Applied Digital Corporation

Good afternoon and welcome to Applied Digital's second fiscal quarter 2023 conference call. My name is Doug and I will be your operator today. Before this call, Applied Digital issued its financial results for the second quarter of fiscal 2023 ended November 30th, 2022 in a press release, a copy of which will be furnished in a report on Form 8K filed with the SEC and will be available in the investor relations section of the company's websites. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins, and CFO, David Wrench. Following their remarks, we will open the call for questions. Before we begin, Jeff Gramp from Gateway Group will make a brief introductory statement. Mr. Gramp, please proceed.

Thank you. Good afternoon, everyone, and welcome to Applied Digital's fiscal second 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 in our annual report on Form 10-K. You may get applied digital 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's website. Now I will turn the call over to Applied Digital's chairman and CEO, Wes Cummins. Wes?

Thanks, Jeff, and good afternoon, everyone. Thank you for joining us for our fiscal second quarter 2023 conference call. Our top line results exceeded expectations with revenue of $12.3 million in the quarter, above the $12 million we discussed on last quarter's call that represents the steady state capabilities of our 100 megawatt Jamestown facility, which continues to perform as expected. When we couple that strong performance of our Jamestown facility with our Allendale and Garden City facilities that are expected to be energized in the near term, we are confident in our ability to deliver long-term, high-margin, sustainable cash flow for our companies. So now let me update you on the progress of our two upcoming facilities, our 200 megawatt facility in Garden City, Texas, and our 180 megawatt facility in Ellendale, North Dakota. In Garden City, construction of the facility is complete and we're actively installing miners at the facility. We've received regulatory approval and are working through final technical details with the utility and our wind partner. We expect to energize by the end of our current fiscal quarter. Our Ellendale facility has made great strides on construction in spite of the harsh winter weather of North Dakota. All concrete has been poured, which was the key gating item determining the construction timeline, and the buildings are being actively stood up. We expect Ellendale to be energized towards the end of the current fiscal quarter as well. Recall, Ellendale is fully contracted by Marathon for five years. In addition to the build-out of our next generation data centers, we have also made an important branding update, changing the name of our company from Applied Blockchain to Applied Digital. The name change more accurately reflects Applied's mission, services, and broad business offerings to serve customers who require low-cost power for their high-performance computing needs. Ultimately, our core assets are low-cost and reliable power contracts and our next-generation data centers, which we have wide-ranging use cases beyond cryptocurrency, including applications in machine learning, artificial intelligence, image processing, graphics rendering, and various Web3 applications. We will remain a premier provider of digital infrastructure for cryptocurrency miners, but it's important for us as a company to distinguish that our next-generation data centers support many other HPC applications as we look to capitalize on the rapidly growing high-performance computing market, which is set to reach $65 billion globally by 2030. To be clear, we still continue to see robust demand from cryptocurrency miners that exceeds our capacity. Irrespective of the macro dynamics in the sector, as low-cost hosting capacity remains the bottleneck in the system. However, we believe it is in the best interest of our shareholders to diversify our customer base and grow our exposure to other high-growth segments of the HPC market. We're beginning to capitalize on this broader HPC market opportunity. As we announced last month, we broke ground on a 5-megawatt standalone facility adjacent to our Jamestown site that will host several hundred graphics processing units for machine learning application with a new customer. Concurrently, we also retrofitted a small portion of our existing facility in Jamestown to support a Web3 application with another non-crypto customer, which demonstrates our ability to modify existing locations to accommodate various HPC customer needs. We're optimistic about our growth opportunities in the HPC market, where our next-generation data centers offer a more purpose-built solution than traditional data centers that are generally higher cost and more focused on delivering low latency than high compute power. Before I turn the call over to David, I want to address a few line items that are financials. First, our stock-based compensation expense was extremely high in the quarter. This is a result of almost two years of stock-based comp being recognized in a single quarter, which was triggered by our resale registration statement becoming effective in October. In addition to the multi-quarters being recognized in a single quarter, the value of the RSUs in many cases were significantly higher than any price our stock has traded at since our NASDAQ listing. This was due to the RSUs having been granted when the stock was thinly traded on the OTC. Second, our gross margin was lower in Q2, partially due to billing adjustments that happened in September from the partial outage of the Jamestown site that occurred in the first fiscal quarter. Gross margins are expected to be significantly higher in our current fiscal quarter, as you will see in David's guidance. This is a more normalized level. I'll now turn the call over to our CFO, David Wrench, to walk you through our financials before providing my closing remarks.

David? Thanks, Wes, and good afternoon, 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 second quarter were $12.3 million, which were entirely attributable to our hosting operations in Jamestown, North Dakota. The Jamestown site operated at full capacity throughout the quarter. Cost of revenues in the fiscal second quarter were $11.8 million, consisting of $10.3 million of energy costs to generate our hosting revenues, $900,000 of depreciation and amortization expense, and $700,000 of personnel expenses for employees directly working at our Jamestown hosting facility. Note that while our energy services agreement for Jamestown has a largely fixed cost, there can be quarter-to-quarter variability based on seasonal power prices, which were higher in our second quarter than other recent periods. This may also impact our revenues in our fiscal third quarter, but this is expected seasonality that normalizes itself over full-year periods. Adjusted gross profit, a non-GAAP measure that excludes depreciation embedded in costs of revenue and one-time electricity charges, was $1.5 million, or 12% of revenue, for the fiscal second quarter of 2023. Operating expenses for the fiscal second quarter of 2023 were $27.2 million, which included $21.8 million of stock-based compensation, $4.7 million of other selling, general and administrative costs, and $700,000 of depreciation and amortization expenses. The elevated stock-based compensation during the quarter is anonymous as accounting rules dictated that we have a catch-up of recording these expenses as we had our registration statement declared effective related to the potential resale of previously awarded restricted stock and restricted stock units. We do not expect such events to occur going forward based on our currently outstanding awards, and it's important to note that the stock-based compensation is, of course, a non-cash expense. Adjusted net loss from a continuing operations for the fiscal second quarter of 2023 was a loss of $3.7 million, or a loss of $0.04 per basic and diluted share based on a weighted average share count during the quarter of approximately $93.4 million. Net loss attributable to Applied Digital for the fiscal second quarter of 2023 was a loss of $26.6 million, or a loss of $0.29 per basic and diluted share based on a weighted average share count during the quarter of approximately $93.4 million. Adjusted EBITDA, a non-GAAP measure for the fiscal second quarter of 2023, was a loss of $2.1 million. Lastly, on our balance sheet, we ended the fiscal second quarter of 2023 with $18.1 million in cash and cash equivalents and $20.5 million in debt. During the second fiscal quarter of 2023, we received $10.6 million in net customer deposits and $10.2 million in net deferred revenue, which collectively amounted to $20.8 million in net cash inflow due to the structure of our commercial arrangements with customers that incorporate upfront deposits and prepayments. In certain contracts, the prepayments are amortized back to the customers over the first year of their contract with no impact to revenue recognition but the timing of the cash flow with the upfront cash to us is a major benefit to the company in that it helps with our CapEx funding needs as we build out our data centers. Now turning to guidance. Similar to last quarter, we will not be providing explicit guidance for the forward quarter given revenue materiality of our Garden City and Ellendale facilities that we expect both to come online in the current quarter. With regard to our Jamestown site, we expect our revenue generated to be slightly sequentially With regard to our Jamestown site, we expect our revenue generated to be up slightly sequentially from fiscal Q2. We expect gross margin and non-GAAP number to be 25% of revenue or higher. That completes my financial summary. Now I'll turn the call over to Wes for closing remarks.

Thank you, David.

Before we get to Q&A, I'd like to quickly go over some goals and initiatives for our company as we look to the future of Applied Digital. To start, we remain focused on the execution of our day-to-day business, and that includes operating Jamestown with high uptime and reliable performance and energizing our Garden City and Ellendale facilities in the near term. We continue to expect that once online, this hosting capacity should put us at an annualized adjusted EBITDA run rate of close to $100 million. To execute on this growth trajectory, we have also focused on remaining in a strong financial position. As David stated, we ended the quarter with $18 million in cash and cash equivalents, and have over $7 million of undrawn capacity on our loan agreement for our Garden City facility. Also, our Ellendale facility is currently unlevered, providing us optionality for additional non-dilutive sources of liquidity to fund future build-out. Lastly, the other strategic focus for us is to continue building out our non-crypto use cases to demonstrate the broad capabilities of our next-generation data center assets. We're eager to initiate our pilot operations that I previously discussed and are actively in discussions with additional prospective customers for other HPC applications. We see significant potential in this part of our business as traditional data centers are a higher cost and less efficient solution than we can provide. With our proven ability to construct and operate low cost next generation data centers, We remain confident that applied digital will continue to be a leader in digital infrastructure in the digital infrastructure industry and capitalize on this market opportunity that is set to hit approximately 65 billion by 2030. To close, while this is a difficult time for the crypto industry, we are extremely confident that we're in a position to come out of these turbulent times stronger than ever. This is an incredibly exciting time to be part of Applied Digital as we continue to build out our facilities to accommodate the strong demand we have secured by both crypto and non-crypto customers for our services. I remain optimistic about our future and want to thank all of our team members for their dedication and service to Applied Digital. We're now happy to take questions. Operator?

Hi, everyone. This is CFO David Wrench.

I want to quickly clarify that I misspoke on one metric during the remarks. I referenced adjusted net loss from continuing operations of $3.7 million. It was actually $3.8 million loss, which is reflected in today's earnings release. Thank you, operator. We can now take questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Lucas Pipes with B. Riley. Please proceed with your question.

Thank you very much, operator, and good afternoon, everyone. Happy New Year, everyone, and congratulations on the progress on the HPC side. Thank you for taking my questions. My first question is, is in regards to Allendale and Garden City. I wondered if, for both sides, you can walk us through in more detail on kind of the current status. If we were at the site today, what would we see? And then more specifically to Garden City, what exactly is preventing the facility from being energized today? Thank you very much for your color on this.

Sure. Thanks, Lucas, for the comments and the question. So at Garden City, what you would see is, as you can see pictures, I think, up on our social media feed, but basically a fully constructed facility. There's some, I think, six of the buildings have miners racked in them, and so we're continuing to do that. We very recently, last week, received the approvals that we need. The last pieces of the puzzle here are mostly buildings technical, around metering and instrumentation transformers. And so we're finalizing that. And so we expect to finalize that obviously on the timeline that we set and energize before the end of February. So the way that energization looks is like we've talked, we light up the buildings that are available, but we expect that facility to be fully online by the May-June timeframe. We call for our largest customer there. There's 90. We expect to bring that online sooner than that time frame.

That's very helpful. Thank you.

Let me follow up. I missed that one. There you'll see four to six buildings standing. We're putting racks in the buildings. The timeline there is We sat in front of the PSC in late December. I think we'll get the finalized approvals there. I feel very confident about that process. There's some work to be done by the utility on the substation for interconnection. That's kind of the primary gating item. But also our buildings aren't ready to turn on yet there either, but we expect that again by the end of February.

Thank you, Wes. My second question is on Jamestown. Your customer in a press release last week noted installing additional miners there. What allows that to take place, given that this facility was already fully contracted? Thank you for your color on this.

That's a good question. So we're getting additional power, a little bit of additional power at Jamestown. So there's two pieces. It's optimizing Jamestown. So we have some additional power. And with Marathon, we've installed six immersion containers on site. It'll be a trial for us for immersion. I think they've already been through that pretty in depth and know how it works. So those are there. We're waiting for a final sign-off. They're actually connected and mostly ready to turn on. So hopefully those turn on in the next few weeks for us and for Marathon. And so then we have some additional space in the air-cool, and we're shuffling one of our customers down to Garden City. Again, it's not any of the 90 megawatts that we've contracted with Marathon, We're moving some of their capacity or some of their minors to Garden City, and we're putting Marathon in place in Jamestown. And that will happen this month mostly.

Very helpful. Thank you, Wes. I'll do one last one before turning it over. On the HPC side, you mentioned you're in discussions for additional commercial relationships. Can you give us a sense of the order of magnitude in terms of the discussions you're having currently? Thank you very much for your comment on this.

That's a great question, Lucas. I think you should think about HPC. The way I think about it is we're putting this facility up. We already have some GPUs running and we have some customers working and trialing on those GPUs in a couple of locations. The site that is being built in Jamestown, it's going to happen in phases. It really happens in three phases. The first phase goes up and there will be 300 GPUs that run We have two customers for those GPUs, and that's really kind of proving out how this works, and then we'll expand it from there by a little over two megawatts, and then there's a third expansion by another little over two megawatts that would happen later in the year, so it's kind of staged a couple of months apart on each one, but the way I look at this is we're seeing a significant amount of demand, and If we get these customers up and running successfully over the next few months, we'll sign additional customers. I have no doubt that we'll do that. But my view is there's a potential to sign a few very large customers once this is proven out. But we've had some initial discussions with those customers, but we're not going down the track with them initially. We'd rather make sure that we kind of have these facilities tuned to where I think they should be and where the team thinks they should be before we do that. But, you know, the strategy is to add a few small customers and then maybe add, you know, kind of what I would call an anchor tenant, similar to what we did with the Bitcoin mining later this year.

Thank you very much, Wes. To you and to your team, continue best of luck.

Thanks. Our next question comes from the line of John Todaro with Needham & Company. Please proceed with your question.

Great. Thanks for taking my question. Congrats on another quarter down here. First question, just as we do think about gross margin, so 25% of revenue for Jamestown, with the Texas and Ellendale sites when they're up and running, should we expect kind of a similar gross margin profile there as well?

Yeah, I think we expect those sites to be a little bit more profitable than Jamestown. I mean, the target we're shooting for, John, is around 30% gross margin. Once we have everything up and optimized, it'll need the sites to be running for a couple of quarters to get there. Now, that can be a moving target a little bit because, you know, generally our business – focuses on a spread between electricity and what we charge our customers. But where that's dialed in right now, I think looking towards 30% optimized gross margin is where we're trying to get to and where I think we can get to.

Okay, got it. Great. And just one other question for me on HPC. So just remind us, I'm sorry if I missed this, kind of the timeline for the pilot program and And what is being determined in that? Is there some optimization you guys would look to do, or is this really just kind of testing the waters before building more demand?

Yeah, it's both of those, actually. So it's putting the facility up. We've designed the facility, putting it up, and then making sure it works correctly for the application. So we have a software partner on this that we're working with as well and working through how that software works on site, specifically for machine learning. And so we're putting that up, making sure it works on this location in Jamestown, making sure our design looks good, and then we can expand from there. But, yeah, it's truly both of those. And so you should expect the 300 GPUs to be running in March. And then we'll expand from there. But right now, I fully expect the full five megawatts to be running by the end of the year of 23. But if things are running well there, we should already be on to the next facility and expanding that.

Got it. Great. Thank you. I appreciate it. Thanks, Sean.

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

Good afternoon. Congratulations as well. I just wondered how much capex do you project for completing Allendale and Garden City?

I'll let David take that.

I think we have 15 to 20 million more in capex to complete both of those. And we have that in cash. potential loans lined up, so we're in good shape there.

And we have additional prepayments.

Yep, additional prepayments.

Rob, I think the important part of that is we think we're fully funded to build, to finalize Garden City, Allendale, and the 5-megawatt HPC center as well.

Okay, great.

And then in the HPC business, maybe longer term or midterm, how do you see that as a mix of your business kind of playing out in, say, three years out?

Yeah, so that's a good question. The goal for us right now is at least 10% of our revenue coming from HPC besides Bitcoin by the end of this current calendar year. And three years from now, we're shooting for a 50-50 split by 2025.

Okay, great. Thank you. I'll turn it over. Thanks.

Our next question comes from the line of Chris Frendler with DA Davidson. Please proceed with your question.

Hi, thanks, and good afternoon. Thanks for my questions. I may have missed this, but the gross margin came under pressure. I think there was a note in the press release about some charges or some follow-up from last quarter's shutdown. He's giving a little cover there. And what's a normalized non-GAAP gross margin look like?

So, Chris, there was adjustments from specifically really the month of August where they have shutdowns in the way we bill. The customers got credits for that in September. And so you'll see that hit the gross margin. So in September, we actually had a a slightly negative gross margin for the month because of those adjustments. So that impacted the full quarter. And then as I've made in the comments, you know, in David's guidance, they expect gross margin to be above 25% for the current quarter. So a significant move back up. And I think you should expect that to be more of a normalized gross margin for us right in that. And then to answer the earlier question that John had, you know, I think the goal for us here is a 30% gross margin over time.

Great. Fair to take that normalized margin and estimate the one-time charge from last quarter? Or is there also a comment on power costs being a little higher this quarter? Is that also a factor?

In Jamestown, and you'll have this at Ellendale as well, both in North Dakota, the power cost, it changes somewhat through the year, but it will average out to the cost we expect it to, roughly plus or minus $1. call it 10% for the year. We actually have a mechanism in our contracts that allow us to adjust for that, which we do, but it's a little bit lagging. So in North Dakota, you're going to see some quarters where we're below that level on gross margin and some quarters where we're above that level on gross margin where we call it over-earned and under-earned. Texas will be more stable. The price doesn't have a lot of seasonality to it. It's more fixed because of how we structured that.

Okay, great. That's helpful. Separate area questions, obviously a lot of stress in the crypto mining sector, and it seems getting worse rather than better. Click an update on your customer base and how you feel outside of Marathon, which we kind of have a lot more information since it's public, but your private customer base. Is there any situation that deserves more monitoring, or are you still feeling really good about the customers you have?

Yeah, we haven't seen anything yet. So, you know, we have Bitmain, we have GMR, we have F2Pool, we talked about in the previous call, the other, you know, fairly large customers. There are facilities, and, you know, I think those remain, as far as those types of miners go, kind of the best of the best financially. So we haven't had any issues. Obviously, you can see Marathon, I think, You know, I talked about that last time where I think that, you know, from a balance sheet and liquidity position, they're best in class. I think they even made their liquidity position even better in December. So I think we have as good of a customer base as we can possibly have. You know, in the industry, call it the best houses in a bad neighborhood. But I don't know that there's any more color I can give you than that. We've got no issue with payments or defaults or anything of that nature.

I guess you benefit from being a relatively recent installation, so I imagine a lot of your customers have S19s or better, so they're more profitable than some of the older operating machines out there.

It's all S19 pros, and then I think a lot of the marathon equipment will be XPs as well. At the end, our customers have some of the most efficient miners in the marketplace. We run an efficient operation, and we charge a very reasonable price, so I think it makes our customers very competitive in the market.

Excellent. One last area of question, which is the $100 billion fund that you're participating in or helping setting up, is that going to require any capital on your side, or is that independent from what you're contributing to that?

It's independent from us. It's just we have the ability to host. If people who are not professional miners want to participate in a distressed industry, distressed environment, this is a vehicle for them to do that. And so we're participating in that, but not from a financial commitment.

Awesome. Thanks, Wes, and congrats on the progress. Thanks.

Our next question comes from the line of George Sutton with Craig Hallam. Please receive your question.

Thank you. Wes, just going further with your best house in a bad neighborhood, and congratulations for now being in that spot. The future expansion plans you have and inorganic opportunities, can you just address the opportunities that you're seeing and should we be surprised to see you make a couple of larger inorganic bets as a result of this or not?

So, George, thanks for the question. I have spent a lot of time looking at those types of opportunities over the past five months now. And we just, you know, we've seen some things that are interesting. We're in some processes where we made some bids. But I don't feel like, I feel like there's distressed assets that are still not selling at distressed prices. So when I see assets moving at a price that is, you know, at or even higher than what it costs us to build, where I know the site is good, I know the equipment is good, I'm just not going to buy anything like that. If I see something and we see something that is a really attractive price and we get really comfortable with, I think you could see us pull the trigger on some opportunities that are out there. But I've looked at a lot. I just haven't seen anything that makes sense for our shareholders. And the further along we get and the type of conversations we're having and the customers that we're talking to or potential customers we're talking to on the HPC front, I just, it's getting harder and harder for me to justify more money going towards Bitcoin mining versus the opportunities that we're seeing on HPC. You know, specifically in machine learning and AI, we're just, you know, we're having conversations with what most of the people on the phone here would have, you know, called well-recognized names. And there's just a lot of interest. And so it's another kind of a higher hurdle here. that we need to get over if we're going to do something like that. But it's not stopping us from looking at it every single week.

So following further into your 50-50 split three years out relative to mining versus HPC, outside of the 500 megawatts you've announced, are we assuming in that number that you are continuing to expand the mining piece of the business?

Not. I don't think you should. I think you should... expect us to be really focused on HPC. Like I said, the opportunities we're seeing there, the potential customers, the conversations we're having, I think you should expect us to focus more on that. Our soon-to-be largest customer, if they ask me to find another site and build it, and we have a couple of really interesting locations, would we do that? Absolutely. But we're really focused on the HPC side. And so just to put that in perspective, to get that 50-50 split, it we're going to need to, once we're fully live on the 500 megawatts, we're going to need to build out 50 to 70 megawatts of HPC to get to that 50-50 split.

Gotcha. And then finally, January 23rd, there's an ERCOT meeting, an LFLT meeting, that I was curious, are you on that agenda? Is there anything that actually needs even a formal approval, or is that not part of a process? necessary for you.

We're not on that agenda. Okay, perfect. Thanks, guys.

As a reminder, it's Star 1 to ask a question. Our next question comes from the line of Mike Grundle with Northwind Capital Markets. Please proceed with your question.

Hi, this is Mike Pachuccio for Mike Grundle. Thanks for taking our questions. Maybe just on Jamestown, you talked about the retrofitting for that Web 3.0 application customer. Can you talk about how difficult that is? Is that more or less plug and play or how much has to go into that?

Yeah, it's not plug and play. You know, we put some extra walls up, a little extra filtration. But it's, you know, point being, it didn't take long. It took about seven weeks to do that. So if we needed to do more of that, you know, it was One, we were trying to find space for this. We wanted to put it online pretty quickly because we wanted to get on this application fairly quickly. But two, I thought it was a nice exercise as far as can we retrofit some of this space and can we run GPU, CPU inside of it? And we can. But it didn't take that long.

And it's not wildly expensive either.

Got it. And then just to change down more broadly, You talked about the kind of five megawatts with the machine learning use case. Is there a certain amount of either like space or bringing new power like at a certain megawatt level or become kind of a higher CapEx type of deal to add more to Jamestown?

Yeah, so if we want to expand more HPC or Bitcoin at Jamestown, we're going to have to spend some additional CapEx on the electrical infrastructure. mostly running a line, but it won't be prohibitively expensive. It's not like a substation or anything like that. But we will have to spend some extra. But I do hope that we're doing that in the second half of this year because that will mean that the HPC stuff is growing as fast as we expect it to.

Thanks.

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

Hi, Wes. Thanks for taking my question. On the HPC side, it seems like your go-to-market strategy is on power costs. I was wondering how your customers balance that sacrifice or that gain for the sacrifice and latency. And it seems that even though demand is high for you, How do you market the fact that you're pretty much still a non-redundant facility? I guess on whatever additional color you can provide to sort of set your, you know, the applied offering versus, say, AWS or Azure.

Sure. It's a great question. Sure. There's a couple of things that set us apart, not just the power cost. It's going to be the total cost of the infrastructure. The infrastructure is built specifically for this. The applications do not require ultra-low latency. The machine learning and AI applications just don't require that nearly as much. Many of them are even interruptible, similar to how the Bitcoin mining is. We don't expect them to be interruptible, but we can run it in that fashion. We're going to give a lot more details as the year goes by, but we have a partnership we've formed with a software company, a software development company that has a specific software that really is necessary to run these type of machine learning applications in our style of data center ultra-efficiently. And so I think this is going to come down to just a game of cost of compute. And we're playing to be the lowest cost compute provider. We get it with these facilities in North Dakota. We have low-cost power, again, purpose-built for this. The facility is designed for this. And we're doing it around wind power. And the other big component here, Kevin, we've talked about is that we're going to use air cooling for a vast majority of the cooling here because of the climate. And what that does is a couple of things. The electricity usage at most data centers is about 50% for the compute and networking, et cetera, and 50% for HVAC. And so if we can take that down to HVAC being less than 10% or even lower than that, that's going to be another significant cost saving. But it's also what some people refer to as green computing or truly green computing, where We're using primarily renewable energy. We're using air cooling instead of using electricity to burn for HVAC. And so from that perspective, which the customers we're talking to, they absolutely care about that aspect of it as well. So if you're significantly lower cost, truly green computing, and provide performance that's on par with anything else they can offer, sign up for for these specific applications. I think we're in a really good position to compete and the conversations we're having tell me that we're on the right track here.

Okay. On the Bitcoin mining side, Wes, we're looking at a hash price that's I think 25% of where it was through the last downturn or the last winter. I guess Listen, it seems to me that you're pretty fully booked up, but it just also seems to me that you would be getting some pressure from your customers on helping them manage their profitability. And I know you alluded to it a little bit, you know, with Bitmain and Marathon, it just doesn't seem that you're getting that kind of pushback, but it's also a little bit difficult, at least from the outside, to get my arms around that. Can you add anything to how you're managing those negotiations?

Yeah, so we haven't had any price reductions at all. I mean, it wouldn't be fair to say that our customers, even prior to where prices were, aren't always trying to negotiate the best price all the time. So that's ongoing, and I don't think our industry is unique for that. But I think we are one of the lowest-cost operators out there, and so we don't get a lot of pushback about that. And I don't really know what else to say about it.

No, that's fair. I appreciate the color. I do. Chris brought up the investment fund, and you mentioned – You mentioned looking at opportunities there, and my understanding is perhaps I don't understand it well enough. So just help me get my thinking straight on whether or not your participation is exclusively on the hosting of assets that your partners here deliver to your sites. Is that how to think about it?

No, it's twofold. So the guys at GMR would run the site. They're the or run the fund, the actual mining of it. And they do, I don't need to get into it too much, but they do some things around it as far as hedging and selling and things like that. But think of it as a mining SPV or hedge fund, and there's a management fee on it, and we would get the hosting contract from the fund, plus we would share in 50% of the economics on the fees. And then GMR would run the fund. Does that make sense?

Yeah, yeah, yeah. So they run the fund, you run the machines. And we split the management fees. Split the management fees, but not the, I guess, the Bitcoin mind.

No, that goes to the investors.

Right, okay. And can you give us an indication on, I mean, obviously the market's pretty depressed. I mean, I know that you for Applied haven't seen anything, but Have the GMR guys pulled the trigger on anything yet?

So there's multiple conversations, and I'm not directly involved in those conversations, but conversations going on on two fronts, people who put capital directly into the fund and then also some institutions that are more financially oriented institutions that are in possession of crypto miners having an interest in doing an in-kind contribution, if that makes sense.

Oh, absolutely. Yeah, I could think of a bunch of companies that are in that situation. All right, last question for me is just on your, I mean, I know David pointed to, I think, $25 million maybe left to spend to build everything out that you've got set up. I was just wondering if you could speak to how dynamic those costs have been, right, whether or not prevailing or how prevailing economics may have changed as inflation driving costs up or are you seeing costs come down maybe on account of less lower aggregate demand for those types of things given the you know the bitcoin reset we've remained pretty uh on budget uh we've seen some opportunities with uh

you know, finding equipment for, you know, some discounts, but mainly just contracted along the way and keeping on budget.

So no large swings varying from our budget. Okay. Thank you very much, gentlemen. Appreciate the opportunity. You took me in. Thanks, Kevin.

We have a follow-up question from the line of Lucas Pipes. Please proceed with your question.

Thank you very much, operator. Great discussion this afternoon. Wes, I thought I squeezed one in. You mentioned some of the names you're talking to on the HPC side would be recognized by most on the call, and I wondered if you could maybe elaborate on that a little bit and provide us a flavor with the sort of counterparties you're engaging with. Thank you.

The short answer, Lucas, is I'm not yet ready to elaborate on that, and I'm not trying to hide anything or be a tease. I just don't have permission to use any names.

Well understood. I thought I'd give it a shot. I appreciate the follow-up, and again, best of luck.

Thanks, Lucas.

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

Thanks, everyone, and I want to take the opportunity again to thank all of our employees. We've grown quickly and really appreciate everyone's hard work here, especially the rough weather we've had in North Dakota for the month of December and everyone on the construction side as well making it through that. So thanks, everyone, for joining us, and talk to you next quarter.

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.