Applied Digital (APLD) - 2026 Q1 - Quarterly Report

Part I - Financial Information This section details the company's financial performance and position through statements and explanatory notes Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in equity, and cash flows, along with detailed notes providing context on business operations, accounting policies, debt, equity, and recent developments Condensed Consolidated Balance Sheets This table presents the company's financial position, including assets, liabilities, and equity, at specific dates Condensed Consolidated Balance Sheets (in thousands): | Metric | August 31, 2025 | May 31, 2025 | Change | % Change | | :---------------------------------- | :-------------- | :----------- | :----- | :------- | | Total Assets | $2,398,995 | $1,870,090 | $528,905 | 28.3% | | Total Liabilities | $1,291,007 | $1,236,365 | $54,642 | 4.4% | | Total Stockholders' Equity | $1,044,260 | $497,688 | $546,572 | 109.8% | | Cash and cash equivalents | $73,911 | $41,552 | $32,359 | 77.9% | | Current assets held for sale | $310,006 | $304,200 | $5,806 | 1.9% | | Property and equipment, net | $1,461,775 | $1,206,341 | $255,434 | 21.2% | | Current portion of debt | $382,056 | $10,331 | $371,725 | 3600.1% | | Long-term debt | $305,283 | $677,825 | $(372,542) | -54.9% | | Additional paid in capital | $1,573,367 | $1,009,913 | $563,454 | 55.8% | | Accumulated deficit | $(497,981) | $(481,055) | $(16,926) | 3.5% | Condensed Consolidated Statements of Operations This table outlines the company's revenues, costs, and net loss over specific reporting periods Condensed Consolidated Statements of Operations (in thousands, except per share data): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | % Change | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----- | :------- | | Total revenue | $64,216 | $34,849 | $29,367 | 84.2% | | Cost of revenues | $55,606 | $22,743 | $32,863 | 144.5% | | Selling, general and administrative | $29,152 | $10,993 | $18,159 | 165.2% | | Operating (loss) income | $(22,293) | $25,293 | $(47,586) | -188.1% | | Net (loss) income from continuing operations | $(26,247) | $15,912 | $(42,159) | -264.9% | | Net (loss) income from discontinued operations | $9,321 | $(20,159) | $29,480 | -146.3% | | Net loss | $(16,926) | $(4,247) | $(12,679) | 298.5% | | Net loss attributable to common stockholders | $(18,502) | $(4,291) | $(14,211) | 331.2% | | Basic and diluted net loss per share | $(0.07) | $(0.03) | $(0.04) | 133.3% | | Basic and diluted weighted average shares outstanding | 255,892,902 | 149,099,336 | 106,793,566 | 71.6% | Condensed Consolidated Statements of Changes in Temporary Equity and Stockholders' Equity This section details changes in the company's equity accounts, including stock issuances and conversions - Total stockholders' equity increased by $546,572 thousand from $497,688 thousand as of May 31, 2025, to $1,044,260 thousand as of August 31, 2025[14] - Additional paid-in capital increased by $563,454 thousand, primarily due to $190,406 thousand from shares issued in offerings, $121,204 thousand from warrant issuances, and $242,452 thousand from the conversion of Series G Preferred Stock[14] - Series G Preferred Stock decreased from $72,094 thousand (78,000 shares) as of May 31, 2025, to $0 (0 shares) as of August 31, 2025, due to conversions[14] Condensed Consolidated Statements of Cash Flows This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----- | | Net cash used in operating activities | $(82,023) | $(75,890) | $(6,133) | | Net cash used in investing activities | $(249,420) | $(32,606) | $(216,814) | | Net cash provided by financing activities | $322,236 | $163,365 | $158,871 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(9,207) | $54,869 | $(64,076) | | Cash, cash equivalents, and restricted cash, end of period | $114,111 | $86,557 | $27,554 | Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and context for the figures presented in the consolidated financial statements Note 1. Business and Organization This note describes the company's core business, operational segments, and organizational structure - Applied Digital Corporation designs, builds, and operates high-performance, sustainably engineered data centers and colocation services for artificial intelligence, cloud, networking, and blockchain workloads[18] - The Company has two reportable segments: Data Center Hosting Business and High-Performance Compute (HPC) Hosting Business[18][26] Note 2. Basis of Presentation and Significant Accounting Policies This note outlines the accounting principles, revenue recognition methods, and classification of discontinued operations used in financial reporting - The interim unaudited condensed consolidated financial statements are prepared in conformity with GAAP and SEC rules, with certain information condensed or omitted compared to annual statements[19][21] - Revenue recognition follows ASC 606; Data Center Hosting revenue is recognized over time based on fixed rates, and HPC Hosting revenue is recognized over time based on input measures of costs incurred[22][23][24] - The Cloud Services Business was classified as discontinued operations during the fiscal quarter ended May 31, 2025, due to meeting 'held for sale' criteria and representing a strategic shift[36] Cash, Cash Equivalents, and Restricted Cash (in thousands): | Category | August 31, 2025 | May 31, 2025 | | :---------------------------------- | :-------------- | :----------- | | Cash and cash equivalents | $73,911 | $41,552 | | Restricted cash - funds for construction | $2,851 | $41,026 | | Restricted cash - letters of credit | $37,342 | $31,342 | | Restricted cash included in other assets | $0 | $7,000 | | Total cash, cash equivalents, and restricted cash | $114,104 | $120,920 | Note 3. Property and Equipment This note details the company's property and equipment, including construction in progress and depreciation expenses Property and Equipment, Net (in thousands): | Category | August 31, 2025 | May 31, 2025 | Change | | :-------------------------- | :-------------- | :----------- | :----- | | Construction in progress | $1,309,756 | $1,053,656 | $256,100 | | Total cost of property and equipment | $1,488,367 | $1,230,220 | $258,147 | | Accumulated depreciation | $(26,592) | $(23,879) | $(2,713) | | Property and equipment, net | $1,461,775 | $1,206,341 | $255,434 | Depreciation expense totaled $2.7 million for the three months ended August 31, 2025, compared to $2.6 million for the same period in 2024 Note 4. Revenue from Contracts with Customers This note provides information on revenue concentration by major customers and deferred revenue balances Revenue Concentration by Major Customers (Three Months Ended August 31, 2025): | Customer | % of Revenue | | :--------- | :----------- | | Customer A | 59 % | | Customer B | 41 % | Deferred Revenue (in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | | :---------------------- | :------------------------------ | :------------------------------ | | Balance, beginning of period | $0 | $8,188 | | Advance billings | $39,584 | $26,910 | | Revenue recognized | $(37,921) | $(34,593) | | Balance, end of period | $626 | $3,780 | Customer Deposits (in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | | :-------------------------- | :------------------------------ | :------------------------------ | | Balance, beginning of period | $16,125 | $15,367 | | Customer deposits received | $627 | $2,849 | | Customer deposits refunded | $0 | $(1,549) | | Customer deposits applied | $0 | $(2,991) | | Balance, end of period | $16,752 | $13,676 | Note 5. Discontinued Operations This note explains the reclassification and financial results of the Cloud Services Business as discontinued operations - The Cloud Services Business was classified as 'held for sale' and discontinued operations as of May 31, 2025, representing a strategic shift for the Company[46] Financial Results of Cloud Services Business (Discontinued Operations, in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----- | | Revenue | $16,718 | $25,855 | $(9,137) | | Operating income (loss) | $12,531 | $(15,810) | $28,341 | | Net income (loss) from discontinued operations | $9,321 | $(20,159) | $29,480 | Assets and Liabilities Held for Sale (Cloud Services Business, in thousands): | Category | August 31, 2025 | May 31, 2025 | | :-------------------------------- | :-------------- | :----------- | | Total current assets held for sale | $310,006 | $304,200 | | Total current liabilities held for sale | $188,215 | $216,047 | Note 6. Related Party Transactions This note discloses revenue and other transactions with related parties, including changes in their status Related Party Revenue (in thousands): | Customer | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | | :--------- | :------------------------------ | :------------------------------ | | Customer D | $0 | $1,244 | | Customer E | $0 | $682 | Related party revenue decreased 100% to $0 for the three months ended August 31, 2025, as certain related parties ceased to be beneficial owners of more than 5% of the Company's common stock[49][50] - Software license fees of $0.1 million were incurred with a company whose chairman is also a member of the Company's Board of Directors for both the three months ended August 31, 2025, and August 31, 2024[51] Note 7. Debt This note details the company's outstanding debt components, interest rates, maturity dates, and principal payment schedules Outstanding Debt Components (in thousands): | Debt Type | Interest Rate | Maturity Date | August 31, 2025 | May 31, 2025 | | :-------------------------------- | :------------ | :------------ | :-------------- | :----------- | | Convertible Notes, senior unsecured | 2.75% | June 2030 | $450,000 | $450,000 | | SMBC Loan | Variable | August 2026 | $375,000 | $375,000 | | Starion Ellendale Loan | 7.48% | February 2028 | $11,268 | $12,283 | | Cornerstone Bank Loan | 8.59% | March 2029 | $12,153 | $12,866 | | Starion Term Loan | 6.50% | July 2027 | $6,289 | $7,061 | | Other long-term debt | | | $12,310 | $12,275 | | Less: Current portion of debt | | | $(382,056) | $(10,331) | | Long-term debt, net | | | $305,283 | $677,825 | Remaining Principal Payments (in thousands): | Fiscal Year | Amount | | :---------- | :----- | | FY26 | $7,867 | | FY27 | $386,193 | | FY28 | $7,715 | | FY29 | $3,209 | | FY30 | $35 | | Thereafter | $462,001 | | Total | $867,020 | - The Company had letters of credit totaling $37.3 million as of August 31, 2025, held in restricted cash[54] Note 8. Balance Sheet Components This note provides a breakdown of various balance sheet accounts, including prepaid expenses, other assets, and accrued liabilities Prepaid Expenses and Other Current Assets (in thousands): | Category | August 31, 2025 | May 31, 2025 | | :------------------------------ | :-------------- | :----------- | | Short term equipment deposit | $172,523 | $0 | | Deferred issuance costs | $7,176 | $5,443 | | Short term lease incentive | $2,390 | $1,290 | | Prepaid expenses | $2,766 | $1,225 | | Other current assets | $3,636 | $1,472 | | Total | $188,491 | $9,430 | Other Assets (in thousands): | Category | August 31, 2025 | May 31, 2025 | | :------------------------------ | :-------------- | :----------- | | Long term lease incentive | $204,520 | $84,416 | | Deposits on assets & construction | $26,825 | $69,500 | | Deferred construction costs | $26,151 | $33,600 | | Restricted cash: letters of credit | $0 | $7,000 | | Deferred lease costs | $10,738 | $8,811 | | Investments in other companies | $6,073 | $6,073 | | Other | $3,475 | $4,976 | | Total | $277,782 | $214,376 | Accrued Liabilities (in thousands): | Category | August 31, 2025 | May 31, 2025 | | :-------------------------- | :-------------- | :----------- | | Accrued construction payables | $158,458 | $0 | | Accrued expenses | $16,938 | $26,293 | | Accrued interest | $6,010 | $2,694 | | Other accrued liabilities | $1,542 | $562 | | Total | $182,948 | $29,549 | Note 9. Stockholders' Equity This note describes changes in stockholders' equity, including common stock issuances from public offerings - Under the June 2025 At-the-Market Sales Agreement, the Company issued and sold approximately 15.3 million shares of common stock for gross proceeds of approximately $196.4 million[57][58] Note 10. Warrants This note details warrant activity, including issuances, exercises, and their impact on common stock and additional paid-in capital Warrant Activity (Three Months Ended August 31, 2025): | Metric | Warrants | Weighted-Average Exercise Price | | :-------------------------- | :--------- | :------------------------------ | | Outstanding at May 31, 2025 | 18,097,718 | $7.63 | | Granted | 8,393,611 | $10.75 | | Exercised | (300) | $7.19 | | Outstanding at August 31, 2025 | 26,491,029 | $8.62 | - The Company issued a warrant to CoreWeave for 8,393,611 shares of common stock at an exercise price of $10.75 per share on August 28, 2025, in connection with the Building 4 Lease[64] - The estimated fair value of the Building 4 Warrant was $14.44 per share, totaling $121.2 million, recorded as a lease incentive asset and additional paid-in capital[65] Note 11. Stock-Based Compensation Plans This note outlines stock-based compensation expenses and the remaining unrecognized expense for unvested awards Stock-Based Compensation (in thousands): | Category | August 31, 2025 | August 31, 2024 | | :-------------------------------- | :-------------- | :-------------- | | Cost of revenue | $691 | $425 | | Selling, general, and administrative | $13,755 | $(2,808) | | Capitalized | $929 | $102 | | Total stock-based compensation | $15,375 | $(2,281) | - As of August 31, 2025, there were 7,163,970 unvested restricted stock units outstanding, with a total remaining expense of $56.5 million to be recognized over a weighted average period of 2.1 years[72] - As of August 31, 2025, there were 7,207,500 performance stock units outstanding, with a total remaining expense of $29.8 million to be recognized over a weighted average period of 2.0 years[74] Note 12. Temporary Equity This note describes the company's redeemable and convertible preferred stock, including dividend rates and conversion activities - Series E Redeemable Preferred Stock: 301,673 shares outstanding, with 9.0% cumulative dividends, ranking senior to common stock[75][76][77] - Series E-1 Redeemable Preferred Stock: 62,260 shares outstanding, with 9.0% cumulative dividends, ranking on parity with Series E Preferred Stock[80][81][82] - Series G Convertible Preferred Stock: During the quarter, 180,000 shares were issued for $175.0 million, and 258,000 shares were converted into approximately 28.2 million common shares As of August 31, 2025, no Series G Preferred Stock was outstanding[94] - On August 14, 2025, the initial Floor Price for Series G Preferred Stock conversion was increased to $12.50 from $4.25[93] Note 13. Leases This note details the company's data center lease agreements, minimum contracted payments, and total net lease costs - The Company entered into three data center leases with CoreWeave for an aggregate of 400 MW of infrastructure at Polaris Forge 1 (Building 2: 100 MW, Building 3: 150 MW, Building 4: 150 MW)[95][96] Minimum Contracted Lease Payments (Lessor, in thousands): | Fiscal Year | Amount | | :---------- | :----- | | FY26 | $81,000 | | FY27 | $356,340 | | FY28 | $586,030 | | FY29 | $606,611 | | FY30 | $624,809 | | Thereafter | $8,596,727 | | Total | $10,851,517 | Total Net Lease Cost (Lessee, in thousands): | Category | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | | :-------------------- | :------------------------------ | :------------------------------ | | Total operating lease cost | $835 | $195 | | Total finance lease cost | $1,256 | $1,693 | | Variable lease cost | $65 | $55 | | Total net lease cost | $2,156 | $1,943 | Note 14. Commitments and Contingencies This note discloses the company's minimum energy commitments and ongoing legal proceedings, including class action lawsuits - The Company has a minimum commitment of approximately $40.1 million related to the energy services agreement for its Jamestown, North Dakota co-hosting facility, payable over approximately the next 1.4 years[101] - The Company is a defendant in a putative securities class action lawsuit (McConnell v. Applied Digital Corporation, et al.) filed in August 2023, alleging false or misleading statements The lawsuit is currently stayed pending resolution of a motion to dismiss[104] - A derivative lawsuit (Weich v. Cummins, et al.) filed in November 2023 was dismissed without prejudice on June 5, 2024, for failure to plead demand futility or a claim for breach of fiduciary duty[106][107] - The Company is unable to estimate a range of loss for the Securities Lawsuit, but an unfavorable outcome could be material to its results of operations[105] Note 15. Business Segments This note presents financial results for the company's Data Center Hosting and HPC Hosting business segments - The Company's two reportable segments are the Data Center Hosting Business and the HPC Hosting Business The Cloud Services Business is presented as discontinued operations[110][114] Segment Profit (Loss) (in thousands): | Segment | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | | :------------------------ | :------------------------------ | :------------------------------ | :----- | | Data Center Hosting Business | $6,035 | $35,851 | $(29,816) | | HPC Hosting Business | $(2,022) | $(2,949) | $927 | | Total segment profit | $4,013 | $32,902 | $(28,889) | - Data Center Hosting Business profit decreased primarily due to a $24.8 million gain on classification of held for sale in the prior year and an approximate 17% increase in power costs[190] - HPC Hosting Business operating loss decreased due to revenue generated from tenant fit-out services[191] Note 16. Loss Per Share This note provides basic and diluted net loss per share calculations and details potentially dilutive securities Net Loss Per Share Attributable to Common Stockholders: | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | | :------------------------------------------ | :------------------------------ | :------------------------------ | | Basic and diluted net loss per share | $(0.07) | $(0.03) | | Basic and diluted weighted average shares outstanding | 255,892,902 | 149,099,336 | - Potentially dilutive securities, including approximately 14.6 million unvested stock awards, 4.4 million preferred stock shares, 25.5 million warrants, and 46.1 million shares from Convertible Notes, were excluded from diluted EPS calculation for August 31, 2025, as their inclusion would be anti-dilutive[119] Note 17. Subsequent Events This note describes significant events occurring after the reporting period, including new financing agreements and equity commitments - On September 9, 2025, the Company entered into a $50 million Promissory Note with Macquarie Equipment Capital, Inc. for the development of its Polaris Forge 2 campus, with potential for an additional $25 million[120][124] - The Series G Preferred Stock offering was amended on September 11, 2025, to increase the aggregate commitment to $450 million, and again on October 7, 2025, to $590 million, to fund Polaris Forge 1 construction[126][130] - On October 3, 2025, the Company entered into an Amended and Restated Unit Purchase Agreement with MIP HPC Holdings, LLC (an affiliate of Macquarie Asset Management), with an initial closing on October 6, 2025, for $112.5 million investment in the HPC Hosting Business and a right for MAM to invest up to an additional $4.9 billion[131][132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, highlighting significant revenue growth driven by HPC Hosting, increased operating expenses, and strategic financing activities to support data center expansion. It also discusses regulatory trends, critical accounting estimates, and recent developments Forward-Looking Statements This section cautions readers about the inherent risks and uncertainties in forward-looking statements, which may cause actual results to differ - The report contains forward-looking statements based on management's beliefs and assumptions, which are subject to substantial risks and uncertainties, meaning actual results could differ materially from expectations[135][136] - Readers are cautioned to review the risks described in the Company's Annual Report on Form 10-K and other cautionary language in this report, as the operating environment is evolving with new, unpredictable risk factors[137][138] Executive Overview This section provides a high-level summary of the company's business, operational segments, and strategic direction - Applied Digital Corporation is a U.S. designer, developer, and operator of high-performance, sustainably engineered data centers and colocation services for AI, networking, and blockchain workloads[141] - The Company operates in two distinct business segments: Data Center Hosting and HPC Hosting The Cloud Services Business has been reclassified as discontinued operations[141][142] Trends and Other Factors Affecting Our Business This section discusses the evolving regulatory landscape for AI and blockchain hosting services and the company's adaptive approach to compliance - The regulatory landscape for AI and blockchain hosting services is rapidly evolving, with anticipated increased scrutiny and potential regulation, including measures for responsible AI development and energy consumption[143][144][145] - The Company is committed to a proactive and adaptive approach to regulatory compliance, monitoring developments and engaging with stakeholders to align business practices with the evolving legal framework[146] Critical Accounting Estimates This section explains management's judgments and assumptions in preparing financial statements, acknowledging potential differences in actual results - The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates about future events and apply judgments that affect reported amounts[147] - Management regularly reviews accounting policies, assumptions, estimates, and judgments to ensure fair presentation, acknowledging that actual results could differ materially from estimates[147] Business Update This section provides updates on the company's data center operations, HPC facility development, and key personnel changes - Data Center Hosting Business facilities in Jamestown (106 MW) and Ellendale (180 MW) continue to operate at full capacity[148] - HPC Hosting Business is building two HPC data centers (100 MW and 150 MW) at Polaris Forge 1, with a third 150 MW facility in planning for 2027, and has secured 400 MW in leases with CoreWeave[150][151][152] - The Company recognized $26.3 million in tenant fit-out revenue from the HPC Hosting Business during the three months ended August 31, 2025[153] - The Company broke ground on its Polaris Forge 2 campus, a $3 billion, 280 MW data center near Harwood, North Dakota, with initial capacity anticipated in 2026 and full capacity in early 2027[154] - The Cloud Services Business, now classified as discontinued operations, generated $16.7 million in revenue for the three months ended August 31, 2025[156] - Jason Zhang was appointed Chief Strategy Officer on August 1, 2025[157] Public Offerings and Changes to Equity This section details recent equity financing activities, including common stock sales and preferred stock issuances and conversions - Under the June 2025 At-the-Market Sales Agreement, the Company issued and sold approximately 15.3 million shares of common stock for gross proceeds of approximately $196.4 million[158] - The aggregate commitment amount for Series G Convertible Preferred Stock was increased from $150 million to $300 million on August 14, 2025 During the quarter, 180,000 shares were issued for $175.0 million, and 258,000 shares were converted into approximately 28.2 million common shares, resulting in no Series G Preferred Stock outstanding as of August 31, 2025[159][160] - On August 28, 2025, the Company issued a warrant to CoreWeave to acquire up to 8,393,611 shares of common stock at an exercise price of $10.75 per share, related to the Building 4 Lease[161] Recent Developments This section highlights significant recent events, including new financing agreements and increased commitments for preferred stock offerings - On September 9, 2025, the Company entered into a Promissory Note with Macquarie Equipment Capital, Inc. for an initial $50 million loan (with potential for an additional $25 million) to fund the purchase of properties, finance improvements, and acquire equipment for the Polaris Forge 2 campus[162][166] - The aggregate commitment amount for Series G Convertible Preferred Stock was increased to $450 million on September 11, 2025, and further to $590 million on October 7, 2025, to fund Polaris Forge 1 construction The Floor Price was increased to $22.00 from $12.50 on September 25, 2025[168][170][172] - On October 6, 2025, an initial closing occurred under the Amended and Restated Unit Purchase Agreement with MIP HPC Holdings, LLC (Macquarie Asset Management affiliate), involving the sale of $112.5 million in Preferred Units and the issuance of warrants for 2.4 million common shares MAM has the right to invest up to an additional $4.9 billion[174][175] Results of Operations This section analyzes the company's financial performance, including revenue growth, cost increases, and net loss changes Comparative Results of Operations (in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | % Change | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----- | :------- | | Total revenue | $64,216 | $34,849 | $29,367 | 84.2% | | Cost of revenues | $55,606 | $22,743 | $32,863 | 144.5% | | Selling, general and administrative | $29,152 | $10,993 | $18,159 | 165.2% | | Operating (loss) income | $(22,293) | $25,293 | $(47,586) | -188.1% | | Net loss attributable to common stockholders | $(18,502) | $(4,291) | $(14,211) | 331.2% | - Revenue increased by $31.3 million (95%) due to $26.3 million from HPC Hosting tenant fit-out services and $5.0 million from Data Center Hosting performance improvements Related party revenue decreased 100% to zero[180][181] - Cost of revenues increased by $32.9 million (144%) due to $25.0 million in HPC Hosting tenant fit-out expenses and $7.2 million in Data Center Hosting energy costs[182] - Selling, general and administrative expense increased by $18.2 million (165%), primarily due to $16.6 million in stock-based compensation and $3.9 million in personnel expenses[183][185] - Net income from discontinued operations improved by $29.5 million (146%) to $9.3 million, driven by a $28.3 million increase in operating income[188] Comparative Segment Data for the Three Months Ended August 31, 2025 and August 31, 2024 This section compares the financial performance of the Data Center Hosting and HPC Hosting business segments Segment Profit (Loss) (in thousands): | Segment | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | | :------------------------ | :------------------------------ | :------------------------------ | :----- | | Data Center Hosting Business | $6,035 | $35,851 | $(29,816) | | HPC Hosting Business | $(2,022) | $(2,949) | $927 | | Total segment profit | $4,013 | $32,902 | $(28,889) | - Data Center Hosting Business operating profit decreased by $29.8 million (83%) primarily due to a $24.8 million gain on classification of held for sale in the prior year and an approximate 17% increase in power costs[190] - HPC Hosting Business operating loss decreased by $0.9 million (31%) due to revenue generated from tenant fit-out services[191] Non-GAAP Measures This section explains the company's use of non-GAAP financial measures to provide additional insights into operational performance - The Company presents non-GAAP financial measures (Adjusted Operating (Loss) Income, Adjusted Net Loss from Continuing Operations Attributable to Common Stockholders, EBITDA, and Adjusted EBITDA) to provide additional information and facilitate comparison of past and present operations by excluding one-time or significant non-cash items[192][193][194] - Adjusted Operating (Loss) Income excludes items like stock-based compensation, non-recurring repair expenses, diligence/acquisition/disposition/integration expenses, litigation expenses, loss on abandonment of assets, gain on classification of held for sale, accelerated depreciation/amortization, restructuring expenses, and other non-recurring expenses[195] - Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation, and amortization) further adjusted for stock-based compensation, non-recurring expenses, and other non-recurring items[196] Reconciliation of GAAP to Non-GAAP Measures This table reconciles GAAP financial measures to their non-GAAP counterparts, detailing adjustments for specific items Reconciliation of GAAP to Non-GAAP Measures (in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | | :---------------------------------------------------------------- | :------------------------------ | :------------------------------ | | Operating (loss) income (GAAP) | $(22,293) | $25,293 | | Adjusted operating (loss) income (Non-GAAP) | $(3,616) | $2,164 | | Net (loss) income from continuing operations attributable to common stockholders (GAAP) | $(27,823) | $15,868 | | Adjusted net loss from continuing operations attributable to common stockholders (Non-GAAP) | $(7,570) | $(795) | | EBITDA (Non-GAAP) | $(19,716) | $22,970 | | Adjusted EBITDA (Non-GAAP) | $537 | $6,262 | - Key adjustments for August 31, 2025, include $14.4 million in stock-based compensation and $1.8 million in loss on abandonment of assets For August 31, 2024, key adjustments included a $(24.8) million gain on classification of held for sale and a $6.4 million loss on change in fair value of debt[198][199] Sources of Liquidity This section discusses the company's cash position, historical funding sources, and management's assessment of future liquidity - As of August 31, 2025, the Company had $73.9 million in unrestricted cash and cash equivalents and $2.9 million in funds restricted for construction expenditures[200] - Historically, the Company has relied on equity and debt financings, including term loans, common and preferred stock issuances, convertible promissory notes, and debt facilities, to fund operations[200] - Management believes existing cash balances, cash flows from operations, existing debt facilities, and access to capital markets will provide sufficient liquidity to meet debt obligations, working capital needs, and planned capital expenditures for at least the next twelve months[201] Recent Financing Activities This section details the company's recent equity and debt financing efforts to support its growth and operations - Under the June 2025 At-the-Market Sales Agreement, the Company issued and sold approximately 15.3 million shares of common stock for gross proceeds of approximately $196.4 million[203] - The aggregate commitment amount for Series G Preferred Stock was increased from $150 million to $300 million on August 14, 2025 During the three months ended August 31, 2025, the Company issued and sold 180,000 shares of Series G Preferred Stock for $175.0 million, and 258,000 shares were converted into approximately 28.2 million common shares[205][207] - The Company received $39.4 million in payments for future data center hosting services during the three months ended August 31, 2025[208] Material Contractual Obligations This table outlines the company's significant contractual commitments, including debt, leases, and power agreements Material Contractual Obligations as of August 31, 2025 (in thousands): | Obligation Type | Total | Remainder of FY 2026 | FY 2027 | FY 2028 | FY 2029 | FY 2030 | Thereafter | | :------------------------ | :---- | :------------------- | :------ | :------ | :------ | :------ | :--------- | | Debt obligations | $867,020 | $7,867 | $386,193 | $7,715 | $3,209 | $35 | $462,001 | | Interest on debt obligations | $94,346 | $13,934 | $42,031 | $13,153 | $12,680 | $12,548 | $0 | | Operating lease obligations | $965 | $573 | $365 | $27 | $0 | $0 | $0 | | Financing lease obligations | $12,116 | $12,101 | $14 | $1 | $0 | $0 | $0 | | Power commitments | $40,120 | $20,942 | $19,178 | $0 | $0 | $0 | $0 | | Preferred share dividends | $36,237 | $4,727 | $6,302 | $6,302 | $6,302 | $6,302 | $6,302 | Funding Requirements This section addresses the company's anticipated funding needs, potential risks, and expected increases in operating and capital expenditures - The Company expects to have sufficient liquidity to support ongoing operations and meet working capital needs for at least the next 12 months, relying on cash on hand, customer payments, debt financing, and public capital markets[211] - There is a risk that the Company may need to raise additional funds sooner than expected if available capital resources are used more quickly, and such financing may not be available on favorable terms or at all[211] - General and administrative expenses and operating expenditures are expected to increase with business expansion, and significant investments in property and equipment will continue throughout fiscal year 2026 for HPC hosting facilities[212] Summary of Cash Flows This table summarizes the company's cash flow activities from operations, investing, and financing, highlighting key changes Summary of Cash Flows (in thousands): | Metric | Three Months Ended Aug 31, 2025 | Three Months Ended Aug 31, 2024 | Change | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----- | | Net cash used in operating activities | $(82,023) | $(75,890) | $(6,133) | | Net cash used in investing activities | $(249,420) | $(32,606) | $(216,814) | | Net cash provided by financing activities | $322,236 | $163,365 | $158,871 | | Net (decrease) increase in cash and cash equivalents | $(9,207) | $54,869 | $(64,076) | | Cash, cash equivalents, and restricted cash from continuing operations | $114,104 | $86,548 | $27,556 | - The increase in cash used in operating activities was primarily driven by an increase in accounts receivable due to tenant fit-out services revenue and a decrease in depreciation and amortization[216] - Net cash used in investing activities increased significantly by $216.8 million, mainly due to a $194.6 million increase in investments in property and equipment for the construction of Polaris Forge 1 data center facilities[217] - Net cash provided by financing activities increased by $158.9 million, primarily due to a $274.0 million increase in net proceeds from common and preferred stock offerings[218] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's exposure to market risk from the information provided in its Annual Report on Form 10-K for the fiscal year ended May 31, 2025 - No material changes in the Company's exposure to market risk have occurred since the filing of the Annual Report on Form 10-K for the fiscal year ended May 31, 2025[219] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of August 31, 2025 A previously identified material weakness in accounting for complex financial instruments was remediated during the quarter through new controls, additional personnel, and third-party consulting Management's Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and the remediation of a material weakness - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of August 31, 2025[220] - A previously identified material weakness in the design of internal controls around the accounting and assessment of complex financial instruments was remediated during the quarter ended August 31, 2025[221][222] - Remediation measures included hiring additional qualified accounting personnel and engaging a third-party consultant to assist with analyzing and documenting complex financial instruments[222] Changes in Internal Control over Financial Reporting This section confirms that there were no material changes to internal control over financial reporting, aside from remediation efforts - There were no changes in internal control over financial reporting, other than the remediation steps for the material weakness, that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting during the three months ended August 31, 2025[223] Part II - Other Information This section covers legal proceedings, risk factors, equity sales, and other disclosures relevant to the company's operations Item 1. Legal Proceedings The company is involved in a securities class action lawsuit, which is currently stayed pending a motion to dismiss, and a derivative lawsuit, which was dismissed without prejudice The potential loss from the securities lawsuit is unestimable but could be material - The Company is a defendant in a putative securities class action lawsuit (McConnell v. Applied Digital Corporation, et al.) filed in August 2023, alleging false or misleading statements The lawsuit is currently stayed pending resolution of a motion to dismiss[227] - A derivative lawsuit (Weich v. Cummins, et al.) filed in November 2023 was dismissed without prejudice on June 5, 2024, for failure to plead demand futility or a claim for breach of fiduciary duty[229][230] - The Company is unable to estimate a range of loss for the Securities Lawsuit, but an unfavorable outcome could be material to its results of operations[228][231] Item 1A. Risk Factors As of the filing date, there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended May 31, 2025 - There have been no material changes to the risk factors associated with the Company's business previously disclosed in its Annual Report on Form 10-K for the fiscal year ended May 31, 2025[232] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There are no unregistered sales of equity securities or use of proceeds to report for the period - None[233] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reporting period - Not applicable[234] Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reporting period - Not applicable[235] Item 5. Other Information The company entered into a third amendment to the Preferred Equity Purchase Agreement on October 7, 2025, increasing the aggregate commitment for Series G Preferred Stock from $450.0 million to $590.0 million to fund Polaris Forge 1 construction - On October 7, 2025, the Company entered into the third amendment to the Preferred Equity Purchase Agreement, increasing the aggregate commitment amount of Series G Preferred Stock from $450.0 million to $590.0 million[236][237] - This increase in capital access is intended to fund the continued construction and development of the Polaris Forge 1 data center campus in Ellendale, North Dakota[236] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including amendments to preferred stock designations, sales agreements, employment agreements, data center leases, and certifications - Exhibits include amendments to the Certificate of Designations for Series G Convertible Preferred Stock, the Sales Agreement with Northland Securities and Wells Fargo, the Employment Agreement with Jason Zhang, the Building 4 Datacenter Lease with CoreWeave, the Third Amendment to Preferred Equity Purchase Agreement, and CEO/CFO certifications[242] Signatures The report is signed by Wes Cummins, Chief Executive Officer, and Saidal Mohmand, Chief Financial Officer, on October 9, 2025, certifying its submission - The report was signed by Wes Cummins, Chief Executive Officer, and Saidal Mohmand, Chief Financial Officer, on October 9, 2025[245][246]