APPLIED BLOCKCHAIN, INC. Management’s discussion and analysis of financial condition and results of operations Forward-looking statements (Form 10-Q)
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; •equipment failures, power or other supply disruptions; and You should carefully review the risks described in Item 1A of the Company's Annual Report on Form 10-K for the year endedMay 31, 2022 , which was filed onAugust 29, 2022 , 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, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications. Our first facility was constructed inJamestown, North Dakota with 100 Megawatts ("MW") 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 learning and additional blockchain networks and applications. During the quarter endedNovember 30, 2022 , we began tests for hosting other high-compute applications at our first facility. In addition to this facility, we have substantially completed construction on our second facility inGarden City, Texas , and are mid-construction on our third facility, which is located inEllendale, North Dakota . We have a colocation business model where our customers place 13 -------------------------------------------------------------------------------- Table of Contents 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. 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 acrossU.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, theFederal Reserve Board ,U.S. Congress and certainU.S. agencies (e.g., theCommodity Futures Trading Commission , theSEC , theFinancial Crimes Enforcement Network and theFederal 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, onSeptember 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 inthe 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 significant accounting policies are discussed in Note 3 - Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the fiscal year endedMay 31, 2022 filed with theSEC onAugust 29, 2022 .
Hosting highlights
Applied Digital's first facility is inJamestown, 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 14
————————————————– ————————————
Table of contents, which provides insight into the cost structure as a stable price mechanism for energy costs, has been negotiated.
The facility began energizing in lateJanuary 2022 and has over 90 MW online as ofNovember 30, 2022 . As previously reported in a Current Report on Form 8-K filed by the Company onJuly 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 toJamestown ahead of the schedule for early September. TheJamestown facility was not damaged and remains fully operational and capable of hosting the entire 100 MW of capacity. There were no reductions or interruptions in service for the three months endedNovember 30, 2022 . OnJuly 12, 2022 , the Company entered into a five-year hosting contract with Marathon Digital Holdings, Inc. ("Marathon") for 270 MW of mining capacity. As a result of this arrangement, the Company will supply Marathon with 90 MW of hosting capacity at its facility inTexas and 180 MW of hosting capacity at its second facility inNorth Dakota .
Discontinued business
During the fourth quarter of our last fiscal year, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment. The results of the crypto mining operations are accounted for as discontinued operations in our unaudited condensed consolidated financial statements.
Expansion possibilities
OnNovember 24, 2021 , we entered into a letter of intent to develop a facility inTexas using 200 MW of wind power. OnApril 13, 2022 , the Company entered into a 99-year ground lease inGarden City, Texas , with the intent to build our second datacenter facility on this site. OnApril 25, 2022 the Company began construction on this site. This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers. The facility is nearing completion and is expected to begin operating in the first calendar quarter of 2023. The 200 MW capacity is fully contracted with customers. OnAugust 8, 2022 , the Company completed the purchase of 40 acres of land ("the Land") inEllendale, North Dakota , for a total cost of$1 million . The Company took possession of the Land onAugust 15, 2022 , and is process of building a 180 MW datacenter on the Land, with completion scheduled for the first calendar quarter of 2023. As our hosting operations expand, we believe our business structure will 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. OnSeptember 1, 2022 , Company entered into a joint-venture agreement withGMR Limited ("GMR") to formHighland Digital Holdings, LLC ("Highland Digital"), which may acquire mining hardware and digital infrastructure assets. Both the Company and GMR have a 50% ownership stake in Highland Digital. GMR is the controlling partner and will consolidate the results of Highland Digital. Therefore, the Company will not consolidate the Highland in their financial statements, but will report results based on the Company's ownership percentage in Highland Digital. OnOctober 13, 2022 , the Company entered into a joint venture agreement withFoundry Technologies, Inc. ("Foundry") to formSAI 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 theJamestown, North Dakota datacenter facility to provide access to SAI and its customers. The Company has an 98% ownership interest in SAI and plans to consolidate the entity. 15
————————————————– ————————————
Table of contents
OnDecember 14, 2022 , the Company began construction of its latest specialized processing center, a 5 MW facility next to the Company's currently operating 100-MW hosting facility inJamestown, North Dakota . This separate and unique building, designed and purpose-built for Graphics Processing Units ("GPUs"), will sit separate from the Company's current buildings and plans to host more traditional high performance computing ("HPC") applications, such as natural language processing, machine learning, and additional HPC developments. Changes to Equity OnApril 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. OnJanuary 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. OnOctober 11, 2022 , theSecurities 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. 16
————————————————– ————————————
Table of Contents
Operating results Comparative results for the ended three and six months
The following table sets forth key components of the results of operations (in thousands) of Applied Digital during the three and six months endedNovember 30, 2022 and 2021. Three Months Ended Six Months Ended November 30, 2022 November 30, 2021 November 30, 2022 November 30, 2021 Revenues: Hosting revenue $ 12,340 $ - $ 19,264 $ - Cost of revenues $ 11,812 $ - $ 17,905 $ - Gross profit 528 - 1,359 - Costs and expenses: Selling, general and administrative $ 26,502 $ 1,181 $ 31,212 $ 14,216 Depreciation and amortization 703 174 1,001 177 Total costs and expenses $ 27,205 $ 1,355 $ 32,213 $ 14,393 Operating loss$ (26,677) $ (1,355)$ (30,854) $ (14,393) Other income (expense): Interest Expense $ (385) $ - $ (741) $ - Loss on extinguishment of debt - - (94) (1,342) Total other expense, net (385) - (835) (1,342) Net loss from continuing operations before income tax expenses (27,062) (1,355) (31,689) (15,735) Income tax benefit (expense) 312 (214) 280 (214) Net loss from continuing operations (26,750) (1,569) (31,409) (15,949) Net loss from discontinued operations, net of income taxes - 1,398 - 1,681 Net loss including noncontrolling interests (26,750) (171) (31,409) (14,268) Net loss attributable to noncontrolling interest (133) - (261) - Net loss attributable to Applied Digital Corporation$ (26,617) $ (171)$ (31,148) $ (14,268) Basic and diluted net (loss) gain per share: Continuing Operations $ (0.29) $ (0.03) $ (0.34) $ (0.32) Discontinued Operations $ - $ 0.03 $ - $ 0.03 Basic and diluted net loss per share $ (0.29) $ - $ (0.34) $ (0.29) Basic and diluted weighted average number of shares outstanding 93,422,427 53,396,920 93,263,266 49,143,981 Adjusted Amounts (a) Adjusted Operating Loss from Continuing Operations (3,700) (1,004) (6,596) (403) Adjusted Operating Margin from Continuing Operations (30) % - % (34) % - % Adjusted Net Loss from Continuing Operations (3,773) (1,218) (7,151) (1,959) Other Financial Data (a) EBITDA (25,109) (1,181) (28,244) (15,558) as a percentage of revenues (203) % - % (147) % - % Adjusted EBITDA (2,132) (830) (3,986) (1,568) as a percentage of revenues (17) % - % (21) % - % Adjusted Gross Profit 1,509 - 3,176 - as a percentage of revenues 12 % - % 16 % - % 17
-------------------------------------------------------------------------------- Table of Contents (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.
Comment on operating results Comparative results for the ended three and six months
Income
Hosting revenues increased by$12.3 million , or 100%, from zero for the three months endedNovember 30, 2021 to$12.3 million for the three months endedNovember 30, 2022 . Hosting revenues increased by$19.3 million , or 100%, from zero for the six months endedNovember 30, 2021 to$19.3 million for the six months endedNovember 30, 2022 . The increase in hosting revenues was driven by our completion of our first hosting facility inJamestown, North Dakota , which was brought online in phases during the final six months of the fiscal year endedMay 31, 2022 . Cost of Revenues Cost of revenues increased by$11.8 million , or 100%, from zero for the three months endedNovember 30, 2021 to$11.8 million for the three months endedNovember 30, 2022 . Cost of revenues increased by$17.9 million , or 100%, from zero for the six months endedNovember 30, 2021 to$17.9 million for the six months endedNovember 30, 2022 . The increase in cost of revenues was primarily driven by the initiation of our co-hosting business in late fiscal year endedMay 31, 2022 , which represents all of our continuing operations. Cost of revenues for the three months endedNovember 30, 2022 consists of$0.9 million of depreciation and amortization expense attributable to the property, plant and equipment at ourJamestown, North Dakota hosting facility,$10.3 million of energy costs used to generate our hosting revenues, and$0.7 million of personnel expenses for employees directly working at the hosting facility. Cost of revenues for the six months endedNovember 30, 2022 consists of$1.7 million of depreciation and amortization expense attributable to the property, plant and equipment at ourJamestown, North Dakota hosting facility,$15.1 million of energy costs used to generate our hosting revenues, and$1.1 million of personnel expenses for employees directly working at the hosting facility. Operating Expenses Selling, general and administrative expenses increased by$25.3 million , or 2,142%, from$1.2 million for the three months endedNovember 30, 2021 to$26.5 million for the three months endedNovember 30, 2022 . The three primary drivers of selling, general and administrative expense for the three months endedNovember 30, 2022 were$1.5 million of employee salaries and benefits expense not directly attributable to revenues,$1.2 million of professional service expenses incurred to support the growth of the business, and stock-based compensation expense of$21.8 million . The stock-based compensation expense is primarily driven by restricted stock award and restricted stock unit grants made to directors, officers, and consultants inJanuary 2022 that contained a vesting condition related to an effective registration statement of shares covering the resale of the shares of Common Stock underlying the awards. The registration statement covering the resale of these shares was deemed effective during the three months endedNovember 30, 2022 , leading to a catch-up of expense as required by ASC 718. There was no stock-based compensation expense recognized during the three months endedNovember 30, 2021 . Selling, general and administrative expenses increased by$17.0 million , or 120%, from$14.2 million for the six months endedNovember 30, 2021 to$31.2 million for the six months endedNovember 30, 2022 . The three primary drivers of selling, general and administrative expense for the six months endedNovember 30, 2022 were$2.8 million of employee salaries and benefits expense not directly attributable to revenues,$2.3 million of professional service expenses incurred to support the growth of the business, and stock-based compensation expense of$22.4 million . The stock-based compensation expense is primarily driven by restricted stock award 18 -------------------------------------------------------------------------------- Table of Contents and restricted stock unit grants made to directors, officers, and consultants inJanuary 2022 that contained a vesting condition related to an effective registration statement of shares covering the resale of the shares of Common Stock underlying the awards. The registration statement covering the resale of these shares was deemed effective during the six months endedNovember 30, 2022 , leading to a catch-up of expense as required by ASC 718. During the six months endedNovember 30, 2021 , the Company recognized stock-based compensation expense related to our service agreements with strategic partners, who provided advisory and consulting services in exchange for shares of common stock we issued to them. The awards were granted inJune 2021 and vested immediately, as the services were fully rendered during the month ofJune 2021 . Depreciation and amortization expense not attributable to costs of sales increased$0.5 million , or 304%, from$0.2 million for the three months endedNovember 30, 2021 to$0.7 million for the three months endedNovember 30, 2022 . Depreciation and amortization expense not attributable to costs of sales increased$0.8 million or 304%, from$0.2 million for the six months endedNovember 30, 2021 to$1.0 million for the six months endedNovember 30, 2022 . Both changes were driven by a significant increase in assets placed in service between periods to support the growth of the business.
Other costs Interest costs increased
Interest expense increased$0.7 million , or 100% , from zero for the six months endedNovember 30, 2021 to$0.7 million for the six months endedNovember 30, 2022 . Both increases were driven by the increase in finance leases and change in the company's debt obligations between periods, asAPLD Hosting, LLC ("Hosting"), a wholly-owned subsidiary ofApplied Digital Corporation , entered into the Loan Agreement withStarion Bank ("Starion Lender") and the Company as Guarantor (the "Starion Loan Agreement") for a term loan (the "Starion Term Loan") in the three months endedNovember 30, 2022 , and had previously entered into a term loan agreement withVantage Bank , which was subsequently extinguished. TheStarion Loan Agreement provides for an interest rate of 6.50% per annum. TheStarion Term Loan is secured by a mortgage on the Company'sJamestown, North Dakota property, and a security interest in substantially all of the assets of the Company as set forth in the Security Agreement dated as ofJuly 25, 2022 by and between Hosting and the Starion Lender and a security interest in the form of a collateral assignment of the Company's rights and interests in a master hosting agreement related to the Company'sJamestown, North Dakota property and records and data relating thereto as set forth in the Security Agreement dated as ofJuly 25, 2022 by and among Hosting, the Company as Grantor and theStarion Lender. In addition, the Company unconditionally guaranteed the Company's obligations to the Starion Lender, including under the Starion Term Loan, pursuant to an Unlimited Commercial Corporate Guaranty of the Company dated as ofJuly 25, 2022 . TheCity of Jamestown, North Dakota andStutsman 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, theJamestown Stutsman Development Corporation (JSDC) makes direct loans, equity investments, and interest buy-downs to businesses. The Company has entered into an agreement withJDSC andStarion Bank which which buys down the Company's interest rate to 1.5% for a period of 13 months through a loan and community bond. The loan totals$0.2 million and bears an interest rate of 2%, and the bond totals$0.5 million . OnNovember 7, 2022 , APLD -Rattlesnake Den I, LLC (the "Borrower"), a wholly-owned subsidiary of the Company, entered into a Loan Agreement withVantage Bank Texas ("Vantage Lender") and the Company, as guarantor, which provides for a term loan 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 inGarden City, Texas (the "Garden City Facility"), with each installment not exceeding$0.9 million for the costs and expenses of a building at the Garden City Facility. The 19
————————————————– ————————————
Table of contents
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 maturesApril 26, 2028 . The Vantage Garden City Loan Agreement contains customary representations, warranties, covenants and events of default. As of the date of this report, an aggregate amount of$6.6 million has been advanced under the Vantage Garden City Loan Agreement.
Loss on termination of debt for the three months ended
Loss on extinguishment of debt decreased$1.2 million , or 93%, from$1.3 million for the six months endedNovember 30, 2021 to$0.1 million for the six months endedNovember 30, 2022 . This decrease was driven by the extinguishment of our related party notes payable by conversion to common stock during the six months endedNovember 30, 2021 , compared to a smaller extinguishment of term debt that was recognized in the six months endedNovember 30, 2022 . Income tax benefit (expense) The income tax benefit increased$0.5 million or 246% from a$0.2 million expense for the three months endedNovember 30, 2021 to a$0.3 million benefit for the three months endedNovember 30, 2022 . Income tax benefit increased$0.5 million or 231% from a$0.2 million expense for the six months endedNovember 30, 2021 to approximately$0.3 million benefit for the six months endedNovember 30, 2022 . This change was driven by a change in valuation allowance for the periods endedNovember 30, 2022 compared to the periods endedNovember 30, 2021 . Gain from Discontinued Operations Beginning in the quarter endedAugust 31, 2021 (the first quarter of the fiscal year endedMay 31, 2022 ), we began cryptoasset mining operations, using Nvidia GPU miners which we hosted at a facility operated byCoinmint . In the fiscal year endedMay 31, 2022 , we made the strategic decision to discontinue our mining operations and focus on hosting operations in the future. As a result of this strategic shift, our mining operations were reclassified as discontinued operations. Gain from discontinued operations decreased$1.4 million , or 100%, from the three months endedNovember 30, 2021 to zero for the three months endedNovember 30, 2022 . Gain from discontinued operations decreased$1.7 million , or 100%, from the six months endedNovember 30, 2021 to zero the six months endedNovember 30, 2022 . The decrease was due to the fact that the Company no longer generates revenues from mining operations.
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.
20
————————————————– ————————————
Table of contents
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. 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.
21
————————————————– ————————————
Table of Contents
Reconciliation of GAAP to Non-GAAP Measures
Three Months Ended Six Months Ended
November 30, November 30, November 30, November 30,
$ in thousands 2022 2021 2022 2021
Adjusted operating loss
Operating Loss from Continuing Operations
(GAAP) $ (26,677) $ (1,355) $ (30,854) $ (14,393)
Add: Stock-based compensation 21,819 - 22,398 12,337
Add: Gain on Extinguishment of Accounts
Payable - (285) - (325)
Add: Loss on Extinguishment of Debt - - 94 1,342
Add: Non-recurring professional service
costs 664 636 1,072 636
Add: One-time electricity charges 114 - 114 -
Add: Other non-recurring expenses 380 - 580 -
Adjusted Operating Loss from Continuing
Operations (Non-GAAP) $ (3,700) $ (1,004) $ (6,596) $ (403)
Adjusted operating margin from Continuing
Operations (30.0) % - % (34.2) % - %
Adjusted net income (loss)
Net Loss from Continuing Operations (GAAP) $ (26,750) $ (1,569) $ (31,409) $ (15,949)
Add: Stock-based compensation 21,819 - 22,398 12,337
Add: Gain on Extinguishment of Accounts
Payable - (285) - (325)
Add: Loss on Extinguishment of Debt - - 94 1,342
Add: Non-recurring professional service
costs 664 636 1,072 636
Add: One-time electricity charges 114 - 114 -
Add: Other non-recurring expenses 380 - 580 -
Adjusted net loss from Continuing
Operations (Non-GAAP) $ (3,773) $ (1,218)
EBITDA and Adjusted EBITDA Net Loss from Continuing Operations (GAAP)$ (26,750) $ (1,569) $ (31,409) $ (15,949) Add: Interest Expense 385 - 741 - Add: Income Tax Benefit (Expense) (312) 214 (280) 214 Add: Depreciation and Amortization 1,568 174 2,704 177 EBITDA (Non-GAAP)$ (25,109) $ (1,181) $ (28,244) $ (15,558) Add: Stock-based compensation 21,819 - 22,398 12,337 Add: Gain on Extinguishment of Accounts Payable - (285) - (325) Add: Loss on Extinguishment of Debt - - 94 1,342 Add: Non-recurring professional service costs 664 636 1,072 636 Add: One-time electricity charges 114 - 114 - Add: Other non-recurring expenses 380 - 580 - Adjusted EBITDA (Non-GAAP)$ (2,132) $ (830) $ (3,986) $ (1,568) Adjusted Gross Profit Gross profit (GAAP)$ 528 $ -$ 1,359 $ - Add: Depreciation and amortization in cost of revenues 867 - 1,703 - Add: One-time electricity charges 114 - 114 - Adjusted Gross Profit (Non-GAAP)$ 1,509 $ -$ 3,176 $ - The Sources of Liquidity We have primarily generated cash in the last 12 months from the proceeds of our term loans, proceeds from our initial public offering, and the receipt of contractual deposits and revenue prepayments from hosting customers. OnApril 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. OnJuly 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 onMarch 11, 2022 . 22
————————————————– ————————————
Table of contents
The remaining proceeds of the term loan will be used for working capital requirements for the operation of phase I of the host facility i
OnNovember 7, 2022 , APLD -Rattlesnake Den I, LLC (the "Borrower"), a wholly-owned subsidiary of the Company, entered into the Vantage Garden City Loan Agreement. As of the date of this report, an aggregate amount of$6.6 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 7 – 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 the Vantage Garden City Loan.
During the three and six months endedNovember 30, 2022 , we received$22.4 million and$44.6 million , respectively, in payments for future hosting services. During the fiscal year endedMay 31, 2022 , we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations. During the three and six months endedNovember 30, 2022 , we have generated revenue from co-hosting, but have incurred net losses from operations. As ofNovember 30, 2022 andMay 31, 2022 , we had cash of$18.1 million and$46.3 million , respectively, and an accumulated deficit of$87.2 million and$56.1 million , respectively. Funding Requirements We have experienced net losses through the periods endedNovember 30, 2022 . 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, and revenue payments we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online inFebruary 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 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 decrease into calendar 2023 as we complete construction of additional capacity. We also expect that our revenues will increase as we continue to bring online additional capacity at ourJamestown, North Dakota ,Garden City, Texas , andEllendale, North Dakota locations. We believe that our existing cash, together with the anticipated revenues from current operations and debt funding opportunities, will enable us to fund our operating expense requirements through at least 12 months as well as 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. 23
————————————————– ————————————
Table of contents
© Edgar Online, source
