DUG Technology : December 2021 Quarterly Activities and Cash Flow Report

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ASX Release

31 January 2022

Q2 FY22 QUARTERLY ACTIVITIES REPORT & APPENDIX 4C

DUG Technology Ltd (ASX: DUG) ("DUG" or the "Company") is pleased to provide this update on activities and the Appendix 4C for the quarter ended 31 December 2021.

Highlights

• Total revenue from external customers during Q2 FY22 was US$8.36 million.
• A reduction in net cash outflows from operating and investing activities of US$1.57 million to US$1.26 million for the quarter compared to Q1 FY22.
• During the quarter, the Company received proceeds of A$1.59 million from the second tranche of its A$15.0 million share placement undertaken during Q1 FY22. The Company also raised a further A$1.78 million from existing shareholders who participated in a SPP on the same terms as the Placement, bringing total proceeds of the Capital Raise to A$16.78 million.
• Total cash held at 31 December 2021 was US$11.16 million (30 September 2021: US$10.54 million).
• DUG has restructured its Services business line to reduce costs and enhance operational efficiency, resulting in improved overall operating margin for the business.

Capital raising and debt

DUG completed a successful placement of ordinary shares to new and existing sophisticated and institutional investors in Q1 FY22 to raise A$15.0 million ("Placement"). A$13.41 million of the Placement proceeds was received in Q1 FY22 with the balance (A$1.59 million) received in October 2021. This included A$0.40 million from the Company's Managing Director and other members of the Board.

In addition, the Company provided all shareholders an opportunity to participate in a share purchase plan ("SPP") on the same terms as the Placement. The SPP closed in October 2021 with applications for A$1.78 million of shares being received.

The capital raising was undertaken to provide funding for the Company's key expansionary activities including Military and Space business development, expanding sales teams and purchasing computer equipment, and to improve working capital and the ability to repay debt.

As previously reported, the repayment date of the Company's term debt facility with CBA was extended to 1 July 2022 and US$5.25 million of debt was repaid during H1 FY22 with an additional US$1.0 million to be repaid during H2 FY22.

DUG has engaged external advisers to advise and assist the Company in relation to refinancing its debt facility and to review the Company's overall capital structure to maximise its ambitious growth plans including its plans for a climate-positive HPC campus in Geraldton, Western Australia.

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Restructure of Services business line

DUG has restructured its Services business line during Q2 FY22. The objectives of the restructure were to reduce the level of fixed costs, enhance operational efficiency and position the business to take advantage of improvements in new business activity in the oil and gas industry.

Geographical Services business units have been created from the Company's major service centres with each unit responsible for its own financial performance. This initiative includes profit-sharing incentives and salary deferment arrangements which commenced in December 2021 to assist with cash flow management. Key members of the Company's executive management team and board, including DUG's Managing Director and Chief Operating Officer, have also deferred a portion of their salary.

Given DUG focuses on continual improvements in software efficiency and functionality, the Company was able to reduce staff headcount and enhance workflow productivity. Total redundancy and restructure costs incurred by DUG during the half-year period to 31 December 2021 were US$0.95 million and include the cost from staff reductions in the Services business line and from selective other staff reductions throughout the Company. The full financial benefit of these staff reductions will be realised during the second half of FY22.

The Company is also targeting projects that maximise profit in line with capacity. It has ceased third-party R&D projects and has conducted a review of the Company's required office space. Right-sizing of office space is expected to provide annualised savings of approximately US$0.55 million to commence from the second half of the 2022 calendar year.

Business unit managers in the Services business line have welcomed the increased autonomy and are focussed on profitability improvement. DUG stands ready to apply additional cost savings measures in response to prevailing business conditions.

Revenue and expenditure

Total revenue earned from external customers was US$8.36 million for Q2 FY22. The table below summarises the break-down of revenue across the Company's three business lines:

		Q1 FY22	Q2 FY22	Variance Q1 to	H1 FY22
Business line		US$ million	US$ million	Q2	US$ million
Services	6.54	5.90	(10.0%)	12.44
Software	1.35	1.55	15.3%	2.90
HPCaaS	0.77	0.91	18.9%	1.68
		8.66	8.36	(3.5%)	17.02

DUG's Services business line was impacted throughout the Covid-19 pandemic, through a sharp decrease in commodity prices and a widespread reduction in oil and gas exploration activities. This continued in Q2 FY22 as the Services business line generated US$5.90 million revenue, a decrease of 10% compared to Q1 FY22. However, the Company has seen a significant increase in new Service contract awards during the second half of December 2021 and this positive trend has continued in January 2022.

Following the Services restructure, DUG's Services business line is well positioned to take advantage of increased oil and gas activity and commodity prices in calendar year 2022.

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Both the Company's HPCaaS and Software business lines performed well and recorded quarter on quarter increases in revenue during Q2 FY22 (19% and 15%, respectively). The graph below illustrates the growth trend in HPCaaS revenue, including the component of revenue from committed compute hours:

Third Party HPCaaS Revenue (US$'000)

The strong performance of the HPCaaS business line during Q2 FY22 has continued into Q3 FY22 with record high levels of compute usage being recorded during January 2022- this results in a significant increase in projected revenue for January 2022 as shown above.

Excluding non-cash depreciation and amortisation, total operating expenditure during the quarter was US$9.51 million. The largest component of operating expenditure is payroll and related expenditure, which for Q2 FY22 was US$7.10 million. This included the impact of additional once-off expenditure incurred in relation to staff redundancies of US$0.76 million. Excluding the impact of redundancy costs, total operating expenditure excluding depreciation and amortisation charges was US$0.52 million lower than in Q1 FY22.

Operations and cash flow

Total cash utilised in operating activities was US$1.10 million for Q2 FY22 - this includes interest payments on debt of US$0.07 million and the interest component of lease payments of US$0.22 million. Excluding interest, operating cash utilised was US$0.81 million which represents a decrease US$ 0.87 million as compared with Q1 FY22. Included within net operating cash flows are non-recurring redundancy payments made during the quarter of US$0.76 million.

Cash receipts from external customers for the quarter under review were US$8.49 million (Q1 FY22: US$8.57 million).

DUG continues to carefully manage new capital expenditure with relatively low investment expenditure of US$0.15 million during Q2 FY22 (Q1 FY22: US$0.72 million). This is in line with the Company's traditional "just in time" approach to adding additional compute and storage capacity.

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As at 31 December 2021, total cash held by the Company was US$11.16 million, a net increase of US$0.6 million compared to 30 September 2021.

The Company continues to advance the planning process for its climate-positive HPC campus in Geraldton, Western Australia. Having entered into an option to lease land during Q1 FY22, the Company has now received development application approval for the first data hall and associated infrastructure.

Payments to related parties of the entity and their associates

The amount included in section 6.1 of the Appendix 4C comprises fees and salaries paid to directors of US$175,210 and fees of US$18,011 for consulting services paid to Comsen Solutions Pty Ltd, a company of which non-executive director Ms Louise Bower is a director.

This ASX Announcement has been approved for release by the Board of DUG Technology Ltd.

ENDS

For more information:

DUG Technology Ltd

T. [phone]

DUG Investor Email: [e-mail]

DUG Investor Centre: www.dug.com/investor-centre

About DUG

DUG is an ASX listed technology company, headquartered in Australia, that specialises in analytical software development and reliable, green, high-performance computing (HPC). The company is built on a strong foundation of applied science and a history of converting research into practical, real-world solutions. DUG delivers innovative software products and cost- effective, cloud-based HPC as a service backed by bespoke support for technology onboarding. DUG's expertise in algorithm development and code optimisation enables clients to leverage big data and solve complex problems.

DUG is a global company with offices in Perth, London, Houston and Kuala Lumpur, supporting a diverse industrial client-base that includes radio-astronomy, biomedicine and meteorology, as well as the resource, government and education sectors. DUG designs, owns, and operates a network of some of the largest and greenest supercomputers on Earth. The company continues to invest and innovate at the forefront of software and HPC, working towards a climate-positive future.

To learn more, please visit www.dug.com.

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Rule 4.7B

Appendix 4C

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Quarterly cash flow report for entities subject to Listing Rule 4.7B

Name of entity
DUG Technology Ltd
ABN	Quarter ended ("current quarter")
99 169 944 334	31 December 2021
Consolidated statement of cash flows	Current quarter	Year to date (6
	$US'000	months)
		$US'000

1. Cash flows from operating activities

1.1

Receipts from customers

8,492

17,058

1.2 Payments for

	(a)	research and development	-	-
	(b)	product manufacturing and operating	(924)	(2,399)
		costs
	(c)	advertising and marketing	(242)	(479)
	(d)	leased assets	-	-
	(e)	staff costs	(6,639)	(14,193)
	(f)	administration and corporate costs	(674)	(1,405)
1.3	Dividends received (see note 3)	-	-
1.4	Interest received	-	-
1.5	Interest and other costs of finance paid	(292)	(715)
1.6	Income taxes paid	(65)	(127)
1.7	Government grants and tax incentives	-	-
1.8	Other (provide details if material)	-	-
	Non recurring redundancy costs	(759)	(946)
1.9	Net cash from / (used in) operating	(1,103)	(3,206)
	activities

2. Cash flows from investing activities

2.1 Payments to acquire or for:

(a) entities

-

-

(b)	businesses	-	-
(c) property, plant and equipment	(145)	(768)
(d)	investments	-	-
(e)	intellectual property	(8)	(103)

ASX Listing Rules Appendix 4C (17/07/20)	Page 1
+ See chapter 19 of the ASX Listing Rules for defined terms.