Applied Digital (APLD) 10-K2023 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

APPLIED DIGITAL CORPORATION

APPLICABLE ONLY TO CORPORATE ISSUERS:

The registrant had outstanding 103,950,005 shares of common stock as of July 25, 2023.

DOCUMENTS INCORPORATED BY REFERENCE

None.

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.

These statements are based on our management’s beliefs and assumptions, which are based on currently available information. Our actual results, and the assumptions on which we relied, could prove materially different from our expectations. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:

You should carefully review the risks described in Item 1A of this Annual Report on form 10-K, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

We are a designer, builder and operator of next-generation digital infrastructure. We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.

Our AI Cloud service operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.

On October 13, 2022, we formed Sai Computing, LLC (“Sai Computing”). Sai Computing was formed to provide artificial intelligence and machine learning application customers with access to machines and a hosting environment.

On May 15, 2023, we announced the formal launch of our AI cloud services business through Sai Computing. On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period. The customer will make a significant prepayment as part of the agreement.

On May 25, 2023, we formed Sai Computing Holdings LLC (“Sai Holdings”) and Sai-Foundry Computing LLC (“Sai-Foundry”). Sai Holdings serves as the parent entity over Sai Computing and Sai-Foundry, and Sai-Foundry will serve as the joint venture entity between the Company and Foundry Technologies (“Foundry”). We have a 98% ownership interest in Sai-Foundry and consolidate the entity.

On June 23, 2023, we announced that we had signed our second customer in our AI cloud hosting business. This agreement has a value worth up to $460 million over 36 months.

To support our AI Cloud Services business, we have placed orders for over 26,000 Graphics Processing Units ("GPUs"). We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services. Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

On December 14, 2022, we announced the beginning of construction of a 5 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota. We subsequently determined to increase the capacity of this facility to 9 MW. This separate and unique building, designed and purpose-built for GPUs, will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments. This facility is expected to be brought online in the second half of calendar year 2023. During early calendar year 2023, we began testing HPC hosting at this facility. The systems in this facility passed initial testing in the second calendar quarter of 2023.

We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.

Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers. With expert advisors in the fields of power, crypto mining operations, procurement, and construction, we have designed and implemented a plan for a prefabricated facility and organization within the facility that can be delivered and installed quickly and maximize performance and efficiency of the facility and our customers’ crypto mining equipment. We provide energized space for customers to host computing equipment.

We have a colocation business model where our customers place hardware they own into our facilities and we provide operational and maintenance services for a fixed fee. We typically enter into long-term fixed rate contracts with our customers.

As of May 31, 2023, we had approximately 185 MW of capacity online and available to service crypto mining customers. Subsequent to May 31, 2023, we brought another 100 MW of capacity online, bringing total energized capacity to approximately 285 MW as of the date of this report. Additionally, there is another 200 MW of capacity the Company has committed to energize, all of which is contracted for under multi-year arrangements.

During the fiscal year ended May 31, 2023, the Company entered into a joint venture agreement with GMR Limited ("GMR") to form Highland Digital Holdings, LLC ("Highland Digital"). Highland Digital is dormant and the Company currently has no plans to use the entity for any activities.

As our operations expand, we believe our business structure may become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE: DLR) and Equinix, Inc. (NASDAQ: EQIX), each of which is a traditional datacenter operator, and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry. We have begun to investigate the possibility, costs and benefits of converting to a REIT structure.

On May 24, 2023, we announced that we are working with Super Micro Computer, Inc. ("Super Micro"), a global leader in Application-Optimized Total IT Solutions, to deliver Applied Digital’s AI Cloud service. Super Micro is a leading provider of application-optimized, high-performance server and storage solutions that address a broad range of computational-intensive workloads. Super Micro’s next-generation GPU servers significantly lower the power requirements of data centers. With the amount of power required to enable today's rapidly evolving large scale AI models, optimizing the Total Cost of Ownership (TCO) and the Total Cost to Environment (TCE) is crucial to data center operators.

On June 30, 2023, we announced a collaboration with Hewlett Packard Enterprise Company ("HPE"), a global edge-to-cloud company. As part of the collaboration, HPE will deliver its powerful, energy-efficient supercomputers that are proven to support large-scale AI through Applied Digital's AI cloud service.

One of the main benefits of our electrical services agreements for our Jamestown, North Dakota and Ellendale,

North Dakota facilities is the low cost of power. Power capacity available for high computing power processes is

scarce, especially at scalable sites with over 100 MW of potential capacity. This scarcity of power allows us to

realize attractive hosting rates in the current market, in particular given our ability to provide long-term (3-5 year)

hosting contracts.

Next-Gen datacenters are optimized for large computing power and require more power than traditional datacenters that are optimized for data retention and retrieval. Next-Gen datacenters and traditional datacenters also have very different layouts, internet connection requirements and cooling designs to accommodate different power demands and customer requirements. Traditional datacenters cannot be easily converted to Next-Gen datacenter facilities like ours because of these differences. Geographically, traditional datacenters are at a disadvantage because they require fiber bases, low-latency connections and connection redundancies that are usually found in high-cost areas with high-density populations.

Within each of our business streams, we have entered into long-term fixed rate contracts with our customers. In addition, we have obtained access to low cost energy through our energy services agreements, which provides us with consistent margins and cash flow. We intend for the steady cash flows generated by our operations to be reinvested into our AI Cloud services and HPC datacenter businesses.

We have continued to expand our leadership team by attracting top talent in the digital infrastructure space. Recent hires from both publicly traded and private companies have allowed us to build a team capable of designing and

constructing hosting facilities, for example, our Chief Technology Officer, Michael Maniscalco. Mr. Maniscalco was an Entrepreneur in Residence at Stanley Black & Decker Venture Studio (StanleyX AI) in 2021. He was a founder and Chief Executive Officer of Better Living Technologies from 2018 to 2022. Prior to that, Mr. Maniscalco founded, and was Vice President of Product, of Ihiji from 2009 to 2018.

We have started expansion into hosting for HPC applications. We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations. Further, we launched our AI cloud hosting services business through Sai Computing and have announced our first major customer.

We believe that the signing of our initial customers for our AI cloud service business will help us elevate our profile within the market. Further, we are working with Super Micro and HPE, which are both leading vendors in the AI hosting space, and we believe that we will be able to leverage their networks to identify leads for the expansion of our AI cloud services and HPC datacenter hosting businesses.

We have developed a pipeline of potential power sources across our sites in Jamestown, North Dakota; Garden City, Texas; and Ellendale, North Dakota. Through our build-out of our first North Dakota facility and the prior

experience our leadership team brings to our initiatives, we believe that we have developed a repeatable power

strategy to significantly scale our operations. In addition, we are currently focused on and will continue to target

states that have favorable laws and regulations for HPC application industries, which we believe further minimizes

the associated with risks the scaling of our operations.

With recent additions to our management team, we are increasingly looking at various types of power assets to support the growth of our hosting operations. This also includes power generation assets, which longer-term could be used to reduce our cost of power. Our management team has experience not only in evaluating and acquiring power assets, but also in the conversion of power assets to crypto mining/hosting operations and the construction of datacenters with the specific purpose of mining cryptocurrency assets.

To the extent we are building new facilities, our site selection criteria considers geographic diversity, attractive return on investment, and environmental impact.

Geographic diversity minimizes the risk to us of any event in a particular region that may impact our facilities. We expect to choose locations in environments that are policy and regulation friendly, and find sites with less expensive stable energy.

We are doing our part to be as environmentally conscious as possible when choosing sites for development by targeting renewable energy assets to minimize our carbon footprint. Further, because Next-Gen datacenters like ours represent a unique power load, we believe our demand for renewable energy and entry into agreements with renewable energy providers will increase and accelerate the buildout of renewable energy infrastructures.

There is no assurance that selection criteria will be met or that viable sites will be selected.

We have material customer concentration in our crypto datacenter hosting business. We have entered into service contracts with Spring Mud, LLC (a subsidiary of GMR Limited) Bitmain Technologies Limited, Arrakis, Inc., Hashing LLC, Marathon Digital Holdings, Inc., and Global Operating Infrastructure, LLC ("GOI"), who have collectively contracted to use the entire capacity of our three crypto hosting datacenters.

Our crypto hosting site-level strategy consists of having one key anchor tenant that has signed a 3 – 5 year long-term contract at the site and filling the rest of the facility with customers with 18 – 36 month terms.

We have also material customer concentrations in our AI cloud services business, as we only have two customers. On May 16, 2023, we announced that we had signed our first customer in our AI cloud hosting business. This agreement has a value worth up to $180 million over 24 months, and contains a significant prepayment. On June 23, 2023, we announced that we had signed our second customer in our AI cloud hosting business with a total value worth up to $460 million over 36 months. If we acquire rights to additional properties and build additional facilities, we intend to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

North Dakota is one of the states leading the United States in wind power generation. The power comes off a grid and we cannot control whether that energy is generated by wind or other methods. Currently, we do not have access to such information. In addition, we expect our Texas facility will be largely supplied with power that is generated from wind, including power generated by the adjacent wind farm. Beyond the wind farm, the data center will be connected to the Wind Energy Transmission of Texas transmission lines, which for the most part transmit wind generated power. We are, however, not purchasing the renewable energy credits from the wind generation facility. We have, and will continue to, consider opportunities for limiting the impact of our business on the environment.

As of May 31, 2023, we had 121 employees, all of whom were full time. We also had 6 independent contractors who focus full time on our business and 67 independent contractors who worked on a part time basis on our business. We have relied and plan on continuing to rely on independent organizations, advisors and consultants to perform certain services for us. Such services may not always be available to us on a timely basis, on commercially reasonable terms or at all. Our future performance will depend in part on our ability to successfully integrate newly hired employees and to engage and retain consultants, as well as our ability to develop an effective working relationship with our employees and consultants.

Although we began generating revenue from crypto mining in June 2021 and began generating revenue from hosting operations when our first co-hosting facility came online on February 2, 2022, we are subject to the risks and

uncertainties of a new business, including the risk that we may never further develop, complete development of or market any of our proposed services. During the building of our co-hosting operations, we determined that it would be beneficial to our stockholders to focus more of our resources on building our co-hosting operations than on expanding our mining operations. Accordingly, in December 2021, we began selling our crypto mining equipment. On March 9, 2022, we ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. We have no plans to return to crypto mining operations in the future.

Accordingly, we have only a limited history upon which an evaluation of our prospects and future performance can be made. Hosting revenues includes only fees from access to space and electricity and not maintenance or other services provided by us. Direct costs of sales from hosting includes operations, maintenance, and power related costs. However, any increased hosting revenue or decreased costs, for instance, as a result of pricing power, economies of scale and additional services provided, or any decrease in demand for our hosting services, for example as a result of increased regulation on cryptoasset mining of our hosting customers or a significant decrease in cryptoasset prices, will significantly change the terms on which we are able to enter into additional agreements necessary to expand our business and thus impact the results of our hosting revenues and direct hosting costs.

We intend to reduce the impact of such variability on our hosting revenue and hosting costs by entering into long term contracts with the goal of having one blue chip anchor tenant that has signed a 3-5 year long-term contract at each site and filling the rest of the facility with customers with 18-36 month terms. The actual results may vary significantly from the plans set forth above and we make no representations with respect thereto.

If we are unable to successfully implement our development plan or to increase our generation of revenue, we will not become profitable, and we may be unable to continue our operations. Furthermore, our proposed operations are subject to all business risks associated with new enterprises. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the expansion of a business, operation in a competitive industry, and the continued development of advertising, promotions and a corresponding customer base. There can be no assurances that we will operate profitably.

Our success depends on external factors in the cryptomining industry.

We have a material concentration of customers in the crypto mining industry. The cryptomining industry is subject to various risks which could adversely affect our current customers’ ability to continue to operate their businesses, including, but not limited to:

Even if we are able to diversify our customer base, negative impacts to the cryptomining industry may negatively affect our business, financial condition, operating results, liquidity and prospects.

If we fail to effectively manage our growth, our business, financial condition and results of operations could be harmed.

We are a development stage company with a small management team and are subject to the strains of ongoing development and growth, which will place significant demands on our management and our operational and financial infrastructure. Although we may not grow as we expect, if we fail to manage our growth effectively or to develop and expand our managerial, operational and financial resources and systems, our business and financial results could be materially harmed. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results. Further, we cannot provide any assurance that we will successfully identify emerging trends and growth opportunities in this business sector and we may lose out on opportunities. Such circumstances could have a material adverse effect on our business, prospects or operations.

We may be unable to raise additional capital needed to grow our business.

We expect to need to raise substantial additional capital to expand our operations, pursue our growth strategies and to respond to competitive pressures or unanticipated working capital requirements. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations.

If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. Furthermore, if we engage in additional debt financing, the holders of debt likely would have priority over the holders of common stock on order of payment preference. We may be required to accept terms that restrict our ability to incur additional indebtedness, pay dividends to our shareholders, or take other actions. We may also be required to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders.

We are continuously evaluating our capacity requirements in order to effectively manage our capital expenditures and operating results. However, we may be unable to accurately project our future capacity needs or sufficiently allocate resources to address such needs. If we under estimate these requirements, we may not be able to provide sufficient service to existing customers or may be required to limit new customer acquisition, both of which may materially and adversely impair our results of operations.

Similarly, we have entered into multi-year contract commitments with colocation service providers. If we overestimate our capacity requirements and therefore secure excess capacity and have excess capital expenditures, our operating material could be materially reduced.

We rely on several third-party service providers for services that are essential to our business model, the most important of which are our suppliers of power, electrical equipment, building materials, and construction services. Additionally, as we build our AI Cloud services, we also expect to rely on third parties to lease or sell us equipment which we then lease to certain of our AI Cloud customers. If these third parties experience difficulty providing the services or products we require, or if they experience disruptions or financial distress or cease operations temporarily or permanently, or if the products they supply are defective or cease to operate for any reason, it could make it difficult for us to execute our operations. If we are unsuccessful in identifying or finding highly qualified third-party service providers, or if we fail to negotiate cost-effective relationships with them or if we are ineffective in managing and maintaining these relationships, it could materially and adversely affect our business and our financial condition, operating results, cash flows, and prospects.

Certain natural disasters or other external events could harm our business, financial condition, results of operations, cash flows, and prospects.

We may experience disruptions due to mechanical failure, power outage, human error, physical or electronic security breaches, war, terrorism, fire, earthquake, pandemics, hurricane, flood and other natural disasters, sabotage and vandalism. Our systems may be susceptible to damage, interference, or interruption from modifications or upgrades, power loss, telecommunications failures, computer viruses, ransomware attacks, computer denial of service attacks, phishing schemes, or other attempts to harm or access our systems. Such disruptions could materially and adversely affect our business and our financial condition, operating results, cash flows, and prospects.

Various actual and potential conflicts of interest may be detrimental to stockholders.

Certain conflicts of interest may exist, or be perceived to exist, between certain of our directors or officers and us. Mr. Cummins and certain of our directors have other business interests to which they also must devote time, resources and attention. These other interests may conflict with such officer’s or director’s interest in us, including conflicting with interests in allocating resources, time and attention to our business and impacting decisions made on our behalf with respect to such entities, their affiliates or competitors.

We do not have specific procedures in place with respect to potential conflicts of interest, however, in determining to engage with potential competitors and entities with whom our officers or directors may have relationships, we considered the risks and risk mitigation factors, including requiring that transactions valued at over $120,000 in which our officers, directors and holders of more than 5% of our common stock have an interest be approved or ratified by our Audit Committee. Mr. Cummins holds over 22% of our common stock, and has a financial interest in the success of our operations.

We also have more than a majority of independent directors on our Board in order to ensure that there are limitations on the risks of conflicts of interest impacting Board level decisions. We cannot, however, guarantee that the conflicts of interest described above, or other future conflicts of interest, will not manifest in advice or decisions that negatively impact our financial results and our operations.

The loss of any of our management team, our inability to execute an effective succession plan, or our inability to attract and retain qualified personnel, could adversely affect our business.

Our success and future growth will depend to a significant degree on the skills and services of our management team. We will need to continue to grow our management team in order to alleviate pressure on our existing team and in order to continue to develop our business. If our management team, including any new hires that we may make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed. Furthermore, if we fail to execute an effective contingency or succession plan with the loss of any member of our management team, the loss of such management personnel may significantly disrupt our business.

The loss of key members of our management team could inhibit our growth prospects. Our future success also depends in large part on our ability to attract, retain and motivate key management and operating personnel. As we continue to develop and expand our operations, we may require personnel with different skills and experiences, and who have a sound understanding of our business and high computing power technologies. The market for highly qualified personnel in this industry is very competitive and we may be unable to attract such personnel. If we are unable to attract such personnel, our business could be harmed.

We may become involved in lawsuits or other disputes relating to employment matters, such as hostile work place, discrimination, wage and hour disputes, sexual harassment, or other employment issues. These types of claims, depending on their nature, can have a significant negative impact on businesses. Certain companies that have faced employment- or harassment-related lawsuits have had to terminate management or other key personnel, and have borne economic and other costs and suffered reputational harm that has negatively impacted their business. If we were to face any employment-related claims, our business could be negatively affected.

As previously disclosed, on June 23, 2023, the Company announced an internal investigation with respect to a potential sexual harassment claim between two of our executive officers. Based on information obtained through the investigation, the Audit Committee of our Board of Directors determined that the relationship between the parties was consensual and the allegations of workplace harassment are unfounded. However, we cannot guarantee that this matter is resolved or that these or subsequent allegations will not result in litigation or other disputes. In such an event, we would likely incur significant legal fees and expenses, and any dispute could distract our management from the operation of our business or lead to employee separations from the Company. Moreover, while we do not believe any such claim would have merit, any dispute or resolution could result in the payment of damages, severance, vesting of equity awards or payment of other amounts by the Company, which could be significant. All of these factors could negatively affect our business, financial condition, operating results, liquidity and prospects.

We may depend upon outside advisors who may not be available on reasonable terms as needed.

To supplement the business experience of our officers and directors, we may be required to employ technical experts, appraisers, attorneys, or other consultants or advisors. Our management, with our Board approval in certain cases, without any input from stockholders will make the selection of any such advisors. Furthermore, it is

anticipated that such persons may be engaged on an “as needed” basis without a continuing fiduciary or other obligation to us. In the event we consider it necessary to hire outside advisors, we may elect to hire persons who are affiliates, if they are able to provide the required services.

COVID-19 or any pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business.

COVID-19 or any pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business. The COVID-19 virus has had unpredictable and unprecedented impacts in the United States and around the world. The implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain. The economic effects of the pandemic and any recovery and resulting societal changes, including the impact of current labor shortages in the United States, are currently not predictable, and the future financial impacts could vary from current projections.

We currently have material customer concentration of cryptomining customers.

As a result of the risks our crypto mining customers face, it is not possible for us to predict the future level of demand for our services that will be generated by these customers or the future demand for the products and services of these customers. Should some or all of our co-hosting customers suffer from harm or loss due to a set of circumstances, their businesses could be negatively impacted or prevented. Further, our contracts with these customers permit them to terminate our services at any time (subject to notice and certain other provisions).

If any of our customers' experience declining mining operations for any reason or determine to stop utilizing our co-hosting facilities, we could be pressured to reduce the prices we charge for our services or we could lose a major customer. Any such development could have an adverse effect on our margins and financial position, and would negatively affect our revenues and results of operations.

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax (the “Excise Tax”) on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The Excise Tax is imposed on the repurchasing corporation itself, not its stockholders from which shares are repurchased. The amount of the Excise Tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the Excise Tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the Excise Tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the Excise Tax. Any share redemption or other share repurchase that occurs after December 31, 2022 may be subject to the Excise Tax. Whether and to what extent we would be subject to the Excise Tax will depend on a number of factors, including (i) the fair market value of any redemptions and repurchases, (ii) the nature and amount of any equity issuances, and (iii) the content of regulations and other guidance from the Treasury. Depending on the number of shares of our Series E Preferred Stock we sell and the number of holders of Series E Preferred Stock who redeem their stock, the Excise Tax could be applicable to the Company and adversely affect the cash we have available for our operations. As of the date of this prospectus supplement we have not sold or issued any shares of Series E Preferred Stock.

We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.

Accounting for our power purchase agreements could cause variability in the results we report.

With respect to certain of our power purchase agreements, it is both possible and probable that we will net settle them, meaning that we have the ability and intent to sell power back into the grid in lieu of taking full physical delivery of all of the contracted power. Accordingly, these agreements will meet the definition of an accounting derivative. This means that these agreements will be accounted for at fair value at each quarterly measurement period, and these values may fluctuate significantly. As a result, our consolidated financial statements and results of operations may fluctuate quarterly based on factors outside of our control. We could have substantial variability in our financial results and disclosures, which, if material, could affect our operating results and in turn could impact our stock price. Investors should consider such derivative accounting matters when evaluating our financial results.

The trading price of our common stock has been volatile and may continue to be volatile in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on an investment in our securities:

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Broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected.

The trading prices and valuations of these stocks, and of our common stock, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies that investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our common stock also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

We do not expect to declare or pay dividends on our common stock in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business. Therefore, holders of our common stock may not receive any return on their investment in our common stock unless and until the value of such common stock increases and they are able to sell such shares of common stock, and there is no assurance that any of the foregoing will occur.

We are a newly public company and are now required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act (“SOX”), which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. To comply with the requirements of being a public company, we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff.

We have identified the following material weakness in the design of our internal controls:

We are in the process of remediating such material weaknesses and there can be no assurance as to when or if we will fully remediate such material weaknesses.

Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future and comply with the certification and reporting obligations under Sections 302 and 404 of SOX. Any failure to maintain effective controls or any difficulties encountered in our implementation or improvement of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Ineffective internal controls could also cause investors to lose confidence in our reported financial information.

In the future, we may issue additional shares of capital stock in our company, resulting in the dilution of current stockholders’ relative ownership. Our board and stockholders have approved an employee incentive plan and a non-employee director incentive plan. We have reserved 18,000,897 shares of our common stock for future issuance under our plans. Such conversions and issuances would also result in dilution of current stockholders’ relative ownership.

On January 6, 2022, we and Antpool entered into a Limited Liability Company Agreement of 1.21 Gigawatts, LLC pursuant to which we and Antpool will own 80% and 20%, respectively, of 1.21 Gigawatts. Antpool’s interest in each such entity will be convertible by it at any time into a number of shares of our common stock equal to Antpool’s capital contribution in connection with the acquisition of such interests divided by $7.50. Antpool’s potential ownership of our common stock is dependent on its capital contributions to 1.21 Gigawatts which in turn will depend on which projects are approved by us and Antpool and the costs associated therewith. Accordingly, we cannot predict the amount of Antpool’s potential ownership of our common stock.

On January 14, 2022, we granted an aggregate of 1,791,666 restricted stock units (“RSUs”) to three consultants, consisting of 125,000 RSUs to Roland Davidson, who acts as our Executive Vice President of Engineering, 416,666 RSUs to Nick Phillips, our Executive Vice President of Hosting and Public Affairs, and 1,250,000 RSUs to Etienne Snyman, who acts as our Executive Vice President of Power. Subsequently, Mr. Phillips’ 416,666 RSUs were terminated and Mr. Phillips was hired as an employee receiving awards under our employee incentive plan.

On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement, with Craig-Hallum Capital Group LLC ("Craig-Hallum Capital"), pursuant to which the Company may sell up to $125 million in shares of our common stock, par value $.001 per share (the "Common Stock"). The Company has sold approximately 7.9 million shares.

We may also issue other securities that are convertible into or exercisable for equity in our company in connection with hiring or retaining employees or consultants, future acquisitions or future sales of our securities.

Provisions contained in our Articles and Bylaws could make it more difficult for a third party to acquire us if we have become a publicly traded company. Provisions of our Articles and Bylaws impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. For example, our Articles authorize our Board to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock without any vote or action by our stockholders. Thus, our Board can authorize and issue shares of

preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our other series of capital stock. These rights may have the effect of delaying or deterring a change of control of our company. Additionally, our Bylaws establish limitations on the removal of directors and on the ability of our stockholders to call special meetings.

For a more complete understanding of these provisions, please refer to the Nevada Revised Statutes and our Articles and Bylaws filed with the SEC. Though we are not currently, in the future we may become subject to Nevada’s control share law. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation. The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority or more. The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others.

The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law. If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor of approval of voting rights is entitled to demand fair value for the redemption of such stockholder’s shares. Nevada’s control share law may have the effect of discouraging takeovers of the corporation.

In addition to the control share law, Nevada has a business combination law which prohibits certain business combinations between Nevada corporations and “interested stockholders” for two years after the “interested stockholder” first becomes an “interested stockholder,” unless our Board approves the combination in advance or thereafter by both the Board and 60% of the disinterested stockholders. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders. The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of us from doing so if it cannot obtain the approval of our Board.

We expect the trading market for our common stock to be influenced by the research and reports that industry or securities analysts publish about us, our business or our industry. As a new public company, we have only minimal research coverage by securities and industry analysts. If we do not expand securities or industry analyst coverage, or if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline and our common stock to be less liquid. Moreover, if one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, or if our results of operations do not meet their expectations, our stock price could decline.

We may not be able to maintain the listing of our common stock on Nasdaq, which may adversely affect the ability of holders of common stock to resell their securities in the secondary market.

Our common stock is presently listed on Nasdaq, which requires us to meet certain conditions to maintain our listing status. If the Company is unable to meet the continued listing criteria of Nasdaq and the common stock became delisted, trading of the common stock could thereafter be conducted in the over-the-counter markets in the OTC Pink Market, also known as “pink sheets” or, if available, on another OTC trading platform. We cannot assure you that we will meet the criteria for continued listing, in which case the common stock could become delisted. Any such delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the loss of confidence in our financial stability by suppliers, customers and employees. Investors would likely find it more difficult to dispose of, or to obtain accurate market quotations for, the common stock, as the liquidity that Nasdaq provides would no longer be available to investors. In addition, the failure of our common stock to continue to be listed on the Nasdaq could adversely impact the market price for the common stock and our other securities, and we could face a lengthy process to re-list the common stock, if we are able to re-list such stock.

We are a public reporting company. There are ongoing costs in maintaining compliance with being a public reporting company and our management will spend a significant amount of time ensuring such compliance. If we are unable to maintain compliance with our public reporting company obligations, our securities may be delisted and we may be unable to re-list our common stock on another national stock exchange or quotation system.

We have not yet determined if or when we may elect to be taxed as a REIT.

Our board of directors has not yet determined whether we will elect to be taxed as a REIT and/or when any such election would be effective. In addition, even if we do make an election to be taxed as a REIT, our board of directors may revoke or otherwise terminate the REIT election of the Company, without the approval of holders of the common stock, if the board determines that it is no longer in the best interest of the stockholders to continue to qualify as a REIT. We can make no assurance that we will ever elect to be taxed as a REIT or, if we do make such an election, that such REIT election will be in place during a stockholder’s entire holding period of our stock. Our board of directors’ broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks our stockholders face.

Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets, and other tests imposed by the Code. If we fail to quality as a REIT after electing to be taxed as a REIT, we would generally be disqualified from qualifying as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. To qualify for REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income, determined without regard for any deduction for distributions paid and excluding any net capital gain to our stockholders. If we do not qualify as a REIT (either because we choose not to elect to be taxed as a REIT or because we failed to so qualify after having made a REIT election), this would reduce our net earnings available for distribution and would adversely affect the timing, amount, and character of distributions to our common stockholders. If we do not elect to be taxed as a REIT or fail to maintain REIT status, we will continue to be subject to federal income tax at regular corporate rates.

If we elect to be taxed as a REIT, then in order to qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, ownership requirements, the sources of our income, nature of our assets, and

the amounts we distribute to our stockholders. For example, in order for us to qualify as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year after the first year for which we elect to qualify as a REIT. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed as a REIT). Additionally, as typical for REITs, our board of directors would likely pursue an amendment of our Articles to restrict any person from owning more than 9.8% by value of our outstanding capital stock. These ownership limits could delay or prevent a transaction or a change in control of our company that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.

If we elect to be taxed as a REIT and we do not have other funds available to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement, we could be subject to corporate income tax and the 4% excise tax in a particular year. To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income tax purposes, at the end of any REIT taxable year. Such non-REIT earnings and profits generally will include any accumulated earnings and profits of any corporations acquired by us (or whose assets we acquire), which, for this purpose, would include any earnings and profits we have in a taxable year in which we were taxed as a C corporation prior to the taxable year in which our REIT election is effective.

None.

We lease approximately 10,700 square feet of office space at 3811 Turtle Creek Blvd., Suite 2100, Dallas, Texas 75219. We use this location as our principal offices. In addition, we lease approximately 11,000 square feet of office and warehouse space in Irving, Texas that serve as our hosting operations control center.

Our wholly-owned subsidiary, APLD Hosting LLC, owns in fee simple a 40-acre parcel of land located in Jamestown, Stutsman County, North Dakota. Our subsidiary APLD – Rattlesnake Den I LLC, which is part of the 1.21 Gigawatts, LLC joint venture, in which the Company owns an 80% equity interest, is party to a 99-year land lease for a 50-acre parcel of land located in Garden City, Texas. APLD ELN-01, LLC, a wholly owned subsidiary of the Company, owns 40 acres of land in Ellendale, North Dakota. The Company has built datacenters on each of the properties in Jamestown, North Dakota; Garden City, Texas; and Ellendale, North Dakota.

As of the date of this filing, we are not involved in any material pending legal proceedings.

Not applicable.

Primary Market

The Company's Common Stock is traded on the Nasdaq Global Select Market under the symbol "APLD".

Holders

As of July 25, 2023, we had 102 shareholders of record.

Dividends

We have not paid cash dividends to our common stock holders in the past. We anticipate that all of our earnings in the foreseeable future will be retained to finance the continued growth and development of our business and to repay our outstanding debts and any debts we may incur in the future. We have no intention of paying cash dividends to our common stock holders in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our Board may deem relevant.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We and our affiliates have not undertaken any share repurchases during the year ended May 31, 2023.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

We are a designer, builder and operator of next-generation digital infrastructure. We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.

Our AI cloud services business operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.

On May 15, 2023, we announced the formal launch of our AI Cloud services business through Sai Computing. On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period. The customer will make a significant prepayment as part of the agreement.

On June 23, 2023, we announced that Sai Computing had secured its second AI customer with an agreement worth up to $460 million over 36 months. We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services. Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.

Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.

We are in the process of constructing a 9 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota. This separate and unique building, designed and purpose-built for Graphics Processing Units (“GPUs”), will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments. This facility is expected to be brought online in the second half of calendar year 2023. During early calendar year 2023, we began testing HPC hosting at this facility. The systems in this facility passed initial testing in the second calendar quarter of 2023.

In June, the Company expanded its commitment for up to 26,000 GPUs for the Company's AI Cloud services business. The Company has received and deployed an initial production cluster of 1,024 GPUs.

We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.

Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers.

We purchased property in Jamestown, North Dakota on which we constructed our first co-hosting facility. Construction of our first co-hosting facility began in September 2021. On February 2, 2022, we brought our first facility online and it has been fully operational since that date. As of May 31, 2023, the facility had approximately 105 MW of capacity, which is fully contracted with our customers.

On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility in Garden City, Texas. On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, Texas, with the intent to build our second datacenter facility on this site. On April 25, 2022, we began construction on this site. This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers. The facility is expected to begin operating in the second half of calendar 2023 and the 200 MW capacity is fully contracted with our customers.

On August 8, 2022, we completed the purchase of 40 acres of land in Ellendale, North Dakota, for a total cost of $1 million. We took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023. The facility is fully energized and the facility will have approximately 180 MW of capacity, which is fully contracted with our customers

On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement, with Craig-Hallum Capital Group LLC ("Craig-Hallum Capital"), pursuant to which the Company may sell up to $125 million in shares of our common stock, par value $.001 per share (the "Common Stock"). The Company has sold approximately 7.9 million shares. Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.

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 Term Loan is secured by the Jamestown hosting facility, a security interest in the substantially all of the assets of the APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility.

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.

On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement (the “Vantage Garden City Loan Agreement”) with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan ("The Vantage Garden City Loan") in the principal amount of $15 million . The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for Rattlesnake Den I, LLC'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 Loan is secured by the leasehold interest on the Garden City Facility, a security interest in substantially all of the assets of the Rattlesnake Den I, LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in the master hosting agreements related to the Garden City Facility and records and data relating thereto.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 May 31, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement, with the outstanding principal balance totaling $10.1 million. Total deferred costs related to the issuance of this loan total are $0.2 million.

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 (The "Ellendale Loan") in the principal amount of $20 million with a maturity date of February 3, 2028. The Ellendale Loan Agreement contains customary covenants, representations and warranties and events of default. The Ellendale Loan is secured by the Ellendale hosting facility, a security interest in the substantially all of the assets of the APLD ELN-01 LLC, and interests in all master hosting agreements related to the Ellendale hosting facility. The Ellendale 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. Total deferred costs related to the issuance of this loan total are $0.2 million. As of May 31, 2023, the total balance outstanding under the Ellendale Loan Agreement was $19.7 million.

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, Inc (collectively "B. Riley"). with the Company as Guarantor. The B. Riley Loan provides for a term loan of up to $50 million in the principal amount of 9.00% per annum. The proceeds of the B. Riley Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud services platform and datacenters by Sai, and for general corporate purposes and working capital. The B. Riley Loan contains events of default and covenants customary for such an agreement. The B. Riley Loan is secured by a security interest in substantially all of the assets of SAI as set forth in the B. Riley Loan and a security interest in any proceeds of Sai's operations. Pursuant to the B. Riley Loan agreement, the Company unconditionally guaranteed Sai’s obligations to B. Riley. The B. Riley Loan contains initial fees of approximately $1.5 million that were reduced from the initial funds remitted to Sai. The B. Riley Loan also contains a term fee of $1 million that is due upon the Company's initial principal payment. Finally, the B. Riley Loan and Security agreement contains a commitment fee of 3% on any balance outstanding as of each quarter end beginning with the calendar quarter ending September 30, 2023. As of May 31, 2023, the total outstanding balance under the B. Riley Loan was $36.5 million. The Company repaid the total balance of the B. Riley Loan on July 17, 2023.

Results of Operations for the fiscal year ended May 31, 2023 compared to fiscal year ended May 31, 2022

The following table sets forth key components of the results of operations of Applied Digital Corporation during the three months and fiscal year ended May 31, 2023 and 2022 (in thousands).

Hosting revenues increased by $14.5 million, or 193%, from $7.5 million for the three months ended May 31, 2022 to $22.0 million for the three months ended May 31, 2023. The increase in hosting revenues was driven by the increase in energized capacity with the Company's Ellendale, North Dakota facility energizing during the three months ended May 31, 2023.

Cost of revenues increased by $8.6 million, or 116%, from $7.4 million for the three months ended May 31, 2022 to $16.0 million for the three months ended May 31, 2023. The increase in cost of revenues was primarily driven by the energization of the Company's Ellendale, North Dakota facility during the three months ended May 31, 2023. The primary drivers of the change to cost of revenues for the three months ended May 31, 2023 were:

Selling, general and administrative expenses increased by $7.9 million, or 181%, from $4.4 million for the three months ended May 31, 2022 to $12.3 million for the three months ended May 31, 2023. The primary drivers of the change to selling, general and administrative expense for the three months ended May 31, 2023 were:

These factors are partially offset by an approximately $0.8 million decrease in professional service expense, which is attributable to the increase in full time employees that have replaced previously outsourced professional services.

Interest expense increased $0.8 million, or approximately 681% , from interest expense of $0.1 million for the three months ended May 31, 2022 to $0.9 million for the three months ended May 31, 2023. The increase was driven by the increase in finance leases and in the Company’s debt obligations between periods.

The income tax benefit increased by $0.5 million or 191% from a $0.3 million expense for the three months ended May 31, 2022 to a $0.2 million benefit for the three months ended May 31, 2023. This change was driven by a change in valuation allowance for the three months ended May 31, 2023 compared to the three months ended May 31, 2022.

Gain from discontinued operations decreased by $1.8 million, or 100%, from $1.8 million for the three months ended May 31, 2022 to zero for the three months ended May 31, 2023. The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.

Hosting revenues increased by $46.9 million, or 548%, from $8.5 million for the year ended May 31, 2022 to $55.4 million for the year ended May 31, 2023. The increase in hosting revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.

Cost of revenues increased by $34.9 million, or 367%, from $9.5 million for the fiscal year ended May 31, 2022 to $44.4 million for the fiscal year ended May 31, 2023. The increase in cost of revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022. The primary drivers of the change to cost of revenues for the fiscal year ended May 31, 2023 were:

Selling, general and administrative expenses increased by $35.2 million, or 176%, from $19.9 million for the fiscal year ended May 31, 2022 to $55.1 million for the fiscal year ended May 31, 2023. The primary drivers of the change to selling, general and administrative expense for the fiscal year ended May 31, 2023 were:

Interest expense increased $1.9 million, or 1,666% , from $0.1 million for the fiscal year ended May 31, 2022 to $2.0 million for the fiscal year ended May 31, 2023. The change is driven by the increase in finance leases and change in the Company’s debt obligations between periods.

Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million for the fiscal year ended May 31, 2022 to $0.1 million for the fiscal year ended May 31, 2023. This decrease was driven by the lack of extinguishment of our related party notes payable by conversion to common stock, which occurred during the fiscal year ended May 31, 2022, compared to a smaller extinguishment of term debt that was recognized in the fiscal year ended May 31, 2023.

Income tax benefit increased $1.0 million or approximately 193% from a $0.5 million expense for the year ended May 31, 2022 to approximately $0.5 million benefit for the fiscal year ended May 31, 2023. This change was driven by a change in valuation allowance for the fiscal year ended May 31, 2023 compared to the fiscal year ended May 31, 2022.

Loss from discontinued operations decreased $1.0 million, or 100%, from $1.0 million for the fiscal year ended May 31, 2022 to zero for the year ended May 31, 2023. The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.

“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represent operating loss and net loss, respectively, from continuing operations excluding stock-based compensation and nonrecurring expenses. We believe these are useful metrics as they provide additional information regarding factors and trends affecting our business and provide perspective on results absent one-time or significant non-cash items. However, Applied Digital’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Applied Digital’s computation of Adjusted Operating Loss and Adjusted Net Loss may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Operating Loss and Adjusted Net Loss in the same fashion.

Because of these limitations, Adjusted Operating Loss and Adjusted Net Loss should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Digital compensates for these limitations by relying primarily on its GAAP results and using Adjusted Operating Loss and Adjusted Net Loss on a supplemental basis. You should review the reconciliation of operating loss to Adjusted Operating Loss and net loss to Adjusted Net Loss above and not rely on any single financial measure to evaluate Applied Digital’s business.

“EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization. “Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs, one-time costs related to electricity set up, and other non-recurring expenses. These costs have been adjusted as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of Applied Digital’s performance that is neither required by, nor presented in accordance with, GAAP. Applied Digital believes that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. We also believe EBITDA and Adjusted EBITDA are useful metrics to investors because they provide additional information regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of their importance as measures of underlying operating performance, as the primary compensation performance measure under certain programs and plans. However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Digital may incur future expenses similar to those excluded when calculating these measures. In addition, Applied Digital’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Applied Digital’s computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Digital compensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA above and not rely on any single financial measure to evaluate Applied Digital’s business.

“Adjusted Gross Profit” is a non-GAAP measure that represents gross profit adjusted for depreciation expense and one-time charges related to electricity set up within cost of revenues. We believe this is a useful metric as it provides additional information regarding gross profit aside from significant non-cash expense in depreciation. However, Applied Digital’s presentation of this measure should not be construed as an inference that its future results will be unaffected by other factors within cost of revenues. Applied Digital’s computation of Adjusted Gross Profit may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Gross Profit in the same fashion.

Because of these limitations, Adjusted Gross Profit should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Digital compensates for these limitations by relying primarily on its GAAP results and using Adjusted Gross Profit on a supplemental basis. You should review the reconciliation of gross profit to Adjusted Gross Profit above and not rely on any single financial measure to evaluate Applied Digital’s business.

We have primarily generated cash in the last 12 months from the proceeds of our term loans, issuance of common stock, and the receipt of contractual deposits and revenue prepayments from hosting customers. The Company's primary term loans are noted below.

On July 25, 2022, the Company entered into the Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Term Loan which has a total principal balance of $15.0 million, with an interest rate per annum of 6.50%. Approximately $7.1 million of the proceeds were used to pay down the remaining Vantage term loan balance that was entered into on March 11, 2022. The remaining proceeds of the term loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.

On November 7, 2022, the Company entered into the Vantage Garden City Loan Agreement, with a maximum total principal value of $15 million, and an interest rate per annum of 6.15%. As of February 28, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement. The proceeds of the Vantage Garden City Loan will be used for the costs and expenses of a building at the Garden City Facility.

On February 16, 2023, the Company entered into the Starion Ellendale Loan Agreement with Starion Bank. This agreement provides for a term loan in the principal amount of $20 million with a maturity date of February 3, 2028. The loan provides for an interest rate of 7.48% per annum. The proceeds of the loan will be used to fund expansion on the Ellendale Facility. On March 30, 2023, the Company received funding for the Starion Ellendale Loan. The funding, net of issuance fees, totaled $19.8 million.

On May 23, 2023, the Company entered into the B. Riley Loan and Security Agreement with B. Riley Commercial Capital, LLC and B. Riley Securities. The B. Riley Loan and Security Agreement provides for a term loan in the principal amount of up to $50 million, with an interest rate of 9.00% per annum. The proceeds of the Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud platform and datacenters by the Company, and for general corporate purposes and working capital. The Company was initially advanced $34.9 million in funding, net of issuance fees of $1.6 million. The Company repaid the total balance of the B. Riley Loan on July 17, 2023.

On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sales agreement, with Craig-Hallum Capital, pursuant to which the Company may sell up to $125 million in shares of Common Stock. The Company has sold approximately 7.9 million shares. Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.

During the fiscal year ended May 31, 2023, we received $100.1 million in payments for future hosting services. During the fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations. During the fiscal year ended May 31, 2023, we have generated revenue from co-hosting, but incurred net losses from operations. As of May 31, 2023 and May 31, 2022, we had cash and cash equivalents of $29.0 million and $38.8 million, respectively, and an accumulated deficit of $100.7 million and $56.1 million, respectively.

We have experienced net losses through the periods ended May 31, 2023. Our transition to profitability is dependent on the successful operation of our hosting facilities. We believe that amounts we received from proceeds from our term loans, proceeds from stock offerings, and payments we have received from our hosting operations will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently

projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company. We believe that the significant investments in property and equipment continue during calendar 2023 as we continue to grow our AI cloud services business. We also expect that our revenues will increase as we continue to bring online additional capacity at existing datacenter facilities and as we begin to provide services to AI cloud services and HPC customers.

The following table provides information about Applied Digital’s net cash flow for the fiscal years ended May 31, 2023 and May 31, 2022.

The net cash provided by operating activities of $58.7 million for the fiscal year ended May 31, 2023 consisted primarily of the following:

The above factors were partially offset by the $45.6 million loss from continuing operations

The net cash used in investing activities of $132.1 million for the fiscal year ended May 31, 2023 was driven by the increase of purchases of property and equipment and other assets related to the construction of the Company’s Garden City, Texas and Ellendale, North Dakota hosting facilities, as well as deposit payments on equipment.

The net cash provided by financing activities of $70.6 million for the fiscal year ended May 31, 2023 was primarily driven by the following factors:

These above factors were partially offset by the extinguishment of the Vantage term loan totaling $7.1 million.

The net cash used in operating activities of $0.9 million for the fiscal year ended May 31, 2022 consisted primarily of the following:

These above factors were partially offset by the following

The net cash used in investing activities of $45.9 million for the fiscal year ended May 31, 2022 consisted of:

The net cash provided by financing activities of $81.3 million for the fiscal year ended May 31, 2022 consisted primarily of:

None.

None.

For a discussion of recently issued financial accounting standards, refer to Note 3 - Basis of Presentation and Significant Accounting Policies, in Part II, Item 8 of this Annual Report on Form 10-K.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

We account for stock-based compensation with performance conditions by recognizing expense ratably over the requisite service period once the Company concludes that it is probable that the performance conditions will be achieved. The Company's conclusion as to the probability of achievement is complex and requires judgment. In addition, the Company makes estimates around the service period for certain performance awards that are probable of being achieved. The Company may revise its estimate when it determines that it is probable that the performance condition will be achieved within a different time period.

The Company reassesses the probability related to vesting and the requisite service period at each reporting period, and recognizes a cumulative catch up adjustment for such changes in its probability assessment in subsequent reporting periods. The Company's determination of probability is based on historical metrics, future projections, and the Company's historical performance against such projections.

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our financial instruments are denominated in United States Dollars and are not subject to interest rate or foreign currency exchange risks. Our term note facility and the note payable issued thereunder bears interest at a fixed interest rate. We have determined our energy services agreement for our Ellendale, North Dakota facility represents a derivative instrument with a notional amount of 180 MW, however, we have determined that

this instrument does not have any value as the agreement provides purchases and sales at market value. We do not hold any other financial instruments.

Our market risk exposure is primarily a result of exposure due to potential changes in inflation.

Inflationary factors such as increases in costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our operating expenses.

We manage a portion of our inflation risk through our participation in a long-term Electricity Supply Agreement, through which we have negotiated a fixed rate for the electricity to be used by our Jamestown, ND hosting facility.

Item 8. Financial Statements and Supplementary Data

To the Shareholders and Board of Directors of Applied Digital Corporation

We have audited the accompanying consolidated balance sheets of Applied Digital Corporation (the “Company”) as of May 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended May 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ Marcum LLP

Marcum LLP

We have served as the Company’s auditor since 2020.

New York, NY

August 2, 2023

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

For the Years Ended May 31, 2023 and 2022

Applied Digital Corporation, f/k/a Applied Blockchain, Inc. (the “Company”) is a designer, builder and operator of next-generation digital infrastructure. The Company has three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting. For the fiscal year ended May 31, 2023, the Company has only had operational activity in the crypto datacenter hosting business.

The Company was originally incorporated in Nevada in May 2001. On November 14, 2022, the Company changed its corporate name from Applied Blockchain, Inc. to Applied Digital Corporation.

As of May 31, 2023, the Company had approximate cash and cash equivalents of $29.0 million and negative working capital of $69.7 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 were issued.

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The accompanying consolidated financial statements of the Company include the accounts of the Company and its wholly owned and controlled subsidiaries. Consolidated subsidiaries results are included from the date the subsidiary was formed or acquired. Noncontrolling interests in consolidated subsidiaries in the consolidated financial statements represent non-controlling stockholders' proportionate share of the operations in such subsidiaries. Intercompany investments, balances and transactions have been eliminated in the consolidated financial statements. The Company’s consolidated operating subsidiaries include the Company's wholly-owned subsidiaries, the Company's interest in Highland Digital Holdings LLC, and the Company's majority interests in Sai Foundry Computing LLC, as well as 1.21 Gigawatts LLC.

The preparation of 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 are:

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. Our cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although we believe they are subject to minimal risk.