apld-20221130

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 November 30, 2022


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

Applied Blockchain, Inc.

(Former name, former address and former fiscal year, if changed since last report)

________________________

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of January 10, 2023, 94,474,316 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 November 30, 2022 and May 31, 2022 (unaudited)	1
	Condensed Consolidated Statements of Operations for the three and six month periods ended November 30, 2022 and November 30, 2021 (unaudited)	2
	Condensed Consolidated Statements of Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended November 30, 2022 and November 30, 2021 (unaudited)	3
	Condensed Consolidated Statements of Consolidated Statements of Changes in Stockholders’ Equity for the six month periods ended November 30, 2022 and November 30, 2021 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the six month periods ended November 30, 2022 and November 30, 2021 (unaudited)	5
	Notes to the Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25

Part II - Other Information

Item 1.	Legal Proceedings	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
Signatures		28

Part I - Financial Information

Item 1. Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

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


	November 30, 2022		May 31, 2022
ASSETS
Current Assets:
Cash and cash equivalents	$	18,074	$	46,299
Accounts receivable	276		227
Prepaid expenses and other current assets	2,397		1,336
Total current assets	20,747		47,862
Property and equipment, net	132,893		64,260
Right of use asset, net	12,353		6,408

Utility deposits	1,450		1,450
TOTAL ASSETS	$	167,443	$	119,980

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities	$	7,472	$	13,260
Current portion of lease liability	3,664		1,004

Current portion of term loan	4,122		1,333
Customer deposits	24,689		9,524
Current deferred revenue	29,394		3,877
Sales and use tax payable	865		—
Total current liabilities	70,206		28,998
Deferred tax liability	260		540

Long-term portion of lease liability	8,631		5,310
Long-term term loan	16,376		5,897
Total liabilities	$	95,473	$	40,745
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value, 166,666,667 shares authorized, 93,982,650 shares issued and 93,946,353 shares outstanding at November 30, 2022, and 97,837,703 shares issued and 97,801,406 shares outstanding at May 31, 2022	$	94	$	98
Additional paid in capital	150,695		128,293
Treasury stock, 36,300 shares at November 30, 2022 and May 31, 2022, at cost	(62)		(62)
Accumulated deficit	(87,218)		(56,070)
Total stockholders’ equity attributable to Applied Digital Corporation	63,509		72,259
Noncontrolling interest	8,461		6,976
Total Stockholders' equity (deficit) including noncontrolling interest	$	71,970	$	79,235
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	167,443	$	119,980

and use t

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


	Three Months Ended				Six Months Ended
	November 30, 2022		November 30, 2021		November 30, 2022		November 30, 2021
Revenues:
Hosting revenue	$	12,340	$	—	$	19,264	$	—

Cost of revenues	$	11,812	$	—	$	17,905	$	—
Gross profit	528		—		1,359		—

Costs and expenses:
Selling, general and administrative	$	26,502	$	1,181	$	31,212	$	14,216

Depreciation and amortization	703		174		1,001		177
Total costs and expenses	$	27,205	$	1,355	$	32,213	$	14,393
Operating loss	$	(26,677)	$	(1,355)	$	(30,854)	$	(14,393)

Other income (expense):
Interest Expense	$	(385)	$	—	$	(741)	$	—

Loss on extinguishment of debt	—		—		(94)		(1,342)
Total other expense, net	(385)		—		(835)		(1,342)
Net loss from continuing operations before income tax expenses	(27,062)		(1,355)		(31,689)		(15,735)
Income tax benefit (expense)	312		(214)		280		(214)
Net loss from continuing operations	(26,750)		(1,569)		(31,409)		(15,949)
Net gain from discontinued operations, net of income taxes	—		1,398		—		1,681
Net loss including noncontrolling interests	(26,750)		(171)		(31,409)		(14,268)
Net loss attributable to noncontrolling interest	(133)		—		(261)		—
Net loss attributable to Applied Digital Corporation	$	(26,617)	$	(171)	$	(31,148)	$	(14,268)

Basic and diluted net (loss) gain per share:
Continuing Operations	$	(0.29)	$	(0.03)	$	(0.34)	$	(0.32)
Discontinued Operations	$	—	$	0.03	$	—	$	0.03
Basic and diluted net loss per share	$	(0.29)	$	—	$	(0.34)	$	(0.29)
Basic and diluted weighted average number of shares outstanding	93,422,427		53,396,920		93,263,266		49,143,981

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

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

(In thousands, except share data)


Three Months Ended November 30, 2022
	Common Stock		Additional Paid in Capital	Treasury Stock	Accumulated deficit	Total Stockholders Equity	Noncontrolling Interest	Total Equity
	Shares	Amount
Balance, August 31, 2022	92,872,271	$93	$128,877	$(62)	$(60,601)	$68,307	$8,594	$76,901
Stock-based compensation	1,110,379	1	21,818	—	—	21,819	—	21,819

Net Loss	—	—	—	—	(26,617)	(26,617)	(133)	(26,750)
Balance, November 30, 2022	93,982,650	$94	$150,695	$(62)	$(87,218)	$63,509	$8,461	$71,970


Three Months Ended November 30, 2021

	Series C Convertible Redeemable Preferred Stock		Series D Convertible Redeemable Preferred Stock		Total Mezzanine Equity	Common Stock	Additional Paid in Capital	Treasury Stock		Accumulated Deficit	Total Stockholders Equity	Total Equity
	Shares	Amount	Shares	Amount	Amount		Shares	Amount
Balance, August 31, 2021	660,000	15,135,000	1,304,000	29,902	45,037		53,396,920	53		43,925	(62)	(44,666)	(750)	44,287
Issuance of Preferred Stock	—	—	76,000	1,900	1,900		—	—		—	—	—	—	1,900
Issuance Costs of Preferred Stock	—	—	—	(228)	(228)		—	—		—	—	—	—	(228)
Net Loss	—	—	—	—	—		—	—		—	—	(171)	(171)	(171)
Balance, November 30, 2021	660,000	15,135,000	1,380,000	31,574	46,709		53,396,920	$	53	43,925	(62)	(44,837)	(921)	45,788

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)

(In thousands, except per share data)


Six Months Ended November 30, 2022
	Common Stock		Additional Paid in Capital	Treasury Stock	Accumulated deficit	Total Stockholders Equity	Noncontrolling Interest	Total Equity
	Shares	Amount
Balance, May 31, 2022	97,837,703	$98	$128,293	$(62)	$(56,070)	$72,259	$6,976	$79,235
Stock-based compensation	1,110,379	1	22,397	—	—	22,398	—	22,398
Capital contribution to noncontrolling interest	—	—	—	—	—	—	1,746	1,746
Stock Cancellation	(4,965,432)	(5)	5	—	—	—	—	—
Net Loss	—	—	—	—	(31,148)	(31,148)	(261)	(31,409)
Balance, November 30, 2022	93,982,650	$94	$150,695	$(62)	$(87,218)	$63,509	$8,461	$71,970


Six Months Ended November 30, 2021

	Series C Convertible Redeemable Preferred Stock			Series D Convertible Redeemable Preferred Stock			Total Mezzanine Equity	Series A Convertible Preferred Stock			Series B Convertible Preferred Stock			Common Stock			Additional Paid in Capital		Treasury Stock		Accumulated Deficit		Total Stockholders Deficit	Total Equity
	Shares	Amount		Shares	Amount		Amount	Shares	Amount		Shares	Amount		Shares	Amount
Balance, May 31, 2021	660,000	$	15,135	—	$	—	$15,135	27,195	$3,370		17,087	$1,849		1,511,061	$1		$13,882		$(62)		$(21,623)		$(2,583)	$12,552
Extinguishment of Debt	—	—		—	—		—	—	—		—	—		5,083,828	5		3,473		—		—		3,478	3,478
Issuance of Dividends to Preferred Stock	—	—		—	—		—	60,822	6,082		29,772	2,979		—	—		—		—		(8,946)		115	115
Conversion of Preferred Stock	—	—		—	—		—	(88,017)	(9,452)		(46,859)	(4,828)		28,765,308	29		14,251		—		—		—	—
Service agreement stock compensation	—	—		—	—		—	—	—		—	—		18,036,723	18		12,319		—		—		12,337	12,337
Issuance of Preferred Stock	—	—		1,380,000	34,500		34,500	—	—		—	—		—	—		—		—		—		—	34,500
Issuance Costs of Preferred Stock	—	—		—	(2,926)		(2,926)	—	—		—	—		—	—		—		—		—		—	(2,926)
Net Loss	—	—		—	—		—	—	—		—	—		—	—		—		—		(14,268)		(14,268)	(14,268)
Balance, November 30, 2021	660,000	$	15,135	1,380,000	$31,574		$46,709	—	$	—	—	$	—	53,396,920	$	53	$	43,925	$	(62)	$	(44,837)	$(921)	$45,788

See Accompanying Notes to the Financial Statements

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

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


	Six Months Ended
	November 30, 2022		November 30, 2021
CASH FLOW FROM OPERATING ACTIVITIES
Net loss attributable to Applied Digital Corporation	$	(31,148)	$	(14,268)
Net loss from discontinued operations, net of income taxes	—		1,681
Net Loss attributable to noncontrolling interest	(261)		—
Net Income (loss) from continuing operations	(31,409)		(15,949)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and Amortization	2,704		177

Loss on extinguishment of debt	94		1,342
Stock-Based Compensation	22,398		12,337
Lease Expense	97		28
Deferred Tax	(280)		214

Changes in assets and liabilities:
Accounts receivable	(49)		—

Prepaid expenses and other current assets	(1,061)		(1,644)
Customer deposits	15,165		—
Deferred revenue	25,517		—
Accounts payable and accrued liabilities	(5,745)		5,254
Sales and use tax payable	865		—



Lease Assets and Liabilities	(317)		(25)

Net cash provided by operating activities of continuing operations	27,979		1,734
Net cash provided by operating activities of discontinued operations	—		600
NET CASH PROVIDED BY OPERATING ACTIVITIES	27,979		2,334
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment	(70,305)		(10,314)


Deposit on equipment	—		(23,230)

Net cash used in investing activities of continuing operations	(70,305)		(33,544)
Net cash provided by investing activities of discontinued operations	—		1,931
NET CASH USED IN INVESTING ACTIVITIES	(70,305)		(31,613)
CASH FLOW FROM FINANCING ACTIVITIES



Issuance of preferred stock	—		34,500
Repayment of finance leases	(778)		—
Preferred issuance costs	—		(2,926)


Term loan payoff	(7,056)		—
Proceeds from issuance of term loan	21,711		—
Term Loan Issuance Costs	(378)		—
Loan Payments	(1,102)		—
Payments of employee restricted stock tax withholdings	(43)		—
Equity contributions to subsidiaries	1,747		—
Net cash provided by financing activities of continuing operations	14,101		31,574
Net cash provided by financing activities of discontinued operations	—		—
CASH FLOW PROVIDED BY FINANCING ACTIVITIES	14,101		31,574
NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS	(28,225)		2,295
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	46,299		11,750
CASH AND CASH EQUIVALENTS, END OF PERIOD	18,074		14,045
Less: cash and cash equivalents of discontinued operations	—		—
Cash and cash equivalents of continuing operations	$	18,074	$	14,045

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid	$	707	$	—

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

Right-of-use asset obtained by lease obligation	$	6,925	$	1,291
Fixed assets in accounts payable	$	3,466	$	513

See Accompanying Notes to the Financial Statements

Table of Contents

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

For the Three and Six Month Periods Ended November 30, 2022

1.BUSINESS AND ORGANIZATION

Applied Digital Corporation, f/k/a Applied Blockchain, Inc. (the “Company”), is a builder and operator of next-generation data centers across North America, which provide substantial computing power to high power computing applications such as blockchain infrastructure, nature language processing, and artificial intelligence. The Company has a colocation business model where customers place hardware they own into the Company’s facilities and the Company provides full operational and maintenance services for a fixed fee. The Company typically enters into long term fixed rate contracts with its customers.

On April 12, 2022, the Company effected a one-for-six (1:6) reverse split (the “Reverse Stock Split”) of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share.

On September 1, 2022, Company entered into a joint venture agreement with GMR Limited (“GMR”) to form Highland Digital Holdings, LLC (“Highland Digital”), which may acquire mining hardware and digital infrastructure assets. The Company and GMR each have a 50% ownership stake in Highland Digital. GMR is the controlling partner and will consolidate the results of Highland Digital in its financial statements. The Company will not consolidate Highland Digital in its financial statements, but will account for the entity under the equity method. As of November 30, 2022, the Company had a firm commitment of $0.6 million to Highland Digital.

On October 13, 2022, the Company entered into a joint venture agreement with Foundry Technologies, Inc. (“Foundry”) to form SAI Computing, LLC (“SAI”). SAI will provide artificial intelligence and machine learning application customers with access to machines and a hosting environment. The Company is currently expanding capacity at the Jamestown, North Dakota datacenter facility to provide access to SAI and its customers. The Company has an 98% ownership interest in SAI and plans to consolidate the entity.

2.LIQUIDITY AND FINANCIAL CONDITION

As of November 30, 2022, the Company had approximate cash and cash equivalents of $18.1 million and negative working capital of $49.5 million. Historically the Company has incurred losses and has relied on equity financings to fund its operations. Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued.

3.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,

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

2022 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. 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, 2022 filed with the SEC on August 29, 2022.

Significant Accounting Policies and Use of Estimates:

There were no material changes in the Company’s significant accounting policies for the three and six months ended November 30, 2022 as compared to the year ended May 31, 2022. See Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2022, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.

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 the valuation allowance associated with the Company’s deferred tax assets.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. The Company’s cash equivalents in excess of federally insured limits potentially subject us to concentrations of credit risk, although the Company believes it is subject to minimal risk.

The Company has restricted cash related to its letter of credit. The Company is required to keep this balance in a separate account for the duration of the letter of credit agreement, which lasts through January 2024. The Company also has restricted cash related to its Starion Term Loan buy-down (as defined below). The following tables reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of November 30, 2022, and May 31, 2022.


(in thousands)	November 30, 2022		May 31, 2022
Net Cash & Equivalents	$	10,512	$	38,798
Restricted Cash	$	7,562	$	7,501
Total Cash & Cash Equivalents	$	18,074	$	46,299

Recent Accounting Pronouncements

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

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

4.PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of November 30, 2022, and May 31, 2022:


(in thousands)	Estimated Useful Life	November 30, 2022		May 31, 2022
Hosting Equipment
Electric Generation and Transformers	15 years	$	4,519	$	4,338

Other Equipment and Fixtures	5 years-7 years	718		588
Construction in Progress		83,290		18,305
Information Systems and Software	5 years	11,116		9,608
Land & Building
Land		2,152		1,074
Land Improvements	15 years	1,259		1,180
Building	39 years	32,519		30,176
Total cost of property and equipment		135,572		65,269
Accumulated Depreciation		(2,679)		(1,009)
Property Plant and Equipment, Net		$	132,893	$	64,260

Depreciation expense from continuing operations totaled $0.8 million and $0.2 million and for the three months ended November 30, 2022 and 2021, respectively. Depreciation expense from continuing operations totaled $1.7 million and $0.2 million and for the six months ended November 30, 2022 and 2021, respectively.

5.REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration to which the Company expects to be received in exchange for those services. The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue.

Below is a summary of the Company’s revenue concentration by major customer for the three and six months ended November 30, 2022 and 2021, respectively.


	Three Months Ended November 30,
Customer	2022		2021
Customer A	32.6	%	—	%
Customer B	26.5	%	—	%
Customer C	16.2	%	—	%
Customer D	13.0	%	—	%
Customer E	11.8	%	—	%

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022


	Six Months Ended November 30,
Customer	2022		2021
Customer A	33.7	%	—	%
Customer B	21.5	%	—	%
Customer C	17.9	%	—	%
Customer D	14.2	%	—	%
Customer E	12.7	%	—	%

Remaining Performance Obligations

As of November 30, 2022, the Company had $29.4 million in deferred revenue, which represents the Company’s remaining performance obligations. The Company expects to recognize $29.4 million within the next 12 months.

Deferred Revenue

Changes in the Company's deferred revenue balances from hosting operations for the three and six months ended November 30, 2022 and 2021, respectively, are shown in the following table:


(in thousands)			(in thousands)
Three Months Ended November 30, 2022			Three Months Ended November 30, 2021
Balance at August 31, 2022	$	19,193	Balance at May 31, 2021	$	—
Advance billings	22,406		Advance billings	—
Revenue recognized	(12,340)		Revenue recognized	—
Other adjustments	$	135	Other adjustments	$	—
Balance at November 30, 2022	$	29,394	Balance at November 30, 2021	$	—


(in thousands)			(in thousands)
Six Months Ended November 30, 2022			Six Months Ended November 30, 2021
Balance at May 31, 2022	3,877		Balance at May 31, 2021	$	—
Advance billings	44,646		Advance billings	—
Revenue recognized	(19,264)		Revenue recognized	—
Other adjustments	$	135	Other adjustments	$	—
Balance at November 30, 2022	$	29,394	Balance at November 30, 2021	$	—

Customer Deposits

Changes in the Company's customer deposits balances for the three and six months ended November 30, 2022 and 2021, respectively, are shown in the following table:

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022


(in thousands)			(in thousands)
Three Months Ended November 30, 2022			Three Months Ended November 30, 2021
Balance at August 31, 2022	$	14,111	Balance at August 31, 2021	$	—
Customer deposits received	10,713		Customer deposits received	—
Customer deposits refunded	—		Customer deposits refunded	—
Other adjustments	$	(135)	Other adjustments	$	—
Balance at November 30, 2022	$	24,689	Balance at November 30, 2021	$	—


(in thousands)			(in thousands)
Six Months Ended November 30, 2022			Six Months Ended November 30, 2021
Balance at May 31, 2022	$	9,524	Balance at May 31, 2021	$	—
Customer deposits received	15,300		Customer deposits received	—
Customer deposits refunded	—		Customer deposits refunded	—
Other adjustments	$	(135)	Other adjustments	$	—
Balance at November 30, 2022	$	24,689	Balance at November 30, 2021	$	—

6.RELATED PARTY TRANSACTIONS

Related Party Policy

Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all material related party transactions.

Related Party Note Payable

During the period ended November 30, 2021, a related party note payable was held by the CEO of the Company. During this period, the outstanding debt principal of $0.5 million and accrued interest of $1.6 million were converted to 5.1 million shares of Common Stock with a fair value of $0.75 per share which resulted in a loss on extinguishment of $1.3 million. Upon the consummation of an exchange agreement, the note payable was surrendered and cancelled, and all rights including rights to accrued interest due were extinguished.

Related Party Revenue

The Company has material transactions with two related parties Company A is a customer and is also the parent company of the minority member of the 1.21 Gigawatts joint venture.. Company B is a customer and is also the controlling member of the Highland Digital joint venture. Company B became a related party during September 2022. The following tables illustrate related party revenue for the three and six months ended November 30, 2022 and November 30, 2021.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022


	Revenue for the Three Months ended
(in thousands)	November 30, 2022		November 30, 2021
Customer A	$	4,016	$	—
Customer B	$	5,043	$	—


	Revenue for the Six Months ended
(in thousands)	November 30, 2022		November 30, 2021
Customer A	$	6,469	$	—
Customer B	$	8,622	$	—

The following tables illustrate related party deferred revenue and deposits balances as of November 30, 2022 and May 31, 2022.


	Customer A Balances as of
(in thousands)	November 30, 2022		May 31, 2022
Deferred revenue	$	700	$	1,721
Customer Deposits	$	1,584	$	1,719


	Customer B Balances as of
(in thousands)	November 30, 2022		May 31, 2022
Deferred revenue	$	2,279	$	888
Customer Deposits	$	7,024	$	6,508

7.DEBT

Letter of Credit

As of November 30, 2022 and May 31, 2022, the Company had a letter of credit totaling $7.5 million. As discussed in Footnote 3, the Company is required to maintain this amount in a separate cash balance, and therefore the cash is restricted. Further, the Company has no unused lines of credit as of November 30, 2022 or May 31, 2022, respectively.

Starion Term Loan

On July 25, 2022, APLD Hosting, LLC (the “Borrower”), a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank (“Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”). The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $15 million with a maturity date of July 25, 2027. The Starion Loan Agreement provides for an interest rate of 6.50% per annum. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. The Company is not subject to financial covenants until May 31, 2024. At that time, the Company will

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

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 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.

Vantage Garden City Loan

On November 7, 2022, APLD – Rattlesnake Den I, LLC (the “Borrower”), a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Vantage Bank Texas (“Vantage Lender”) and the Company, as guarantor, which agreement provides for a term loan in the principal amount of $15 million (the “Vantage Garden City Loan Agreement”). The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for the Borrower’s datacenter in Garden City, Texas, with each installment not exceeding approximately $0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”). The unpaid principal amount of the Vantage Garden City Loan Agreement will bear interest at a fixed rate of 6.15% per annum, and the Borrower may prepay the Vantage Garden City Loan Agreement, in whole or in part, without the payment of any fee or penalty. The Vantage Garden City Loan Agreement matures April 26, 2028. The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default. As of the date of this report, an aggregate amount of $6.6 million has been advanced under the Vantage Garden City Loan Agreement. Total deferred costs related to the issuance of this loan total are $0.2 million.

Below is a summary of the remaining principal payments due over the life of the Starion Loan Agreement and Vantage Garden City Loan Agreement notes as of November 30, 2022.


Year	Principal Payments (in thousands)
FY23	$	1,537
FY24	5,415
FY25	5,783
FY26	4,033
FY27	3,373
Thereafter	526
Total Term Loan Remaining Payments	$	20,667

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

Below is a summary of Starion Loan Agreement Vantage Garden City Loan Agreement term loan balances, including current debt and deferred financing fees as of November 30, 2022 and May 31, 2022.


(in thousands)	November 30, 2022	May 31, 2022
Term Loan Balance	$20,667	$7,324
Less: Deferred Issuance Costs	(240)	(94)
Less: Current portion of Term Loan	(4,076)	(1,333)
Long-term Portion of Term Loan	$16,351	$5,897

8. STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock

The Company is authorized to issue 166,666,667 shares of Common Stock at $0.001 par value per share. As of November 30, 2022, 93,982,650 shares of Common Stock were issued and 93,946,353 shares were outstanding and as of May 31, 2022, 97,837,703 shares of Common Stock were issued and 97,801,406 shares were outstanding. All shares of Common Stock in this report reflect the one-for-six reverse stock split disclosed in Note 1 - Business and Organization.

Restricted Stock Awards

The Company has granted restricted stock awards to officers and directors. Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of Common Stock comprising the stock award with the Securities and Exchange Commission (the “SEC”). The Company will recognize the cost of the restricted stock-based on the grant date fair value of the awards over the related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met.

The following is a summary of the activity and balances for unvested restricted stock awards granted for the six months ended November 30, 2022:


	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2022	$	1,366,666	$	8.04
Granted	77,500		$	2.04
Vested	(952,500)		$	7.55
Forfeited	—		$	—
Outstanding as of November 30, 2022	491,666		$	8.04

As of November 30, 2022, total expense to be recognized related to these awards was $0.9 million and the weighted average remaining recognition period for the unvested awards was 3 months.

Restricted Stock Units

The Company has granted restricted stock unit awards (“RSUs”) to certain consultants, in all cases as compensatory grants for consulting services rendered to the Company, which contain performance conditions that affect vesting. The Company will recognize the cost of these RSUs based on the grant date fair value of the awards when it is probable that the performance conditions will be achieved over the related vesting terms.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

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 November 30, 2022, the Company had issued approximately 8.0 million awards under the plans.

The following is a summary of the activity and balances for unvested restricted stock units granted for the six months ended November 30, 2022:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2022	1,791,666	$	8.04
Granted	7,897,907	$	2.32
Vested	(179,166)	$	8.04
Forfeited	(445,749)	$	7.65
Outstanding as of November 30, 2022	9,064,658	$	3.07

As of November 30, 2022, total expense to be recognized related to these awards was $17.7 million and the weighted average remaining recognition period for the unvested awards was 23 months.

Share Forfeiture

On June 6, 2022, through an agreement between the Company and Sparkpool, Sparkpool agreed to forfeit shares of Common Stock that had been issued pursuant to the service agreement executed on March 19, 2021. Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered. As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and canceled by the Company.

9. LEASES

During the six months ended November 30, 2022, the Company entered into 18 new leases, bringing the total number of leases to 39. The Company considered the nature of the leases under ASC 842 Leases and determined each of these leases represent finance leases. The weighted average term of the leases is 31 months and the weighted average discount rate of the leases is 7.50%. Total ROU assets entered into during the six months ended November 30, 2022 totaled $6.9 million.

10. COMMITMENTS AND CONTINGENCIES

Commitments

As of November 30, 2022, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 9 - Leases, respectively.

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

Energy Commitment

The Company also has a commitment of approximately $24.2 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility as of November 30, 2022. The minimum term of this agreement is five years, and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination. The commitment is fully due within the next year, as the Company commits to specific power consumption on an annual basis as part of the energy services agreement. The Company purchased approximately $10.3 million and zero in power under the energy services agreement during the three months ended November 30, 2022 and 2021, respectively. The Company purchased approximately $15.1 million and zero in power under the energy services agreement during the six months ended November 30, 2022 and 2021, respectively.

Claims and Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of November 30, 2022 and May 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. 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.

11. EARNINGS PER SHARE

Basic net income (loss) per share (“EPS”) of Common Stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity.

Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for this quarter’s earnings per share:


Basic and diluted loss per share:	Three Months Ended				Six Months Ended
	November 30, 2022		November 30, 2021		November 30, 2022		November 30, 2021
Net loss from continuing operations	$	(26,750)	$	(1,569)	$	(31,409)	$	(15,949)
Net loss from discontinued operations, net of income taxes	—		1,398		—		1,681
Net loss including noncontrolling interests	(26,750)		(171)		(31,409)		(14,268)
Net loss attributable to noncontrolling interest	(133)		—		(261)		—
Net loss attributable to Applied Digital Corporation	$	(26,617)	$	(171)	$	(31,148)	$	(14,268)

Basic and diluted net (loss) gain per share:
Continuing Operations	$	(0.29)	$	(0.03)	$	(0.34)	$	(0.32)
Discontinued Operations	$	—	$	0.03	$	—	$	0.03
Basic and diluted net loss per share	$	(0.29)	$	—	$	(0.34)	$	(0.29)
Basic and diluted weighted average number of shares outstanding	93,422,427		53,396,920		93,263,266		49,143,981

APPLIED DIGITAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three and Six Month Period Ended November 30, 2022

12. DISCONTINUED OPERATIONS

During February 2022, the Company implemented pla