Applied Blockchain, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2022 (fiscal first quarter of 2023), compared with the three months ended August 31, 2021. The company operated data centers providing hosting and related services, primarily to blockchain and Bitcoin-mining customers.
Financial performance and position
- Revenue: Hosting revenue was $6.9 million, versus none in the prior-year quarter. Five customers represented all reported revenue; the largest accounted for 35.5%. One customer was related to a minority member of the company’s joint venture.
- Profitability: Cost of revenue was $6.1 million and gross profit was $0.8 million, a 12.0% gross margin. Operating loss was $4.2 million and net loss attributable to Applied Blockchain was $4.5 million, or $0.05 per share. Prior-year net loss attributable to the company was $14.1 million, or $0.31 per share. The comparison was affected by $12.3 million of prior-year stock-based compensation, versus $0.6 million this quarter.
- Non-GAAP measures: Adjusted EBITDA was negative $1.9 million and adjusted gross profit was $1.7 million. These measures exclude specified expenses; they are not substitutes for GAAP results.
- Cash flow: Operating cash flow was $17.3 million, largely reflecting $15.3 million of higher deferred revenue and $4.6 million of customer deposits, rather than operating profit. Investing cash outflow was $31.7 million, primarily property and equipment purchases; financing cash inflow was $8.9 million. Cash declined $5.5 million during the quarter.
- Liquidity: Cash and cash equivalents were $40.8 million, including $7.5 million of restricted cash; cash excluding restricted funds was $33.3 million. Working capital was negative $6.3 million. Management said available cash and expected operating revenue were sufficient for at least 12 months from issuance of the financial statements.
- Debt and commitments: The company entered a $15 million Starion Bank term loan at 6.50%, maturing July 2027, and used part of the proceeds to repay its Vantage loan. Term-loan carrying amounts totaled about $14.7 million, including current and long-term portions. The Starion loan is secured by property and substantially all company assets, with a company guarantee. A $24.2 million energy-services commitment was fully due within the next year under the agreement’s annual power commitment.
Material developments, outlook and risks
- The 100 MW Jamestown, North Dakota facility was fully contracted. An earlier substation failure caused a roughly 50% partial outage; repairs were completed in mid-August 2022 and capacity was restored.
- A five-year Marathon hosting contract signed in July covered 200 MW: 90 MW at the Texas facility and at least 110 MW at the planned second North Dakota facility. Marathon also received an option for up to another 70 MW.
- Construction began at the 200 MW Garden City, Texas facility, which the company expected to begin operating in calendar Q4 2022. The company purchased land in Ellendale, North Dakota, and planned a 200 MW facility with completion targeted for calendar Q1 2023. These are management expectations, not guarantees.
- The company discontinued and sold its crypto-mining operations in fiscal 2022 and reported no mining revenue this quarter. Its ongoing hosting business nevertheless remains exposed to crypto-mining customer demand and regulatory developments.
- Management cited customer concentration, facility construction and ramp-up, equipment or power disruptions, workforce challenges, crypto-market and regulatory uncertainty, and potential need for additional capital. Proposed local incentives that could reduce loan interest were pending final approval.
- Disclosure controls were not effective as of August 31, 2022 because of material weaknesses, including inadequate access controls, segregation of duties, and control design. Remediation was underway but not complete.
- No formal financial guidance was provided. Management said operating and capital expenditures are expected to rise as facilities expand and noted that additional financing may be needed.
Important facts for investors to verify
- Whether Jamestown and planned Texas and Ellendale capacity reached stated operating milestones, and whether the contracted hosting capacity converts into recognized revenue and positive margins.
- Customer concentration, including the related-party customer relationship, and the ability of crypto-mining customers to meet contractual obligations.
- Cash available after excluding restricted funds, timing of customer prepayments, construction spending, and the company’s ability to fund expansion without additional capital.
- Compliance with Starion loan terms, potential approval and effect of local interest-rate support, and the substantial collateral and guarantee provisions.
- Progress in remediating internal-control material weaknesses and the remaining stock-based compensation expense; the filing reported $23.9 million of unrecognized expense subject to performance conditions.