UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
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(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28,August 31, 2023
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ and __________
Commission file number 001-31968
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APPLIED DIGITAL CORPORATION
(Exact name of registrant as specified in its charter)
________________________
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Nevada | 95-4863690 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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3811 Turtle Creek, Blvd., Suite 2100, Dallas, TX | 75219 |
(Address of Principal Executive Offices) | (Zip Code) |
(214) 556-2465
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last report)
________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | APLD | Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o | | Accelerated filer | o |
Non-accelerated filer | x | | Smaller reporting company | x |
| | | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 6,October 9, 2023, 94,901,529106,300,245 shares of Common Stock, $0.001 par value, were outstanding.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except number of sharesshare and par value data)
| | | February 28, 2023 | | May 31, 2022 | | August 31, 2023 | | May 31, 2023 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current Assets: | | |
Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 22,921 | | | $ | 46,299 | | Cash and cash equivalents | | $ | 5,942 | | | $ | 28,999 | |
Restricted cash | | Restricted cash | | 25,271 | | | 14,575 | |
Accounts receivable | Accounts receivable | | 82 | | | 227 | | Accounts receivable | | 27 | | | 82 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 1,387 | | | 1,336 | | Prepaid expenses and other current assets | | 2,308 | | | 2,103 | |
| Total current assets | Total current assets | | 24,390 | | | 47,862 | | Total current assets | | 33,548 | | | 45,759 | |
Property and equipment, net | Property and equipment, net | | 167,276 | | | 64,260 | | Property and equipment, net | | 222,666 | | | 195,593 | |
Right of use asset, net | | 12,911 | | | 6,408 | | |
Operating lease right of use assets, net | | Operating lease right of use assets, net | | 11,183 | | | 1,290 | |
Finance lease right of use assets, net | | Finance lease right of use assets, net | | 55,691 | | | 14,303 | |
| Other Assets | | 3,030 | | | 1,450 | | |
Other assets | | Other assets | | 26,065 | | | 7,012 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 207,607 | | | $ | 119,980 | | TOTAL ASSETS | | $ | 349,153 | | | $ | 263,957 | |
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY | | |
Current Liabilities: | | |
Accounts payable and accrued liabilities | | $ | 14,000 | | | $ | 13,260 | | |
Current portion of lease liability | | 4,193 | | | 1,004 | | |
| Current portion of term loan | | 4,855 | | | 1,333 | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | LIABILITIES AND STOCKHOLDERS' EQUITY |
Current liabilities: | | Current liabilities: | |
Accounts payable | | Accounts payable | | $ | 16,229 | | | $ | 6,446 | |
Accrued liabilities | | Accrued liabilities | | 12,743 | | | 8,330 | |
Current portion of operating lease liability | | Current portion of operating lease liability | | 1,807 | | | 320 | |
Current portion of finance lease liability | | Current portion of finance lease liability | | 23,471 | | | 5,722 | |
Current portion of debt | | Current portion of debt | | 9,163 | | | 7,950 | |
Customer deposits | Customer deposits | | 36,370 | | | 9,524 | | Customer deposits | | 32,559 | | | 32,559 | |
Current deferred revenue | | 47,619 | | | 3,877 | | |
Related party customer deposits | | Related party customer deposits | | 3,811 | | | 3,811 | |
Deferred revenue | | Deferred revenue | | 50,863 | | | 47,168 | |
Related party deferred revenue | | Related party deferred revenue | | 971 | | | 1,524 | |
Sales and use tax payable | Sales and use tax payable | | 1,563 | | | — | | Sales and use tax payable | | 62 | | | 1,630 | |
Total current liabilities | Total current liabilities | | 108,600 | | | 28,998 | | Total current liabilities | | 151,679 | | | 115,460 | |
Deferred tax liability | | 260 | | | 540 | | |
| Long-term portion of lease liability | | 8,490 | | | 5,310 | | |
Long-term term loan | | 18,862 | | | 5,897 | | |
Long-term portion of operating lease liability | | Long-term portion of operating lease liability | | 9,573 | | | 1,005 | |
Long-term portion of finance lease liability | | Long-term portion of finance lease liability | | 25,071 | | | 8,334 | |
Long-term debt | | Long-term debt | | 34,882 | | | 33,222 | |
Long-term related party loan | | Long-term related party loan | | — | | | 35,257 | |
Other long-term related party liabilities | | Other long-term related party liabilities | | — | | | 1,000 | |
Total liabilities | Total liabilities | | $ | 136,212 | | | $ | 40,745 | | Total liabilities | | 221,205 | | | 194,278 | |
Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | |
Stockholders' equity: | Stockholders' equity: | | Stockholders' equity: | |
Common stock, $0.001 par value, 166,666,667 shares authorized, 99,471,127 shares issued and 94,469,399 shares outstanding at February 28, 2023, and 97,837,702 shares issued and 97,801,406 shares outstanding at May 31, 2022 | | $ | 100 | | | $ | 98 | | |
Treasury stock, 5,001,728 shares at February 28, 2023 and 36,296 shares at May 31, 2022, at cost | | (62) | | | (62) | | |
Common stock, $0.001 par value, 166,666,667 shares authorized, 110,850,885 shares issued and 105,849,157 shares outstanding at August 31, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023 | | Common stock, $0.001 par value, 166,666,667 shares authorized, 110,850,885 shares issued and 105,849,157 shares outstanding at August 31, 2023, and 100,927,358 shares issued and 95,925,630 shares outstanding at May 31, 2023 | | 110 | | | 101 | |
Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost | | Treasury stock, 5,001,728 shares at August 31, 2023 and 5,001,728 shares at May 31, 2023, at cost | | (62) | | | (62) | |
Additional paid in capital | Additional paid in capital | | 155,055 | | | 128,293 | | Additional paid in capital | | 240,073 | | | 160,194 | |
Accumulated deficit | Accumulated deficit | | (94,243) | | | (56,070) | | Accumulated deficit | | (112,173) | | | (100,716) | |
Total stockholders’ equity attributable to Applied Digital Corporation | Total stockholders’ equity attributable to Applied Digital Corporation | | 60,850 | | | 72,259 | | Total stockholders’ equity attributable to Applied Digital Corporation | | 127,948 | | | 59,517 | |
Noncontrolling interest | Noncontrolling interest | | 10,545 | | | 6,976 | | Noncontrolling interest | | — | | | 10,162 | |
Total Stockholders' equity including noncontrolling interest | | $ | 71,395 | | | $ | 79,235 | | |
Total stockholders' equity including noncontrolling interest | | Total stockholders' equity including noncontrolling interest | | 127,948 | | | 69,679 | |
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | | $ | 207,607 | | | $ | 119,980 | | TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | | $ | 349,153 | | | $ | 263,957 | |
See Accompanying Notesaccompanying notes to the Financial Statementscondensed consolidated financial statements
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
| | | Three Months Ended | | | Nine Months Ended | | Three Months Ended | |
| | February 28, 2023 | | February 28, 2022 | | | February 28, 2023 | | February 28, 2022 | | August 31, 2023 | | August 31, 2022 | |
Revenues: | | | | | | |
Revenue: | | Revenue: | | | | |
Hosting revenue | Hosting revenue | | $ | 14,090 | | | $ | 1,026 | | | | $ | 33,354 | | | $ | 1,026 | | Hosting revenue | $ | 29,987 | | | $ | 4,338 | | |
| Cloud services revenue | | Cloud services revenue | 2,152 | | | — | | |
Related party hosting revenue | | Related party hosting revenue | 4,184 | | | 2,586 | | |
Total revenue | | Total revenue | 36,323 | | | 6,924 | | |
Costs and expenses: | | Costs and expenses: | | |
Cost of revenues | Cost of revenues | | $ | 10,533 | | | $ | 2,073 | | | | $ | 28,438 | | | $ | 2,073 | | Cost of revenues | 24,398 | | | 6,093 | | |
Gross profit | | 3,557 | | | (1,047) | | | | 4,916 | | | (1,047) | | |
| Costs and expenses: | | | | |
Selling, general and administrative | Selling, general and administrative | | $ | 10,514 | | | $ | 1,370 | | | | $ | 42,727 | | | $ | 15,585 | | Selling, general and administrative | 17,052 | | | 5,008 | | |
| Total costs and expenses | Total costs and expenses | | $ | 10,514 | | | $ | 1,370 | | | | $ | 42,727 | | | $ | 15,585 | | Total costs and expenses | 41,450 | | | 11,101 | | |
Operating loss | Operating loss | | $ | (6,957) | | | $ | (2,417) | | | | $ | (37,811) | | | $ | (16,632) | | Operating loss | (5,127) | | | (4,177) | | |
| Other income (expense): | | | | |
Interest Expense | Interest Expense | | $ | (384) | | | $ | — | | | | $ | (1,125) | | | $ | — | | Interest Expense | 2,074 | | | 356 | | |
Gain on extinguishment of accounts payable | | — | | | 80 | | | | — | | | 405 | | |
Loss on extinguishment of debt | Loss on extinguishment of debt | | — | | | — | | | | (94) | | | (1,342) | | Loss on extinguishment of debt | 2,353 | | | 94 | | |
Total other expense, net | | (384) | | | 80 | | | | (1,219) | | | (937) | | |
Net loss from continuing operations before income tax expenses | | (7,341) | | | (2,337) | | | | (39,030) | | | (17,569) | | |
Income tax benefit (expense) | | — | | | (60) | | | | 280 | | | (274) | | |
Net loss from continuing operations | | (7,341) | | | (2,397) | | | | (38,750) | | | (17,843) | | |
Net gain from discontinued operations, net of income taxes | | — | | | (4,048) | | | | — | | | (2,870) | | |
Net loss including noncontrolling interests | | (7,341) | | | (6,445) | | | | (38,750) | | | (20,713) | | |
Loss from legal settlement | | Loss from legal settlement | 2,300 | | | — | | |
Net loss before income tax expenses | | Net loss before income tax expenses | (11,854) | | | (4,627) | | |
Income tax expense | | Income tax expense | — | | | 32 | | |
Net loss | | Net loss | (11,854) | | | (4,659) | | |
Net loss attributable to noncontrolling interest | Net loss attributable to noncontrolling interest | | (316) | | | — | | | | (577) | | | — | | Net loss attributable to noncontrolling interest | (397) | | | (128) | | |
Net loss attributable to Applied Digital Corporation | Net loss attributable to Applied Digital Corporation | | $ | (7,025) | | | $ | (6,445) | | | | $ | (38,173) | | | $ | (20,713) | | Net loss attributable to Applied Digital Corporation | $ | (11,457) | | | $ | (4,531) | | |
| Basic and diluted net (loss) gain per share: | Basic and diluted net (loss) gain per share: | | | | Basic and diluted net (loss) gain per share: | | |
Continuing Operations | | $ | (0.08) | | | $ | (0.04) | | | | $ | (0.41) | | | $ | (0.35) | | |
Discontinued Operations | | $ | — | | | $ | (0.08) | | | | $ | — | | | $ | (0.06) | | |
Basic and diluted net loss per share | Basic and diluted net loss per share | | $ | (0.08) | | | $ | (0.12) | | | | $ | (0.41) | | | $ | (0.41) | | Basic and diluted net loss per share | $ | (0.12) | | | $ | (0.05) | | |
Basic and diluted weighted average number of shares outstanding | Basic and diluted weighted average number of shares outstanding | | 94,119,944 | | | 53,396,920 | | | | 93,545,687 | | | 50,546,048 | | Basic and diluted weighted average number of shares outstanding | 100,521,673 | | | 93,105,835 | | |
See Accompanying Notesaccompanying notes to the Financial Statementscondensed consolidated financial statements
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)
For the Three Months Ended August 31, 2023 and August 31, 2022
(In thousands, except share data)
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Three Months Ended February 28, 2023 | | | |
| Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated deficit | Total Stockholders Equity | Noncontrolling Interest | Total Equity |
| Shares | Amount | Shares | Amount | | | | | |
Balance, November 30, 2022 | 98,948,081 | | $ | 99 | | (5,001,728) | $ | (62) | | $ | 150,690 | | $ | (87,218) | | $ | 63,509 | | $ | 8,461 | | $ | 71,970 | |
Issuance of common stock - vesting of restricted stock units | 523,046 | | 1 | | — | | — | | (115) | | — | | (114) | | — | | (114) | |
Stock-based compensation | — | | — | | — | | — | | 4,480 | | — | | 4,480 | | — | | 4,480 | |
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Capital contribution to noncontrolling interest | — | | — | | — | | — | | — | | — | | — | | 2,400 | | 2,400 | |
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Net Loss | — | | — | | — | | — | | — | | (7,025) | | (7,025) | | (316) | | (7,341) | |
Balance, February 28, 2023 | 99,471,127 | | $ | 100 | | (5,001,728) | $ | (62) | | $ | 155,055 | | $ | (94,243) | | $ | 60,850 | | $ | 10,545 | | $ | 71,395 | |
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(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid in Capital | | Accumulated Deficit | | Stockholders’ Equity | | Noncontrolling interest | | Total Equity |
| Shares | | Amount | | Shares | | Amount | | | | | |
Balance, May 31, 2023 | 100,927,358 | | $ | 101 | | | (5,001,728) | | | $ | (62) | | | $ | 160,194 | | | $ | (100,716) | | | $ | 59,517 | | | $ | 10,162 | | | $ | 69,679 | |
Shares issued in offering, net of costs | 7,908,528 | | 8 | | — | | — | | 64,474 | | — | | 64,482 | | | — | | 64,482 |
Shares issued from award vestings | 530,732 | | — | | — | | — | | — | | — | | — | | | — | | — |
Stock-based compensation | — | | — | | — | | — | | 5,641 | | — | | 5,641 | | | — | | 5,641 |
Net loss | — | | — | | — | | — | | — | | (11,457) | | (11,457) | | | (397) | | (11,854) |
Extinguishment of noncontrolling interest | 1,484,267 | | 1 | | | — | | | — | | | 9,764 | | | — | | | 9,765 | | | (9,765) | | | — | |
Balance, August 31, 2023 | 110,850,885 | | $ | 110 | | | (5,001,728) | | | $ | (62) | | | $ | 240,073 | | | $ | (112,173) | | | $ | 127,948 | | | $ | — | | | $ | 127,948 | |
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Three Months Ended February 28, 2022 | |
| Series C Convertible Redeemable Preferred Stock | Series D Convertible Redeemable Preferred Stock | Total Mezzanine Equity | | | Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated Deficit | Total Stockholders Equity | | |
| Shares | Amount | Shares | Amount | Amount | | | | | Shares | Amount | Shares | Amount | | | | | |
Balance, November 30, 2021 | 660,000 | | $ | 15,135 | | 1,380,000 | | $ | 31,574 | | $ | 46,709 | | | | | | 53,396,920 | | $ | 320 | | (36,296) | | $ | (62) | | $ | 43,657 | | $ | (44,837) | | $ | (922) | | | |
Preferred Stock Dividends Accrued | 16,086 | | 402 | | 33,624 | | 840 | | 1,242 | | | | | | — | | — | | — | | $ | — | | — | | (1,242) | | (1,242) | | | |
Net Loss | — | | — | | — | | — | | — | | | | | | — | | — | | — | | $ | — | | — | | (6,445) | | (6,445) | | | |
Balance, February 28, 2022 | 676,086 | | $ | 15,537 | | 1,413,624 | | $ | 32,414 | | $ | 47,951 | | | | | | 53,396,920 | | $ | 320 | | (36,296) | | $ | (62) | | $ | 43,657 | | $ | (52,524) | | $ | (8,609) | | | |
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| Common Stock | | Treasury Stock | | Additional Paid in Capital | | Accumulated Deficit | | Stockholders’ Equity | | Noncontrolling interest | | Total Equity |
| Shares | | Amount | | Shares | | Amount | | | | | |
Balance, May 31, 2022 | 97,837,703 | | $ | 98 | | | (36,296) | | | $ | (62) | | | $ | 128,293 | | | $ | (56,070) | | | $ | 72,259 | | | $ | 6,976 | | | $ | 79,235 | |
Stock-based compensation | — | | — | | — | | — | | 579 | | — | | 579 | | — | | 579 |
Capital contribution to noncontrolling interest | — | | — | | — | | — | | — | | — | | — | | 1,746 | | 1,746 |
Common stock forfeited | — | | — | | (4,965,432) | | — | | — | | — | | — | | — | | — |
Net loss | — | | — | | — | | — | | — | | (4,531) | | (4,531) | | (128) | | (4,659) |
Balance, August 31, 2022 | 97,837,703 | | $ | 98 | | | (5,001,728) | | | $ | (62) | | | $ | 128,872 | | | $ | (60,601) | | | $ | 68,307 | | | $ | 8,594 | | | $ | 76,901 | |
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See Accompanying Notesaccompanying notes to the Financial Statementscondensed consolidated financial statements
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)
(In thousands, except per share data)
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Nine Months Ended February 28, 2023 |
| Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated deficit | Total Stockholders Equity | Noncontrolling Interest | Total Equity |
| Shares | Amount | Shares | Amount | | | | | |
Balance, May 31, 2022 | 97,837,702 | | $ | 98 | | (36,296) | $ | (62) | | $ | 128,293 | | $ | (56,070) | | $ | 72,259 | | $ | 6,976 | | $ | 79,235 | |
Issuance of common stock - vesting of restricted stock units | 1,633,425 | | 2 | | — | | — | | (116) | | — | | (114) | | — | | (114) | |
Stock-based compensation | — | | — | | — | | — | | 26,878 | | — | | 26,878 | | — | | 26,878 | |
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Capital contribution to noncontrolling interest | — | | — | | — | | — | | — | | — | | — | | 4,146 | | 4,146 | |
Common stock forfeited | — | | — | | (4,965,432) | | — | | — | | — | | — | | — | | — | |
Net Loss | — | | — | | — | | — | | — | | (38,173) | | (38,173) | | (577) | | (38,750) | |
Balance, February 28, 2023 | 99,471,127 | | $ | 100 | | (5,001,728) | $ | (62) | | $ | 155,055 | | $ | (94,243) | | $ | 60,850 | | $ | 10,545 | | $ | 71,395 | |
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Nine Months Ended February 28, 2022 | | | | | | |
| Series C Convertible Redeemable Preferred Stock | Series D Convertible Redeemable Preferred Stock | Total Mezzanine Equity | Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated Deficit | Total Stockholders Deficit | | | | | |
| Shares | Amount | Shares | Amount | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | | | | | | | | |
Balance, May 31, 2021 | 660,000 | | $ | 15,135 | | — | | $ | — | | $ | 15,135 | | 27,195 | | $ | 3,370 | | 17,087 | | $ | 1,849 | | 1,511,061 | | $ | 9 | | (36,296) | | $ | (62) | | $ | 13,874 | | $ | (21,623) | | $ | (2,583) | | | | | | |
Extinguishment of Debt | — | | — | | — | | — | | — | | — | | — | | — | | — | | 5,083,828 | | 31 | | — | | — | | 3,446 | | — | | 3,477 | | | | | | |
Issuance of Dividends to Preferred Stock | — | | — | | — | | — | | — | | 60,822 | | 6,082 | | 29,772 | | 2,979 | | — | | — | | — | | — | | — | | (8,946) | | 115 | | | | | | |
Conversion of Preferred Stock | — | | — | | — | | — | | — | | (88,017) | | (9,452) | | (46,859) | | (4,828) | | 28,765,308 | | 172 | | — | | — | | 14,108 | | — | | — | | | | | | |
Service agreement stock compensation | — | | — | | — | | — | | — | | — | | — | | — | | — | | 18,036,723 | | 108 | | — | | — | | 12,229 | | — | | 12,337 | | | | | | |
Issuance of Preferred Stock | — | | — | | 1,380,000 | | 34,500 | | 34,500 | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | | | | |
Issuance Costs of Preferred Stock | — | | — | | — | | (2,926) | | (2,926) | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | | | | |
Preferred Stock Dividends Accrued | 16,086 | | 402 | | 33,624 | | 840 | | 1,242 | | — | | — | | — | | — | | — | | — | | — | | | — | | (1,242) | | (1,242) | | | | | | |
Net Loss | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | $ | (20,713) | | (20,713) | | | | | | |
Balance, February 28, 2022 | 676,086 | | $ | 15,537 | | 1,413,624 | | $ | 32,414 | | $ | 47,951 | | — | | $ | — | | — | | $ | — | | 53,396,920 | | $ | 320 | | (36,296) | | $ | (62) | | $ | 43,657 | | $ | (52,524) | | $ | (8,609) | | | | | | |
See Accompanying Notes to the Financial Statements
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)(In thousands) | | | | | | | | | | | |
| Nine Months Ended |
| February 28, 2023 | | February 28, 2022 |
CASH FLOW FROM OPERATING ACTIVITIES | | | |
Net loss attributable to Applied Digital Corporation | $ | (38,173) | | | $ | (20,713) | |
Net loss from discontinued operations, net of income taxes | — | | | (2,870) | |
Net loss attributable to noncontrolling interest | (577) | | | — | |
Net loss from continuing operations | (38,750) | | | (17,843) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and Amortization | 4,631 | | | 245 | |
Gain on extinguishment of accounts payable | — | | | (405) | |
Loss on extinguishment of debt | 94 | | | 1,342 | |
Stock-Based Compensation | 26,878 | | | 12,337 | |
Lease Expense | 246 | | | 136 | |
Deferred Tax | (280) | | | 274 | |
| | | |
Changes in assets and liabilities: | | | |
Accounts receivable | 145 | | | 12 | |
| | | |
Prepaid expenses and other current assets | (51) | | | (2,091) | |
Customer deposits | 26,846 | | | 2,126 | |
Deferred revenue | 43,742 | | | 2,883 | |
Accounts payable and accrued liabilities | (10,020) | | | 4,479 | |
Sales and use tax payable | 1,563 | | | — | |
Interest on finance leases | (104) | | | — | |
| | | |
| | | |
Lease Assets and Liabilities | (796) | | | (233) | |
Net cash provided by operating activities of continuing operations | 54,144 | | | 3,262 | |
Net cash provided by operating activities of discontinued operations | — | | | 966 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 54,144 | | | 4,228 | |
CASH FLOW FROM INVESTING ACTIVITIES | | | |
Purchases of property and equipment | (96,214) | | | (28,180) | |
| | | |
| | | |
Investments in private companies | (100) | | | — | |
| | | |
| | | |
Net cash used in investing activities of continuing operations | (96,314) | | | (28,180) | |
Net cash used in investing activities of discontinued operations | — | | | (7,408) | |
NET CASH USED IN INVESTING ACTIVITIES | (96,314) | | | (35,588) | |
| | | |
| | | |
| | | |
| | | |
Issuance of preferred stock | — | | | 34,500 | |
Repayment of finance leases | (1,635) | | | (2) | |
Preferred issuance costs | — | | | (2,927) | |
| | | |
| | | |
Term loan payoff | (7,056) | | | — | |
Proceeds from issuance of term loan | 25,567 | | | — | |
Term Loan Issuance Costs | (333) | | | — | |
Loan Payments | (1,784) | | | — | |
Payments of employee restricted stock tax withholdings | (114) | | | — | |
Noncontrolling interest contributions | 4,147 | | | — | |
Net cash provided by financing activities of continuing operations | 18,792 | | | 31,571 | |
Net cash provided by financing activities of discontinued operations | — | | | — | |
CASH FLOW PROVIDED BY FINANCING ACTIVITIES | 18,792 | | | 31,571 | |
NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS | (23,378) | | | 211 | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 46,299 | | | 11,750 | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | 22,921 | | | 11,961 | |
Less: cash and cash equivalents of discontinued operations | — | | | — | |
Cash and cash equivalents of continuing operations | $ | 22,921 | | | $ | 11,961 | |
| | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Interest Paid | $ | 1,118 | | | $ | — | |
| | | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES | | | |
| | | |
Right-of-use asset obtained by lease obligation | $ | 8,693 | | | $ | 1,207 | |
Fixed assets in accounts payable | $ | 9,384 | | | $ | 12,156 | |
| | | |
| | | |
| | | | | | | | | | | |
| Three Months Ended |
| August 31, 2023 | | August 31, 2022 |
CASH FLOW FROM OPERATING ACTIVITIES | | | |
Net loss | $ | (11,854) | | | $ | (4,659) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 7,860 | | | 1,136 | |
Stock-based compensation | 5,641 | | | 579 | |
Deferred income taxes | — | | | 32 | |
Loss on extinguishment of debt | 2,353 | | | 94 | |
Loss from legal settlement | 2,300 | | | — | |
Amortization of debt issuance costs | 235 | | | — | |
Loss on abandonment of assets | 173 | | | — | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 55 | | | 177 | |
Prepaid expenses and other current assets | (205) | | | (164) | |
Customer deposits | — | | | 4,042 | |
Related party customer deposits | — | | | 545 | |
Current deferred revenue | 3,695 | | | 15,316 | |
Current related party deferred revenue | (553) | | | — | |
Accounts payable | 205 | | | 196 | |
Accrued liabilities | 2,113 | | | — | |
Lease assets and liabilities | 39 | | | — | |
Sales and use tax payable | (1,568) | | | — | |
Other assets | (5,972) | | | — | |
CASH FLOW PROVIDED BY OPERATING ACTIVITIES | 4,517 | | | 17,294 | |
CASH FLOW FROM INVESTING ACTIVITIES | | | |
Purchases of property and equipment and other assets | (32,591) | | | (31,673) | |
| | | |
| | | |
Finance lease prepayments | (7,560) | | | — | |
Purchases of investments | (390) | | | — | |
CASH USED IN INVESTING ACTIVITIES | (40,541) | | | (31,673) | |
CASH FLOW FROM FINANCING ACTIVITIES | | | |
Repayment of finance leases | (4,849) | | | (209) | |
Borrowings of long-term debt | 3,750 | | | 15,000 | |
Borrowings of related party debt | 3,000 | | | — | |
Repayments of long-term debt | (3,463) | | | (7,488) | |
Repayment of related party debt | (39,257) | | | — | |
Payment of deferred financing costs | — | | | (140) | |
| | | |
Noncontrolling interest contributions | — | | | 1,747 | |
Proceeds from issuance of common stock | 64,482 | | | — | |
CASH FLOW PROVIDED BY FINANCING ACTIVITIES | 23,663 | | | 8,910 | |
| | | |
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (12,361) | | | (5,469) | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD | 43,574 | | | 46,299 | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | $ | 31,213 | | | $ | 40,830 | |
| | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | |
Interest paid | $ | 1,839 | | | $ | 356 | |
| | | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES | | | |
| | | |
Operating right-of-use assets obtained by lease obligation | $ | 10,272 | | | $ | — | |
Finance right-of-use assets obtained by lease obligation | $ | 46,952 | | | $ | 922 | |
Property and equipment in accounts payable | $ | 6,729 | | | $ | 8,352 | |
Conversion of non-controlling interest | $ | 9,765 | | | $ | — | |
Loss from legal settlement | $ | 2,300 | | | $ | — | |
See Accompanying Notesaccompanying notes to the Financial Statementscondensed consolidated financial statements
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (unaudited)
For the Three and Nine Month PeriodsMonths Ended February 28,August 31, 2023
1.BUSINESS AND ORGANIZATION Business and Organization
Applied Digital Corporation f/k/a Applied Blockchain, Inc. (the “Company”), is a designer, builder, and operator of Next-Gen data centers across North America, which provide substantial computing powernext generation digital infrastructure providing cost-competitive solutions to high power computing applications such as blockchain infrastructure, nature language processing,customers in High-Performance Compute (“HPC”), artificial intelligence cloud service (“Cloud services”), and artificial intelligence.datacenter hosting (“Hosting”) industries. The Company has a colocation business model where customers place hardware they own into the Company’s facilities and the Company provides full operational and maintenance servicesthree reportable segments. Financial information for a fixed fee. The Company typically enters into long term fixed rate contracts with its customers.
On April 12, 2022, the Company effected a one-for-six (1:6) reverse split (the “Reverse Stock Split”) of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related informationeach segment is contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares of the Company’s common stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fractional share.
On September 1, 2022, Company entered into a joint venture agreement with GMR Limited (“GMR”) to form Highland Digital Holdings, LLC (“Highland Digital”), which may acquire mining hardware and digital infrastructure assets. The Company and GMR each have a 50% ownership stake in Highland Digital. GMR is the controlling partner and will consolidate the results of Highland Digital in its financial statements. The Company will not consolidate Highland Digital in its financial statements, but will account for the entity under the equity method. In the Quarterly Report on Form 10-Q filed for the quarter ended November 30, 2022, Company had disclosed a firm commitment of $0.6 million to Highland Digital. During the period ended February 28, 2023, the Company’s obligation to fulfill that commitment was relieved, and the Company no longer has such commitment.
On February 17, 2023, the Company entered into a letter of credit agreement with Frost Bank for $7.0 million to secure the Company’s power contract at the Ellendale, North Dakota facility. The agreement runs through February 2024.Note 10 - Business Segments.
2.LIQUIDITY AND FINANCIAL CONDITION
As Basis of February 28, 2023, the Company had approximate cashPresentation and cash equivalents of $22.9 million and negative working capital of $84.2 million. Historically the Company has incurred losses and has relied on equity and debt financings to fund its operations. Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued.
3.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIESSignificant Accounting Policies
Principles of Consolidation:Consolidation
The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of May 31, 20222023 has been derived from the audited consolidated financial statements as of that date, but does not
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
include all disclosures required for audited annual financial statements.
In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. For further information, please refer to and read these interim unaudited condensed Consolidated Financial Statementsconsolidated financial statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 20222023 filed with the SEC on August 29, 2022.2, 2023.
Significant Accounting Policies and Use of Estimates:Estimates
There were no material changes in the Company’s significant accounting policies for the three and nine months ended February 28,August 31, 2023 as compared to the year ended May 31, 2022.2023. See Note 3 - Property and Equipment to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2022,2023, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates.
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates of the valuation allowance associated with the Company’s deferred tax assets.
Revenue Recognition
Cash and Cash EquivalentsThe Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers.
Hosting Revenue
The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment. Hosting revenues are recorded monthly in fixed amounts, net of credits for non-performance, based on the terms of the agreements. Any ancillary revenue for maintenance or installation services is at a point in time when the customer has received the full service. As these services support the hosting operation as a whole, this revenue is captured within the hosting revenue caption. Customer contracts include advance payment terms. Advanced payments are recorded as deferred revenue until the related service is provided.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended August 31, 2023
Cloud Services Revenue
The Company considersalso provides cloud services applicable to artificial intelligence. Customers pay a rate to the Company in exchange for managed services supported by Company-provided equipment. Revenues are recorded based on the fixed rate, net of any credits for non-performance, based on the terms of the agreements.
Segments
The Company has identified three reportable segments: artificial intelligence cloud services (“Cloud services”), high performance computing (“HPC”) datacenter hosting, and datacenter hosting (“Hosting”). Our chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on these three reportable segments. Intercompany transactions between segments are excluded for management reporting purposes.
The Cloud services segment operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by Company-provided equipment.
The HPC datacenter segment designs, builds, and operates next generation datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.
The Hosting segment provides infrastructure, including energized space, and colocation services to crypto mining customers. Customers place hardware they own into the Company’s facilities and the Company provides operational and maintenance services for a fixed fee.
Recent Accounting Pronouncements
We reviewed all highly liquid investments with an original maturityrecently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements.
Reclassifications
We have reclassified certain prior period revenue amounts from hosting revenue to cloud services revenue and related party revenue on our condensed consolidated statements of three monthsoperations. We have also reclassified amounts from accounts payable and accrued expenses and prepaid expenses and other current assets to accounts payable, accrued expenses, prepaid expenses, and other current assets as well as from customer deposits and deferred revenue to the associated related party caption lines in our condensed consolidated balance sheets to conform to our current period presentation. These reclassifications had no impact on reported net income, cash flows, or less at the date of acquisition to be cash equivalents. The Company’stotal assets and liabilities.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash within the consolidated balance sheets that are included in excessthe consolidated statements of federally insured limits potentially subject us to concentrationscash flows as of credit risk, although the Company believes it is subject to minimal risk.August 31, 2023 and August 31, 2022 were as follows (in thousands):
| | | | | | | | | | | |
| August 31, 2023 | | May 31, 2023 |
Net Cash & Equivalents | $ | 5,942 | | | $ | 28,999 | |
Restricted Cash | 25,271 | | | 14,575 | |
Total Cash & Cash Equivalents | $ | 31,213 | | | $ | 43,574 | |
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended August 31, 2023
3. Property and Equipment
Property and equipment consisted of the following as of August 31, 2023, and May 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| Estimated Useful Life | | August 31, 2023 | | May 31, 2023 |
Hosting equipment | | | | | |
Electric generation and transformers | 15 years | | $ | 7,763 | | | $ | 4,655 | |
| | | | | |
Other equipment and fixtures | 5 years - 7 years | | 3,101 | | | 1,684 | |
Construction in progress | | | 97,280 | | | 106,226 | |
Information systems and software | 5 years | | 27,570 | | | 21,173 | |
Land and building | | | | | |
Land | | | 2,152 | | | 2,152 | |
Land improvements | 15 years | | 1,296 | | | 1,293 | |
Building | 39 years | | 88,346 | | | 63,350 | |
Leasehold improvements | 3 years - 6 years | | 2,299 | | | — | |
Total cost of property and equipment | | | 229,807 | | | 200,533 | |
Accumulated depreciation | | | (7,141) | | | (4,940) | |
Property and equipment, net | | | $ | 222,666 | | | $ | 195,593 | |
Depreciation expense totaled $2.2 million and $0.8 million and for the three months ended August 31, 2023 and 2022, respectively.
4. Revenue from Contracts with Customers
Below is a summary of the Company’s revenue concentration by major customers for the three months ended August 31, 2023 and 2022, respectively.
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | |
| 2023 | | 2022 | | | | |
Customer A | 68 | % | | — | % | | | | |
Customer B | 10 | % | | 12 | % | | | | |
Customer C | — | % | | 36 | % | | | | |
Customer D | — | % | | 21 | % | | | | |
Customer E | — | % | | 17 | % | | | | |
Customer F | — | % | | 14 | % | | | | |
| | | | | | | |
| | | | | | | |
Deferred Revenue
As of August 31, 2023, the Company had $51.8 million in deferred revenue, which represents the Company’s remaining performance obligations, and expects to recognize the entire balance within the next 12 months. Changes in the Company's deferred revenue balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following tables (in thousands):
| | | | | | | | | | | |
| Three Months Ended |
| August 31, 2023 | | August 31, 2022 |
Balance, beginning of period | $ | 48,692 | | | $ | 3,877 | |
Advance billings | 39,465 | | | 22,240 | |
Revenue recognized | (36,323) | | | (6,924) | |
| | | |
Balance, end of period | $ | 51,834 | | | $ | 19,193 | |
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended August 31, 2023
Customer Deposits
Changes in the Company's customer deposits balances for the three months ended August 31, 2023 and 2022, respectively, are shown in the following table (in thousands):
| | | | | | | | | | | |
| Three Months Ended |
| August 31, 2023 | | August 31, 2022 |
Balance, beginning of period | $ | 36,370 | | | $ | 9,524 | |
Customer deposits received | — | | | 4,587 | |
| | | |
| | | |
Balance, end of period | $ | 36,370 | | | $ | 14,111 | |
5. Related Party Transactions
Related Party Revenue
The following table illustrates related party revenue for the three months ended August 31, 2023 and August 31, 2022 (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended August 31, | | |
| 2023 | | 2022 | | | | |
Customer D* | $ | 2,332 | | | $ | 1,450 | | | | | |
Customer E** | $ | 1,852 | | | $ | 1,136 | | | | | |
*Customer D is a subsidiary of an entity which is deemed to beneficially own over 5% of the Company's outstanding common stock
**Customer E is 60% owned by an individual who is deemed to beneficially own over 5% of the Company's outstanding common stock
The following table illustrates related party deferred revenue and deposits balances as of August 31, 2023 and May 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Customer D balances as of | | Customer E balances as of |
| August 31, 2023 | | May 31, 2023 | | August 31, 2023 | | May 31, 2023 |
Deferred revenue | $ | 923 | | | $ | 1,474 | | | $ | 48 | | | $ | 50 | |
Customer Deposits | $ | 2,450 | | | $ | 2,450 | | | $ | 1,361 | | | $ | 1,361 | |
Related Party Sublease Income
For three months ended August 31, 2023 and August 31, 2022, the Company received sublease income of $23 thousand and $27 thousand, respectively, from B. Riley Asset Management, which is also a wholly-owned subsidiary of B. Riley Financial, Inc. Mr. Cummins, the CEO of the Company, is also the President of B. Riley Asset Management.
6. Debt
Long-term debt consisted of the following components (in thousands):
| | | | | | | | | | | |
| August 31, 2023 | | May 31, 2023 |
6.50% Starion term loan | $ | 12,109 | | | $ | 12,786 | |
6.15% Vantage Garden City loan | 13,154 | | | 10,074 | |
7.48% Starion Ellendale loan | 18,859 | | | 19,728 | |
Other long-term debt | 386 | | | 354 | |
Debt issuance costs, net of amortization | (463) | | | (3,012) | |
Less: Current portion of term loan | (9,163) | | | (7,950) | |
Long-term debt, net | $ | 34,882 | | | $ | 31,980 | |
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended August 31, 2023
Letters of Credit
As of August 31, 2023, the Company had letters of credit totaling $25.3 million. As of May 31, 2023, the Company had letters of credit totaling $14.5 million. The Company has restricted cash related to its letters of credit that it holds with Vantage Bank and Frost Bank. The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which last through January 2024 and February 2024, respectively. The Company also has restricted cash related to its Starion Term Loan Buy-Down (as defined below). Theall have terms ending within the 12 months following table reconciles cash and cash equivalents and restricted cash to presentation on the balance sheet as of February 28, 2023 and MayAugust 31, 2022.
| | | | | | | | |
(in thousands) | February 28, 2023 | May 31, 2022 |
Net Cash & Equivalents | $ | 8,421 | | $ | 38,798 | |
Restricted Cash | $ | 14,500 | | $ | 7,501 | |
Total Cash & Cash Equivalents | $ | 22,921 | | $ | 46,299 | |
Recent Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
Reclassifications
Within the Condensed Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current period presentation. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.
4.PROPERTY AND EQUIPMENT AND DEPOSITS ON EQUIPMENT
Property and equipment consisted of the following as of February 28, 2023, and May 31, 2022:
| | | | | | | | | | | | | | | | | |
(in thousands) | Estimated Useful Life | | February 28, 2023 | | May 31, 2022 |
Hosting Equipment | | | | | |
Electric Generation and Transformers | 15 years | | $ | 4,520 | | | $ | 4,338 | |
| | | | | |
Other Equipment and Fixtures | 5 years-7 years | | 1,034 | | | 588 | |
Construction in Progress | | | 109,822 | | | 18,305 | |
Information Systems and Software | 5 years | | 11,229 | | | 9,608 | |
Land & Building | | | | | |
Land | | | 2,152 | | | 1,074 | |
Land Improvements | 15 years | | 1,285 | | | 1,180 | |
Building | 39 years | | 33,008 | | | 30,176 | |
Deposits on Equipment | | | 7,816 | | | — | |
Total cost of property and equipment | | | 170,865 | | | 65,269 | |
Accumulated Depreciation | | | (3,590) | | | (1,009) | |
Property and Equipment, Net | | | $ | 167,276 | | | $ | 64,260 | |
| | | | | |
| | | | | |
Depreciation expense from continuing operations totaled $0.9 million and $0.2 million and for the three months ended February 28, 2023 and 2022, respectively. Depreciation expense from continuing operations totaled $2.6 million and $0.2 million and for the nine months ended February 28, 2023 and 2022, respectively. Construction in progress as of February 28, 2023 represents assets not placed into service at the Company’s Garden City, Texas and Ellendale, North Dakota locations, which were not operational as of February 28, 2023.
5.REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue when promised services are transferred to customers in an amount that reflects the consideration which the Company expects to be received in exchange for those services. The Company notes all revenue recognized from continuing operations during the quarter was received through hosting revenue.
Below is a summary of the Company’s revenue concentration by major customer for the three and nine months ended February 28, 2023 and 2022, respectively.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
| | | | | | | | | | | |
| Three Months Ended February 28, |
Customer | 2023 | | 2022 |
Customer A | 26 | % | | 62 | % |
Customer B | 25 | % | | — | % |
Customer C | 16 | % | | 16 | % |
Customer D | 13 | % | | 9 | % |
Customer E | 13 | % | | 13 | % |
Others | 7 | % | | — | % |
| | | |
| | | |
| | | | | | | | | | | |
| Nine Months Ended February 28, |
Customer | 2023 | | 2022 |
Customer A | 31 | % | | 62 | % |
Customer B | 23 | % | | — | % |
Customer C | 17 | % | | 16 | % |
Customer D | 14 | % | | 9 | % |
Customer E | 13 | % | | 13 | % |
Others | 3 | % | | — | % |
| | | |
| | | |
Remaining Performance Obligations
As of February 28, 2023, the Company had $47.6 million in deferred revenue, which represents the Company’s remaining performance obligations. The Company expects to recognize the entire $47.6 million within the next 12 months.
Deferred Revenue
Changes in the Company's deferred revenue balances from hosting operations for the three and nine months ended February 28, 2023 and 2022, respectively, are shown in the following table:
| | | | | | | | | | | | | | |
(in thousands) | | (in thousands) |
Three Months Ended February 28, 2023 | | Three Months Ended February 28, 2022 |
Balance at November 30, 2022 | $ | 29,394 | | | Balance at November 30, 2021 | $ | — | |
Advance billings | $ | 32,315 | | | Advance billings | $ | 3,909 | |
Revenue recognized | $ | (14,090) | | | Revenue recognized | $ | (1,026) | |
Other adjustments | $ | — | | | Other adjustments | $ | — | |
Balance at February 28, 2023 | $ | 47,619 | | | Balance at February 28, 2022 | $ | 2,883 | |
| | | | | | | | | | | | | | |
(in thousands) | | (in thousands) |
Nine Months Ended February 28, 2023 | | Nine Months Ended February 28, 2022 |
Balance at May 31, 2022 | $ | 3,877 | | | Balance at May 31, 2021 | $ | — | |
Advance billings | $ | 76,961 | | | Advance billings | $ | 3,909 | |
Revenue recognized | $ | (33,354) | | | Revenue recognized | $ | (1,026) | |
Other adjustments | $ | 135 | | | Other adjustments | $ | — | |
Balance at February 28, 2023 | $ | 47,619 | | | Balance at February 28, 2022 | $ | 2,883 | |
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
Customer Deposits
Changes in the Company's customer deposits balances for the three and nine months ended February 28, 2023 and 2022, respectively, are shown in the following table:
| | | | | | | | | | | | | | |
(in thousands) | | (in thousands) |
Three Months Ended February 28, 2023 | | Three Months Ended February 28, 2022 |
Balance at November 30, 2022 | $ | 24,689 | | | Balance at November 30, 2021 | $ | — | |
Customer deposits received | $ | 11,681 | | | Customer deposits received | $ | 5,645 | |
Customer deposits refunded | $ | — | | | Customer deposits refunded | $ | — | |
Other adjustments | $ | — | | | Other adjustments | $ | — | |
Balance at February 28, 2023 | $ | 36,370 | | | Balance at February 28, 2022 | $ | 5,645 | |
| | | | | | | | | | | | | | |
(in thousands) | | (in thousands) |
Nine Months Ended February 28, 2023 | | Nine Months Ended February 28, 2022 |
Balance at May 31, 2022 | $ | 9,524 | | | Balance at May 31, 2021 | $ | — | |
Customer deposits received | $ | 26,980 | | | Customer deposits received | $ | 5,645 | |
Customer deposits refunded | $ | — | | | Customer deposits refunded | $ | — | |
Other adjustments | $ | (135) | | | Other adjustments | $ | — | |
Balance at February 28, 2023 | $ | 36,370 | | | Balance at February 28, 2022 | $ | 5,645 | |
6.RELATED PARTY TRANSACTIONS
Related Party Policy
Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all material related party transactions.
Related Party Note Payable
During the period ended February 28, 2022, a related party note payable was held by the CEO of the Company. During this period, the outstanding debt principal of $0.5 million and accrued interest of $1.6 million were converted to 5.1 million shares of Common Stock with a fair value of $0.75 per share which resulted in a loss on extinguishment of $1.3 million. Upon the consummation of an exchange agreement, the note payable was surrendered and cancelled, and all rights including rights to accrued interest due were extinguished.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
Related Party Revenue
The Company has material transactions with two related parties Company A is a customer and is also the parent company of the minority member of the 1.21 Gigawatts joint venture.. Company B is a customer and is also the controlling member of the Highland Digital joint venture. Company B became a related party during September 2022. The following tables illustrate related party revenue for the three and nine months ended February 28, 2023 and February 28, 2022.
| | | | | | | | |
| Revenue for the Three Months ended |
(in thousands) | February 28, 2023 | February 28, 2022 |
Customer A | $ | 3,700 | | $ | 634 | |
Customer B | $ | 5,828 | | $ | 392 | |
| | | | | | | | |
| Revenue for the Nine Months ended |
(in thousands) | February 28, 2023 | February 28, 2022 |
Customer A | $ | 10,169 | | $ | 634 | |
Customer B | $ | 14,450 | | $ | 392 | |
The following tables illustrate related party deferred revenue and deposits balances as of February 28, 2023 and May 31, 2022.
| | | | | | | | |
| Customer A Balances as of |
(in thousands) | February 28, 2023 | May 31, 2022 |
Deferred revenue | $ | 1,616 | | $ | 1,721 | |
Customer Deposits | $ | 1,584 | | $ | 1,719 | |
| | | | | | | | |
| Customer B Balances as of |
(in thousands) | February 28, 2023 | May 31, 2022 |
Deferred revenue | $ | 2,997 | | $ | 1,150 | |
Customer Deposits | $ | 7,214 | | $ | 5,048 | |
7.DEBT
Letter of Credit
As of February 28, 2023 and May 31, 2022, the Company had letters of credit with Vantage Bank and Frost Bank that together total $14.5 million. As discussed in Footnote 3, the Company is required to maintain theses amount in separate cash balance, and therefore the cash is restricted. Further, the Company had no unused lines of credit as of February 28, 2023 or May 31, 2022, respectively.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
Starion TermB. Riley Loan
On July 25, 2022, APLD Hosting, LLC, a wholly-owned subsidiary of Applied Digital Corporation, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Starion Loan Agreement”). The Starion Loan Agreement provides for a term loan (the “Starion Term Loan”) in the principal amount of $15 million with a maturity date of July 25, 2027. The Starion Loan Agreement provides for an interest rate of 6.50% per annum. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. The Company is not subject to financial covenants until May 31, 2024. At that time, the Company will be subject to a debt service coverage ratio. Deferred financing costs related to the Starion Term Loan total $0.1 million.
The City of Jamestown, North Dakota and Stutsman County’s Economic Development Fund provides a multimillion-dollar economic development program, available to assist with expanding or relocating businesses. As part of financial packages, the Jamestown Stutsman Development Corporation (JSDC) makes direct loans, equity investments, and interest buy-downs to businesses. The Company has entered into an agreement with JDSC and Starion Bank which buys down the Company’s interest rate to 1.5% for a period of 13 months through a loan and community bond (the “Starion Term Loan Buy-Down”). The loan totals $0.2 million and bears an interest rate of 2%, and the bond totals $0.5 million.
In connection with the Starion Loan Agreement, the Company repaid all of the outstanding balance on the March 11, 2022 agreement between the Company and Vantage Bank Texas. This agreement included a promissory note agreement for $7.5 million for a five year term with an interest rate of 5% per annum.
Vantage Garden City Loan
On November 7, 2022, APLD – Rattlesnake Den I,23, 2023, Sai Computing LLC, a wholly-owned subsidiary of the Company (“SAI”), entered into a Loan and Security Agreement (the "B. Riley Loan") with Vantage Bank TexasB. Riley Commercial Capital, LLC and B. Riley Securities, with the Company as guarantor, which agreementGuarantor. The B. Riley Loan provides for a term loan of up to $50 million in the principal amount of $15 million (the “Vantage Garden City Loan Agreement”). The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for the Borrower’s datacenter in Garden City, Texas, with each installment not exceeding approximately $0.9 million for the costs and expenses of a building at the Company’s hosting facility in Garden City, Texas (the “Garden City Facility”). The unpaid principal amount of the Vantage Garden City Loan Agreement will bear interest at a fixed rate of 6.15% per annum, and the Borrower may prepay the Vantage Garden City Loan Agreement, in whole or in part, without the payment of any fee or penalty. The Vantage Garden City Loan Agreement matures April 26, 2028. The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default. As of February 28, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement. Total deferred costs related to the issuance of this loan total are $0.2 million.
Starion Ellendale Loan
On February 16, 2023, APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement with Starion Bank and the Company as Guarantor (the “Ellendale Loan Agreement”). The Ellendale Loan Agreement provides for a term loan in the principal amount of $20 million with a maturity date of February 3, 2028. The Loan Agreement contains customary covenants, representations and warranties and events of default. The Loan Agreement provides for an interest rate of 7.48%9.00% per annum.annum and a 3% commitment fee on outstanding balances as of each quarter. The proceeds of the B. Riley Loan will beare being used to provide additional liquidity to help fund expansion on the Ellendale hosting datacenter.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Forbuildout of the ThreeCompany’s recently announced cloud services platform and Nine Month Period Ended February 28, 2023
datacenters by the Company, and for general corporate purposes and working capital. As of February 28,August 31, 2023, the Company had not received funding fromrepaid all balances on the Ellendaleloans. Total remaining unused capacity on the B. Riley Loan Agreement, and accordingly no amounts have been included in the tables below.
as of August 31, 2023 was $10.5 million.
Remaining Principal Payments and Term Loan Balances
Below is a summary of the remaining principal payments due over the life of the term loans as of February 28, 2023.
August 31, 2023 (in thousands):
| | | | | |
Year | Principal Payments (in thousands) |
FY23Remainder of FY24 | $ | 901 | |
FY24 | 5,5026,930 | |
FY25 | 5,8879,831 | |
FY26 | 6,23110,508 | |
FY27 | 5,00411,221 | |
ThereafterFY28 | 5266,018 | |
| |
Total Term Loan Remaining Payments | $ | 24,05144,508 | |
Below is a summary of the Company’s term loan balances, including current debt and deferred financing fees as of February 28, 2023 and May 31, 2022.
| | | | | | | | | | | | | | |
(in thousands) | | February 28, 2023 | | May 31, 2022 |
Term Loan Balance | | $24,051 | | $7,324 |
Less: Deferred Issuance Costs | | (333) | | (94) |
Less: Current portion of Term Loan | | (4,855) | | (1,333) |
Long-term Portion of Term Loan | | $18,862 | | $5,897 |
8. STOCKHOLDERS’ EQUITY
Common Stock
The table below illustrates the Company’s common stock balances as February 28, 2023 and May 31, 2022.
| | | | | | | | |
| Share Amounts As Of |
| February 28, 2023 | May 31, 2022 |
Authorized to Issue | 166,666,667 | | 166,666,667 | |
Issued | 99,471,127 | | 97,837,702 | |
Outstanding | 94,469,399 | | 97,801,406 | |
Restricted Stock Awards
The Company has granted restricted stock awards to officers and directors. Each of the awards vests upon the completion of service conditions for specified times and a performance condition for the occurrence of an effective registration statement covering the resale of the shares of Common Stock comprising the stock award with the Securities and Exchange Commission (the “SEC”). The Company will recognize the cost of the restricted stock-based on the grant date fair value of the awards over the
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Month Period Ended February 28, 2023
related vesting terms using a straight-line method when it is probable that the performance condition for the reserved underlying shares will be met.
The following is a summary of the activity and balances for unvested restricted stock awards granted for the nine months ended February 28, 2023:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
Outstanding as of May 31, 2022 | 1,366,666 | | | $ | 8.04 | |
Granted | 77,500 | | | $ | 2.04 | |
Vested | (1,048,333) | | | $ | 7.60 | |
Forfeited | — | | | $ | — | |
Outstanding as of February 28, 2023 | 395,833 | | | $ | 8.04 | |
As of February 28, 2023, total remaining expense to be recognized related to these awards was $0.2 million and the weighted average remaining recognition period for the unvested awards was one month.
Restricted Stock Units
The Company has granted restricted stock unit awards (“RSUs”) to certain consultants, in all cases as compensatory grants for consulting services rendered to the Company, which contain performance conditions that affect vesting. The Company will recognize the cost of these RSUs based on the grant date fair value of the awards when it is probable that the performance conditions will be achieved over the related vesting terms.7. Stockholders' Equity
Equity Plans
On October 9, 2021, the Company’s boardBoard of directorsDirectors approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date. As of February 28,August 31, 2023, the Company had issued awards for approximately 8.013.8 million awardsshares of common stock of the Company (the “Common Stock”) under the plans.
Restricted Stock Awards
As of August 31, 2023, total remaining expense to be recognized related to these awards was $0.3 million and the weighted average remaining recognition period for the unvested awards was 0.2 years.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended August 31, 2023
Restricted Stock Units
The Company has granted restricted stock unit awards (“RSUs”) to certain consultants and full-time employees. The following is a summary of the activity and balances for unvested restricted stock units granted for the ninethree months ended February 28,August 31, 2023:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
Outstanding as of May 31, 2023 | 12,465,935 | | | $ | 2.53 | |
Granted | 1,311,900 | | | 7.79 | |
Vested | (573,428) | | | 2.69 | |
Forfeited | (286,699) | | | 2.21 | |
Outstanding as of August 31, 2023 | 12,917,708 | | | $ | 3.06 | |
As of August 31, 2023, total remaining expense to be recognized related to these awards was $32.3 million and the weighted average remaining recognition period for the unvested awards was 1.9 years.
Public Offering
During the three months ended August 31, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement pursuant to which the Company may sell up to $125 million in shares of Common Stock. As of August 31, 2023, the Company has sold approximately 7.9 million shares. Net proceeds, less commission and legal fees of approximately $2.2 million, were approximately $64.5 million.
Extinguishment of Noncontrolling Interest
On August 31, 2023, pursuant to the joint venture agreement, the minority partner in 1.21 Gigawatts LLC exercised the option to exchange their interest in the joint venture for approximately 1.5 million shares for a value of $9.8 million of the Company’s common stock. The Company is now the sole member of 1.21 Gigawatts LLC and will report all activity as attributable to the Company in future periods.
8. Leases
The Company enters into leases for hosting equipment, office space, and land. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively.
Components of lease expense were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| Three months ended | | | |
| August 31, 2023 | | August 31, 2022 | | | | | |
Operating lease cost: | | | | | | | | |
Operating lease expense | $ | 485 | | $ | 82 | | | | | |
Short-term lease expense | 82 | | 63 | | | | | |
Total operating lease cost | 567 | | 145 | | | | | |
Finance lease expense: | | | | | | | | |
Amortization of right-of-use assets(1) | 5,630 | | 298 | | | | | |
Interest on lease liabilities | 1,082 | | 109 | | | | | |
| | | | | | | | |
Total finance lease cost | 6,712 | | 407 | | | | | |
Sublease Income | (23) | | (27) | | | | | |
Total net lease cost | $ | 7,256 | | $ | 525 | | | | | |
(1) Amortization of right-of-use assets is included within depreciation expense, and is recorded within cost of revenues and selling, general and administrative expense in the condensed consolidated statements of operations.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Nine Month PeriodMonths Ended February 28,August 31, 2023
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
Outstanding as of May 31, 2022 | 1,791,666 | | | $ | 8.04 | |
Granted | 7,897,907 | | | $ | 2.32 | |
Vested | (630,529) | | | $ | 5.33 | |
Forfeited | (473,748) | | | $ | 7.32 | |
Outstanding as of February 28, 2023 | 8,585,296 | | | $ | 3.01 | |
The following table represents the Company’s future minimum lease payments as of May 31, 2023:
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
Remainder of FY24 | $ | 1,921 | | | $ | 20,185 | | $ | 22,106 | |
FY25 | 2,681 | | | 25,678 | | 28,359 | |
FY26 | 2,782 | | | 4,339 | | 7,121 | |
FY27 | 2,536 | | | 188 | | 2,724 | |
FY28 | 2,336 | | | 180 | | 2,516 | |
Thereafter | 1,398 | | | 89,944 | | 91,342 | |
Total lease payments | 13,654 | | | 140,514 | | 154,168 | |
Less: imputed interest | (2,274) | | | (91,972) | | (94,246) | |
Total lease liabilities | 11,380 | | 48,542 | | 59,922 | |
Less: Current portion of lease liability | (1,807) | | | (23,471) | | (25,278) | |
Long-term portion of lease liability | $ | 9,573 | | | $ | 25,071 | | $ | 34,644 | |
As of February 28, 2023, total remaining expense to be recognizedSupplemental cash flow and other information related to these awards was $13.3leases is as follows:
| | | | | | | | | | | |
| Three Months Ended |
| August 31, 2023 | | August 31, 2022 |
Weighted-average years remaining (in years): | | | |
Finance leases | 8.4 years | | 51.0 years |
Operating leases | 5.0 years | | 4.2 years |
| | | |
Weighted-average discount rate: | | | |
Finance leases | 8.5 | % | | 8.0 | % |
Operating leases | 7.7 | % | | 12.5 | % |
The Company has entered into operating leases which are executed but not yet commenced with total minimum payments of approximately $143.4 million andto support the weighted average remaining recognition periodCompany's Cloud service business. The payments are for the unvested awards was 20various leases with various lease terms ranging from 60 months to 84 months.
Share Forfeiture
On June 6, 2022, through an agreement between the Company and Xsquared Holding Limited (“Sparkpool”), Sparkpool agreed to forfeit shares of Common Stock that had been issued pursuant to the service agreement executed on March 19, 2021. Sparkpool ceased providing the contracted services for the Company, and agreed to forfeit shares to compensate for future services that will not be rendered. As a result of this agreement, 4,965,432 shares of Common Stock were forfeited and returned to the Company and placed in treasury.
9. LEASES
During the nine months ended February 28, 2023, the Company entered into twenty-five new leases, bringing the total number of leases to 44. The Company considered the nature of the leases under ASC 842 LeasesCommitments and determined each of these leases represent finance leases. The weighted average term of the leases is 30 months and the weighted average discount rate of the leases is 7.87%. Total ROU assets entered into during the nine months ended February 28, 2023 totaled $8.7 million.
10. COMMITMENTS AND CONTINGENCIES
Commitments
As of February 28, 2023, the Company has commitments related to its term loan and lease agreements , which have been disclosed in Note 7 - Debt and Note 9 - Leases, respectively.
Contingencies
Energy Commitment
The Company also has an annuala minimum commitment of approximately $24.2$95.7 million related to the energy services agreement for its Jamestown, North Dakota cohosting facility with a remaining term of approximately 3.5 years as of February 28,August 31, 2023. The minimum term of this agreement is five years, and will remain in effect on a year-to-year basis unless terminated by either party by notice given at least 365 calendar days in advance of termination. The commitment is fully due within the next year, as the Company commits to specific power consumption on an annual basis as part of the energy services agreement.
Claims and Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business.
On August 12, 2023, a putative securities class action complaint, captioned McConnell v. Applied Digital Corporation, Wesley Cummins and David Rench, No. 3:23-cv-1805, was filed in the U.S. District Court for the Northern District of Texas, Dallas Division against Applied Digital Corporation (the “Company”) and two of its officers, Chief Executive Officer Wesley Cummins and Chief Financial Officer David Rench, asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act. The complaint alleges that the defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleges that the Company overstated the profitability of its datacenter hosting business and its ability to successfully transition into a low-
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended August 31, 2023
cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of NASDAQ listing rules.
The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable.
As of February 28,August 31, 2023 and May 31, 2022,2023, there were no other pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest.
Settlement of Potential Claim
Subsequent to August 31, 2023, the Company entered into a settlement agreement in respect of employment-related claims by a former executive. The terms of the settlement include payment to the claimant of $2.3 million, which was included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.
10. Business Segments
Revenue by segment (excluding HPC as that segment has no revenue) was as follows (in thousands):
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| August 31, 2023 | | August 31, 2022 | | | | | |
Cloud services segment | $ | 2,152 | | | $ | — | | | | | | |
Hosting segment | 34,171 | | | 6,924 | | | | | | |
| | | | | | | | |
Total revenue | $ | 36,323 | | | $ | 6,924 | | | | | | |
Segment profit and a reconciliation to net income (loss) before income tax expenses is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| August 31, 2023 | | August 31, 2022 | | | | | |
Segment Profit: | | | | | | | | |
Cloud services segment | $ | (7,434) | | | $ | — | | | | | | |
Hosting segment | 8,958 | | | (658) | | | | | | |
HPC hosting segment | (730) | | | — | | | | | | |
Total segment profit | 794 | | | (658) | | | | | | |
Other (1) | (8,221) | | | (3,519) | | | | | | |
Interest expense | 2,074 | | | 356 | | | | | |
Loss on debt extinguishment | 2,353 | | | 94 | | | | | |
Income before income taxes | $ | (11,854) | | | $ | (4,627) | | | | | | |
(1) Other includes corporate related items not allocated to reportable segments.
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Nine Month PeriodMonths Ended February 28,August 31, 2023
We also provide the following additional segment disclosures (in thousands):
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| August 31, 2023 | | August 31, 2022 | | | | | |
Depreciation and amortization: | | | | | | | | |
Cloud services segment | $ | 4,508 | | | $ | — | | | | | | |
Hosting segment | 3,199 | | | 1,115 | | | | | | |
HPC hosting segment | 126 | | | — | | | | | | |
Other (1) | 27 | | | 21 | | | | | | |
Total depreciation and amortization | $ | 7,860 | | | $ | 1,136 | | | | | | |
Capital expenditures: | | | | | | | | |
Cloud services segment | $ | 45,717 | | | $ | — | | | | | | |
Hosting segment | 18,298 | | | 33,097 | | | | | | |
HPC hosting segment | 11,644 | | | — | | | | | | |
Total capital expenditures | $ | 75,659 | | | $ | 33,097 | | | | | | |
(1) Other includes corporate related items not allocated to reportable segments.
Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands):
| | | | | | | | | | | |
| August 31, 2023 | | May 31, 2023 |
Cloud services segment | $ | 68,075 | | | $ | 3,127 | |
Hosting segment | 232,451 | | | 224,447 | |
HPC hosting segment | 23,449 | | | 10,949 | |
Total segment assets | 323,975 | | | 238,523 | |
Other (1) | 25,178 | | | 25,434 | |
Total assets | $ | 349,153 | | | $ | 263,957 | |
(1) Other includes corporate related items not allocated to reportable segments.
11. EARNINGS PER SHAREEarnings Per Share
Basic net income (loss) per share (“EPS”) of Common Stockcommon stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of Common Stockcommon stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue Common Stockcommon stock were exercised or converted into Common Stockcommon stock or resulted in the issuance of Common Stockcommon stock that then shared in the earnings of the entity.
Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted loss per share: | | Three Months Ended | | Nine Months Ended |
| | February 28, 2023 | | February 28, 2022 | | February 28, 2023 | | February 28, 2022 |
Net loss from continuing operations | | $ | (7,341) | | | $ | (2,397) | | | $ | (38,750) | | | $ | (17,843) | |
Net loss from discontinued operations, net of income taxes | | — | | | (4,048) | | | — | | | (2,870) | |
Net loss including noncontrolling interests | | (7,341) | | | (6,445) | | | (38,750) | | | (20,713) | |
Net loss attributable to noncontrolling interest | | (316) | | | — | | | (577) | | | — | |
Net loss attributable to Applied Digital Corporation | | $ | (7,025) | | | $ | (6,445) | | | $ | (38,173) | | | $ | (20,713) | |
| | | | | | | | |
Basic and diluted net (loss) gain per share: | | | | | | | | |
Continuing Operations | | $ | (0.08) | | | $ | (0.04) | | | $ | (0.41) | | | $ | (0.35) | |
Discontinued Operations | | $ | — | | | $ | (0.08) | | | $ | — | | | $ | (0.06) | |
Basic and diluted net loss per share | | $ | (0.08) | | | $ | (0.12) | | | $ | (0.41) | | | $ | (0.41) | |
Basic and diluted weighted average number of shares outstanding | | 94,119,944 | | | 53,396,920 | | | 93,545,687 | | | 50,546,048 | |
12. DISCONTINUED OPERATIONS
During February 2022, the Company implemented plans to cease all cryptomining operations and start the sale process of all cryptomining equipment. The Company ceased all crypto mining operations and completed the sale of the assets during the year ended May 31, 2022. The Company has no plans to return to crypto mining operations in the future as the Company grows. The results of these operations have been displayed as discontinued operations.Operating results of discontinued operations are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
in thousands | February 28, 2023 | | February 28, 2022 | | February 28, 2023 | | February 28, 2022 |
Cryptoasset mining revenue, net | $ | — | | | $ | 907 | | | $ | — | | | $ | 2,945 | |
Cost of sales | — | | | 628 | | | — | | | 1,589 | |
Gross profit | — | | | 279 | | | — | | | 1,356 | |
Impairment of cryptocurrency assets | — | | | (225) | | | — | | | (390) | |
Loss on the sale of fixed assets | $ | — | | | (578) | | | $ | — | | | (582) | |
Loss on the reclassification of fixed assets | | | (3,524) | | | | | (3,254) | |
Net loss from discontinued operations | $ | — | | | $ | (4,048) | | | $ | — | | | $ | (2,870) | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| August 31, 2023 | | August 31, 2022 | | | | |
Net loss | $ | (11,854) | | | $ | (4,659) | | | | | |
Net loss attributable to noncontrolling interest | (397) | | | (128) | | | | | |
Net loss attributable to Applied Digital Corporation | $ | (11,457) | | | $ | (4,531) | | | | | |
| | | | | | | |
Basic and diluted net (loss) gain per share: | | | | | | | |
Basic and diluted net loss per share | $ | (0.12) | | | $ | (0.05) | | | | | |
Basic and diluted weighted average number of shares outstanding | 100,521,673 | | | 93,105,835 | | | | | |
APPLIED DIGITAL CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the Three and Nine Month PeriodMonths Ended February 28,August 31, 2023
As of February 28, 2023 and May 31, 2022,12. Subsequent Events
B. Riley Loan
SAI borrowed an additional $5.0 million under the remaining capacity from the existing B. Riley Loan that the Company did not hold any cryptoassets.
13. SUBSEQUENT EVENTS
On March 30, 2023, the Company received funding for the Starion Ellendale Loan. The funding, net of issuance fees, totaled $19.8 million. See full discussion over Starion Ellendale Loanentered into in in Note 7 - Debt.May 2023.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
•
• labor and other workforce shortages and challenges;
•our dependence on principal customers;
•the addition or loss of significant customers or material changes to our relationships with these customers;
•our ability to timely and successfully build new hosting facilities with the appropriate contractual margins and efficiencies;
•our ability to continue to grow sales in our hosting business;
•concentration of customers in the crypto mining industry, which customer base may decline due to price volatility and uncertainties around regulation policy of cryptoasset prices; and
•equipment failures, power or other supply disruptions.
You should carefully review the risks described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended May 31, 2022,2023, which was filed on August 29, 2022,2, 2023, as well as any other cautionary language in this Quarterly Report on Form 10-Q, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.
Executive Overview
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.
Business Overview
We design, build,are a designer, builder, and operate Next-Gen datacenters which are designedoperator of next generation digital infrastructure providing cost-competitive solutions to provide massive computing power and support high-compute applications. Our first facility was constructedcustomers in Jamestown, North Dakota with 100 MegawattsHigh-Performance Compute (“MW”HPC”) of capacity. We signed an energy services agreement with a utility to power this facility. We provide energized space for customers to host computing equipment. Initially, these datacenters primarily hosted servers serving the Bitcoin network, but these facilities can also host hardware for other applications such as, artificial intelligence protein sequencing, drug discovery, machine learningcloud service (“Cloud services”), and additional blockchain networks and applications. During the quarter ended February 28, 2023, we have testeddatacenter hosting other high-compute applications at our first facility. On March 7, 2023, we announced the energizing of the 180 MW facility in Ellendale, ND. Once fully energized, this location will bring the Company to 280 MW of total hosting capacity across its facilities in North Dakota, all of which are contracted out to customers on multi-year terms. In addition to this facility, we have substantially completed construction on our facility in Garden City,
Texas. We have a colocation business model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a fixed fee. We typically enter into long-term fixed rate contracts with our customers.
(“Hosting”) industries.
Trends and Other Factors Affecting Our Business
Regulatory Environment
We have a material concentration of customers in the crypto mining industry. Our customers’ businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax. Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies. As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S. federal, state and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or
our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers’ conclusions. To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations. As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Network and the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets. Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry. For instance, on September 24, 2021, China imposed a ban on all crypto transactions and mining.
Ongoing and future regulatory actions could effectively prevent our customers’ mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete. Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significantcritical accounting policies and estimates are discussedidentified and described in Note 3 – Basis of Presentationour annual consolidated financial statements and Significant Accounting Policies, of the Notes to Consolidated Financial Statements of the Company'srelated notes included in our Annual Report, on Form 10-K for the fiscal year ended May 31, 2022 filed with the SEC on August 29, 2022.
Hosting Operation Highlights
Applied Digital’s first facility is in Jamestown, North Dakota with capacity of 100 MW. The entire 100 MW of capacity has been fully contracted on multi-year contracts with our customers, providing revenue visibility for
the Company. Additionally, the facility is powered through a five-year energy services agreement with a local utility.
The facility began energizing in late January 2022 and has over 90 MW online as of February 28, 2023. As previously reported in a Current Report on Form 8-K filed by the Company on July 18, 2022, there was an unexpected equipment failure at the substation powering the facility, resulting in a partial outage of approximately 50%. The power provider completed the required repairs in mid-August, fully restoring power capacity to Jamestown ahead of the schedule for early September. The Jamestown facility was not damaged and remains fully operational and capable of hosting the entire 100 MW of capacity. There have been no reductions or interruptions in servicematerial changes since that timethe filing of our Annual Report.
Business Update
Cloud Services
Our Cloud services business operates through our Sai Computing brand and February 28, 2023.provides cloud services applicable to artificial intelligence.
On July 12, 2022,In June 2023, the Company entered into a five-year hosting contract with Marathon Digital Holdings, Inc. ("Marathon")expanded its commitment for 270 MW of mining capacity. As a result of this arrangement,up to 26,000 GPUs for the Company's Cloud services business. During the three months ended August 31, 2023, the Company will supply Marathon with 90 MWreceived and deployed an initial production cluster of hosting capacity at its facility in Texas1,024 GPUs, and 180 MW of hosting capacity at its second facility in North Dakota. Marathon has subsequently added 39.6 MW of additional capacity at the Company’s Jamestown, North Dakota facility.began recognizing revenue on our first cloud services contract.
HPC Datacenter Hosting
Discontinued Operations
During the fourth quarter of our last fiscal year, the Company ceased all crypto mining operationsOur HPC datacenter business designs, builds, and completed the sale of all crypto mining equipment. The results of the crypto mining operationsoperates next-gen datacenters which are accounted for as discontinued operations in our unaudited condensed consolidated financial statements.
Expansion Opportunities
On November 24, 2021, we entered into a letter of intent to develop a facility in Texas using 200 MW of wind power. On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, Texas, with the intent to build our second datacenter facility on this site. On April 25, 2022 the Company began construction on this site. This facility is collocated with a wind farm and upon completion is expecteddesigned to provide 200 MW ofmassive computing power to hosting customers. The facility is substantially complete and the 200 MW capacity is fully contracted with customers.support high-compute applications within a cost-effective model.
On August 8, 2022, the Company completed the purchase of 40 acres of land in Ellendale, North Dakota, for a total cost of $1 million. The Company took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023. Once fully energized, this location will bring the Company to 280 MW of total hosting capacity across its facilities in North Dakota, all of which are contracted out to customers on multi-year terms.
As our hosting operations expand, we believe our business structure may become conducive to a real estate investment trust (“REIT”) structure, comparable to Digital Realty Trust (NYSE: DLR) and Equinix, Inc. (NASDAQ: EQIX), each of which is a traditional datacenter operator, and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry. We have begun to investigate the possibility, costs and benefits of converting to a REIT structure.
On October 13, 2022, the Company entered into a joint venture agreement with Foundry Technologies, Inc. (“Foundry”) to form SAI Computing, LLC (“SAI”). SAI will provide artificial intelligence and machine learning application customers with access to machines and a hosting environment. The Company is currently expanding capacity at the Jamestown, North Dakota datacenter facility to provide access to SAI and its customers. The Company has an 98% ownership interest in SAI and consolidates the entity.
On December 14, 2022, the Company began constructionprocess of its latest specialized processing center,constructing a 5 MW facility next to the Company’s currently operating 100-MWfacilities in Jamestown, North Dakota, and Ellendale, North Dakota.
Datacenter Hosting
Our datacenter hosting business provides infrastructure and colocation services to crypto mining customers.
As of August 31, 2023, the Company’s 106 MW facility in Jamestown, North Dakota. This separateDakota and unique building, designed180 MW facility in Ellendale, North Dakota were fully operational. The Company’s 200 MW facility in Garden City, Texas is expected to energize during the fourth quarter of calendar 2023. On September 8, 2023, the Company entered into a Facility Extension Agreement with Oncor Electricity Delivery Company LLC for the transmission and purpose-built for Graphics Processing Units (“GPUs”), will sit separate frommetering of power to the Company’s current buildingsGarden City facility. With this in place, metering and plans to host more traditional high performance computing (“HPC”) applications, such as natural language processing, machine learning,telemetry equipment will be installed onsite by Oncor and additional HPC developments.once installed, the site will be energized.
Changes to Equity
On April 12, 2022, the Company effected a one-for-six (1:6) reverse split (the “Reverse Stock Split”) of shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). All references to Common Stock, options to purchase Common Stock, restricted stock units, share data, per share data and related information contained in the unaudited condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares of the Company’s Common Stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share. On January 14, 2022, the Company granted restricted stock awards to directors and officers and restricted stock units to certain consultants. Each of these awards and units contained a vesting condition of an effective registration statement covering the resale of the Common Stock underlying these awards. On October 11, 2022, the Securities and Exchange Commission declared the Company’s registration statement covering these awards to be effective. In conjunction with this registration statement being declared effective, awards for approximately 1.1 million shares of Common Stock vested.
Results of Operations
Comparative Results for the Three and Nine Months Ended February 28,August 31, 2023 and 2022:
The following table sets forth key components of the results of operations (in thousands) of Applied Digital during the three and nine months ended February 28,August 31, 2023 and 2022.
| | | Three Months Ended | | | Nine Months Ended | | Three Months Ended | |
| | February 28, 2023 | | February 28, 2022 | | | February 28, 2023 | | February 28, 2022 | | August 31, 2023 | | August 31, 2022 | |
Revenues: | | | | | | |
Revenues | | Revenues | | | | |
Hosting revenue | Hosting revenue | | $ | 14,090 | | | $ | 1,026 | | | | $ | 33,354 | | | $ | 1,026 | | Hosting revenue | $ | 29,987 | | | $ | 4,338 | | |
| Cloud services revenue | | Cloud services revenue | 2,152 | | | — | | |
Related party hosting revenue | | Related party hosting revenue | 4,184 | | | 2,586 | | |
Total revenue | | Total revenue | 36,323 | | | 6,924 | | |
Costs and expenses: | | Costs and expenses: | | |
Cost of revenues | Cost of revenues | | $ | 10,533 | | | $ | 2,073 | | | | $ | 28,438 | | | $ | 2,073 | | Cost of revenues | 24,398 | | | 6,093 | | |
Gross profit | | 3,557 | | | (1,047) | | | | 4,916 | | | (1,047) | | |
| Costs and expenses: | | | | |
Selling, general and administrative | Selling, general and administrative | | $ | 10,514 | | | $ | 1,370 | | | | $ | 42,727 | | | $ | 15,585 | | Selling, general and administrative | 17,052 | | | 5,008 | | |
| Total costs and expenses | Total costs and expenses | | $ | 10,514 | | | $ | 1,370 | | | | $ | 42,727 | | | $ | 15,585 | | Total costs and expenses | 41,450 | | | 11,101 | | |
Operating loss | Operating loss | | $ | (6,957) | | | $ | (2,417) | | | | $ | (37,811) | | | $ | (16,632) | | Operating loss | (5,127) | | | (4,177) | | |
| Other income (expense): | | | | |
Interest Expense | | $ | (384) | | | $ | — | | | | $ | (1,125) | | | $ | — | | |
Gain on extinguishment of accounts payable | | — | | | 80 | | | | — | | | 405 | | |
Interest expense, net | | Interest expense, net | 2,074 | | | 356 | | |
Loss on extinguishment of debt | Loss on extinguishment of debt | | — | | | — | | | | (94) | | | (1,342) | | Loss on extinguishment of debt | 2,353 | | | 94 | | |
Total other expense, net | | (384) | | | 80 | | | | (1,219) | | | (937) | | |
Net loss from continuing operations before income tax expenses | | (7,341) | | | (2,337) | | | | (39,030) | | | (17,569) | | |
Income tax benefit (expense) | | — | | | (60) | | | | 280 | | | (274) | | |
Net loss from continuing operations | | (7,341) | | | (2,397) | | | | (38,750) | | | (17,843) | | |
Net loss from discontinued operations, net of income taxes | | — | | | (4,048) | | | | — | | | (2,870) | | |
Net loss including noncontrolling interests | | (7,341) | | | (6,445) | | | | (38,750) | | | (20,713) | | |
Loss from legal settlement | | Loss from legal settlement | 2,300 | | | — | | |
Net loss before income taxes | | Net loss before income taxes | (11,854) | | | (4,627) | | |
Income tax expenses | | Income tax expenses | — | | | 32 | | |
Net loss | | Net loss | (11,854) | | | (4,659) | | |
Net loss attributable to noncontrolling interest | Net loss attributable to noncontrolling interest | | (316) | | | — | | | | (577) | | | — | | Net loss attributable to noncontrolling interest | (397) | | | (128) | | |
Net loss attributable to Applied Digital Corporation | Net loss attributable to Applied Digital Corporation | | $ | (7,025) | | | $ | (6,445) | | | | $ | (38,173) | | | $ | (20,713) | | Net loss attributable to Applied Digital Corporation | $ | (11,457) | | | $ | (4,531) | | |
| Basic and diluted net (loss) gain per share: | Basic and diluted net (loss) gain per share: | | | | Basic and diluted net (loss) gain per share: | | |
Continuing Operations | | $ | (0.08) | | | $ | (0.04) | | | | $ | (0.41) | | | $ | (0.35) | | |
Discontinued Operations | | $ | — | | | $ | (0.08) | | | | $ | — | | | $ | (0.06) | | |
Basic and diluted net loss per share | Basic and diluted net loss per share | | $ | (0.08) | | | $ | (0.12) | | | | $ | (0.41) | | | $ | (0.41) | | Basic and diluted net loss per share | $ | (0.12) | | | $ | (0.05) | | |
Basic and diluted weighted average number of shares outstanding | Basic and diluted weighted average number of shares outstanding | | 94,119,944 | | | 53,396,920 | | | | 93,545,687 | | | 50,546,048 | | Basic and diluted weighted average number of shares outstanding | 100,521,673 | | 93,105,835 | |
| Adjusted Amounts (a) | Adjusted Amounts (a) | | | | Adjusted Amounts (a) | | |
Adjusted Operating Loss from Continuing Operations | | (1,017) | | | (2,064) | | | | (7,613) | | | (2,289) | | |
Adjusted Operating Margin from Continuing Operations | | (7) | % | | (201) | % | | | (23) | % | | (223) | % | |
Adjusted Net Loss from Continuing Operations | | (1,401) | | | (2,044) | | | | (8,552) | | | (3,500) | | |
Adjusted Operating Loss | | Adjusted Operating Loss | 1,759 | | | (2,990) | | |
Adjusted Operating Margin | | Adjusted Operating Margin | 5 | % | | (42) | % | |
Adjusted Net Income (Loss) | | Adjusted Net Income (Loss) | 82 | | | (3,378) | | |
Basic and diluted net loss per share | | Basic and diluted net loss per share | $ | — | | | $ | (0.03) | | |
Other Financial Data (a) | Other Financial Data (a) | | | | Other Financial Data (a) | | |
EBITDA | EBITDA | | (5,030) | | | (2,092) | | | | (33,274) | | | (17,324) | | EBITDA | (1,523) | | | (3,135) | | |
as a percentage of revenues | as a percentage of revenues | | (36) | % | | (204) | % | | | (100) | % | | (1688) | % | as a percentage of revenues | (4) | % | | (45) | % | |
Adjusted EBITDA | Adjusted EBITDA | | 910 | | | (1,739) | | | | (3,076) | | | (2,981) | | Adjusted EBITDA | 10,016 | | | (1,854) | | |
as a percentage of revenues | as a percentage of revenues | | 6 | % | | (169) | % | | | (9) | % | | (291) | % | as a percentage of revenues | 28 | % | | (27) | % | |
Adjusted Gross Profit | | 4,435 | | | (987) | | | | 7,611 | | | (987) | | |
as a percentage of revenues | | 31 | % | | (96) | % | | | 23 | % | | (96) | % | |
| |
(a)
(a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A.
Commentary on Results of Operations Comparative Results for the three monthsThree Months Ended February 28,August 31, 2023 compared to the three months ended February 28,Three Months Ended August 31, 2022
RevenuesRevenue
Hosting revenuesTotal revenue increased by $13.1$29.4 million, or 1273%425%, from $1.0$6.9 million for the three months ended February 28,August 31, 2022 to $14.1$36.3 million for the three months ended February 28,August 31, 2023. The increase in hosting revenuesrevenue was driven by a fullan increase in online
capacity from the Ellendale, North Dakota facility being operational, and revenue from the Company’s first cloud services contract, which started during the three months of operation at our first hosting facility in Jamestown, North Dakota.
ended August 31, 2023.
Cost of Revenuesrevenues
Cost of revenues increased by $8.4$18.3 million, or 407%300%, from $2.1$6.1 million for the three months ended February 28,August 31, 2022 to $10.5$24.4 million for the three months ended February 28,August 31, 2023. The increase in cost of revenues was primarily driven by driven by a full three months of operation at our first hosting facility in Jamestown, North Dakota. The primary drivers of the change to cost of revenues for the three months ended February 28,August 31, 2023 were:
•approximately $0.8 million increase in depreciation and amortization expense directly attributable to the property and equipment at the Jamestown, North Dakota hosting facility;
•approximately $6.7$12.8 million increase in energy costs used to generate our hosting revenues; andrevenue;
•approximately $0.9$3.9 million increase in depreciation and amortization expense attributable to owned and leased assets directly supporting revenue;
•approximately $1.2 million increase in personnel expenses for employees directly working at the Jamestown, North Dakotaattributable to generating hosting facility.revenue; and
•approximately $0.4 million increase in other expenses directly attributable to generating hosting revenue.
Operating Expenses
Selling, general and administrative expenses increased by $9.3$12.1 million, or 782%241%, from $1.2$5.0 million for the three months ended February 28,August 31, 2022 to $10.5$17.1 million for the three months ended February 28,August 31, 2023. The primary drivers of the change toincrease in selling, general and administrative expense for the three months ended February 28,August 31, 2023 were:
•approximately $0.8$1.8 million increase in employee salaries and benefits expense not directly attributable to revenues;
•approximately $0.3$0.2 million increase in professional service expenses incurred to support the growth of the business;
•approximately $4.5 million increase in stock-based compensation expense;
•approximately $1.0$2.8 million increase in depreciation and amortization expense not directly attributable to the Jamestown, North Dakota hosting facility;owned and leased assets directly supporting revenue;
•approximately $2.7$2.2 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses, which is directly related to the growth of the Company.expenses; and
•approximately $5.1 million increase in stock based compensation expense. The increase was driven by an increase in awards to be expensed between the periods.
Other Expense
Interest expense increased $0.4$1.7 million, or 100% 483%, from zero for the three months ended February 28, 2022 to $0.4 million for the three months ended February 28,August 31, 2022 to $2.1 million for the three months ended August 31, 2023. The increase was driven by the increase in finance leases and change in the Company’s debt obligationsinterest-bearing loans between periods.
Loss on extinguishment of debt increased $2.3 million, or 2403%, from $0.1 million for the three months ended February 28,August 31, 2022 andto $2.4 million for the three months ended February 28,August 31, 2023.The increase was driven by the termination fees to extinguish the B. Riley loan during the three the three months ended August 31, 2023.
Loss from legal settlement was $2.3 million for the three months ended August 31, 2023 due to a settlement agreement entered into by the Company in respect to employment-related claims by a former executive. The terms of the settlement include payment to the claimant of $2.3 million, which was zero for both periods.
included in accrued liabilities on the condensed consolidated balance sheets as of August 31, 2023.
Income tax benefit
The income tax benefitexpense decreased $0.1 million$32 thousand, or 100%, from a $0.1 million$32 thousand expense for the three months ended February 28,August 31, 2022 to a zero for the three months ended February 28,August 31, 2023. This change was driven by a change in valuation allowance for the three months ended February 28,August 31, 2023 compared to the three months ended February 28,August 31, 2022.
Loss from Discontinued Operations
Commentary on Segments Revenue
Loss from discontinued operations decreased $4.0The following table sets forth segment revenue (excluding HPC as that segment has no revenue) (in thousands) during the three months ended August 31, 2023 and 2022:
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| August 31, 2023 | | August 31, 2022 | | | | | |
Cloud services segment | $ | 2,152 | | | $ | — | | | | | | |
Hosting segment | 34,171 | | | 6,924 | | | | | | |
| | | | | | | | |
Total revenue | $ | 36,323 | | | $ | 6,924 | | | | | | |
Cloud Services Revenue
Cloud services revenue increased $2.2 million, or 100%, from $4.0zero for the three months ended August 31, 2022 to $2.2 million for the three months ended February 28,August 31, 2023. The increase is due the Company beginning to provide services within the Cloud services segment during three months ended August 31, 2023.
Hosting Revenue
Hosting revenue increased $27.2 million, or 394%, from $6.9 million for the three months ended August 31, 2022 to $34.2 million for the three months ended August 31, 2023. The increase is due to the full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota facilities during the three months ended August 31, 2023, compared to the Company providing limited capacity at only the Jamestown, North Dakota facility during the three months ended August 31, 2022.
Commentary on Segments Operating Profit and Loss
The following table sets forth the Company’s operating profit for each of our segments for the three months ended August 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| August 31, 2023 | | August 31, 2022 | | | | | |
Segment Operating (Loss) Profit: | | | | | | | | |
Cloud services segment | $ | (7,434) | | | $ | — | | | | | | |
Hosting segment | 8,958 | | | (658) | | | | | | |
HPC hosting segment | (730) | | | — | | | | | | |
Total segment profit | 794 | | | (658) | | | | | | |
Cloud Services Operating Loss
Cloud services operating loss increased $7.4 million, or 100% from zero for the three months ended February 28, 2023. The change was dueAugust 31, 2022 to the fact that the Company no longer generates revenues from mining operations.
Commentary on Results of Operations Comparative Results for the nine months Ended February 28, 2023 compared to the nine months ended February 28, 2022
Revenues
Hosting revenues increased by $32.3 million, or 3150%, from $1.0$7.4 million for the ninethree months ended February 28, 2022 to $33.4 million forAugust 31, 2023 as the nineCompany began providing cloud services during the first quarter of fiscal year 2024. The change from the three months ended February 28, 2023. The increase in hosting revenues wasAugust 31, 2022 is driven by a full nine months ofthe segment expanding operations at our first hosting facility in Jamestown, North Dakota.
Cost of Revenues
Cost of revenues increased by $26.3 million, or 1270%, from $2.1 million forduring the nine months ended February 28, 2022 to $28.4 million for the nine months ended February 28, 2023.current period. The increase in cost of revenues wasoperating loss is primary driven by a full nine months of operations at our first hosting facility in Jamestown, North Dakota. The primary drivers of the change to cost of revenues for the nine months ended February 28, 2023 were:
•approximately $2.5 million increase in depreciation and amortization expense on finance leases on computing equipment, stock-based compensation expense attributable to the propertysegment, and equipment at the segment only generating revenue for part of the period.
Hosting Operating Profit
Hosting operating profit increased $9.7 million, or 1,462% from a loss of $0.7 million for the three months ended August 31, 2022 to a profit of $9.0 million for the three months ended August 31, 2023. The change is driven by full energization of the Company’s Ellendale, North Dakota and Jamestown, North Dakota hosting facility;
•approximately $21.9 million increase in energy costs usedfacilities during the three months ended August 31, 2023, relative to generate the hosting revenues; and
•approximately $1.9 million increase in personnel expenses for employees directly workingoperations only at the Company’s Jamestown North Dakota hosting facility.
Operating Expenses
Selling, general and administrative expenses increased by $27.1 million, or 174%, from $15.6 million forfacility during the ninethe three months ended February 28,August 31, 2022 to $42.7 millionand the Jamestown facility operating at less than full capacity for the nine months ended February 28, 2023. The primary driversa portion of the change to selling, general and administrative expense for the nine months ended February 28, 2023 were:
•approximately $2.9 million increase in employee salaries and benefits expense not directly attributable to revenues;
•approximately $2.4 million increase in professional service expenses incurred to support the growth of the business;
•approximately $14.5 million increase in of stock-based compensation expense;
•approximately $1.9 million increase in depreciation and amortization expense not directly attributable to the Jamestown, North Dakota hosting facility; andcomparative period.
•approximately $5.4 million increase in other selling, general, and administrative expenses such as insurance premiums and computer and software expenses, which is directly related to the growth of the Company.HPC Hosting Operating Loss
Other Expense
Interest expenseHigh performance compute hosting operating loss increased $1.1$0.7 million, or 100% , from zero for the nine months ended February 28, 2022 to $1.1$0.7 million for the nine months ended February 28, 2023. The change is driven by the increase in finance leases and change in the Company’s debt obligations between periods.
Loss on extinguishment of debt decreased $1.2 million, or 93%, from $1.3 million for the nine months ended February 28, 2022 to $0.1 million for the nine months ended February 28, 2023. This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the nine months ended February 28, 2022, compared to a smaller extinguishment of term debt that was recognized in the nine months ended February 28, 2023.
Income tax benefit (expense)
Income tax benefit increased $0.6 million or 202% from a $0.3 million expense for the nine months ended February 28, 2022 to approximately $0.3 million benefit for the nine months ended February 28, 2023. This change was driven by a change in valuation allowance for the nine months ended February 28, 2023 compared to the nine months ended February 28, 2022.
Loss from Discontinued Operations
Loss from discontinued operations decreased $2.9 million, or 100%, from $2.9 million for the nine months ended February 28, 2022 to zero for the nine months ended February 28, 2023. The change was due to the fact thatCompany launching the Company no longer generates revenues from mining operations.segment during the current period. The loss is largely comprised of stock-based compensation expense, payroll, and amortization expense related to finance leases in the HPC hosting buildout.
Non-GAAP Measures
Adjusted Operating Loss and Adjusted Net Loss
“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represents operating loss and net loss, respectively, from continuing operations excluding stock-based compensation and nonrecurring expenses. We believe these are useful metrics as they provide additional information regarding factors and trends affecting our business and provide perspective on results absent one-time or significant non-cash items. However, Applied Digital’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Applied Digital’s computation of Adjusted Operating Loss and Adjusted Net Loss may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Operating Loss and Adjusted Net Loss in the same fashion.
Because of these limitations, Adjusted Operating Loss and Adjusted Net Loss should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Digital compensates for these limitations by relying primarily on its GAAP results and using Adjusted Operating Loss and Adjusted Net Loss on a supplemental basis. You should review the reconciliation of operating loss to Adjusted Operating Loss and net loss to Adjusted Net Loss above and not rely on any single financial measure to evaluate Applied Digital’s business.
EBITDA and Adjusted EBITDA
“EBITDA” is defined as earnings before interest, taxes, and depreciation and amortization. “Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, and one-time professional service costs, not directly related to the Company’s offering and therefore not deferred under the guidance in ASC 340 and SAB Topic 5A.other nonrecurring costs. These costs have been adjusted as they are not indicative of business operations. Adjusted EBITDA is intended as a
supplemental measure of Applied Digital’s performance that is neither required by, nor presented in accordance with, GAAP. Applied Digital believes that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. We also believe EBITDA and Adjusted EBITDA are useful metrics to investors because they provide additional information regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of their importance as measures of underlying operating performance, as the primary compensation performance measure under certain programs and plans. However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Digital may incur future expenses similar to those excluded when calculating these measures. In addition, Applied Digital’s presentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Applied Digital’s computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Digital compensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA above and not rely on any single financial measure to evaluate Applied Digital’s business.
Adjusted Gross Profit
“Adjusted Gross Profit” is a non-GAAP measure that represents gross profit adjusted for depreciation expense within cost of revenues. We believe this is a useful metric as it provides additional information regarding gross profit aside from significant non-cash expense in depreciation. However, Applied Digital’s presentation of this measure should not be construed as an inference that its future results will be unaffected by other factors within cost of revenues. Applied Digital’s computation of Adjusted Gross Profit may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted Gross Profit in the same fashion.
Because of these limitations, Adjusted Gross Profit should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. Applied Digital compensates for these limitations by relying primarily on its GAAP results and using Adjusted Gross Profit on a supplemental basis. You should review the reconciliation of gross profit to Adjusted Gross Profit above and not rely on any single financial measure to evaluate Applied Digital’s business.
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Reconciliation of GAAP to Non-GAAP Measures |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
$ in thousands | February 28, 2023 | | February 28, 2022 | | February 28, 2023 | | February 28, 2022 |
Adjusted operating loss | | | | | | | |
Operating Loss from Continuing Operations (GAAP) | $ | (6,957) | | | $ | (2,417) | | | $ | (37,811) | | | $ | (16,632) | |
Add: Stock-based compensation | 4,481 | | | — | | | 26,879 | | | 12,337 | |
Add: Gain on Extinguishment of Accounts Payable | — | | | (80) | | | — | | | (405) | |
Add: Loss on Extinguishment of Debt | — | | | — | | | 94 | | | 1,342 | |
Add: Non-recurring professional service costs | 365 | | | 433 | | | 1,437 | | | 1,069 | |
Add: One-time electricity charges | — | | | — | | | 114 | | | — | |
Add: Other non-recurring expenses | 1,094 | | | — | | | 1,675 | | | — | |
Adjusted Operating Loss from Continuing Operations (Non-GAAP) | $ | (1,017) | | | $ | (2,064) | | | $ | (7,613) | | | $ | (2,289) | |
Adjusted operating margin from Continuing Operations | (7.2) | % | | (201.2) | % | | (22.8) | % | | (223.1) | % |
| | | | | | | |
Adjusted net income (loss) | | | | | | | |
Net Loss from Continuing Operations (GAAP) | $ | (7,341) | | | $ | (2,397) | | | $ | (38,750) | | | $ | (17,843) | |
Add: Stock-based compensation | 4,481 | | | — | | | 26,879 | | | 12,337 | |
Add: Gain on Extinguishment of Accounts Payable | — | | | (80) | | | — | | | (405) | |
Add: Loss on Extinguishment of Debt | — | | | — | | | 94 | | | 1,342 | |
Add: Non-recurring professional service costs | 365 | | | 433 | | | 1,437 | | | 1,069 | |
Add: One-time electricity charges | — | | | — | | | 114 | | | — | |
Add: Other non-recurring expenses | 1,094 | | | — | | | 1,675 | | | — | |
Adjusted net loss from Continuing Operations (Non-GAAP) | $ | (1,401) | | | $ | (2,044) | | | $ | (8,552) | | | $ | (3,500) | |
| | | | | | | |
EBITDA and Adjusted EBITDA | | | | | | | |
Net Loss from Continuing Operations (GAAP) | $ | (7,341) | | | $ | (2,397) | | | $ | (38,750) | | | $ | (17,843) | |
Add: Interest Expense | 384 | | | — | | | 1,125 | | | — | |
Add: Income Tax Benefit (Expense) | — | | | 60 | | | (280) | | | 274 | |
Add: Depreciation and Amortization | 1,927 | | | 245 | | | 4,631 | | | 245 | |
EBITDA (Non-GAAP) | $ | (5,030) | | | $ | (2,092) | | | $ | (33,274) | | | $ | (17,324) | |
Add: Stock-based compensation | 4,481 | | | — | | | 26,879 | | | 12,337 | |
Add: Gain on Extinguishment of Accounts Payable | — | | | (80) | | | — | | | (405) | |
Add: Loss on Extinguishment of Debt | — | | | — | | | 94 | | | 1,342 | |
Add: Non-recurring professional service costs | 365 | | | 433 | | | 1,437 | | | 1,069 | |
Add: One-time electricity charges | — | | | — | | | 114 | | | — | |
Add: Other non-recurring expenses | 1,094 | | | — | | | 1,675 | | | — | |
Adjusted EBITDA (Non-GAAP) | $ | 910 | | | $ | (1,739) | | | $ | (3,076) | | | $ | (2,981) | |
| | | | | | | |
Adjusted Gross Profit | | | | | | | |
Gross profit (GAAP) | $ | 3,557 | | | $ | (1,047) | | | $ | 4,916 | | | $ | (1,047) | |
Add: Depreciation and amortization in cost of revenues | 878 | | | 60 | | | 2,581 | | | 60 | |
Add: One-time electricity charges | — | | | — | | | 114 | | | — | |
Adjusted Gross Profit (Non-GAAP) | $ | 4,435 | | | $ | (987) | | | $ | 7,611 | | | $ | (987) | |
Reconciliation of GAAP to Non-GAAP Measures
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
$ in thousands | August 31, 2023 | | August 31, 2022 | | | | |
Adjusted operating loss | | | | | | | |
Operating loss (GAAP) | $ | (5,127) | | | $ | (4,177) | | | | | |
Stock-based compensation | 5,641 | | | 579 | | | | | |
Non-recurring professional service costs | 592 | | | 408 | | | | | |
| | | | | | | |
Other non-recurring expenses | 653 | | | 200 | | | | | |
Adjusted operating income (loss) (Non-GAAP) | $ | 1,759 | | | $ | (2,990) | | | | | |
Adjusted operating margin | 4.8 | % | | (43.2) | % | | | | |
| | | | | | | |
Adjusted net income (loss) | | | | | | | |
Net loss attributable to Applied Digital Corporation (GAAP) | $ | (11,457) | | | $ | (4,531) | | | | | |
Stock-based compensation | 5,641 | | | 579 | | | | | |
Loss on extinguishment of debt | 2,353 | | | 94 | | | | | |
Loss from legal settlement | 2,300 | | | — | | | | | |
Non-recurring professional service costs | 592 | | | 408 | | | | | |
| | | | | | | |
Other non-recurring expenses | 653 | | | 200 | | | | | |
Adjusted net income (loss) (Non-GAAP) | $ | 82 | | | $ | (3,250) | | | | | |
Adjusted net income (loss) per share (Non-GAAP) | $ | — | | | $ | (0.03) | | | | | |
| | | | | | | |
EBITDA and Adjusted EBITDA | | | | | | | |
Net loss attributable to Applied Digital Corporation (GAAP) | $ | (11,457) | | | $ | (4,531) | | | | | |
Interest expense | 2,074 | | | 356 | | | | | |
Income tax benefit (expense) | — | | | 32 | | | | | |
Depreciation and amortization | 7,860 | | | 1,136 | | | | | |
EBITDA (Non-GAAP) | $ | (1,523) | | | $ | (3,007) | | | | | |
Stock-based compensation | 5,641 | | | 579 | | | | | |
Loss on extinguishment of debt | 2,353 | | | 94 | | | | | |
Loss from legal settlement | 2,300 | | | — | | | | | |
Non-recurring professional service costs | 592 | | | 408 | | | | | |
| | | | | | | |
Other non-recurring expenses | 653 | | | 200 | | | | | |
Adjusted EBITDA (Non-GAAP) | $ | 10,016 | | | $ | (1,726) | | | | | |
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Sources of Liquidity
As of August 31, 2023, the Company had approximate cash and cash equivalents of $5.9 million and negative working capital of $118.1 million. Historically the Company has incurred losses and has relied on equity and debt financings to fund its operations. Based on an analysis of cash flows, current net working capital, and expected operations revenue, the Company believes its current cash on hand is sufficient to meet its operating and capital requirement for at least next twelve months from the date these financial statements are issued. We have primarily generated cash in the last 12 months from the proceeds of our term loans, proceeds from our initial public offering,issuance of common stock, and the receipt of contractual deposits and revenue prepaymentspayments from hosting customers. On April 18, 2022, we received approximately $36 million in net proceeds from the issuance of 8 million shares of Common Stock in conjunction with the closing of our initial public offering. On July 25, 2022, the Company entered into the Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Term Loan. A portion of the proceeds were used to pay down the Vantage term loan that was entered into on March 11, 2022.
The remaining proceeds of the term loan will be used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota.
On November 7, 2022, the Company entered into the Vantage Garden City Loan Agreement. As of February 28, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement. The proceeds of the Vantage Garden City Loan will be used for the costs and expenses of a building at the Garden City Facility.
See Note 76 - Debt to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on the Starion Term Loan and Vantage Garden City Loan.
our term loans.
On February 16,June 27, 2023, the Company entered into a Starion Ellendale Loan Agreementbegan issuing and selling common stock under an "at the market" sales agreement, with Starion Bank. This agreement provides for a term loanCraig-Hallum Capital, pursuant to which the Company may sell up to $125 million in the principal amountshares of $20,000,000 with a maturity datecommon stock. As of February 3, 2028. The loan provides for an interest rate of 7.48% per annum. The proceeds of the loan will be used to fund expansion on the Ellendale Facility. On March 30,August 31, 2023, the Company has sold approximately 7.9 million shares. Net proceeds, less commission and legal fees of approximately $2.2 million, were approximately $64.5 million. The Company received funding for the Starion Ellendale Loan. The funding, netan additional $2.7 million in proceeds subsequent to August 31, 2023.
During the three and nine months ended February 28,August 31, 2023, we received $32.3$39.5 million and $77.0 million, respectively, in payments for future hosting services. During
On September 13, 2023, Sai Computing borrowed an additional $5.0 million under the fiscal year endedremaining capacity from the existing B. Riley Loan that the Company entered into in May 31, 2022, we generated revenue2023.
The Company has also received prepayments from crypto mining and co-hosting, but we have incurred net losses from operations. During the three and nine months ended February 28, 2023, we have generated revenue from co-hosting, but have incurred net losses from operations. As of February 28, 2023 and May 31, 2022, we had cash of $22.9new cloud services customers totaling $9.6 million and $46.3 million, respectively, and an accumulated deficit of $94.2 million and $56.1 million, respectively.
for future services.
Funding Requirements
We have experienced net losses through the periodsperiod ended February 28,August 31, 2023. Our transition to profitability is dependent on the successful operation of our co-hosting facilities. We believe that amounts we received from proceeds from our term loans, proceeds from our initial public offering,stock offerings, and revenue payments we have begun to achieve inreceived from our co-hostinghosting operations since our first co-hosting facility was brought online in February 2022, after planned expenditures with respect to the items described in the section titled “Expansion Opportunities” above, will be sufficient to meet our working capital needs for at least the next 12 months and all of the Company’s known requirements and plans for cash. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company. We believe that the significant investments in property and equipment will begin to decreaseremain throughout during calendar 2023 as we completecontinue construction of additional capacity.our HPC facilities and acquire assets to support our cloud services business. We also expect that our revenues will increase as we continue to bring online additional capacity at our Jamestown, North Dakota, Garden City, Texas location and Ellendale, North Dakota locations.within our cloud services contracts.
Summary of Cash Flows
The following table provides information about Applied Digital’s net cash flow (in thousands) for the ninethree months ended February 28, 2023.August 31, 2023 and August 31, 2022, respectively.
| | | Nine Months Ended | | Three Months Ended |
$ in thousands | $ in thousands | February 28, 2023 | | February 28, 2022 | $ in thousands | August 31, 2023 | | August 31, 2022 |
| Net cash provided by operating activities | Net cash provided by operating activities | $ | 54,144 | | | $ | 4,228 | | Net cash provided by operating activities | $ | 4,517 | | | $ | 17,294 | |
Net cash used in investing activities | Net cash used in investing activities | (96,314) | | (35,588) | | Net cash used in investing activities | (40,541) | | (31,673) | |
Net cash provided by financing activities | Net cash provided by financing activities | 18,792 | | 31,571 | Net cash provided by financing activities | 23,663 | | 8,910 |
Net change in cash and cash equivalents | (23,378) | | $ | 211 | | |
Cash and cash equivalents at beginning of year | 46,299 | | | $ | 11,750 | | |
Cash and cash equivalents at end of period | $ | 22,921 | | | $ | 11,961 | | |
Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | (12,361) | | (5,469) | |
Cash, cash equivalents, and restricted cash at beginning of year | | Cash, cash equivalents, and restricted cash at beginning of year | 43,574 | | | 46,299 | |
Cash, cash equivalents, and restricted cash at end of period | | Cash, cash equivalents, and restricted cash at end of period | $ | 31,213 | | | $ | 40,830 | |
Commentary on the change in cash flows forbetween the nine monthsThree Months Ended February 28,August 31, 2023
and Three Months Ended August 31, 2022
Operating Activities
The net cash provided by operating activities of $54.1decreased by $12.8 million, or 74%, from $17.3 million for the ninethree months ended February 28, 2023 consisted primarily ofAugust 31, 2022 to $4.5 million for the following:
• $26.9 million non-cash adjustmentthree months ended August 31, 2023. The primary reason for stock-based compensation expense;
• $26.8 million increasethe change was decrease in customer deposits duerevenue prepayments received relative to the Company executing new contractsrevenue earned during the period; and
• $43.7 million increase in deferred revenue due to prepayments due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.
The above factors were partially offset by the $38.8 million loss from continuing operations
three months ended August 31, 2023.
Investing Activities
The net cash used in investing activities of $96.3increased by $8.9 million, or 28%, from $31.7 million for the ninethree months ended February 28, 2023August 31, 2022 to $40.5 million for the three months ended August 31, 2023. The primary reason for the change was driven by the increase of purchases of property andfinance lease prepayments made for leases on hosting equipment related to the construction ofsupport the Company’s Garden City, Texas and Ellendale, North Dakota facilities.
cloud services business during the three months ended August 31, 2023.
Financing Activities
The net cash provided by financing activities of $18.8increased by $14.8 million, or 166%, from $8.9 million for the ninethree months ended February 28, 2023 was primarily driven by:
•$25.6August 31, 2022 to $23.7 million in proceeds fromfor the Starion Term Loan andthree months ended August 31, 2023. The primary reason for the Vantage Garden City Loan; and
•$4.1 million in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.
These above factors were partially offset by the extinguishment of the Vantage term loan totaling $7.1 million.
change
Commentary on cash flows for the nine months Ended February 28, 2022
Operating Activities
Thewas receipt of net cash provided by operating activities of $4.2 million for the nine months ended February 28, 2022 consisted primarily of:
•$12.3 million non-cash expense adjustment for stock-based compensation expense;
•$1.3 million non-cash adjustment for loss on the extinguishment of debt;
•$4.5 million increase in accounts payable and accrued liabilities due to the timing of payments;
•$2.1 million increase in customer deposits; and
•$2.9 million increase in deferred revenue.
These above factors were partially offset by:
•$2.1 million increase to prepaid expense and other current assets due to the timing of payments; and
•$17.8 million in loss from continuing operations
Investing Activities
The net cash used in investing activities of $35.6 million for the nine months ended February 28, 2022 consisted of:
•$28.2 million in purchases of property and equipment related to the construction of the Company’s Jamestown, ND facility; and
•$7.4 million in purchases of equipment related to the Company’s discontinued operations.
Financing Activities
The net cash provided by financing activities of $31.6 million for the nine months ended February 28, 2022 represents proceeds from the issuance of preferredCompany’s common stock $34.5 million,offering the three months ended August 31, 2023 which was partially offset by issuance costs of $2.9 million.
an increase in term lease payments during the three months ended August 31, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, and as a result of the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of February 28,August 31, 2023, our disclosure controls and procedures were not effective at the reasonable assurance level.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.
In connection with our initial public offering, weWe have identified the following material weaknesses in the design of our internal controls, which could adversely affect:controls:
•Our abilityWe have not designed and implemented controls to ensure we can record, process, summarize, and report financial data.
•We have not yet designed and implemented user access controls to ensure appropriate segregation of duties that would adequately restrict user and privileged access to the financially relevant systems and data to appropriate personnel.
•We did not design and maintain effective controls associated with related party transactions and disclosures. Controls in place were not designed or implemented at a sufficient level of precision or rigor to effectively identify related party relationships and disclose their related transactions in our financial statements.
•We also do not have a properly designed internal control system that identifies critical processes and key controls.
In order to remediate these material weaknesses, we are taking the following steps, among others:
1.continued hiring of additional qualified accounting and financial reporting personnel to support division of responsibilities;
2.improving and updating our systems;
3.developing IT general controls to manage access and program changes across our key systems and the execution of improvements to application controls within our systems; and
4.implementing processes and controls to better identify and manage segregation of duties.
We will not be able to fully remediate the material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting, other than the remediation steps described above that are in process, that occurred during the three months ended February 28,August 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
None.The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's Chief Financial Officer, have been named as a defendants in a class action lawsuit that was filed in August 2023 in the Northern District of Texas (McConnell v. Applied Digital Corporation et al., Case No. 3:23-cv-1805). The case is in an early stage and the class has not yet been certified. The Company has not yet responded to the complaint. At this time, the Company is unable to estimate potential losses, if any, related to this action. While it is not possible to predict the outcome of these matters with certainty, we do not expect the results of this action to have a material adverse effect on our results of operations or financial position. However, this matter is subject to uncertainties, and we could incur judgments or enter into settlements of claims that could adversely affect our financial position, results of operations or cash flows.
Item 1A. Risk Factors
The followingA description of the risk factors supplementassociated with our business is contained in the Risk Factors disclosed in Item 1A“Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.
We have not yet determined if or when we may elect to be taxed as a REIT.
Our board of directors (the “Board”) has not yet determined whether we will elect to be taxed as a REIT and/or when any such election would be effective. In addition, even if we do make an election to be taxed as a REIT, our Board may revoke or otherwise terminate the REIT election of the Company, without the approval of holders of the common stock, if the board determines that it is no longer in the best interest of the stockholders to continue to qualify as a REIT. We can make no assurance that we will ever elect to be taxed as a REIT or, if we do make such an election, that such REIT election will be in place during a stockholder’s entire holding period of our stock. Our Board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks our stockholders face.
Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets, and other tests imposed by the Code. If we fail to quality as a REIT after electing to be taxed as a REIT, we would generally be disqualified from qualifying as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. To qualify for REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our REIT taxable income, determined without regard for any deduction for distributions paid and excluding any net capital gain to our stockholders. If we do not qualify as a REIT (either because we choose not to elect to be taxed as a REIT or because we failed to so qualify after having made a REIT election), this would reduce our net earnings available for distribution and would adversely affect the timing, amount, and character of distributions to our common stockholders. If we do not elect to be taxed as a REIT or fail to maintain REIT status, we will continue to be subject to federal income tax at regular corporate rates.
If we elect REIT status, the REIT ownership and distribution requirements may inhibit opportunities or have an impact on the Company.
If we elect to be taxed as a REIT, then in order to qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, ownership requirements, the sources of our income, nature of our assets, and the amounts we distribute to our stockholders. For example, in order for us to qualify as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year after the first year for which we elect to qualify as a REIT. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed as a REIT). Additionally, as typical for REITs, our Board would likely pursue an amendment of our Articles to restrict any person from owning more than 9.8% by value of our outstanding capital stock. These ownership limits could delay or prevent a transaction or a change in control of our company that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
If we elect to be taxed as a REIT and we do not have other funds available to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement, we could be
subject to corporate income tax and the 4% excise tax in a particular year. To qualify as a REIT, we must not have any non-REIT accumulated earnings and profits, as measured for U.S. federal income tax purposes, at the end of any REIT taxable year. Such non-REIT earnings and profits generally will include any accumulated earnings and profits of any corporations acquired by us (or whose assets we acquire), which, for this purpose, would include any earnings and profits we have in a taxable year in which we were taxed as a C corporation prior to the taxable year in which our REIT election is effective.
We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.
We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. For example, on March 10, 2023, Silicon Valley Bank failed and was taken into receivership by the FDIC. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S., or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.
Accounting for our power purchase agreements could cause variability in the results we report.
With respect to certain of our power purchase agreements, it is both possible and probable that we will net settle them, meaning that we have the ability and intent to sell power back into the grid in lieu of taking full physical delivery of all of the contracted power. Accordingly, these agreements will meet the definition of an accounting derivative. This means that these agreements will be accounted for at fair value at each quarterly measurement period, and these values may fluctuate significantly. As a result, our consolidated financial statements and results of operations may fluctuate quarterly based on factors outside of our control. We could have substantial variability in our financial results and disclosures, which, if material, could affect our operating results and in turn could impact our stock price. Investors should consider such derivative accounting matters when evaluating our financial resultsReport.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description of Document |
1.1* | | |
3.1* | | |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.INS* | | Inline XBRL Instance Document. |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith.
** Furnished herewith.
Signatures
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | APPLIED DIGITAL CORPORATION |
| | | | |
Date: April 6, | October 10, 2023 | | | By: | /s/ Wesley Cummins |
| | | | Wesley Cummins Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |
| | | | |
Date: April 6, | October 10, 2023 | | | By: | /s/ David Rench |
| | | | David Rench Chief Financial Officer (Principal Financial Officer) |