Applied Digital Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 29, 2024. Comparative periods ended February 28, 2023. The filing was signed April 11, 2024. The company designs, builds, and operates digital infrastructure across datacenter hosting, cloud services, and high-performance computing (HPC) hosting.
Financial results
| Metric | Quarter ended Feb. 29, 2024 | Quarter ended Feb. 28, 2023 | Nine months ended Feb. 29, 2024 | Nine months ended Feb. 28, 2023 |
|---|---|---|---|---|
| Revenue | $43.3 million | $14.1 million | $121.9 million | $33.4 million |
| Operating loss | $55.8 million | $7.0 million | $71.4 million | $37.9 million |
| Net loss attributable to Applied Digital | $62.8 million | $7.0 million | $84.8 million | $38.2 million |
| Basic and diluted loss per share | $0.52 | $0.07 | $0.77 | $0.41 |
| Operating cash flow | Not presented for the quarter | $47.9 million | $54.1 million | |
| Investing cash flow | Not presented for the quarter | $(122.5) million | $(96.3) million | |
| Financing cash flow | Not presented for the quarter | $72.0 million | $18.8 million |
Quarterly gross loss was $3.7 million, or approximately negative 8.6% of revenue; nine-month gross profit was $19.8 million, or approximately 16.3% of revenue. Revenue growth reflected increased datacenter capacity and the launch of cloud services, but costs rose substantially with energy use, depreciation and amortization, leases, and expansion. The quarter included a $21.7 million Garden City held-for-sale loss. Non-GAAP adjusted EBITDA was a loss of $2.3 million for the quarter and income of $17.4 million for the nine months; these company-defined measures exclude specified items and are not GAAP results.
Liquidity, debt, and capital
- At February 29, cash and cash equivalents were $4.4 million; restricted cash was $29.5 million, with another $7.0 million of restricted cash in other assets. Management reported negative working capital of $243.5 million, including assets held for sale.
- Operating cash flow was positive, but included a $55.5 million increase in accounts payable and a $16.0 million increase in deferred revenue. Investing outflows included $87.0 million for property and other assets and $35.1 million in finance-lease prepayments.
- Total debt on the balance sheet was approximately $61.8 million, including the $15.0 million AI Bridge Loan at quarter-end. Lease liabilities totaled $232.5 million. The Garden City-related $12.8 million loan became callable upon sale and was classified as current.
- The completed at-the-market stock offering raised approximately $121.0 million net from about 18.9 million shares during the nine months, increasing shares outstanding. The company also borrowed $15.0 million under the AI Bridge Loan and repaid its B. Riley loan, recognizing a $2.4 million extinguishment loss.
- After quarter-end, the company received $15.7 million net from the Cornerstone Bank Loan and borrowed the remaining $5.0 million available under the AI Bridge Loan. A March 2024 convertible-note financing provided approximately $38.0 million against a $40.0 million principal note; a further $10.0 million principal note was subject to registration effectiveness.
Changes, outlook, and material items
- Segment performance: Datacenter hosting generated $37.8 million of quarterly revenue; cloud services generated $5.6 million. HPC hosting had no reported revenue. Quarterly segment losses were $24.4 million for datacenter hosting, $21.6 million for cloud services, and $1.4 million for HPC hosting. Cloud and HPC losses reflect ramp-up expenses, including equipment lease amortization, occupancy, and compensation.
- Garden City: The company classified the Texas facility as held for sale and recorded a $21.7 million write-down. The sale to a Marathon subsidiary closed April 1, 2024; the filing reports approximately $61.1 million of net cash proceeds. Additional consideration of up to $34.0 million depended on regulatory approval of additional energization and was not included in the quarter-end fair-value estimate.
- Ellendale outage: Transformer failures reduced operations at the 180 MW North Dakota facility. By the filing date, it had been re-energized to approximately 25 MW, or 14% capacity. Management targeted approximately 65%–75% capacity by the end of May 2024 as replacement transformers were installed. The company recorded $2.8 million of accelerated depreciation and $1.4 million of accelerated amortization related primarily to the issue.
- Cloud and HPC plans: Cloud equipment began generating revenue near quarter-end; management expected a positive financial contribution in fiscal Q4, without quantifying it. The company broke ground on a 100 MW HPC facility and reported an exclusivity arrangement and letter of intent with a U.S. hyperscaler for a proposed 400 MW lease. The exclusive negotiation period expired at the end of March; the filing does not report a completed lease.
- Management liquidity view: Management said available cash, customer payments, debt access, and public capital markets should support operations and known cash needs for at least 12 months. It cautioned that assumptions may prove inaccurate and additional financing may be needed sooner or may not be available on acceptable terms. Significant investment in HPC construction and cloud equipment was expected to continue through fiscal 2025. No formal earnings or revenue guidance was provided.
- Commitments and risks: The company disclosed an approximately $82.2 million minimum energy commitment for Jamestown, $120.7 million of executed leases not yet commenced, and material reliance on customers and third-party equipment suppliers. Risks include crypto-industry regulation and customer concentration, construction and supply delays, power interruptions, and pricing pressure in HPC.
- Legal and controls: A securities class action and a derivative action remained at early stages; the company could not estimate potential losses. A separate former-executive employment matter resulted in a $2.3 million settlement payment. Management concluded disclosure controls were ineffective due to material weaknesses involving financial reporting controls, system access and segregation of duties, related-party disclosures, and control-process design; remediation was in progress.
Most important facts for investors to verify
- Whether the Ellendale transformer replacements achieved the stated operating-capacity target, and the associated effect on revenue and costs.
- Final Garden City transaction economics, including net proceeds, lease-liability obligations, deferred-revenue release, and any contingent payment from regulatory approval.
- Whether the proposed HPC anchor-tenant arrangement becomes a binding contract and how the company will finance the buildout.
- Cash availability and near-term obligations, including negative working capital, lease payments, callable debt, and the terms and dilution effects of subsequent financing.
- Progress toward cloud-services profitability, given the segment’s substantial reported losses and management’s unquantified expectation of a Q4 contribution.
- Developments in the litigation, customer concentration, and remediation of the disclosed internal-control material weaknesses.