Applied Digital Corporation Common Stock

Item 1A. Risk Factors

A description Except as set forth below, there have been no material changes in or additions to the risk factors included in our Annual Report on Form 10-K for the year ended May 31, 2024, as supplemented by the Risk Factors included in Exhibit 99.2 to the Companys Form 8-K filed with the SEC on November 5, 2024 and incorporated herein by reference.

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Any delays of the risk factors associated with our business is r unexpected costs in the development of our existing space and developable land and new properties acquired for development may delay and harm our growth prospects, future operating results and financial condition.

We are currently in the process of building the HPC Ellendale Facility and we may in the future continue to build out additional HPC hosting facilities on a speculative basis at significant cost. Our successful development of this and future projects is subject to many risks, including those associated with:

delays in construction, or changes to the plans or specifications;

financing availability, including our ability to obtain construction financing and permanent financing, or increases in interest rates or credit spreads;

delays or denials of entitlements or permits, including zoning, siting, utility and other permits, or other delays resulting from requirements of public agencies and utility companies;

budget overruns, increased prices for raw materials or building supplies, or lack of availability and/or increased costs for specialized data center components, including long lead time items such as generators;

construction site accidents and other casualties;

labor availability, costs, disputes and work stoppages with contractors, subcontractors or others that are constructing the project;

failure of contractors to perform on a timely basis or at all, or other miscontained in the Risk duct on the part of contractors;

access to sufficient power and related costs of providing such power to our customers;

environmental issues;

supply chain constraints;

fire, flooding, earthquakes and other natural disasters;

pandemics; and

geological, construction, excavation and equipment problems.

In addition, development activities, regardless of whether they are ultimately successful, also typically require a substantial portion of our managements time and attention. This may distract our management from focusing on other operational activities of our business. If we are unable to complete development projects successfully, our business may be adversely affected.

We have concentrated our operations in the state of North Dakota and, thus, are particularly exposed to the regulatory framework and changes in the regulatory environment, market conditions and natural disasters in that state.

We currently operate data centers in the state of North Dakota. The revenue we collected from operating these data centers was responsible for the majority of our revenue in the fiscal years ended May 31, 2024, and 2023. We are also in the process of constructing the HPC Ellendale Factors secility, which we expect to begin generating revenue in calendar year 2025. Consequently, our business operations and financial condition of our Annual Report.are particularly reliant on the performance of these data centers, which are all located in North Dakota.

As a result of the concentrated nature of our operations in this state, the operation of our business is particularly exposed to the regulatory framework, including but not limited to state utility permitting regulations, and changes in the regulatory environment, market conditions and natural disasters in the state, any of which may cause delays in the construction and operation of our data center facilities, including completion of the HPC Ellendale Facility, or prevent us from executing on our expansion strategy.

In addition, historically, North Dakota, through its regulatory and economic incentives, has encouraged Bitcoin mining companies to locate their operations in the state. As such, we face substantial competition in North Dakota for suitable Bitcoin mining data center sites and skilled workers. Conversely, if the regulatory and economic environment in North Dakota were to become less favorable to Bitcoin mining companies, including by way of increased taxes, and such Bitcoin mining companies would relocate out of the state, we could lose one or more of our data center hosting customers, which would have a material adverse effect on our business, financial condition and results of operations.

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Although we are concurrently in negotiations with multiple hyperscalers for a lease of the HPC Ellendale Facility, we have not yet entered into any definitive lease documentation with any one of these parties and there can be no assurance that we will be able to do so in the future on terms favorable to us or at all.

Through our HPC Hosting Business, we design, construct and manage data centers tailored to support HPC applications and running AI workloads. We are currently building two HPC data centers. The first facility, which is nearing completion, is a 7.5 MW facility in Jamestown, North Dakota located adjacent to our 106 MW data center hosting facility. We also began construction of a 100 MW HPC data center in Ellendale, North Dakota, on land located adjacent to our existing 180 MW data center hosting facility, which is the first of three planned buildings on this site for a total of 400 MW of capacity. These facilities are being designed and purpose-built for GPUs, and will sit separate from our current buildings and host more traditional HPC applications.

The Company plans to lease these purpose-built data centers to one or more hyperscalers. We are concurrently negotiating and working closely with multiple hyperscalers on lease terms for the same premises.

We believe our Ellendale HPC data center is a unique asset, in that it is the largest data center of its kind and furthest along in construction compared to any other comparable data center, making it a market leader. The market for data centers is intensely competitive and we believe there is strong interest among tier-one hyperscalers to lease this data center. We intend to continue working with several hyperscalers toward entering into definitive, long term lease documentation. We intend to accept the proposal from the hyperscaler that we perceive to present the best opportunity to enhance value for the Company and our shareholders in a market relevant timeframe. Despite the significant work we have undertaken with respect to these negotiations, we cannot be certain that we will actually finalize lease documentation with any one of these hyperscalers with which we have engaged in negotiations to date, or at all. We therefore cannot give any assurance that we will enter into a lease for our Ellendale HPC data center on terms favorable to us, or at all, or generate any revenue from this data center. If we are unable to generate revenue from our Ellendale HPC data center, our business, financial condition and results of operations will be materially adversely affected.

We plan to lease these purpose-built data centers to one or more hyperscalers. We are concurrently negotiating and working closely with multiple hyperscalers on lease terms for the same premises.

We believe our HPC Ellendale Facility is a unique asset, in that it is the largest data center of its kind and furthest along in construction compared to any other comparable data center, making it a market leader. The market for data centers is intensely competitive and we believe there is strong interest among tier-one hyperscalers to lease this data center. We intend to continue working with several hyperscalers toward entering into definitive, long term lease documentation. We intend to accept the proposal from the hyperscaler that we perceive to present the best opportunity to enhance value for the Company and our shareholders in a market relevant timeframe. Despite the significant work we have undertaken with respect to these negotiations, we cannot be certain that we will actually finalize lease documentation with any one of these hyperscalers with which we have engaged in negotiations to date, or at all. We therefore cannot give any assurance that we will enter into a lease for our HPC Ellendale Facility on terms favorable to us, or at all, or generate any revenue from this data center. If we are unable to generate revenue from our HPC Ellendale Facility, our business, financial condition and results of operations will be materially adversely affected.

We are subject to risks associated with our need for significant electrical power.

Our operations require significant amounts of electrical power and we anticipate our demand for electrical power will continue to grow as we begin to operate the HPC Ellendale Facility. The fluctuating price of electricity required for our operations and to power our expansion may inhibit our profitability. If we are unable to continue to obtain sufficient electrical power on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments.

Furthermore, we currently have a minimum commitment of approximately $61.1 million related to the energy services agreement for our Jamestown, North Dakota co-hosting facility payable over the remaining term of the services agreement of approximately 2.2 years as of November 30, 2024. Any delay or failure to make timely payments under this agreement could risk the operation of our Jamestown, North Dakota co-hosting facility, which would have a material adverse effect on our business.

Additionally, our operations could be materially adversely affected by prolonged power outages. Although certain critical functions of our facilities may be powered by backup generators on a temporary basis, it may not be feasible or cost-effective to run on back-up power generators for extended periods of time. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected.

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We are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns on these investments.

We expect to continue to expand our data center footprint. In connection with our expansion plans, we may be required to commit significant operational and financial resources, but there can be no guarantee we will have sufficient customer demand in those markets to support the data centers once they are built. This risk may be greater in a market where we have not operated previously. Once development of a data center facility is complete, we incur certain operating expenses even if there are no customers occupying any space. Consequently, if any of our properties have significant vacancies for an extended period of time, our results of operations and business and financial condition will be adversely affected, the impact of which could be material. In addition, unanticipated technological changes could affect customer requirements for data centers, and we may not have built such requirements into our new data centers. If any of these developments or contingencies were to occur, it could make it difficult for us to realize expected or reasonable returns on our investments.

Our anticipated partnership with MAM is subject to closing conditions and no assurance can be given that those closing conditions will be met and the transactions contemplated by the Unit Purchase Agreement will be consummated.

On January 13, 2025, APLDH entered into the Unit Purchase Agreement with the Purchaser. Pursuant to the terms of the Unit Purchase Agreement, at the Closing, APLDH will issue perpetual preferred equity units and common equity units for an initial investment by MAM of $225 million payable to APLDH at the Closing. The Closing is conditioned upon, among other things:

the negotiation and execution of the limited liability company agreement for APLDH which, among other things, shall (i) set forth the Purchasers right to invest an additional $675 million to fund the development of the remaining 300 MW of the Ellendale Campus following execution of leases approved by the Purchaser within 15 months of Closing, and (ii) set forth the Purchasers right to invest up to an additional $4.1 billion on the same terms of the Preferred Units (as defined in the Unit Purchase Agreement) to provide a portion of the equity financing for future HPC datacenter development projects presented to the Purchaser by APLDH during the 30 months following the Closing; a corporate services agreement between the Company, APLDH and the Purchaser and a management incentive plan for APLDH;

the execution of a lease with a hyperscaler for the first 100 MW on the HPC Ellendale Facility, in a form acceptable to the Purchaser; and

the Company and APLDH carrying out an internal restructuring to segregate the HPC Hosting Business assets and liabilities before Closing from the rest of the Companys assets and liabilities.

No assurance can be given that the parties will successfully negotiate the terms of the foregoing documents, or that APLDH will enter into any such lease or that any such lease would be on terms acceptable to MAM. If the parties do not enter into each of the foregoing documents in form and substance mutually satisfactory to the parties, on or before February 15, 2025, then either MAM or APLDH may terminate the Unit Purchase Agreement, with no further liability to the other (other than the reverse termination fee of $11.25 million payable by MAM under certain specified circumstances, including if the Closing does not occur by July 13, 2025), in which case, the Closing will not occur,.

Any delay in Closing could cause us to not realize some or all of the anticipated benefits of the transactions contemplated by the Unit Purchase Agreement when expected, if at all. If the Unit Purchase Agreement is not consummated, we could be subject to a number of risks that may adversely affect our business and operating results, including, among other things:

we may be unable to repay project-level debt and recover equity investment in the Ellendale Campus;

we may need to negotiate other financing options for the HPC Ellendale Campus and/or our HPC data center pipeline;

our stock price could decline, to the extent it reflects an assumption that Closing will occur;

our incurrence of significant costs that we would be unable to recoup;

and negative publicity resulting from the failure to close the Unit Purchase Agreement.