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 result for the fiscal third quarter ended February 29, 2024, in a press release, a copy of which will be furnished in a report on a Form 8-K 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 Rench. Following their remarks, we will open the call for questions. Before we begin, Alex Kovtun from Gateway Group will make a brief introductory statement. Mr. Kovtun, please proceed.

Great. Thank you, operator. Good morning, everyone and welcome to Applied Digital's fiscal third quarter 2024 conference call. Before management begins 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. 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, the 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-K 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. 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 website. Now, I will turn the call over to Applied Digital’s Chairman and CEO, Wes Cummins. Wes?

Thanks, Alex, and good afternoon, everyone. Thank you for joining our fiscal third quarter 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 to our CFO, David Rench 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. 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 hundred megawatt HPC data center in Ellendale. Our achievements include welcoming our newest cloud service customer 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 a letter of intent with a US-based hyperscaler for 400 megawatts of capacity at our Ellendale campus, inclusive of our current a hundred megawatt facility and two forthcoming buildings. 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 site signed lease. We also significantly strengthened our balance sheet after the quarter closed with $160 million 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. This achievement marks the sixth 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 effective portions of our site. Upon re-energization, we have determined that the failures were due to transformers not meeting industry standards. We have now successfully procured replacement transformers and related components from North American industry leading manufacturers. As of today, the Ellendale facility has been reenergized 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. 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 two fully contracted locations in North Dakota. This positions us to be insulated from volatility in the crypto markets leading up to the halving event. Let's move on to our cloud services business, which provides high performance computing power for AI applications. Despite a lack of significant sequential revenue growth due to delays in 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 Together AI 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 fourth quarter. 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. 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 US-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 and will 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 Rench to walk you through our financials and provide an update on guidance.

Thanks, Wes, and good afternoon, everyone. Let me begin by addressing the complexity of this quarter's financial reporting. Although we have reported an adjusted EBITDA loss of approximately $2.3 million, several one-time items significantly impacted our financial performance and comparability to prior quarters. Notably, we missed out on substantial revenue opportunities in our cloud service business due to the difference in 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. Additionally, unexpected expenses arose from addressing power outages at our Ellendale data center hosting facility, which alone had an estimated $4.5 million impact on operating loss during the quarter. We also incurred a $21.7 million loss on held-for-sale classification related to the Garden City transaction and $4.2 million 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 third quarter of 2024 were $43.3 million compared to $14.1 million for the fiscal third quarter of 2023. 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 $37.7 million in revenue, while our cloud services segment generated $5.6 million of revenue. Cost of revenues for the fiscal third quarter of 2024 was $47.1 million compared to $10.5 million for the fiscal third quarter of 2023. The increase in cost of revenues was attributable to higher energy costs due to the 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 third quarter of 2024 were $30.4 million compared to $10.5 million in the prior year comparable period. The increase was primarily due to startup 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 third quarter of 2024 was $62.8 million or $0.52 per basic and diluted share based on a weighted average share count during the quarter of approximately $121.4 million. This compares to a net loss of $7 million or $0.07 per basic and diluted share in the fiscal third quarter of 2023 based on a weighted average share count during the quarter of approximately $94.1 million. Notably, our cloud services business reported a 21.6% operating loss this quarter inclusive of $16.5 million in depreciation and amortization expenses alone. We expect these losses to decrease as we deploy more clusters over the next six months. Adjusted net loss, a non-GAAP measure for the fiscal third quarter of 2024 was $28.9 million or adjusted net loss per basic and diluted share of $0.24 based on a weighted average share count during the quarter of approximately $121.4 million. This compares to adjusted net loss of $1.4 million or $0.01 per basic and diluted share for the fiscal third quarter of 2023 based on a weighted average share count of approximately $94.1 million during the quarter. Adjusted EBITDA a non-GAAP measure for the fiscal third quarter of 2024 was a loss of $2.3 million compared to adjusted EBITDA for the fiscal third quarter of 2023 of $0.9 million. Moving to our balance sheet, we ended the fiscal third quarter with $41 million in cash, cash equivalents, and restricted cash, and $61.8 million 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, approximately $87.3 million. While there are still ongoing elements in the sale of the Garden City assets, including a $25 million holdback and $9 million in contingent 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 million convertible debenture that we recently announced. Despite the challenges, we are encouraged in the past quarter, and we remain confident in the promising future of Applied Digital. Now, I'll turn the call over to Wes for closing remarks.

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 two highest growth segments are capital intensive businesses. To date, we have primarily been funding these initiatives from corporate level financings. We're planning for this to change in the near future, specifically to cloud services we have engaged, 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 two years to approximately five 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. 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 are 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 cost of our Ellendale facility with corporate level funds. We have been in the process of securing project-level debt for this facility since late last year. 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 flow position due to the strategic financing in the different business segments. In summary, we faced significant challenges this quarter, largely due to external factors, but we are fully dedicated to delivering strong long-term shareholder value. 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.

Thank you. Our first question comes from Lucas Pipes with B. Riley.

Thank you very much, operator. Good afternoon, everyone. Wes, you described Ellendale and Jamestown as strategic. 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.

Sure. Thanks, Lucas. Those assets are strategic to us in 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.

That's helpful. Thank you. On Ellendale, you mentioned you have more than 600 megawatts of future capacity. First, is this 600 megawatts inclusive of the current BTC business or incremental? Then, how is this power capacity secured? 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. Wondered how investors should think about that?

Yes. It's inclusive of the 180 megawatts on the BTC. Right now we've secured 535 megawatts at that site, but we believe it goes to 605 megawatts.

What's the mechanism is through down payments or could you expand on that a bit?

I'm sorry, the mechanisms for?

The mechanisms through which this power is secured at?

It's through signed ESAs.

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

Yes. I'm hesitant to say the size, but it's somewhere in the multi-hundred million, maybe $500 million to roughly $1 billion range.

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 hundred megawatt that you had previously announced? Where does that original hundred megawatts sit? Would this be in addition to or a completely new move on your part with respect to what you have out there for sale?

Yeah, so the 400 megawatts is inclusive of the hundred. So it will take that, the previous customer didn't go forward. As I've mentioned on our call, last call in January, we've had a significant amount of interest at that site. And I feel like we're moving forward with the best party for us to move forward with, which is effectively for the entire site.

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

Yeah. That's the correct way to think about that.

So when you announced the 100 megawatt deal, you gave some sense of a 10 year contract term of about $2.2 billion. Would this be suggestive of an $8 billion plus 10 year deal? Is that kind of how I'm to read that?

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.

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, including inclusive and pinna band, 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.

Yeah, sure. So, couple of things on that. We feel good on the supply. We're seeing shipments and including everything. One 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. 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. But right now, you should be thinking about eight weeks from when we receive all components on site to the clusters being turned over to customers.

All right. Very good. Thank you for answering.

Good afternoon. 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?

Sure. 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 is a lot of work to be done from a legal contracting perspective. I would expect this to be kind of a 60 to 90 day process from when we started.

Okay, good. I guess on the transformer that 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?

We've procured all the transformers. They will all be on site within the next few weeks, and then it will just be the work connecting these. I don't have to get into the details 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 all indications from a performance perspective. The new transformers we procured are working extraordinarily well. And so we expect that to proceed fairly smoothly. But procuring transformers in this market is not easy. We were really happy with the team able to find the number of transformers we found and the timeframe we found them. Like I said, already shipped to site, it's painful for us with that site being down just from an economic perspective and for our customer, by the way. The faster we can get that back online the better for all of us.

Thanks. 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.

I'm trying to think on it, but it's been going for maybe three or four weeks on the discussions. Just to make it clear, there's no contract. There's a letter of intent, which is kind of the standard process here.

But I think you are saying from when you started three or four weeks ago, 60 to 90 days from that time, you might have a contract and financing in place?

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

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 it'll be generating revenue at the end of May?

Yeah, so we owned, I believe, 5,120 H100 class GPUs, so there's 4,000. I'm having trouble doing the math in my head to round it to the exact number. But, so round it 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.

Got it. So 4,000 as of today are generating revenue and another two to 4,000 by the end of May. And roughly how much did the transformers cost that you needed to put in to Ellendale the new ones?

I have David here.

$300,000 a piece.

Yeah, a piece.

And how many total did you need?

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.

Got it. Okay. And last question from me. Do you guys have a rough, kind of committed CapEx number for the rest of calendar ‘24?

Well, we have seven more weeks of, oh, calendar ‘24. 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. Mike, I did want to make a point on the GPU business. We've been adding people, we've been accelerating our work 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 that we started seeing demand from enterprise customers and large enterprise customers, which we've really been focused on. So pushing, because 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 slowness in the deployment through the end of May, just because I like to diversify our customer base outside of just the startups, even though I love our customers there, but we would like to diversify the customer base. We're working pretty hard on that.

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 guided to 10,000 as a bogey for GPU number exiting May. Can you sort of speak to that goal, if it's still one, 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 ‘25?

Yes, I believe you are correct about the second point. The types of customers we are seeing are diversifying; they are all engaged in different activities and creating various products, primarily among start-ups that are mostly backed by venture capital. It's crucial for us to focus on building this diversification in the business over the long term, rather than hurrying to achieve a specific target by a particular date. Additionally, I wanted to clarify that the amount for the transformers is $200,000, not $300,000 as mentioned in the previous question.

Got it. And then maybe one on the data center piece. The hyperscaler LOI, is there a financing negotiation period like you had with your prior LOI?

No.

Does that LOI include a ROFR on additional capacity beyond the 400 megawatts?

No.

Got it. Just last one for me. Any change on AI cloud pricing since the last call? Has it stayed stable or moved up?

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 pre-payment percentage and the price per hour on GPUs has been pretty steady for us since the last quarter.

Thanks for taking my question, guys. Just kind of summarizing it here. First on the GPU piece, you mentioned, I think it's 4,000 generating revenue now, 2,000 to 4,000 brought online end of May. 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 and 8,000 is the right number to think about.

Okay. On the enterprise customers that you'd want to diversify into, those still aren't signed. The slowdown is you still would need to go out and sign those or kind of I guess just where are we in that process?

Yes. It's advanced since the last quarter. I think I'd mentioned we're in proof-of-concept with some and it's moved to contract negotiation. That's definitely made an advancement. They just take longer. I haven't talked, I think talked about this publicly, but our first customer contract we signed, I think it was two weeks from initial conversation to signing. It was pretty fast. The enterprise has a much longer process for qualification, but I'm happy where we are in that process.

Got it. Just lastly, so on the 100-megawatt site, kind of how much now is built on it on a percentage basis? And how much financing additionally needs to do to get it 100% done?

Yes. We have about a little over $100 million into that site at this point. And 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.

Thanks for having me. Can you give me an estimate of how many AI customers are currently operating from the Nevada, Colorado, Minnesota, and Jamestown sites?

Yes. We primarily have two larger customers that are deployed, along with some smaller ones, and we expect to add more with the new clusters that we're bringing up.

So yes, the 4,000 that are in service is split primarily between two customers.

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

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 colocation 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. 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.

Okay. 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?

I don't want to go into too many specifics, but we are actively looking for ways to recover our costs. The transformers at Ellendale and Jamestown came from a US manufacturer based in Nexus. When we approached Ellendale, we experienced faster delivery from a non-US company that is well-known in the industry. However, they have not met our specifications, which is disappointing.

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.

Yes, no longer an issue.

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

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.

Based on, I think you alluded to, what, $160 million, I think that includes the sale of Garden City that you 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 work and build the 400 now?

Yes, Jamestown is paid for. It gets us out a 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 something went awry and that got delayed or pushed, could we pause there? Yes, we could. But that's where the vast majority of our CapEx is going at this point.

And just apologies for not being the sharpest pool in the shed, Wes, but just to make sure, the site-level financing is a function of turning that LOI into a contract?

Correct. Thanks, everyone, for joining. Looking forward to catching up on our next quarterly call. 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.

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 day.