Applied Digital Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 11, 2024

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to Applied Digital's Fiscal Third Quarter 2024 Conference Call. My name is Doug, and I will be your operator today. Before this call, Applied Digital issued its financial results for the fiscal Q3 ended February 29, 2024. In a press release, a copy of which will be furnished in a report on Form 8 ks filed with the SEC and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins and CFO, David Wrench.

Operator

Following their remarks, we will open the call for questions. Before we begin, Alex Kufton from Gateway Group will make a brief introductory statement. Mr. Compton, please proceed.

Speaker 1

Great. Thank you, operator. Good afternoon, everyone, and welcome to Applied Digital's fiscal Q3 2024 conference call. Before management begins their formal remarks, we would like to remind everyone that some statements we're making today may be considered forward looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward looking statements.

Speaker 1

For more detailed risks, uncertainties and assumptions relating to our forward looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or any undertaking to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made, except as required by law. We will also discuss non GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the Securities and Exchange Commission for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption Risk Factors in our Annual Report on Form 10 ks and our quarterly report on Form 10 Q. You may get Applied Digital's Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov.

Speaker 1

I would also like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Digital's website. Now I will turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes?

Speaker 2

Thanks, Alex, and good afternoon, everyone. Thank you for joining our fiscal Q3 2024 conference call. I want to start by thanking our employees for their ongoing hard work and service in supporting our mission of providing purpose built infrastructure to the rapidly growing high performance computing industry. Before turning over the call over to our CFO, David Wrench, for a detailed review of our financial results, I'd like to share some recent developments across our business. During the quarter, we encountered several challenges that impacted our financial performance due to facility power outages in our data center hosting business.

Speaker 2

Despite these short term setbacks, the company has made significant progress with our key growth initiatives in the development of our cloud services business and the establishment of our special purpose built 100 Megawatt HPC data center in Ellendale. Our achievements include welcoming our newest cloud service together AI and the strategic decision to divest our Garden City facility. We are also pleased to announce that we have entered into exclusivity and executed an LOI with the U. S. Based hyperscaler for 400 megawatts of capacity at our Ellendale campus, inclusive of our current 100 megawatt facility and 2 forthcoming buildings.

Speaker 2

We're in discussions for project level financing for this investment grade tenant and we hope to have construction financing in place coinciding with the signed lease. We also significantly strengthened our balance sheet after the quarter closed with $160,000,000 of announced asset sales and financing transactions. Now I will provide an update on each of our business units. Let's begin by discussing our data center hosting business. Our 100 Megawatt Jamestown facility has consistently met expectations, operating at full capacity with uninterrupted uptime throughout the quarter.

Speaker 2

This achievement marks the 6th consecutive quarter of full capacity operation for the Jamestown facility. While we are pleased with Jamestown's performance, we encountered challenges at our other facilities. As previously disclosed, our 180 Megawatt Ellendale facility in North Dakota experienced a power outage starting in January. In response to these challenges, our utility provider installed additional equipment to enable us to selectively power down the affected portions of our site. Upon reenergization, we have determined that the failures were due to transformers not meeting industry standards.

Speaker 2

We have now successfully procured replacement transformers and related components from North American industry leading manufacturers. As of today, the Ellendale facility has been re energized to approximately 14% of its full capacity or 25 megawatts. Additionally, we anticipate that as the new transformers are received and installed, the Ellendale facility will be operating at 65% to 75% of full capacity by the end of May 2024. The company is also pursuing remedies to recoup lost revenues and additional costs incurred to identify and rectify the outages. Furthermore, we made the strategic decision to sell Garden City as it was not compatible with our HPC growth strategy.

Speaker 2

This divestment enables us to redirect financial and operational resources towards our strategic sites in North Dakota, bolstering our growth initiatives in HPC and cloud service applications. The decision to sell this facility underscores our commitment to optimizing our asset portfolio while focusing on our core growth areas. As a result of this sale, we will maintain 280 megawatts of data center hosting capacity across our 2 fully contracted locations in North Dakota. This positions us to be insulated from volatility in the crypto markets leading up to the having event. Let's move on to our cloud services business, which provides high performance computing power for AI applications.

Speaker 2

Despite a lack of significant sequential revenue growth due to delays clusters entering revenue generation, this segment continues to experience rapid growth as we advance in fulfilling our existing contracts and exploring new opportunities in our pipeline. We've recently seen positive developments including the enrollment of clients like TogetherAI and we have exited this quarter with positive momentum. The newly deployed clusters were turned over to customers late in the quarter, which will provide a significant positive inflection to revenue and EBITDA in our fiscal Q4. Lastly, let me provide an update on our purpose built HPC data centers. We currently have 400 megawatts of capacity in development across North Dakota, not including the 9 megawatts of capacity we have at our HPC facility in Jamestown to support cloud service customers.

Speaker 2

During the quarter, we continued to make significant strides in the construction of our 100 Megawatt High Performance Computing Facility in Ellendale, North Dakota. This state of the art facility will feature cost effective, highly efficient liquid cooled infrastructure specifically designed for the most demanding HPC applications. Construction is proceeding as expected and we are proud of the progress to date. We encourage you to visit our social media channels for some recent images of the facility. As previously mentioned, we have entered into exclusivity and executed a letter of intent with the U.

Speaker 2

S.-based hyperscaler for a 400 Megawatt capacity lease and are progressing with project level financing tailored for this investment grade tenant. In summary, we are encouraged by the positive trends we are witnessing across our business and remain confident in our growth trajectory. We are excited about the numerous potential catalysts on the horizon. We'll continue to allocate our capital strategically to achieve the highest risk adjusted returns and maximize shareholder value. With that, I will now turn the call over to our CFO, David Wrench to walk you through our financials and provide an update on guidance.

Speaker 2

David?

Speaker 3

Thanks, Wes, and good afternoon, everyone. Let me begin by addressing the complexity of this quarter's financial reporting. Although we reported an adjusted EBITDA loss of approximately 2,300,000 dollars several one time items significantly impacted our financial performance and comparability to prior quarters. Notably, we missed out on a substantial revenue opportunities in our cloud service business due to the difference of timing between hardware delivery and final configuration and customer access. We incurred one time professional service expenses primarily related to our capital raising initiatives, financial analysis for data center financing and strategic transactions.

Speaker 3

Additionally, unexpected expenses arose from addressing power outages at our Ellendale data center posting facility, which alone had an estimated $4,500,000 impact on operating loss during the quarter. We also incurred a $21,700,000 loss on held for sale classification related to the Garden City transaction and $4,200,000 of accelerated depreciation and amortization related to the disposal of damaged equipment of the Ellendale facility, which further impacted our financials. We are pursuing all available remedies to recoup lost revenues and the additional costs incurred to identify and rectify these outages. With these items in mind, let's move to our results for the quarter. Revenues for the fiscal Q3 of 2024 were $43,300,000 compared to $14,100,000 for the fiscal Q3 of 2023.

Speaker 3

The increase was driven primarily by increased capacity across data center hosting facilities and the contribution of revenue from the cloud services contracts. Our data center hosting segment generated $37,700,000 revenue while our cloud services segment generated $5,600,000 of revenue. Cost of revenues for the fiscal Q3 of 2024 was $47,100,000 compared to $10,500,000 for the fiscal Q3 of 2023. The increase in cost of revenues was attributable to higher energy costs due to higher number of megawatts used to generate hosting revenues as well as increases in depreciation and amortization expense and personnel expenses driven by the growth of the business as more facilities were energized. Selling, general and administrative expenses for the fiscal Q3 of 2024 were $30,400,000 compared to $10,500,000 in the prior year comparable period.

Speaker 3

The increase was primarily due to a start up costs as we ramped the cloud services business, including increases in depreciation, amortization and lease costs on assets not yet supporting revenue as well as personnel costs to support the overall growth of the business. Net loss for the fiscal Q3 of 2024 was $62,800,000 or $0.52 per basic and diluted share based on a weighted average share count during the quarter of approximately 121,400,000. This compares to a net loss of 7,000,000 or $0.07 per basic and diluted share in the fiscal Q3 of 2023 based on a weighted average share count during the quarter of approximately 94 $100,000 Notably, our cloud services business reported a $21,600,000 operating loss this quarter, inclusive of $16,500,000 in depreciation and amortization expenses alone. We expect these losses to decrease as we deploy more clusters over the next 6 months. Adjusted net loss, a non GAAP measure for the fiscal Q3 of 2024 was $28,900,000 or adjusted net loss per basic and diluted share of $0.24 based on a weighted average share count during the quarter of approximately 121,400,000.

Speaker 3

This compares to adjusted net loss of $1,400,000 or $0.01 per basic and diluted share for the fiscal Q3 of 2023 based on a weighted average share count of approximately 94,100,000 during the quarter. Adjusted EBITDA, a non GAAP measure for the fiscal Q3 of 2024 was a loss of $2,300,000 compared to adjusted EBITDA for the fiscal Q3 of 2023 of $900,000 Moving to our balance sheet, we ended the fiscal Q3 with $41,000,000 in cash, cash equivalents and restricted cash and $61,800,000 in debt. We continue to work on improving our cash position taking into account the sale of our Garden City location, which includes maximum cash consideration of approximately $87,300,000 while there are still ongoing elements in the sale of the Garden City assets, including a $25,000,000 holdback and a $9,000,000 in continued liabilities relating to final power approval in Texas, we have observed an improvement in our balance sheet since the close of the quarter, including a $50,000,000 convertible debenture that we recently announced. Despite the challenges, we are encouraged in the past quarter, we remain confident in the promising future of Applied Digital. Now I'll turn the call over to Wes for closing remarks.

Speaker 2

Thank you, David. I'd like to take a few minutes to discuss our capital formation strategy to fund the growth we expect in our business. Our 2 highest growth segments are capital intensive businesses. To date, we have primarily been funding these initiatives from corporate level financings. We are planning for this to change in the near future.

Speaker 2

Specifically to cloud services, we have been engaged in a process since late last year to secure a large debt facility directly at our cloud services subsidiary to fund GPU purchases. We have received indications from multiple parties and are proceeding forward with a goal to close a debt facility by the end of the current fiscal quarter. The debt facility has some attractive attributes relative to the leases we currently use to fund the deployments. First, it would change the amortization schedule for the GPUs from the current 2 years to approximately 5 years, which would align with the expected useful life. This would have a positive effect on our income statement in the near term as well as aligning the assets and liabilities on our balance sheet to better reflect reality.

Speaker 2

A significant portion of our lease financing is in current liabilities, while the entire asset of the GPUs is in long term assets. This creates a growing negative working capital balance as we deploy more GPUs. If we're not successful in securing the debt facility, we will continue to have access to lease financing and have recently seen more attractive financing structures coming to the market. Moving to our HPC data center financing, we have been funding the initial building of our cost of our Ellendale facility with corporate level funds. We had been in the process of securing project level debt for this facility since late last year.

Speaker 2

We have multiple interested parties. The recent positive results from a feasibility study have pushed this process forward. We expect to have this financing in place with the execution of the lease on the current 100 megawatt building. Once these asset level financing vehicles are in place, it will leave the company in a positive free cash position due to the strategic financing in the different business segments. In summary, we faced significant challenges this quarter, largely due to external factors that we are fully dedicated to delivering strong long term shareholder value.

Speaker 2

The robust demand for our products and services coupled with our differentiated asset base and the attractive valuation of our peers strengthens our conviction. We welcome your questions at this time. Operator?

Operator

Thank you. Our first question comes from the line of Lucas Pipes with B. Riley. Please proceed with your question.

Speaker 4

Thank you very much, operator. Good afternoon, everyone. Wes, you described Allendale and Jamestown as strategic. So I wanted to ask if it's fair to conclude from that comment that those assets would not be sold, specifically just the BTC piece of it? Thank you very much.

Speaker 2

Sure. Thanks, Lucas. So those assets are strategic to us and that they have really good fiber connectivity at those sites versus what we had in Texas, and we have no plans of selling those in the immediate future.

Speaker 4

That's helpful. Thank you. And then on Allendale, you mentioned you have more than 600 megawatts of future capacity. And first, is this 600 megawatt inclusive of the current PTC business or incremental? And then how is this power capacity secured?

Speaker 4

Obviously, there's a lot of interest for power assets out there with everything that you've been talking about for a very long time. So I wonder how investors should think about that. Thank you.

Speaker 2

Yes. So it's inclusive of the $180,000,000 on the BTC. And right now we've secured 5 35 Megawatts at that site, but we believe it goes to 605.

Speaker 4

Got it. And what's the mechanism is through down payments or could you expand on that a bit?

Speaker 2

I'm sorry, the mechanisms for?

Speaker 4

Well, the mechanisms through which this power is secured at?

Speaker 2

It's through signed ESAs.

Speaker 4

Very helpful. Thank you. And then, I'll try to squeeze one more in. Just in terms of the facility that you had mentioned for the GPUs. What potential size could we think about for that?

Speaker 2

I'm hesitant to say the size, but somewhere in the multi $100,000,000 maybe $500,000,000 to roughly $1,000,000,000 range.

Speaker 4

Okay. Wes, really appreciate all the color and to you and the team, best of luck.

Speaker 2

Thanks.

Operator

Our next question comes from the line of George Sutton with Craig Hallum. Please proceed with your question.

Speaker 5

Thank you. Wes, obviously, the big news on this call is the 400 Megawatt Hyperscaler contract. Can we just talk about that relative to the 100 Megawatt that you had previously announced? Where does that original 100 Megawatts that Would this be in addition to or a completely new move on your part with respect to what you have out there for sale?

Speaker 2

Yes. So the 400 megawatts is inclusive of the 100 megawatts. So we'll take that. The previous customer didn't go forward. As I've mentioned on our call, last call in January, we have had a significant amount of interest at that site.

Speaker 2

And I think, I feel like we're moving forward with the best party for us to move forward with, which is effectively for the entire site.

Speaker 5

Okay, great. So the original customer in talking to some of the infrastructure investors that we talked to would suggest of a little bit more challenging to finance a 10 year contract. This hyperscaler customer definitionally would be a very high credit worthy customer and therefore I assume the ability to get that finance would be substantially easier. Is that a

Speaker 2

reasonable scenario? Yes. That's the correct way to think about that.

Speaker 5

So when you announced the 100 Megawatts deal, you gave some a sense of a 10 year contract term of about $2,200,000,000 Would this be suggestive of an $8,000,000,000 plus 10 year deal? Is that kind

Speaker 6

of how I'm to read that?

Speaker 2

Yes. I don't want to get into too many of the details because there's a ways to go here. But this what we're looking at is more like 15 year commitments. But it sticks close to what we've talked about in the past, what the economics per megawatt we expect.

Speaker 5

Okay. And then finally on the GPU side, could you just give us a quick update on sort of where your orders sit, where the supply of GPUs, how well that's coming in, inclusive of InfiniBand? And just any sense on an example of sort of once you get a cluster built, how long it takes to get to revenue recognition, so just so we're clear on that?

Speaker 2

Yes, sure. So a couple of things on that. We feel good on the supply. We're seeing shipments, including everything. 1 of the blocks we hit a little bit in the quarter is we've been hiring more people because there is a significant amount of work to put these together to commission them and turn them over to customers.

Speaker 2

And we have a limited team. And so we've been adding to that team. I think it's tens of thousands of cables that need to be connected. The cabling takes a long time and then the commissioning, but there's a lot of work involved. So hopefully, we'll shorten that with experience and with more bodies in the future.

Speaker 2

But the right now you should be thinking about 8 weeks from when we receive all components on-site to the clusters being turned over to customers.

Speaker 5

All right. Very good. Thank you for answering.

Speaker 2

Absolutely. Thanks, George.

Operator

Our next question comes from the line of Rob Brown with Lake Street. Please proceed with your question.

Speaker 2

Good afternoon.

Speaker 7

On the large potential new contract, could you give us a sense of the steps that go into that? Is it contingent on financing or are there details to negotiating contracts and then you go out and get financing, just a sense of the steps and timing on how that plays out?

Speaker 2

Sure. So I'm not worried about financing on this one. There's just a process that the steps you go through from where we are now, some diligence, a lot of things that we have to provide and there's a lot of work to be done from a legal contracting perspective. And then I would expect this to be kind of a 60 to 90 day process from when we started.

Speaker 7

Okay, good. And I guess on the transformer that you're trying or transformers you're trying to procure and get put in place, You have some timing on May, but what's the timeline for the rest of the transformers in getting that site up to full speed?

Speaker 2

So we've procured all the transformers. They'll all be on-site within the next few weeks. And then it'll just be the work connecting these. There's I don't have to get into the weeds too much, but there's been a certain connector component that actually has been the delay, not the transformers on connecting and energizing these. But we've already installed several of them and they should just continue daily as we ramp this back up.

Speaker 2

The all indications from a performance perspective is the new transformers we procured are working extraordinarily well. And so we expect that to proceed fairly smoothly. But it was procuring transformers in this market is not easy. We were I was really happy with the team able to find the amount of transformers we found and the timeframe we found them. And like I said, already shipped to site, it's painful for us with that site being down just from an economic perspective.

Speaker 2

The faster and for our customer by the way. So the faster we can get that back online, the better for all of us. Thank you. I'll turn it over.

Operator

Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Speaker 8

Hey, thanks. Hey, Wes, you said the contract with the hyperscaler, the 400 megawatts was like 60 to 90 days from when you started. When roughly did those discussions start? Just trying to figure out that start date.

Speaker 2

It's I'm trying to think on it, but it's been going for maybe 3 or 4 weeks on the discussions. And just to make it clear, it's not there's no contract. There's a letter of intent, which is kind of the standard process here.

Speaker 8

Got it. But I think you're saying from when you started 3 or 4 weeks ago, 60 to 90 days from that time, you might have a contract and financing in place?

Speaker 2

Yes, I think that's the right way to think about it.

Speaker 8

Okay. And then on the cloud services GPU side, how many GPUs did you own at the end of February? And how many were generating revenue? And then what's your kind of estimate for the same, how many you'll own and will be generating revenue at the end of May?

Speaker 2

Yes. So we owned, I believe, 5,000, 5,120 or 5,120, the H100 Class GPUs. So there's 4,000 and I'm having trouble doing the math in my head to round it to the exact number, but so rounded to 4,000. There's 4,000 in revenue generation now. And then there's 2,000 that are being brought up to that stage and we should have more before the end of the quarter.

Speaker 8

Got it. So $4,000 as of today you're generating revenue and another $2,000 to $4,000 by the end of May?

Speaker 2

Yes, that's our goal.

Speaker 8

Okay. Okay. And roughly how much do the transformers cost that you need to do put into Ellendale, the new ones?

Speaker 2

I have David here. Yes, dollars 300,000 a piece.

Speaker 8

And how many total did you need?

Speaker 2

We needed about 45 of those. There's some of the ones that the other model that we had that are still working technically, but we're replacing all of them.

Speaker 8

Got it. Okay. And last question for me. Do you guys have a rough kind of committed CapEx number for the rest of calendar 2024?

Speaker 2

We have We have 7 more weeks of calendar 2024, I'm sorry. Let me come back to you on that, Mike. I don't have that in front of me. We didn't have it here for the call.

Speaker 9

Fair enough. Okay.

Speaker 2

Mike, I did want to make a point on the GPU business. We've been adding people, we've been accelerating or working to accelerate from receiving to revenue generating. But there's one piece that I mentioned on the last call and we're much more focused on it now, which is we started seeing demand from enterprise customers and large enterprise customers, which we've really been focused on. And so pushing we can continue to deploy with the current customer base kind of as aggressively as we want to, but we'd really like to transition up to the enterprise customers and we're close. I think we have a few of those in process right now, but that's one of the reasons that there's some other slowness in the deployment through the end of May, just because I'd like to diversify our customer base outside of just the startups.

Speaker 2

I'd love our customers there, but we would like to diversify the customer base. We're working pretty hard on that.

Speaker 8

Got it. Okay. Hey, thank you.

Operator

Our next question comes from the line of Darren Aftahi with ROTH. Please proceed with your question.

Speaker 9

Hey, guys. Thanks for taking my questions. Wes, if I could follow-up on that last comment you made. So I think in the prior call, you guys guided to 10,000 as a bogey for GPU number exiting May. Can you sort of speak to that goal if it's still 1?

Speaker 9

And then embedded in that, your comment about slowing down to diversify away from more VC backed clients. Is the achievement of getting that 10,000 less important, but more important to be diversified going into fiscal 2025?

Speaker 2

Yes, I think you hit it right on the second one. The types of customers diversifying away from the group of they're all doing different things, obviously, different products for the start up. So it's diversified through those customers, but it's all similar and they're all start ups and mostly VC backed. And so I think it's more important for us just to think about diversification in that business over the longer term instead of kind of rushing to make a single date. And I just outside of that, I wanted to make a correction, 200,000 on the transformers, not 300,000 on the prior question.

Speaker 9

Got it. And then maybe one on the data center piece. So the hyperscaler LOI, is there a financing negotiation period like you have with your prior LOI? No. Okay.

Speaker 9

And does that LOI include a capacity

Speaker 1

beyond the

Speaker 9

400 megawatts? No. Got it. And just last one for me. Any change on AI cloud pricing since the last call?

Speaker 9

Has it stayed stable or moved up?

Speaker 2

Yes, it's been stable. I think if I talked about this on the last call, but we've kind of seen that pricing level out. I hate giving pricing talk on public calls, but kind of where the prepayment percentage and the price per hour on GPUs has been pretty steady for us since the last quarter.

Operator

Got it. Thank you. Appreciate it. Our next question comes from the line of John Zadaro with Needham and Company. Please proceed with your question.

Speaker 2

Thanks for taking my question, guys. Just kind of summarizing it here. So first on the GPU piece, you had mentioned, I think it's 4,000 generating revenue now, 2,000 to 4,000 brought online end of May. So kind of as we think about that exiting May run rate, fair to say about 8,000 generating revenue? Could be close to $8,000 somewhere between $6,000 $8,000 is the right number to think about.

Speaker 2

Okay. And then on the so the enterprise customers that you'd want to diversify into, so those still aren't signed. So the slowdown is you still would need to go out and sign those or kind of I

Speaker 5

guess just where are we in that process?

Speaker 2

Yes. So it's advanced since the last quarter. I think I'd mentioned we were in proof of concept with some and there's more it's moved to contract negotiation. So that's it's definitely made an advancement. Those take they just take longer.

Speaker 2

I haven't talked I don't know, I think I've talked about this publicly, but like our first customer contract we signed, I think it was 2 weeks from initial conversation to signing. So it was pretty fast. The enterprise has a much longer process for qualification, but we're I'm happy where we are in that process. Got it. And then just lastly, so on the the 100 Megawatt site, how much now is built on it

Speaker 5

on a percentage basis? And how much

Speaker 2

financing additionally needs to do to get it 100% done? Yes. So we have about a little over $100,000,000 into that site at this point. And where we're negotiating now on financing, we expect the LTC somewhere in the 80% to 85% range. So we've put a lot of the money in that we're going to need to put in on the equity side.

Speaker 2

Got it. Okay. Thanks, Wes. Appreciate it. Yes, absolutely.

Operator

Our next question comes from the line of Kevin Dede with H. C. Wainwright. Please proceed with your question.

Speaker 6

Thanks. Hi, Wes. Thanks for having me on. Yes.

Speaker 9

Thanks, Kevin. Sure. Can you give

Speaker 6

me a ballpark on how many AI customers you have now that are running off of like the Nevada, Colorado, Minnesota and Ellendale sorry, Jamestown sites?

Speaker 2

Yes. So we have primarily we have some smaller, but we primarily have 2 larger customers that are deployed. And we expect to deploy more with the new clusters that we're bringing up. So yes, the 4,000 that are in service is split primarily between 2 customers.

Speaker 6

Are you thinking that you'll be able to dump those co location sites and move what you have there to Ellendale in the next quarter?

Speaker 2

So Ellendale is going to go we won't have capacity for our AI cloud at Ellendale as it's currently structured. The potential customer there is taking all of that capacity. And I think that's the right decision for the company on long term contract and just where to best place our dollars. The co location sites, I think are going to prove to be extraordinarily valuable. The demand we see from enterprise and even some customers that are larger than enterprise is pretty large.

Speaker 2

And I think we're not going to have a problem filling those up. I would never cut those loose because it's extraordinarily hard to find in the market.

Speaker 4

Okay.

Speaker 6

Can you help me understand the difference between the transformers you had at Ellendale versus the ones at Jamestown and why the Ellendale ones failed on you?

Speaker 2

Yes. So the I don't want to get into too many of the specifics here because as we said, we're going to be pursuing all remedies to recoup our costs there. But the Ellent or the Jamestown transformers are from a U. S. Based one manufacturer actually based in Texas.

Speaker 2

And then when we went to Ellendale, we had speed of delivery. We bought some from a non Americas based company. And they're a well recognized company in the industry, but we've made that change and they just haven't lived up to spec as far as I'm concerned.

Speaker 6

Understood. I appreciate the color. You mentioned that you were okay on equipment source, but if I remember, you did see some problems getting the InfiniBand product. Is that no longer an issue? I know you mentioned it earlier this evening, but I just want to make sure I understood it.

Speaker 2

Yes, no longer an issue.

Speaker 6

Okay. So what would keep you from reaching that 8,000 goal that you have for May?

Speaker 2

I don't think there will be anything that keeps us from reaching that. Like I said, we're in process as soon as we secure some of these other customers that we have been pursuing. I think you'll see us accelerate, which is like I said, why we're augmenting the team for deployment and so that we can move quickly with that. So I don't see anything from a supply chain side that will stop us.

Speaker 6

Based on I think you alluded to what $160,000,000 I think that includes the sale of Garden City

Speaker 4

that you

Speaker 6

have in your hands, how far does that get you? And does that mean the Jamestown HPC site is fully paid for and you're just working to build the 400 now? Yes.

Speaker 2

So, Jamtown is paid for. It gets us out ways. It's just a matter of how much we spend on construction in Ellendale between now and site level financing. So hopefully that's 6 to 8 weeks away, because that's where the vast majority of our funds are going. And if we something went awry and that got delayed or pushed, could we pause there?

Speaker 2

Yes, we could. But that's where the vast majority of our CapEx is going at this point.

Speaker 6

And just apologies for not being the sharpest tool in the shed, Wes. But just to make sure, the site level financing is a function of turning that LOI to a contract?

Speaker 2

Correct.

Speaker 4

Okay.

Speaker 6

Thank you for entertaining my questions and apologies for making you go over stuff.

Speaker 2

Not never a problem.

Operator

Our next question comes from the line from Lucas Pipes with B. Riley. Please proceed with your question.

Speaker 4

Thank you very much for taking my follow-up question. Wes, I wondered if you could maybe talk a little bit about the cadence of how the LOI came about. You had a contingent financing agreement up until recently. Did you decide to walk away from that, that agreement expire? Was the hyperscaler kind of always in the wings?

Speaker 4

Was there a discussion with the same hyperscaler before you entered into this prior agreement? Would you just give us some additional color?

Speaker 2

Sure. So Lucas, we've constantly had discussions. Once we went into the agreement on the 100 megawatts, we stopped having discussions on that because there was that exclusivity, but we had additional capacity that we're marketing both at Allendale and in other markets. And so we were in constant discussions with other parties. As I mentioned on the call in January, we were seeing a lot of demand.

Speaker 2

And on our additional capacity, we were we've been in discussions with 3 different hyperscalers and then 2 parties that I don't know if I would classify as that. So that's it's kind of a constant that we continue to market the capacity we have available. And so that's how I don't know if that's how those discussions came about, but yes, that we're constantly doing that. Okay. That's helpful.

Speaker 2

I think I don't recall if I Allendale site. The Ellendale

Speaker 4

site. Thank you. Wes, can you expand on that pipeline a bit? Is that all and sorry to harp on this, but again, my view is power is going to be constrained. So that pipeline is that power that you have

Speaker 2

committed to you? Sure. So we have I don't want to give states, Lucas, because we haven't signed these fully yet, but we're doing the process of probably over the next few months. But we have a pipeline of sites, a lot of it in the, I would call it, the Midwest. So we have you have a site for 300 megawatts in the Midwest that would come online in 'twenty five, one for 500 that would come online in 2025, one that's in the northern part, not in North Dakota, but up in that area that we kind of in that area that we work now for 200 that would be available for 25.

Speaker 2

And then a few other sites that are we have obviously the Utah site for 100 that we've mentioned publicly before. So that's just a few.

Speaker 4

I appreciate that. And I'd assume the power would be kind of similar cost structure as to what you have in Ellendale and Jamestown?

Speaker 2

Yes. It's an attractive price for the HPC application for sure.

Speaker 4

Very helpful. Thank you. Then follow-up on the recourse. Thinking of $8,000,000 or so, so is the primary potential source of recourse going back to the supplier or is there business interruption insurance and potentially other sources? Thank you.

Speaker 2

It's every available for us. But yes, there's obviously it should be warranty obligations here and other sources of recourse for us.

Operator

There are no further questions in the queue. I'd like to hand it back to Wes Cummings for closing remarks.

Speaker 2

Thanks everyone for joining. Looking forward to catching up on our next quarterly call. Again, I want to thank all of our employees for their hard work and our shareholders for their patience with us and looking forward to speaking to you soon.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful

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Earnings Conference Call
Applied Digital Q3 2024
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