Applied Digital Corporation

Item 1A. Risk Factors

The Company is providing these additional risk factors to supplement the risk factors contained in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

We rely on third parties to manufacture the equipment and infrastructure we rely on, and if they are unable to do so on a timely basis or to satisfactory technical standards, our business could be materially adversely affected.

We rely on third-party companies to provide equipment required for our business, including but not limited to electrical infrastructure for all of our businesses and GPUs for our HPC hosting business. The manufacture and testing of these items are not within our control, and there are limited sources for such items. If any of the equipment or infrastructure we purchase and rely on are not timely available to us or are found to be unreliable or sub-standard, we may not be able to provide the services we have contracted to provide to our customers, which could have a material adverse effect on our business.

If we fail to maintain the efficiency of our supply chain, our business could be materially adversely affected.

Our ability to meet customer demand for our products depends, in part, on our ability to deliver the services our customers seeA description of the risk from us on a timely basis. Accordingly, we rely on our supply chain for the timely availability of our facilitieactors and, in some cases, equipment, to our customers. As we continue to grow our business and our facilities, expand to high-growth adjacent markets, acquire new customers and strengthen relationships with existing customers, our need to provide active and available facilities to our customers will rely on our ability to procure necessary infrastructure and equipment in relevant time-frames. If we are unable to do so, our customers may seek other providers, which could have a material adverse effect on our business.

Mainssociated with our business is containing key supplier relationships is crucial to our business operations, as we rely on these partnerships to secure essential computing hardware,ed infrastructure components, and other materials. The complexity of developing high-performance computing and cloud services hardware at scale limits the number of suppliers capable of meeting our requirements. Consequently, we have established purchase orders with leading hardware manufacturers, which include

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extended delivery schedules spanning several months before the hardware is delivered to our facilities. These fluctuations in delivery timelines necessitate careful planning and advanced purchasing strategies to ensure we can acquire hardware well in advance of their anticipated deployment.

The development of our Ellendale, North Da the Riskota facility demands significant quantities of electrical infrastructure components and construction raw material. To facilitate the deployment of hardware at scale and on accelerated timelines, we proactively procure these materials from our suppliers in sufficient quantities. To mitigate potential supply chain disruptions and ensure the smooth operation of our facilities, we have established long-term contracts and agreements with key suppliers. These arrangements provide us with greater certainty regarding the availability and pricing of essential components and materials. Furthermore, we continuously monitor market trends and maintain open lines of communication with our suppliers to anticipate and address any potential supply chain challenges that may arise. However, in spite  Factors section of our attempts to anticipate and mitigate such issues, there can be no assurance that disruptions will not arise, which could adversely affect our business and financial results.

Regulatory Developments May Impact our Business

The regulatory landscape surrounding high-performance computing, artificial intelligence (AI), and blockchain hosting services is evolving rapidly, and we anticipate increased scrutiny and potential regulation in the near and long term. These developments may significantly impact on our business and operations in ways that are difficult to predict.

There are growing concerns about the ethical implications and potential misuse of the growing AI technologies and the AI landscape is facing challenges and uncertainties. The development of more advanced AI systems, such as large language models and generative AI, has raised concerns about potential misuse, bias, and the displacement of human workers. Governments and regulatory bodies are considering measures to ensure responsible development and deployment of AI systems, including guidelines for transparency, accountability, and fairness. In recent years, crypto mining has received increased attention from regulators with respect to technical and financial aspects of this industry. We expect that regulatory efforts in this area will continue to evolve and potentially impact our business.

As a company operating at the intersection of HPC, AI, and Blockchain hosting services, we are committed to maintaining a proactive and adaptive approach to regulatory compliance. We continue to monitor legislative and regulatory developments closely and engage in dialogue with relevant stakeholders to ensure our business practices align with the evolving legal and regulatory framework. However, there can be no assurance that our business will not be adversely impacted by future developments.

The continuing commoditization of HPC hardware and software has resulted in increased pricing pressure and may adversely affect our operating results.

The continuing commoditization of HPC hardware, such as processors, interconnects, flash storage and other infrastructure, and the growing commoditization of software, including plentiful building blocks and more capable open source software, as well as the potential for integration of differentiated technology into already-commoditized components, has resulted in, and may result in increased pricing pressure that may cause us to reduce our pricing in order to remain competitive, which can negatively impact our gross margins and adversely affect our operating results.Annual Report.