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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, 2023
OR
oTRANSITION 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)
________________________
Nevada95-4863690
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
3811 Turtle Creek Boulevard, Suite 2100, Dallas, Texas
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareAPLDNasdaq 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 fileroAccelerated filero
Non-accelerated filerxSmaller reporting companyx
Emerging growth companyo
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 January 10, 2024, 122,044,737 shares of Common Stock, $0.001 par value, were outstanding.




Table of Contents
Page
Item 6.


Table of Contents
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)
November 30, 2023May 31, 2023
ASSETS
Current assets:
Cash and cash equivalents$9,217 $28,999 
Restricted cash25,416 14,575 
Accounts receivable307 82 
Prepaid expenses and other current assets1,517 2,012 
Total current assets36,457 45,668 
Property and equipment, net258,508 195,593 
Operating lease right of use assets, net73,373 1,290 
Finance lease right of use assets, net95,199 14,303 
Other assets17,117 7,103 
TOTAL ASSETS$480,654 $263,957 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$38,262 $6,446 
Accrued liabilities10,538 8,330 
Current portion of operating lease liability8,887 320 
Current portion of finance lease liability42,805 5,722 
Current portion of debt9,279 7,950 
Customer deposits36,833 32,559 
Related party customer deposits3,811 3,811 
Deferred revenue50,051 47,168 
Related party deferred revenue1,953 1,524 
Sales and use tax payable4 1,630 
Total current liabilities202,423 115,460 
Long-term portion of operating lease liability52,324 1,005 
Long-term portion of finance lease liability36,748 8,334 
Long-term debt33,501 33,222 
Long-term related party loan 35,257 
Other long-term related party liabilities 1,000 
Total liabilities324,996 194,278 
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value, 166,666,667 shares authorized, 122,734,060 shares issued and 117,732,332 shares outstanding at November 30, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023
123 101 
Treasury stock, 5,001,728 shares at November 30, 2023 and 5,001,728 shares at May 31, 2023, at cost
(62)(62)
Additional paid in capital278,299 160,194 
Accumulated deficit(122,702)(100,716)
Total stockholders’ equity attributable to Applied Digital Corporation155,658 59,517 
Noncontrolling interest 10,162 
Total stockholders' equity including noncontrolling interest155,658 69,679 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$480,654 $263,957 
See accompanying notes to the condensed consolidated financial statements
1

Table of Contents
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share data)
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Revenue:
Datacenter hosting revenue$34,119 $8,747 $64,106 $13,086 
Cloud services revenue4,450  6,602  
Related party datacenter hosting revenue3,634 3,593 7,819 6,178 
Total revenue42,203 12,340 78,527 19,264 
Costs and expenses:
Cost of revenues29,222 11,812 53,620 17,905 
Selling, general and administrative21,075 27,226 38,127 32,245 
Loss from legal settlement
80  2,380  
Total costs and expenses50,377 39,038 94,127 50,150 
Operating loss(8,174)(26,698)(15,600)(30,886)
Interest expense, net2,355 364 4,430 709 
Loss on extinguishment of debt  2,353 94 
Net loss before income tax expenses(10,529)(27,062)(22,383)(31,689)
Income tax expense (benefit) (312) (280)
Net loss(10,529)(26,750)(22,383)(31,409)
Net loss attributable to noncontrolling interest (133)(397)(261)
Net loss attributable to Applied Digital Corporation$(10,529)$(26,617)$(21,986)$(31,148)
Basic and diluted net loss per share attributable to Applied Digital Corporation$(0.10)$(0.28)$(0.21)$(0.33)
Basic and diluted weighted average number of shares outstanding109,663,030 93,422,427 105,067,375 93,263,266 
See accompanying notes to the condensed consolidated financial statements
2

Table of Contents
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months ended November 30, 2023 and November 30, 2022
(In thousands, except share data)
(Unaudited)
Common StockTreasury Stock
Additional
Paid in
Capital
Accumulated
Deficit
Stockholders’
Equity
Noncontrolling interest
Total Equity
SharesAmountSharesAmount
Balance, August 31, 2023110,850,885$110 (5,001,728)$(62)$240,073 $(112,173)$127,948 $ $127,948 
Shares issued in offering, net of costs6,879,070833,43233,440 33,440
Shares issued from award vestings5,004,1055(5)— 
Stock-based compensation4,7994,799 4,799
Net loss(10,529)(10,529)(10,529)
Balance, November 30, 2023122,734,060$123 (5,001,728)$(62)$278,299 $(122,702)$155,658 $ $155,658 

Common StockTreasury Stock
Additional
Paid in
Capital
Accumulated
Deficit
Stockholders’
Equity
Noncontrolling interest
Total Equity
SharesAmountSharesAmount
Balance, August 31, 202297,837,703$98 (5,001,728)$(62)$128,872 $(60,601)$68,307 $8,594 $76,901 
Shares issued from award vestings1,110,379 1 — — (1)— — — — 
Stock-based compensation— — — — 21,819 — 21,819 — 21,819 
Net loss— — — — — (26,617)(26,617)(133)(26,750)
Balance, November 30, 202298,948,082$99 $(5,001,728)$(62)$150,690 $(87,218)$63,509 $8,461 $71,970 
See accompanying notes to the condensed consolidated financial statements
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended November 30, 2023 and November 30, 2022
(In thousands, except share data)
(Unaudited)

Common StockTreasury Stock
Additional
Paid in
Capital
Accumulated
Deficit
Stockholders’
Equity
Noncontrolling interest
Total Equity
SharesAmountSharesAmount
Balance, May 31, 2023100,927,358$101 $(5,001,728)$(62)$160,194 $(100,716)$59,517 $10,162 $69,679 
Shares issued in offering, net of costs14,787,598 16 — — 97,906 — 97,922— 97,922
Shares issued from award vestings5,534,837 5 — — (5)— — 
Stock-based compensation— — — — 10,440 — 10,440— 10,440
Net loss— — — — — (21,986)(21,986)(397)(22,383)
Extinguishment of noncontrolling interest1,484,267 1 — — 9,764 — 9,765(9,765)
Balance, November 30, 2023122,734,060$123 (5,001,728)$(62)$278,299 $(122,702)$155,658 $ $155,658 

Common StockTreasury Stock
Additional
Paid in
Capital
Accumulated
Deficit
Stockholders’
Equity
Noncontrolling interest
Total Equity
SharesAmountSharesAmount
Balance, May 31, 202297,837,703$98 (36,296)$(62)$128,293 $(56,070)$72,259 $6,976 $79,235 
Shares issued from award vestings1,110,379 1 — — (1)— 
Stock-based compensation— — — — 22,398 — 22,39822,398
Capital contribution to noncontrolling interest— — — — — — 1,7461,746
Common stock forfeited— — (4,965,432)— — — 
Net loss— — — — — (31,148)(31,148)(261)(31,409)
Balance, November 30, 202298,948,082$99 (5,001,728)$(62)$150,690 $(87,218)$63,509 $8,461 $71,970 
See accompanying notes to the condensed consolidated financial statements
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six Months Ended
November 30, 2023November 30, 2022
CASH FLOW FROM OPERATING ACTIVITIES
Net loss$(22,383)$(31,409)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization21,284 2,704 
Stock-based compensation10,440 22,398 
Deferred income taxes (280)
Loss on extinguishment of debt2,353 94 
Amortization of debt issuance costs352  
Loss on abandonment of assets189  
Changes in operating assets and liabilities:
Accounts receivable(225)(49)
Prepaid expenses and other current assets495 (1,061)
Customer deposits
4,274 14,784 
Related party customer deposits 381 
Deferred revenue
2,883 25,147 
Related party deferred revenue429 370 
Accounts payable6,442 (6,844)
Accrued liabilities2,093 1,099 
Lease assets and liabilities(16,904)(220)
Sales and use tax payable(1,626)865 
Other assets(1,040) 
CASH FLOW PROVIDED BY OPERATING ACTIVITIES9,056 27,979 
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment and other assets(45,830)(70,305)
Finance lease prepayments(19,388) 
Purchases of investments(390) 
CASH USED IN INVESTING ACTIVITIES(65,608)(70,305)
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of finance leases(13,071)(778)
Borrowings of long-term debt4,732 21,711 
Borrowings of related party debt8,000  
Repayments of long-term debt(4,471)(8,158)
Repayment of related party debt(45,500) 
Payment of deferred financing costs (378)
Tax payments for restricted stock upon vesting (43)
Noncontrolling interest contributions 1,747 
Proceeds from issuance of common stock, net of costs97,922  
CASH FLOW PROVIDED BY FINANCING ACTIVITIES47,612 14,101 
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH(8,940)(28,225)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD43,574 46,299 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD$34,634 $18,074 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid$4,370 $707 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Operating right-of-use assets obtained by lease obligation$69,329 $ 
Finance right-of-use assets obtained by lease obligation$96,946 $6,925 
Property and equipment in accounts payable$23,572 $3,466 
Conversion of non-controlling interest$9,765 $ 
See accompanying notes to the condensed consolidated financial statements
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (unaudited)
For the Three and Six Months Ended November 30, 2023

1.    Business and Organization
Applied Digital Corporation (the “Company”), is a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers. 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
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.
Datacenter Hosting Revenue
The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All datacenter 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 customer-provided equipment. Revenue is recognized based on the contractual fixed rate, net of any credits for non-performance, over the term of the agreements. Any ancillary revenue for maintenance or installation services is at a point in time when the maintenance or installation service is complete. As these services are directly attributable to the Company’s datacenter hosting service, this revenue is captured within the datacenter hosting revenue caption in our condensed consolidated statements of operations. Customer contracts include advance payment terms. All advanced service payments are recorded as deferred revenue and are recognized as revenue once the related service is provided.
Cloud Services Revenue
The Company also provides managed cloud infrastructure services to customers, such as artificial intelligence and machine learning developers, to help develop their advanced products. Customers pay a fixed rate to the Company in exchange for managed cloud services supported by Company-provided equipment. Revenues are recognized based on the fixed rate, net of any credits for non-performance, over the term of the agreements.
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
Segments
The Company has identified three reportable segments: cloud services (“Cloud services”), high-performance compute hosting (“HPC hosting”), and datacenter hosting (“Datacenter hosting”). The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on the basis of these three reportable segments. Intercompany transactions between segments are excluded for management reporting purposes.
The Datacenter hosting segment operates datacenters to provide energized space to crypto mining customers. Customer-owned hardware is installed in the Company’s facilities and the Company provides operational and maintenance services for a fixed fee.
The Cloud services segment operates through our Sai Computing brand and provides cloud services to customers, such as artificial intelligence and machine learning developers, to develop their advanced products. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment.
The HPC hosting segment designs, builds, and operates datacenters which are designed to support high-compute applications using advanced and sophisticated infrastructures to provide services to customers.
See Note 3 - Basis of Presentation and Significant Accounting Policies 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.
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 datacenter hosting revenue to related party datacenter hosting 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 and from prepaid expenses and other current assets to other assets in our condensed consolidated balance sheets to conform to our current period presentation. Lastly, we have reclassified interest income from selling, general and administrative to interest expense, net in our condensed consolidated statement of operations 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 November 30, 2023 and May 31, 2023 were as follows (in thousands):
November 30, 2023May 31, 2023
Net Cash & Equivalents$9,217 $28,999 
Restricted Cash25,416 14,575 
Total Cash & Cash Equivalents$34,633 $43,574 
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
3.    Property and Equipment
Property and equipment consisted of the following as of November 30, 2023, and May 31, 2023 (in thousands):
Estimated Useful LifeNovember 30,
2023
May 31,
2023
Electric generation and transformers15 years$13,169 $4,655 
Other equipment and fixtures
5 years - 7 years
5,074 1,684 
Construction in progress70,846 106,226 
Information systems and software5 years41,295 21,173 
Land and building
Land6,213 2,152 
Land improvements15 years1,391 1,293 
Building39 years129,815 63,350 
Leasehold improvements
3 years - 7 years
468  
Total cost of property and equipment268,271 200,533 
Accumulated depreciation(9,763)(4,940)
Property and equipment, net$258,508 $195,593 
Depreciation expense totaled $2.6 million and $4.9 million for the three and six months ended November 30, 2023 and $0.8 million and $1.7 million for the three and six months ended November 30, 2022.
4.    Revenue from Contracts with Customers
Below is a summary of the Company’s revenue concentration by major customers for the three and six months ended November 30, 2023 and 2022, respectively.
Three Months Ended November 30,Six Months Ended November 30,
2023202220232022
Customer A70 % %69 % %
Customer B %27 % %22 %
Customer C %33 % %34 %
Customer D %16 % %18 %
Customer E %13 % %14 %
Customer F %12 % %13 %
Customer G11 % % % %
Deferred Revenue
As of November 30, 2023, the Company had $52.0 million in deferred revenue (inclusive of related party deferred revenue), which represents the Company’s remaining performance obligations, and expects to recognize the entire balance
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
within the next 12 months. Changes in the Company's deferred revenue balances for the six months ended November 30, 2023 and 2022, respectively, are shown in the following tables (in thousands):
Six Months Ended
November 30, 2023November 30, 2022
Balance, beginning of period$48,692 $3,877 
Advance billings81,839 44,646 
Revenue recognized(78,527)(19,264)
Other adjustments 135 
Less: Related party balances(1,953)(1,639)
Balance, end of period$50,051 $27,755 
Customer Deposits
Changes in the Company's customer deposits balances for the six months ended November 30, 2023 and 2022, respectively, are shown in the following table (in thousands):
Six Months Ended
November 30, 2023November 30, 2022
Balance, beginning of period$36,370 $9,524 
Customer deposits received4,274 15,300 
Customer deposits refunded  
Other adjustments (135)
Less: Related party balances(3,811)(1,940)
Balance, end of period$36,833 $22,749 
5.    Related Party Transactions
Related Party Revenue
The following table illustrates related party revenue for the three and six months ended November 30, 2023 and November 30, 2022 (in thousands):
Three Months Ended November 30,Six Months Ended November 30,
2023202220232022
Customer D*$1,986 $1,996 $4,319 $3,446 
Customer E**$1,648 $1,596 $3,500 $2,732 
*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 November 30, 2023 and May 31, 2023 (in thousands):
Customer D balances as ofCustomer E balances as of
November 30, 2023May 31, 2023November 30, 2023May 31, 2023
Deferred revenue$1,470 $1,474 $483 $50 
Customer Deposits$2,450 $2,450 $1,361 $1,361 
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
Related Party Sublease Income
The Company receives sublease income 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. The following table illustrates related party revenue for the three and six months ended November 30, 2023 and November 30, 2022 (in thousands):
Three Months Ended November 30,Six Months Ended November 30,
2023202220232022
Sublease Income$24 $30 $47 $58 
B. Riley Loan
During the six months ended November 30, 2023, the Company borrowed an additional $8.0 million and repaid the outstanding balance of $44.5 million. Interest expense associated with the loan was $0.5 million for the six months ended November 30, 2023. Total remaining unused capacity on the B. Riley Loan as of November 30, 2023, was $5.5 million.
6.    Debt
Long-term debt consisted of the following components (in thousands):
Interest RateMaturity DateNovember 30, 2023May 31, 2023
Starion term loan6.50%July 25, 2027$11,428 $12,786 
Vantage Garden City loan6.15%April 26, 202813,427 10,074 
Starion Ellendale loan7.48%February 3, 202817,974 19,728 
Other long-term debt372 354 
Deferred financing costs, net of amortization(421)(3,012)
Less: Current portion of term loan(9,279)(7,950)
Long-term debt, net$33,501 $31,980 
Remaining Principal Payments
Below is a summary of the remaining principal payments due over the life of the term loans as of November 30, 2023 (in thousands):
Remainder of FY24$4,645 
FY259,768 
FY2610,441 
FY2711,150 
FY287,197 
Total$43,201 
Letters of Credit
As of November 30, 2023, the Company had letters of credit totaling $25.4 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 November 30, 2023.
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
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
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, 2023, the Company had issued awards for approximately 14.2 million shares of common stock of the Company (the “Common Stock”) under the plans. During the three and six months ended November 30, 2023 the Company recognized $4.8 million and $10.4 million in stock-based compensation.
Restricted Stock Awards
The following is a summary of the activity and balances for unvested restricted stock awards granted for the six months ended November 30, 2023:
Number of SharesWeighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2023
380,955 $2.22 
Granted202,110 4.75 
Vested(380,955)2.22 
Forfeited  
Outstanding as of November 30, 2023
202,110 $4.75 
As of November 30, 2023, total remaining expense to be recognized related to these awards was $0.9 million and the weighted average remaining recognition period for the unvested awards was 0.9 years.
Restricted Stock Units
The following is a summary of the activity and balances for unvested restricted stock units granted for the six months ended November 30, 2023:
Number of SharesWeighted Average Grant Date Fair Value Per Share
Outstanding as of May 31, 2023
12,465,935 $2.53 
Granted1,564,400 7.38 
Vested(5,377,778)2.64 
Forfeited(305,110)2.43 
Outstanding as of November 30, 2023
8,347,447 $3.42 
As of November 30, 2023, total remaining expense to be recognized related to these awards was $29.2 million and the weighted average remaining recognition period for the unvested awards was 2.1 years.
Public Offering
During the six months ended November 30, 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 aggregate proceeds of Common Stock. As of November 30, 2023, the Company has sold approximately 14.8 million shares. Net proceeds, less commission and legal fees of approximately $3.3 million, were approximately $97.9 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.
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
8.    Leases
The Company enters into leases for 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 EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Operating lease cost:
Operating lease expense$2,486$82$2,970$164
Short-term lease expense80105207223
Total operating lease cost2,5661873,177387
Finance lease expense:
Amortization of right-of-use assets(1)
10,86073516,4901,033
Interest on lease liabilities1,6591832,741292
Total finance lease cost12,51991819,2311,325
Variable lease cost4077
Sublease Income(24)(30)(47)(58)
Total net lease cost$15,101$1,075$22,438$1,654
(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.
The following table represents the Company’s future minimum lease payments as of November 30, 2023:
Operating LeasesFinance LeasesTotal
Remainder of FY24$6,605 $24,341$30,946 
FY2513,562 47,34060,902 
FY2614,031 12,10826,139 
FY2714,166 18814,354 
FY2814,360 18014,540 
Thereafter12,441 89,944102,385 
Total lease payments75,165 174,101249,266 
Less: imputed interest(13,954)(94,548)(108,502)
Total lease liabilities61,21179,553140,764 
Less: Current portion of lease liability(8,887)(42,805)(51,692)
Long-term portion of lease liability$52,324 $36,748$89,072 
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
Supplemental cash flow and other information related to leases is as follows:
Six Months Ended
November 30, 2023November 30, 2022
Weighted-average years remaining (in years):
Finance leases5.5 years28.6 years
Operating leases5.7 years3.9 years
Weighted-average discount rate:
Finance leases8.8 %8.0 %
Operating leases7.9 %12.5 %
The Company has entered into operating leases which are executed but not yet commenced with total minimum payments of approximately $130.4 million. The payments are for various leases with terms ranging from 2 years to 7 years.
9.    Commitments and Contingencies
Energy Commitment
The Company also has a minimum commitment of approximately $89.2 million related to the energy services agreement for its Jamestown, North Dakota co-hosting facility with a remaining term of approximately 3.2 years as of November 30, 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-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules.
On November 15, 2023, a putative securities complaint, captioned Robert Weich v. Wes Cummins, Chuck Hastings, Kelli McDonald, Douglas Miller, Virginia Moore, and Richard Nottenburg, No. A-23-881629-C, was filed in the U.S. District Court for Clark County, Nevada against certain members of Applied Digital Corporation’s Board of Directors and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting breaches of fiduciary duties and unjust enrichment from April 2022 through the present. 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-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 November 30, 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.
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
Settlement of Potential Claim
During the second quarter of fiscal year 2024, the Company entered into a settlement agreement with respect to employment-related claims by a former executive. The terms of the settlement included payment to the claimant of $2.3 million, which is included in Loss on legal settlement on our condensed consolidated statements of operations.
10.    Business Segments
Revenue by segment (excluding HPC hosting as that segment has no revenue) was as follows (in thousands):
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Datacenter hosting segment$37,753 $12,340 $71,925 $19,264 
Cloud services segment
4,450  6,602  
Total revenue$42,203 $12,340 $78,527 $19,264 
Segment profit (loss) and a reconciliation to net loss before income tax expenses is as follows (in thousands):
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Segment Profit (Loss):
Datacenter hosting segment$10,846 $(14,236)$19,804 $(15,101)
Cloud services segment
(11,719) (19,129) 
HPC hosting segment(908) (1,662) 
Total segment loss(1,781)(14,236)(987)(15,101)
Other (1)
(6,393)(12,462)(14,613)(15,785)
Interest expense, net2,355 364 4,430 709 
Loss on debt extinguishment  2,353 94 
Net loss before income tax expenses$(10,529)$(27,062)$(22,383)$(31,689)
(1) Other includes corporate related items not allocated to reportable segments.
We also provide the following additional segment disclosures (in thousands):
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Depreciation and amortization:
Datacenter hosting segment$4,365 $1,568 $7,564 $2,692 
Cloud services segment
8,782  13,290  
HPC hosting segment184  311  
Other (1)
93  119 12 
Total depreciation and amortization$13,424 $1,568 $21,284 $2,704 
(1) Other includes corporate related items not allocated to reportable segments.
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands):
November 30, 2023May 31, 2023
Datacenter hosting segment$232,747 $224,447 
Cloud services segment
166,536 3,127 
HPC hosting segment54,748 10,949 
Total segment assets454,031 238,523 
Other (1)
26,623 25,434 
Total assets$480,654 $263,957 
(1) Other includes corporate related items not allocated to reportable segments.
11.    Earnings Per Share
Basic net income (loss) per share (“EPS”) of common stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for earnings per share:
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Net loss$(10,529)$(26,750)$(22,383)$(31,409)
Net loss attributable to noncontrolling interest (133)(397)(261)
Net loss attributable to Applied Digital Corporation$(10,529)$(26,617)$(21,986)$(31,148)
Basic and diluted net loss per share attributable to Applied Digital Corporation$(0.10)$(0.28)$(0.21)$(0.33)
Basic and diluted weighted average number of shares outstanding109,663,030 93,422,427 105,067,375 93,263,266 
12.    Subsequent Events
At-The-Market Common Stock Offering
The Company completed sales of common stock under the “at the market” common stock sale agreement dated June 26, 2023. The Company sold approximately 4.2 million shares subsequent to November 30, 2023. Net proceeds from these sales, less commission fees of approximately $0.7 million, are approximately $23.1 million.
Indemnification Agreements
On January 13, 2024, the Company entered into an individual Indemnification Agreement with each member of its Board of Directors. The Indemnification Agreements generally provide that the Company will indemnify the indemnitees, to the fullest extent permitted by applicable law, against liabilities that may arise by reason of their status with, or service to, the Company. The Indemnification Agreements also generally provide that the Company advance expenses incurred by the indemnitees as a result of any proceeding related to such matters.
Conditional Agreement
On January 15, 2024, the Company entered into a conditional agreement to provide HPC datacenter capacity at its Ellendale, North Dakota campus, subject to finalization of definitive lease documents. The conditional agreement is for a total of 100 MWs for a term of 10 years, with a total value of approximately $2.2 billion over such 10 year term. The
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APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Six Months Ended November 30, 2023
conditional agreement is conditioned upon each party securing satisfactory financing for the completion of construction, with the ability of each party to terminate within 45 days, without penalty, if the condition is not satisfied.
Other Agreements
Subsequent to November 30, 2023, the Company entered into three additional agreements for services in our cloud services and datacenter hosting segments totaling a combined $104.4 million over a weighted average term of 32 months.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as 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.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. 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:
labor and other workforce shortages and challenges;
our dependence on principal customers;
the addition or loss of significant customers or material changes to our relationships with these customers;
our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies;
our ability to continue to grow sales in our hosting business;
concentration of customers in the crypto mining industry, which customer base may decline due to price volatility and uncertainties around regulation policy of cryptoasset prices; and
equipment failures, power or other supply disruptions.
You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended May 31, 2023, which was filed on August 2, 2023, as well as any other cautionary language in this Quarterly Report on Form 10-Q, 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.
Executive Overview
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.
Business Overview
We are a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers in high-performance compute hosting (“HPC hosting”), cloud service (“Cloud services”), and datacenter hosting (“Datacenter hosting”) industries.
Trends and Other Factors Affecting Our Business
Regulatory Environment
We have a material concentration of customers in the crypto mining industry. Our customers’ businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax. Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies. As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S. federal, state and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or
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our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions. To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations. As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets. Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry. For instance, on September 24, 2021, China imposed a ban on all crypto transactions and mining.
Ongoing and future regulatory actions could effectively prevent our customers’ mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete. Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.
Critical Accounting Policies and Estimates
Our unaudited condensed 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 unaudited condensed 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. Our critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report, and there have been no material changes since the filing of our Annual Report.
Business Update
Cloud Services
Our Cloud services business operates through our Sai Computing brand and provides cloud services to customers, such as artificial intelligence and machine learning developers, to develop their advanced products.
During the six months ended November 30, 2023, the Company received and deployed an initial production cluster of 1,024 GPUs, and began recognizing revenue on our first cloud services contract.
HPC Hosting
Our HPC hosting business designs, builds, and operates datacenters which are designed to support high-compute applications using advanced and sophisticated infrastructures to provide services to customers.
The Company is in process of constructing a facility next to the Company’s currently operating facilities in Jamestown, North Dakota, and Ellendale, North Dakota.
On January 15, 2024, the Company entered into a conditional agreement to provide HPC datacenter capacity at its Ellendale, North Dakota campus, subject to finalization of definitive lease documents. The conditional agreement is for a total of 100 MWs for a term of 10 years, with a total value of approximately $2.2 billion over such 10 year term. The conditional agreement is conditioned upon each party securing satisfactory financing for the completion of construction, with the ability of each party to terminate within 45 days, without penalty, if the condition is not satisfied.
Datacenter Hosting
Our Datacenter hosting business operates datacenters to provide energized space to crypto mining customers.
As of November 30, 2023, the Company’s 106 MW facility in Jamestown, North Dakota and 180 MW facility in Ellendale, North Dakota were fully operational. During the quarter ended November 30, 2023, the Company entered into a long term
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Retail Electric Service Agreement with TerraForm Power to provide energy to the Company’s 200 MW Garden City, Texas facility and the Company began energizing the facility.
Results of Operations
Comparative Results for the Three and Six Months Ended November 30, 2023 and 2022:
The following table sets forth key components of the results of operations (in thousands) during the three and six months ended November 30, 2023 and 2022.
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Revenues
Datacenter hosting revenue$34,119$8,747$64,106$13,086
Cloud services revenue4,4506,602
Related party datacenter hosting revenue3,6343,5937,8196,178
Total revenue42,20312,34078,52719,264
Costs and expenses:
Cost of revenues29,22211,81253,62017,905
Selling, general and administrative21,07527,22638,12732,245
Loss from legal settlement
802,380
Total costs and expenses50,37739,03894,12750,150
Operating loss(8,174)(26,698)(15,600)(30,886)
Interest expense, net2,3553644,430709
Loss on extinguishment of debt2,35394
Net loss before income taxes(10,529)(27,062)(22,383)(31,689)
Income tax expenses(312)(280)
Net loss(10,529)(26,750)(22,383)(31,409)
Net loss attributable to noncontrolling interest(133)(397)(261)
Net loss attributable to Applied Digital Corporation$(10,529)$(26,617)$(21,986)$(31,148)
Basic and diluted net loss per share$(0.10)$(0.28)$(0.21)$(0.33)
Basic and diluted weighted average number of shares outstanding109,663,03093,422,427105,067,37593,263,266
Adjusted Amounts (a)
Adjusted operating loss$(2,800)$(3,721)$(1,040)$(6,722)
Adjusted operating margin(7)%(30)%(1)%(35)%
Adjusted net loss$(5,155)$(3,773)$(5,470)$(7,151)
Basic and diluted net loss per share$(0.05)$(0.04)$(0.05)$(0.08)
Other Financial Data (a)
EBITDA$5,250$(25,130)$3,331$(28,276)
as a percentage of revenues12 %(204)%%(147)%
Adjusted EBITDA$10,624$(2,153)$20,244$(4,018)
as a percentage of revenues25 %(17)%26 %(21)%
(a)Adjusted Amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A.
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Commentary on Results of Operations Comparative Results for the Three Months Ended November 30, 2023 compared to the Three Months Ended November 30, 2022
Revenue
Datacenter hosting revenue increased $25.4 million, or 290%, from $8.7 million for the three months ended November 30, 2022 to $34.1 million for the three months ended November 30, 2023 driven primarily by a full quarter of revenue generation from the Company’s Ellendale facility as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024.
Cloud services revenue increased $4.5 million, or 100%, from zero for the three months ended November 30, 2022 to $4.5 million for the three months ended November 30, 2023 driven by a full quarter of revenue generation as the Company began providing service to its cloud services customers during the first quarter of fiscal year 2024.
Related party datacenter hosting revenue was $3.6 million for the three months ended November 30, 2023 which was comparable to $3.6 million for the three months ended November 30, 2022.
Cost of revenues
Cost of revenues increased $17.4 million, or 147%, from $11.8 million for the three months ended November 30, 2022 to $29.2 million for the three months ended November 30, 2023. The increase was primarily driven by the growth in the business as more facilities were energized compared to the three months ended November 30, 2022. The change in cost of revenues are categorized as follows:
approximately $8.2 million increase in energy costs used to generate revenue;
approximately $7.7 million increase in depreciation and amortization expense attributable to owned and leased assets directly supporting revenue;
approximately $1.0 million increase in personnel expenses for employees directly attributable to generating revenue; and
approximately $0.5 million increase in other expenses directly attributable to generating revenue.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $6.1 million, or 23%, from $27.2 million for the three months ended November 30, 2022 to $21.1 million for the three months ended November 30, 2023. The primary driver of the decrease was a $17.0 million decrease in stock based compensation expense, as the Company recognized a cumulative catch-up of expense in stock based compensation expense in the comparative period upon the Company’s registration statement for the award shares being declared effective. This decrease was partially offset by the following increases:
approximately $5.0 million increase in depreciation and amortization expense attributable to owned and leased assets that do not directly support revenue;
approximately $2.0 million increase in employee salaries and benefits expense not directly attributable to revenues;
approximately $1.9 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses;
approximately $1.5 million increase in colocation lease expenses, incurred prior to services being provided, due to the growth of the business; and
approximately $0.5 million increase in professional service expenses incurred to support the growth of the business.
Other expenses
Interest expense, net increased $2.0 million, or 547%, from $0.4 million for the three months ended November 30, 2022 to $2.4 million for the three months ended November 30, 2023. The increase was driven by an increase in finance leases and interest-bearing loans between periods.
Income tax benefit
The income tax benefit decreased $0.3 million, or 100%, from a $0.3 million benefit for the three months ended November 30, 2022 to zero for the three months ended November 30, 2023. This change was driven by a change in
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valuation allowance for the three months ended November 30, 2023 compared to the three months ended November 30, 2022.
Commentary on Results of Operations Comparative Results for the Six Months Ended November 30, 2023 compared to the Six Months Ended November 30, 2022
Revenues
Datacenter hosting revenues increased $51.0 million, or 390%, from $13.1 million for the six months ended November 30, 2022 to $64.1 million for the six months ended November 30, 2023. The increase in datacenter hosting revenues was driven by a full six months of operations at our Ellendale, North Dakota facility as well as as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024.
Cloud services revenue increased $6.6 million, or 100%, from zero for the six months ended November 30, 2022 to $6.6 million for the six months ended November 30, 2023 due to revenue from the Company’s first cloud services contract, which started during the first quarter of fiscal year 2024.
Related party datacenter hosting revenue increased $1.6 million, or 27%, from $6.2 million for the six months ended November 30, 2022 to $7.8 million for the six months ended November 30, 2023 driven by increased uptime at the Company’s Jamestown, North Dakota facility.
Cost of revenues
Cost of revenues increased by $35.7 million, or 199%, from $17.9 million for the six months ended November 30, 2022 to $53.6 million for the six months ended November 30, 2023. The increase is primarily driven by the growth in the business as more facilities were energized compared to the six months ended November 30, 2022. The change in cost of revenues are categorized as follows:
approximately $21.1 million increase in energy costs used to generate revenue;
approximately $11.6 million increase in depreciation and amortization expense attributable to owned and leased assets directly supporting revenue;
approximately $2.1 million increase in personnel expenses for employees directly attributable to generating revenue; and
approximately $0.9 million increase in other expenses directly attributable to generating revenue.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $5.9 million, or 18%, from $32.2 million for the six months ended November 30, 2022 to $38.1 million for the six months ended November 30, 2023. The primary drivers of the change to selling, general and administrative expense for the six months ended November 30, 2023 were:
approximately $7.8 million increase in depreciation and amortization expense not attributable to owned and leased assets directly supporting revenue;
approximately $3.8 million increase in employee salaries and benefits expense not directly attributable to revenues;
approximately $3.7 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses;
approximately $1.9 million increase in colocation lease expenses, incurred prior to services being provided, due to the growth of the business; and
approximately $0.7 million increase in professional service expenses incurred to support the growth of the business.
These increases were partially offset by a $12.0 million decrease in stock based compensation expense, as the Company recognized a cumulative catch-up of expense in stock based compensation expense in the comparative period upon the Company’s registration statement for the award shares being declared effective.
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Loss from Legal Settlement
Loss from legal settlement was $2.4 million for the six months ended November 30, 2023 primarily due to a settlement agreement entered into by the Company in respect to employment-related claims by a former executive. The terms of the settlement include payment to the claimant of $2.3 million.
Other expenses
Interest expense, net increased $3.7 million, or 525% , from $0.7 million for the six months ended November 30, 2022 to $4.4 million for the six months ended November 30, 2023 driven by an increase in finance leases and change in the Company’s debt obligations between periods.
Loss on extinguishment of debt increased $2.3 million, or 2403%, from $0.1 million for the six months ended November 30, 2022 to $2.4 million for the six months ended November 30, 2023. The increase was driven by the termination fees to extinguish the B. Riley loan during the six months ended November 30, 2023.
Income tax benefit
Income tax benefit decreased $0.3 million or 100% from a $0.3 million benefit for the six months ended November 30, 2022 to zero for the six months ended November 30, 2023. This change was driven by a change in valuation allowance for the six months ended November 30, 2023 compared to the six months ended November 30, 2022.
Comparative Segment Data for the Three and Six Months Ended November 30, 2023 and 2022:
The following table sets forth the Company’s operating profit for each of our segments for the three and six months ended November 30, 2023 and 2022 (in thousands):
Three Months EndedSix Months Ended
November 30, 2023November 30, 2022November 30, 2023November 30, 2022
Segment Operating Profit (Loss):
Datacenter hosting segment10,846 (14,236)19,804 (15,101)
Cloud services segment
$(11,719)$— $(19,129)$— 
HPC hosting segment(908)— (1,662)— 
Total segment profit$(1,781)$(14,236)$(987)$(15,101)
Commentary on Segment Data Comparative Results for the Three Months Ended November 30, 2023 compared to the Three Months Ended November 30, 2022
Datacenter Hosting Segment
Operating Profit
Datacenter hosting operating profit increased $25.1 million, or 176% from a loss of $14.2 million for the three months ended November 30, 2022 to a profit of $10.8 million for the three months ended November 30, 2023. The change is driven by full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota facilities during the three months ended November 30, 2023, relative to operations only at the Company’s Jamestown facility during the the three months ended November 30, 2022. The change is also driven by a decrease in stock-based compensation between the periods.
Cloud Services Segment
Operating Loss
Cloud services operating loss increased $11.7 million, from zero for the three months ended November 30, 2022 to $11.7 million for the three months ended November 30, 2023. The operating loss is primarily driven by amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense attributable to the segment.
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HPC Hosting Segment
Operating Loss
HPC hosting operating loss increased $0.9 million, or 100% from zero to $0.9 million due to the Company launching the segment during the current period. The loss is largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases in the HPC hosting buildout.
Commentary on Segment Data Comparative Results for the Six Months Ended November 30, 2023 compared to the Six Months Ended November 30, 2022
Datacenter Hosting Segment
Operating Profit
Datacenter hosting operating profit increased $34.9 million, or 231% from a loss of $15.1 million for the six months ended November 30, 2022 to a profit of $19.8 million for the six months ended November 30, 2023. The change is driven by a full six months of operations at our Ellendale, North Dakota facility as well as the Garden City facility beginning revenue generation during the second quarter of fiscal year 2024. The change is also driven by a decrease in stock-based compensation between the periods.
Cloud Services Segment
Operating Loss
Cloud services operating loss increased $19.1 million, from zero for the six months ended November 30, 2022 to $19.1 million for the six months ended November 30, 2023 primarily driven by amortization expense on finance leases on computing equipment, occupancy costs from operating leases, and stock-based compensation expense attributable to the segment.
HPC Hosting Segment
Operating Loss
HPC hosting operating loss increased $1.7 million, or 100% from zero to $1.7 million due to the Company launching the segment during the current period. The loss is largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases in the HPC hosting buildout.
Non-GAAP Measures
Adjusted Operating Loss and Adjusted Net Loss
“Adjusted Operating Loss” is a non-GAAP measure that represents operating loss excluding stock-based compensation, loss from legal settlement, non-recurring professional service costs and other non-recurring expenses. “Adjusted Net Loss” is a non-GAAP measure that represents net loss excluding stock-based compensation, loss on extinguishment of debt, loss on legal settlement, non-recurring professional services costs and other non-recurring 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, the Company’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. The Company’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. The Company 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 the Company’s business.
EBITDA and Adjusted EBITDA
“EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization. “Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, loss on extinguishment of debt, loss from legal settlement, non-recurring professional service costs, and other non-recurring expenses. These costs have been adjusted as they are not
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indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of the Company’s performance that is neither required by, nor presented in accordance with, GAAP. The Company 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, the Company may incur future expenses similar to those excluded when calculating these measures. In addition, the Company’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. the Company’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. The Company 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 the Company’s business.
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Reconciliation of GAAP to Non-GAAP Measures
Three Months EndedSix Months Ended
$ in thousandsNovember 30, 2023November 30, 2022November 30, 2023November 30, 2022
Adjusted operating loss
Operating loss (GAAP)$(8,174)$(26,698)$(15,600)$(30,886)
Stock-based compensation4,799 21,819 10,440 22,398 
Loss from legal settlement
80 — 2,380 — 
Non-recurring professional service costs (a)
495 664 1,087 1,072 
Other non-recurring expenses (b)