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Applied Digital Corp.

Applied Digital Corp.APLDEarnings & Financial Report

Nasdaq · Information Technology · Services-Computer Processing & Data Preparation

BAE Systems Digital Intelligence is an international defence and security technology firm owned by BAE Systems. They specialize in delivering digital solutions that enable rapid, data-driven decision-making. Their services, solutions and products span customers in Law Enforcement, National Security, Government Departments and Government Enterprises, Critical National Infrastructure, Telecommunications, the Military, and Space.

What changed in Applied Digital Corp.'s 10-K — 2022 vs 2023

Top changes in Applied Digital Corp.'s 2023 10-K

253 paragraphs added · 266 removed · 97 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

19 edited+27 added−71 removed2 unchanged
This scarcity of mining power allows us to realize attractive hosting rates in the current market, in particular given our ability to provide long-term (3-5 year) hosting contracts. 6 Benefits of Next-Gen datacenters compared to traditional datacenters. Next-Gen datacenters are optimized for large computing power and require more power than traditional datacenters that are optimized for data retention and retrieval.
This scarcity of power allows us to realize attractive hosting rates in the current market, in particular given our ability to provide long-term (3-5 year) hosting contracts. Benefits of Next-Gen datacenters compared to traditional datacenters. Next-Gen datacenters are optimized for large computing power and require more power than traditional datacenters that are optimized for data retention and retrieval.
In addition, we are currently focused on and will continue to target states that have favorable laws and regulations for the crypto mining industry, which we believe further minimizes the associated with risks the scaling of our operations. Vertically integrate power assets.
In addition, we are currently focused on and will continue to target states that have favorable laws and regulations for HPC application industries, which we believe further minimizes the associated with risks the scaling of our operations. Vertically integrate power assets.
Working with expert advisors in the fields of power, crypto mining operations, procurement, and construction, we have designed a plan for a prefabricated facility and organization within the facility that can be delivered and installed quickly and maximize performance and efficiency of the facility and our customers’ crypto mining equipment. Construction of our first co-hosting facility began in September 2021.
With expert advisors in the fields of power, crypto mining operations, procurement, and construction, we have designed and implemented a plan for a prefabricated facility and organization within the facility that can be delivered and installed quickly and maximize performance and efficiency of the facility and our customers’ crypto mining equipment.
The power comes off a grid and we cannot control whether that energy is generated by wind or other methods. Currently, we do not have access to such information. In addition, our second facility, which is currently being constructed in Texas, will be fully supplied with power that is generated from wind.
The power comes off a grid and we cannot control whether that energy is generated by wind or other methods. Currently, we do not have access to such information. In addition, we expect our Texas facility will be largely supplied with power that is generated from wind, including power generated by the adjacent wind farm.
Our management team has experience not only in evaluating and acquiring power assets, but also in the conversion of power assets to crypto mining/hosting operations and the construction of datacenters with the specific purpose of mining cryptocurrency assets. Expand into other high computing processing applications and businesses.
Our management team has experience not only in evaluating and acquiring power assets, but also in the conversion of power assets to crypto mining/hosting operations and the construction of datacenters with the specific purpose of mining cryptocurrency assets.
Our site level strategy consists of having one key anchor tenant that has signed a 3 – 5 year long-term contract at the site and filling the rest of the facility with customers with 18 – 36 month terms.
We have disclosed related party revenue in the accompanying footnotes to the financial statements, Our crypto hosting site-level strategy consists of having one key anchor tenant that has signed a 3 – 5 year long-term contract at the site and filling the rest of the facility with customers with 18 – 36 month terms.
Through our build-out of our first Midwest facility and the prior experience our leadership team brings to our initiatives, we believe that we have developed a repeatable power strategy to significantly scale our operations.
We have developed a pipeline of potential power sources across our sites in Jamestown, North Dakota; Garden City, Texas; and Ellendale, North Dakota. Through our build-out of our first North Dakota facility and the prior experience our leadership team brings to our initiatives, we believe that we have developed a repeatable power strategy to significantly scale our operations.
Site Selection Criteria Our site selection criteria considers geographic diversity, attractive return on investment, and environmental impact. Geographic Diversity: Geographic diversity minimizes the risk to us of any event in a particular region that may impact our facilities. We expect to choose locations in environments that are policy and regulation friendly, and find sites with less expensive stable energy.
Site Selection Criteria To the extent we are building new facilities, our site selection criteria considers geographic diversity, attractive return on investment, and environmental impact. Geographic Diversity Geographic diversity minimizes the risk to us of any event in a particular region that may impact our facilities.
Environmental Impact: We are doing our part to be as environmentally conscious as possible when choosing sites for development by targeting renewable energy assets to minimize our carbon footprint.
We expect to choose locations in environments that are policy and regulation friendly, and find sites with less expensive stable energy. Environmental Impact We are doing our part to be as environmentally conscious as possible when choosing sites for development by targeting renewable energy assets to minimize our carbon footprint.
Geographically, traditional datacenters are at a disadvantage because they require fiber bases, low-latency connections and connection redundancies that are usually found in high-cost areas with high-density populations. Hosting provides predictable, recurring revenue and cash flow as compared to more volatile mining operations.
Geographically, traditional datacenters are at a disadvantage because they require fiber bases, low-latency connections and connection redundancies that are usually found in high-cost areas with high-density populations. Hosting provides predictable, recurring revenue and cash flow Within each of our business streams, we have entered into long-term fixed rate contracts with our customers.
Such services may not always be available to us on a timely basis, on commercially reasonable terms or at all. Our future performance will depend in part on our ability to successfully integrate newly hired employees and to engage and retain consultants, as well as our ability to develop an effective working relationship with our employees and consultants. 10
Our future performance will depend in part on our ability to successfully integrate newly hired employees and to engage and retain consultants, as well as our ability to develop an effective working relationship with our employees and consultants.
Further, because Next-Gen datacenters like ours represent a unique power load, we believe our demand for renewable energy and entry into agreements with renewable energy providers will increase and accelerate the buildout of renewable energy infrastructures. Customers We have material customer concentration in our co-hosting business as of May 31, 2022.
Further, because Next-Gen datacenters like ours represent a unique power load, we believe our demand for renewable energy and entry into agreements with renewable energy providers will increase and accelerate the buildout of renewable energy infrastructures. 7 There is no assurance that selection criteria will be met or that viable sites will be selected.
We have a colocation business model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a monthly recurring fee. We 4 typically enter into long term contracts with our customers. We purchased property in North Dakota on which we constructed our first co-hosting facility.
We provide energized space for customers to host computing equipment. We have a colocation business model where our customers place hardware they own into our facilities and we provide operational and maintenance services for a fixed fee. We typically enter into long-term fixed rate contracts with our customers.
We have recently expanded our leadership team by attracting top talent in the hosting space. Recent hires from both publicly traded and private companies have allowed us to build a team capable of designing and constructing hosting facilities. In addition, our board of advisors includes experts in the crypto space, including the co-founders of SparkPool and GMR.
Strong management team We have continued to expand our leadership team by attracting top talent in the digital infrastructure space. Recent hires from both publicly traded and private companies have allowed us to build a team capable of designing and 6 constructing hosting facilities, for example, our Chief Technology Officer, Michael Maniscalco. Mr.
One of the main benefits of our Amended and Restated Electric Service Agreement is the low cost of power for mining. Even prior to the crypto mining restrictions in China, power capacity available for Bitcoin mining was scarce, especially at scalable sites with over 100 MW of potential capacity.
Access to low-cost power with long-term services agreement One of the main benefits of our electrical services agreements for our Jamestown, North Dakota and Ellendale, North Dakota facilities is the low cost of power. Power capacity available for high computing power processes is scarce, especially at scalable sites with over 100 MW of potential capacity.
As our co-hosting operations expand, we believe our business structure will become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE: DLR) and Equinix, Inc. (NASDAQ: EQIX), each of which is a traditional datacenter operator, and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry.
(NASDAQ: EQIX), each of which is a traditional datacenter operator, and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry. We have begun to investigate the possibility, costs and benefits of converting to a REIT structure. Our Competitive Strengths Premier strategic collaboration with leading industry participants.
We also had 6 independent contractors who focus full time on our business and 24 independent contractors who worked on a part time basis on our business. We have relied and plan on continuing to rely on independent organizations, advisors and consultants to perform certain services for us.
We have relied and plan on continuing to rely on independent organizations, advisors and consultants to perform certain services for us. Such services may not always be available to us on a timely basis, on commercially reasonable terms or at all.
We have, and will continue to, consider opportunities for limiting the impact of our business on the environment. Employees and Human Capital As of May 31, 2022, we had 55 employees, all of whom were full time.
Employees and Human Capital As of May 31, 2023, we had 121 employees, all of whom were full time. We also had 6 independent contractors who focus full time on our business and 67 independent contractors who worked on a part time basis on our business.
Beyond their own use of our hosting capabilities, our partners have strong relationships across the cryptocurrency ecosystem, and we believe that we will be able to leverage their networks to identify leads for our expansion of hosting operations. We believe we have sufficient demand to fill our planned hosting expansion. Secure scalable power sites in areas favorable for crypto mining.
Further, we are working with Super Micro and HPE, which are both leading vendors in the AI hosting space, and we believe that we will be able to leverage their networks to identify leads for the expansion of our AI cloud services and HPC datacenter hosting businesses. Secure scalable power sites.
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Item 1. Business Overview Our Business Hosting Operation We design, build, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications. Initially, these datacenters will primarily host servers securing the Bitcoin network but can also host hardware for other applications such as artificial intelligence, machine learning and other blockchain networks in the future.
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Item 1. Business Overview Our Business We are a designer, builder and operator of next-generation digital infrastructure. We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting. AI Cloud Service Our AI Cloud service operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.
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We entered into an Amended and Restated Energy Services Agreement for the purpose of supplying 100 megawatts ("MW") of electricity to be used by our co-hosting customers at this facility.
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On October 13, 2022, we formed Sai Computing, LLC (“Sai Computing”). Sai Computing was formed to provide artificial intelligence and machine learning application customers with access to machines and a hosting environment. 4 On May 15, 2023, we announced the formal launch of our AI cloud services business through Sai Computing.
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We also entered into agreements with five customers (JointHash Holding Limited (a subsidiary of GMR), Spring Mud (a subsidiary of GMR), Bitmain Technologies Limited, F2Pool Mining, Inc. and Hashing LLC, ) which are expected to utilize the total available energy under the Amended and Restated Energy Services Agreement at our first facility and 85MW of energy at our second facility, once it is built and able to provide such energy.
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On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period. The customer will make a significant prepayment as part of the agreement. On May 25, 2023, we formed Sai Computing Holdings LLC (“Sai Holdings”) and Sai-Foundry Computing LLC (“Sai-Foundry”).
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The company pays for energy from part of the revenue from customers.
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Sai Holdings serves as the parent entity over Sai Computing and Sai-Foundry, and Sai-Foundry will serve as the joint venture entity between the Company and Foundry Technologies (“Foundry”). We have a 98% ownership interest in Sai-Foundry and consolidate the entity. On June 23, 2023, we announced that we had signed our second customer in our AI cloud hosting business.
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On February 2, 2022, we brought our first facility online. It is now fully operational. On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility. On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, TX, with the intent to build our second datacenter facility on this site.
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This agreement has a value worth up to $460 million over 36 months. To support our AI Cloud Services business, we have placed orders for over 26,000 Graphics Processing Units ("GPUs"). We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services.
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On April 25, 2022 the Company began construction on this site. This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers. The facility is expected to begin operating in calendar Q4 of 2022 and the 200 MW capacity is fully contracted with our customers.
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Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers. HPC Datacenter Hosting Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.
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On January 6, 2022, we and Antpool, an affiliate of Bitmain Technologies Holding Company, entered into a Limited Liability Company Agreement of 1.21 Gigawatts, LLC ("1.21 Gigawatts"), pursuant to which we and Antpool contributed $8,000 and $2,000, respectively, and will initially own 80% and 20%, respectively, of 1.21 Gigawatts. 1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with up to 1.5 gigawatts ("GW") of capacity for hosting blockchain infrastructure.
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On December 14, 2022, we announced the beginning of construction of a 5 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota. We subsequently determined to increase the capacity of this facility to 9 MW.
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We are the managing member of 1.21 Gigawatts and are primarily responsible for all site development, construction and the eventual operations of the datacenters. However, certain activities of 1.21 Gigawatts and its subsidiaries require the vote of 90% of the then outstanding units of each such entity.
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This separate and unique building, designed and purpose-built for GPUs, will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments. This facility is expected to be brought online in the second half of calendar year 2023.
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As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts. 1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member.
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During early calendar year 2023, we began testing HPC hosting at this facility. The systems in this facility passed initial testing in the second calendar quarter of 2023. We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.
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Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason, and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of the other members to purchase some or all of such units.
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Crypto Datacenter Hosting Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers.
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Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our common stock.
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As of May 31, 2023, we had approximately 185 MW of capacity online and available to service crypto mining customers. Subsequent to May 31, 2023, we brought another 100 MW of capacity online, bringing total energized capacity to approximately 285 MW as of the date of this report.
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The number of shares that Antpool may convert is equal to the capital contributions of 1.21 Gigawatts made by Antpool divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts.
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Additionally, there is another 200 MW of capacity the Company has committed to energize, all of which is contracted for under multi-year arrangements. During the fiscal year ended May 31, 2023, the Company entered into a joint venture agreement with GMR Limited ("GMR") to form Highland Digital Holdings, LLC ("Highland Digital").
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We have begun to investigate the possibility, costs and benefits of converting to a REIT structure. Mining Operation Our initial mission was to quickly scale a large mining operation focused on Bitcoin and Ethereum (Ether).
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Highland Digital is dormant and the Company currently has no plans to use the entity for any activities. 5 REIT structure As our operations expand, we believe our business structure may become conducive to a REIT structure, comparable to Digital Realty Trust (NYSE: DLR) and Equinix, Inc.
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With a specialized algorithm and expertise provided by strategic partners and mining pool managers, we were able to mine the most profitable cryptoassets in the market and adjust in real-time.
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On May 24, 2023, we announced that we are working with Super Micro Computer, Inc. ("Super Micro"), a global leader in Application-Optimized Total IT Solutions, to deliver Applied Digital’s AI Cloud service. Super Micro is a leading provider of application-optimized, high-performance server and storage solutions that address a broad range of computational-intensive workloads.
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As a result of changes to Chinese regulations of cryptoasset mining, ultimately leading to the shut down on mining facilities in locations across China, we were compelled to explore other co-hosting locations outside of China.
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Super Micro’s next-generation GPU servers significantly lower the power requirements of data centers. With the amount of power required to enable today's rapidly evolving large scale AI models, optimizing the Total Cost of Ownership (TCO) and the Total Cost to Environment (TCE) is crucial to data center operators.
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By July 2021, we had entered into a co-hosting 5 agreement with Coinmint LLC, had our initial order of mining equipment delivered and installed at Coinmint's co-hosting facility, and began our mining operations.
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On June 30, 2023, we announced a collaboration with Hewlett Packard Enterprise Company ("HPE"), a global edge-to-cloud company. As part of the collaboration, HPE will deliver its powerful, energy-efficient supercomputers that are proven to support large-scale AI through Applied Digital's AI cloud service.
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We also determined that constructing our own co-hosting facilities would enable us to generate a stable cash flow stream through long-term hosting agreements, lower the cost of power for our own mining operations, and eliminate risks to us of relying on a third-party host.
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In addition, we have obtained access to low cost energy through our energy services agreements, which provides us with consistent margins and cash flow. We intend for the steady cash flows generated by our operations to be reinvested into our AI Cloud services and HPC datacenter businesses.
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During the development of our co-hosting operations, we determined that it would be beneficial to our stockholders to focus more of our resources on building our co-hosting operations than on expanding our mining operations. Accordingly, in December 2021, we began selling our crypto mining equipment.
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Maniscalco was an Entrepreneur in Residence at Stanley Black & Decker Venture Studio (StanleyX AI) in 2021. He was a founder and Chief Executive Officer of Better Living Technologies from 2018 to 2022. Prior to that, Mr. Maniscalco founded, and was Vice President of Product, of Ihiji from 2009 to 2018. Our Growth Strategies Continued expansion of businesses.
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On March 9, 2022 we ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. We have no plans to return to crypto mining operations in the future.
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We have started expansion into hosting for HPC applications. We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations. Further, we launched our AI cloud hosting services business through Sai Computing and have announced our first major customer. Leverage leading equipment vendors to grow operations while minimizing risk.
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Company History Applied Blockchain, Inc. was incorporated in Nevada in May 2001 and conducted business under several names until July 2009, when we filed a Form 15 with the SEC to suspend the registration of our common stock and our obligations to file annual, quarterly and other periodic reports with the SEC in order to conserve financial and other resources for the continuing development and commercialization of our business.
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We believe that the signing of our initial customers for our AI cloud service business will help us elevate our profile within the market.
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Our common stock continued to trade on the OTC Pink Market. In 2021, we changed our name to Applied Blockchain, Inc. and began our current next-gen data center business. On February 2, 2022, we brought our first North Dakota facility online. It is now fully operational.
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Customers We have material customer concentration in our crypto datacenter hosting business. We have entered into service contracts with Spring Mud, LLC (a subsidiary of GMR Limited) Bitmain Technologies Limited, Arrakis, Inc., Hashing LLC, Marathon Digital Holdings, Inc., and Global Operating Infrastructure, LLC ("GOI"), who have collectively contracted to use the entire capacity of our three crypto hosting datacenters.
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In April 2022, we completed our initial public offering and our common stock began trading on The Nasdaq Global Select Market. Our Competitive Strengths Premier strategic partnerships with leading industry participants.
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GMR Limited (“GMR”) holds more than 5% of our outstanding Common Stock. Guo Chen, a 50% owner and sole director of GMR, is also deemed to beneficially own shares of our Common Stock held by GMR. Mr. Chen owns 60% of Alternity Fund Ltd., which owns 100% of GOI.
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In March 2021, we executed a strategy planning and portfolio advisory services agreement (“Services Agreement”) with GMR Limited, a British Virgin Island limited liability company (“GMR”), Xsquared Holding Limited, a British Virgin Island limited liability company (“SparkPool”) and Valuefinder, a British Virgin Islands limited liability company (“Valuefinder”) and, together with GMR and SparkPool, (the “Service Provider(s)”).
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On December 8th, 2021, we entered into a Service Order with GOI pursuant to which we provide energized space for mining activities of GOI. Our hosting arrangements with Spring Mud and GOI are therefore considered related party transactions.
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Jason Zhang, one of our board members, is the sole equity holder and manager of Valuefinder and a related party.
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We have also material customer concentrations in our AI cloud services business, as we only have two customers. On May 16, 2023, we announced that we had signed our first customer in our AI cloud hosting business. This agreement has a value worth up to $180 million over 24 months, and contains a significant prepayment.
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Pursuant to the Services Agreement, the Service Providers agreed to provide cryptoasset mining management and analysis and to assist us in securing difficult to obtain equipment and we agreed to issue 7,440,148 shares of our common stock to GMR or its designees, 7,440,148 shares of our common stock to SparkPool or its designees and 3,156,426 shares of our common stock to Valuefinder or its designees.
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On June 23, 2023, we announced that we had signed our second customer in our AI cloud hosting business with a total value worth up to $460 million over 36 months.
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Each Service Provider has provided such services to us which services commenced in June 2021. Each of these Service Providers assisted in the creation of our crypto mining operations, which we then terminated on March 9, 2022. Each of them also advised us in connection with the design and buildout of our co-hosting operations.
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If we acquire rights to additional properties and build additional facilities, we intend to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers. Environmental Regulations North Dakota is one of the states leading the United States in wind power generation.
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GMR and SparkPool have since become customers of our co-hosting operations. As of June 2022, SparkPool ceased all operations and is no longer in a position to provide services under the Services Agreement. On June 2, 2022, SparkPool forfeited 4,965,432 shares of our common stock back to us.
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Beyond the wind farm, the data center will be connected to the Wind Energy Transmission of Texas transmission lines, which for the most part transmit wind generated power. We are, however, not purchasing the renewable energy credits from the wind generation facility. We have, and will continue to, consider opportunities for limiting the impact of our business on the environment.
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We believe that our partnerships with GMR, Bitmain and certain other partners have provided, and continue to provide, us with a significant competitive advantage. GMR has also been a proponent of our hosting strategy, having signed a contract for approximately 50% of our 100 MW capacity as part of our hosting operation under development.
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Bitmain, provides leads for potential hosting customers. SparkPool, GMR, and Bitmain are each strategic equity investors in our company. Each of them also advised us in connection with the design and buildout of our co-hosting operations. GMR, SparkPool and Bitmain have since become customers of our co-hosting operations. Access to low-cost power with long-term services agreement.
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As compared to our previous mining operations, co-hosting revenues are less subject to volatility related to the underlying cryptoasset markets. Through our Amended and Restated Electric Service Agreement with a utility in the upper Midwest, we have a contractual ceiling for our energy costs.
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The Electric Service Agreement has also enabled us to launch our hosting business with long-term customer contracts. Cambridge Bitcoin Electricity Consumption Index reported that as of February 1, 2021 more than 6 GW of Bitcoin was mined in China (or $4.3 billion of power cost, assuming $0.08 per kWh average hosting cost). China has since banned cryptoasset mining related activity.
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We expect much of the demand for hosting locations previously met in China will move to the United States due to its reliable power options. We intend for the steady cash flows generated by our hosting operations to be reinvested into the hosting business. Strong management team and board of advisors with deep experience in crypto mining and hosting operations.
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Our Growth Strategies Leverage partners to grow hosting operations while minimizing risk. Our strategic partners GMR and Bitmain have entered into hosting contracts with us that will utilize the available capacity from our currently operating 100 MW hosting site, which enabled us to pre-fill our initial site before breaking ground.
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We have developed a pipeline of potential power sources. Our first hosting site in the Midwest is fully operational and we have begun construction on our second facility in Garden City, TX. We also expect to begin construction in North Dakota on our third facility, resulting in a total combined capacity of roughly 500 MW.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

35 edited+51 added−21 removed52 unchanged
A decline in the market price of our common stock also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. We do not expect to declare or pay dividends in the foreseeable future, which may limit the return our shareholders realize on their investment.
A decline in the market price of our common stock also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. We do not expect to declare or pay dividends on our common stock in the foreseeable future, which may limit the return our shareholders realize on their investment.
The cryptomining industry is subject to various risks which could adversely affect our current customers’ ability to continue to operate their businesses, including, but not limited to: • ongoing and future government or regulatory actions that could effectively prevent our customers’ mining operations, with little to no access to policymakers and lobbying organizations in many jurisdictions; • a high degree of uncertainty about cryptoassets’ status as a “security,” a “commodity” or a “financial instrument” in any relevant jurisdiction which may be subject our customers to regulatory scrutiny, investigations, fines, and other penalties; • banks or financial institutions may close the accounts of businesses engaging in cryptoasset- related activities as a result of compliance risk, cost, government regulation or public pressure; • use of cryptoassets in the retail and commercial marketplace is limited; 11 • extreme volatility in the market price of cryptoassets that may harm our customers financial resources, ability to meet their contractual obligations to us or cause them to reduce or cease mining operations • use of a ledger-based platform may not necessarily benefit from viable trading markets or the rigors of listing requirements for securities creating higher potential risk for fraud or the manipulation of the ledger due to a control event; • concentrated ownership, large sales of cryptoassets, or distributions or redemptions by vehicles invested in cryptoassets could have an adverse effect on the demand or, and market price of, such cryptoasset; • our customers could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto, rapidly changing technology or methods of, rules of, or access to, platforms; • the number of cryptoassets awarded for solving a block in a blockchain could decrease which may adversely affect our customers’ incentive to expend processing power to solve blocks and/or continue mining and our customers may not have access to resources to invest in increasing processing power when necessary in order to in order to maintain the continuing revenue production of their mining operations; • our customers may face third parties' intellectual property claims or claims relating to the holding and transfer of cryptoassets and their source code, which, regardless of the merit of any such action, could reduce confidence in some or all cryptoasset networks’ long-term viability or the ability of end-users to hold and transfer cryptoassets; • contributors to the open-source structure of the cryptoasset network protocols are generally not directly compensated for their contributions in maintaining and developing the protocol and may lack incentive to properly monitor and upgrade the protocols; • a disruption of the Internet on which our customers’ business of mining cryptoassets is dependent; • decentralized nature of the governance of cryptoasset systems, generally by voluntary consensus and open competition with no clear leadership structure or authority, may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles; and • security breaches, hacking, or other malicious activities or loss of private keys relating to, or hack or other compromise of, digital wallets used to store our customers’ cryptoassets could adversely affect their ability to access or sell their cryptoassets or effectively utilize impacted platforms.
The cryptomining industry is subject to various risks which could adversely affect our current customers’ ability to continue to operate their businesses, including, but not limited to: • ongoing and future government or regulatory actions that could effectively prevent our customers’ mining operations, with little to no access to policymakers and lobbying organizations in many jurisdictions; • a high degree of uncertainty about cryptoassets’ status as a “security,” a “commodity” or a financial instrument in any relevant jurisdiction which may subject our customers to regulatory scrutiny, investigations, fines, and other penalties; • banks or financial institutions may close the accounts of businesses engaging in cryptoasset-related activities as a result of compliance risk, cost, government regulation or public pressure; • use of cryptoassets in the retail and commercial marketplace is limited; • extreme volatility in the market price of cryptoassets that may harm our customers financial resources, ability to meet their contractual obligations to us or cause them to reduce or cease mining operations; • use of a ledger-based platform may not necessarily benefit from viable trading markets or the rigors of listing requirements for securities creating higher potential risk for fraud or the manipulation of the ledger due to a control event; 9 • concentrated ownership, large sales of cryptoassets, or distributions or redemptions by vehicles invested in cryptoassets could have an adverse effect on the demand for, and market price of, such cryptoasset; • our customers could face difficulty adapting to emergent digital ledgers, blockchains, or alternatives thereto, rapidly changing technology or methods of, rules of, or access to, platforms; • the number of cryptoassets awarded for solving a block in a blockchain could decrease, which may adversely affect our customers’ incentive to expend processing power to solve blocks and/or continue mining and our customers may not have access to resources to invest in increasing processing power when necessary in order to maintain the continuing revenue production of their mining operations; • our customers may face third parties' intellectual property claims or claims relating to the holding and transfer of cryptoassets and their source code, which, regardless of the merit of any such action, could reduce confidence in some or all cryptoasset networks’ long-term viability or the ability of end-users to hold and transfer cryptoassets; • contributors to the open-source structure of the cryptoasset network protocols are generally not directly compensated for their contributions in maintaining and developing the protocol and may lack incentive to properly monitor and upgrade the protocols; • a disruption of the Internet on which our customers’ business of mining cryptoassets is dependent; • decentralized nature of the governance of cryptoasset systems, generally by voluntary consensus and open competition with no clear leadership structure or authority, may lead to ineffective decision making that slows development or prevents a network from overcoming emergent obstacles; and • security breaches, hacking, or other malicious activities or loss of private keys relating to, or hack or other compromise of, digital wallets used to store our customers’ cryptoassets could adversely affect their ability to access or sell their cryptoassets or effectively utilize impacted platforms.
To comply with the 16 requirements of being a public company, we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff.
To comply with the requirements of being a public company, we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting, finance and legal staff.
We are a newly public company and are now required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act ("SOX"), which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting.
We are a newly public company and are now required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act (“SOX”), which requires our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting.
Thus, our Board can authorize and issue shares of 17 preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our other series of capital stock. These rights may have the effect of delaying or deterring a change of control of our company.
Thus, our Board can authorize and issue shares of 16 preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our other series of capital stock. These rights may have the effect of delaying or deterring a change of control of our company.
If any of our customers experience declining mining operations for any reason or determine to stop utilizing our co-hosting facilities, we could be pressured to reduce the prices we charge for our services or we could lose a major customer.
If any of our customers' experience declining mining operations for any reason or determine to stop utilizing our co-hosting facilities, we could be pressured to reduce the prices we charge for our services or we could lose a major customer.
Any of the factors listed below could have a material adverse effect on an investment in our securities: • actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; 15 • changes in the market’s expectations about our operating results; • relative success of our competitors; • our operating results failing to meet the expectations of securities analysts or investors in a particular period; • changes in financial estimates and recommendations by securities analysts concerning us and the market for our co-hosting facilities; • operating and stock price performance of other companies that investors deem comparable to us; • our ability to continue to expand our operations; • changes in laws and regulations affecting our business or our industry; • commencement of, or involvement in, litigation involving us; • changes in our capital structure, such as future issuances of securities or the borrowing of additional debt; • the volume of shares of common stock available for public sale pursuant to an effective registration statement or exemption from registration requirements ; • any major change in our board of directors or management; • sales of substantial amounts of our common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and • general economic and political conditions such as recessions, interest rates, international currency and crypto currency fluctuations and acts of war or terrorism.
Any of the factors listed below could have a material adverse effect on an investment in our securities: • actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; • changes in the market’s expectations about our operating results; • relative success of our competitors; • our operating results failing to meet the expectations of securities analysts or investors in a particular period; • changes in financial estimates and recommendations by securities analysts concerning us and the market for our co-hosting facilities and services; • operating and stock price performance of other companies that investors deem comparable to us; • our ability to continue to expand our operations; • changes in laws and regulations affecting our business or our industry; • commencement of, or involvement in, litigation involving us; • changes in our capital structure, such as future issuances of securities or the borrowing of additional debt; 14 • the volume of shares of common stock available for public sale pursuant to an effective registration statement or exemption from registration requirements • any major change in our board of directors or management; • sales of substantial amounts of our common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and • general economic and political conditions such as recessions, interest rates, international currency and crypto currency fluctuations and acts of war or terrorism. • Broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance.
We do not expect to declare or pay dividends in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business.
We do not expect to declare or pay dividends on our common stock in the foreseeable future, as we anticipate that we will invest future earnings in the development and growth of our business.
In addition, the failure of our Common Stock to continue to be listed on the Nasdaq could adversely impact the market price for the Common Stock and our other securities, and we could face a lengthy process to re-list the Common Stock, if we are able to re-list the Common Stock.
In addition, the failure of our common stock to continue to be listed on the Nasdaq could adversely impact the market price for the common stock and our other securities, and we could face a lengthy process to re-list the common stock, if we are able to re-list such stock. We are a public reporting company.
Although we began generating revenue from hosting operations when our first co-hosting facility came online on February 2, 2022, we are subject to the risks and uncertainties of a new business, including the risk that we may never develop, complete development or market any of our proposed services.
Although we began generating revenue from crypto mining in June 2021 and began generating revenue from hosting operations when our first co-hosting facility came online on February 2, 2022, we are subject to the risks and 8 uncertainties of a new business, including the risk that we may never further develop, complete development of or market any of our proposed services.
Our board and stockholders have approved an employee incentive plan and a non-employee director incentive plan. We have reserved 15,166,666 shares of our common stock for future issuance under our plans. Such conversions and issuances would also result in dilution of current stockholders’ relative ownership.
Our board and stockholders have approved an employee incentive plan and a non-employee director incentive plan. We have reserved 18,000,897 shares of our common stock for future issuance under our plans. Such conversions and issuances would also result in dilution of current stockholders’ relative ownership.
Our future success also depends in large part on our ability to attract, retain and motivate key management and operating personnel. As we continue to develop and expand our operations, we may require personnel with different skills and experiences, and who have a sound understanding of our business and the cryptoasset industry.
Our future success also depends in large part on our ability to attract, retain and motivate key management and operating personnel. As we continue to develop and expand our operations, we may require personnel with different skills and experiences, and who have a sound understanding of our business and high computing power technologies.
Antpool’s interest in each such entity will be convertible by it at any time into a number of shares of our common stock equal to Antpool’s capital contribution in connection with the acquisition of such interests divided by $1.25 (or $7.50 after giving effect to the Reverse Stock Split).
Antpool’s interest in each such entity will be convertible by it at any time into a number of shares of our common stock equal to Antpool’s capital contribution in connection with the acquisition of such interests divided by $7.50.
If these third parties experience difficulty providing the services we require, or if they experience disruptions or financial distress or cease operations temporarily or permanently, it could make it difficult for us to execute our operations.
If these third parties experience difficulty providing the services or products we require, or if they experience disruptions or financial distress or cease operations temporarily or permanently, or if the products they supply are defective or cease to operate for any reason, it could make it difficult for us to execute our operations.
A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation.
Though we are not currently, in the future we may become subject to Nevada’s control share law. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation.
Additionally, as a result of the risks our crypto mining customers face, it is not possible for us to predict the future level of demand for our services that will be generated by these customers or the future demand for the products and services of these customers.
We currently have material customer concentration of cryptomining customers. As a result of the risks our crypto mining customers face, it is not possible for us to predict the future level of demand for our services that will be generated by these customers or the future demand for the products and services of these customers.
The trading prices and valuations of these stocks, and of our common stock, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies that investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations.
A loss of investor confidence in the market for retail stocks or the stocks of other companies that investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations.
COVID-19 or any pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business. The COVID-19 virus has had unpredictable and unprecedented impacts in the United States and around the world.
COVID-19 or any pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business. The COVID-19 virus has had unpredictable and unprecedented impacts in the United States and around the world. The implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain.
If the Company is unable to meet the continued listing criteria of Nasdaq and the Common Stock became delisted, trading of the Common Stock could thereafter be conducted in the over-the-counter markets in the OTC Pink, also known as “pink sheets” or, if available, on another OTC trading platform. 18 We cannot assure you that we will meet the criteria for continued listing, in which case the Common Stock could become delisted.
If the Company is unable to meet the continued listing criteria of Nasdaq and the common stock became delisted, trading of the common stock could thereafter be conducted in the over-the-counter markets in the OTC Pink Market, also known as “pink sheets” or, if available, on another OTC trading platform.
The trading price of our common stock has been volatile and may continue to be volatile in response to various factors, some of which are beyond our control.
Risks Related to our Common Stock Continued volatility of our stock price may affect the price at which you could sell our common stock. The trading price of our common stock has been volatile and may continue to be volatile in response to various factors, some of which are beyond our control.
There can be no assurances that we will operate profitably. Our success depends on external factors in the cryptomining industry. All of our current customers are crypto miners.
There can be no assurances that we will operate profitably. Our success depends on external factors in the cryptomining industry. We have a material concentration of customers in the crypto mining industry.
We have also have more than a majority of independent directors on our Board in order to ensure that there are limitations on the risks of conflicts of interest impacting Board level decisions.
Mr. Cummins holds over 22% of our common stock, and has a financial interest in the success of our operations. We also have more than a majority of independent directors on our Board in order to ensure that there are limitations on the risks of conflicts of interest impacting Board level decisions.
Broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected.
The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our common stock, may not be predictable.
Any disruption of service experienced by certain of our third-party service providers, or our ineffective management of relationships with third-party service providers could harm our business, financial condition, operating results, cash flows, and prospects.
If we overestimate our capacity requirements and therefore secure excess capacity and have excess capital expenditures, our operating material could be materially reduced. Any disruption of service experienced by certain of our third-party service providers, or our ineffective management of relationships with third-party service providers could harm our business, financial condition, operating results, cash flows, and prospects.
Additionally, our Bylaws establish limitations on the removal of directors and on the ability of our stockholders to call special meetings. For a more complete understanding of these provisions, please refer to the Nevada Revised Statutes and our Articles and Bylaws. Though we are not currently, in the future we may become subject to Nevada’s control share law.
Additionally, our Bylaws establish limitations on the removal of directors and on the ability of our stockholders to call special meetings. For a more complete understanding of these provisions, please refer to the Nevada Revised Statutes and our Articles and Bylaws filed with the SEC.
We do not have specific procedures in place with respect to potential conflicts of interest, however, in determining to engage with potential competitors and entities with whom our officers or directors may have relationships, we considered the risks and risk mitigation factors, including requiring that transactions with entities that are related to our officers and directors be approved or ratified by our Audit Committee.
These other interests may conflict with such officer’s or director’s interest in us, including conflicting with interests in allocating resources, time and attention to our business and impacting decisions made on our behalf with respect to such entities, their affiliates or competitors. 11 We do not have specific procedures in place with respect to potential conflicts of interest, however, in determining to engage with potential competitors and entities with whom our officers or directors may have relationships, we considered the risks and risk mitigation factors, including requiring that transactions valued at over $120,000 in which our officers, directors and holders of more than 5% of our common stock have an interest be approved or ratified by our Audit Committee.
Moreover, if one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, or if our results of operations do not meet their expectations, our stock price could decline. Item 1B. Unresolved Staff Comments None
Moreover, if one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, or if our results of operations do not meet their expectations, our stock price could decline. 17 We may not be able to maintain the listing of our common stock on Nasdaq, which may adversely affect the ability of holders of common stock to resell their securities in the secondary market.
We may not be able to maintain the listing of our Common Stock on Nasdaq, which may adversely effect the flexibility of holders of Common Stock to resell their securities in the secondary market. Our Common Stock is presently listed on Nasdaq, which requires us to meet certain conditions to maintain our listing status.
Our common stock is presently listed on Nasdaq, which requires us to meet certain conditions to maintain our listing status.
We expect to need to raise substantial additional capital to expand our operations, pursue our growth strategies and to respond to competitive pressures or unanticipated working capital requirements. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations.
We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our existing operations. 10 If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline.
The market for highly qualified personnel in this industry is very competitive and we may be unable to attract such personnel. If we are unable to attract such personnel, our business could be harmed. We may depend upon outside advisors who may not be available on reasonable terms as needed.
The market for highly qualified personnel in this industry is very competitive and we may be unable to attract such personnel. If we are unable to attract such personnel, our business could be harmed. Employee disputes or litigation and related unfavorable publicity may negatively affect our future business, financial condition and operating results.
We may be required to accept terms that restrict our ability to incur additional indebtedness, pay dividends to our shareholders, or take other actions. We may also be required to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders.
Furthermore, if we engage in additional debt financing, the holders of debt likely would have priority over the holders of common stock on order of payment preference. We may be required to accept terms that restrict our ability to incur additional indebtedness, pay dividends to our shareholders, or take other actions.
We have not yet designed and/or implemented user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel. We also do not currently have an internal control system that identifies critical processes and key controls.
We have identified the following material weakness in the design of our internal controls: • We have not designed and implemented controls to ensure we can record, process, summarize, and report financial data. • We have not yet designed and implemented user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel. • We did not design and maintain effective controls associated with related party transactions and disclosures.
Furthermore, it is anticipated that such persons may be engaged on an “as needed” basis without a continuing fiduciary or other obligation to us. In the event we consider it necessary to hire outside advisors, we may elect to hire persons who are affiliates, if they are able to provide the required services.
Our management, with our Board approval in certain cases, without any input from stockholders will make the selection of any such advisors. Furthermore, it is 12 anticipated that such persons may be engaged on an “as needed” basis without a continuing fiduciary or other obligation to us.
To supplement the business experience of our officers and directors, we may be required to employ technical experts, appraisers, attorneys, or other consultants or advisors. Our management, with our board of directors (“Board”) approval in certain cases, without any input from stockholders will make the selection of any such advisors.
We may depend upon outside advisors who may not be available on reasonable terms as needed. To supplement the business experience of our officers and directors, we may be required to employ technical experts, appraisers, attorneys, or other consultants or advisors.
Any such development could have an adverse effect on our margins and financial position, and would negatively affect our revenues and results of operations. Risks Related to our Common Stock The liquidity of our common stock is uncertain; the limited trading volume of the common stock may depress the price of such stock or cause it to fluctuate significantly.
Any such development could have an adverse effect on our margins and financial position, and would negatively affect our revenues and results of operations. Under the Inflation Reduction Act of 2022, we may have liability for the 1% stock buyback tax to the extent holders of Series E Preferred Stock require that we redeem such stock.
Removed
Such circumstances could have a material adverse effect on our business, prospects or operations. We have an evolving business model which is subject to various uncertainties. 12 As cryptoassets and blockchain technologies become more widely available, we expect the services and products associated with them to evolve.
Added
Such circumstances could have a material adverse effect on our business, prospects or operations. We may be unable to raise additional capital needed to grow our business. We expect to need to raise substantial additional capital to expand our operations, pursue our growth strategies and to respond to competitive pressures or unanticipated working capital requirements.
Removed
Future regulations may require our co-hosting customers to change their businesses in order to comply fully with federal and state laws regulating cryptoasset (including Ethereum and Bitcoin) mining. In order to stay current with the industry, our business model may need to evolve as well.
Added
We may also be required to maintain specified liquidity or other ratios that could otherwise not be in the interests of our stockholders. If we incorrectly estimate our hosting capacity requirements and related capital expenditures, our results of operations could be adversely affected.
Removed
From time to time, we may modify aspects of our business model relating to our strategy. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to our business. We may be unable to raise additional capital needed to grow our business.
Added
We are continuously evaluating our capacity requirements in order to effectively manage our capital expenditures and operating results. However, we may be unable to accurately project our future capacity needs or sufficiently allocate resources to address such needs.
Removed
If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. Furthermore, if we engage in additional debt financing, the holders of debt likely would have priority over the holders of common stock on order of payment preference.
Added
If we under estimate these requirements, we may not be able to provide sufficient service to existing customers or may be required to limit new customer acquisition, both of which may materially and adversely impair our results of operations. Similarly, we have entered into multi-year contract commitments with colocation service providers.
Removed
These other interests may conflict with such officer’s or director’s interest in us, including conflicting with interests in allocating resources, time and attention to our business and impacting decisions made on our behalf with respect to such entities, their affiliates or competitors.
Added
Additionally, as we build our AI Cloud services, we also expect to rely on third parties to lease or sell us equipment which we then lease to certain of our AI Cloud customers.
Removed
Our Service Providers (other than SparkPool which discontinued its operations as of June 2022) and Bitmain, operate businesses related to crypto mining. Specifically, GMR and Bitmain actively mine cryptoassets. Valuefinder consults with and advise other cryptoasset-related companies.
Added
We may become involved in lawsuits or other disputes relating to employment matters, such as hostile work place, discrimination, wage and hour disputes, sexual harassment, or other employment issues. These types of claims, depending on their nature, can have a significant negative impact on businesses.
Removed
Our Service Providers’ and Bitmain’s interest in their 13 own business and that of entities they advise may conflict with our interests and may impact the advice provided to us or our competitors such that our business, operations and financial results may be negatively impacted.
Added
Certain companies that have faced employment- or harassment-related lawsuits have had to terminate management or other key personnel, and have borne economic and other costs and suffered reputational harm that has negatively impacted their business. If we were to face any employment-related claims, our business could be negatively affected.
Removed
Recognizing that Mr. Cummins holds over 23% of our common stock, and our Service Providers, other than Xsquared which no longer operates, hold between 3.2% and 7.5% of our common stock, all of them have a financial interest in the success of our operations. Additionally, none of our Service Providers or Bitmain operate in the co-hosting business.
Added
As previously disclosed, on June 23, 2023, the Company announced an internal investigation with respect to a potential sexual harassment claim between two of our executive officers. Based on information obtained through the investigation, the Audit Committee of our Board of Directors determined that the relationship between the parties was consensual and the allegations of workplace harassment are unfounded.
Removed
Because we are not engaging in the crypto mining business at this time and focusing on expanding our co-hosting business, the effects of any such risks of conflicts of interest are limited in scope. We expect that as our co-hosting business continues to grow, the risks of conflicts of interest will become more limited over time.
Added
However, we cannot guarantee that this matter is resolved or that these or subsequent allegations will not result in litigation or other disputes. In such an event, we would likely incur significant legal fees and expenses, and any dispute could distract our management from the operation of our business or lead to employee separations from the Company.
Removed
China has prohibited the shipment of cryptoasset related products in and out of its borders, which could negatively impact our ability to receive mining equipment from China-based suppliers on behalf of our customers.
Added
Moreover, while we do not believe any such claim would have merit, any dispute or resolution could result in the payment of damages, severance, vesting of equity awards or payment of other amounts by the Company, which could be significant. All of these factors could negatively affect our business, financial condition, operating results, liquidity and prospects.
Removed
Third-party manufacturers, suppliers, sub-contractors and customers have been and could continue to be disrupted by worker absenteeism, quarantines, restrictions on employees’ ability to work, office and factory closures, disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions.
Added
In the event we consider it necessary to hire outside advisors, we may elect to hire persons who are affiliates, if they are able to provide the required services. COVID-19 or any pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business.
Removed
Depending on the 14 magnitude of such effects on our supply chain, shipments of parts for our customers’ existing miners may be delayed. As our customers’ equipment requires repair or becomes obsolete and requires replacement, our and their ability to obtain adequate replacements or repair parts from their manufacturer may therefore be hampered.
Added
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law.
Removed
To the extent we are providing maintenance and repair services to our customers, our ability to provide such services may also be hampered by supply chain and labor disruptions. If not resolved quickly, supply chain disruptions could negatively impact our operations. The implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain.
Added
The IR Act provides for, among other things, a new U.S. federal 1% excise tax (the “Excise Tax”) on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023.
Removed
We have material customer concentration in our co-hosting business. We have entered into contracts with five customers to utilize our first co-hosting facility in North Dakota. These five customers account for 100% of the revenue from our first co-hosting facility (100 MW).
Added
The Excise Tax is imposed on the repurchasing corporation itself, not its stockholders from which shares are repurchased. The amount of the Excise Tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase.
Removed
These customers have also contracted for 85MW of power at our second co-hosting facility once it is completed and operational. In addition, in July 2022, the Company entered into a five-year hosting contract with Marathon Digital Holdings, Inc. for 200 MW of mining capacity.
Added
However, for purposes of calculating the Excise Tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the Excise Tax. The U.S.
Removed
As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility being built in Texas and at least 110 MW of hosting capacity at its second facility to be built in North Dakota.
Added
Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the Excise Tax. Any share redemption or other share repurchase that occurs after December 31, 2022 may be subject to the Excise Tax.
Removed
There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers.
Added
Whether and to what extent we would be subject to the Excise Tax will depend on a number of factors, including (i) the fair market value of any redemptions and repurchases, (ii) the nature and amount of any equity issuances, and (iii) the content of regulations and other guidance from the Treasury.
Removed
Although our common stock is listed on Nasdaq, there has been a limited public market for the common stock and there can be no assurance that a more active trading market will develop. As a result, shareholders may not be able to sell shares of common stock in short time periods, or possibly at all.
Added
Depending on the number of shares of our Series E Preferred Stock we sell and the number of holders of Series E Preferred Stock who redeem their stock, the Excise Tax could be applicable to the Company and adversely affect the cash we have available for our operations.
Removed
The absence of an active trading market may cause the price per share of the common stock to fluctuate significantly. Our stock price has been volatile and may continue to be volatile in the future; this volatility may affect the price at which you could sell our common stock.
Added
As of the date of this prospectus supplement we have not sold or issued any shares of Series E Preferred Stock. We maintain cash deposits in excess of federally insured limits.
Removed
We will not be required to make our first assessment of our internal control over financial reporting until the year following this annual report, (i.e., the fiscal year ending May 31, 2023).
Added
Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance. 13 We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits.
Removed
We currently have material weaknesses in the design or operation of our internal controls, which could adversely affect our ability to record, process, summarize and report financial data.
Added
Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC.
Added
The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance.
Added
There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.
Added
Accounting for our power purchase agreements could cause variability in the results we report.

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Item 2. Properties

Properties — owned and leased real estate

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Our wholly-owned subsidiary, APLD – Rattlesnake Den I LLC, is party to a 99-year land lease for a 50-acre parcel of land located in Garden City, Texas. We are constructing our second co-hosting facility at this location.
Our subsidiary APLD – Rattlesnake Den I LLC, which is part of the 1.21 Gigawatts, LLC joint venture, in which the Company owns an 80% equity interest, is party to a 99-year land lease for a 50-acre parcel of land located in Garden City, Texas.
Item 2. Properties We lease approximately 10,699 square feet of office space at 3811 Turtle Creek Blvd., Suite 2100, Dallas, Texas 75219. We use this location as our principal offices. Our wholly-owned subsidiary, APLD Hosting LLC ("Hosting"), owns in fee simple a 40-acre parcel of land located in Jamestown, Stutsman County, North Dakota, to be used in our co-hosting business.
Item 2. Properties We lease approximately 10,700 square feet of office space at 3811 Turtle Creek Blvd., Suite 2100, Dallas, Texas 75219. We use this location as our principal offices. In addition, we lease approximately 11,000 square feet of office and warehouse space in Irving, Texas that serve as our hosting operations control center.
Item 4. Mine Safety Disclosures Not applicable. 19 Part II
Legal Proceedings As of the date of this filing, we are not involved in any material pending legal proceedings. Item 4. Mine Safety Disclosures Not applicable. 19 Part II
Removed
We have constructed our first co-hosting facility at this location. The portion of this property used in Phase I of the Jamestown, North Dakota hosting facility is mortgaged in connection with a loan from Vantage Bank Texas.
Added
Our wholly-owned subsidiary, APLD Hosting LLC, owns in fee simple a 40-acre parcel of land located in Jamestown, Stutsman County, North Dakota.
Removed
On August 8, 2022, Hosting completed the purchase of 40 acres of land in Ellendale, North Dakota, The Company took possession of the Land on August 15, 2022. We plan to construct our third co-hosting facility at this location. Item 3. Legal Proceedings As of the date of this filing, we are not involved in any material pending legal proceedings.
Added
APLD ELN-01, LLC, a wholly owned subsidiary of the Company, owns 40 acres of land in Ellendale, North Dakota. The Company has built datacenters on each of the properties in Jamestown, North Dakota; Garden City, Texas; and Ellendale, North Dakota. Item 3.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our Board may deem relevant.
We have no intention of paying cash dividends to our common stock holders in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our Board may deem relevant.
We anticipate that all of our earnings in the foreseeable future will be retained to finance the continued growth and development of our business and to repay our outstanding debts and any debts we may incur in the future. We have no intention of paying cash dividends to our shareholders in the foreseeable future.
Dividends We have not paid cash dividends to our common stock holders in the past. We anticipate that all of our earnings in the foreseeable future will be retained to finance the continued growth and development of our business and to repay our outstanding debts and any debts we may incur in the future.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Primary Market The Company's Common Stock is traded on the Nasdaq Global Select Market under the symbol "APLD". Holders As of August 25, 2022, we had 161 shareholders of record. Dividends We have not paid cash dividends to our shareholders in the past.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Primary Market The Company's Common Stock is traded on the Nasdaq Global Select Market under the symbol "APLD". Holders As of July 25, 2023, we had 102 shareholders of record.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers We and our affiliates have not undertaken any share repurchases during the year ended May 31, 2021. Sale of Equity Securities and Use of Proceeds On April 12, 2022, the SEC declared effective the Company’s IPO Registration Statement (Reg. No. 333-261278).
Purchases of Equity Securities by the Issuer and Affiliated Purchasers We and our affiliates have not undertaken any share repurchases during the year ended May 31, 2023. Item 6. [Reserved] 20
Removed
The offering under the IPO Registration Statement commenced on April 12, 2022 and was consummated on April 18, 2022 with the sale of 8,000,000 newly-issued shares of Common Stock at a price of $5.00 per share, constituting the total aggregate amount registered. B. Riley Securities, Inc. and Needham & Company acted as book-running managers, Craig-Hallum and D.A.
Removed
Davidson & Co. acted as lead managers, and Lake Street and Northland Capital Markets acted as co-managers for the offering. In connection with the offering, the Company granted the underwriters a 30-day option to purchase up to an additional 1,200,000 shares of common stock at the public offering price, less underwriting discounts and commission, although such option was not exercised.
Removed
Between April 12 and May 31, 2022 we incurred total expenses related to the offering of approximately $4.3 million, consisting of $2.8 million in underwriting discounts and commissions, approximately $400,000 in expenses paid to the underwriters, and approximately $1.1 million in other expenses including legal, accounting, listing, and other expenses.
Removed
No such payments were made to officers directors or associates of the Company except that, with respect to underwriting discounts and commissions and expenses to the underwriters, (a) Wes Cummins, the Company’s CEO and Chairman, sold, in 2021, a majority interest in 272 Capital LP, a registered investment adviser controlled by him, to B.
Removed
Riley Financial, Inc., an affiliate of B. Riley Securities, Inc., (b) Wes Cummins is the CEO and President of B. Riley Capital Management, LLC, an affiliate of B. Riley Securities, Inc., (c) Chuck Hastings, CEO of B.
Removed
Riley Wealth Management, Inc., serves on the Company’s board of directors, and (d) Virginia Moore, a member of the Company’s Board of Directors, is the spouse of the CEO of B. Riley Securities, Inc. The net offering proceeds to the Company after deducting the expenses described herein were approximately $35.7 million.
Removed
Between April 12, and May 31, 2022, the Company used the proceeds to fund capital expenditures of $13 million focused on fully energizing our first facility and acquiring assets related to our Garden City, TX facility.
Removed
In addition, the Company used approximately $1.5 million of the proceeds for operating expenditures, which were primarily comprised of selling, general, and administrative expenses and salaries and wages. Item 6. [Reserved] 20

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

34 edited+74 added−67 removed4 unchanged
We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all.
We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently 31 projected, which may not be available to us on acceptable terms, or at all.
Applied Blockchain 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.
Applied Digital believes that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors.
Applied Blockchain’s computation of Adjusted EBITDA may not be comparable to 27 other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
Applied Digital’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.
However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Blockchain may incur future expenses similar to those excluded when calculating these measures. In addition, Applied Blockchain’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.
However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Digital may incur future expenses similar to those excluded when calculating these measures. In addition, Applied Digital’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items.
Applied Blockchain 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 below and not rely on any single financial measure to evaluate Applied Blockchain’s business.
Applied Digital compensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA above and not rely on any single financial measure to evaluate Applied Digital’s business.
You should read the sections titled “Risk Factors” and “Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
You should read the sections titled “Risk Factors” and “Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Business Overview We are a designer, builder and operator of next-generation digital infrastructure.
This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers. The facility is expected to begin operating in calendar Q4 of 2022 and the 200 MW capacity is fully contracted with our customers.
On April 25, 2022, we began construction on this site. This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers. The facility is expected to begin operating in the second half of calendar 2023 and the 200 MW capacity is fully contracted with our customers.
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.
Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.
Funding Requirements Having ceased our operations in 2014, we have experienced net losses through our fiscal year ended May 31, 2022. Our transition to profitability is dependent on the successful operation of our co-hosting facilities.
Funding Requirements We have experienced net losses through the periods ended May 31, 2023. Our transition to profitability is dependent on the successful operation of our hosting facilities.
On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, TX, with the intent to build our second datacenter facility on this site. On April 25, 2022 the Company began construction on this site.
Garden City, Texas Datacenter On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility in Garden City, Texas. On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, Texas, with the intent to build our second datacenter facility on this site.
These costs have been adjusted as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of Applied Blockchain’s performance that is neither required by, nor presented in accordance with, GAAP.
Adjusted EBITDA is intended as a supplemental measure of Applied Digital’s performance that is neither required by, nor presented in accordance with, GAAP.
On July 25, 2022, Hosting entered into a Loan Agreement with Starion Bank (the “Starion Lender”) and the Company as Guarantor (the “Starion Loan Agreement”). The Starion Loan Agreement provides for a term loan (the “Starion Loan”) in the principal amount of $15.0 million with a maturity date of July 25, 2027.
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.
A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A. Revenues Hosting revenues increased $8.5 million, or 100%, from the year ended May 31, 2021 to May 31, 2022.
A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A.
For the year ended May 31, 2022, we had $81.3 million of cash inflows from financing activities, which primarily consisted of inflows of $40.0 million from our initial public offering of common stock, $34.5 million from the placement of Class D preferred stock, and $7.3 million from term loan proceeds, less issuance costs of $2.9 million and $4.3 million related to these equity offerings.
Financing Activities The net cash provided by financing activities of $81.3 million for the fiscal year ended May 31, 2022 consisted primarily of: • $34.5 million in proceeds from the issuance of preferred stock , partially offset by issuance costs of $2.9 million. 33 • $40.0 million in proceeds from the issuance of Common Stock from the April 2022 initial public offering, partially offset by issuance costs of $4.3 million • $7.3 million in proceeds from the issuance of term loans; and • $7.0 million in contributions in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.
“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs not directly related to the company’s offering and therefore not deferred under the guidance in ASC 340 and SAB Topic 5A, and other one-time expenses.
“Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs, one-time costs related to electricity set up, and other non-recurring expenses. These costs have been adjusted as they are not indicative of business operations.
We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company. We expect significant increases in our investment in property and equipment as we expand our co-hosting capacity.
Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company.
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 significant accounting policies are discussed in Note 3 – Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
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.
The Starion Loan is secured by a mortgage on the Property, and a security interest in the substantially all of the assets of Hosting as set forth in the Security Agreement dated as of July 25, 2022 by and between Hosting and the Starion Lender (the “Hosting Starion Security Agreement”) and a security interest in the form of a collateral assignment of Company’s rights and interests in a master hosting agreement related to the Property and records and data relating thereto as set forth in the Security Agreement dated as of July 25, 2022 by and among Hosting, the Company, as Grantor, and the Starion Lender (the “Company Starion Security Agreement”).
The Loan is secured by the leasehold interest on the Garden City Facility, a security interest in substantially all of the assets of the Rattlesnake Den I, LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in the master hosting agreements related to the Garden City Facility and records and data relating thereto.The Vantage Garden City Loan Agreement matures April 26, 2028.
On July 25, 2022, Hosting entered into the Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Loan in the principal amount of $15 million with a maturity date of July 25, 2027. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default, and provides for an interest rate of 6.50% per annum.
The Company's primary term loans are noted below. On July 25, 2022, the Company entered into the Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Term Loan which has a total principal balance of $15.0 million, with an interest rate per annum of 6.50%.
Hosting revenues for the quarter-ended May 31, 2021 were $0, compared to $7.5 million for the quarter-ended May 31, 2022 The increase in hosting revenues was driven by our completion of our first hosting facility in Jamestown, North Dakota, which was brought online in phases between the third and fourth fiscal quarters of fiscal year 2022.
The increase in hosting revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.
Pursuant to the Loan Agreement, on March 11, 2022, Hosting entered into a promissory note agreement (the “ VBT Note”) and borrowed $7.50 million for a five (5)) year term with an interest rate of five percent (5%) per annum (the “VBT Term Loan”).
This agreement included a promissory note agreement for $7.5 million for a five year term with an interest rate of 5% per annum.
Results of Operations for the fiscal year ended May 31, 2022 (fiscal year 2022) compared to fiscal year ended May 31, 2021 24 Fiscal Year Ended May 31, 2022 May 31, 2021 Hosting revenue $ 8,549 $ — Cost of revenues $ 9,506 $ — Gross loss $ (957) $ — Costs and expenses: Selling, general and administrative $ 7,555 $ 332 Stock-based compensation 12,337 — Depreciation and amortization 49 — Total costs and expenses $ 19,941 $ 332 Operating loss $ (20,898) $ (332) Other (expense) income: Interest expense $ (112) $ (236) Gain on extinguishment of accounts payable 406 — Loss on extinguishment of debt (1,342) — Total other expense $ (1,048) $ (236) Net loss from continuing operations before income tax expenses (21,946) (568) Income tax expenses (540) — Net loss from continuing operations $ (22,486) $ (568) Net loss from discontinued operations, net of income taxes (1,044) — Net Loss including noncontrolling interests (23,530) (568) Net Loss attributable to noncontrolling interest 10 — Net loss attributable to Applied Blockchain (23,520) (568) Adjusted Amounts (a) Adjusted Operating Loss from Continuing Operations $(6,222) $(332) Adjusted Operating Margin from Continuing Operations (72.8) % — % Adjusted Net Loss from Continuing Operations $(7,810) $(568) Other Financial Data (a) EBITDA $(20,714) $(332) as a percentage of revenues (242.3) % — % Adjusted EBITDA $(6,038) $(332) as a percentage of revenues (70.6) % — % (a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.
Riley Loan on July 17, 2023. 23 Results of Operations for the fiscal year ended May 31, 2023 compared to fiscal year ended May 31, 2022 The following table sets forth key components of the results of operations of Applied Digital Corporation during the three months and fiscal year ended May 31, 2023 and 2022 (in thousands). 24 Three Months Ended Year Ended May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Revenues: Hosting revenue $ 22,038 $ 7,523 $ 55,392 $ 8,549 Cost of revenues $ 15,950 $ 7,433 $ 44,388 $ 9,506 Gross profit 6,088 90 11,004 (957) Costs and expenses: Selling, general and administrative $ 12,332 $ 4,356 $ 55,059 $ 19,941 Total costs and expenses $ 12,332 $ 4,356 $ 55,059 $ 19,941 Operating loss $ (6,244) $ (4,266) $ (44,055) $ (20,898) Other income (expense): Interest Expense $ (855) $ (112) $ (1,980) $ (112) Gain on extinguishment of accounts payable — — — 406 Loss on extinguishment of debt — — (94) (1,342) Total other expense, net (855) (112) (2,074) (1,048) Net loss from continuing operations before income tax expenses (7,099) (4,378) (46,129) (21,946) Income tax benefit (expense) 243 (266) 523 (540) Net loss from continuing operations (6,856) (4,643) (45,606) (22,486) Net loss from discontinued operations, net of income taxes — 1,826 — (1,044) Net loss including noncontrolling interests (6,856) (2,817) (45,606) (23,530) Net loss attributable to noncontrolling interest (383) (10) (960) (10) Net loss attributable to Applied Digital Corporation $ (6,473) $ (2,807) $ (44,646) $ (23,520) Basic and diluted net (loss) gain per share: Continuing Operations $ (0.07) $ (0.06) $ (0.49) $ (0.39) Discontinued Operations $ — $ 0.02 $ — $ (0.02) Basic and diluted net loss per share $ (0.07) $ (0.04) $ (0.49) $ (0.41) Basic and diluted weighted average number of shares outstanding 95,146,122 76,631,835 93,976,233 57,121,096 Adjusted Amounts (a) Adjusted Operating Loss from Continuing Operations 293 (3,933) (7,320) (6,222) Adjusted Operating Margin from Continuing Operations 1 % (52) % (13) % (73) % Adjusted Net Loss from Continuing Operations (319) (4,311) (8,871) (7,810) Other Financial Data (a) EBITDA (3,607) (3,391) (36,881) (20,714) as a percentage of revenues (16) % (45) % (67) % (242) % Adjusted EBITDA 2,930 (3,058) (146) (6,038) as a percentage of revenues 13 % (41) % — % (71) % Adjusted Gross Profit 7,827 1,100 15,438 113 as a percentage of revenues 36 % 15 % 28 % 1 % (a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.
Cost of Revenues Cost of revenues increased $9.5 million, or 100%, from the year ended May 31, 2021 to May 31, 2022. The increase in cost of revenues was primarily driven by the initiation of our Co-hosting business in fiscal year 2022, which represent all of our continuing operations.
Cost of Revenues Cost of revenues increased by $34.9 million, or 367%, from $9.5 million for the fiscal year ended May 31, 2022 to $44.4 million for the fiscal year ended May 31, 2023.
Cost of revenues for the year ended May 31, 2022 consists of $986,000 of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, ND 25 hosting facility, $8.1 million of energy costs used to generate our hosting revenues, and $414,000 of personnel expenses for employees directly working at the hosting facility.
The primary drivers of the change to cost of revenues for the fiscal year ended May 31, 2023 were: • approximately $28.5 million increase in energy costs used to generate hosting revenues; • approximately $2.7 million increase in personnel expenses directly attributable to generating hosting revenues; • approximately $3.2 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues; and • approximately $0.5 million increase in other expenses directly attributable to generating hosting revenues.
As of May 31, 2022, the Company no longer generates revenues from mining operations. 26 Non-GAAP Measures Fiscal Year Ended Quarter Ended $ in thousands May 31, 2022 May 31, 2021 May 31, 2022 May 31, 2021 Adjusted Operating Loss Operating loss from continuing operations (GAAP) $(20,898) $(332) $(4,266) $(332) Add: Stock-based compensation for service agreement 12,337 — — — Add: Gain on extinguishment of accounts payable (406) — — — Add: Loss on extinguishment of debt 1,342 — — — Add: Non-recurring professional service costs 1,310 — 240 — Add: Other non-recurring expenses 93 — 93 — Adjusted Operating Loss from continuing operations (Non-GAAP) $(6,222) $(332) $(3,933) $(332) Adjusted operating margin from continuing operations (72.8) % — % (52.3) % — % Adjusted Net Loss Net loss from continuing operations (GAAP) $(22,486) $(568) $(4,643) $(345) Add: Stock-based compensation for service agreement 12,337 — — — Add: Gain on extinguishment of accounts payable (406) — — — Add: Loss on extinguishment of debt 1,342 — — — Add: Non-recurring professional service costs 1,310 — 240 — Add: Other non-recurring expenses 93 — 93 — Adjusted Net Loss from continuing operations (Non-GAAP) $(7,810) $(568) $(4,310) $(345) EBITDA and Adjusted EBITDA Net loss from continuing operations (GAAP) $(22,486) $(568) $(4,643) $(345) Add: Interest expense 112 236 112 13 Add: Income tax expense 540 — 266 — Add: Depreciation and amortization 1,120 — 875 — EBITDA (non-GAAP) $(20,714) $(332) $(3,390) $(332) Add: Stock-based compensation for service agreement 12,337 — — — Add: Gain on extinguishment of accounts payable (406) — — — Add: Loss on extinguishment of debt 1,342 — — — Add: Non-recurring professional service costs 1,310 — 240 — Add: Other non-recurring expenses 93 — 93 — Adjusted EBITDA (Non-GAAP) $(6,038) $(332) $(3,057) $(332) EBITDA and Adjusted EBITDA “EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization.
Non-GAAP Measures 29 Reconciliation of GAAP to Non-GAAP Measures Three Months Ended Fiscal Year Ended $ in thousands May 31, 2023 May 31, 2022 May 31, 2023 May 31, 2022 Adjusted operating loss Operating Loss from Continuing Operations (GAAP) $ (6,244) $ (4,266) $ (44,055) $ (20,898) Add: Stock-based compensation 5,195 — 32,074 12,337 Add: Gain on Extinguishment of Accounts Payable — — — (406) Add: Loss on Extinguishment of Debt — — 94 1,342 Add: Non-recurring professional service costs 727 240 2,164 1,310 Add: One-time electricity charges — — 114 — Add: Other non-recurring expenses 615 93 2,290 93 Adjusted Operating Loss from Continuing Operations (Non-GAAP) $ 293 $ (3,933) $ (7,320) $ (6,222) Adjusted operating margin from Continuing Operations 1 % (52) % (13) % (73) % Adjusted net income (loss) Net Loss from Continuing Operations (GAAP) $ (6,856) $ (4,643) $ (45,606) $ (22,486) Add: Stock-based compensation 5,195 — 32,074 12,337 Add: Gain on Extinguishment of Accounts Payable — — — (406) Add: Loss on Extinguishment of Debt — — 94 1,342 Add: Non-recurring professional service costs 727 240 2,164 1,310 Add: One-time electricity charges — — 114 — Add: Other non-recurring expenses 615 93 2,290 93 Adjusted net loss from Continuing Operations (Non-GAAP) $ (319) $ (4,310) $ (8,871) $ (7,810) EBITDA and Adjusted EBITDA Net Loss from Continuing Operations (GAAP) $ (6,856) $ (4,643) $ (45,606) $ (22,486) Add: Interest Expense 855 112 1,980 112 Add: Income Tax Benefit (Expense) (242) 266 (523) 540 Add: Depreciation and Amortization 2,636 875 7,267 1,120 EBITDA (Non-GAAP) $ (3,607) $ (3,390) $ (36,881) $ (20,714) Add: Stock-based compensation 5,195 — 32,074 12,337 Add: Gain on Extinguishment of Accounts Payable — — — (406) Add: Loss on Extinguishment of Debt — — 94 1,342 Add: Non-recurring professional service costs 727 240 2,164 1,310 Add: One-time electricity charges — — 114 — Add: Other non-recurring expenses 615 93 2,290 93 Adjusted EBITDA (Non-GAAP) $ 2,930 $ (3,057) $ (146) $ (6,038) Adjusted Gross Profit Gross profit (GAAP) $ 6,088 $ 90 $ 11,004 $ (957) Add: Depreciation and amortization in cost of revenues 1,739 1,010 4,320 1,070 Add: One-time electricity charges — — 114 — Adjusted Gross Profit (Non-GAAP) $ 7,827 $ 1,100 $ 15,438 $ 113 Sources of Liquidity 30 We have primarily generated cash in the last 12 months from the proceeds of our term loans, issuance of common stock, and the receipt of contractual deposits and revenue prepayments from hosting customers.
Loans On March 11, 2022, the Company and Applied Hosting, LLC (“Hosting”), a wholly-owned subsidiary of the Company, entered into a term loan agreement (the “VBT Loan Agreement”) by and among Hosting, as the borrower, Vantage Bank Texas, as lender (the “VBT Lender”) and the Company as guarantor.
Vantage Garden City Loan On November 7, 2022, APLD – Rattlesnake Den I, LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement (the “Vantage Garden City Loan Agreement”) with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan ("The Vantage Garden City Loan") in the principal amount of $15 million .
Operating Expenses Selling, general and administrative expense increased $7.2 million, or 2177%, from the year ended May 31, 2021 to May 31, 2022. This increase is driven by the initiation of our co-hosting business in fiscal year 2022, which represents our sole continuing operations.
Operating Expenses Selling, general and administrative expenses increased by $35.2 million, or 176%, from $19.9 million for the fiscal year ended May 31, 2022 to $55.1 million for the fiscal year ended May 31, 2023.
The proceeds of the VBT Term Loan were used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota (the "Property"). The VBT Loan Agreement and VBT Note contain customary representations and warranties and events of default.
Approximately $7.1 million of the proceeds were used to pay down the remaining Vantage term loan balance that was entered into on March 11, 2022. The remaining proceeds of the term loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.
We believe that amounts we received from our April 2021 and July 2021 sales of convertible preferred stock, from our crypto mining operations, prior to cessation of such operations on March 9, 2022, proceeds from term loan, proceeds from our initial public offering, and revenue we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online as to 92MW as of May 31, 2022, after planned expenditures to build our co-hosting operations, will be sufficient to meet our working capital needs for at least the next 12 months.
We believe that amounts we received from proceeds from our term loans, proceeds from stock offerings, and payments we have received from our hosting operations will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash.
The two primary drivers of Selling, general and administrative expense are $2.3 million of employee salaries and benefits expense, and $2.4 million of professional service expenses incurred to support the growth of the business. Stock-based compensation for service agreement increased $12.3 million, or 100%, from the year ended May 31, 2021 to May 31, 2022.
Operating Expenses Selling, general and administrative expenses increased by $7.9 million, or 181%, from $4.4 million for the three months ended May 31, 2022 to $12.3 million for the three months ended May 31, 2023.
Other Expense Interest expense decreased by $124,000, or 52%, from the year ended May 31, 2021 to May 31, 2022. This decrease was driven by the change in our debt obligations. Interest expense for the year ended May 31, 2021 was incurred on related party notes, which bore interest at a annual rate of 16%.
This decrease was driven by the lack of extinguishment of our related party notes payable by conversion to common stock, which occurred during the fiscal year ended May 31, 2022, compared to a smaller extinguishment of term debt that was recognized in the fiscal year ended May 31, 2023.
For the year ended May 31, 2022, we had $45.9 million of cash outflows from investing activities from continuing operations, which primarily consisted of $58.3 million of cash paid for property, plant, and equipment for our hosting facilities, partially offset by $3.3 million of a decrease in deposits on equipment as these were applied against equipment purchases.
The above factors were partially offset by the $45.6 million loss from continuing operations Investing Activities The net cash used in investing activities of $132.1 million for the fiscal year ended May 31, 2023 was driven by the increase of purchases of property and equipment and other assets related to the construction of the Company’s Garden City, Texas and Ellendale, North Dakota hosting facilities, as well as deposit payments on equipment.
Income tax expense increased by $540,000, or 100% from the year ended May 31, 2021 to May 31, 2022. This increase is a result of the commencement of our hosting operations in the third quarter of fiscal year 2022.
Income tax benefit (expense) Income tax benefit increased $1.0 million or approximately 193% from a $0.5 million expense for the year ended May 31, 2022 to approximately $0.5 million benefit for the fiscal year ended May 31, 2023.
On April 18, 2022, we received $40.0 million in gross proceeds from the issuance of 8 million shares of the Company’s Common Stock in conjunction with the closing of our initial public offering. During the year ended May 31, 2021, we did not generate any revenue from crypto mining, co-hosting or otherwise. We have incurred net losses from operations.
During the fiscal year ended May 31, 2023, we received $100.1 million in payments for future hosting services. During the fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations.
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Business Overview We design, build, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications. Our first facility was constructed in North Dakota with 100 MW of capacity. We signed an energy services agreement with a utility to power this facility. We provide energized space for customers to host computing equipment.
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We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting. Business Update AI Cloud Services Our AI cloud services business operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.
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Initially, these datacenters will primarily host servers securing the Bitcoin network, but these facilities can also host hardware for other applications such as artificial intelligence, protein sequencing, drug discovery, machine learning and additional blockchain networks and applications.
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On May 15, 2023, we announced the formal launch of our AI Cloud services business through Sai Computing. On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period. The customer will make a significant prepayment as part of the agreement.
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We are mid-construction on our second facility in Garden City, Texas, and are in the development stage of the Company's third facility, located in North Dakota. We have a colocation business model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a fixed fee.
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On June 23, 2023, we announced that Sai Computing had secured its second AI customer with an agreement worth up to $460 million over 36 months. We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services.
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We typically enter into long-term fixed rate contracts with our customers. Trends and Uncertainties Regulatory Matters 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.
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Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers. HPC Datacenter Hosting Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.
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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.
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We are in the process of constructing a 9 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota.
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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.
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This separate and unique building, designed and purpose-built for Graphics Processing Units (“GPUs”), will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments. This facility is expected to be brought online in the second half of calendar year 2023.
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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 our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions.
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During early calendar year 2023, we began testing HPC hosting at this facility. The systems in this facility passed initial testing in the second calendar quarter of 2023. In June, the Company expanded its commitment for up to 26,000 GPUs for the Company's AI Cloud services business. The Company has received and deployed an initial production cluster of 1,024 GPUs.
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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.
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We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations. Crypto Datacenter Hosting Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers. Jamestown, North Dakota Datacenter 21 We purchased property in Jamestown, North Dakota on which we constructed our first co-hosting facility.
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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.
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Construction of our first co-hosting facility began in September 2021. On February 2, 2022, we brought our first facility online and it has been fully operational since that date. As of May 31, 2023, the facility had approximately 105 MW of capacity, which is fully contracted with our customers.
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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.
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Ellendale, North Dakota Datacenter On August 8, 2022, we completed the purchase of 40 acres of land in Ellendale, North Dakota, for a total cost of $1 million. We took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023.
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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. 21 Hosting Operation Highlights On January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies Holding Company, entered into a joint venture in the form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8 million and $2 million, respectively, and will initially own 80% and 20% of 1.21 Gigawatts, respectively. 1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with initially up to 1.5GW of capacity for hosting blockchain infrastructure.
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The facility is fully energized and the facility will have approximately 180 MW of capacity, which is fully contracted with our customers Public Offering and Changes to Equity On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement, with Craig-Hallum Capital Group LLC ("Craig-Hallum Capital"), pursuant to which the Company may sell up to $125 million in shares of our common stock, par value $.001 per share (the "Common Stock").
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We are the managing member of 1.21 Gigawatts and are responsible for all site development, construction and operations of the datacenters. However, certain activities of 1.21 Gigawatts and its subsidiaries, if any, require the vote of 90% of the then outstanding units of each such entity.
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The Company has sold approximately 7.9 million shares. Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million. Debt Financing Starion Term Loan On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Starion Loan Agreement”).
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As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts. 1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member.
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The Starion Term Loan is secured by the Jamestown hosting facility, a security interest in the substantially all of the assets of the APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility. The Starion Loan Agreement provides for an interest rate of 6.50% per annum.
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Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of other members to purchase some or all of such units.
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The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. The Company is not subject to financial covenants until May 31, 2024. At that time, the Company will be subject to a debt service coverage ratio. Deferred financing costs related to the Starion Term Loan total $0.1 million.
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Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our Common Stock equal to the capital contributions by Antpool in connection with the acquisition of such units divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts.
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The Company has entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5% for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”).
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On February 2, 2022, we brought our first North Dakota facility online as to the initial 55 MW, and as of May 31, 2022, there was approximately 90 MW of power online at this facility.
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The loan totals $0.2 million and bears an interest rate of 2%, and the bond totals $0.5 million. 22 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.
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Sale of Crypto Mining Equipment On March 9, 2022, we ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. Total proceeds from the sale of the equipment were $1.6 million. We recognized a loss of $2.9 million in the sale of the equipment during the quarter and year ended May 31, 2022.
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The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for Rattlesnake Den I, LLC's datacenter in Garden City, Texas, with each installment not exceeding approximately $0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”).
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We have no plans to return to crypto mining operations in the future as we grow our co-hosting operations. The results of our crypto mining operations have been accounted for as discontinued operations in our consolidated financial statements as of and for the year ended May 31, 2022.
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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.
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This decision may decrease liquidity and our available capital resources, which may adversely affect us. Expansion Opportunities On November 24, 2021, we entered into a letter of intent to develop a facility in Texas using 200 MW of wind power.
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The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default. As of May 31, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement, with the outstanding principal balance totaling $10.1 million. Total deferred costs related to the issuance of this loan total are $0.2 million.
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As our hosting operations expand, we believe our business structure will become conducive to a REIT structure, akin to Digital Realty Trust (NYSE: DLR) and Equinix, Inc. (NASDAQ: EQIX), each of which is a traditional datacenter operator and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry.
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Starion Ellendale Loan On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”). The Ellendale Loan Agreement provides for a term loan (The "Ellendale Loan") in the principal amount of $20 million with a maturity date of February 3, 2028.
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We have begun to investigate the possibility, costs and benefits of converting to a REIT structure. Public Offering and Changes to Equity On August 13, 2021, the Company filed a registration statement for the resale by certain selling stockholders of shares of Common Stock with the SEC (Reg.
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The Ellendale Loan Agreement contains customary covenants, representations and warranties and events of default. The Ellendale Loan is secured by the Ellendale hosting facility, a security interest in the substantially all of the assets of the APLD ELN-01 LLC, and interests in all master hosting agreements related to the Ellendale hosting facility.
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No. 333-258818) (the “Resale Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022. On November 22, 2021, the Company filed a registration statement for the sale by the Company of shares of Common Stock with the SEC (Reg.
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The Ellendale Loan Agreement provides for an interest rate of 7.48% per annum. The proceeds of the Loan will be used to fund expansion on the Ellendale hosting datacenter. Total deferred costs related to the issuance of this loan total are $0.2 million. As of May 31, 2023, the total balance outstanding under the Ellendale Loan Agreement was $19.7 million.
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No. 333-261278) (the “IPO Registration Statement”) and received a notice of effectiveness for such registration statement on April 12, 2022. On April 11, 2022, the Company filed a registration statement for the Common Stock 22 under the Securities Exchange Act of 1934, as amended, with the SEC which became effective automatically on April 12, 2022.
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B. Riley Loan On May 23, 2023, SAI Computing LLC, a wholly-owned subsidiary of the Company ("Sai"), entered into a Loan and Security Agreement (the "B. Riley Loan") with B. Riley Commercial Capital, LLC and B. Riley Securities, Inc (collectively "B. Riley"). with the Company as Guarantor. The B.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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We manage a portion of our inflation risk through our participation in a long-term Electricity Supply Agreement, through which we have negotiated a fixed rate for the electricity to be used by our Jamestown, ND mining facility. This electricity cost represents a significant portion of our cost of revenues. 31
We manage a portion of our inflation risk through our participation in a long-term Electricity Supply Agreement, through which we have negotiated a fixed rate for the electricity to be used by our Jamestown, ND hosting facility. 35
Our term note facility and the note payable issued thereunder bears interest at a fixed interest rate. We do not hold any derivative instruments or other financial instruments. Our market risk exposure is primarily a result of exposure due to potential changes in inflation. Inflation Risk 30 Inflationary factors such as increases in costs may adversely affect our operating results.
Our market risk exposure is primarily a result of exposure due to potential changes in inflation. Inflation Risk Inflationary factors such as increases in costs may adversely affect our operating results.
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Our term note facility and the note payable issued thereunder bears interest at a fixed interest rate.
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We have determined our energy services agreement for our Ellendale, North Dakota facility represents a derivative instrument with a notional amount of 180 MW, however, we have determined that 34 this instrument does not have any value as the agreement provides purchases and sales at market value. We do not hold any other financial instruments.

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