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May 13, 2022, 5:31 p.m. EDT

10-Q: APPLIED BLOCKCHAIN, INC.

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(EDGAR Online via COMTEX) -- 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

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;

You should carefully review the risks described in the final prospectus of our Registration Statement on Form S-1 (Reg. No. 333-261278) filed with the SEC on April 13, 2022, as well as any other cautionary language in this Quarterly Report, 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.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

Business Overview

We build and operate Next-Gen datacenters which are designed to provide massive computing power. Our first facility was constructed in North Dakota and as of February 2, 2022 is online and providing 55MW of energy and services to customers, with the remaining 45MW expected to be brought online during the second calendar quarter of 2022. 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 will host servers securing the Bitcoin network but can also host hardware for other applications such as artificial intelligence, machine learning and other blockchain networks in the future. 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.

Trends and Other Factors Affecting Our Business Regulatory Environment

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.

COVID-19

Critical Accounting Policies and 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.

Our significant accounting policies are discussed in Note 3 - Basis of Presentation and Significant Accounting Policies, of the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Hosting Operation Highlights

On January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies Holding Company, entered into a joint venture in the form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8 million and $2 million, respectively, and will initially own 80% and 20% of 1.21 Gigawatts, respectively. 1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with initially up to 1.5GW of capacity for hosting blockchain infrastructure. We Table of Contents

On February 2, 2022, we brought our North Dakota facility online as to the first 55MW, with the remaining 45MW expected to be brought online during the second calendar quarter of 2022.

On March 9, 2022, the Company ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. Total proceeds from the sale of the equipment were $1.6 million, and the Company will recognize a loss $2.9 million on the sale of the equipment during the quarter ending May 31, 2022. The Company has no plans to return to crypto mining operations in the future as we grow our co-hosting operations. The results of the crypto mining operations are accounted for as discontinued operations in our consolidated financial statements as of and for the period ended February 28, 2022. Expansion Opportunities

On November 24, 2021, we entered into a letter of intent to develop a facility in Texas with 200MW of wind power. The arrangement is subject to entry into definitive agreements by the parties. Construction of the facility began in March 2022.

We are exploring potential new locations where we intend to replicate our hosting business model. Additionally, we are evaluating potential partnerships with owners of low-cost energy sources, with a particular focus on renewable sources, as a potential avenue to grow our hosting operations.

As our hosting operations expand, we believe our business structure will become conducive to a REIT structure, comparable to Digital Realty Trust /zigman2/quotes/206785129/composite DLR -1.12% and Equinix, Inc. /zigman2/quotes/208927761/composite EQIX -0.52% , each of which is a traditional datacenter operator and Innovative Industrial Properties, Inc. /zigman2/quotes/208038978/composite IIPR -1.68% , 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. Public Offering and Changes to Equity

On August 13, 2021, the Company filed a registration statement for the resale by certain selling stockholders of shares of Common Stock with the SEC (Reg. No. 333-258818) (the "Resale Registration Statement") and received a notice of effectiveness for such registration statement on April 12, 2022. On November 22, 2021, the Company filed a registration statement for the sale by the Company of shares of Common Stock with the SEC (Reg. No. 333-261278) (the "IPO Registration Statement") and received a notice of effectiveness for such registration statement on April 12, 2022. On April 11, 2022, the Company filed a registration statement for the Common Stock under the Securities Exchange Act of 1934, as amended, with the SEC which became effective automatically on April 12, 2022.

On April 12, 2022, concurrent with receipt of the notice of effectiveness for the Resale Registration Statement, all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were automatically converted (without payment of additional consideration) into fully paid and non-assessable shares of Common Stock, consistent with the Series C and Series D Preferred Stock terms. All rights with respect to the Series C and Series D Preferred Stock terminated upon conversion.

The Company's board of directors approved a reverse split of shares of the Company's common stock on a one-for-six basis, which was effected on April 12, 2022 (the "Reverse Stock Split"). All references to Common Table of Contents

On April 13, 2022, the Company announced its initial public offering of 8 million shares of its Common Stock at $5.00 per share. The shares began trading on the Nasdaq Global Select Market on April 13, 2022, under the ticker symbol "APLD."

On April 18, 2022, the Company completed its initial public offering. In addition, the Company granted the underwriters a 30-day option to purchase up to an additional 1,200,000 shares of common stock at the public offering price, less underwriting discounts and commissions. The net proceeds received by the Company from the offering (after deducting underwriting discounts and commission and estimated offering expenses) were approximately $36 million. The Company intends to use the net proceeds to lease or purchase additional property on which to build additional co-hosting facilities, to construct those facilities, to enter into additional energy service agreements for each additional site and for funding its working capital and general corporate purposes.

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        Results of Operations Comparative Results for the Three and Nine Months Ended
        February 28, 2022 and 2021:
        The following table sets forth key components of the results of operations (in
        thousands) of Applied Blockchain during the three and nine months ended February
        30, 2021 and 2020.
                                                                Three Months Ended                                Nine Months Ended
                                                                                                          February 28,
                                                      February 28, 2022   February 28, 2021                   2022       February 28, 2021
        Revenues:
        Hosting revenue                              $          1,026    $             -                  $    1,026    $              -
        Total revenue, net                           $          1,026    $             -                  $    1,026                   -
        Cost of revenues                             $          2,073    $             -                  $    2,073    $              -
        Gross Profit                                           (1,047)                 -                      (1,047)                  -
        Costs and expenses:
        Selling, General and Administrative                     1,356                  -                       3,234                   -
        Stock-based compensation for service
        agreement                                                   -                  -                      12,337                   -
        Depreciation                                               14                  -                          14                   -
        Total costs and expenses                                1,370                  0                      15,585                   0
        Operating loss                                         (2,417)                 -                     (16,632)                  0
        Other income (expense):
        Interest Expense                                            -                (77)                          -                (223)
        Gain on Extinguishment of Accounts Payable                 80                  -                         405                   -
        Loss on Extinguishment of Debt                              -                  -                      (1,342)                  -
        Income Tax Expenses                                       (60)                 -                        (274)                  -
        Total Other Income (Expense)                               20                (77)                     (1,211)               (223)
        Net Loss from Continuing Operations                    (2,397)               (77)                    (17,843)               (223)
        Net Loss from Discontinued Operations                  (4,048)                 -                      (2,870)                  -
        Total Net Loss                               $         (6,445)   $           (77)                 $  (20,713)   $           (223)
        Adjusted Amounts (a)
        Adjusted Operating Loss from Continuing
        Operations                                   $         (2,064)   $             -                  $   (2,289)   $              -
        Adjusted Operating Margin from Continuing
        Operations                                            (201.17) %               -    %                (223.14) %                -  %
        Adjusted Net Loss from Continuing Operations $         (2,044)   $           (77)                 $   (3,500)   $           (223)
        Other Financial Data (a)
        EBITDA                                       $         (2,092)   $             -                  $  (17,324)   $              -
         as a percentage of revenues                           (203.9) %               -    %                (1688.5) %                -  %
        Adjusted EBITDA                              $         (1,739)   $             -                  $   (2,981)   $              -
        as a percentage of revenues                            (169.5) %               -    %                 (290.6) %                -  %
        


(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.

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Commentary on Results of Operations Comparative Results for the Three Months Ended February 28, 2022 and 2021:

Revenue:

For the three months ended February 28, 2022, hosting revenue was $1 million, and there was no data center hosting revenue for the three months ended February 28, 2021. Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. All of the Company's revenues were generated from its North Dakota facility which became operational on February 2, 2022.

Costs and expenses

Cost of revenues for hosting for the three months ended February 28, 2022, was $2.1 million and there were no hosting costs for the three months ended February 28, 2021. The costs consisted primarily of electricity costs, including costs for the North Dakota facility under noncancelable purchase commitments prior to the facility becoming operational on February 2, 2022. Other costs include personnel cost for employees directly working at the hosting facility and depreciation expense for equipment in service at the hosting facility.

Selling, general and administrative expenses during the three months ended February 28, 2022 were $1.4 million and there were no selling, general, and administrative expenses during the three months ended February 28, 2021. The 2022 costs consist of selling, general and administrative expenses consist of legal and professional fees, advertising and marketing expenses, and other personnel and related costs.

Other income and expense:

Other income for the three months ended February 28, 2022 was $20 thousand and other expense for the three months ended February 28, 2021 was $77 thousand. The change is primarily related to a decrease in interest expense due to the conversion of a related party note payable into Common Stock during the first fiscal quarter of the year ending May 31, 2022, as well as a gain recognized in the extinguishment of accounts payable, partially offset by an increase in income tax expense.

Commentary on Results of Operations Comparative Results for the Nine Months Ended February 28, 2022 and 2021

Revenue:

For the nine months ended February 28, 2022, hosting revenue was $1 million, and there was no data center hosting revenue for the nine months ended February 28, 2021.Hosting revenue includes upfront payments which we record as deferred revenue and generally recognize as services are provided. All of the Company's revenues were generated from its North Dakota facility which became operational on February 2, 2022.

Costs and expenses:

Cost of revenues for hosting for the nine months ended February 28, 2022, was $2.1 million and there were no hosting costs for the nine months ended February 28, 2021. The costs consisted primarily of electricity costs, including costs for the North Dakota facility under noncancelable purchase commitments prior to the facility becoming operational on February 2, 2022. Other costs include personnel cost for employees directly working at the hosting facility and depreciation expense for equipment in service at the hosting facility.

Selling, general and administrative expenses during the nine months ended February 28, 2022 were $3.2 million and there were no selling, general, and administrative expenses during the nine months ended February 28, 2021. The 2022 costs consist of selling, general and administrative expenses consist of legal and professional fees, advertising and marketing expenses, and other personnel and related costs.







        Table of Contents
        


Stock-based compensation during nine months ended February 28, 2022 was $12.3 million and there were no stock-based compensation costs for the nine months ended February 28, 2021. The 2022 cost was incurred as part of a service agreement for the first fiscal quarter in the year ending May 31, 2022.

Other Expenses:

Other expenses for the nine months ended February 28, 2022 was $1.2 million and other expense for the nine months ended February 28, 2021 was $223 thousand. The change is primarily related to a loss recognized on the extinguishment of a related party note to Common Stock during the first fiscal quarter of the year ended May 31, 2022, as well as recognition of income tax expense during 2022, partially offset by a reduction of interest expense due to the conversion of a related party note payable to Common Stock during the first fiscal quarter of the year ended May 31, 2022, and gains recognized on the extinguishment of accounts payable.

Table of Contents







                                                                 Three Months Ended                                Nine Months Ended
                                                                                                        February 28,
        $ in thousands                              February 28, 2022         February 28, 2021             2022             February 28, 2021
        Adjusted operating loss
        Operating Loss from Continuing Operations
        (GAAP)                                     $         (2,417)         $             -            $  (16,632)         $              -
        Add: Stock-based compensation for service
        agreement                                                 -                        -                12,337                         -
        Add: Gain on Extinguishment of Accounts
        Payable                                                 (80)                       -                  (405)                        -
        Add: Loss on Extinguishment of Debt                       -                        -                 1,342                         -
        Add: Non-deferred professional service
        costs                                                   433                        -                 1,069                         -
        Adjusted Operating Loss from Continuing
        Operations (Non-GAAP)                      $         (2,064)         $             -            $   (2,289)         $              -
        Adjusted operating margin from Continuing
        Operations                                           (201.2) %                     -    %           (223.1) %                      -  %
        Adjusted net income (loss)
        Net Loss from Continuing Operations (GAAP) $         (2,397)         $           (77)           $  (17,843)         $           (223)
        Add: Stock-based compensation for service
        agreement                                                 -                        -                12,337                         -
        Add: Gain on Extinguishment of Accounts
        Payable                                                 (80)                       -                  (405)                        -
        Add: Loss on Extinguishment of Debt                       -                        -                 1,342                         -
        Add: Non-deferred professional service
        costs                                                   433                        -                 1,069                         -
        Adjusted net loss from Continuing
        Operations (Non-GAAP)                      $         (2,044)         $           (77)           $   (3,500)         $           (223)
        EBITDA and Adjusted EBITDA
        Net Loss from Continuing Operations (GAAP) $         (2,397)         $           (77)           $  (17,843)         $           (223)
        Add: Interest Expense                                     -                       77                     -                       223
        Add: Income Tax Expense                                  60                        -                   274                         -
        Add: Depreciation                                       245                        -                   245                         -
        EBITDA (Non-GAAP)                          $         (2,092)         $             -            $  (17,324)         $              -
        Add: Stock-based compensation for service
        agreement                                                 -                        -                12,337                         -
        . . .
        


May 13, 2022

COMTEX_407158664/2041/2022-05-13T17:30:39

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