Earnings Call Transcript - APLD Q3 2023

Operator, Operator

Good morning, and welcome to Applied Digital’s Third Quarter – Third Fiscal Quarter 2023 Conference Call. My name is Melissa and I will be your operator today. Before the call, Applied Digital issued its financial results for the third quarter of fiscal 2023 ended February 28, 2023 in a press release, a copy of which will be furnished in a report on Form 8-K filed with the SEC and will be available on 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 go ahead.

Alex Kovtun, Investor Relations

Thank you, operator. Good morning, everyone, and welcome to Applied Digital’s fiscal third quarter 2023 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. 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 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” and our annual report on Form 10-K. You may get Applied Digital’s Securities and Exchange Commission filings for free by visiting the SEC website at www.sec.gov. I would 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?

Wes Cummins, Chairman and CEO

Thanks, Alex, and good morning everyone. Thank you for joining us for our fiscal third quarter 2023 conference call. I want to start by thanking our employees for their ongoing hard work, including our construction and operations team for getting through the winter and keeping our facilities operational and construction timeline reasonable. Before turning the call over to our CFO, David Rench for a detailed review of our financial results, I'd like to touch on some updates from our business over the last quarter and why we remain excited about the future and our ability to deliver long-term high-margin sustainable cash flow. Let's start with an update on our two newest facilities, Ellendale and Garden City. We successfully completed the energization of our 180 megawatt facility in Ellendale, North Dakota, in early March. This marks the second facility that we energized within North Dakota following the successful 100 megawatt facility in Jamestown that was energized in 2022. Recall that we broke ground on Ellendale in September 2022 and are now powering and operating the new site only six months after initial work began. This is a tremendous accomplishment given the harsh winter weather we experienced in North Dakota over the last several months along with some construction delays. We continue to ramp up our capacity and anticipate this first half of capacity will be turned on by the end of April with the rest to be turned on by the end of June. The facility is fully contracted by Marathon for five years with a flat rate agreement and our agreement begins upon energization. Once fully energized, this location will bring Applied Digital to 280 megawatts of hosting capacity across all our facilities in North Dakota, all of which are contracted out to customers on multi-year terms. In addition to Ellendale, we're making great progress on our 200 megawatt Garden City facility in Texas. The construction of Garden City is complete and over 130 megawatts of miners are installed and ready to turn on. Our customers are continuing to send miners to the facility and we're actively installing them. Given the unique behind-the-meter aspect of this facility, we're awaiting final approval on some technical details and expect to resolve these issues in the coming weeks to begin energizing the facility. Once we energize our Garden City facility, we anticipate it ramping faster than our Ellendale facility due to the number of miners already installed. As a reminder, both our Ellendale and Garden City facilities are fully contracted with fixed prices and we are not exposed to any volatility in the cryptocurrency markets. Our 100 megawatt Jamestown facility continues to perform as expected and operated at full capacity throughout the quarter, delivering revenue of $14.1 million in the quarter, exceeding the $12 million steady-state capabilities of the facility that we previously discussed. As mentioned on our last call, we successfully retrofitted a small portion of our existing facility in Jamestown to accommodate HPC requirements to support a web three application with a non-crypto customer. We have decided rather than to use the GPU capacity for the Web3 application, it would be better utilized for machine learning and AI applications and have onboarded multiple customers, recognizing our first HPC revenue in the quarter. We also broke ground on a 5-megawatt standalone facility adjacent to our Jamestown site in December that will host several hundred graphics processing units for machine learning applications within new customers. Our first GPUs in the new facility are expected to be operational later this month or early May. The build-out will be completed in two additional stages with the first scheduled to come online this summer and the second later in the year. When finalized, we expect to have over 7,000 NVIDIA A100 class GPUs in the building, making it one of the largest GPU clusters of its kind in the world. Importantly, it's worth noting that demand for hosting capacity across our facilities has not been impacted during the last several months and we're exploring numerous opportunities. Now let's discuss the HPC opportunity in front of us and why we're excited about the year ahead. While we continue to see robust demand from cryptocurrency miners, we aim to diversify our customer base and exposure to the growing segments of the HPC market, as we believe that will be the highest return of capital in the long-term for our shareholders. Our goal remains to get at least 10% of our revenue from HPC by the end of this calendar year and ultimately diversify our revenue to a 50/50 split by 2025. We remain optimistic about the growth opportunities in HPC, which is expected to reach 900 billion globally by 2030 and remain well positioned to capitalize on this opportunity. As data continues to grow at an exponential rate, more data sources will be required to store the data, and we believe our next-generation facilities are ideal hosting sites for HPC applications as they can accommodate the unique demands for this growing industry. Our data centers offer a more purpose-built solution offering lower costs combined with higher computing power compared to traditional data centers that are typically focused on delivering low latency and high computing power. We are well positioned for success in this space, given our expertise in hosting Bitcoin mining, and realize HPC applications require a different type of engineering that more resembles what you would see in an ASIC world at Bitcoin mining because of its dense power. The density of racks is a key point as each HPC application requires a different setup that provides sufficient power and cooling to handle those unique needs and properly scale efficiently. These applications do not require ultra-low latency, and we believe that the deciding factor on whether these applications will be hosted comes down to the cost of compute. Our next-generation data centers are optimized for green computing, and we aim to be the lowest cost compute provider with access to renewable energy and air cooling. To close, we remain confident that Applied Digital will continue to be a leader in digital infrastructure with our next-generation data centers. Demand for our services from both traditional customers and emerging HPC applications remains robust, which validates our position as a financially strong leading digital infrastructure provider to serve various hosting needs. With that update, I'll pass it over to our CFO, David Rench for a financial update.

David Rench, CFO

Thanks, Wes, and good morning everyone. Before I begin my remarks, I would like to note that, like last quarter's call, since we did not have operations in a year-ago comparable period, we will not be providing any year-over-year comparisons. Revenues in the fiscal third quarter were $14.1 million, which were entirely attributable to our hosting operations. The Jamestown site operated at full capacity throughout Dakota. Cost of revenues in the fiscal third quarter were $10.5 million, consisting of $8.6 million of energy cost to generate our hosting revenues, $900,000 of depreciation and amortization expense, and $1 million of personnel expense for employees directly working at our Jamestown hosting facility. Adjusted gross profit, a non-GAAP measure that excludes depreciation embedded in the cost of revenues and one-time electricity charges, was $4.4 million or 31% of revenue for the fiscal third quarter of 2023. Operating expenses for the fiscal third quarter of 2023 were $10.5 million, which includes $4.5 million of stock-based compensation, $3.9 million in other selling general and administrative costs and $1.1 million in depreciation and amortization expenses. Net loss attributable to Applied Digital for the fiscal third quarter of 2023 was a loss of $7 million, or a loss of $0.08 per basic and diluted share based on a weighted average share count during the quarter of approximately 94.1 million. Adjusted net loss attributable to Applied Digital for the fiscal third quarter of 2023 was a loss of $7 million, or a loss of $0.08 per basic and diluted share, based on a weighted average share count during the quarter of approximately 94.1 million. Adjusted net loss attributable to Applied Digital, a non-GAAP measure for the fiscal third quarter of 2023 was a loss of $1.4 million, or a loss of $0.01 per basic and diluted share, based on a weighted average share count during the quarter of approximately 94.1 million. Adjusted EBITDA, a non-GAAP measure for the fiscal third quarter of 2023 was $900,000. Lastly, on our balance sheet, we ended the fiscal third quarter of 2023 with $22.9 million in cash and cash equivalents and $23.7 million in debt. During the third fiscal quarter of 2023, we received $11.7 million in net customer deposits and $32.3 million in net deferred revenue, which collectively amounted to a $44 million net cash inflow due to the structure of our commercial arrangements with our customers that incorporate upfront deposits and prepayments. In certain contracts, the prepayments were amortized back to the customers for the first year of their contract with no impact to revenue recognition, but the timing of cash flow with upfront cash to us is a major benefit for the company and helps with our CapEx funding needs as we build our data centers. Our balance sheet remains strong and we have no exposure to any major financial institutions. Now turning to guidance. Similar to last quarter, we will not be providing explicit guidance for the fourth quarter, given the revenue materiality of our Garden City potentially coming online and the continued ramp of the Ellendale facility that should occur in the fiscal fourth quarter. Once those facilities are online, we will have nearly 500 megawatts of hosting capacity that we expect to put us in an annualized adjusted EBITDA run rate of approximately $100 million. That completes my financial summary. Now I'll turn the call back over to Wes for closing remarks.

Wes Cummins, Chairman and CEO

Thank you, David. I want to add a little more detail around our expectations for the current quarter. While we expect Garden City to energize during the quarter, if we exclude it completely and look at our expected ramp of Ellendale, we expect to generate approximately $24 million of revenue and approximately $4 million of EBITDA. Before we get to Q&A, I’d like to quickly go over some key goals and initiatives for our company as we look to the future of Applied Digital. We remain focused on operating our Jamestown facility efficiently and look forward to energizing our Garden City facility and continuing to make progress at our Ellendale facility in the near term. We will also continue to build out our non-crypto use cases to demonstrate the broad capabilities of our next-generation data center assets for HPC applications. So while the crypto industry remains volatile, we are well positioned to capitalize on strong demand from both crypto and non-crypto customers for our services. I remain optimistic about our future and I thank all of our team members for their dedication and service to Applied Digital. With that operator, let's open up the call for questions.

Operator, Operator

Thank you. Our first question comes from Lucas Pipes with B. Riley Securities. Please go ahead with your question.

Lucas Pipes, Analyst

Thank you very much operator and good morning everyone. Congrats on the progress at Ellendale and I do want to ask about Garden City. You mentioned an expectation that it could come online in the coming weeks. And I wondered if you could touch on the level of confidence on that statement and in terms of a faster pace of energization, which was also mentioned in the prepared remarks is the ability to quantify the cadence of the ramp once you have those final metering issues resolved. Thank you very much.

Wes Cummins, Chairman and CEO

Thanks, Lucas. This is Wes. Let me try to explain the specific issue, the primary issue that we're dealing with. It is an issue related to the behind-the-meter installation, which is not unique right now in Texas as there are several large projects turning on or trying to turn on, and I think we might be the only Bitcoin mining project of its kind. There are several other kinds of projects that are turning on. The issue at the way they settle on metering and the visibility they want into the power generation plus the grid energy, and there's a concern with double counting. There wasn't really a framework for this in ERCOT and we're dealing with it mostly from a metering perspective with Encore. ERCOT had a meeting last week with a rule change that should solve this issue. So now it's back in the hands of Encore. We think that issue is solved, but they typically seem to move very slowly. While it might not happen the next day, we expect some meaningful progress on finalizing—there are, just my opinion, some very simple solutions for it, but it just had to go through the process, and it feels like the process is now largely complete with the rule change, which should solve the issue with Encore, not just for us, but for several different people. So we expect this to move forward in the very near term. Hopefully, that makes sense. As far as the pace of energizing, recall Ellendale—this is, as we build, we’re energizing. The buildings will go up much faster. Now, we had all the concrete poured. We're finalizing the buildings. All of them are worked on in stages. But now it's just turning on each building as it's completed as the miners are racked and as they're available to turn on. That's much more like we did in Jamestown. Because we originally expected Garden City to energize much earlier, the construction is complete, and the majority of the miners are already racked. So we’re not doing it in those types of stages as we've done in North Dakota. Once we have the final approval, when we're ready to turn on, all of these buildings are ready to go, you could see these come up in just a week or two. It still takes a little bit of effort on each building. But they're already in place and ready to go. That's why we would expect that to ramp up significantly faster than we're seeing in Ellendale over what we saw in Jamestown last year.

Lucas Pipes, Analyst

That's very helpful. I appreciate the color, Wes. And for my second question, I do want to turn to HPC. Could you share some light on what an anchor agreement could look like in terms of revenue, unit economics, and term duration? What would be the potential capital requirements for a large HPC kind of anchor tenant? Thank you very much.

Wes Cummins, Chairman and CEO

Sure, sure. There are a couple of different models that we're exploring with HPC. The first ones we're running in our HPC class are the retrofitted portion of one of the mining buildings. We own those GPUs. We rent the capacity out. I think we've mentioned three customers live on those, doing mostly machine learning and deep learning applications, and it's been going really well. If you recall, we have a software partner that is helping us with that on the front end that loads onto the system. That's gone very well. As we move into the pilot phase of the new building, it will be around 300 GPUs that will ramp up, and those will also be owned by us. We have customers booked for those GPUs as well. The rest of the building can go in one of two ways. There’s a potential for us to do just co-location in those areas. If you think about co-location in good areas, we can put a finer point on this: A good way to think about this is on a per megawatt basis, and I'm just comparing that to what we do with Bitcoin mining. You should expect more in the 10 to 12 times revenue versus per megawatt of HPC applications compared to Bitcoin hosting, with a similar lift in EBITDA—maybe even slightly higher, which might offer a better margin on the EBITDA front. If we move forward with owning GPUs, which we would only do if we had the right customer to do so, a very large solid counterparty, that building would generate well north of $100 million of revenue and upwards of $50 million or $60 million of EBITDA. We are still working through what the business model will be. I think it will be a bit split, but right now, we are fully funded on our balance sheet. We ended the quarter with cash, and as of yesterday, the company had about $41 million of cash. This significant step up was due to the debt facility that went into place post the close of the quarter on the Ellendale facility, which boosted that. We are fully funded to build the building and place the GPUs we plan to put inside the building currently, and we’re working on financing if we’re going to move forward with owning more of the GPUs. But when you think about a longer-term model here, you should really consider that the co-location model is what we're chasing, and then blending it with some GPU ownership when necessary.

Lucas Pipes, Analyst

Very, very helpful. The $100 million revenue—what size of building would that be? Thanks a lot, Wes.

Wes Cummins, Chairman and CEO

That’s just the current build. The 5 megawatts, if we owned all the GPUs and did a leasing business more of an integrated model, like what you would see with an AWS, it would be, I said $100 million; it would be well north of $100 million.

Lucas Pipes, Analyst

That's super helpful, Wes and team. I really appreciate the color and all the best of luck. Thank you.

Wes Cummins, Chairman and CEO

Thank you.

Operator, Operator

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

Rob Brown, Analyst

Good morning. I wanted to get a little more color on the Jamestown facility as you consider that $14 million revenue above its nameplate capacity. What drove that? Do you see that continuing?

Wes Cummins, Chairman and CEO

Yeah, good morning, Rob. Thanks for the question. So, just higher efficiency in the quarter for us was part of it. There was a little bit of a price lift. We do have the ability to increase prices somewhat on our customers because we do have— I think we've talked about this before. Last quarter, you saw a lower gross margin for us, which was kind of the lagging effect of energy prices that moved around at that facility. Then we do pricing changes for our customers, but it’s lagging. So, we catch up with the pricing changes. You could see that fluctuate up and down. We are turning on a little bit more. So we have about 6 megawatts of Marathon containers at that facility that we expect to turn on any day, which will boost operations there a little bit. I think that the levels somewhere between $13 to $15 million or $16 million of revenue is reasonable on a quarterly basis from Jamestown.

Rob Brown, Analyst

Okay, great. Just wanted to get a little bit into the cash flow from the customer prepayments and deferred revenue. Would that happen over 12 months? How long does it take to sort of burn off that balance sheet prepayment and sort of normalize the cash flow against what you're reporting?

Wes Cummins, Chairman and CEO

Yeah, so, basically, from the customers when their contract turns on, when we energize that portion of the contract, we begin to amortize that prepayment back to them. It’s a four-month thing—it’s fairly simple. So, it’s a four-month amortization back over 12 months. Once we go through a full 12 months, that deferred revenue will be gone off the balance sheet. Obviously, from a P&L perspective, you’ll still get the deferred revenue and the same earnings impact. From a cash flow perspective, think about our building a $100 million run rate for the first year of that run rate. The cash conversion from EBITDA to cash flow will be lower. But there will still be significant positive cash flow for the company as we amortize that back to the customers. And then, when you get through that year, the cash flow versus the EBITDA should move up more towards 80% or 90%. Thanks.

Operator, Operator

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum Capital Group. Please proceed with your question.

George Sutton, Analyst

Thank you. Wes, one thing I wanted to clarify, because we had multiple clients concerned about the proposed permitting framework in Texas, the Texas Legislature. You are, well beyond that, the modest delay we have had has nothing to do with that. That is a correct statement?

Wes Cummins, Chairman and CEO

Yeah, that's correct. There are a couple of things going on there, George, and it's new. Some of the stuff which is just yesterday—I think we don’t believe it will impact us. So, from that site specifically, we’re beyond that portion. Also from that site, they are talking about grid balancing or the demand-response benefits in the legislature now. The setup of that site does not take advantage of those programs in Texas to reach the price on energy we are contracting there. So, we don't believe it will have any impact on us.

George Sutton, Analyst

Gotcha. Great. And then, on the use cases for HPC, I want to make sure I fully understood when we talk machine learning versus what I was viewing as large language models. I just want to ensure we’ve seen somewhat of a use case change as we look to deploy for new customers?

Wes Cummins, Chairman and CEO

No, no, the large language models fall into the machine learning category. So it's beyond just some training models. When I say machine learning, it’s about training the model. If you want to call it AI or machine learning, the applications running now include what we call natural language processing. Thanks, George.

Operator, Operator

Thank you. Our next question comes from the line of John Todaro with Needham and Company. Please proceed with your question.

John Todaro, Analyst

Thanks for taking my question, guys. Two questions here. First on the Bitcoin mining piece. Can you just remind us for your major mining contract, when those are up for renewal? Any expectations you have with the having coming up in Q1 ‘24?

Wes Cummins, Chairman and CEO

Yeah, so the contracts are mostly contracted under five-year contracts that are effectively just starting as we energize Ellendale. In Jamestown, I don't know the exact contract life remaining, but it's probably in the two-and-a-half-year timeframe. That's the majority of our contracts. And then, on the having—it’s pretty simple, the concept is that we think our current customers, we run a really efficient operation and our current customers are very profitable at the current Bitcoin price and significantly below the Bitcoin price. But when you think about just variable cost, effectively, your cost will double at the having event. So that really depends on the price of Bitcoin and the network hash rate. John, the thing about Bitcoin over its life is that there is generally a self-correcting mechanism in the network of hash rate versus price that allows miners to stay profitable. There will be periods of time where they won't be, but at the end of the day, you're looking for the most efficient operators. We're running only S19 Pro, and the majority of what we're turning on now and will be in our current facilities are all XPs. So running the latest model mining equipment, we think that we and our customers are well positioned for that.

John Todaro, Analyst

Got it. Thanks for that. And then, just the other question on the HPC segment, obviously a lot of interest in the space recently. I would imagine that has increased competition there. Could you just discuss that a little bit and provide some insight into the competitive landscape?

Wes Cummins, Chairman and CEO

Yeah. I expect there to be plenty of competition and people entering this space. I expect competition from traditional data center providers and new entrants. I think it's a really large opportunity. Let me just give you some comparisons of traditional data centers versus what we're building and what we see in the future. Traditional data centers are generally built for ultra-low latency, energized video streaming, all of those types of things. Traditional data centers build power to the rack, typically for a full rack delivering about 7.5 kilowatts. Their capability is somewhere around 10 to 15 kilowatts to a rack. When we load a rack full of 100 GPUs, which is the gold standard for machine learning and AI, that rack requires about 40 kilowatts to power that rack. You’re looking at almost a five-fold increase in power needs, which directly correlates to the amount of heat created. We're talking to the largest players in the industry and spending considerable time with them. The view is that power density is increasing significantly, making it very difficult to retrofit older data centers for these needs. We’re sitting on large amounts of low-cost power, and we're mostly in very cold locations. For example, our new facility is designed for massive airflow, significantly higher than traditional setups, which helps us cut down on electricity usage. Traditional data centers can sometimes provide half a mile per hour of airflow; our design is around eight miles per hour. We're well positioned for success here. We see a significant lead over almost everyone out there, with only a few smaller players doing this currently. But I believe that you're going to see some of the larger entrants move towards it. We have a significant advantage given where we are now, our existing operations, and the knowledge base we’ve built around electrical engineering for handling this kind of power density. I do expect competition; this is an extraordinarily large industry, and competition is to be expected.

John Todaro, Analyst

Got it. That's great. Thanks, Wes. I appreciate it.

Wes Cummins, Chairman and CEO

Yes, operator?

Operator, Operator

Thank you. The next question is coming from Mike Grondahl of Northland Securities. Please go ahead.

Mike Grondahl, Analyst

Hey guys, thanks. Wes, when do you think you kind of have a green light on the HPC opportunity? Is it when the 5 megawatts are sort of up and running? Is that this summer, this fall? When do you think you have that? And then, what could the HPC business look like in two to three years in terms of number of megawatts and a rough range for revenue?

Wes Cummins, Chairman and CEO

Sure. I gave the revenue comparison earlier; I can repeat that for you if you want. But just to frame where we think HPC revenue is, we've kind of— we're definitely moving from red to yellow already. We're operating at our site, seeing that this works. The network connectivity, the software, and the setup work. As we bring the building on, there will be some fine-tuning needed on the 5 megawatt building as it is designed. But we’re really close, and the conversations with people we’re engaging in have provided a large amount of confidence that we are moving in the right direction. Few years out, we talked about getting a 50/50 split. The demand out there for this type of data center build is large right now. We’re talking about hosting or GPU rental in very large quantities. Depending on how some of these things go in the next few months, this business could be very material by the end of this year. It could ramp quickly. If it starts moving in that direction, it presents a really long runway for growth. We are getting demand from individuals wanting substantial megawatt builds. For example, we are seeing individuals want 10 or 20 megawatts, with others looking for 50 to 100 megawatts of HPC build, which is significant given the revenue comparison we provided earlier. We’re moving towards some certifications we need, which we’ll have by summer, but I don’t think that will prevent us from signing some large customers prior to that since these are substantial projects that will need to be built and turned on.

Mike Grondahl, Analyst

Got it. Okay. And I took away that the revenue comparison is like 10 to 12 times.

Wes Cummins, Chairman and CEO

Yes.

Mike Grondahl, Analyst

Revenue generated from a miner? Okay, got it.

Wes Cummins, Chairman and CEO

And that’s for co-location, just for clarity—if we just do the hosting, that's a good comparison right now. If we own the GPUs, it’s significantly higher than that.

Mike Grondahl, Analyst

Got it. Okay, thanks.

Operator, Operator

Thank you. Our next question comes from Kevin Dede with H. C. Wainwright. Please proceed with your question.

Kevin Dede, Analyst

Hi Wes. Thanks for the discussion on the HPC side. That sort of raises the question given that you seem pretty fully contracted out on 500 megawatts. Can you give us a peek into the pipeline for your next round of builds, your next site acquisition, and the timing?

Wes Cummins, Chairman and CEO

Yes. We have a very good site identified in another cold region, not in North Dakota, that has a good power price for us. We're optioning that site. I actually— we have demand for Bitcoin mining for that site, but we're seeing a significant amount of demand that’s emerging on the HPC front. The likelihood of it going towards HPC is extraordinarily high. We do have another site identified, and we also expect to expand at the Jamestown site further. Those are the two primary ones in the pipeline.

Kevin Dede, Analyst

Okay. Does Jamestown entail another set of buildings or are you going to kind of do it in those 5 megawatt increments?

Wes Cummins, Chairman and CEO

The next build for HPC in Jamestown would be larger—above the 5 megawatts. Recall—originally in Jamestown, we expected to go to 200 megawatts. I think we can push that beyond 100 with the power provider there for HPC. I am uncertain what that limit is for us just yet, but we do think we can expand at that site and then push more towards new sites. But we have identified one very attractive site that we expect to move forward with.

Kevin Dede, Analyst

Okay. Can you dig in a little bit on the co-location versus, I guess, the machine owned business models in HPC, Wes? How do you approach that from a financing perspective?

Wes Cummins, Chairman and CEO

From a financing perspective, the goal—owning the GPUs will be significantly more expensive. You guys probably know the pricing on these GPUs is extremely high. Our team on the finance side has done a great job to-date getting us very low-cost financing for the sites we have. For the GPUs, there’s a much better, well-developed financing market. We’ve already gone down that path. I think we'll be able to tap some of that financing. We're on the initial build. But if everything grows extraordinarily large, we’re working on solutions to accommodate that. It will be capital-intensive. The fully integrated model is one we will pursue; however, I don’t know what extent that will be limited by our ability to finance it. For co-location, I believe we won't have any issue financing that for HPC builds; it's large companies with strong credit profiles that will contract for those facilities. That shouldn’t pose any issues for financing, even in the more difficult environment we're seeing right now.

Kevin Dede, Analyst

Okay. Would you mind just touching on the JV that you sort of set up for picking up excess rigs? How's that looking? What can you speak to?

Wes Cummins, Chairman and CEO

Yes, we didn’t pull in a significant amount of money in that JV, unfortunately. We saw the opportunity which created demand, but we never got critical mass to push forward. It just wasn't a huge appetite from investors to put money into the space when we were trying to do that, which might have signaled it could be a good opportunity. So we never really pulled anything material into that.

Kevin Dede, Analyst

All right? Thanks so much, Wes. Good effort. Pretty significant insight.

Wes Cummins, Chairman and CEO

Thanks, Kevin.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Cummins for any final comments.

Wes Cummins, Chairman and CEO

Thanks operator. Just to clarify in the prepared remarks, and David repeated the adjusted earnings number twice; it’s two different numbers. The appropriate one is a loss of $1.4 million and a loss of $0.01 on the adjusted net income. Outside of that, I just want to thank the shareholders that are on the call for their support and thank our employees again. It was an extraordinarily difficult winter in North Dakota, and it’s still ongoing with more snow recently falling there. Everyone has done a great job getting the buildings up and operating them. I genuinely appreciate everyone’s effort on that, and we'll talk to you next quarter. Thank you.

Operator, Operator

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.