Applied Digital Corporation — Form 10-Q Summary
Reporting period: Three months ended August 31, 2023, the first quarter of fiscal 2024. Comparisons are with the three months ended August 31, 2022. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
Applied Digital designs, builds, and operates digital infrastructure for AI cloud services, high-performance computing (HPC), and data-center hosting, including crypto-mining customers. During the quarter, it deployed an initial 1,024-GPU cloud-services cluster and began earning revenue under its first cloud contract. Jamestown (106 MW) and Ellendale (180 MW) hosting facilities were operational; the company expected its 200 MW Garden City facility to energize in calendar Q4 2023.
Financial performance and liquidity
| Metric | Quarter ended Aug. 31, 2023 | Quarter ended Aug. 31, 2022 |
|---|---|---|
| Revenue | $36.3 | $6.9 |
| Cost of revenue | $24.4 | $6.1 |
| Operating loss | $(5.1) | $(4.2) |
| Net loss | $(11.9) | $(4.7) |
| Net loss attributable to Applied Digital | $(11.5) | $(4.5) |
| Basic and diluted loss per share | $(0.12) | $(0.05) |
| Net cash from operating activities | $4.5 | $17.3 |
| Net cash used in investing activities | $(40.5) | $(31.7) |
| Net cash from financing activities | $23.7 | $8.9 |
- Revenue rose 425%, principally from increased hosting capacity at Ellendale and Jamestown, plus $2.2 million of new cloud-services revenue. Hosting segment revenue was $34.2 million; cloud-services revenue was $2.2 million.
- Calculated gross margin was approximately 32.8%, compared with 12.0% a year earlier; GAAP operating margin was approximately (14.1%), compared with (60.3%). These percentages are calculated from reported revenue and cost or operating loss.
- Hosting segment profit was $9.0 million; cloud-services segment loss was $7.4 million and HPC segment loss was $0.7 million. Consolidated operating results also include corporate costs.
- Management reported non-GAAP adjusted EBITDA of $10.0 million, versus a loss of $1.9 million in its results table. This measure excludes specified items and is not a substitute for GAAP results.
- At August 31, cash and cash equivalents were $5.9 million, with restricted cash of $25.3 million; combined cash and restricted cash was $31.2 million. Working capital was negative $118.1 million.
- Debt was approximately $44.0 million, including current and long-term portions. Finance and operating lease liabilities totaled approximately $59.9 million. The company repaid its outstanding B. Riley loan balances during the quarter; $10.5 million of capacity remained at quarter-end, and it borrowed another $5.0 million after quarter-end.
- Assets totaled $349.2 million and stockholders’ equity was $127.9 million at quarter-end. The quarter included $64.5 million of net proceeds from at-the-market share sales.
Material changes and notable items
- Revenue increased from $6.9 million to $36.3 million as hosting facilities came online and cloud services launched. Selling, general and administrative expense rose from $5.0 million to $17.1 million, including a $5.1 million increase in stock-based compensation.
- Interest expense increased to $2.1 million. A $2.4 million loss on extinguishment of debt related to termination fees on the B. Riley loan; a $2.3 million former-executive settlement was also recorded.
- Operating cash flow fell to $4.5 million, principally because customer prepayments were lower relative to revenue recognized. Investing outflows were $40.5 million, including $7.6 million of finance-lease prepayments.
- The minority partner in 1.21 Gigawatts LLC exchanged its interest for approximately 1.5 million Applied Digital shares valued at $9.8 million; the company became the sole member.
Outlook, risks and contingencies
- No specific financial guidance was provided. Management stated it believes available resources and expected operating revenue are sufficient for at least 12 months after issuance of the financial statements, while cautioning that estimates could prove inaccurate and further financing may be needed.
- Management expects continued investment in HPC construction and cloud-services assets, and anticipated revenue growth as Garden City and cloud-services capacity come online. The filing describes the Garden City energization timing as expected, not assured.
- Customer concentration is significant: one customer represented 68% of quarterly revenue. The company also cites dependence on crypto-mining customers, regulatory uncertainty, customer or power disruptions, facility-construction execution, and its ability to obtain financing as risks.
- Commitments include approximately $95.7 million under a Jamestown energy-services agreement and approximately $143.4 million of minimum payments for operating leases signed but not yet commenced to support cloud services. The filing also reports $51.8 million of deferred revenue expected to be recognized within 12 months.
- A securities class action filed in August 2023 names the company and two officers; the company could not estimate a potential loss. The filing says the case is at an early stage. The separate $2.3 million former-executive settlement was accrued at quarter-end.
- Management concluded disclosure controls and procedures were not effective as of August 31, 2023, citing material weaknesses in financial reporting controls, system access and segregation of duties, related-party controls, and identification of key controls. Remediation was in progress.
Most important facts for investors to verify
- Whether Garden City energizes as expected and whether the company can deliver planned HPC and cloud-services capacity on time and within budget.
- Whether cloud-services revenue and utilization grow sufficiently to offset segment start-up losses and substantial lease and buildout commitments.
- The sustainability of hosting revenue, customer concentration, and exposure to crypto-mining regulation, energy costs, and customer credit or operating disruptions.
- Liquidity and funding needs, including restricted cash, negative working capital, lease obligations, debt maturities, and potential future equity issuance.
- Developments in the securities lawsuit and the effectiveness and timing of remediation of disclosed control weaknesses.
- The filing’s non-GAAP comparative figures: its results table and reconciliation report different prior-year EBITDA and adjusted EBITDA amounts. Investors should consult the underlying reconciliation and any company clarification.