Applied Digital Corp (APLD) 2023 Q2 法說會逐字稿

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 30, 2022, 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 in the Investor Relations section of the company's website.

Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins; and CFO, David Rench. Following their remarks, we will open the call for questions.

Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, 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 of Risk Factors in 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 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 the 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 Ellendale 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 company.

So now let me update you on the progress of our 2 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 time line 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 5 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 in our next-generation data centers, which we have wide-ranging use cases beyond cryptocurrency, including applications and 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 center 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 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 opportunities. As we announced last month, we broke ground on a 5-megawatt stand-alone facility adjacent to our Jamestown site that will host several hundred graphics processing units for a machine learning application with a new customer.

Concurrently, we're also -- 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 and high compute power.

Before I turn the call over to David, I want to address a few line items in our financials. First, our stock-based compensation expense was extremely high in the quarter. This is the result of almost 2 years of stock-based comp being recognized in a single quarter, which was triggered by a resale registration statement becoming effective in October. In addition to the multi-quarters being recognized in the 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 Rench, 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 cost 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 cost of revenue and onetime 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 anomalous with -- 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 noncash expense.

Adjusted net loss from continuing operations for the fiscal second quarter of 2023 was a loss of $3.7 million (sic) [$3.8 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 and 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 -- I'm sorry. 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 in 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 of 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 nondilutive 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 Rench. I want to quickly clarify that I misspoke on 1 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.

(Operator Instructions) Our first question comes from the line of Lucas Pipes with B. Riley.

Happy new year, everyone, and congratulations on the progress on the HPC side. My first question is in regards to Ellendale and Garden City. I wondered if for both sites, you can walk us through the -- in more detail on the kind of the current status. If you 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?

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 6 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 needed. The last pieces of the puzzle here are mostly technical around metering and instrumentation transformers. And so we're finalizing that. And so we expect to finalize that, obviously, on the time line that we set and energized 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 time frame. Recall for our largest customer there, there's 90, we expect to bring that online sooner than that time frame.

That's very helpful.

Let me follow up. I missed the Ellendale piece. There you'll see 4 to 6 buildings standing. We're putting racks in the buildings. The time line 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.

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.

That's a good question. So we're getting additional power, a little bit of additional power at Jamestown. So there's 2 pieces. It's optimizing Jamestown. So we have some additional power and with Marathon, we've installed 6 immersion containers on site. It will 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, not -- 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 miners to Garden City, and we're putting Marathon in place in Jamestown and that will happen this month mostly.

Very helpful. 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 for the order of magnitude in terms of the discussions you're having currently?

Sure. That's a great question, Lucas. So 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. So it really happens in 3 phases. The first phase goes up. There will be 300 GPUs that run. We have 2 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 2 megawatts. And then there's a third expansion by another a little over 2 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 signing a few -- 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 the strategy is to add a few small customers and then maybe add kind of what I would call an anchor tenant similar to what we did with the Bitcoin mining later this year.

Our next question comes from the line of John Todaro with Needham & Company.

First question, as we do think about gross margin, so 25% of revenue for Jamestown. With the Texas and Ellenville sites when they're up and running, should we expect kind of a similar gross margin profile there as well?

Yes. 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 will need the site to be running for a couple of quarters to get there. Now that can be a moving target a little bit because generally, our business focuses on a spread between electricity and what we charge to 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 where I think we can get to.

Okay. Got it. Great. And just one other question for me on HPC. So just remind us -- and sorry if I missed this kind of a time line for the pilot program? 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?

Yes. 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 design looks good, and then we can expand from there. But it's -- yes, 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 5 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.

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

Just wondering how much CapEx do you project for completing Ellendale and Garden City?

I'll let David take that.

I think we have $15 million to $20 million more in CapEx to complete both of those, and we have that in cash and potential loans lined up. So we're in good shape there.

And we have additional prepayments.

Yes. Additional prepayments.

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

Okay. Great. And then on the HPC business, maybe longer term or midterm, how do you see that -- the mix of your business kind of playing out in, say, 3 years out?

Yes. 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 3 years from now, we're shooting for a 50-50 split by 2025.

Our next question comes from the line of Chris Brendler with D.A. Davidson.

I may have missed this, but the gross margin came under pressure, and there is a note in the press release about some charges or some follow-up from last quarter's shutdown needs giving a little color there. And with the normalized non-GAAP gross margin look like?

So Chris, there was adjustments from specifically really the month of August. We had shutdowns in the way we build. The customers got credits for that in September. And so you see that hit the gross margin. So in September, we actually had 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, in David's guidance, we 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, I think the goal for us here is the 30% gross margin over time.

Great. Is it fair to take that normalized margin and sort of estimate the onetime charge from last quarter? Or is there also a comment on power cost being a little higher this quarter?

In Jamestown and you'll have this in 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 expected to roughly plus or minus, 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 we're below that level on gross margin and some quarters where we're above that level on gross margin where we call it overearn and underearn. Excess will be more stable than the prices. It 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 of questions. Obviously, a lot of stress in the crypto-mining sector and it's getting worse rather than better. If you can update on your customer base and how you feel outside of Marathon, which we kind of have a lot more information as public, but your private customer base, is there any situation that deserves more monitoring? Or is it still feeling good about the customers you have?

We haven't seen anything yet. So we have Bitmain, we have GMR, we have Antpool. We talked about in the previous call, the other fairly large customers that are facilities. And 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 I talked about that last time, where I think that from a balance sheet and liquidity position, they're best-in-class. I think they've made their liquidity position even better in December.

So I think we have as good of a customer base as we can possibly have in the industry call it the best houses in a bad neighborhood, but that -- 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 or -- and then I think a lot of the Marathon equipment will be XPs as well. So at the end, it's -- our customers have some of the most efficient miners in the marketplace. We've 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 question is just the $100 million fund that you're participating 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 a -- 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.

Our next question comes from the line of George Sutton with Craig-Hallum.

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 would -- 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 5 months now. And we just -- 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 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 or 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 have 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, the customers that we're talking to -- our 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, specifically in machine learning and AI, we're just -- we're having conversations with what most of the people on the phone here would have called well-recognized names, and there's just a lot of interest.

And so it's another kind of a higher hurdle that we need to get over if we're going to do something like that, but it's not stopping us from looking -- look at it every single week.

So following further into your 50-50 split 3 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?

No. I don't think you should -- I think you should expect us to be really focused on HPC. Like I said, with 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 -- or soon to be the 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, 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.

Got you. And then finally, January 23, there's an ORCA meeting that an LF -- LT 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.

(Operator Instructions)

Our next question comes from the line of Mike Grondahl with Northland Capital Markets.

This is Mike Pochucha on for Mike Grondahl. Maybe just on Jamestown, you talked about kind of retrofitting for that Web3 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?

Yes, it's not plug and play. We put some extra walls up a little extra filtration, but it's -- it didn't take long. It took about 7 weeks to do that. So if we needed to do more of that, one, we needed -- 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. So -- but it didn't take that long. And it's not wildly expense either.

Got it. And then just, Jamestown more broadly, you talked about the kind of 5 megawatts of machine learning use case. Is there a certain amount of either like space or bring in new power like at a certain megawatt level where it becomes kind of a higher CapEx type of deal to add more to Jamestown?

Yes. 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 there won't be prohibitively expensive. It's not like a substation or anything like that. So -- but we will have to dispense 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 we expected to.

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

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 nonredundant facility? I guess whatever additional color you can provide to sort of set your -- the Applied offering versus, say, AWS or Azure?

Sure. It's a great question. So 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. And so the infrastructure is built specifically for this. The applications do not require ultra-low latency -- sorry, 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 detail as the year goes by, but we have a partnership we formed with 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 through just a game of cost of compute. And we're playing to be the lowest cost compute provider. We put these facilities in North Dakota. We have low-cost power, again, purpose built for this, another 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 that does 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. 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 a significantly lower cost, truly green computing and provide performance that's on par with anything else, they can sign up for the -- for these specific applications. I think we're in a really good position to compete and kind of 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 half price that's, I think, 25% of where it was through the last downturn, 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 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 on the outside to get my arms around that. Can you add anything to how you're managing those negotiations?

Yes. So we haven't had any price reductions at all. I mean it would be -- 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 I don't -- we don't get a lot of pushback about that. And I don't really know what else to say about that.

Yes. No, that's fair. I appreciate the color. I do. Chris brought up the investment fund, and you mentioned looking at opportunities there. And am I 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?

It's twofold. So the guys at GMR would run the site -- 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?

Yes, yes, yes. So they run the fund, you run the machines.

The management.

The management fees, but not the -- I guess, the bitcoin mined.

No, that goes to the investors.

Right. Okay. And could you give us an indication on -- I mean, obviously, the market is pretty depressed. I mean I know that you, for Applied, haven't seen anything, but have the GMR guys pull the trigger on anything yet?

So there's multiple conversations, and I'm not directly involved in those conversations, but conversations going on, on 2 fronts. People that have put capital directly into the fund. And then also some institutions that are more financially oriented institutions that have -- that are in possession of crypto miners having an interest in doing an in-kind contribution, if that makes sense.

Oh, absolutely. Yes, 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 the how dynamic those costs have been, right, whether or not prevailing -- or how prevailing economics may have changed, is 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 Bitcoin reset?

We've remained pretty on budget. We've seen some opportunities with finding equipment for some discounts, but mainly just contracted along the way and keeping on budget. So no large swings bearing from our budget.

We have a follow-up question from the line of Lucas Pipes.

Great discussion this afternoon, I -- but I thought I'd squeeze 1 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?

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

There are no further questions in the queue. I'd like to hand the call back to Mr. Cummins 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.