APPLIED BLOCKCHAIN, INC. Management’s discussion and analysis of financial condition and results of operations Forward-looking statements (Form 10-Q)

This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve substantial risks and
uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "plan," "seek," "should," "will," and "would," or
similar words. Statements that contain these words and other statements that are
forward-looking in nature should be read carefully because they discuss future
expectations, contain projections of future results of operations or of
financial positions or state other "forward-looking" information.

Forward-looking statements involve inherent uncertainty and may ultimately prove
to be incorrect or false. These statements are based on our management's beliefs
and assumptions, which are based on currently available information. These
assumptions could prove inaccurate. You are cautioned not to place undue
reliance on forward-looking statements. Except as otherwise may be required by
law, we undertake no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or actual
operating results. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including, but not limited to:

•  labor and other workforce shortages and challenges;
•  our dependence on principal customers;
•  the addition or loss of significant customers or material changes to our
relationships with these customers;
•  our ability to timely and successfully build new hosting facilities with the
appropriate contractual margins and efficiencies;
•  our ability to continue to grow sales in our hosting business;
•concentration of customers in the crypto mining industry, which customer base
may decline due to price volatility and uncertainties around regulation policy
of cryptoasset prices;
•equipment failures, power or other supply disruptions; and

You should carefully review the risks described in Item 1A of the Company's
Annual Report on Form 10-K for the year ended May 31, 2022, which was filed on
August 29, 2022, as well as any other cautionary language in this Quarterly
Report on Form 10-Q, as the occurrence of any of these events could have an
adverse effect, which may be material, on our business, results of operations,
financial condition or cash flows.

Executive Overview

The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes and
other financial information included elsewhere in this Quarterly Report on Form
10-Q.

Business Overview

We 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 Jamestown, North Dakota with 100 Megawatts ("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.
Initially, these datacenters primarily hosted servers serving 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. During the quarter ended
November 30, 2022, we began tests for hosting other high-compute applications at
our first facility. In addition to this facility, we have substantially
completed construction on our second facility in Garden City, Texas, and are
mid-construction on our third facility, which is located in Ellendale, North
Dakota. We have a colocation business model where our customers place
                                       13
--------------------------------------------------------------------------------
  Table of Contents
hardware they own into our facilities and we provide full operational and
maintenance services for a fixed fee. We typically enter into long-term fixed
rate contracts with our customers.


Trends and Other Factors Affecting Our Business
Regulatory Environment
We have a material concentration of customers in the crypto mining industry. Our
customers' businesses are subject to extensive laws, rules, regulations,
policies and legal and regulatory guidance, including those governing
securities, commodities, cryptoasset custody, exchange and transfer, data
governance, data protection, cybersecurity and tax. Many of these legal and
regulatory regimes were adopted prior to the advent of the Internet, mobile
technologies, cryptoassets and related technologies. As a result, they do not
contemplate or address unique issues associated with the crypto economy, are
subject to significant uncertainty, and vary widely across U.S. federal, state
and local and international jurisdictions. These legal and regulatory regimes,
including the laws, rules and regulations thereunder, evolve frequently and may
be modified, interpreted and applied in an inconsistent manner from one
jurisdiction to another, and may conflict with one another. Moreover, the
complexity and evolving nature of our business and the significant uncertainty
surrounding the regulation of the crypto economy requires us to exercise our
judgement as to whether certain laws, rules and regulations apply to us or our
customers, and it is possible that governmental bodies and regulators may
disagree with our or our customers' conclusions. To the extent we or our
customers have not complied with such laws, rules and regulations, we could be
subject to significant fines and other regulatory consequences, which could
adversely affect our business, prospects or operations. As cryptoassets have
grown in popularity and in market size, the Federal Reserve Board, U.S. Congress
and certain U.S. agencies (e.g., the Commodity Futures Trading Commission, the
SEC, the Financial Crimes Enforcement Network and the Federal Bureau of
Investigation) have begun to examine the operations of cryptoasset networks,
cryptoasset users and cryptoasset exchange markets. Other countries around the
world are likewise reviewing and, in some cases, increasing regulation of the
cryptoasset industry. For instance, on September 24, 2021, China imposed a ban
on all crypto transactions and mining.

Ongoing and future regulatory actions could effectively prevent our customers'
mining operations and our ongoing or planned co-hosting operations, limiting or
preventing future revenue generation by us or rendering our operations and
crypto mining equipment obsolete. Such actions could severely impact our ability
to continue to operate and our ability to continue as a going concern or to
pursue our strategy at all, which would have a material adverse effect on our
business, prospects or operations.

Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). In connection with the preparation of our financial
statements, we are required to make assumptions and estimates about future
events and apply judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and the related disclosures. We base our
assumptions, estimates and judgments on historical experience, current trends
and other factors that management believes to be relevant at the time our
unaudited condensed consolidated financial statements are prepared. On a regular
basis, management reviews the accounting policies, assumptions, estimates and
judgments to ensure that our financial statements are presented fairly and in
accordance with GAAP. However, because future events and their effects cannot be
determined with certainty, actual results could differ from our assumptions and
estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 3 - Basis of
Presentation and Significant Accounting Policies, of the Notes to Consolidated
Financial Statements of the Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 2022 filed with the SEC on August 29, 2022.

Hosting highlights

Applied Digital's first facility is in Jamestown, North Dakota with capacity of
100 MW. The entire 100 MW of capacity has been fully contracted on multi-year
contracts with our customers, providing revenue visibility for the Company.
Additionally, the facility is powered through a five-year energy services
agreement with a local
                                       14

————————————————– ————————————

Table of contents, which provides insight into the cost structure as a stable price mechanism for energy costs, has been negotiated.

The facility began energizing in late January 2022 and has over 90 MW online as
of November 30, 2022. As previously reported in a Current Report on Form 8-K
filed by the Company on July 18, 2022, there was an unexpected equipment failure
at the substation powering the facility, resulting in a partial outage of
approximately 50%. The power provider completed the required repairs in
mid-August, fully restoring power capacity to Jamestown ahead of the schedule
for early September. The Jamestown facility was not damaged and remains fully
operational and capable of hosting the entire 100 MW of capacity. There were no
reductions or interruptions in service for the three months ended November 30,
2022.

On July 12, 2022, the Company entered into a five-year hosting contract with
Marathon Digital Holdings, Inc. ("Marathon") for 270 MW of mining capacity. As a
result of this arrangement, the Company will supply Marathon with 90 MW of
hosting capacity at its facility in Texas and 180 MW of hosting capacity at its
second facility in North Dakota.

Discontinued business

During the fourth quarter of our last fiscal year, the Company ceased all crypto
mining operations and completed the sale of all crypto mining equipment. The
results of the crypto mining operations are accounted for as discontinued
operations in our unaudited condensed consolidated financial statements.

Expansion possibilities

On November 24, 2021, we entered into a letter of intent to develop a facility
in Texas using 200 MW of wind power. 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. 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 nearing completion and is expected to begin operating in the first
calendar quarter of 2023. The 200 MW capacity is fully contracted with
customers.

On August 8, 2022, the Company completed the purchase of 40 acres of land ("the
Land") in Ellendale, North Dakota, for a total cost of $1 million. The Company
took possession of the Land on August 15, 2022, and is process of building a 180
MW datacenter on the Land, with completion scheduled for the first calendar
quarter of 2023.

As our hosting operations expand, we believe our business structure will become
conducive to a real estate investment trust ("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. We
have begun to investigate the possibility, costs and benefits of converting to a
REIT structure.

On September 1, 2022, Company entered into a joint-venture agreement with GMR
Limited ("GMR") to form Highland Digital Holdings, LLC ("Highland Digital"),
which may acquire mining hardware and digital infrastructure assets. Both the
Company and GMR have a 50% ownership stake in Highland Digital. GMR is the
controlling partner and will consolidate the results of Highland Digital.
Therefore, the Company will not consolidate the Highland in their financial
statements, but will report results based on the Company's ownership percentage
in Highland Digital.

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

                                       15

————————————————– ————————————

Table of contents

On December 14, 2022, the Company began construction of its latest specialized
processing center, a 5 MW facility next to the Company's currently operating
100-MW hosting facility in Jamestown, North Dakota. This separate and unique
building, designed and purpose-built for Graphics Processing Units ("GPUs"),
will sit separate from the Company's current buildings and plans to host more
traditional high performance computing ("HPC") applications, such as natural
language processing, machine learning, and additional HPC developments.

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

On January 14, 2022, the Company granted restricted stock awards to directors
and officers and restricted stock units to certain consultants. Each of these
awards and units contained a vesting condition of an effective registration
statement covering the resale of the Common Stock underlying these awards. On
October 11, 2022, the Securities and Exchange Commission declared the Company's
registration statement covering these awards to be effective. In conjunction
with this registration statement being declared effective, awards for
approximately 1.1 million shares of Common Stock vested.




































                                       16

————————————————– ————————————

  Table of Contents

Operating results Comparative results for the ended three and six months
30 November 2022 and 2021:

The following table sets forth key components of the results of operations (in
thousands) of Applied Digital during the three and six months ended November 30,
2022 and 2021.

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

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

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

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

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

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

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

Adjusted Amounts (a)
Adjusted Operating Loss from Continuing
Operations                                                (3,700)                   (1,004)                         (6,596)                     (403)
Adjusted Operating Margin from Continuing
Operations                                                   (30) %                      -  %                          (34) %                      -  %
Adjusted Net Loss from Continuing
Operations                                                (3,773)                   (1,218)                         (7,151)                   (1,959)
Other Financial Data (a)
EBITDA                                                   (25,109)                   (1,181)                        (28,244)                  (15,558)
as a percentage of revenues                                 (203) %                      -  %                         (147) %                      -  %
Adjusted EBITDA                                           (2,132)                     (830)                         (3,986)                   (1,568)
as a percentage of revenues                                  (17) %                      -  %                          (21) %                      -  %
Adjusted Gross Profit                                      1,509                         -                           3,176                         -
as a percentage of revenues                                   12  %                      -  %                           16  %                      -  %



                                       17

--------------------------------------------------------------------------------
  Table of Contents
(a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures.
A reconciliation of reported amounts to adjusted amounts can be found in the
"Non-GAAP Measures and Reconciliation" section of the MD&A.

Comment on operating results Comparative results for the ended three and six months 30 November 2022 and 2021

Income

Hosting revenues increased by $12.3 million, or 100%, from zero for the three
months ended November 30, 2021 to $12.3 million for the three months ended
November 30, 2022. Hosting revenues increased by $19.3 million, or 100%, from
zero for the six months ended November 30, 2021 to $19.3 million for the six
months ended November 30, 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 during the final six months of the fiscal year
ended May 31, 2022.

Cost of Revenues
Cost of revenues increased by $11.8 million, or 100%, from zero for the three
months ended November 30, 2021 to $11.8 million for the three months ended
November 30, 2022. Cost of revenues increased by $17.9 million, or 100%, from
zero for the six months ended November 30, 2021 to $17.9 million for the six
months ended November 30, 2022. The increase in cost of revenues was primarily
driven by the initiation of our co-hosting business in late fiscal year ended
May 31, 2022, which represents all of our continuing operations.

Cost of revenues for the three months ended November 30, 2022 consists of
$0.9 million of depreciation and amortization expense attributable to the
property, plant and equipment at our Jamestown, North Dakota hosting facility,
$10.3 million of energy costs used to generate our hosting revenues, and
$0.7 million of personnel expenses for employees directly working at the hosting
facility.

Cost of revenues for the six months ended November 30, 2022 consists of
$1.7 million of depreciation and amortization expense attributable to the
property, plant and equipment at our Jamestown, North Dakota hosting facility,
$15.1 million of energy costs used to generate our hosting revenues, and
$1.1 million of personnel expenses for employees directly working at the hosting
facility.

Operating Expenses
Selling, general and administrative expenses increased by $25.3 million, or
2,142%, from $1.2 million for the three months ended November 30, 2021 to $26.5
million for the three months ended November 30, 2022. The three primary drivers
of selling, general and administrative expense for the three months ended
November 30, 2022 were $1.5 million of employee salaries and benefits expense
not directly attributable to revenues, $1.2 million of professional service
expenses incurred to support the growth of the business, and stock-based
compensation expense of $21.8 million. The stock-based compensation expense is
primarily driven by restricted stock award and restricted stock unit grants made
to directors, officers, and consultants in January 2022 that contained a vesting
condition related to an effective registration statement of shares covering the
resale of the shares of Common Stock underlying the awards. The registration
statement covering the resale of these shares was deemed effective during the
three months ended November 30, 2022, leading to a catch-up of expense as
required by ASC 718. There was no stock-based compensation expense recognized
during the three months ended November 30, 2021.

Selling, general and administrative expenses increased by $17.0 million, or
120%, from $14.2 million for the six months ended November 30, 2021 to
$31.2 million for the six months ended November 30, 2022. The three primary
drivers of selling, general and administrative expense for the six months ended
November 30, 2022 were $2.8 million of employee salaries and benefits expense
not directly attributable to revenues, $2.3 million of professional service
expenses incurred to support the growth of the business, and stock-based
compensation expense of $22.4 million. The stock-based compensation expense is
primarily driven by restricted stock award
                                       18
--------------------------------------------------------------------------------
  Table of Contents
and restricted stock unit grants made to directors, officers, and consultants in
January 2022 that contained a vesting condition related to an effective
registration statement of shares covering the resale of the shares of Common
Stock underlying the awards. The registration statement covering the resale of
these shares was deemed effective during the six months ended November 30, 2022,
leading to a catch-up of expense as required by ASC 718. During the six months
ended November 30, 2021, the Company recognized stock-based compensation expense
related to our service agreements with strategic partners, who provided advisory
and consulting services in exchange for shares of common stock we issued to
them. The awards were granted in June 2021 and vested immediately, as the
services were fully rendered during the month of June 2021.

Depreciation and amortization expense not attributable to costs of sales
increased $0.5 million, or 304%, from $0.2 million for the three months ended
November 30, 2021 to $0.7 million for the three months ended November 30, 2022.
Depreciation and amortization expense not attributable to costs of sales
increased $0.8 million or 304%, from $0.2 million for the six months ended
November 30, 2021 to $1.0 million for the six months ended November 30, 2022.
Both changes were driven by a significant increase in assets placed in service
between periods to support the growth of the business.

Other costs Interest costs increased 0.4 million dollarsor 100% , from zero for the three months ended 30 November 2021 to 0.4 million dollars for the three months ended
30 November 2022.

Interest expense increased $0.7 million, or 100% , from zero for the six months
ended November 30, 2021 to $0.7 million for the six months ended November 30,
2022.

Both increases were driven by the increase in finance leases and change in the
company's debt obligations between periods, as APLD Hosting, LLC ("Hosting"), a
wholly-owned subsidiary of Applied Digital Corporation, entered into the Loan
Agreement with Starion Bank ("Starion Lender") and the Company as Guarantor (the
"Starion Loan Agreement") for a term loan (the "Starion Term Loan") in the three
months ended November 30, 2022, and had previously entered into a term loan
agreement with Vantage Bank, which was subsequently extinguished. The Starion
Loan Agreement provides for an interest rate of 6.50% per annum. The Starion
Term Loan is secured by a mortgage on the Company's Jamestown, North Dakota
property, and a security interest in substantially all of the assets of the
Company as set forth in the Security Agreement dated as of July 25, 2022 by and
between Hosting and the Starion Lender and a security interest in the form of a
collateral assignment of the Company's rights and interests in a master hosting
agreement related to the Company's Jamestown, North Dakota 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. In addition, the Company unconditionally guaranteed the Company's
obligations to the Starion Lender, including under the Starion Term Loan,
pursuant to an Unlimited Commercial Corporate Guaranty of the Company dated as
of July 25, 2022.

The City of Jamestown, North Dakota and Stutsman County'sEconomic Development
Fund provides a multimillion-dollar economic development program, available to
assist with expanding or relocating businesses. As part of financial packages,
the Jamestown Stutsman Development Corporation (JSDC) makes direct loans, equity
investments, and interest buy-downs to businesses. The Company has entered into
an agreement with JDSC and Starion Bank which which buys down the Company's
interest rate to 1.5% for a period of 13 months through a loan and community
bond. The loan totals $0.2 million and bears an interest rate of 2%, and the
bond totals $0.5 million.

On November 7, 2022, APLD - Rattlesnake Den I, LLC (the "Borrower"), a
wholly-owned subsidiary of the Company, entered into a Loan Agreement with
Vantage Bank Texas ("Vantage Lender") and the Company, as guarantor, which
provides for a term loan in the principal amount of $15 million (the "Vantage
Garden City Loan Agreement"). The Vantage Garden City Loan Agreement will be
advanced in 16 installments for working capital needs for the Borrower's
datacenter in Garden City, Texas (the "Garden City Facility"), with each
installment not exceeding $0.9 million for the costs and expenses of a building
at the Garden City Facility. The
                                       19

————————————————– ————————————

Table of contents

unpaid principal amount of the Vantage Garden City Loan Agreement will bear
interest at a fixed rate of 6.15% per annum, and the Borrower may prepay the
Vantage Garden City Loan Agreement, in whole or in part, without the payment of
any fee or penalty. The Vantage Garden City Loan Agreement matures April 26,
2028. The Vantage Garden City Loan Agreement contains customary representations,
warranties, covenants and events of default. As of the date of this report, an
aggregate amount of $6.6 million has been advanced under the Vantage Garden City
Loan Agreement.

Loss on termination of debt for the three months ended 30 November 2021 and for the three months just ended 30 November 2022 was zero for both periods.

Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million
for the six months ended November 30, 2021 to $0.1 million for the six months
ended November 30, 2022. This decrease was driven by the extinguishment of our
related party notes payable by conversion to common stock during the six months
ended November 30, 2021, compared to a smaller extinguishment of term debt that
was recognized in the six months ended November 30, 2022.

Income tax benefit (expense)
The income tax benefit increased $0.5 million or 246% from a $0.2 million
expense for the three months ended November 30, 2021 to a $0.3 million benefit
for the three months ended November 30, 2022. Income tax benefit increased
$0.5 million or 231% from a $0.2 million expense for the six months ended
November 30, 2021 to approximately $0.3 million benefit for the six months ended
November 30, 2022. This change was driven by a change in valuation allowance for
the periods ended November 30, 2022 compared to the periods ended November 30,
2021.

Gain from Discontinued Operations
Beginning in the quarter ended August 31, 2021 (the first quarter of the fiscal
year ended May 31, 2022), we began cryptoasset mining operations, using Nvidia
GPU miners which we hosted at a facility operated by Coinmint. In the fiscal
year ended May 31, 2022, we made the strategic decision to discontinue our
mining operations and focus on hosting operations in the future. As a result of
this strategic shift, our mining operations were reclassified as discontinued
operations.

Gain from discontinued operations decreased $1.4 million, or 100%, from the
three months ended November 30, 2021 to zero for the three months ended
November 30, 2022. Gain from discontinued operations decreased $1.7 million, or
100%, from the six months ended November 30, 2021 to zero the six months ended
November 30, 2022. The decrease was due to the fact that the Company no longer
generates revenues from mining operations.

Non-GAAP Measures

Adjusted Operating Loss and Adjusted Net Loss
"Adjusted Operating Loss" and "Adjusted Net Loss" are non-GAAP measures that
represents operating loss and net loss, respectively, from continuing operations
excluding stock-based compensation and nonrecurring expenses. We believe these
are useful metrics as they provide additional information regarding factors and
trends affecting our business and provide perspective on results absent one-time
or significant non-cash items. However, 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 Digital's computation of
Adjusted Operating Loss and Adjusted Net Loss may not be comparable to other
similarly titled measures computed by other companies, because all companies may
not calculate Adjusted Operating Loss and Adjusted Net Loss in the same fashion.
                                       20

————————————————– ————————————

Table of contents

Because of these limitations, Adjusted Operating Loss and Adjusted Net Loss
should not be considered in isolation or as a substitute for performance
measures calculated in accordance with GAAP. Applied Digital compensates for
these limitations by relying primarily on its GAAP results and using Adjusted
Operating Loss and Adjusted Net Loss on a supplemental basis. You should review
the reconciliation of operating loss to Adjusted Operating Loss and net loss to
Adjusted Net Loss above and not rely on any single financial measure to evaluate
Applied Digital's business.

EBITDA and Adjusted EBITDA

"EBITDA" is defined as earnings before interest, taxes, and depreciation and
amortization. "Adjusted EBITDA" is defined as EBITDA adjusted for stock-based
compensation, gain on extinguishment of accounts payable, loss on extinguishment
of debt, and 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. These costs have been adjusted as they are not indicative of
business operations. Adjusted EBITDA is intended as a supplemental measure of
Applied Digital's performance that is neither required by, nor presented in
accordance with, GAAP. 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. We also believe EBITDA and Adjusted EBITDA are useful
metrics to investors because they provide additional information regarding
factors and trends affecting our business, which are used in the business
planning process to understand expected operating performance, to evaluate
results against those expectations, and because of their importance as measures
of underlying operating performance, as the primary compensation performance
measure under certain programs and plans. However, you should be aware that when
evaluating EBITDA and Adjusted EBITDA, 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 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. 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.

Adjusted gross profit

"Adjusted Gross Profit" is a non-GAAP measure that represents gross profit
adjusted for depreciation expense within cost of revenues. We believe this is a
useful metric as it provides additional information regarding gross profit aside
from significant non-cash expense in depreciation. However, Applied Digital's
presentation of this measure should not be construed as an inference that its
future results will be unaffected by other factors within cost of revenues.
Applied Digital's computation of Adjusted Gross Profit may not be comparable to
other similarly titled measures computed by other companies, because all
companies may not calculate Adjusted Gross Profit in the same fashion.

Because of these limitations, Adjusted Gross Profit should not be considered in
isolation or as a substitute for performance measures calculated in accordance
with GAAP. Applied Digital compensates for these limitations by relying
primarily on its GAAP results and using Adjusted Gross Profit on a supplemental
basis. You should review the reconciliation of gross profit to Adjusted Gross
Profit above and not rely on any single financial measure to evaluate Applied
Digital's business.
                                       21

————————————————– ————————————

  Table of Contents

                                    Reconciliation of GAAP to Non-GAAP Measures

                                                  Three Months Ended                       Six Months Ended
                                           November 30,        November 30,        November 30,        November 30,
$ in thousands                                 2022                2021                2022                2021
Adjusted operating loss
Operating Loss from Continuing Operations
(GAAP)                                     $  (26,677)$   (1,355)$  (30,854)$  (14,393)
Add: Stock-based compensation                  21,819                   -              22,398              12,337
Add: Gain on Extinguishment of Accounts
Payable                                             -                (285)                  -                (325)
Add: Loss on Extinguishment of Debt                 -                   -                  94               1,342
Add: Non-recurring professional service
costs                                             664                 636               1,072                 636
Add: One-time electricity charges                 114                   -                 114                   -
Add: Other non-recurring expenses                 380                   -                 580                   -
Adjusted Operating Loss from Continuing
Operations (Non-GAAP)                      $   (3,700)$   (1,004)$   (6,596)$     (403)
Adjusted operating margin from Continuing
Operations                                      (30.0) %                -  %            (34.2) %                -  %

Adjusted net income (loss)
Net Loss from Continuing Operations (GAAP) $  (26,750)$   (1,569)$  (31,409)$  (15,949)
Add: Stock-based compensation                  21,819                   -              22,398              12,337
Add: Gain on Extinguishment of Accounts
Payable                                             -                (285)                  -                (325)
Add: Loss on Extinguishment of Debt                 -                   -                  94               1,342
Add: Non-recurring professional service
costs                                             664                 636               1,072                 636
Add: One-time electricity charges                 114                   -                 114                   -
Add: Other non-recurring expenses                 380                   -                 580                   -
Adjusted net loss from Continuing
Operations (Non-GAAP)                      $   (3,773)$   (1,218)

USD (7,151)$(1,959)

EBITDA and Adjusted EBITDA
Net Loss from Continuing Operations (GAAP) $  (26,750)$   (1,569)$  (31,409)$  (15,949)
Add: Interest Expense                             385                   -                 741                   -
Add: Income Tax Benefit (Expense)                (312)                214                (280)                214
Add: Depreciation and Amortization              1,568                 174               2,704                 177
EBITDA (Non-GAAP)                          $  (25,109)$   (1,181)$  (28,244)$  (15,558)
Add: Stock-based compensation                  21,819                   -              22,398              12,337
Add: Gain on Extinguishment of Accounts
Payable                                             -                (285)                  -                (325)
Add: Loss on Extinguishment of Debt                 -                   -                  94               1,342
Add: Non-recurring professional service
costs                                             664                 636               1,072                 636
Add: One-time electricity charges                 114                   -                 114                   -
Add: Other non-recurring expenses                 380                   -                 580                   -
Adjusted EBITDA (Non-GAAP)                 $   (2,132)$     (830)$   (3,986)$   (1,568)

Adjusted Gross Profit
Gross profit (GAAP)                        $      528          $        -          $    1,359          $        -
Add: Depreciation and amortization in cost
of revenues                                       867                   -               1,703                   -
Add: One-time electricity charges                 114                   -                 114                   -
Adjusted Gross Profit (Non-GAAP)           $    1,509          $        -          $    3,176          $        -




The Sources of Liquidity

We have primarily generated cash in the last 12 months from the proceeds of our
term loans, proceeds from our initial public offering, and the receipt of
contractual deposits and revenue prepayments from hosting customers. On April
18, 2022, we received approximately $36 million in net proceeds from the
issuance of 8 million shares of Common Stock in conjunction with the closing of
our initial public offering. On July 25, 2022, the Company entered into the
Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Term
Loan. A portion of the proceeds were used to pay down the Vantage term loan that
was entered into on March 11, 2022.
                                       22

————————————————– ————————————

Table of contents

The remaining proceeds of the term loan will be used for working capital requirements for the operation of phase I of the host facility i Jamestown, North Dakota.

On November 7, 2022, APLD - Rattlesnake Den I, LLC (the "Borrower"), a
wholly-owned subsidiary of the Company, entered into the Vantage Garden City
Loan Agreement. As of the date of this report, an aggregate amount of
$6.6 million has been advanced under the Vantage Garden City Loan Agreement. The
proceeds of the Vantage Garden City Loan will be used for the costs and expenses
of a building at the Garden City Facility.

See Note 7 – Debt to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the Starion Term Loan and the Vantage Garden City Loan.

During the three and six months ended November 30, 2022, we received
$22.4 million and $44.6 million, respectively, 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.
During the three and six months ended November 30, 2022, we have generated
revenue from co-hosting, but have incurred net losses from operations. As of
November 30, 2022 and May 31, 2022, we had cash of $18.1 million and $46.3
million, respectively, and an accumulated deficit of $87.2 million and
$56.1 million, respectively.

Funding Requirements
We have experienced net losses through the periods ended November 30, 2022. Our
transition to profitability is dependent on the successful operation of our
co-hosting facilities. We believe that amounts we received from proceeds from
our term loans, proceeds from our initial public offering, and revenue payments
we have begun to achieve in our co-hosting operations since our first co-hosting
facility was brought online in February 2022, after planned expenditures with
respect to the items described in the section titled "Expansion Opportunities"
above, 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.

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 believe that the
significant investments in property and equipment will begin to decrease into
calendar 2023 as we complete construction of additional capacity. We also expect
that our revenues will increase as we continue to bring online additional
capacity at our Jamestown, North Dakota, Garden City, Texas, and Ellendale,
North Dakota locations.

We believe that our existing cash, together with the anticipated revenues from
current operations and debt funding opportunities, will enable us to fund our
operating expense requirements through at least 12 months as well as all of the
Company's known requirements and plans for cash. 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. 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.
                                       23

————————————————– ————————————

Table of contents

© Edgar Online, source Flash