Applied Digital Corporation — Form 10-Q Summary
Reporting period: Fiscal 2024 second quarter and first six months, ended November 30, 2023; comparatives are the periods ended November 30, 2022. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Applied Digital designs, builds, and operates digital infrastructure across datacenter hosting, cloud services, and high-performance computing (HPC) hosting. Datacenter hosting serves crypto-mining customers; its Sai Computing cloud business serves customers including AI and machine-learning developers. HPC hosting was in development and had no revenue in the reported periods.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $42.2m, up from $12.3m | $78.5m, up from $19.3m |
| Operating loss | $(8.2)m, versus $(26.7)m | $(15.6)m, versus $(30.9)m |
| Net loss attributable to Applied Digital | $(10.5)m, versus $(26.6)m | $(22.0)m, versus $(31.1)m |
| Basic and diluted loss per share | $(0.10), versus $(0.28) | $(0.21), versus $(0.33) |
| Adjusted EBITDA (non-GAAP) | $10.6m, versus $(2.2)m | $20.2m, versus $(4.0)m |
Quarterly revenue comprised $34.1m datacenter hosting, $4.5m cloud services, and $3.6m related-party datacenter hosting. Growth reflected Ellendale operations, Garden City beginning revenue generation, and the first cloud services contract. For the six-month period, datacenter hosting revenue was $64.1m and cloud services revenue was $6.6m. Datacenter hosting segment profit was $10.8m for the quarter and $19.8m for six months; cloud services reported segment losses of $11.7m and $19.1m, respectively.
Cost of revenues rose to $29.2m for the quarter and $53.6m for six months, primarily due to higher energy costs and depreciation as more facilities and equipment entered service. GAAP operating losses narrowed versus the prior year, while six-month SG&A increased to $38.1m from $32.2m. Interest expense increased to $4.4m for six months from $0.7m, and the company recorded a $2.4m debt-extinguishment loss and a $2.4m legal-settlement loss. Adjusted EBITDA and other adjusted measures are non-GAAP; the company cautions they should not be considered substitutes for GAAP results.
Cash, liquidity, and obligations
- At November 30, cash and cash equivalents were $9.2m; restricted cash was $25.4m, primarily held for letters of credit. Combined cash and restricted cash was $34.6m.
- Working capital was negative $166.0m, as reported in MD&A. Current liabilities were $202.4m, including $50.1m deferred revenue, $36.8m customer deposits, and $42.8m current finance-lease liabilities.
- Six-month operating cash flow was $9.1m, compared with $28.0m in the prior-year period. Investing cash outflow was $65.6m, including $45.8m for property and other assets and $19.4m in finance-lease prepayments. Financing cash inflow was $47.6m, including $97.9m net ATM proceeds, partly offset by debt and lease repayments.
- Debt, net of financing costs, totaled approximately $42.8m, including $9.3m current and $33.5m long-term. Separately, total lease liabilities were $140.8m, of which $51.7m was current. The company also disclosed approximately $130.4m of executed operating leases not yet commenced.
- Property and equipment, net, was $258.5m, versus $195.6m at May 31, 2023. Total assets were $480.7m and stockholders’ equity was $155.7m.
Management said it expected available liquidity—including cash, customer payments, and access to public capital markets—to fund operations and known requirements for at least the next 12 months. It also warned that estimates depend on assumptions and additional financing might be needed sooner or might not be available on acceptable terms.
Material changes, outlook, and risks
- The company raised approximately $97.9m net through its ATM offering by November 30; the offering was subsequently completed. It reported an additional $23.1m net proceeds from post-quarter sales.
- Cloud services deployed an initial production cluster of 1,024 GPUs and began recognizing revenue on its first contract. Management expects revenue to increase as Garden City capacity and cloud services contracts ramp, while significant construction and equipment investment is expected to continue during fiscal 2024. No specific company-wide revenue or earnings guidance is provided.
- On January 15, 2024, after quarter-end, the company signed a conditional agreement for 100 MW of HPC capacity at Ellendale for a 10-year term and approximately $2.2bn total stated value. Definitive lease documents and satisfactory financing are required; either party may terminate within 45 days if the financing condition is unmet. The company also disclosed three subsequent service agreements totaling $104.4m over a weighted-average 32-month term.
- Customer concentration is material: Customer A represented 70% of quarterly revenue and 69% of six-month revenue. The filing identifies customers by letter, not name. The company highlights dependence on significant customers and crypto-mining customers, regulatory uncertainty, power or equipment disruptions, and its ability to build facilities and achieve contractual economics.
- Two putative securities-related actions were disclosed, including a class action and a fiduciary-duty complaint; the company could not estimate a potential loss for the latter. The claims include allegations regarding business statements and board independence; these are allegations, not findings. A former-executive employment claim was settled for $2.3m, included in the six-month legal-settlement expense.
- Management concluded disclosure controls and procedures were not effective at November 30 due to material weaknesses involving financial reporting processes, system access and segregation of duties, related-party controls, and identification of key controls. Remediation steps were underway and had not yet operated long enough to establish full remediation.
Most important facts for investors to verify
- Whether cash generation and customer prepayments can support the negative working-capital position, construction plans, lease obligations, and ongoing operating losses.
- The ramp, utilization, customer commitments, and full costs of Garden City and cloud services, including whether cloud-segment losses narrow as capacity is deployed.
- Customer concentration, contract terms, payment timing, and exposure to crypto-mining demand and regulatory changes.
- Whether the conditional Ellendale HPC agreement secures financing and definitive documents, and whether its stated value converts into enforceable revenue.
- Progress remediating control weaknesses, and developments or potential financial exposure from the disclosed litigation.
- Future dilution and capital needs following the ATM offering and equity awards, alongside the company’s substantial lease commitments.