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https://friendlybearresearch.com/2023/07/26/b-riley-may-face-fallout-from-applied-digital-governance-problems/

• Recent developments suggest that B. Riley is controlling managerial decisions at Applied Digital to the detriment of Applied Digital shareholders
• After raising “low-cost” debt from B. Riley specifically for the purpose of “accelerating growth”, Applied Digital turned around and paid the loan off almost two years ahead of contractual maturity, and at the exact time that B. Riley needed to raise cash for its FRG acquisition
• We do not believe that Applied Digital’s board meets the independence requirements under Nasdaq rules and believe the Board is essentially controlled by B. Riley
• The CEO of APLD bought shares of APLD utilizing his B. Riley fund immediately in front of significant market moving news – we believe the Boards of both companies should probe these trades
• Given the clear conflicts of interest at play, the Audit Committee’s alleged investigation into the CEO’s sexual harassment could subject Applied Digital to significant legal blowback

Applied Digital represents one of the worst governance situations we have ever seen and we expect both APLD and RILY could face substantial litigation in the coming months due to severe disclosure and governance problems.  We question the judgment of partners that have decided to work with Applied Digital despite its internal control (p17) and governance problems.

In this article we focus on the legal issues in front of Applied Digital that we believe can spillover to B. Riley because of the company’s improperly disclosed relationship.  Unbelievably, nowhere in APLD’s 2022 10-K does the company mention a risk factor relating to its relationship to B. Riley despite the obvious conflicts of interests including the CEO holding a dual role as a fund manager at B. Riley, the CEO using B. Riley funds to trade shares of APLD, and 3 of 6 board seats being held by senior B. Riley executives or their spouse.  We think the lack of disclosure on this matter subjects both companies to substantial legal risk.  

Applied Digital currently has 6 Board members, 5 of whom the company claims are independent. Nasdaq listing requirements require “a majority” of the Board to be independent. However, as we analyze below, both Mr. Hastings and Ms. Moore (the wife of the CEO of B. Riley Securities) do not appear to be independent and, even if they may technically fit the definition, they clearly open the company up to significant legal liabilities.

Amazingly, Ms. Moore Chairs the Nominating Committee and Mr. Hastings also sits on it (2 of 3 seats).  As such, they are tasked with determining the independence of the members of the board.  There is no way two B. Riley linked individuals can determine their own independence given the linkages.  More on this below.

As such, we believe that Applied Digital’s current Board has only 3 truly independent directors, representing less than a majority and potentially running afoul of Nasdaq listing requirements. Nasdaq rule 5605(a)(2) requires a majority of a board to be independent (meaning more than 3 seats), and Mr. Cummins as Chairman clearly tilts the board towards lacking independence.

We think this matters because there is evidence B. Riley is influencing managerial decision making at Applied Digital, thereby effectively exercising control over the company.  This is not disclosed as a possible risk factor in the company’s SEC filings.

Below we demonstrate examples of instances in which B. Riley’s influence on Applied Digital suggests that Applied Digital’s Board of Directors is putting B. Riley’s interests ahead of Applied Digital shareholders – making short term and conflicted decisions that are favorable for Mr. Cummins and B. Riley and not for shareholders.