Applied Blockchain, Inc. (now Applied Digital Corp.) — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2022. Although the request metadata refers to “2021 Q4,” this is an annual filing for FY2022; the company’s fourth fiscal quarter ended May 31, 2022. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
The company shifted its strategy toward building and operating high-power colocation data centers, initially serving cryptocurrency miners under recurring hosting contracts. Its first 100 MW North Dakota facility came online in phases beginning February 2022. The company stopped mining and sold its mining equipment on March 9, 2022; mining results are reported as discontinued operations. It completed an IPO in April 2022 and began trading on Nasdaq under APLD. A 1-for-6 reverse stock split was effected in April 2022.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Hosting revenue | $8.549 million | $0 |
| Cost of revenues | $9.506 million | $0 |
| Gross profit (loss) | $(0.957) million | $0 |
| Operating loss | $(20.898) million | $(0.332) million |
| Net loss from continuing operations | $(22.486) million | $(0.568) million |
| Net loss attributable to Applied Blockchain | $(23.520) million | $(0.568) million |
| Net loss per share | $(0.41) | $(0.38) |
FY2022 gross margin was approximately negative 11.2%. Hosting revenue was $7.5 million in the fourth quarter, reflecting the ramp-up of the Jamestown facility. Hosting cost of revenue included $8.1 million of energy costs, $986,000 of depreciation and amortization, and $414,000 of facility personnel costs. The reported operating loss included $12.337 million of stock-based compensation related to strategic-partner services. Adjusted EBITDA, a non-GAAP measure, was a loss of $6.038 million for FY2022.
At May 31, 2022, cash and cash equivalents were $46.299 million, including $7.501 million of restricted cash; working capital was $20.3 million. Total assets were $119.980 million and total liabilities were $40.745 million. Notes payable were approximately $7.230 million net of financing costs and current classification, and lease liabilities totaled $6.314 million. Customer deposits of $9.524 million and deferred revenue of $3.877 million were also recorded.
Cash provided by continuing operating activities was $9.275 million, but discontinued operations used $10.147 million, resulting in total operating cash use of $0.872 million. Investing activities used $54.974 million for continuing operations, principally facility property and equipment. Financing activities provided $81.292 million, including IPO and preferred-stock proceeds, term-loan proceeds, and a joint-venture contribution. The IPO raised $40.0 million gross and approximately $35.7 million net.
Material changes versus the prior period
- The company moved from no hosting revenue in FY2021 to $8.549 million in FY2022 as its first facility began operating; the new hosting business nevertheless reported a gross loss.
- Net loss attributable to the company increased to $23.520 million from $0.568 million, reflecting the build-out and launch of operations, substantial stock-based service costs, and discontinued mining losses.
- Capital investment expanded sharply: property and equipment, net, rose to $64.260 million from $20,000.
- Cash increased to $46.299 million from $11.750 million, primarily following financing activity. Series C and D preferred stock converted to common stock in April 2022.
- The company ended crypto mining operations and redirected resources to hosting. It reported $1.044 million of loss from discontinued operations, including a $2.9 million equipment-sale loss described in MD&A.
Outlook, risks and unusual items
Management stated that cash, expected operating revenue, and financing sources should fund operations for at least 12 months after issuance of the financial statements, while cautioning that assumptions may prove inaccurate and further capital may be needed. The filing provides no formal earnings or revenue guidance.
Management expected the 200 MW Garden City, Texas facility to begin operating in calendar Q4 2022; its capacity was described as fully contracted. Subsequent to year-end, the company signed a five-year 200 MW hosting agreement with Marathon, including an option for up to 70 MW more, and purchased land in Ellendale, North Dakota, for a planned 200 MW facility targeted for calendar Q1 2023. These are plans and subsequent events, not FY2022 operating results. The company also described a longer-term development opportunity through its 80%-owned 1.21 Gigawatts joint venture, with a stated potential of up to 1.5 GW.
- Customer and sector concentration: Five mining customers represented all revenue at the first facility; customer demand depends on crypto-mining economics and regulation. Some agreements permit termination subject to contract terms.
- Build-out and funding: Expansion requires substantial capital and depends on construction, power availability, equipment, labor, customer commitments, and access to financing. The company reported a $24.2 million energy-services commitment as of May 31, 2022, with the minimum term of five years.
- Debt and liquidity developments: The $7.5 million Vantage Bank loan was paid off in August 2022. A subsequent Starion Bank facility provided for up to $15 million at 6.50% interest, secured by facility assets and guaranteed by the company; stated local incentives that could reduce its effective rate were pending approval.
- Governance and controls: Management concluded disclosure controls were ineffective at May 31, 2022 because of material weaknesses, including inadequate user-access/segregation-of-duties controls and an insufficiently designed control system. Remediation was underway. The auditor issued an unqualified opinion on the financial statements and reported no critical audit matters; it did not opine on control effectiveness.
- Other items: The company recorded a $1.342 million loss on extinguishment of debt after converting related-party notes to common stock. It has no stated plan to pay dividends. No material pending legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Actual commissioning, energized capacity, construction cost, and customer utilization at the Jamestown, Garden City, and Ellendale sites versus the stated schedules and capacities.
- Customer contract terms, termination rights, concentration, related-party exposure, and whether contracted capacity translates into collected revenue and positive facility margins.
- Unrestricted liquidity after excluding restricted cash, subsequent loan advances and repayment, debt service, lease commitments, and the $24.2 million energy commitment.
- Capital needs and potential dilution, including equity-plan reserves and Antpool’s conversion rights in the 1.21 Gigawatts joint venture.
- Progress in remediating material weaknesses in internal controls, and the effect of crypto-related regulation, power costs, and customer financial health on demand.