apld-20230831

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2023


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ and __________

Commission file number 001-31968

________________________

APPLIED DIGITAL CORPORATION

(Exact name of registrant as specified in its charter)

________________________


Nevada			95-4863690
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3811 Turtle Creek, Blvd., Suite 2100, Dallas, TX			75219
(Address of Principal Executive Offices)			(Zip Code)

(214) 556-2465

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	APLD	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 9, 2023, 106,300,245 shares of Common Stock, $0.001 par value, were outstanding.

Table of Contents


		Page
Part I - Financial Information

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of August 31, 2023 and May 31, 2023 (unaudited)	1
	Condensed Consolidated Statements of Operations for the three months ended August 31, 2023 and August 31, 2022 (unaudited)	2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended August 31, 2023 and August 31, 2022 (unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2023 and August 31, 2022 (unaudited)	4
	Notes to the Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

Part II - Other Information

Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
Signatures		25

Part I - Financial Information

Item 1. Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share and par value data)


	August 31, 2023		May 31, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	5,942	$	28,999
Restricted cash	25,271		14,575
Accounts receivable	27		82
Prepaid expenses and other current assets	2,308		2,103

Total current assets	33,548		45,759
Property and equipment, net	222,666		195,593
Operating lease right of use assets, net	11,183		1,290
Finance lease right of use assets, net	55,691		14,303


Other assets	26,065		7,012
TOTAL ASSETS	$	349,153	$	263,957

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	16,229	$	6,446
Accrued liabilities	12,743		8,330
Current portion of operating lease liability	1,807		320
Current portion of finance lease liability	23,471		5,722
Current portion of debt	9,163		7,950
Customer deposits	32,559		32,559
Related party customer deposits	3,811		3,811
Deferred revenue	50,863		47,168
Related party deferred revenue	971		1,524
Sales and use tax payable	62		1,630
Total current liabilities	151,679		115,460

Long-term portion of operating lease liability	9,573		1,005
Long-term portion of finance lease liability	25,071		8,334
Long-term debt	34,882		33,222
Long-term related party loan	—		35,257
Other long-term related party liabilities	—		1,000
Total liabilities	221,205		194,278
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 166,666,667 shares authorized, 110,850,885 shares issued and 105,849,157 shares outstanding at August 31, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023	110		101
Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost	(62)		(62)
Additional paid in capital	240,073		160,194
Accumulated deficit	(112,173)		(100,716)
Total stockholders’ equity attributable to Applied Digital Corporation	127,948		59,517
Noncontrolling interest	—		10,162
Total stockholders' equity including noncontrolling interest	127,948		69,679
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	349,153	$	263,957

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


	Three Months Ended
	August 31, 2023		August 31, 2022
Revenue:
Hosting revenue	$	29,987	$	4,338
Cloud services revenue	2,152		—
Related party hosting revenue	4,184		2,586
Total revenue	36,323		6,924
Costs and expenses:
Cost of revenues	24,398		6,093
Selling, general and administrative	17,052		5,008


Total costs and expenses	41,450		11,101
Operating loss	(5,127)		(4,177)
Interest Expense	2,074		356
Loss on extinguishment of debt	2,353		94
Loss from legal settlement	2,300		—
Net loss before income tax expenses	(11,854)		(4,627)
Income tax expense	—		32
Net loss	(11,854)		(4,659)
Net loss attributable to noncontrolling interest	(397)		(128)
Net loss attributable to Applied Digital Corporation	$	(11,457)	$	(4,531)

Basic and diluted net (loss) gain per share:
Basic and diluted net loss per share	$	(0.12)	$	(0.05)
Basic and diluted weighted average number of shares outstanding	100,521,673		93,105,835

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

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

(In thousands, except share data)

(Unaudited)


	Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated Deficit		Stockholders’ Equity		Noncontrolling interest		Total Equity
	Shares	Amount		Shares	Amount
Balance, May 31, 2023	100,927,358	$	101	(5,001,728)	$	(62)	$	160,194	$	(100,716)	$	59,517	$	10,162	$	69,679
Shares issued in offering, net of costs	7,908,528	8		—	—		64,474		—		64,482		—		64,482
Shares issued from award vestings	530,732	—		—	—		—		—		—		—		—
Stock-based compensation	—	—		—	—		5,641		—		5,641		—		5,641
Net loss	—	—		—	—		—		(11,457)		(11,457)		(397)		(11,854)
Extinguishment of noncontrolling interest	1,484,267	1		—	—		9,764		—		9,765		(9,765)		—
Balance, August 31, 2023	110,850,885	$	110	(5,001,728)	$	(62)	$	240,073	$	(112,173)	$	127,948	$	—	$	127,948


	Common Stock			Treasury Stock			Additional Paid in Capital		Accumulated Deficit		Stockholders’ Equity		Noncontrolling interest		Total Equity
	Shares	Amount		Shares	Amount
Balance, May 31, 2022	97,837,703	$	98	(36,296)	$	(62)	$	128,293	$	(56,070)	$	72,259	$	6,976	$	79,235
Stock-based compensation	—	—		—	—		579		—		579		—		579
Capital contribution to noncontrolling interest	—	—		—	—		—		—		—		1,746		1,746
Common stock forfeited	—	—		(4,965,432)	—		—		—		—		—		—
Net loss	—	—		—	—		—		(4,531)		(4,531)		(128)		(4,659)
Balance, August 31, 2022	97,837,703	$	98	(5,001,728)	$	(62)	$	128,872	$	(60,601)	$	68,307	$	8,594	$	76,901

See accompanying notes to the condensed consolidated financial statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

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


	Three Months Ended
	August 31, 2023		August 31, 2022
CASH FLOW FROM OPERATING ACTIVITIES
Net loss	$	(11,854)	$	(4,659)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	7,860		1,136
Stock-based compensation	5,641		579
Deferred income taxes	—		32
Loss on extinguishment of debt	2,353		94
Loss from legal settlement	2,300		—
Amortization of debt issuance costs	235		—
Loss on abandonment of assets	173		—
Changes in operating assets and liabilities:
Accounts receivable	55		177
Prepaid expenses and other current assets	(205)		(164)
Customer deposits	—		4,042
Related party customer deposits	—		545
Current deferred revenue	3,695		15,316
Current related party deferred revenue	(553)		—
Accounts payable	205		196
Accrued liabilities	2,113		—
Lease assets and liabilities	39		—
Sales and use tax payable	(1,568)		—
Other assets	(5,972)		—
CASH FLOW PROVIDED BY OPERATING ACTIVITIES	4,517		17,294
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment and other assets	(32,591)		(31,673)


Finance lease prepayments	(7,560)		—
Purchases of investments	(390)		—
CASH USED IN INVESTING ACTIVITIES	(40,541)		(31,673)
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of finance leases	(4,849)		(209)
Borrowings of long-term debt	3,750		15,000
Borrowings of related party debt	3,000		—
Repayments of long-term debt	(3,463)		(7,488)
Repayment of related party debt	(39,257)		—
Payment of deferred financing costs	—		(140)

Noncontrolling interest contributions	—		1,747
Proceeds from issuance of common stock	64,482		—
CASH FLOW PROVIDED BY FINANCING ACTIVITIES	23,663		8,910

NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(12,361)		(5,469)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD	43,574		46,299
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	31,213	$	40,830

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	1,839	$	356

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Operating right-of-use assets obtained by lease obligation	$	10,272	$	—
Finance right-of-use assets obtained by lease obligation	$	46,952	$	922
Property and equipment in accounts payable	$	6,729	$	8,352
Conversion of non-controlling interest	$	9,765	$	—
Loss from legal settlement	$	2,300	$	—

See accompanying notes to the condensed consolidated financial statements

Table of Contents

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (unaudited)

For the Three Months Ended August 31, 2023

1. Business and Organization

Applied Digital Corporation (the “Company”), is a designer, builder, and operator of next generation digital infrastructure providing cost-competitive solutions to customers in High-Performance Compute (“HPC”), artificial intelligence cloud service (“Cloud services”), and datacenter hosting (“Hosting”) industries. The Company has three reportable segments. Financial information for each segment is contained in Note 10 - Business Segments.

2. Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of May 31, 2023 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements.

In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. For further information, please refer to and read these interim unaudited condensed consolidated financial statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2023 filed with the SEC on August 2, 2023.

Significant Accounting Policies and Use of Estimates

There were no material changes in the Company’s significant accounting policies for the three months ended August 31, 2023 as compared to the year ended May 31, 2023. See Note 3 - Property and Equipment to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2023, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates of the valuation allowance associated with the Company’s deferred tax assets.

Revenue Recognition

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

Hosting Revenue

The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment. Hosting revenues are recorded monthly in fixed amounts, net of credits for non-performance, based on the terms of the agreements. Any ancillary revenue for maintenance or installation services is at a point in time when the customer has received the full service. As these services support the hosting operation as a whole, this revenue is captured within the hosting revenue caption. Customer contracts include advance payment terms. Advanced payments are recorded as deferred revenue until the related service is provided.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Cloud Services Revenue

The Company also provides cloud services applicable to artificial intelligence. Customers pay a rate to the Company in exchange for managed services supported by Company-provided equipment. Revenues are recorded based on the fixed rate, net of any credits for non-performance, based on the terms of the agreements.

Segments

The Company has identified three reportable segments: artificial intelligence cloud services (“Cloud services”), high performance computing (“HPC”) datacenter hosting, and datacenter hosting (“Hosting”). Our chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on these three reportable segments. Intercompany transactions between segments are excluded for management reporting purposes.

The Cloud services segment operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment.

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

The Hosting segment provides infrastructure, including energized space, and colocation services to crypto mining customers. Customers place hardware they own into the Company’s facilities and the Company provides operational and maintenance services for a fixed fee.

Recent Accounting Pronouncements

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

Reclassifications

We have reclassified certain prior period revenue amounts from hosting revenue to cloud services revenue and related party revenue on our condensed consolidated statements of operations. We have also reclassified amounts from accounts payable and accrued expenses and prepaid expenses and other current assets to accounts payable, accrued expenses, prepaid expenses, and other current assets as well as from customer deposits and deferred revenue to the associated related party caption lines in our condensed consolidated balance sheets to conform to our current period presentation. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.

Cash, Cash Equivalents, and Restricted Cash

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


	August 31, 2023		May 31, 2023
Net Cash & Equivalents	$	5,942	$	28,999
Restricted Cash	25,271		14,575
Total Cash & Cash Equivalents	$	31,213	$	43,574

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

3. Property and Equipment

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


	Estimated Useful Life	August 31, 2023		May 31, 2023
Hosting equipment
Electric generation and transformers	15 years	$	7,763	$	4,655

Other equipment and fixtures	5 years - 7 years	3,101		1,684
Construction in progress		97,280		106,226
Information systems and software	5 years	27,570		21,173
Land and building
Land		2,152		2,152
Land improvements	15 years	1,296		1,293
Building	39 years	88,346		63,350
Leasehold improvements	3 years - 6 years	2,299		—
Total cost of property and equipment		229,807		200,533
Accumulated depreciation		(7,141)		(4,940)
Property and equipment, net		$	222,666	$	195,593

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

4. Revenue from Contracts with Customers

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


	Three Months Ended August 31,
	2023		2022
Customer A	68	%	—	%
Customer B	10	%	12	%
Customer C	—	%	36	%
Customer D	—	%	21	%
Customer E	—	%	17	%
Customer F	—	%	14	%

Deferred Revenue

As of August 31, 2023, the Company had $51.8 million in deferred revenue, which represents the Company’s remaining performance obligations, and expects to recognize the entire balance within the next 12 months. Changes in the Company's deferred revenue balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following tables (in thousands):


	Three Months Ended
	August 31, 2023		August 31, 2022
Balance, beginning of period	$	48,692	$	3,877
Advance billings	39,465		22,240
Revenue recognized	(36,323)		(6,924)

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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Customer Deposits

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


	Three Months Ended
	August 31, 2023		August 31, 2022
Balance, beginning of period	$	36,370	$	9,524
Customer deposits received	—		4,587


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

5. Related Party Transactions

Related Party Revenue

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


	Three Months Ended August 31,
	2023		2022
Customer D*	$	2,332	$	1,450
Customer E**	$	1,852	$	1,136

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

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

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


	Customer D balances as of				Customer E balances as of
	August 31, 2023		May 31, 2023		August 31, 2023		May 31, 2023
Deferred revenue	$	923	$	1,474	$	48	$	50
Customer Deposits	$	2,450	$	2,450	$	1,361	$	1,361

Related Party Sublease Income

For three months ended August 31, 2023 and August 31, 2022, the Company received sublease income of $23 thousand and $27 thousand, respectively, from B. Riley Asset Management, which is also a wholly-owned subsidiary of B. Riley Financial, Inc. Mr. Cummins, the CEO of the Company, is also the President of B. Riley Asset Management.

6. Debt

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


	August 31, 2023		May 31, 2023
6.50% Starion term loan	$	12,109	$	12,786
6.15% Vantage Garden City loan	13,154		10,074
7.48% Starion Ellendale loan	18,859		19,728
Other long-term debt	386		354
Debt issuance costs, net of amortization	(463)		(3,012)
Less: Current portion of term loan	(9,163)		(7,950)
Long-term debt, net	$	34,882	$	31,980

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Letters of Credit

As of August 31, 2023, the Company had letters of credit totaling $25.3 million. As of May 31, 2023, the Company had letters of credit totaling $14.5 million. The Company has restricted cash related to its letters of credit and is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which all have terms ending within the 12 months following August 31, 2023.

B. Riley Loan

On May 23, 2023, Sai Computing LLC, a wholly-owned subsidiary of the Company (“SAI”), entered into a Loan and Security Agreement (the "B. Riley Loan") with B. Riley Commercial Capital, LLC and B. Riley Securities, with the Company as Guarantor. The B. Riley Loan provides for a term loan of up to $50 million in the principal with an interest rate of 9.00% per annum and a 3% commitment fee on outstanding balances as of each quarter. The proceeds of the B. Riley Loan are being used to provide additional liquidity to help fund the buildout of the Company’s recently announced cloud services platform and datacenters by the Company, and for general corporate purposes and working capital. As of August 31, 2023, the Company had repaid all balances on the loans. Total remaining unused capacity on the B. Riley Loan as of August 31, 2023 was $10.5 million.

Remaining Principal Payments

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


Remainder of FY24	$	6,930
FY25	9,831
FY26	10,508
FY27	11,221
FY28	6,018

Total	$	44,508

7. Stockholders' Equity

Equity Plans

On October 9, 2021, the Company’s Board of Directors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date. As of August 31, 2023, the Company had issued awards for approximately 13.8 million shares of common stock of the Company (the “Common Stock”) under the plans.

Restricted Stock Awards

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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

Restricted Stock Units

The Company has granted restricted stock unit awards (“RSUs”) to certain consultants and full-time employees. The following is a summary of the activity and balances for unvested restricted stock units granted for the three months ended August 31, 2023:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2023	12,465,935	$	2.53
Granted	1,311,900	7.79
Vested	(573,428)	2.69
Forfeited	(286,699)	2.21
Outstanding as of August 31, 2023	12,917,708	$	3.06

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

Public Offering

During the three months ended August 31, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement pursuant to which the Company may sell up to $125 million in shares of Common Stock. As of August 31, 2023, the Company has sold approximately 7.9 million shares. Net proceeds, less commission and legal fees of approximately $2.2 million, were approximately $64.5 million.

Extinguishment of Noncontrolling Interest

On August 31, 2023, pursuant to the joint venture agreement, the minority partner in 1.21 Gigawatts LLC exercised the option to exchange their interest in the joint venture for approximately 1.5 million shares for a value of $9.8 million of the Company’s common stock. The Company is now the sole member of 1.21 Gigawatts LLC and will report all activity as attributable to the Company in future periods.

8. Leases

The Company enters into leases for hosting equipment, office space, and land. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively.

Components of lease expense were as follows (in thousands):


	Three months ended
	August 31, 2023		August 31, 2022
Operating lease cost:
Operating lease expense	$	485	$	82
Short-term lease expense	82		63
Total operating lease cost	567		145
Finance lease expense:
Amortization of right-of-use assets(1)	5,630		298
Interest on lease liabilities	1,082		109

Total finance lease cost	6,712		407
Sublease Income	(23)		(27)
Total net lease cost	$	7,256	$	525

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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

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


	Operating Leases		Finance Leases		Total
Remainder of FY24	$	1,921	$	20,185	$	22,106
FY25	2,681		25,678		28,359
FY26	2,782		4,339		7,121
FY27	2,536		188		2,724
FY28	2,336		180		2,516
Thereafter	1,398		89,944		91,342
Total lease payments	13,654		140,514		154,168
Less: imputed interest	(2,274)		(91,972)		(94,246)
Total lease liabilities	11,380		48,542		59,922
Less: Current portion of lease liability	(1,807)		(23,471)		(25,278)
Long-term portion of lease liability	$	9,573	$	25,071	$	34,644

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


	Three Months Ended
	August 31, 2023		August 31, 2022
Weighted-average years remaining (in years):
Finance leases	8.4 years		51.0 years
Operating leases	5.0 years		4.2 years

Weighted-average discount rate:
Finance leases	8.5	%	8.0	%
Operating leases	7.7	%	12.5	%

The Company has entered into operating leases which are executed but not yet commenced with total minimum payments of approximately $143.4 million to support the Company's Cloud service business. The payments are for various leases with various lease terms ranging from 60 months to 84 months.

9. Commitments and Contingencies

Energy Commitment

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

Claims and Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business.

On August 12, 2023, a putative securities class action complaint, captioned McConnell v. Applied Digital Corporation, Wesley Cummins and David Rench, No. 3:23-cv-1805, was filed in the U.S. District Court for the Northern District of Texas, Dallas Division against Applied Digital Corporation (the “Company”) and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act. The complaint alleges that the defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleges that the Company overstated the profitability of its datacenter hosting business and its ability to successfully transition into a low-

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

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

The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable.

As of August 31, 2023 and May 31, 2023, there were no other pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

Settlement of Potential Claim

Subsequent to August 31, 2023, the Company entered into a settlement agreement in respect of employment-related claims by a former executive. The terms of the settlement include payment to the claimant of $2.3 million, which was included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.

10. Business Segments

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


	Three Months Ended
	August 31, 2023		August 31, 2022
Cloud services segment	$	2,152	$	—
Hosting segment	34,171		6,924

Total revenue	$	36,323	$	6,924

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


	Three Months Ended
	August 31, 2023		August 31, 2022
Segment Profit:
Cloud services segment	$	(7,434)	$	—
Hosting segment	8,958		(658)
HPC hosting segment	(730)		—
Total segment profit	794		(658)
Other (1)	(8,221)		(3,519)
Interest expense	2,074		356
Loss on debt extinguishment	2,353		94
Income before income taxes	$	(11,854)	$	(4,627)

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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended August 31, 2023

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


	Three Months Ended
	August 31, 2023		August 31, 2022
Depreciation and amortization:
Cloud services segment	$	4,508	$	—
Hosting segment	3,199		1,115
HPC hosting segment	126		—
Other (1)	27		21
Total depreciation and amortization	$	7,860	$	1,136
Capital expenditures:
Cloud services segment	$	45,717	$	—
Hosting segment	18,298		33,097
HPC hosting segment	11,644		—
Total capital expenditures	$	75,659	$	33,097

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

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


	August 31, 2023		May 31, 2023
Cloud services segment	$	68,075	$	3,127
Hosting segment	232,451		224,447
HPC hosting segment	23,449		10,949
Total segment assets	323,975		238,523
Other (1)	25,178		25,434
Total assets	$	349,153

SEC Form 10-Q filed by Applied Digital Corporation