Applied Blockchain Proposes $60 Million IPO (OTCMKTS:APLD)

A Quick Take On Applied Blockchain

Applied Blockchain (OTCPK:APLD) has filed to raise $60 million from the sale of its common stock in an IPO, according to an amended registration statement.

The company provides data center location services targeted at the crypto mining industry.

APLD is seeking a high valuation on perfect future execution, so the IPO is pricey to me; I’m on Hold on APLD.

Company & Technology

Dallas, Texas-based Applied was founded to develop a range of crypto mining services in the North America region.

Management is headed by Chairman and CEO Wes Cummins, who has been with the firm since 2007 and was previously founder and CEO of 272 Capital LP, a registered investment advisor that was sold to B. Riley Financial.

The company’s primary offerings include:

• Co-hosting services

• Procurement

• Construction

Applied has received at least $89 million in equity investment from investors including Xsquared Holding Limited and GMR Limited.

Management says it has signed deals with ‘4 customers which will account for the total available energy under the Amended and Restated Energy Services Agreement at our first facility and 85MW of energy at our second facility once built and able to provide such energy.’

Applied’s Market

The global market for Bitcoin mining is currently in significant flux, with the recent bans on mining in China causing a large amount of that country’s hash power to exit the network, while those operators look for a more suitable location.

The market value for mining depends on the price of Bitcoin, since the majority of value going to the miner is a function of the current Bitcoin reward rate of 6.25 Bitcoin per successfully mined block.

At a price of $50,000 per Bitcoin, the annual mining rewards for the entire industry would be approximately $16.425 billion.

Major industry participants include:

• Bitfarms

• Argo Blockchain

• DMG Blockchain

• Hive Blockchain

• Hut 8 Mining

• HashChain Technology

• DPW Holdings

• Layer1 Technologies

• Riot Blockchain

• Marathon Patent Corp.

• Others

Applied Blockchain’s Financial Performance

The company only recently began mining operations and its financial results can be summarized as follows:

Total Revenue
Period	Total Revenue
Six Mos. Ended November 30, 2021	$ 2,038,000
FYE May 31, 2021	$ –
Gross Profit (Loss)
Period	Gross Profit (Loss)
Six Mos. Ended November 30, 2021	$ 1,256,000
FYE May 31, 2021	$ –
Gross Margin
Period	Gross Margin
Six Mos. Ended November 30, 2021	61.63%
FYE May 31, 2021	–%
Operating Profit (Loss)
Period	Operating Profit (Loss)
Six Mos. Ended November 30, 2021	$ (13,302,000)
FYE May 31, 2021	$ –
Net Income (Loss)
Period	Net Income (Loss)
Six Mos. Ended November 30, 2021	$ (14,268,000)
FYE May 31, 2021	$ (568,000)
FYE May 31, 2020	$ (263,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended November 30, 2021	$ 2,334,000
FYE May 31, 2021	$ (83,000)
(Glossary Of Terms)

(Source)

As of November 30, 2021, Applied had $14 million in cash and $7.8 million in total liabilities.

Free cash flow during the twelve months ended August 31, 2021, was negative ($34.3 million).

APLD IPO Details

APLD intends to sell approximately 3.2 million shares of common stock at a proposed midpoint price of $18.54 per share for gross proceeds of approximately $60 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.

The firm’s stock is currently quoted on the OTC Pink market under the same symbol.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $1.7 billion.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 3.43%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

to purchase or lease additional property on which to build additional co-hosting facilities, to construct those facilities, to enter into additional energy service agreements for each additional site and to fund our working capital and general corporate purposes, including the costs of operating as a public company.

(Source)

Management’s presentation of the company roadshow is available here until the IPO is completed.

Management says the firm is currently not involved in any legal proceedings.

Listed underwriters of the IPO are B. Riley Securities, Needham & Co., Craig-Hallum and other investment banks.

Valuation Metrics For APLD

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:

Measure [TTM]	Amount
Market Capitalization at IPO	$1,750,941,109
Enterprise Value	$1,682,254,109
Price / Sales	859.15
EV / Revenue	825.44
EV / EBITDA	-126.47
Earnings Per Share	-$0.16
Operating Margin	-652.70%
Net Margin	-727.97%
Float To Outstanding Shares Ratio	3.43%
Proposed IPO Midpoint Price per Share	$18.54
Net Free Cash Flow	-$34,330,000
Free Cash Flow Yield Per Share	-1.96%
(Glossary Of Terms)

(Source)

Commentary About APLD

APLD is seeking to go public to finance its general corporate expansion efforts.

The firm’s financials show revenue just beginning to be recognized while there are significant uses of cash to acquire or lease data center assets.

The market opportunity for providing crypto mining services is large and expected to grow if the price of Bitcoin increases.

Free cash flow for the twelve months ended August 31, 2021, was negative ($34.3 million).

The firm currently plans to pay no dividends on its capital stock except for payment in kind dividends due on its Series C and Series D preferred stock. (Source)

The market opportunity for providing crypto mining services is large and expected to grow substantially if the price of various major cryptocurrencies increases. Also, the growth in the number of mining computers located in the U.S. has been significant due to the 2021 mining ban in China, which pushed many miners to seek more stable operating environments such as the U.S.

B. Riley Securities is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (45.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the variable price of Bitcoin and other cryptocurrencies which in turn may impact the demand from co-hosting customers.

Also, the stock will have an ultra-low float of 3.43%, so the potential for significant volatility is there.

As for valuation, management is asking investors to value the company on its expected future earnings at an EV/Revenue of 825x today for what is essentially a data center company.

While management may indeed grow its way into such a valuation, I’m in wait-and-see mode, so I’m on Hold on APLD.