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Wesley Cummins

Thanks Matt and good afternoon everyone. Thank you for joining our fiscal second quarter, 2025 conference call.
I want to start by expressing gratitude to our employees for their continued hard work and service and supporting our mission of providing purpose built infrastructure to the rapidly growing high performance computing industry. Before turning the call over to our CFO, Saidal Mohmand for a detailed review of our financial results. I'd like to share some recent developments across our businesses.
Starting with our data center hosting business. We currently have 286 megawatts of data center capacity for our Cryptocurrency clients across two fully contracted locations in North Dakota which are operating at full capacity. As many of you know, Bitcoin recently hit $100,000 and the demand for our services in this sector remains robust.
Next, let's discuss our cloud services business which provides high performance computing power for AI applications. This segment continues to experience growth as we fulfill our existing contracts and explore new opportunities in our pipeline. As at the end of the second quarter, we had six clusters online. We are currently evaluating numerous opportunities in this area as we see how next generation GPUS come to market in our HPC hosting segment.
We continue construction of a 400 megawatt campus in Ellendale, North Dakota in December. We reached a major milestone with the successful energization of the main substation transformer. Additionally, I'm very pleased to announce that we won the DCD Community Impact Award for Ellendale Community and Economic Development Initiative through the our wish program we're addressing housing shortages and supporting workforce growth in Allendale, North Dakota.
This is a significant accomplishment for an emerging firm like ours in the data center space as we were finalists alongside established companies from around the globe such as Google NTT, Data from India and Telehouse Europe based in London.
Let's now turn to the topic that's on everyone's mind the lease of our campus in Ellendale, North Dakota. Over the past year, we've learned that the hyperscaler contract process is extremely thorough while we cannot control their speed. We are focusing on what we can't control completing the construction of a 100 megawatt data center on time and within budget, I strongly believe that our Ellendale campus is a valuable asset with 100 megawatts of critical it load available in 2025.
We believe it is in our shareholders' best interest to continue managing what we can and avoid speculating on an exact date while the process has been long. One of the major benefits of undergoing such a significant diligence process is that we have been engaged with some of the largest finance and investment partners in the world today. I'm excited to share, we've agreed to form a strategic partnership with Macquarie Asset Management.
Macquarie Asset Management, the asset management division of Macquarie Group is a global financial services organization operating in 34 markets with over 20,000 employees.
They have been recognized as one of the largest infrastructure investors in the world for the past 12 years. Raising over $80 billion in capital. Last year alone, Macquarie brings extensive experience in infrastructure investment and data centers.
They will leverage their infrastructure investing and development expertise along with our growing digital, along with their growing digital ecosystem capabilities to complement applied digital expertise in delivering and servicing data center infrastructure solutions for enterprise and hypers steel companies.
The partnership will include a $5 billion perpetual preferred equity financing facility. This facility will allocate up to $900 million to the company, Alldale high performance computing data center campus and give Macquarie the right of first refusal to invest up to an additional $4.1 billion across to apply digital's future HPC data center pipeline.
The investment will take the form of perpetual preferred and 15% common equity interest and apply digital's HPC business segment.
Macquarie investment in conjunction with future project financing will be used to repay we repaid project level debt and allow the company to recover over an estimated $300 million of equity investment in the L&L HPC campus.
We believe this expanded relationship with Malory positions applied digital for significant growth in the industry. Establishing applied digital is one of the fastest growing HPC data center owners operators and developers in the United States.
At today's build cost, we have a significant portion of the equity needed to construct over two gigawatts of HPC data center capacity including our L&L HPC campus with an 85% ownership stake in both existing and future HPC assets to a project level preferred equity financing facility sufficient to fund our HPC project pipeline. We believe we are positioned for transformative progress.
We're excited to have Macquarie support as we establish ourselves as a leader in the tier three data center infrastructure sector while continuing to develop and operate large scale state of the art data centers for low class customers at the forefront of the A I revolution.
In summary, we are encouraged by the positive trends. We are witnessing across our business and remain confident in our growth trajectory.
With that, I will now turn the call over to our CFO, Saidal to walk you through our financials and provide an update on guidance. Is that all?

Saidal Mohmand

Thanks, Wes and good afternoon everyone. It has been an active few months for our finance and accounting teams and I am delighted to lead the department as a new CFO.
Let me begin by highlighting some of our recent financial announcements followed by killed.

Wesley Cummins

Overview of the quarter.

Saidal Mohmand

In November. We completed a $450 million 2.75% convertible senior note offering due 2030 which included all84 millionocated for share repurchases in December. We announced a $150 million senior secured debt financing facility with Macquarie Equipment capital and simultaneously repaid our senior credit facility with SIM Group. This allowed us to remove encumbrances on assets as well as the parent guarantee.
Today, we announced a strategic partnership with Macquarie asset management for a $5 billion potential referred a financing facility.
Now let's turn to the quarter revenues for the fiscal second quarter of 2025 were $63.9 million. Up 51% over the prior comparable period. This increase was primarily driven by the continued growth of our cloud services business due to the deployment of additional GP U clusters in total, our data center hosting segment generated $36.2 million in revenue. While our cloud services segment contributed $27.7 million.
Cost of revenues increased $22.6 million to $52.4 million from the prior comparable period, primarily driven by the growth in the business as more facilities were energized and additional services were provided to customers GA expense increased $9.5 million to $29.8 million also driven by growth in the business as more facilities were energized and additional services were provided this quarter, our depreciation amortization expense increased to $26.4 million compared to $13.4 million in the same period of 2024 of this amount, $21.7 million is attributable to to DNA in our cloud segment.
This segment's DNA was primarily driven by the amortization of our GPU leases over a two year period which we have discussed in previous earnings calls during the quarter, we renegotiated our GP U lease terms which allowed us to extend the amortization period for GPU leases to a more industry standard timeline of five years. This segment, this adjustment reduced segment DN Aans by $8.5 million for this quarter.
Looking ahead, we expect this change to further lower DNA expenses by about $7 million per quarter on a GAAP reported basis. All then going forward, we expect to recognize around $15 million per quarter in the cloud segment for the DNA.
Moving on to interest expense, interest expense increased $4.9 million to $7.5 million. Primarily driven by an increase in finance leases and interest bearing loans between periods. Net loss attributable to common stockholders was $138.7 million or $0.66 on a basic and diluted share.
I want to note that this quarter was impacted by the loss and conversion of debt of $25.4 million as convertible debt issued to YA fund was converted during the period.
We also recognize the loss on change in the fair value debt of $87.2 million due to adjustments, the fair value of the 2.75% convertible senior nodes during the two week period in which the conversion option was recorded as a derivative. This was prior to us receiving shareholder approval at the annual meeting on November 20th. 2024 to increase our authorized share count, the adjusted net loss was $12.6 million or $0.06 per share.
Just the increased 93% to $21.4 million as well. Moving to our balance sheet, we ended the fiscal second quarter with $314.6 million of cash, cash equivalent and restricted cash along with $479.6 million in debt.
With that, I'll turn over the call to Wes for closing remarks.

Wesley Cummins

Thank you said all the rapid expansion of hyperscale data centers driven by growing demand for AI capabilities is presenting significant challenges to the electricity availability in the US. According to a recent Morgan Stanley report, there could be a shortfall of approximately 36 gigawatts in power available for us data centers by 2028.
Addressing this issue is not straightforward as adding new capacity requires lengthy planning, regulatory approvals and the development of new generation and transmission infrastructure processes that can span years or even decades based on these dynamics. We believe that much of the US is currently available. Excess power could be under contract within the next few years applied.
Digital was one of the first companies to recognize this growing demand for power and data centers anticipating these needs. We began construction of our facilities before the market fully grasped the shifting demand landscape. As a result, we believe we are well positioned to capitalize on these trends.
Our strategy has been further validated over the past year by securing strategic investments from S group NVIDIA and now Macquarie Asset Management. These investments not only validate our vision and approach but also lower our cost of capital and accelerate the development of our pipeline, transforming it into a highly valuable asset for our shareholders.
Our vision is to establish a platform for building and operating multiple HPC data centers and we're proud of the significant progress achieved this quarter and look forward to sharing further updates as the year unfolds. We welcome your questions at this time. Operator.

Question and Answer Session

Operator

(Operator Instructions)
Nick Giles B. Riley security.

Nick Giles

Thank you very much, operator. Western team. Congratulations on today's announcement. In the release, you noted late stage discussions with multiple hyperscalers.
And I was wondering, can you provide any color on where due diligence processes stand with the other potential hyperscalers at this point? My next question is would, would there come a point where you would reenter exclusivity with any of these counterparties. Thank you very much.

Wesley Cummins

Nick. Thanks for the question. So I think we disclosed in October or November. You know that we had the exclusivity with the first potential customer had expired. We opened up the site for additional customers to look. You know, those are in varying stages of progress. But it's once I would say is once it's been done, once everything is prepared for easy access on when you're, when you're doing the diligence around, technical, the design, fiber power, all of those things, so much, much more accelerated you know, progression of, of those. And does that answer your question.

Nick Giles

That that does, that's very helpful. May maybe just a follow up one on the Macquarie investment. How long have you been looking at similar deals? And to what extent did terms improve over that over that timeline? Thank you very much.

Wesley Cummins

So we started this process last year, it's, it's been probably seven months. We looked at multiple proposals and I think it's because the market developed and the, and the year moved on and the progress that we've made at our site. You know, we, I think signed the best terms and I'm very happy with the outcome on the terms we did with this structure, with Macquarie. But, but we did, do a full process to make sure that we were getting, the a the best partner and the best terms.

Nick Giles

Appreciate all the color continued. Best of luck.

Wesley Cummins

Thanks, Nick.

Operator

Rob Brown, Lake Street Capital.

Robert Brown

Good afternoon. Just a little further on the hypers scalar discussions. I know you can't exactly protect but are they, are they kind of moving forward? Are you, you're looking through final details? Or are there kind of roadblocks that you run into just some sense of maybe where it's at and, and what's left to go?

Wesley Cummins

Hey, Rob, thanks. What, what I would say about it? I think the best way to frame this is, the experience we have had thus far, again, very thorough process. We've done great, like from a design technical perspective, fiber, the work we've done there and what's going into into that site specifically all ande power, all of that has been great and made, made a huge amount of progress on that.
I think with our, the announcement today, we're hitting really one of the last piece of the puzzle for us, which is, I think I've communicated this before we, while we have this, I think the demand for this capacity again, I don't know of anything of this scale available in 2025 is going to allow us to break into full stack development and operations in the in the hyperscale market.
But the last piece here is, we're new, we're new, we're first time supplier to any of these hyperscalers and the financial backing from a very well known partner with a lot of capital I think is really helpful in checking the box for the last hurdle we need to get over. But I'm I'm really optimistic about finalizing a lease on that facility and then moving on to the next level.

Robert Brown

Okay. Got it. And, and then, with this funding are there, I guess the next facilities and the, and the funding backing for, I guess an additional $4 billion plus. How, how does that kind of open up the marketplace? How does that accelerate maybe some of these other discussions you're having.

Wesley Cummins

Again? I think just that the backing in general, right? There's the full amount of due diligence. There's a reason that that we both wanted to enter into this partnership. We have a great power pipeline with a great data center development team, great ops team. And, and so as we finalize this first and we have a significant amount of 2026 power available.
That's the next step as far as marketing across three different locations and what this really does for us. Well, and it's a, I think this is really important is it funds? I've talked about this for, I think our last two or three earnings calls we really needed to move, find financing and funding down to the asset level. This is an asset, heavy business, a CapEx, heavy business and this is a huge step in moving that down to the asset level. So every time we start a new campus, every time we get a new contract, there's not the question mark of where do you get the equity?
How much dilution comes at the public company? It just lays a very clear road map between the equity commitment and then project finance on the debt side that will be layered on top of that to allow us to go out and build. As we said in the prepared remarks, over two gigawatts of the pipeline, which is what we have in the near term, 25, 26, 27 pipeline to go and build out. But I think the important part here is it provides a very clear road map of how we plan to finance that.

Robert Brown

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

Operator

Darren Aftahi, Roth capital partners.

Darren Aftahi

Hey guys, two. If I may just on the Macquarie announcement this morning, is there anything strategic in terms of the process and timing as it relates to the lease? And then I know you guys already hit this, the multiple hyperscaler and pr is there a scenario where that 400 megawatts in Allendale could get lit amongst two or is, are you kind of down the path of, of one is going to take all the capacity? Thanks.

Wesley Cummins

I think on the first question, is really about getting, to the right terms and you know, I'm not going to get into whether there's, there's any anything else as far as the timing around that? On the second question, it could split. I strongly believe it's going to be a single customer for the entire campus.

Darren Aftahi

Thanks.

Operator

Mike Grondahl, Northland Securities.

Mike Grondahl

Hey, guys, thanks. Could you remind us exactly how much money you had invested in Ellendale HPC?
And, how much you'll be able to pull out with this Macquarie financing?

Wesley Cummins

Yeah, I'll call that all into that.

Saidal Mohmand

Hey, Mike. So a as we disclose in the in the, in the AK, we have roughly over $700 million invested in the Ellendale campus and assuming project financing on terms entered along with the lead. We expect in access of $300 million of cash proceeds that we can take back up to the parent.

Wesley Cummins

But Mike, I think it's important just as a reminder, we have the Macquarie Capital facility there, there's some, there's the extra debt that's going to be paid back as well. So when you're trying to do the math between the $700 million then what we pull out, there's there is that, that debt repayment.

Saidal Mohmand

Effectively for for the Allendale campus view it as the applied requirement on a megawatt basis of one of $1 million per megawatt from applied. And that will decrease to 750,000 going forward outside the Allendale campus.

Mike Grondahl

Right? So of the $700 million or over $700 million you have invested in Ellendale, you'll end up with a net $400 million with that $180 million of debt paid off and then you'll pull out some other capital. So your net investment is about $400 million there.

Saidal Mohmand

There's also, it's also a moving target to think about it, right? We're spending, we're putting dollars into the ground every month in the, in the project as well.

Wesley Cummins

Yeah, I a moving target as far as what we'll be able to pull back out.
Yeah, the cash comes, comes back out of the, what is, what is now the HPC subsidiary and goes back to the, to the public parent code.

Mike Grondahl

Okay. And then two more questions. One wes if you could maybe define your pipeline right now, It looks like Macquarie can fund, two gigawatts, do you after the $400 million how much more do you have or can you get your hands on? And then secondly, if you could, I don't know maybe just demand sounds pretty good with all these hyper scalar. But what, what's the pricing environment look like?

Wesley Cummins

So I'll answer the second first so that, the pricing environment is is reflective of the demand environment. And I think there's plenty of data points just even in the last few weeks about data center spend from some of the hyperscalers that that is a strong indicator of where the demand of the market remains and then go to the to the pipeline Mike.
We've talked about, we talked about this on our last call. We have other campuses. I think that the total is 1.6. So that's the two outside of Ellendale, 1.6 of campuses that where we have 2026 hour and 2027 power. So that those are the ones that in some case, we've already been in market with those campuses.

Mike Grondahl

So outside of Ellendale 16 and you can have that available 26 or 27.

Wesley Cummins

Like building all of that, you can't build it all for 27 but first power available in 26. And at this point that that's really, all that matters if you haven't started building, now you're not having 2025 power. So this, this is really looking at 26 for the other campuses.

Mike Grondahl

Got it. Thank you.

Operator

George Sutton, Craig Colen.

George Sutton

Thank you and congratulations on the Macquarie deal today. So I'm curious, I what I understand timing is challenging to predict but in the facility it looks like there is a February 15, 2025 we signing date. That is necessary for this. Can you just address that specific date?

Wesley Cummins

Yeah, so, thanks short, but the, so the fed 2015 is not a lease signing date. I'll have to go back and look, but I think that outside date is maybe in June. But, but the F-15 is for completion of of some other items, but it's, it's not a lease signature date.

George Sutton

And just so we can define this for everybody. My belief is and correct me if I'm wrong, this is effectively the infrastructure equity component going forward. So you would go get a traditional construction loan financing for a large percentage underneath that would be the infrastructure equity. That is a fair, fairly significant portion of the rest of that. That's what this represents. Correct.

Wesley Cummins

That, that, that's exactly it. So I think, important to delineate here between the equity component, which is what this deal is and then the debt component, which is, project finance and then, in the future flips into an A BS or another debt instrument. So, if you want to look at total capital, that would be available when you match that equity with debt, right? There's a, there's a big multiplier effect there.

George Sutton

Understand. And then lastly, if I could just understand the 15% ownership that mcquary takes on of the HPC business, what what investment are they making for that? Is that the initial 200 ish million or is there a requirement for them to fund a specific portion of the $5 billion in total?

Wesley Cummins

So, George, the way.

Saidal Mohmand

To think about it, it's basically lease by lease. Each asset will go into what we deem what we call the box of the H BC company AP L DH. So any asset that goes into that entity, they will own 15% off and assuming that that goes on, they set the lease and then it's funded simultaneously entering.

Wesley Cummins

So any asset that they fund goes into the entity, so it's it's asset by asset, the drop it.

George Sutton

Beautiful. Okay. So if they don't choose to support a specific project that would not contain the equity in.

Wesley Cummins

That case, that's correct.

George Sutton

Okay, great clarity. Thank you guys.

Wesley Cummins

Thanks George.

Operator

Brett Knoblauch, Cantor Fitzgerald.

Brett Knoblauch

Hi guys. Thanks for taking my, my question and correct on the answer this morning on the Rofer, I, is that just a Rofer on the Perpetual Preferreds or would you have to use that before? Say you wanted to raise a traditional equity through a secondary or you have to use the preferred before you can go down that route.

Wesley Cummins

So it's think of it at two different levels. So we want to finance everything at the asset level with the preferred anything up at all at the top companies you're talking about like our public equity that there's nothing on that and, and if that's not what you meant, then please correct me.

Brett Knoblauch

I think that answers it. And then just another question, it says it's kind of Macquarie will receive preferred in common. I guess how many shares of common are they getting? And how does that mechanism work?

Wesley Cummins

So it's just 15% of the HPC subsidiary.

Brett Knoblauch

So not like common of the parent.

Wesley Cummins

Not, not common to the parent, 15% of the HPC subcu.

Brett Knoblauch

Understood. Perfect. And then just maybe just on the terms 12.75% on the dividend. I guess you guys talked about, lease terms ranging in the yield on cost range of, called low to mid 10s, which is more or less the cost of capital here on the preferred equity side. Have you seen terms improved to a level where you would get a yield on cost above the cost of the preferred?

Wesley Cummins

Yeah, so, but, but, but just remember that the preferred is a sliver of the capital and then the remainder of the capitals are equity in the site and then project level finance, which you know is the so for plus, 250 or 225. So when you look at the blended cost, we fully expect the return to be well worth of our cost of capital.

Brett Knoblauch

Perfect. Thank.
You so much guys, really appreciate.

George Sutton

It.

Operator

[Brian Ban], Needham and co.

Great. Thanks guys, you mentioned there's been some learnings on the delivered approach, hyperscales take what's, what's one of those learnings you can apply to the next set of negotiations, some of which may be ongoing.

Wesley Cummins

Yeah, so just, the preparation of, everything that we need to provide going through the process, like I said, it was much more accelerated with anyone else because we have all the, we have the knowledge base of what is being looked for, potential change for things in the future as far as you know, design and, there's a constant evolution, especially on cooling.
So there's, there's that aspect and then, I think one of the biggest is, just I'll call it being stamped, right? Just getting through the process, signing a lease being stamped by, one of these types of customers that that we have the ability, to do all of these things.
I think that's going to help accelerate it you know, one of, one of the things that we have learned is first time supplier. You, it always is going to take longer than if you're already a supplier to that company. And that you shouldn't be, I guess a big surprise, but it's just the delta between existing supplier and first time is a little bit larger than we thought.

Thank you.

Operator

Thank you. There are no further questions at this time. I would like to pass it back to Wes Cummins for closing remarks.

Wesley Cummins

Thank you. Thanks everyone for joining our Q2 Fiscal 2025 conference call. Look forward to speaking with everyone in April.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.