Applied Digital Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended May 31, 2023, with comparisons to fiscal 2022. The filing also reports the quarter ended May 31, 2023; it is not a calendar-year 2022 Q4 report.
Business context
Applied Digital designs, builds, and operates digital infrastructure. Its business streams are crypto datacenter hosting, high-performance computing (HPC) hosting, and AI cloud services. During FY2023, operating activity was solely in crypto datacenter hosting; the AI cloud business formally launched in May 2023. The company had about 185 MW of crypto capacity online at year-end and reported about 285 MW energized after year-end. A further 200 MW was committed to be energized under multi-year customer arrangements.
Financial results and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Hosting revenue | $55.4 million | $8.5 million |
| Gross profit (loss) | $11.0 million | ($1.0) million |
| Gross margin | 19.9% | Negative |
| Operating loss | ($44.1) million | ($20.9) million |
| Net loss attributable to Applied Digital | ($44.6) million | ($23.5) million |
| Basic and diluted loss per share | ($0.49) | ($0.41) |
| Operating cash flow | $58.7 million | ($0.9) million |
| Investing cash flow | ($132.1) million | ($45.9) million |
| Financing cash flow | $70.6 million | $81.3 million |
Revenue rose 548%, primarily from a full year of Jamestown operations and the energization of Ellendale. Cost of revenue increased to $44.4 million, including a $28.5 million increase in energy costs. SG&A rose to $55.1 million, including $32.1 million of stock-based compensation. FY2023 adjusted EBITDA, a non-GAAP measure, was a loss of $0.1 million, versus a $6.0 million loss in FY2022; GAAP EBITDA was a loss of $36.9 million.
For the quarter ended May 31, 2023, revenue was $22.0 million, gross profit $6.1 million (27.6% margin), operating loss $6.2 million, and net loss attributable to Applied Digital $6.5 million. Adjusted EBITDA was $2.9 million, a non-GAAP measure.
At May 31, 2023, cash and cash equivalents were $29.0 million, while cash plus restricted cash was $43.6 million; $14.6 million was restricted for letters of credit. Working capital was negative $69.7 million. Gross term-loan balances were reported at $79.4 million, including a $36.5 million related-party B. Riley loan; the weighted-average loan rate was 13.4%. The B. Riley loan was repaid in July 2023. Finance and operating lease liabilities were also reported, and substantial additional lease commitments support the AI business.
Material changes and financing
- Hosting revenue increased from $8.5 million to $55.4 million as capacity came online, while the company’s net loss widened from $23.5 million to $44.6 million.
- Investing outflows of $132.1 million largely funded construction and equipment for Garden City and Ellendale. Operating cash flow benefited substantially from customer deposits and advance payments, not just operating earnings.
- Customer deposits were $36.4 million and deferred revenue was $48.7 million at year-end. The company expected to recognize all deferred revenue within 12 months.
- In June 2023, the company began an at-the-market stock offering of up to $125 million. By the filing date it had sold about 7.9 million shares, generating approximately $64.7 million in net proceeds after about $2.0 million of commissions.
- After year-end, the company confirmed receipt of an approximately $22.5 million AI customer prepayment and entered into approximately $41 million of financing over 24 months for 1,024 H100 GPUs.
Outlook, risks, and unusual items
Management expected revenue to increase as additional datacenter capacity came online and AI/HPC services began, and expected significant investment in property, equipment, and AI cloud services. It said available cash, financing proceeds, and hosting receipts were expected to meet working-capital and capital needs for at least 12 months from issuance of the financial statements, while cautioning that estimates could prove wrong and additional financing may be needed.
AI customer agreements announced around year-end were valued at up to $180 million over 24 months and, after year-end, up to $460 million over 36 months. These are contract ceilings, not reported FY2023 revenue; the filing describes the first agreement as including a significant prepayment. AI services remained highly concentrated in two customers. Crypto hosting also had material customer concentration, including related-party customers.
- Growth depends on construction execution, timely access to power, equipment and suppliers, customer demand, and the ability to raise capital; dilution and increased debt are possible.
- Crypto customers are exposed to cryptoasset price volatility, regulation, and operational and technology risks, which could affect their ability to meet hosting commitments.
- The company reported ineffective disclosure controls and material weaknesses in financial reporting controls, including data processing, system access/segregation of duties, related-party disclosures, and control design. Remediation was underway.
- Potential workplace-related allegations involving two executive officers were investigated by the Audit Committee, which found the relationship consensual and the allegations unfounded. Mediation was planned; the company estimated a possible loss range of $0–$1 million.
- Power purchase agreements that may be net-settled could require derivative fair-value accounting and cause quarterly results to fluctuate. The company also disclosed $28 million of Jamestown power commitments, about $10.2 million of other purchase commitments, and about $83.1 million of signed but not commenced AI operating leases.
- The company was investigating a possible REIT structure but had made no election. The financial statements received an unqualified audit opinion; the auditor reported no critical audit matters and did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether contracted capacity is energized on schedule, and whether customer deposits and deferred revenue convert to recognized revenue and cash under contract terms.
- The economics, funding requirements, deployment schedule, and customer concentration of the AI GPU business, including the stated contract ceilings and prepayment.
- Cash available after restricted balances, debt and lease obligations, construction spending, GPU financing, and subsequent ATM share sales.
- Progress in remediating the disclosed material weaknesses and the reliability of related-party identification and financial reporting controls.
- Exposure to customer concentration, power costs and commitments, construction delays, and possible volatility from power-agreement derivative accounting.