Applied Digital files 10-Q: quarterly report (10-Q)

• our ability to complete construction of our data center campuses;

• our dependence on principal customers, including our ability to execute leases with key customers;

• availability of financing to continue to grow our business;

• labor and other workforce shortages and challenges;

• power or other supply disruptions and equipment failures;

• the addition or loss of significant customers or material changes to our relationships with these customers;

• 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;

• our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;

• our ability to timely and successfully build new data center facilities with the appropriate contractual margins and efficiencies; and

• uncertainties of regulation policy.

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, 2026, which was filed with the SEC on July 29, 2026, 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.

A comparison of our results of operations and cash flows for the three months ended August 31, 2025 can be found under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q for the quarter ended August 31, 2025, filed with the SEC on October 9, 2025.

During the fiscal year 2026, we completed the contribution of our Cloud Services Business to ChronoScale (as defined below), formerly Ekso (as defined below). As a result of this transaction, certain prior-period amounts presented in this Quarterly Report have been recast to conform to the current period presentation. The recast primarily reflects changes associated with the transaction, including revisions to the presentation of certain historical financial statement line items and related disclosures. As a result, certain fiscal quarter 2025 amounts presented in this Quarterly Report differ from the amounts previously reported in our Quarterly Report on Form 10-Q for the quarter ended August 31, 2025.

Executive Overview

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

Business Overview

We are a U.S. designer, developer, and operator of high-performance, sustainably engineered data centers and colocation services for artificial intelligence (“AI”), networking, and blockchain workloads. We provide digital infrastructure solutions to the rapidly growing industries of high-performance computing (“HPC”) and AI. We operate in two distinct business segments, data center hosting (the "Data Center Hosting Business") and HPC data center hosting (the “HPC Hosting Business”), both of which are included in our unaudited consolidated financial statements, as further discussed below. Management considers the Data Center Hosting Business and the HPC Hosting Business to be our core operations for long-run strategic and performance evaluation purposes.

We consolidate entities that meet the definition of a variable interest entity (“VIE”) for which the Company is considered the primary beneficiary or entities that meet the definition of a voting interest entity (“VOE”). The Company consolidates a VIE where it has been determined that the Company is the primary beneficiary of the entity's operation in accordance with ASC Topic 810, Consolidations. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In evaluating whether the Company is the primary beneficiary, the Company evaluates its power to direct the most significant activities of the VIE by considering the purpose and design of the entity and the risks the entity was designed to create and pass through to its variable interest holders. The Company also evaluates its economic interests in the VIE.

On May 5, 2026, we completed the separation of our cloud services business. As of August 31, 2026 we owned approximately 96% of the outstanding common stock of ChronoScale Holdings Corporation (“ChronoScale”). We consolidate ChronoScale under the voting interest model because we hold a controlling financial interest. The ownership interests in ChronoScale not attributable to us are presented as noncontrolling interests in the unaudited condensed consolidated financial statements.

Trends and Other Factors Affecting Our Business

Regulatory Environment

The regulatory landscape surrounding AI and blockchain hosting services is evolving rapidly, and we anticipate increased scrutiny and potential regulation in the near and long term. Any such developments may significantly impact our business and operations in ways that are difficult to predict.

Governments and regulatory bodies are considering measures to ensure the responsible development and deployment of AI systems, including transparency, accountability, and fairness guidelines. For example, in the U.S Senate, committees of jurisdiction have passed several AI bills that establish industry standards and impose significant obligations in relation to the use of AI systems. On the state level, several U.S. states have considered AI legislation, which aims to reduce risk associated with the use of AI; while certain states have passed comprehensive AI legislation. A number of states have recently issued moratoriums on future AI data centers while other states are considering the same. In Europe, the EU AI Act has been adopted, portions of which have started to take effect, with other portions continuing to take effect over the next several years.