Applied Digital Corp. (APLD) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Forward-Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Business Overview
We are a designer, builder and operator of next-generation digital infrastructure. We have three primary business streams, artificial intelligence (“AI”) cloud services, high performance computing (“HPC”) datacenter hosting, and crypto datacenter hosting.
Business Update
AI Cloud Services
Our AI cloud services business operates through our Sai Computing brand and provides cloud services applicable to artificial intelligence.
On May 15, 2023, we announced the formal launch of our AI Cloud services business through Sai Computing. On May 16, 2023, we announced that Sai Computing secured its first major AI customer with an agreement worth up to $180 million over a 24-month period. The customer will make a significant prepayment as part of the agreement.
On June 23, 2023, we announced that Sai Computing had secured its second AI customer with an agreement worth up to $460 million over 36 months. We have also entered into two contracts with colocation service providers for secure space and energy for our hosting services. Our current strategy is to use a mix of third-party colocation centers and our HPC datacenters to deliver AI Cloud services to customers.
HPC Datacenter Hosting
Our HPC datacenter business designs, builds, and operates Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications within a cost-effective model.
We are in the process of constructing a 9 megawatt (“MW”) facility next to the Company’s currently operating 100-MW hosting facility in Jamestown, North Dakota. This separate and unique building, designed and purpose-built for Graphics Processing Units (“GPUs”), will sit separate from our crypto hosting buildings and will host more traditional high performance computing applications, such as natural language processing, machine learning, and additional HPC developments. This facility is expected to be brought online in the second half of calendar year 2023. During early calendar year 2023, we began testing HPC hosting at this facility. The systems in this facility passed initial testing in the second calendar quarter of 2023.
In June, the Company expanded its commitment for up to 26,000 GPUs for the Company's AI Cloud services business. The Company has received and deployed an initial production cluster of 1,024 GPUs.
We have current plans to expand our HPC hosting capacity up to 200 MW through build outs at existing and future locations.
Crypto Datacenter Hosting
Our crypto datacenter hosting business provides infrastructure and colocation services to crypto mining customers.
Jamestown, North Dakota Datacenter
21
We purchased property in Jamestown, North Dakota on which we constructed our first co-hosting facility. Construction of our first co-hosting facility began in September 2021. On February 2, 2022, we brought our first facility online and it has been fully operational since that date. As of May 31, 2023, the facility had approximately 105 MW of capacity, which is fully contracted with our customers.
Garden City, Texas Datacenter
On November 24, 2021, we entered into a letter of intent to develop a second datacenter facility in Garden City, Texas. 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, we 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 expected to begin operating in the second half of calendar 2023 and the 200 MW capacity is fully contracted with our customers.
Ellendale, North Dakota Datacenter
On August 8, 2022, we completed the purchase of 40 acres of land in Ellendale, North Dakota, for a total cost of $1 million. We took possession of the land on August 15, 2022, built a hosting facility, and began energizing the site on March 4, 2023. The facility is fully energized and the facility will have approximately 180 MW of capacity, which is fully contracted with our customers
Public Offering and Changes to Equity
On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sale agreement, with Craig-Hallum Capital Group LLC ("Craig-Hallum Capital"), pursuant to which the Company may sell up to $125 million in shares of our common stock, par value $.001 per share (the "Common Stock"). The Company has sold approximately 7.9 million shares. Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.
Debt Financing
Starion Term 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 Term Loan is secured by the Jamestown hosting facility, a security interest in the substantially all of the assets of the APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility.
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.
22
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, LLC, a wholly-owned subsidiary of the Company, entered into a Loan Agreement (the “Vantage Garden City Loan Agreement”) with Vantage Bank Texas and the Company, as guarantor, which agreement provides for a term loan ("The Vantage Garden City Loan") in the principal amount of $15 million . The Vantage Garden City Loan Agreement will be advanced in 16 installments for working capital needs for Rattlesnake Den I, LLC'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 Loan is secured by the leasehold interest on the Garden City Facility, a security interest in substantially all of the assets of the Rattlesnake Den I, LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in the master hosting agreements related to the Garden City Facility and records and data relating thereto.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 May 31, 2023, an aggregate amount of $10.3 million has been advanced under the Vantage Garden City Loan Agreement, with the outstanding principal balance totaling $10.1 million. 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 (The "Ellendale Loan") in the principal amount of $20 million with a maturity date of February 3, 2028. The Ellendale Loan Agreement contains customary covenants, representations and warranties and events of default. The Ellendale Loan is secured by the Ellendale hosting facility, a security interest in the substantially all of the assets of the APLD ELN-01 LLC, and interests in all master hosting agreements related to the Ellendale hosting facility. The Ellendale Loan Agreement provides for an interest rate of 7.48% per annum. The proceeds of the Loan will be used to fund expansion on the Ellendale hosting datacenter. Total deferred costs related to the issuance of this loan total are $0.2 million. As of May 31, 2023, the total balance outstanding under the Ellendale Loan Agreement was $19.7 million.
B. Riley Loan
On May 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 B. Riley Commercial Capital, LLC and B. Riley Securities, Inc (collectively "B. Riley"). with the Company as Guarantor. The B. Riley Loan provides for a term loan of up to $50 million in the principal amount of 9.00% per annum. The proceeds of the B. Riley Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud services platform and datacenters by Sai, and for general corporate purposes and working capital. The B. Riley Loan contains events of default and covenants customary for such an agreement. The B. Riley Loan is secured by a security interest in substantially all of the assets of SAI as set forth in the B. Riley Loan and a security interest in any proceeds of Sai's operations. Pursuant to the B. Riley Loan agreement, the Company unconditionally guaranteed Sai’s obligations to B. Riley. The B. Riley Loan contains initial fees of approximately $1.5 million that were reduced from the initial funds remitted to Sai. The B. Riley Loan also contains a term fee of $1 million that is due upon the Company's initial principal payment. Finally, the B. Riley Loan and Security agreement contains a commitment fee of 3% on any balance outstanding as of each quarter end beginning with the calendar quarter ending September 30, 2023. As of May 31, 2023, the total outstanding balance under the B. Riley Loan was $36.5 million. The Company repaid the total balance of the B. Riley Loan on July 17, 2023.
23
Results of Operations for the fiscal year ended May 31, 2023 compared to fiscal year ended May 31, 2022
The following table sets forth key components of the results of operations of Applied Digital Corporation during the three months and fiscal year ended May 31, 2023 and 2022 (in thousands).
24
| Three Months Ended | Year Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Hosting revenue | $ | 22,038 | $ | 7,523 | $ | 55,392 | $ | 8,549 | ||||||||
| Cost of revenues | $ | 15,950 | $ | 7,433 | $ | 44,388 | $ | 9,506 | ||||||||
| Gross profit | 6,088 | 90 | 11,004 | (957) | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Selling, general and administrative | $ | 12,332 | $ | 4,356 | $ | 55,059 | $ | 19,941 | ||||||||
| Total costs and expenses | $ | 12,332 | $ | 4,356 | $ | 55,059 | $ | 19,941 | ||||||||
| Operating loss | $ | (6,244) | $ | (4,266) | $ | (44,055) | $ | (20,898) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest Expense | $ | (855) | $ | (112) | $ | (1,980) | $ | (112) | ||||||||
| Gain on extinguishment of accounts payable | — | — | — | 406 | ||||||||||||
| Loss on extinguishment of debt | — | — | (94) | (1,342) | ||||||||||||
| Total other expense, net | (855) | (112) | (2,074) | (1,048) | ||||||||||||
| Net loss from continuing operations before income tax expenses | (7,099) | (4,378) | (46,129) | (21,946) | ||||||||||||
| Income tax benefit (expense) | 243 | (266) | 523 | (540) | ||||||||||||
| Net loss from continuing operations | (6,856) | (4,643) | (45,606) | (22,486) | ||||||||||||
| Net loss from discontinued operations, net of income taxes | — | 1,826 | — | (1,044) | ||||||||||||
| Net loss including noncontrolling interests | (6,856) | (2,817) | (45,606) | (23,530) | ||||||||||||
| Net loss attributable to noncontrolling interest | (383) | (10) | (960) | (10) | ||||||||||||
| Net loss attributable to Applied Digital Corporation | $ | (6,473) | $ | (2,807) | $ | (44,646) | $ | (23,520) | ||||||||
| Basic and diluted net (loss) gain per share: | ||||||||||||||||
| Continuing Operations | $ | (0.07) | $ | (0.06) | $ | (0.49) | $ | (0.39) | ||||||||
| Discontinued Operations | $ | — | $ | 0.02 | $ | — | $ | (0.02) | ||||||||
| Basic and diluted net loss per share | $ | (0.07) | $ | (0.04) | $ | (0.49) | $ | (0.41) | ||||||||
| Basic and diluted weighted average number of shares outstanding | 95,146,122 | 76,631,835 | 93,976,233 | 57,121,096 | ||||||||||||
| Adjusted Amounts (a) | ||||||||||||||||
| Adjusted Operating Loss from Continuing Operations | 293 | (3,933) | (7,320) | (6,222) | ||||||||||||
| Adjusted Operating Margin from Continuing Operations | 1 | % | (52) | % | (13) | % | (73) | % | ||||||||
| Adjusted Net Loss from Continuing Operations | (319) | (4,311) | (8,871) | (7,810) | ||||||||||||
| Other Financial Data (a) | ||||||||||||||||
| EBITDA | (3,607) | (3,391) | (36,881) | (20,714) | ||||||||||||
| as a percentage of revenues | (16) | % | (45) | % | (67) | % | (242) | % | ||||||||
| Adjusted EBITDA | 2,930 | (3,058) | (146) | (6,038) | ||||||||||||
| as a percentage of revenues | 13 | % | (41) | % | — | % | (71) | % | ||||||||
| Adjusted Gross Profit | 7,827 | 1,100 | 15,438 | 113 | ||||||||||||
| as a percentage of revenues | 36 | % | 15 | % | 28 | % | 1 | % |
(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 months Ended May 31, 2023 compared to the three months ended May 31, 2022
25
Revenues
Hosting revenues increased by $14.5 million, or 193%, from $7.5 million for the three months ended May 31, 2022 to $22.0 million for the three months ended May 31, 2023. The increase in hosting revenues was driven by the increase in energized capacity with the Company's Ellendale, North Dakota facility energizing during the three months ended May 31, 2023.
Cost of Revenues
Cost of revenues increased by $8.6 million, or 116%, from $7.4 million for the three months ended May 31, 2022 to $16.0 million for the three months ended May 31, 2023. The increase in cost of revenues was primarily driven by the energization of the Company's Ellendale, North Dakota facility during the three months ended May 31, 2023. The primary drivers of the change to cost of revenues for the three months ended May 31, 2023 were:
•approximately $6.7 million increase in energy costs used to generate hosting revenues;
•approximately $0.9 million increase in personnel expenses directly attributable to generating hosting revenues;
•approximately $0.7 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues; and
•approximately $0.3 million increase in other expenses directly attributable to generating hosting revenues.
Operating Expenses
Selling, general and administrative expenses increased by $7.9 million, or 181%, from $4.4 million for the three months ended May 31, 2022 to $12.3 million for the three months ended May 31, 2023. The primary drivers of the change to selling, general and administrative expense for the three months ended May 31, 2023 were:
•approximately $5.2 million increase in stock-based compensation expense;
•approximately $0.9 million increase in depreciation and amortization expense not directly attributable to property and equipment supporting hosting revenues;
•approximately $0.9 million increase in employee salaries and benefits expense not directly attributable to revenues;
•approximately $0.6 million increase in insurance expense; and
•approximately $1.1 million increase in other selling, general, and administrative expenses such as computer and software expenses.
These factors are partially offset by an approximately $0.8 million decrease in professional service expense, which is attributable to the increase in full time employees that have replaced previously outsourced professional services.
Other Expense
Interest expense increased $0.8 million, or approximately 681% , from interest expense of $0.1 million for the three months ended May 31, 2022 to $0.9 million for the three months ended May 31, 2023. The increase was driven by the increase in finance leases and in the Company’s debt obligations between periods.
Income tax benefit (expense)
26
The income tax benefit increased by $0.5 million or 191% from a $0.3 million expense for the three months ended May 31, 2022 to a $0.2 million benefit for the three months ended May 31, 2023. This change was driven by a change in valuation allowance for the three months ended May 31, 2023 compared to the three months ended May 31, 2022.
Loss from Discontinued Operations
Gain from discontinued operations decreased by $1.8 million, or 100%, from $1.8 million for the three months ended May 31, 2022 to zero for the three months ended May 31, 2023. The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.
Commentary on Results of Operations Comparative Results for the fiscal year ended May 31, 2023 compared to the fiscal year ended May 31, 2022
Revenues
Hosting revenues increased by $46.9 million, or 548%, from $8.5 million for the year ended May 31, 2022 to $55.4 million for the year ended May 31, 2023. The increase in hosting revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022.
Cost of Revenues
Cost of revenues increased by $34.9 million, or 367%, from $9.5 million for the fiscal year ended May 31, 2022 to $44.4 million for the fiscal year ended May 31, 2023. The increase in cost of revenues was driven by a full year of operations at our hosting facility in Jamestown, North Dakota and energization of our hosting facility in Ellendale, North Dakota for the year ended May 31, 2023 compared to a partial year of operations at the Jamestown, North Dakota facility for the year ended May 31, 2022. The primary drivers of the change to cost of revenues for the fiscal year ended May 31, 2023 were:
•approximately $28.5 million increase in energy costs used to generate hosting revenues;
•approximately $2.7 million increase in personnel expenses directly attributable to generating hosting revenues;
•approximately $3.2 million increase in depreciation and amortization expense directly attributable to the property and equipment supporting hosting revenues; and
•approximately $0.5 million increase in other expenses directly attributable to generating hosting revenues.
Operating Expenses
Selling, general and administrative expenses increased by $35.2 million, or 176%, from $19.9 million for the fiscal year ended May 31, 2022 to $55.1 million for the fiscal year ended May 31, 2023. The primary drivers of the change to selling, general and administrative expense for the fiscal year ended May 31, 2023 were:
•approximately $19.7 million increase in stock-based compensation expense;
•approximately $2.9 million increase in depreciation and amortization expense not directly attributable to property and equipment supporting hosting revenues;
•approximately $4.0 million increase in employee salaries and benefits expense not directly attributable to revenues;
27
•approximately $2.9 million increase in insurance expense;
•approximately $1.5 million increase in professional service expenses incurred as the Company experienced a full year of greater administrative needs; and
•approximately $4.2 million increase in other selling, general, and administrative expenses such as computer and software expenses.
Other Expense
Interest expense increased $1.9 million, or 1,666% , from $0.1 million for the fiscal year ended May 31, 2022 to $2.0 million for the fiscal year ended May 31, 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 fiscal year ended May 31, 2022 to $0.1 million for the fiscal year ended May 31, 2023. This decrease was driven by the lack of extinguishment of our related party notes payable by conversion to common stock, which occurred during the fiscal year ended May 31, 2022, compared to a smaller extinguishment of term debt that was recognized in the fiscal year ended May 31, 2023.
Income tax benefit (expense)
Income tax benefit increased $1.0 million or approximately 193% from a $0.5 million expense for the year ended May 31, 2022 to approximately $0.5 million benefit for the fiscal year ended May 31, 2023. This change was driven by a change in valuation allowance for the fiscal year ended May 31, 2023 compared to the fiscal year ended May 31, 2022.
Loss from Discontinued Operations
Loss from discontinued operations decreased $1.0 million, or 100%, from $1.0 million for the fiscal year ended May 31, 2022 to zero for the year ended May 31, 2023. The change was due to the fact that the Company ceased generating revenues from mining operations in March 2022.
Non-GAAP Measures
Adjusted Operating Loss and Adjusted Net Loss
“Adjusted Operating Loss” and “Adjusted Net Loss” are non-GAAP measures that represent 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.
28
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, one-time professional service costs, one-time costs related to electricity set up, and other non-recurring expenses. 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 and one-time charges related to electricity set up 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.
Non-GAAP Measures
29
| Reconciliation of GAAP to Non-GAAP Measures | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended | Fiscal Year Ended | |||||||||||||
| $ in thousands | May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||
| Adjusted operating loss | ||||||||||||||
| Operating Loss from Continuing Operations (GAAP) | $ | (6,244) | $ | (4,266) | $ | (44,055) | $ | (20,898) | ||||||
| Add: Stock-based compensation | 5,195 | — | 32,074 | 12,337 | ||||||||||
| Add: Gain on Extinguishment of Accounts Payable | — | — | — | (406) | ||||||||||
| Add: Loss on Extinguishment of Debt | — | — | 94 | 1,342 | ||||||||||
| Add: Non-recurring professional service costs | 727 | 240 | 2,164 | 1,310 | ||||||||||
| Add: One-time electricity charges | — | — | 114 | — | ||||||||||
| Add: Other non-recurring expenses | 615 | 93 | 2,290 | 93 | ||||||||||
| Adjusted Operating Loss from Continuing Operations (Non-GAAP) | $ | 293 | $ | (3,933) | $ | (7,320) | $ | (6,222) | ||||||
| Adjusted operating margin from Continuing Operations | 1 | % | (52) | % | (13) | % | (73) | % | ||||||
| Adjusted net income (loss) | ||||||||||||||
| Net Loss from Continuing Operations (GAAP) | $ | (6,856) | $ | (4,643) | $ | (45,606) | $ | (22,486) | ||||||
| Add: Stock-based compensation | 5,195 | — | 32,074 | 12,337 | ||||||||||
| Add: Gain on Extinguishment of Accounts Payable | — | — | — | (406) | ||||||||||
| Add: Loss on Extinguishment of Debt | — | — | 94 | 1,342 | ||||||||||
| Add: Non-recurring professional service costs | 727 | 240 | 2,164 | 1,310 | ||||||||||
| Add: One-time electricity charges | — | — | 114 | — | ||||||||||
| Add: Other non-recurring expenses | 615 | 93 | 2,290 | 93 | ||||||||||
| Adjusted net loss from Continuing Operations (Non-GAAP) | $ | (319) | $ | (4,310) | $ | (8,871) | $ | (7,810) | ||||||
| EBITDA and Adjusted EBITDA | ||||||||||||||
| Net Loss from Continuing Operations (GAAP) | $ | (6,856) | $ | (4,643) | $ | (45,606) | $ | (22,486) | ||||||
| Add: Interest Expense | 855 | 112 | 1,980 | 112 | ||||||||||
| Add: Income Tax Benefit (Expense) | (242) | 266 | (523) | 540 | ||||||||||
| Add: Depreciation and Amortization | 2,636 | 875 | 7,267 | 1,120 | ||||||||||
| EBITDA (Non-GAAP) | $ | (3,607) | $ | (3,390) | $ | (36,881) | $ | (20,714) | ||||||
| Add: Stock-based compensation | 5,195 | — | 32,074 | 12,337 | ||||||||||
| Add: Gain on Extinguishment of Accounts Payable | — | — | — | (406) | ||||||||||
| Add: Loss on Extinguishment of Debt | — | — | 94 | 1,342 | ||||||||||
| Add: Non-recurring professional service costs | 727 | 240 | 2,164 | 1,310 | ||||||||||
| Add: One-time electricity charges | — | — | 114 | — | ||||||||||
| Add: Other non-recurring expenses | 615 | 93 | 2,290 | 93 | ||||||||||
| Adjusted EBITDA (Non-GAAP) | $ | 2,930 | $ | (3,057) | $ | (146) | $ | (6,038) | ||||||
| Adjusted Gross Profit | ||||||||||||||
| Gross profit (GAAP) | $ | 6,088 | $ | 90 | $ | 11,004 | $ | (957) | ||||||
| Add: Depreciation and amortization in cost of revenues | 1,739 | 1,010 | 4,320 | 1,070 | ||||||||||
| Add: One-time electricity charges | — | — | 114 | — | ||||||||||
| Adjusted Gross Profit (Non-GAAP) | $ | 7,827 | $ | 1,100 | $ | 15,438 | $ | 113 |
Sources of Liquidity
30
We have primarily generated cash in the last 12 months from the proceeds of our term loans, issuance of common stock, and the receipt of contractual deposits and revenue prepayments from hosting customers. The Company's primary term loans are noted below.
On July 25, 2022, the Company entered into the Starion Loan Agreement. The Starion Loan Agreement provides for the Starion Term Loan which has a total principal balance of $15.0 million, with an interest rate per annum of 6.50%. Approximately $7.1 million of the proceeds were used to pay down the remaining Vantage term loan balance 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, with a maximum total principal value of $15 million, and an interest rate per annum of 6.15%. 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.
On February 16, 2023, the Company entered into the Starion Ellendale Loan Agreement with Starion Bank. This agreement provides for a term loan in the principal amount of $20 million with a maturity date 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, 2023, the Company received funding for the Starion Ellendale Loan. The funding, net of issuance fees, totaled $19.8 million.
On May 23, 2023, the Company entered into the B. Riley Loan and Security Agreement with B. Riley Commercial Capital, LLC and B. Riley Securities. The B. Riley Loan and Security Agreement provides for a term loan in the principal amount of up to $50 million, with an interest rate of 9.00% per annum. The proceeds of the Loan will be used to provide additional liquidity to fund the buildout of the Company’s recently announced AI cloud platform and datacenters by the Company, and for general corporate purposes and working capital. The Company was initially advanced $34.9 million in funding, net of issuance fees of $1.6 million. The Company repaid the total balance of the B. Riley Loan on July 17, 2023.
See Note 7 - Debt to the consolidated financial statements included in this Annual Report on Form 10-K for more information on our term loans.
On June 27, 2023, the Company began issuing and selling common stock under an "at the market" sales agreement, with Craig-Hallum Capital, pursuant to which the Company may sell up to $125 million in shares of Common Stock. The Company has sold approximately 7.9 million shares. Net proceeds, less commission fees of approximately $2.0 million, are approximately $64.7 million.
During the fiscal year ended May 31, 2023, we received $100.1 million in payments for future hosting services. During the fiscal year ended May 31, 2022, we generated revenue from crypto mining and co-hosting, but we have incurred net losses from operations. During the fiscal year ended May 31, 2023, we have generated revenue from co-hosting, but incurred net losses from operations. As of May 31, 2023 and May 31, 2022, we had cash and cash equivalents of $29.0 million and $38.8 million, respectively, and an accumulated deficit of $100.7 million and $56.1 million, respectively.
Funding Requirements
We have experienced net losses through the periods ended May 31, 2023. Our transition to profitability is dependent on the successful operation of our hosting facilities. We believe that amounts we received from proceeds from our term loans, proceeds from stock offerings, and payments we have received from our hosting operations 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
31
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 continue during calendar 2023 as we continue to grow our AI cloud services business. We also expect that our revenues will increase as we continue to bring online additional capacity at existing datacenter facilities and as we begin to provide services to AI cloud services and HPC customers.
Summary of Cash Flows
The following table provides information about Applied Digital’s net cash flow for the fiscal years ended May 31, 2023 and May 31, 2022.
| Fiscal Year Ended | ||||||
|---|---|---|---|---|---|---|
| $ in thousands | May 31, 2023 | May 31, 2022 | ||||
| Net cash provided by (used in) operating activities | $ | 58,735 | $ | (872) | ||
| Net cash used in investing activities | (132,088) | (45,871) | ||||
| Net cash provided by financing activities | 70,628 | 81,292 | ||||
| Net change in cash, cash equivalents, and restricted cash | (2,725) | $ | 34,549 | |||
| Cash, cash equivalents, and restricted cash at beginning of period | 46,299 | $ | 11,750 | |||
| Cash, cash equivalents, and restricted cash at end of period | $ | 43,574 | $ | 46,299 |
Commentary on cash flows for the fiscal year ended May 31, 2023
Operating Activities
The net cash provided by operating activities of $58.7 million for the fiscal year ended May 31, 2023 consisted primarily of the following:
• $32.1 million non-cash adjustment for stock-based compensation expense;
• $26.8 million increase in customer deposits due to the Company executing new contracts during the period; and
• $44.8 million increase in deferred revenue 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 $45.6 million loss from continuing operations
Investing Activities
The net cash used in investing activities of $132.1 million for the fiscal year ended May 31, 2023 was driven by the increase of purchases of property and equipment and other assets related to the construction of the Company’s Garden City, Texas and Ellendale, North Dakota hosting facilities, as well as deposit payments on equipment.
Financing Activities
32
The net cash provided by financing activities of $70.6 million for the fiscal year ended May 31, 2023 was primarily driven by the following factors:
•$45.7 million in proceeds from term loans
•$36.5 million in proceeds from the related party 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.
Commentary on cash flows for the fiscal year ended May 31, 2022
Operating Activities
The net cash used in operating activities of $0.9 million for the fiscal year ended May 31, 2022 consisted primarily of the following:
•$22.5 million in loss from continuing operations; and
•$1.0 million in loss from discontinued operations
These above factors were partially offset by the following
•$12.3 million non-cash expense adjustment for stock-based compensation expense;
•$6.4 million increase in accounts payable and accrued liabilities due to the timing of payments;
•$9.5 million increase in customer deposits due to the Company executing new contracts during the period; and
•$3.9 million increase in deferred revenue due to prepayments from new contracts as well as more cash being received than revenue recognized during the period.
Investing Activities
The net cash used in investing activities of $45.9 million for the fiscal year ended May 31, 2022 consisted of:
•$55.0 million in purchases of property and equipment related to the construction of the Company’s Jamestown, ND facility; and
•$9.1 million in the sale of equipment related to the Company’s discontinued operations.
Financing Activities
The net cash provided by financing activities of $81.3 million for the fiscal year ended May 31, 2022 consisted primarily of:
•$34.5 million in proceeds from the issuance of preferred stock , partially offset by issuance costs of $2.9 million.
33
•$40.0 million in proceeds from the issuance of Common Stock from the April 2022 initial public offering, partially offset by issuance costs of $4.3 million
•$7.3 million in proceeds from the issuance of term loans; and
•$7.0 million in contributions in equity contributions to 1.21 Gigawatts, a subsidiary of the Company, by noncontrolling interest.
Off Balance Sheet Arrangements
None.
Significant Accounting Pronouncements
None.
Recent Accounting Pronouncements
For a discussion of recently issued financial accounting standards, refer to Note 3 - Basis of Presentation and Significant Accounting Policies, in Part II, Item 8 of this Annual Report on Form 10-K.
Critical Accounting Estimates
Our 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 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.
Stock-based Compensation
We account for stock-based compensation with performance conditions by recognizing expense ratably over the requisite service period once the Company concludes that it is probable that the performance conditions will be achieved. The Company's conclusion as to the probability of achievement is complex and requires judgment. In addition, the Company makes estimates around the service period for certain performance awards that are probable of being achieved. The Company may revise its estimate when it determines that it is probable that the performance condition will be achieved within a different time period.
The Company reassesses the probability related to vesting and the requisite service period at each reporting period, and recognizes a cumulative catch up adjustment for such changes in its probability assessment in subsequent reporting periods. The Company's determination of probability is based on historical metrics, future projections, and the Company's historical performance against such projections.