable exercise price in cash or through cashless exercise for a period of five years from the Initial Exercise Date. The STB Warrant was measured at fair value using the Black-Scholes Option Pricing model. Inherent in pricing models are assumptions related to expected share-price volatility, contractual term, risk-free interest rate and dividend yield, which are considered Level 3 inputs. The estimated fair value of the STB Warrant was based on the following significant inputs: STB Warrant Contractual term 7 years Volatility 95 % Risk-free rate 4.15 % Dividend yield — % The resulting fair value of the STB Warrant was $ 6.42 per warrant, totaling $ 6.4 million and was recorded in the consolidated statements of changes in temporary equity and stockholders’ equity with a commensurate loss of $ 6.4 million on change in fair value of warrants on the consolidated statements of operations. CoreWeave Warrant 95 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 On May 28, 2025, in connection with the entry into the data center leases with CoreWeave (the "CoreWeave Leases"), the Company issued to CoreWeave a warrant (the “CoreWeave Warrant”) to acquire up to 13,062,521 shares of the Company's common stock at an exercise price of $ 7.19 per share, subject to adjustment in accordance with the terms and conditions set forth in the CoreWeave Warrant. The CoreWeave Warrant is exercisable upon issuance, upon payment of the applicable exercise price in cash or through cashless exercise. The CoreWeave Warrant was measured at fair value using the Black-Scholes Option Pricing model. Inherent in pricing models are assumptions related to expected share-price volatility, contractual term, risk-free interest rate and dividend yield, which are considered Level 3 inputs. The estimated fair value of the CoreWeave Warrant was based on the following significant inputs: CoreWeave Warrant Contractual term 10 years Volatility 98 % Risk-free rate 4.42 % Dividend yield — % The resulting fair value of the CoreWeave Warrant was $ 6.56 per warrant, totaling $ 85.7 million which was recorded to lease incentive asset and additional paid in capital on the Company's consolidated balance sheets, and will be amortized over the life of the respective CoreWeave Lease once such lease commences. 12. Stock-Based Compensation Plans 2024 Plan On October 8, 2024, the Company’s Board of Directors approved the Applied Digital Corporation 2024 Omnibus Equity Incentive Plan (the “2024 Plan”), which the Company’s stockholders approved on November 20, 2024. The 2024 Plan provides for grants of various equity awards for eligible employees, officers, non-employee directors and other service providers. Upon stockholder approval of the 2024 Plan, the 2022 Plans (as defined below) were terminated; provided that all awards (as defined in the 2022 Plans) outstanding under the 2022 Incentive Plan and the 2022 Non-Employee Director Stock Plan shall continue in effect in accordance with their terms. 2022 Plans On October 9, 2021, the Company’s Board of Directors (the “Board”) approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “2022 Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date. As of May 31, 2025, the Company had issued awards of approximately 23.2 million shares of common stock of the Company under the 2022 Plans, 5.9 million shares of common stock under the 2024 Plan, and 600,000 shares of common stock outside of either plan, related to an employment inducement award. As of May 31, 2025, there are approximately 4.2 million shares of common stock available for issuance under the 2024 Plan. 96 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 The Company capitalizes a portion of stock-based compensation costs for employees who work directly on construction and development of the Company's data centers. The Company recognized stock-based compensation associated with the 2022 and 2024 Plans as follows (in thousands): May 31, 2025 May 31, 2024 May 31, 2023 Cost of revenue $ 2,504 $ 1,465 $ — Selling, general, and administrative 19,988 5,508 32,072 Capitalized (1) 1,465 207 — Total stock-based compensation $ 23,957 $ 7,180 $ 32,072 (1) Capitalized to CIP in the consolidated balance sheets. Restricted Stock Awards The following is a summary of the activity and balances for unvested restricted stock awards outstanding for the fiscal year ended May 31, 2025: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2024 638,895 $ 4.01 Granted — — Vested ( 351,801 ) 4.16 Forfeited ( 15,650 ) 8.52 Outstanding as of May 31, 2025 271,444 $ 3.55 As of May 31, 2025, total remaining expense to be recognized related to these awards was $ 0.9 million and the weighted average remaining recognition period for the unvested awards was 1.9 years. Restricted Stock Units The following is a summary of the activity and balances for unvested restricted stock units outstanding for the fiscal year ended May 31, 2025: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2024 5,230,986 $ 4.10 Granted 5,915,480 7.09 Vested ( 2,618,163 ) 4.64 Forfeited ( 1,868,473 ) 4.07 Outstanding as of May 31, 2025 6,659,830 $ 6.56 As of May 31, 2025, total remaining expense to be recognized related to these awards was $ 34.1 million and the weighted average remaining recognition period for the unvested awards was 1.9 years. Performance Stock Units Performance stock units (“PSUs”) represent a right to receive a certain number of shares of common stock based on the achievement of company performance goals, individual performance measures, and continued employment during the vesting period. Performance stock units cliff-vest at the end of a service period of three years depending on the achievement of Company and individual performance measures at the end of each vesting period. Such performance measures are based on the Company entering into data center leases with a hyperscaler, the consummation of project financing, receipt of sustainable revenue with respect to the data center leases that implies positive net operating income, and data center buildings achieving "ready for service" dates. The fair value of PSUs is based on the closing price on the date of grant. The compensation expense related to these PSUs is recognized over the vesting period when the achievement 97 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 of the performance conditions becomes probable. The total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest. During the three months ended August 31, 2024, the Board determined that the performance criteria associated with certain performance stock units granted to certain executives in the third fiscal quarter of 2024 were not met. As such, 2.8 million performance stock unit awards were cancelled and the Company recognized a reversal of the expense previously recognized for the awards of approximately $ 6.0 million during the fiscal year ended May 31, 2025. The following is a summary of the activity and balances for unvested performance stock units outstanding for the fiscal year ended May 31, 2025: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2024 3,110,011 $ 2.69 Awarded 7,207,500 6.59 Vested ( 310,011 ) 6.95 Forfeited ( 2,800,000 ) 2.22 Outstanding as of May 31, 2025 7,207,500 $ 6.59 As of May 31, 2025, total remaining expense to be recognized related to these awards was $ 41.5 million and the weighted average remaining recognition period for the unvested awards was 2.3 years. 13. Temporary Equity Series E Redeemable Preferred Stock During the fiscal year ended May 31, 2025, the Company closed on four offerings of the Series E Redeemable Preferred Stock (the “Series E Preferred Stock”). The Company sold total shares of 301,673 for proceeds of $ 6.9 million, net of issuance costs of $ 0.6 million. The Series E Preferred Stock offering was terminated on August 9, 2024. The shares of Series E Preferred Stock have no voting or conversion rights. Holders of the Series E Preferred Stock are entitled to receive cumulative dividends at a fixed rate of 9.0 % per annum. Dividends are calculated based on a 360-day year, declared and accrued monthly, and payable at the discretion of the Board of Directors out of legally available funds. Dividends must be fully paid for all past periods before any distributions can be made to common stockholders or any junior series of equity securities. During the fiscal year ended May 31, 2025, the Company declared and paid approximately $ 0.6 million of dividends related to Series E Preferred Stock as presented on the consolidated statements of operations. The Series E Preferred Stock ranks senior to all classes of common stock and junior to all existing and future debt of the Company. Additionally, it is on parity with any future series of preferred stock with substantially identical terms but may rank junior to any future series of preferred stock if the holders of such series are entitled to rights and preferences with priority over the holders of the Series E Preferred Stock. In the event of liquidation, holders are entitled to receive $ 25.00 per share (the “Series E Stated Value”) plus any accrued but unpaid dividends before any distributions are made to common stockholders. The Series E Preferred Stock has no stated maturity and remains outstanding indefinitely unless redeemed or repurchased by the Company. Holders may require the Company to redeem any portion of their Series E Preferred Stock at any time for a "Settlement Amount" calculated as the Series E Stated Value plus any unpaid dividends, less a Holder Optional Redemption Fee, equal to a percentage of the Series E Stated Value based on the year when the redemption occurs as follows: 9.00 % prior to the first anniversary of the respective tranche closing date (the "Original Issuance Date"); 7.00 % on or after the first anniversary but prior to the second anniversary of the Original Issuance Date; 5.00 % on or after the second anniversary but prior to the third anniversary of the Original Issuance Date: and 0.00 % on or after the third anniversary of the Original Issuance Date. The Settlement Amount can be settled in cash or shares of common stock, subject to a share cap, which limits the total shares deliverable upon redemption to 19.99 % of the common stock outstanding prior to the Series E Preferred Stock offering ( 25,475,751 shares, the “Share Cap”). Any portion of the Settlement Amount exceeding this cap will be settled in cash. 98 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 The Company may also redeem shares of Series E Preferred Stock after the second anniversary of the original issuance date, with a minimum notice of 10 days, at the Company Optional Redemption Settlement Amount, which is equal to the Series E Stated Value per share plus any unpaid and accrued dividends. If the Company elects to pay the redemption amount in shares, then the number of shares to be delivered will be calculated as the Company Optional Redemption Settlement Amount divided by the closing price per share of the common stock on the date of the Company Optional Redemption exercise, subject to the Share Cap. Series F Convertible Preferred Stock On August 29, 2024, the Company entered into a securities purchase agreement for the private placement of 53,191 shares of Series F Convertible Preferred Stock, 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. The shares of Series F Convertible Preferred Stock were convertible into shares of common stock only upon the receipt of shareholder approval, which was received on November 20, 2024. Holders of the Series F Convertible Preferred Stock were entitled to cumulative dividends at an annual rate of 8.0 % of the stated value of $ 1,000 per share (the “Series F Stated Value”), payable quarterly in arrears. Dividends were calculated based on a 360-day year, declared and accrued quarterly, and payable at the discretion of the Board of Directors out of legally available funds. Dividends must be fully paid for all past periods before any distributions can be made to common stockholders or any junior series of equity securities. During the fiscal year ended May 31, 2025, the Company declared and paid approximately $ 0.4 million of dividends related to the Series F Convertible Preferred Stock as presented on the consolidated statements of operations. The Series F Convertible Preferred Stock ranked senior to all classes of common stock and junior to all existing and future debt of the Company. In the event of liquidation, holders were entitled to receive the Series F Stated Value plus any accrued but unpaid dividends before any distributions were made to common stockholders. Series F Convertible Preferred Stock was on parity with the Series E Preferred Stock, Series E-1 Preferred Stock and any future series of preferred stock with substantially identical terms. Upon the receipt of shareholder approval on November 20, 2024, the Series F Convertible Preferred Stock voted on an as-converted basis, subject to a cap equal to the greater of (x) the conversion price then in effect or (y) $ 4.0638 . Holders had the right to require the Company to redeem the Series F Convertible Preferred Stock under certain conditions, including a Change of Control or Trading Failure, each as defined in the Series F Convertible Preferred Stock certificate of designation. If there were a Change of Control, the redemption price was the greater of the Series F Stated Value or the amount that would have been received if the Series F Convertible Preferred Stock had been converted into common stock immediately prior to the redemption event. If there was a Trading Failure, the redemption price was the greater of the Series F Stated Value or the product of the lowest conversion price during the period beginning on the date immediately preceding the Trading Failure and ending on the date the holder delivers a Redemption Notice, multiplied by the number of shares of common stock into which the preferred stock is convertible at the then-effective conversion price. Additionally, holders had a one-time right to require the Company to redeem their shares between December 31, 2024, and January 10, 2025, in which case the redemption price was the Series F Stated Value. Further, upon receipt of shareholder approval of the conversion feature of the Series F Convertible Preferred Stock, which approval was received on November 20, 2024, if the VWAP for any 20 Trading Days during any 30 consecutive trading day period, beginning with the original issuance date of the applicable preferred stock, exceeded two hundred percent ( 200 %) of the conversion price then in effect, the Company may, at any time cause the holder to convert all or part of the holder’s preferred stock. During the fiscal year ended May 31, 2025, all 53,191 shares of Series F Convertible Preferred Stock were converted into approximately 7.6 million shares of the Company’s common stock. Series E-1 Redeemable Preferred Stock On September 23, 2024, the Company entered into a dealer manager agreement for the offering of up to 62,500 shares of 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 (the “Series E-1 Stated Value”). During the fiscal year ended May 31, 2025, the Company closed on eight offerings 99 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 of the Series E-1 Preferred Stock, in which the Company issued and sold 62,500 shares for gross proceeds of $ 62.5 million. As of the date of this report, the offering of Series E-1 Preferred Stock has been completed. The shares of Series E-1 Preferred Stock have no voting or conversion rights. Holders of the Series E-1 Preferred Stock are entitled to receive cumulative dividends at a fixed rate of 9.0 % per annum of the Series E-1 Stated Value. Dividends are calculated based on a 360-day year, declared and accrued monthly, and payable at the discretion of the Board of Directors out of legally available funds. Dividends on the shares of Series E-1 Preferred Stock must be fully paid for all past periods before any distributions can be made to common stockholders or any junior series of equity securities. During the fiscal year ended May 31, 2025, the Company declared and paid approximately $ 1.7 million of dividends related to the Series E-1 Preferred Stock as presented on the consolidated statements of operations. The Series E-1 Preferred Stock ranks senior to all classes or series of common stock and junior to all existing and future debt of the Company. Additionally, the Series E-1 Preferred Stock is on parity with the Series E Preferred Stock, the Series F Convertible Preferred Stock and any future series of preferred stock with substantially identical terms but may rank junior to any future series of preferred stock if the holders of such series are entitled to rights and preferences with priority over the holders of the Series E-1 Preferred Stock. In the event of liquidation, holders of the Series E-1 Preferred Stock and holders of shares of any other class or series of capital stock ranking senior to or on a parity with the Series E-1 Preferred Stock, are entitled to receive an amount per share equal to the Series E-1 Stated Value plus an amount per share that is issuable as a result of any accrued but unpaid dividends before any distributions are made to common stockholders. The Series E-1 Preferred Stock has no stated maturity and remains outstanding indefinitely unless redeemed or repurchased by the Company. Holders may require the Company to redeem any portion of their Series E-1 Preferred Stock at any time for a "Settlement Amount" calculated as the Series E-1 Stated Value plus any unpaid dividends, less a Holder Optional Redemption Fee equal to a percentage of the Series E-1 Stated Value based on the year when the redemption occurs as follows: 9.00 % prior to the first anniversary of the respective tranche closing date (the "Original Issuance Date"); 7.00 % on or after the first anniversary but prior to the second anniversary of the Original Issuance Date; 5.00 % on or after the second anniversary but prior to the third anniversary of the Original Issuance Date: and 0.00 % on or after the third anniversary of the Original Issuance Date. The Settlement Amount can be settled in cash or shares of common stock at the sole option of the Company, subject to a share cap (if required by Nasdaq rules and regulations), which limits the total shares deliverable upon redemption to 19.99 % of the common stock outstanding immediately prior to the Series E-1 Preferred Stock offering ( 25,889,470 shares, the “Share Cap”), unless approval by the Company’s stockholders is obtained to exceed the Share Cap. Any portion of the Settlement Amount exceeding this cap will be settled in cash. Holders may not redeem any shares of Series E-1 Preferred Stock for common stock prior to the first anniversary of the Original Issuance Date. The Company may also redeem shares of the Series E-1 Preferred Stock after the second anniversary of the Original Issuance Date, with a minimum notice of 10 days, at a redemption price equal to the Series E-1 Stated Value plus any accrued but unpaid dividends. If the Company elects to pay the redemption amount in shares, then the number of shares to be delivered will be calculated as the Settlement Amount divided by the closing price per share of the common stock on the last trading day prior to the date upon which notice was provided to the holder, subject to the Share Cap, if applicable. During the fiscal year ended May 31, 2025, 15 of the shares were redeemed. Series G Convertible Preferred Stock On April 30, 2025, the Company entered into the Preferred Equity Purchase Agreement (the “PEPA”) with certain investors for the issuance and sale of up to 156,000 shares of Series G Convertible Preferred Stock (the “Series G Preferred Stock”) in a transaction (the “Private Placement”) pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The shares of the Series G Preferred Stock may be put to the investors from time to time at the Company’s discretion during the period commencing on April 30, 2025 (the “Commitment Date”) and terminating on the earlier of (i) the 36-month anniversary of the Commitment Date or (ii) such date as there ceases to be a sufficient number of authorized but unissued shares of common stock remaining under the Exchange Cap (as defined in the PEPA). The Series G Preferred Stock becomes convertible upon the earlier of (i) 45 days after the first issuance date of the Series G Preferred Stock and (ii) the Registration Effective Date (as defined in the PEPA). Pursuant to the PEPA, the Company agreed to prepare and file with the SEC a registration statement, registering the resale of the shares of common stock 100 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 issuable upon the conversion of the shares of Series G Preferred Stock as soon as practicable after June 2, 2025, but in any case, no later than June 9, 2025 (subject to certain exceptions), which was filed with the SEC on June 3, 2025 and was automatically effective upon filing. The Series G Preferred Stock ranks senior to all classes of common stock and junior to all existing and future debt of the Company. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of the Series G Preferred Stock will be entitled to receive distributions out of the assets of the Company in an amount per share equal to the then-current Series G Preferred Stock stated value, whether capital or surplus, before any distributions are made on any shares of our common stock. The Series G Preferred Stock is on parity with the Series E Preferred Stock, Series E-1 Preferred Stock and any future series of preferred stock with substantially identical terms. Holders have the right to require the Company to redeem the Series G Preferred Stock under certain conditions, such as a Trading Failure, as defined in the Series G Preferred Stock certificate of designation. If there is a Trading Failure, the redemption price is the greater of the Series G Preferred Stock stated value or the product of the lowest conversion price during the period beginning on the date immediately preceding the Trading Failure and ending on the date the holder delivers a Redemption Notice, multiplied by the number of shares of common stock into which the preferred stock is convertible at the then-effective conversion price. If any Investor is prevented from converting any portion of its Series G Preferred Stock because of the Exchange Cap, and such limitation continues for 18 months following the date that is 18 months following the issuance of such Series G Preferred Stock, or, if earlier, the date that is 36 months following the Commitment Date, then the portion of the Series G Preferred Stock held by such Investor at such time shall be redeemed by the Company, within 10 trading days after such earlier date, at a price equal to the greater of (A) the product of (x) the Conversion Price in effect on the first (1st) date this limitation prohibited conversion thereof and (y) the number of shares of our common stock into which such Series G Preferred Stock that was not converted is convertible at such Conversion Price (without regard to any limitations on conversion), and (B) 110 % of the stated value of such Series G Preferred Stock. On each conversion date, the conversion price for the Series G Preferred Stock being converted (the “Conversion Price”) will equal the greater of (i) 95 % of the lowest daily Volume Weighted Average Price for each of the five trading days immediately preceding the conversion date and (ii) the initial floor price of $ 4.25 , which may be reduced by the Company at any time in its sole discretion, but in no event below $ 1.34 (as may be adjusted from time to time, the “Floor Price”). Based on its initial stated value of $ 1,000 per share and the $ 4.25 initial Floor Price, each share of Series G Preferred Stock would be convertible into an aggregate of 236 shares of common stock. No right of conversion may be exercised by the Investors in excess of $ 30 million of stated value, in the aggregate, per month, unless otherwise mutually agreed in writing by the Company and the holders holding a majority of the voting power of the Series G Preferred Stock outstanding at the time. During the fiscal year ended May 31, 2025, we issued and sold 78,000 shares of Series G Preferred Stock for aggregate gross proceeds of $ 75.0 million. 14. Leases Lessor Accounting On May 28, 2025, APLD ELN-02 LLC and APLD ELN-03 LLC, the Company's subsidiaries, each entered into a data center lease with CoreWeave, Inc. (together, the "CoreWeave Leases") to deliver up to an aggregate of 250 MW of infrastructure to host CoreWeave’s HPC operations at Polaris Forge 1. The first lease is for the full capacity of Building 2, our 100 MW data center that is currently under construction and expected to become operational during the calendar year 2025. The second lease is for the full capacity of Building 3, a 150 MW data center that is also under construction and is expected to become operational during the calendar year 2026. A summary of minimum lease payments due from these leases is shown below. These amounts do not reflect future rental revenues from renewal or replacement of existing leases unless the Company is reasonably certain it will exercise the 101 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 option or the lessee has the sole ability to exercise the option. Reimbursements of operating expenses and variable rent increases are excluded from the table below (in thousands): Minimum Contracted Payments FY26 $ 81,156 FY27 326,340 FY28 372,130 FY29 383,294 FY30 394,793 Thereafter 5,206,486 Total $ 6,764,199 Lessee Accounting The Company enters into leases for equipment and office space. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively. Components of lease expense were as follows (in thousands): May 31, 2025 May 31, 2024 May 31, 2023 Operating lease cost: Operating lease expense $ 696 $ 568 $ 347 Short-term lease expense 599 57 187 Total operating lease cost 1,295 625 534 Finance lease expense: Amortization of right-of-use assets (1) 6,929 5,259 3,309 Interest on lease liabilities 1,758 1,140 784 Total finance lease cost 8,687 6,399 4,093 Variable lease cost 232 169 3 Sublease Income — ( 70 ) ( 103 ) Total net lease cost $ 10,214 $ 7,123 $ 4,527 (1) Amortization of right-of-use assets is included within cost of revenues and selling, general and administrative expense in the consolidated statements of operations. The following table represents the Company’s future minimum lease payments as of May 31, 2025 (in thousands): Operating Leases Finance Leases Total FY26 $ 761 $ 13,925 $ 14,686 FY27 365 14 379 FY28 27 1 28 FY29 — — — FY30 — — — Thereafter — — — Total lease payments 1,153 13,940 15,093 Less: imputed interest ( 80 ) ( 292 ) ( 372 ) Total lease liabilities 1,073 13,648 14,721 Less: Current portion of lease liability ( 692 ) ( 13,633 ) ( 14,325 ) Long-term portion of lease liability $ 381 $ 15 $ 396 102 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Supplemental cash flow and other information related to leases is as follows: Fiscal Year Ended May 31, 2025 May 31, 2024 Weighted-average years remaining (in years): Finance leases 1.1 years 1.7 years Operating leases 0.4 years 1.1 years Weighted-average discount rate: Finance leases 9.4 % 8.8 % Operating leases 9.7 % 10.0 % The Company has entered into leases which are executed but not yet commenced with total minimum payments of approximately $ 16.6 million. The payments are for various leases with terms of 2 years. 15. Commitments and Contingencies Commitments Energy Contracts As of May 31, 2025, the Company had a minimum commitment of approximately $ 47.2 million related to the energy services agreement for its Jamestown, North Dakota co-hosting facility payable over, approximately, the next 1.7 years. Construction Contracts The Company routinely engages with construction vendors for the construction of our facilities. These engagements are governed by contracts containing standard terms and conditions, including certain milestones that obligate the Company to pay as work is completed. In the event of termination of any of these contracts by the Company, the Company would be liable for all work that has been completed or in process, plus any applicable fees. The Company generally has the right to cancel these open purchase orders prior to delivery or terminate the contracts without cause. Claims and Litigation From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. Securities Lawsuit The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's then Chief Financial Officer, have been named as defendants in a putative securities class action lawsuit in the matter styled, McConnell v. Applied Digital Corporation, et al., Case No. 3:23-cv-1805, filed in August 2023 in the U.S. District Court for the Northern District of Texas (the “Securities Lawsuit”). Specifically, the complaint asserts claims pursuant to Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 based on allegedly false or misleading statements regarding the company’s business, operations, and compliance policies, including claims that the Company overstated the profitability of its Data Center Hosting Business and its ability to successfully transition into a low-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of Nasdaq listing rules. On May 22, 2024, the court appointed lead plaintiff and approved lead counsel, and on July 22, 2024, lead plaintiff filed an amended complaint which asserts the same claims based on similar allegations in the original complaint. On September 20, 2024, the defendants filed a motion to dismiss the amended complaint. On November 20, 2024, lead plaintiff filed his opposition to the Motion to Dismiss. On January 3, 2025, the defendants filed their reply in further support of the Motion to Dismiss. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in the Securities Lawsuit. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable. 103 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Derivative Lawsuit On November 15, 2023, a derivative action was filed in the matter styled, Weich v. Cummins, et al., Case No. A-23-881629-C in the District Court of Clark County, Nevada (the “Derivative Lawsuit”). The Weich complaint named as defendants certain members of the Company’s Board of Directors and its Chief Executive Officer Wesley Cummins and purports to name the Company’s then Chief Financial Officer David Rench as a defendant. The complaint asserted claims for breach of fiduciary duties, corporate waste and unjust enrichment based upon allegations that the defendants caused or allowed the Company to make materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleged that the Company overstated the profitability of the Data Center Hosting Business and its ability to successfully transition into a low-cost cloud services provider and that the Board was not “independent” within the meaning of Nasdaq listing rules. On February 27, 2024, the derivative plaintiff filed an amended complaint asserting the same claims as the original complaint. On June 5, 2024, following briefing and argument on the defendants’ motion to dismiss the Derivative Lawsuit, the Court entered an order granting the defendants’ motion without prejudice and dismissing all claims against all defendants, including the Company, on the grounds that the plaintiff failed to plead (1) demand futility as to each of plaintiff’s claims or (2) a claim for breach of fiduciary duty. The order dismissed all claims against all defendants, including the Company. The plaintiff can seek leave to file an amended complaint but to date has not done so. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable. As of May 31, 2025, there were no other pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest. 16. Business Segments The Company's business is made up of two operating segments: the Data Center Hosting Business and the HPC Hosting Business. These segments represent management's view of the business for which separate financial information is available and evaluated regularly by the Chief Operating Decision Maker ("CODM"), which is the Company’s Chief Executive Officer. The Company's CODM evaluates performance and makes operating decisions primarily based on revenue and segment profit (loss) on a consolidated basis and for each of the Company's reportable segments. Operating results by segment include costs or expenses directly attributable to each segment, which include selling, general, and administrative expenses, (gain)/loss on classification of held for sale, (gain)/loss on sale of assets, and (gain)/loss from legal settlement. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Segment revenues and segment profit are regularly reviewed by the CODM and compared against historical results, forecast and budget information in order to make decisions about how to allocate capital and other resources to each segment. The Company does not allocate loss on conversion of debt, loss on change in fair value of debt, loss on change in fair value of related party debt, loss on change in fair value of warrants, loss on change in fair value of related party warrants, loss on legal settlement, or income tax expense to these segments for internal reporting purposes, as the Company does not believe that allocating these expenses is beneficial in evaluating segment performance. The "Other" includes corporate related items not allocated to reportable segments for purposes of making operating decisions or assessing financial performance. In accordance with applicable accounting guidance, the results of the Cloud Services Business are presented as discontinued operations in the consolidated statements of operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. See "Note 5 - Discontinued Operations " for operations and segment results for the Cloud Services Business. 104 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 The following tables present segment information, including revenue by segment and segment profit (loss) for the fiscal years ended May 31, 2025, 2024, and 2023 (in thousands): Fiscal Year Ended May 31, 2025 Data Center Hosting Business HPC Hosting Business Revenue $ 142,267 $ — Related party revenue 1,926 — Total segment revenue 144,193 — Costs and expenses Cost of revenues 100,744 143 Selling, general and administrative 3,006 11,943 (Gain) on classification of held for sale ( 24,616 ) — Loss on sale of assets 1,132 — Total costs and expenses 80,266 12,086 Segment profit (loss) $ 63,927 $ ( 12,086 ) Fiscal Year Ended May 31, 2024 Data Center Hosting Business HPC Hosting Business Revenue $ 121,858 $ — Related party revenue 14,761 — Total segment revenue 136,619 — Costs and expenses Cost of revenues 106,023 50 Selling, general and administrative 10,367 4,761 Loss on classification of held for sale 15,417 — Total costs and expenses 131,807 4,811 Segment profit (loss) $ 4,812 $ ( 4,811 ) Fiscal Year Ended May 31, 2023 Data Center Hosting Business HPC Hosting Business Revenue $ 40,984 $ — Related party revenue 14,408 — Total segment revenue 55,392 — Costs and expenses Cost of revenues 44,374 — Selling, general and administrative 29,200 246 Total costs and expenses 73,574 246 Segment loss $ ( 18,182 ) $ ( 246 ) 105 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 The following table presents a reconciliation to net loss from continuing operations before income tax expense (in thousands): Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 Segment profit (loss) Data Center Hosting Business $ 63,927 $ 4,812 $ ( 18,182 ) HPC Hosting Business ( 12,086 ) ( 4,811 ) ( 246 ) Total segment profit (loss) 51,841 1 ( 18,428 ) Other (1) ( 68,686 ) ( 32,853 ) ( 24,483 ) Operating loss ( 16,845 ) ( 32,852 ) ( 42,911 ) Interest expense, net 14,739 17,708 2,006 Loss on conversion of debt 33,612 — — Loss on change in fair value of debt 85,439 7,401 — Loss on change in fair value of related party debt — 8,116 — Loss on extinguishment of debt 1,177 — 94 Loss on extinguishment of related party debt — 2,507 — Loss on change in fair value of warrants 6,421 — — Loss on change in fair value of related party warrants — 5,696 — Net loss from continuing operations before income tax expense $ ( 158,233 ) $ ( 74,280 ) $ ( 45,011 ) (1) Other includes corporate related items not allocated to reportable segments. We also provide the following additional segment disclosures (in thousands): Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 Depreciation and amortization: Data Center Hosting Business $ 13,312 $ 19,948 $ 7,025 HPC Hosting Business 3,733 1,233 59 Other (1) 244 296 29 Total depreciation and amortization (2) $ 17,289 $ 21,477 $ 7,113 Capital expenditures: Data Center Hosting Business $ 9,320 $ 38,266 $ 135,946 HPC Hosting Business 976,506 207,299 9,813 Other (1) — 4,291 ( 1,164 ) Total capital expenditures $ 985,826 $ 249,856 $ 144,595 (1) Other includes corporate related items not allocated to reportable segments. (2) Includes amortization of the finance lease right-of-use assets. 106 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands): Fiscal Year Ended May 31, 2025 May 31, 2024 Data Center Hosting Business $ 141,764 $ 145,222 HPC Hosting Business 1,363,341 220,648 Total segment assets 1,505,105 365,870 Cloud Services Business (Discontinued operations) 304,466 374,216 Other (1) 60,519 22,781 Total assets $ 1,870,090 $ 762,867 (1) Other includes corporate related items not allocated to reportable segments. 17. Loss Per Share The following is a reconciliation of the denominator of the basic and diluted net loss per share computations for the periods presented: Fiscal Year Ended May 31, 2025 May 31, 2024 May 31, 2023 Net loss $ ( 231,065 ) $ ( 149,671 ) $ ( 45,606 ) Net loss attributable to noncontrolling interest — ( 397 ) ( 960 ) Preferred dividends ( 2,615 ) — — Net loss attributable to common stockholders $ ( 233,680 ) $ ( 149,274 ) $ ( 44,646 ) Net loss attributable to common stockholders Continuing operations $ ( 160,950 ) $ ( 73,979 ) $ ( 43,528 ) Discontinued operations ( 72,730 ) ( 75,295 ) ( 1,118 ) Net loss $ ( 233,680 ) $ ( 149,274 ) $ ( 44,646 ) Basic and diluted net loss per share attributable to common stockholders Continuing operations $ ( 0.80 ) $ ( 0.65 ) $ ( 0.46 ) Discontinued operations ( 0.36 ) ( 0.66 ) ( 0.01 ) Basic and diluted net loss per share $ ( 1.16 ) $ ( 1.31 ) $ ( 0.47 ) Basic and diluted weighted average number of shares outstanding 201,194,451 114,061,414 93,976,233 As of May 31, 2025 and 2024, the Company had approximately 14.1 million and 12.1 million shares, respectively, of granted but unvested restricted stock, performance stock, and restricted stock units that would have a potentially dilutive effect on earnings per share. As of May 31, 2025, the Company had approximately 21.7 million shares associated with the Company’s preferred stock which have been excluded from the calculation of earnings per share because the effect of those shares would be antidilutive while as of May 31, 2024, the Company had approximately 19.0 million shares associated with the Yorkville Convertible Debt which have been excluded from the calculation of earnings per share because the effect of those shares would be antidilutive. Additionally, the Company had approximately 17.1 million and 12.3 million warrants outstanding as of May 31, 2025 and May 31, 2024, respectively, which have been excluded from the calculations of earnings per share because the effect of those shares would be antidilutive. 107 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements For the Fiscal Year Ended May 31, 2025 Lastly, if the Company's Convertible Notes were converted into shares of the Company's common stock as of May 31, 2025, approximately 46.1 million shares were excluded from the calculations of earnings per share because the effect of those shares would be antidilutive. 18. Subsequent Events June 2025 At-the-Market Sales Agreement On June 2, 2025, the Company entered into a Sales Agreement with Northland Securities, Inc. and Wells Fargo Securities, LLC (the “June 2025 Sales Agreement”), pursuant to which, up to $ 200,000,000 of shares of the Company's common stock may be issued if and when sold. As of the date of this report, the Company has issued and sold approximately 15.1 million shares under the June 2025 Sales Agreement for gross proceeds of approximately $ 193.9 million . Issuance of Series G Preferred Stock On July 16, 2025, the Company issued 78,000 shares of Series G Preferred Stock for aggregate gross proceeds of $ 75.0 million. Conversion of Series G Preferred Stock As of the date of this report, a total of 156,000 shares of Series G Preferred Stock have been converted into approximately 21.0 million shares of the Company's common stock. CoreWeave Data Center Lease On July 24, 2025, CoreWeave exercised its lease option for an additional 150 MW in a third building at Polaris Forge 1, which is currently in planning stages with an anticipated ready for service date in 2027. Under the option terms, the parties are expected to enter into a new, third lease agreement on substantially the same terms, including the same rent and escalators, as the existing two Data Center Leases, within 60 days. 108 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.