Applied Digital Corporation — Form 10-Q Summary
Business context and period: The company, formerly Applied Blockchain, builds and operates data centers for high-compute workloads. This report covers the quarter and six months ended November 30, 2022 (fiscal Q2 and first half of fiscal 2023). The company had shifted from crypto mining to hosting customer-owned equipment; crypto mining is reported as discontinued operations.
Financial results
| Metric | Three months ended Nov. 30, 2022 | Six months ended Nov. 30, 2022 |
|---|---|---|
| Hosting revenue | $12.3 million | $19.3 million |
| Gross profit / margin | $0.5 million / 4.3% | $1.4 million / 7.1% |
| Operating loss | $26.7 million | $30.9 million |
| Net loss attributable to Applied Digital | $26.6 million | $31.1 million |
| Basic and diluted loss per share | $0.29 | $0.34 |
| Adjusted EBITDA (non-GAAP) | $(2.1) million | $(4.0) million |
Prior-year hosting revenue was zero. The company reported $21.8 million of stock-based compensation in the quarter, primarily a catch-up expense after a resale registration statement became effective. Management’s non-GAAP adjustments exclude stock compensation and other items; these measures are supplemental, not substitutes for GAAP results.
Cash flow and liquidity: For the six months, operating cash flow was $28.0 million, investing cash flow was $(70.3) million, and financing cash flow was $14.1 million. Operating cash flow benefited substantially from customer deposits and advance billings: deposits rose $15.2 million and deferred revenue rose $25.5 million, while the company incurred a $31.4 million continuing-operations loss. Cash and equivalents were $18.1 million at November 30, down from $46.3 million at May 31; $7.6 million was restricted, leaving approximately $10.5 million unrestricted. The company disclosed negative working capital of $49.5 million.
Debt and balance sheet: Term-loan principal was $20.7 million, with a reported carrying amount of approximately $20.5 million after financing costs and current classification. The loans include a $15 million Starion facility at 6.50% and a Vantage Garden City facility of up to $15 million at 6.15%; $6.6 million had been advanced under the latter as of the report date. Total assets were $167.4 million, property and equipment net was $132.9 million, and total stockholders’ equity including noncontrolling interest was $72.0 million. The company had no unused credit lines.
Material changes and operating developments
- Hosting revenue began following the phased launch of the Jamestown, North Dakota facility. More than 90 MW was online at quarter-end; its full 100 MW capacity was contracted on multi-year customer agreements.
- Hosting gross profit remained modest relative to revenue: energy costs were $10.3 million for the quarter and $15.1 million for the six-month period.
- SG&A rose to $26.5 million for the quarter, including the $21.8 million stock-compensation catch-up. Capital investment increased property and equipment substantially.
- Construction at Garden City, Texas, was nearing completion, with 200 MW fully contracted and operations expected in calendar Q1 2023. The 180 MW Ellendale, North Dakota project was also targeted for completion in calendar Q1 2023.
- The company formed Highland Digital, a 50/50 joint venture controlled and consolidated by GMR, and SAI Computing, in which Applied Digital owns 98% and plans to consolidate. SAI is intended to serve AI and machine-learning customers.
- Crypto mining operations and equipment sales were discontinued; no cryptoassets were held at November 30, 2022. The company stated it did not plan to return to mining.
Outlook, risks, and contingencies
Management said existing cash, anticipated operating revenue, and debt funding opportunities were expected to cover operating and capital requirements for at least 12 months from issuance of the financial statements. It expected revenue to grow as capacity comes online and significant property-and-equipment investment to begin declining into calendar 2023. These expectations depend on construction, customer demand, operating performance, and financing availability; management cautioned that assumptions could prove incorrect.
- Customer concentration: Five customers represented all reported hosting revenue for the quarter; the largest accounted for 32.6%. Two customers were related parties, and customer dependence is a stated risk.
- Advance payments and obligations: Deferred revenue was $29.4 million, expected to be recognized within 12 months. Customer deposits were also $24.7 million. The company had an approximately $24.2 million Jamestown energy commitment due within the next year, under an agreement with a minimum five-year term.
- Execution and industry exposure: Risks include timely completion and ramp-up of facilities, power or equipment disruptions, workforce constraints, and customer exposure to crypto-mining market and regulatory conditions.
- Controls: Management concluded disclosure controls were not effective as of November 30, 2022, due to material weaknesses involving system access/segregation of duties and the design of controls over critical processes. Remediation was in progress.
- Legal matters: The filing reported no pending or threatened litigation expected to have a material effect.
Important facts for investors to verify
- Whether Garden City and Ellendale reached planned completion and contracted capacity began generating revenue on schedule.
- Customer concentration, related-party exposure, contract terms, and the conversion of deposits and deferred revenue into recognized revenue and cash generation.
- Actual hosting margins after energy, labor, depreciation, and other facility costs.
- Cash available after restricted balances, construction spending, debt service, and the energy commitment; confirm subsequent borrowing and capital needs.
- The size, timing, and potential dilution from stock-based compensation, and progress in remediating material weaknesses in financial controls.