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Item 1. Financial Statements

2023-10-10 compared with 2023-04-06 · 339 added, 367 removed, 138 unchanged (84% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except number of shares and par value data)

February 28, 2023 May 31, 2022

(In thousands, except share and par value data)

August 31, 2023 May 31, 2023

Current assets:

Cash and cash equivalents $ 5,942 $ 28,999

Restricted cash 25,271 14,575

Accounts receivable 27 82

2 unchanged sentences

Property and equipment, net 222,666 195,593

Right of use asset, net 12,911 6,408

Operating lease right of use assets, net 11,183 1,290

Finance lease right of use assets, net 55,691 14,303

Other assets 26,065 7,012

TOTAL ASSETS $ 349,153 $ 263,957

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities $ 14,000 $ 13,260

Current portion of lease liability 4,193 1,004

Current portion of term loan 4,855 1,333

Accounts payable $ 16,229 $ 6,446

Accrued liabilities 12,743 8,330

Current portion of operating lease liability 1,807 320

Current portion of finance lease liability 23,471 5,722

Current portion of debt 9,163 7,950

Customer deposits 32,559 32,559

Current deferred revenue 47,619 3,877

Related party customer deposits 3,811 3,811

Deferred revenue 50,863 47,168

Related party deferred revenue 971 1,524

Sales and use tax payable 62 1,630

Total current liabilities 151,679 115,460

Deferred tax liability 260 540

Long-term portion of lease liability 8,490 5,310

Long-term term loan 18,862 5,897

Long-term portion of operating lease liability 9,573 1,005

Long-term portion of finance lease liability 25,071 8,334

Long-term debt 34,882 33,222

Long-term related party loan — 35,257

Other long-term related party liabilities — 1,000

Total liabilities 221,205 194,278

1 unchanged sentence

Stockholders' equity:

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 99,471,127 shares issued and 94,469,399 shares outstanding at February 28, 2023, and 97,837,702 shares issued and 97,801,406 shares outstanding at May 31, 2022

Treasury stock, 5,001,728 shares at February 28, 2023 and 36,296 shares at May 31, 2022, at cost

Common stock, $ 0.001 par value, 166,666,667 shares authorized, 110,850,885 shares issued and 105,849,157 shares outstanding at August 31, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023

Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost

( 62 ) ( 62 )

5 unchanged sentences

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 349,153 $ 263,957

See Accompanying Notes to the Financial Statements

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

1 unchanged sentence

(In thousands, except per share data)

Three Months Ended Nine Months Ended

February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022

Three Months Ended

August 31, 2023 August 31, 2022

Hosting revenue $ 29,987 $ 4,338

Cost of revenues $ 10,533 $ 2,073 $ 28,438 $ 2,073

Gross profit 3,557 ( 1,047 ) 4,916 ( 1,047 )

Cloud services revenue 2,152 —

Related party hosting revenue 4,184 2,586

Total revenue 36,323 6,924

Costs and expenses:

Cost of revenues 24,398 6,093

Selling, general and administrative 17,052 5,008

1 unchanged sentence

Operating loss ( 5,127 ) ( 4,177 )

Other income (expense):

Interest Expense 2,074 356

Gain on extinguishment of accounts payable — 80 — 405

Loss on extinguishment of debt 2,353 94

Total other expense, net ( 384 ) 80 ( 1,219 ) ( 937 )

Net loss from continuing operations before income tax expenses ( 7,341 ) ( 2,337 ) ( 39,030 ) ( 17,569 )

Income tax benefit (expense) — ( 60 ) 280 ( 274 )

Net loss from continuing operations ( 7,341 ) ( 2,397 ) ( 38,750 ) ( 17,843 )

Net gain from discontinued operations, net of income taxes — ( 4,048 ) — ( 2,870 )

Net loss including noncontrolling interests ( 7,341 ) ( 6,445 ) ( 38,750 ) ( 20,713 )

Loss from legal settlement

Net loss before income tax expenses ( 11,854 ) ( 4,627 )

Income tax expense — 32

Net loss ( 11,854 ) ( 4,659 )

Net loss attributable to noncontrolling interest ( 397 ) ( 128 )

1 unchanged sentence

Basic and diluted net (loss) gain per share:

Continuing Operations $ ( 0.08 ) $ ( 0.04 ) $ ( 0.41 ) $ ( 0.35 )

Discontinued Operations $ — $ ( 0.08 ) $ — $ ( 0.06 )

Basic and diluted net loss per share $ ( 0.12 ) $ ( 0.05 )

Basic and diluted weighted average number of shares outstanding 100,521,673 93,105,835

See Accompanying Notes to the Financial Statements

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended August 31, 2023 and August 31, 2022

(In thousands, except share data)

Three Months Ended February 28, 2023

Common Stock Treasury Stock Additional Paid in Capital Accumulated deficit Total Stockholders Equity Noncontrolling Interest Total Equity

Common Stock Treasury Stock Additional

Stockholders’

Noncontrolling interest

Shares Amount Shares Amount

Balance, November 30, 2022 98,948,081 $ 99 ( 5,001,728 ) $ ( 62 ) $ 150,690 $ ( 87,218 ) $ 63,509 $ 8,461 $ 71,970

Issuance of common stock - vesting of restricted stock units 523,046 1 — — ( 115 ) — ( 114 ) — ( 114 )

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 7,908,528 8 — — 64,474 — 64,482 — 64,482

Shares issued from award vestings 530,732 — — — — — — — —

Stock-based compensation — — — — 5,641 — 5,641 — 5,641

Capital contribution to noncontrolling interest — — — — — — — 2,400 2,400

Net loss — — — — — ( 11,457 ) ( 11,457 ) ( 397 ) ( 11,854 )

Balance, February 28, 2023 99,471,127 $ 100 ( 5,001,728 ) $ ( 62 ) $ 155,055 $ ( 94,243 ) $ 60,850 $ 10,545 $ 71,395

Three Months Ended February 28, 2022

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Common Stock Treasury Stock Additional Paid in

Capital Accumulated

Deficit Total Stockholders Equity

Shares Amount Shares Amount Amount Shares Amount Shares Amount

Balance, November 30, 2021 660,000 $ 15,135 1,380,000 $ 31,574 $ 46,709 53,396,920 $ 320 ( 36,296 ) $ ( 62 ) $ 43,657 $ ( 44,837 ) $ ( 922 )

Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — $ — — ( 1,242 ) ( 1,242 )

Net Loss — — — — — — — — $ — — ( 6,445 ) ( 6,445 )

Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 $ 47,951 53,396,920 $ 320 ( 36,296 ) $ ( 62 ) $ 43,657 $ ( 52,524 ) $ ( 8,609 )

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)

(In thousands, except per share data)

Nine Months Ended February 28, 2023

Common Stock Treasury Stock Additional Paid in Capital Accumulated deficit Total Stockholders Equity Noncontrolling Interest Total Equity

Extinguishment of noncontrolling interest 1,484,267 1 — — 9,764 — 9,765 ( 9,765 ) —

Balance, August 31, 2023 110,850,885 $ 110 ( 5,001,728 ) $ ( 62 ) $ 240,073 $ ( 112,173 ) $ 127,948 $ — $ 127,948

Common Stock Treasury Stock Additional

Stockholders’

Noncontrolling interest

Shares Amount Shares Amount

Balance, May 31, 2022 97,837,703 $ 98 ( 36,296 ) $ ( 62 ) $ 128,293 $ ( 56,070 ) $ 72,259 $ 6,976 $ 79,235

Issuance of common stock - vesting of restricted stock units 1,633,425 2 — — ( 116 ) — ( 114 ) — ( 114 )

Stock-based compensation — — — — 579 — 579 — 579

2 unchanged sentences

Net loss — — — — — ( 4,531 ) ( 4,531 ) ( 128 ) ( 4,659 )

Balance, February 28, 2023 99,471,127 $ 100 ( 5,001,728 ) $ ( 62 ) $ 155,055 $ ( 94,243 ) $ 60,850 $ 10,545 $ 71,395

Nine Months Ended February 28, 2022

Series C Convertible Redeemable Preferred Stock Series D Convertible Redeemable Preferred Stock Total Mezzanine Equity Series A Convertible Preferred

Stock Series B Convertible Preferred

Stock Common Stock Treasury Stock Additional Paid in

Capital Accumulated

Deficit Total Stockholders Deficit

Shares Amount Shares Amount Amount Shares Amount Shares Amount Shares Amount Shares Amount

Balance, May 31, 2021 660,000 $ 15,135 — $ — $ 15,135 27,195 $ 3,370 17,087 $ 1,849 1,511,061 $ 9 ( 36,296 ) $ ( 62 ) $ 13,874 $ ( 21,623 ) $ ( 2,583 )

Extinguishment of Debt — — — — — — — — — 5,083,828 31 — — 3,446 — 3,477

Issuance of Dividends to Preferred Stock — — — — — 60,822 6,082 29,772 2,979 — — — — — ( 8,946 ) 115

Conversion of Preferred Stock — — — — — ( 88,017 ) ( 9,452 ) ( 46,859 ) ( 4,828 ) 28,765,308 172 — — 14,108 — —

Service agreement stock compensation — — — — — — — — — 18,036,723 108 — — 12,229 — 12,337

Issuance of Preferred Stock — — 1,380,000 34,500 34,500 — — — — — — — — — — —

Issuance Costs of Preferred Stock — — — ( 2,926 ) ( 2,926 ) — — — — — — — — — — —

Preferred Stock Dividends Accrued 16,086 402 33,624 840 1,242 — — — — — — — — ( 1,242 ) ( 1,242 )

Net Loss — — — — — — — — — — — — — — $ ( 20,713 ) ( 20,713 )

Balance, February 28, 2022 676,086 $ 15,537 1,413,624 $ 32,414 $ 47,951 — $ — — $ — 53,396,920 $ 320 ( 36,296 ) $ ( 62 ) $ 43,657 $ ( 52,524 ) $ ( 8,609 )

See Accompanying Notes to the Financial Statements

Balance, August 31, 2022 97,837,703 $ 98 ( 5,001,728 ) $ ( 62 ) $ 128,872 $ ( 60,601 ) $ 68,307 $ 8,594 $ 76,901

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)

Nine Months Ended

February 28, 2023 February 28, 2022

Three Months Ended

August 31, 2023 August 31, 2022

CASH FLOW FROM OPERATING ACTIVITIES

Net loss attributable to Applied Digital Corporation $ ( 38,173 ) $ ( 20,713 )

Net loss from discontinued operations, net of income taxes — ( 2,870 )

Net loss attributable to noncontrolling interest ( 577 ) —

Net loss from continuing operations ( 38,750 ) ( 17,843 )

Net loss $ ( 11,854 ) $ ( 4,659 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization 7,860 1,136

Gain on extinguishment of accounts payable — ( 405 )

Loss on extinguishment of debt 94 1,342

Stock-based compensation 5,641 579

Lease Expense 246 136

Deferred Tax ( 280 ) 274

Changes in assets and liabilities:

Deferred income taxes — 32

Loss on extinguishment of debt 2,353 94

Loss from legal settlement

Amortization of debt issuance costs 235 —

Loss on abandonment of assets 173 —

Changes in operating assets and liabilities:

Accounts receivable 55 177

1 unchanged sentence

Customer deposits

Deferred revenue 43,742 2,883

Accounts payable and accrued liabilities ( 10,020 ) 4,479

Sales and use tax payable 1,563 —

Interest on finance leases ( 104 ) —

Related party customer deposits — 545

Current deferred revenue

Current related party deferred revenue ( 553 ) —

Accounts payable 205 196

Accrued liabilities 2,113 —

Lease assets and liabilities 39 —

Net cash provided by operating activities of continuing operations 54,144 3,262

Net cash provided by operating activities of discontinued operations — 966

NET CASH PROVIDED BY OPERATING ACTIVITIES 54,144 4,228

Sales and use tax payable ( 1,568 ) —

Other assets ( 5,972 ) —

CASH FLOW PROVIDED BY OPERATING ACTIVITIES 4,517 17,294

CASH FLOW FROM INVESTING ACTIVITIES

Purchases of property and equipment ( 96,214 ) ( 28,180 )

Investments in private companies ( 100 ) —

Net cash used in investing activities of continuing operations ( 96,314 ) ( 28,180 )

Net cash used in investing activities of discontinued operations — ( 7,408 )

NET CASH USED IN INVESTING ACTIVITIES ( 96,314 ) ( 35,588 )

Issuance of preferred stock — 34,500

Purchases of property and equipment and other assets ( 32,591 ) ( 31,673 )

Finance lease prepayments ( 7,560 ) —

Purchases of investments ( 390 ) —

CASH USED IN INVESTING ACTIVITIES ( 40,541 ) ( 31,673 )

CASH FLOW FROM FINANCING ACTIVITIES

Repayment of finance leases ( 4,849 ) ( 209 )

Preferred issuance costs — ( 2,927 )

Term loan payoff ( 7,056 ) —

Proceeds from issuance of term loan 25,567 —

Term Loan Issuance Costs ( 333 ) —

Loan Payments ( 1,784 ) —

Payments of employee restricted stock tax withholdings ( 114 ) —

Borrowings of long-term debt 3,750 15,000

Borrowings of related party debt 3,000 —

Repayments of long-term debt ( 3,463 ) ( 7,488 )

Repayment of related party debt ( 39,257 ) —

Payment of deferred financing costs — ( 140 )

Noncontrolling interest contributions — 1,747

Net cash provided by financing activities of continuing operations 18,792 31,571

Net cash provided by financing activities of discontinued operations — —

Proceeds from issuance of common stock 64,482 —

CASH FLOW PROVIDED BY FINANCING ACTIVITIES 23,663 8,910

NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS ( 23,378 ) 211

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,299 11,750

CASH AND CASH EQUIVALENTS, END OF PERIOD 22,921 11,961

cash and cash equivalents of discontinued operations — —

Cash and cash equivalents of continuing operations $ 22,921 $ 11,961

NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 12,361 ) ( 5,469 )

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD 43,574 46,299

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $ 31,213 $ 40,830

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

1 unchanged sentence

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Right-of-use asset obtained by lease obligation $ 8,693 $ 1,207

Fixed assets in accounts payable $ 9,384 $ 12,156

See Accompanying Notes to the Financial Statements

Operating right-of-use assets obtained by lease obligation $ 10,272 $ —

Finance right-of-use assets obtained by lease obligation $ 46,952 $ 922

Property and equipment in accounts payable $ 6,729 $ 8,352

Conversion of non-controlling interest $ 9,765 $ —

Loss from legal settlement

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

For the Three and Nine Month Periods Ended February 28, 2023

Notes to the Condensed Consolidated Financial Statements (unaudited)

For the Three Months Ended August 31, 2023

Business and Organization

Applied Digital Corporation, f/k/a Applied Blockchain, Inc.

(the “Company”), is a builder and operator of Next-Gen data centers across North America, which provide substantial computing power to high power computing applications such as blockchain infrastructure, nature language processing, and artificial intelligence.

The Company has a colocation business model where customers place hardware they own into the Company’s facilities and the Company provides full operational and maintenance services for a fixed fee.

The Company typically enters into long term fixed rate contracts with its customers.

On April 12, 2022, the Company effected a one-for-six (1:6) reverse split (the “Reverse Stock Split”) of shares of the Company’s common stock, par value $ 0.001 per share (the “Common Stock”).

All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split.

Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fractional share.

On September 1, 2022, Company entered into a joint venture agreement with GMR Limited (“GMR”) to form Highland Digital Holdings, LLC (“Highland Digital”), which may acquire mining hardware and digital infrastructure assets.

The Company and GMR each have a 50 % ownership stake in Highland Digital.

GMR is the controlling partner and will consolidate the results of Highland Digital in its financial statements.

The Company will not consolidate Highland Digital in its financial statements, but will account for the entity under the equity method.

In the Quarterly Report on Form 10-Q filed for the quarter ended November 30, 2022, Company had disclosed a firm commitment of $ 0.6 million to Highland Digital.

During the period ended February 28, 2023, the Company’s obligation to fulfill that commitment was relieved, and the Company no longer has such commitment.

On February 17, 2023, the Company entered into a letter of credit agreement with Frost Bank for $ 7.0 million to secure the Company’s power contract at the Ellendale, North Dakota facility.

The agreement runs through February 2024.

LIQUIDITY AND FINANCIAL CONDITION

As of February 28, 2023, the Company had approximate cash and cash equivalents of $ 22.9 million and negative working capital of $ 84.2 million.

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

Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued.

Applied Digital Corporation (the “Company”), is a designer, builder, and operator of next generation digital infrastructure providing cost-competitive solutions to customers in High-Performance Compute (“HPC”), artificial intelligence cloud service (“Cloud services”), and datacenter hosting (“Hosting”) industries.

The Company has three reportable segments.

Financial information for each segment is contained in Note 10 - Business Segments.

Basis of Presentation and Significant Accounting Policies

2 unchanged sentences

Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted.

The condensed consolidated balance sheet as of May 31, 2022 has been derived from the audited consolidated financial statements as of that date, but does not

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

include all disclosures required for audited annual financial statements.

The condensed consolidated balance sheet as of May 31, 2023 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements.

In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented.

The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

For further information, please refer to and read these interim unaudited condensed consolidated financial statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2023 filed with the SEC on August 2, 2023.

Significant Accounting Policies and Use of Estimates

There were no material changes in the Company’s significant accounting policies for the three and nine months ended February 28, 2023 as compared to the year ended May 31, 2022.

See Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2022, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

There were no material changes in the Company’s significant accounting policies for the three months ended August 31, 2023 as compared to the year ended May 31, 2023.

See Note 3 - Property and Equipment to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2023, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

The preparation of the unaudited condensed consolidated financial statements in conformity with 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.

1 unchanged sentence

The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates of the valuation allowance associated with the Company’s deferred tax assets.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents.

The Company’s cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although the Company believes it is subject to minimal risk.

The Company has restricted cash related to its letters of credit that it holds with Vantage Bank and Frost Bank.

The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which last through January 2024 and February 2024, respectively.

The Company also has restricted cash related to its Starion Term Loan Buy-Down (as defined below).

The following table reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of February 28, 2023 and May 31, 2022.

(in thousands) February 28, 2023 May 31, 2022

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers.

Hosting Revenue

The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility.

All hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations.

Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment.

Hosting revenues are recorded monthly in fixed amounts, net of credits for non-performance, based on the terms of the agreements.

Any ancillary revenue for maintenance or installation services is at a point in time when the customer has received the full service.

As these services support the hosting operation as a whole, this revenue is captured within the hosting revenue caption.

Customer contracts include advance payment terms.

Advanced payments are recorded as deferred revenue until the related service is provided.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Cloud Services Revenue

The Company also provides cloud services applicable to artificial intelligence.

Customers pay a rate to the Company in exchange for managed services supported by Company-provided equipment.

Revenues are recorded based on the fixed rate, net of any credits for non-performance, based on the terms of the agreements.

The Company has identified three reportable segments:

artificial intelligence cloud services (“Cloud services”), high performance computing (“HPC”) datacenter hosting, and datacenter hosting (“Hosting”).

Our chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on these three reportable segments.

Intercompany transactions between segments are excluded for management reporting purposes.

The Cloud services segment operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.

Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment.

The HPC datacenter segment designs, builds, and operates next generation datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

The Hosting segment provides infrastructure, including energized space, and colocation services to crypto mining customers.

Customers place hardware they own into the Company’s facilities and the Company provides operational and maintenance services for a fixed fee.

Recent Accounting Pronouncements

We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements.

Reclassifications

We have reclassified certain prior period revenue amounts from hosting revenue to cloud services revenue and related party revenue on our condensed consolidated statements of operations.

We have also reclassified amounts from accounts payable and accrued expenses and prepaid expenses and other current assets to accounts payable, accrued expenses, prepaid expenses, and other current assets as well as from customer deposits and deferred revenue to the associated related party caption lines in our condensed consolidated balance sheets to conform to our current period presentation.

These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in the consolidated statements of cash flows as of August 31, 2023 and August 31, 2022 were as follows (in thousands):

August 31, 2023 May 31, 2023

Net Cash & Equivalents $ 5,942 $ 28,999

1 unchanged sentence

Total Cash & Cash Equivalents $ 31,213 $ 43,574

Recent Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability.

When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Reclassifications

Within the Condensed Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current period presentation.

These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.

PROPERTY AND EQUIPMENT AND DEPOSITS ON EQUIPMENT

Property and equipment consisted of the following as of February 28, 2023, and May 31, 2022:

(in thousands) Estimated Useful Life February 28,

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Property and Equipment

Property and equipment consisted of the following as of August 31, 2023, and May 31, 2023 (in thousands):

Estimated Useful Life August 31,

Hosting equipment

3 unchanged sentences

Information systems and software 5 years 27,570 21,173

Land & Building

Land and building

Land 2,152 2,152

1 unchanged sentence

Building 39 years 88,346 63,350

Deposits on Equipment 7,816 —

Leasehold improvements 3 years - 6 years

Total cost of property and equipment 229,807 200,533

1 unchanged sentence

Property and equipment, net $ 222,666 $ 195,593

Depreciation expense from continuing operations totaled $ 0.9 million and $ 0.2 million and for the three months ended February 28, 2023 and 2022, respectively.

Depreciation expense from continuing operations totaled $ 2.6 million and $ 0.2 million and for the nine months ended February 28, 2023 and 2022, respectively.

Construction in progress as of February 28, 2023 represents assets not placed into service at the Company’s Garden City, Texas and Ellendale, North Dakota locations, which were not operational as of February 28, 2023.

Depreciation expense totaled $ 2.2 million and $ 0.8 million and for the three months ended August 31, 2023 and 2022, respectively.

Revenue from Contracts with Customers

The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration which the Company expects to be received in exchange for those services.

The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue.

Below is a summary of the Company’s revenue concentration by major customer for the three and nine months ended February 28, 2023 and 2022, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Three Months Ended February 28,

Customer 2023 2022

Customer A 26 % 62 %

Customer B 25 % — %

Customer C 16 % 16 %

Customer D 13 % 9 %

Customer E 13 % 13 %

Others 7 % — %

Nine Months Ended February 28,

Customer 2023 2022

Below is a summary of the Company’s revenue concentration by major customers for the three months ended August 31, 2023 and 2022, respectively.

Three Months Ended August 31,

Customer A 68 % — %

3 unchanged sentences

Customer E — % 17 %

Others 3 % — %

Remaining Performance Obligations

As of February 28, 2023, the Company had $ 47.6 million in deferred revenue, which represents the Company’s remaining performance obligations.

The Company expects to recognize the entire $ 47.6 million within the next 12 months.

Customer F — % 14 %

Deferred Revenue

Changes in the Company's deferred revenue balances from hosting operations for the three and nine months ended February 28, 2023 and 2022, respectively, are shown in the following table:

(in thousands) (in thousands)

Three Months Ended February 28, 2023 Three Months Ended February 28, 2022

Balance at November 30, 2022 $ 29,394 Balance at November 30, 2021 $ —

Advance billings $ 32,315 Advance billings $ 3,909

Revenue recognized $ ( 14,090 ) Revenue recognized $ ( 1,026 )

Other adjustments $ — Other adjustments $ —

Balance at February 28, 2023 $ 47,619 Balance at February 28, 2022 $ 2,883

(in thousands) (in thousands)

Nine Months Ended February 28, 2023 Nine Months Ended February 28, 2022

Balance at May 31, 2022 $ 3,877 Balance at May 31, 2021 $ —

Advance billings $ 76,961 Advance billings $ 3,909

Revenue recognized $ ( 33,354 ) Revenue recognized $ ( 1,026 )

Other adjustments $ 135 Other adjustments $ —

Balance at February 28, 2023 $ 47,619 Balance at February 28, 2022 $ 2,883

As of August 31, 2023, the Company had $ 51.8 million in deferred revenue, which represents the Company’s remaining performance obligations, and expects to recognize the entire balance within the next 12 months.

Changes in the Company's deferred revenue balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following tables (in thousands):

Three Months Ended

August 31, 2023 August 31, 2022

Balance, beginning of period $ 48,692 $ 3,877

Advance billings 39,465 22,240

Revenue recognized ( 36,323 ) ( 6,924 )

Balance, end of period $ 51,834 $ 19,193

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Customer Deposits

Changes in the Company's customer deposits balances for the three and nine months ended February 28, 2023 and 2022, respectively, are shown in the following table:

(in thousands) (in thousands)

Three Months Ended February 28, 2023 Three Months Ended February 28, 2022

Balance at November 30, 2022 $ 24,689 Balance at November 30, 2021 $ —

Customer deposits received $ 11,681 Customer deposits received $ 5,645

Customer deposits refunded $ — Customer deposits refunded $ —

Other adjustments $ — Other adjustments $ —

Balance at February 28, 2023 $ 36,370 Balance at February 28, 2022 $ 5,645

(in thousands) (in thousands)

Nine Months Ended February 28, 2023 Nine Months Ended February 28, 2022

Balance at May 31, 2022 $ 9,524 Balance at May 31, 2021 $ —

Customer deposits received $ 26,980 Customer deposits received $ 5,645

Customer deposits refunded $ — Customer deposits refunded $ —

Other adjustments $ ( 135 ) Other adjustments $ —

Balance at February 28, 2023 $ 36,370 Balance at February 28, 2022 $ 5,645

Changes in the Company's customer deposits balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following table (in thousands):

Three Months Ended

August 31, 2023 August 31, 2022

Balance, beginning of period $ 36,370 $ 9,524

Customer deposits received — 4,587

Balance, end of period $ 36,370 $ 14,111

Related Party Transactions

Related Party Policy

Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company.

Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

The Company discloses all material related party transactions.

Related Party Note Payable

During the period ended February 28, 2022, a related party note payable was held by the CEO of the Company.

During this period, the outstanding debt principal of $ 0.5 million and accrued interest of $ 1.6 million were converted to 5.1 million shares of Common Stock with a fair value of $ 0.75 per share which resulted in a loss on extinguishment of $ 1.3 million.

Upon the consummation of an exchange agreement, the note payable was surrendered and cancelled, and all rights including rights to accrued interest due were extinguished.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Related Party Revenue

The Company has material transactions with two related parties Company A is a customer and is also the parent company of the minority member of the 1.21 Gigawatts joint venture..

Company B is a customer and is also the controlling member of the Highland Digital joint venture.

Company B became a related party during September 2022.

The following tables illustrate related party revenue for the three and nine months ended February 28, 2023 and February 28, 2022.

Revenue for the Three Months ended

(in thousands) February 28, 2023 February 28, 2022

Customer A $ 3,700 $ 634

Customer B $ 5,828 $ 392

Revenue for the Nine Months ended

(in thousands) February 28, 2023 February 28, 2022

Customer A $ 10,169 $ 634

Customer B $ 14,450 $ 392

The following tables illustrate related party deferred revenue and deposits balances as of February 28, 2023 and May 31, 2022.

Customer A Balances as of

(in thousands) February 28, 2023 May 31, 2022

Deferred revenue $ 1,616 $ 1,721

Customer Deposits $ 1,584 $ 1,719

Customer B Balances as of

(in thousands) February 28, 2023 May 31, 2022

The following table illustrates related party revenue for the three months ended August 31, 2023 and August 31, 2022 (in thousands):

Three Months Ended August 31,

Customer D* $ 2,332 $ 1,450

Customer E** $ 1,852 $ 1,136

* Customer D is a subsidiary of an entity which is deemed to beneficially own over 5 % of the Company's outstanding common stock

** Customer E is 60 % owned by an individual who is deemed to beneficially own over 5 % of the Company's outstanding common stock

The following table illustrates related party deferred revenue and deposits balances as of August 31, 2023 and May 31, 2023 (in thousands):

Customer D balances as of Customer E balances as of

August 31, 2023 May 31, 2023 August 31, 2023 May 31, 2023

Deferred revenue $ 923 $ 1,474 $ 48 $ 50

Customer Deposits $ 2,450 $ 2,450 $ 1,361 $ 1,361

Letter of Credit

As of February 28, 2023 and May 31, 2022, the Company had letters of credit with Vantage Bank and Frost Bank that together total $ 14.5 million.

As discussed in Footnote 3, the Company is required to maintain theses amount in separate cash balance, and therefore the cash is restricted.

Further, the Company had no unused lines of credit as of February 28, 2023 or May 31, 2022, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Related Party Sublease Income

For three months ended August 31, 2023 and August 31, 2022, the Company received sublease income of $ 23 thousand and $ 27 thousand, respectively, from B.

Riley Asset Management, which is also a wholly-owned subsidiary of B.

Riley Financial, Inc.

Cummins, the CEO of the Company, is also the President of B.

Riley Asset Management.

Long-term debt consisted of the following components (in thousands):

August 31, 2023 May 31, 2023

6.50 % Starion term loan

On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Starion Loan Agreement”).

The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $ 15 million with a maturity date of July 25, 2027.

The Starion Loan Agreement provides for an interest rate of 6.50 % per annum.

The Starion Loan Agreement contains customary covenants, representations and warranties and events of default.

The Company is not subject to financial covenants until May 31, 2024.

At that time, the Company will be subject to a debt service coverage ratio.

Deferred financing costs related to the Starion Term Loan total $ 0.1 million.

The City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund provides a multimillion-dollar economic development program, available to assist with expanding or relocating businesses.

As part of financial packages, the Jamestown Stutsman Development Corporation (JSDC) makes direct loans, equity investments, and interest buy-downs to businesses.

The Company has entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5 % for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”).

The loan totals $ 0.2 million and bears an interest rate of 2 %, and the bond totals $ 0.5 million.

In connection with the Starion Loan Agreement, the Company repaid all of the outstanding balance on the March 11, 2022 agreement between the Company and Vantage Bank Texas.

This agreement included a promissory note agreement for $ 7.5 million for a five year term with an interest rate of 5 % per annum.

$ 12,109 $ 12,786

6.15 % Vantage Garden City loan

On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan in the principal amount of $ 15 million (the “Vantage Garden City Loan Agreement”).

The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for the Borrower’s datacenter in Garden City, Texas, with each installment not exceeding approximately $ 0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”).

The unpaid principal amount of the Vantage Garden City Loan Agreement will bear interest at a fixed rate of 6.15 % per annum, and the Borrower may prepay the Vantage Garden City Loan Agreement, in whole or in part, without the payment of any fee or penalty.

The Vantage Garden City Loan Agreement matures April 26, 2028.

The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default.

As of February 28, 2023, an aggregate amount of $ 10.3 million has been advanced under the Vantage Garden City Loan Agreement.

Total deferred costs related to the issuance of this loan total are $ 0.2 million.

13,154 10,074

7.48 % Starion Ellendale loan

On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”).

The Ellendale Loan Agreement provides for a term loan in the principal amount of $ 20 million with a maturity date of February 3, 2028.

The Loan Agreement contains customary covenants, representations and warranties and events of default.

The Loan Agreement provides for an interest rate of 7.48 % per annum.

The proceeds of the Loan will be used to fund expansion on the Ellendale hosting datacenter.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

As of February 28, 2023, the Company had not received funding from the Ellendale Loan Agreement, and accordingly no amounts have been included in the tables below.

Remaining Principal Payments and Term Loan Balances

Below is a summary of the remaining principal payments due over the life of the term loans as of February 28, 2023.

Year Principal Payments (in thousands)

Thereafter 526

Total Term Loan Remaining Payments $ 24,051

Below is a summary of the Company’s term loan balances, including current debt and deferred financing fees as of February 28, 2023 and May 31, 2022.

(in thousands) February 28, 2023 May 31, 2022

Term Loan Balance $ 24,051 $ 7,324

Deferred Issuance Costs ( 333 ) ( 94 )

18,859 19,728

Other long-term debt 386 354

Debt issuance costs, net of amortization ( 463 ) ( 3,012 )

Current portion of term loan ( 9,163 ) ( 7,950 )

Long-term Portion of Term Loan $ 18,862 $ 5,897

STOCKHOLDERS’ EQUITY

The table below illustrates the Company’s common stock balances as February 28, 2023 and May 31, 2022.

Share Amounts As Of

February 28, 2023 May 31, 2022

Authorized to Issue 166,666,667 166,666,667

Issued 99,471,127 97,837,702

Outstanding 94,469,399 97,801,406

Restricted Stock Awards

The Company has granted restricted stock awards to officers and directors.

Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of Common Stock comprising the stock award with the Securities and Exchange Commission (the “SEC”).

The Company will recognize the cost of the restricted stock-based on the grant date fair value of the awards over the

Long-term debt, net $ 34,882 $ 31,980

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met.

The following is a summary of the activity and balances for unvested restricted stock awards granted for the nine months ended February 28, 2023:

Number of Shares Weighted Average Grant Date Fair Value Per Share

Outstanding as of May 31, 2022 1,366,666 $ 8.04

Granted 77,500 $ 2.04

Vested ( 1,048,333 ) $ 7.60

Forfeited — $ —

Outstanding as of February 28, 2023 395,833 $ 8.04

As of February 28, 2023, total remaining expense to be recognized related to these awards was $ 0.2 million and the weighted average remaining recognition period for the unvested awards was one month .

Restricted Stock Units

The Company has granted restricted stock unit awards (“RSUs”) to certain consultants, in all cases as compensatory grants for consulting services rendered to the Company, which contain performance conditions that affect vesting.

The Company will recognize the cost of these RSUs based on the grant date fair value of the awards when it is probable that the performance conditions will be achieved over the related vesting terms.

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Letters of Credit

As of August 31, 2023, the Company had letters of credit totaling $ 25.3 million.

As of May 31, 2023, the Company had letters of credit totaling $ 14.5 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, which all have terms ending within the 12 months following August 31, 2023.

On May 23, 2023, Sai Computing LLC, a wholly-owned subsidiary of the Company (“SAI”), entered into a Loan and Security Agreement (the "B.

Riley Loan") with B.

Riley Commercial Capital, LLC and B.

Riley Securities, with the Company as Guarantor.

Riley Loan provides for a term loan of up to $ 50 million in the principal with an interest rate of 9.00 % per annum and a 3 % commitment fee on outstanding balances as of each quarter.

The proceeds of the B.

Riley Loan are being used to provide additional liquidity to help fund the buildout of the Company’s recently announced cloud services platform and datacenters by the Company, and for general corporate purposes and working capital.

As of August 31, 2023, the Company had repaid all balances on the loans.

Total remaining unused capacity on the B.

Riley Loan as of August 31, 2023 was $ 10.5 million.

Remaining Principal Payments

Below is a summary of the remaining principal payments due over the life of the term loans as of August 31, 2023 (in thousands):

Remainder of FY24 $ 6,930

Total $ 44,508

Stockholders' Equity

On October 9, 2021, the Company’s Board of Directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022.

The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (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 “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 February 28, 2023, the Company had issued approximately 8.0 million awards under the plans.

The following is a summary of the activity and balances for unvested restricted stock units granted for the nine months ended February 28, 2023:

As of August 31, 2023, the Company had issued awards for approximately 13.8 million shares of common stock of the Company (the “Common Stock”) under the plans.

Restricted Stock Awards

As of August 31, 2023, total remaining expense to be recognized related to these awards was $ 0.3 million and the weighted average remaining recognition period for the unvested awards was 0.2 years.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Restricted Stock Units

The Company has granted restricted stock unit awards (“RSUs”) to certain consultants and full-time employees.

The following is a summary of the activity and balances for unvested restricted stock units granted for the three months ended August 31, 2023:

Number of Shares Weighted Average Grant Date Fair Value Per Share

Outstanding as of May 31, 2023

12,465,935 $ 2.53

Granted 1,311,900 7.79

1 unchanged sentence

Forfeited ( 286,699 ) 2.21

Outstanding as of February 28, 2023 8,585,296 $ 3.01

As of February 28, 2023, total remaining expense to be recognized related to these awards was $ 13.3 million and the weighted average remaining recognition period for the unvested awards was 20 months.

Share Forfeiture

On June 6, 2022, through an agreement between the Company and Xsquared Holding Limited (“Sparkpool”), Sparkpool agreed to forfeit shares of Common Stock that had been issued pursuant to the service agreement executed on March 19, 2021.

Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered.

As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and returned to the Company and placed in treasury.

During the nine months ended February 28, 2023, the Company entered into twenty-five new leases, bringing the total number of leases to 44 .

The Company considered the nature of the leases under ASC 842 Leases and determined each of these leases represent finance leases.

The weighted average term of the leases is 30 months and the weighted average discount rate of the leases is 7.87 %.

Total ROU assets entered into during the nine months ended February 28, 2023 totaled $ 8.7 million.

Outstanding as of August 31, 2023

12,917,708 $ 3.06

As of August 31, 2023, total remaining expense to be recognized related to these awards was $ 32.3 million and the weighted average remaining recognition period for the unvested awards was 1.9 years.

Public Offering

During the three months ended August 31, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement pursuant to which the Company may sell up to $ 125 million in shares of Common Stock.

As of August 31, 2023, the Company has sold approximately 7.9 million shares.

Net proceeds, less commission and legal fees of approximately $ 2.2 million, were approximately $ 64.5 million.

Extinguishment of Noncontrolling Interest

On August 31, 2023, pursuant to the joint venture agreement, the minority partner in 1.21 Gigawatts LLC exercised the option to exchange their interest in the joint venture for approximately 1.5 million shares for a value of $ 9.8 million of the Company’s common stock.

The Company is now the sole member of 1.21 Gigawatts LLC and will report all activity as attributable to the Company in future periods.

The Company enters into leases for hosting equipment, office space, and land.

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):

Three months ended

August 31, 2023 August 31, 2022

Operating lease cost:

Operating lease expense $ 485 $ 82

Short-term lease expense 82 63

Total operating lease cost 567 145

Finance lease expense:

Amortization of right-of-use assets (1)

Interest on lease liabilities 1,082 109

Total finance lease cost 6,712 407

Sublease Income ( 23 ) ( 27 )

Total net lease cost $ 7,256 $ 525

(1) Amortization of right-of-use assets is included within depreciation expense, and is recorded within cost of revenues and selling, general and administrative expense in the condensed consolidated statements of operations.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

The following table represents the Company’s future minimum lease payments as of May 31, 2023:

Operating Leases Finance Leases Total

Remainder of FY24 $ 1,921 $ 20,185 $ 22,106

FY25 2,681 25,678 28,359

FY26 2,782 4,339 7,121

FY27 2,536 188 2,724

FY28 2,336 180 2,516

Thereafter 1,398 89,944 91,342

Total lease payments 13,654 140,514 154,168

imputed interest ( 2,274 ) ( 91,972 ) ( 94,246 )

Total lease liabilities 11,380 48,542 59,922

Current portion of lease liability ( 1,807 ) ( 23,471 ) ( 25,278 )

Long-term portion of lease liability $ 9,573 $ 25,071 $ 34,644

Supplemental cash flow and other information related to leases is as follows:

Three Months Ended

August 31, 2023 August 31, 2022

Weighted-average years remaining (in years):

Finance leases 8.4 years 51.0 years

Operating leases 5.0 years 4.2 years

Weighted-average discount rate:

Finance leases 8.5 % 8.0 %

Operating leases 7.7 % 12.5 %

The Company has entered into operating leases which are executed but not yet commenced with total minimum payments of approximately $ 143.4 million to support the Company's Cloud service business.

The payments are for various leases with various lease terms ranging from 60 months to 84 months.

Commitments and Contingencies

As of February 28, 2023, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 9 - Leases, respectively.

Energy Commitment

The Company also has an annual minimum commitment of approximately $ 24.2 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility as of February 28, 2023.

The minimum term of this agreement is five years , and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination.

The commitment is fully due within the next year, as the Company commits to specific power consumption on an annual basis as part of the energy services agreement.

The Company also has a minimum commitment of approximately $ 95.7 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility with a remaining term of approximately 3.5 years as of August 31, 2023.

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.

As of February 28, 2023 and May 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations.

On August 12, 2023, a putative securities class action complaint, captioned McConnell v.

Applied Digital Corporation, Wesley Cummins and David Rench , No.

3:23-cv-1805, was filed in the U.S.

District Court for the Northern District of Texas, Dallas Division against Applied Digital Corporation (the “Company”) and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act.

The complaint alleges that the defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies.

Specifically, the complaint alleges that the Company overstated the profitability of its datacenter hosting business and its ability to successfully transition into a low-

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules.

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 August 31, 2023 and May 31, 2023, 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.

Settlement of Potential Claim

Subsequent to August 31, 2023, the Company entered into a settlement agreement in respect of employment-related claims by a former executive.

The terms of the settlement include payment to the claimant of $ 2.3 million, which was included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.

Business Segments

Revenue by segment (excluding HPC as that segment has no revenue) was as follows (in thousands):

Three Months Ended

August 31, 2023 August 31, 2022

Cloud services segment

Hosting segment

Total revenue $ 36,323 $ 6,924

Segment profit and a reconciliation to net income (loss) before income tax expenses is as follows (in thousands):

Three Months Ended

August 31, 2023 August 31, 2022

Segment Profit:

Cloud services segment

$ ( 7,434 ) $ —

Hosting segment

8,958 ( 658 )

HPC hosting segment ( 730 ) —

Total segment profit 794 ( 658 )

( 8,221 ) ( 3,519 )

Interest expense 2,074 356

Loss on debt extinguishment 2,353 94

Income before income taxes $ ( 11,854 ) $ ( 4,627 )

(1) Other includes corporate related items not allocated to reportable segments.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

We also provide the following additional segment disclosures (in thousands):

Three Months Ended

August 31, 2023 August 31, 2022

Depreciation and amortization:

Cloud services segment

Hosting segment

HPC hosting segment 126 —

Total depreciation and amortization $ 7,860 $ 1,136

Capital expenditures:

Cloud services segment

Hosting segment

18,298 33,097

HPC hosting segment 11,644 —

Total capital expenditures $ 75,659 $ 33,097

(1) Other includes corporate related items not allocated to reportable segments.

Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands):

August 31, 2023 May 31, 2023

Cloud services segment

$ 68,075 $ 3,127

Hosting segment

232,451 224,447

HPC hosting segment 23,449 10,949

Total segment assets 323,975 238,523

25,178 25,434

Total assets $ 349,153 $ 263,957

(1) Other includes corporate related items not allocated to reportable segments.

Earnings Per Share

3 unchanged sentences

The table below shows the calculation for earnings per share:

Basic and diluted loss per share:

Three Months Ended Nine Months Ended

February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022

Net loss from continuing operations $ ( 7,341 ) $ ( 2,397 ) $ ( 38,750 ) $ ( 17,843 )

Net loss from discontinued operations, net of income taxes — ( 4,048 ) — ( 2,870 )

Net loss including noncontrolling interests ( 7,341 ) ( 6,445 ) ( 38,750 ) ( 20,713 )

Three Months Ended

August 31, 2023 August 31, 2022

Net loss $ ( 11,854 ) $ ( 4,659 )

Net loss attributable to noncontrolling interest ( 397 ) ( 128 )

1 unchanged sentence

Basic and diluted net (loss) gain per share:

Continuing Operations $ ( 0.08 ) $ ( 0.04 ) $ ( 0.41 ) $ ( 0.35 )

Discontinued Operations $ — $ ( 0.08 ) $ — $ ( 0.06 )

Basic and diluted net loss per share $ ( 0.12 ) $ ( 0.05 )

Basic and diluted weighted average number of shares outstanding 100,521,673 93,105,835

DISCONTINUED OPERATIONS

During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment.

The Company ceased all crypto mining operations and completed the sale of the assets during the year ended May 31, 2022.

The Company has no plans to return to crypto mining operations in the future as the Company grows.

The results of these operations have been displayed as discontinued operations.

Operating results of discontinued operations are summarized below:

Three Months Ended Nine Months Ended

in thousands February 28, 2023 February 28, 2022 February 28, 2023 February 28, 2022

Cryptoasset mining revenue, net $ — $ 907 $ — $ 2,945

Cost of sales — 628 — 1,589

Gross profit — 279 — 1,356

Impairment of cryptocurrency assets — ( 225 ) — ( 390 )

Loss on the sale of fixed assets $ — ( 578 ) $ — ( 582 )

Loss on the reclassification of fixed assets ( 3,524 ) ( 3,254 )

Net loss from discontinued operations $ — $ ( 4,048 ) $ — $ ( 2,870 )

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Nine Month Period Ended February 28, 2023

As of February 28, 2023 and May 31, 2022, the Company did not hold any cryptoassets.

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Subsequent Events

On March 30, 2023, the Company received funding for the Starion Ellendale Loan.

The funding, net of issuance fees, totaled $ 19.8 million.

See full discussion over Starion Ellendale Loan in in Note 7 - Debt.

SAI borrowed an additional $ 5.0 million under the remaining capacity from the existing B.

Riley Loan that the Company entered into in May 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements