Applied Digital Corporation — Form 10-Q Summary
Business context and period. This filing covers the fiscal quarter and nine months ended February 28, 2023; the quarter is fiscal Q3 2023. Applied Digital builds and operates North American data centers, providing hosting and operational services under typically long-term, fixed-rate contracts. The company had exited its own crypto-mining operations; reported revenue was from hosting.
Key financial results
| Metric | Three months ended Feb. 28, 2023 | Nine months ended Feb. 28, 2023 |
|---|---|---|
| Hosting revenue | $14.1 million | $33.4 million |
| Gross profit (margin) | $3.6 million (25.2%) | $4.9 million (14.7%) |
| Operating loss | $7.0 million | $37.8 million |
| Net loss attributable to Applied Digital | $7.0 million | $38.2 million |
| Basic and diluted loss per share | $0.08 | $0.41 |
For the quarter, adjusted EBITDA, a non-GAAP measure, was positive $0.9 million; for the nine months it was negative $3.1 million. GAAP net losses continued, and SG&A included $26.9 million of stock-based compensation for the nine-month period.
- Cash and liquidity: Cash and cash equivalents were $22.9 million at February 28, versus $46.3 million at May 31, 2022. Of the reported balance, $14.5 million was restricted for letters of credit, leaving approximately $8.4 million unrestricted. Working capital was negative $84.2 million.
- Cash flows, nine months: Operating activities provided $54.1 million, substantially reflecting customer deposits and advance billings/deferred revenue, as well as noncash stock compensation. Investing activities used $96.3 million, primarily for facility construction. Financing activities provided $18.8 million. Cash declined $23.4 million.
- Debt: Term-loan principal was $24.1 million at period-end. The filing reports a further $20 million Ellendale term loan, bearing 7.48%, that had not been funded by February 28; the company received $19.8 million net of fees on March 30, 2023.
- Contract liabilities: Customer deposits were $36.4 million and deferred revenue was $47.6 million at period-end. The company expected to recognize all deferred revenue within 12 months.
Changes versus the comparable period
- Quarterly hosting revenue rose from $1.0 million to $14.1 million; nine-month revenue rose from $1.0 million to $33.4 million, mainly reflecting expanded operations at Jamestown.
- Quarterly gross profit turned positive from a $1.0 million gross loss, but operating loss widened to $7.0 million from $2.4 million. Nine-month operating loss widened to $37.8 million from $16.6 million, reflecting higher facility costs and SG&A, including stock compensation.
- Cash used in construction increased: property and equipment purchases were $96.2 million for the nine months, versus $28.2 million in the prior-year period.
- Prior-year results included discontinued crypto-mining operations and related losses; no discontinued-operations results were reported for the current period.
Outlook, commentary, and risks
- Management said existing cash, financing, customer receipts, and expected operating revenue should meet operating and capital needs for at least 12 months from issuance of the statements, while cautioning that estimates could prove wrong and additional financing might be needed.
- Management expected revenue to grow as capacity came online and significant construction spending to decrease during calendar 2023. No specific earnings or revenue guidance was provided.
- Jamestown’s 100 MW capacity was fully contracted on multi-year terms, with over 90 MW online at February 28. Garden City’s 200 MW was substantially complete and fully contracted. Ellendale was being energized in March 2023; the filing described planned total North Dakota capacity of 280 MW as contracted to customers on multi-year terms.
- The company disclosed an approximately $24.2 million annual minimum energy commitment for Jamestown, due within the next year, under an agreement with a five-year minimum term. It also had $14.5 million of restricted cash supporting letters of credit and no unused credit lines at period-end.
- Risks include customer concentration and dependence on crypto-mining customers, changing crypto regulation, timely construction and facility utilization, power or equipment disruptions, and the possibility of needing financing sooner than expected. Certain power purchase agreements may require derivative accounting and could cause quarterly earnings volatility.
- Disclosure controls and procedures were not effective at the reasonable-assurance level because of material weaknesses involving system access/segregation of duties and the design of controls over key processes. Remediation was in progress.
- The board had not decided whether or when to elect REIT tax status. The filing also highlighted exposure of deposits above FDIC limits to bank failures. No material litigation was reported.
Important facts for investors to verify
- Whether new facilities are energized on schedule, operate efficiently, and generate the contracted revenue and margins.
- How much reported operating cash flow depends on customer prepayments and deposits, and how cash needs evolve as construction spending and customer obligations continue.
- Available unrestricted liquidity, debt repayments and covenant terms, and funding for planned expansion.
- Customer and related-party concentration, including the durability of multi-year contracts and customer ability to perform.
- Progress in remediating material weaknesses in internal controls and any subsequent changes to REIT plans or power-contract accounting.