Applied Digital Corp. 10-Q

Item 1. Financial Statements APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and par value data) August 31, 2023 May 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 5,942 $ 28,999 Restricted cash 25,271 14,575 Accounts receivable 27 82 Prepaid expenses and other current assets 2,308 2,103 Total current assets 33,548 45,759 Property and equipment, net 222,666 195,593 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 AND STOCKHOLDERS' EQUITY Current liabilities: 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 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 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 Commitments and contingencies Stockholders' equity: 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 110 101 Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost ( 62 ) ( 62 ) Additional paid in capital 240,073 160,194 Accumulated deficit ( 112,173 ) ( 100,716 ) Total stockholders’ equity attributable to Applied Digital Corporation 127,948 59,517 Noncontrolling interest — 10,162 Total stockholders' equity including noncontrolling interest 127,948 69,679 TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 349,153 $ 263,957 See accompanying notes to the condensed consolidated financial statements 1 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended August 31, 2023 August 31, 2022 Revenue: Hosting revenue $ 29,987 $ 4,338 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 Total costs and expenses 41,450 11,101 Operating loss ( 5,127 ) ( 4,177 ) Interest Expense 2,074 356 Loss on extinguishment of debt 2,353 94 Loss from legal settlement 2,300 — 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 ) Net loss attributable to Applied Digital Corporation $ ( 11,457 ) $ ( 4,531 ) Basic and diluted net (loss) gain per share: 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 condensed consolidated financial statements 2 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES 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) (Unaudited) Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity Shares Amount Shares Amount 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 Net loss — — — — — ( 11,457 ) ( 11,457 ) ( 397 ) ( 11,854 ) 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 Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling interest Total Equity 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 Stock-based compensation — — — — 579 — 579 — 579 Capital contribution to noncontrolling interest — — — — — — — 1,746 1,746 Common stock forfeited — — ( 4,965,432 ) — — — — — — Net loss — — — — — ( 4,531 ) ( 4,531 ) ( 128 ) ( 4,659 ) 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 3 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)(In thousands) Three Months Ended August 31, 2023 August 31, 2022 CASH FLOW FROM OPERATING ACTIVITIES 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 Stock-based compensation 5,641 579 Deferred income taxes — 32 Loss on extinguishment of debt 2,353 94 Loss from legal settlement 2,300 — Amortization of debt issuance costs 235 — Loss on abandonment of assets 173 — Changes in operating assets and liabilities: Accounts receivable 55 177 Prepaid expenses and other current assets ( 205 ) ( 164 ) Customer deposits — 4,042 Related party customer deposits — 545 Current deferred revenue 3,695 15,316 Current related party deferred revenue ( 553 ) — Accounts payable 205 196 Accrued liabilities 2,113 — Lease assets and liabilities 39 — 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 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 ) 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 Proceeds from issuance of common stock 64,482 — CASH FLOW PROVIDED BY FINANCING ACTIVITIES 23,663 8,910 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 Interest paid $ 1,839 $ 356 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES 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 $ 2,300 $ — See accompanying notes to the condensed consolidated financial statements 4 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (unaudited) For the Three Months Ended August 31, 2023 1. Business and Organization 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. 2. Basis of Presentation and Significant Accounting Policies Principles of Consolidation The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. 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, 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 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. Actual results could differ significantly from those estimates. 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. 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. 5 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. Segments 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 Restricted Cash 25,271 14,575 Total Cash & Cash Equivalents $ 31,213 $ 43,574 6 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three Months Ended August 31, 2023 3. 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, 2023 May 31, 2023 Hosting equipment Electric generation and transformers 15 years $ 7,763 $ 4,655 Other equipment and fixtures 5 years - 7 years 3,101 1,684 Construction in progress 97,280 106,226 Information systems and software 5 years 27,570 21,173 Land and building Land 2,152 2,152 Land improvements 15 years 1,296 1,293 Building 39 years 88,346 63,350 Leasehold improvements 3 years - 6 years 2,299 — Total cost of property and equipment 229,807 200,533 Accumulated depreciation ( 7,141 ) ( 4,940 ) Property and equipment, net $ 222,666 $ 195,593 Depreciation expense totaled $ 2.2 million and $ 0.8 million and for the three months ended August 31, 2023 and 2022, respectively. 4. Revenue from Contracts with Customers 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, 2023 2022 Customer A 68 % — % Customer B 10 % 12 % Customer C — % 36 % Customer D — % 21 % Customer E — % 17 % Customer F — % 14 % Deferred Revenue 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 7 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES 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 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 5. Related Party Transactions Related Party Revenue 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, 2023 2022 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 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. Mr. Cummins, the CEO of the Company, is also the President of B. Riley Asset Management. 6. Debt Long-term debt consisted of the following components (in thousands): August 31, 2023 May 31, 2023 6.50 % Starion term loan $ 12,109 $ 12,786 6.15 % Vantage Garden City loan 13,154 10,074 7.48 % Starion Ellendale loan 18,859 19,728 Other long-term debt 386 354 Debt issuance costs, net of amortization ( 463 ) ( 3,012 ) Less: Current portion of term loan ( 9,163 ) ( 7,950 ) Long-term debt, net $ 34,882 $ 31,980 8 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES 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. B. Riley Loan 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. The B. 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 FY25 9,831 FY26 10,508 FY27 11,221 FY28 6,018 Total $ 44,508 7. Stockholders' Equity Equity Plans 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 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. 9 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES 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 Vested ( 573,428 ) 2.69 Forfeited ( 286,699 ) 2.21 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. 8. Leases 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) 5,630 298 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. 10 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 Less: imputed interest ( 2,274 ) ( 91,972 ) ( 94,246 ) Total lease liabilities 11,380 48,542 59,922 Less: 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. 9. Commitments and Contingencies Energy Commitment 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. 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- 11 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. 10. 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 $ 2,152 $ — Hosting segment 34,171 6,924 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 ) Other (1) ( 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. 11 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES 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 $ 4,508 $ — Hosting segment 3,199 1,115 HPC hosting segment 126 — Other (1) 27 21 Total depreciation and amortization $ 7,860 $ 1,136 Capital expenditures: Cloud services segment $ 45,717 $ — 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 Other (1) 25,178 25,434 Total assets $ 349,153 $ 263,957 (1) Other includes corporate related items not allocated to reportable segments. 11. Earnings Per Share Basic net income (loss) per share (“EPS”) of common stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for earnings per share: Three Months Ended August 31, 2023 August 31, 2022 Net loss $ ( 11,854 ) $ ( 4,659 ) Net loss attributable to noncontrolling interest ( 397 ) ( 128 ) Net loss attributable to Applied Digital Corporation $ ( 11,457 ) $ ( 4,531 ) Basic and diluted net (loss) gain per share: 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 12 APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements For the Three Months Ended August 31, 2023 12. Subsequent Events B. Riley Loan 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. 13 Table of Contents