Applied Blockchain, Inc. (now Applied Digital Corp.) — Form 10-Q summary
Reporting period: The filing covers the fiscal quarter and nine months ended February 28, 2022, with a May 31, 2021 balance-sheet comparison. This does not match the request metadata’s “2021 Q3.” Amounts below are in U.S. dollars; financial statements are unaudited.
Business context and reporting period
The company was building and operating co-hosting data centers, where customers install their own equipment and pay for hosting and operational services. Its first North Dakota facility began hosting operations in February 2022. In February, the company decided to discontinue crypto mining and shift its focus to hosting; mining results and related assets were reported as discontinued operations and held for sale.
Financial results and liquidity
| Metric | Three months ended Feb. 28, 2022 | Nine months ended Feb. 28, 2022 |
|---|---|---|
| Hosting revenue | $1.026 million | $1.026 million |
| Gross profit (loss), continuing operations | $(1.047) million | $(1.047) million |
| Operating loss, continuing operations | $(2.417) million | $(16.632) million |
| Net loss, continuing operations | $(2.397) million | $(17.843) million |
| Net loss, discontinued operations | $(4.048) million | $(2.870) million |
| Total net loss | $(6.445) million | $(20.713) million |
| Basic and diluted loss per share | $(0.12) | $(0.41) |
Hosting gross margin was negative: hosting cost of revenue was $2.073 million against $1.026 million revenue. The filing attributes much of the cost to electricity commitments incurred before the facility became operational. Nine-month adjusted EBITDA, a non-GAAP measure, was a loss of $2.981 million; reported EBITDA was a loss of $17.324 million, including substantial stock compensation.
At February 28, 2022, cash was $11.961 million, current assets $18.668 million, current liabilities $22.819 million, and working capital was negative $4.5 million. Total assets were $63.494 million and total liabilities $24.152 million. The company reported $47.951 million of redeemable convertible preferred stock in mezzanine equity and a shareholders’ deficit of $8.609 million. No material conventional borrowings were shown at period-end; related-party notes had been converted to common stock in June 2021. Lease liabilities totaled $1.220 million.
For the nine months, operating cash flow was positive $4.113 million, investing cash flow was negative $35.588 million, and financing cash flow was positive $31.686 million. Cash increased by $0.211 million. Operating cash flow benefited from noncash stock compensation and increased payables and accrued liabilities; investing outflows primarily reflected equipment and property purchases. Management said available cash and anticipated operating revenue were expected to fund operations and capital requirements for at least 12 months, while cautioning that estimates could prove wrong.
Material changes versus the prior comparable period
- Prior-year comparable periods reported no hosting revenue; hosting generated $1.026 million in the current nine-month period, all from the North Dakota facility, which went online at 55 MW in February.
- Continuing-operations expenses rose with the launch of hosting and business expansion. Nine-month results included $12.337 million in stock-based compensation for a service agreement and a $1.342 million loss on extinguishment of debt.
- During the quarter, the company recognized a $3.254 million loss on reclassifying mining assets to discontinued operations. It reported a further $0.226 million cryptoasset impairment and a $0.847 million gain on sale of fixed assets in discontinued operations.
- Property and equipment increased to $43.619 million from $0.020 million at May 31, 2021, reflecting facility and equipment investment.
Outlook, risks, contingencies, and unusual items
- The company expected the remaining 45 MW of its North Dakota facility to come online in the second calendar quarter of 2022. It described plans with its joint venture partner, Antpool, to develop up to 1.5 GW of hosting capacity over 24 months; these are plans, not assured results.
- After quarter-end, the company completed the sale of its crypto mining equipment on March 9, 2022, for $1.6 million and said it expected to record a $2.9 million loss on the sale in the quarter ending May 31, 2022. It stated it did not plan to resume mining.
- After quarter-end, it borrowed $7.5 million under a five-year term loan at 5% interest to support the Jamestown facility. The loan is secured by facility property and related assets, with the company as guarantor.
- After quarter-end, the company completed an IPO of 8 million shares at $5 per share, receiving approximately $36 million net. It intended to use proceeds for additional facilities, construction, energy agreements, working capital, and general corporate purposes. Series C and D preferred shares also converted to common stock on April 12, 2022.
- Key risks include customer concentration, ability to build facilities on schedule and at suitable margins, labor and supply-chain constraints, capital needs, cryptoasset price volatility, and changing regulation. Three customers represented 62%, 16%, and 13% of hosting revenue, respectively.
- Management concluded disclosure controls and procedures were ineffective as of February 28, 2022, due to material weaknesses in access controls, segregation of duties, and control design. Remediation was ongoing. The cover page also indicates the company had not filed all required reports during the preceding 12 months.
- The filing reported no pending or threatened litigation expected to have a material effect and $697,000 of purchase commitments for the fiscal year ending May 31, 2022. A Texas facility proposal for 200 MW was subject to definitive agreements.
Important facts for investors to verify
- Whether the remaining North Dakota capacity came online as planned, and the resulting utilization, customer commitments, and hosting margins.
- Customer concentration, contract duration and pricing, and the company’s ability to diversify customers and energy sources.
- Actual cash burn and funding requirements after facility investment, the IPO, and the $7.5 million secured loan.
- The realized proceeds and final accounting for the mining-equipment sale, and whether discontinued-operation results or assets changed.
- Progress remediating the disclosed internal-control material weaknesses and the status of required SEC filings.
- Execution, financing, and governance terms for the 1.5 GW joint-venture expansion and the proposed Texas project.