You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled "Risk Factors" and "Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Business Overview We design, build, and operate Next-Gen datacenters which are designed to provide massive computing power and support high-compute applications. Our first facility was constructed in
North Dakotawith 100 MW of capacity. We signed an energy services agreement with a utility to power this facility. We provide energized space for customers to host computing equipment. Initially, these datacenters will primarily host servers securing the Bitcoin network, but these facilities can also host hardware for other applications such as artificial intelligence, protein sequencing, drug discovery, machine learning and additional blockchain networks and applications. We are mid-construction on our second facility in Garden City, Texas, and are in the development stage of the Company's third facility, located in North Dakota. We have a colocation business model where our customers place hardware they own into our facilities and we provide full operational and maintenance services for a fixed fee. We typically enter into long-term fixed rate contracts with our customers. Trends and Uncertainties Regulatory Matters Our customers' businesses are subject to extensive laws, rules, regulations, policies and legal and regulatory guidance, including those governing securities, commodities, cryptoasset custody, exchange and transfer, data governance, data protection, cybersecurity and tax. Many of these legal and regulatory regimes were adopted prior to the advent of the Internet, mobile technologies, cryptoassets and related technologies. As a result, they do not contemplate or address unique issues associated with the crypto economy, are subject to significant uncertainty, and vary widely across U.S.federal, state and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules and regulations thereunder, evolve frequently and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the crypto economy requires us to exercise our judgement as to whether certain laws, rules and regulations apply to us or our customers, and it is possible that governmental bodies and regulators may disagree with our or our customers' conclusions. To the extent we or our customers have not complied with such laws, rules and regulations, we could be subject to significant fines and other regulatory consequences, which could adversely affect our business, prospects or operations. As cryptoassets have grown in popularity and in market size, the Federal Reserve Board, U.S. Congressand certain U.S.agencies (e.g., the Commodity Futures Trading Commission, the SEC, the Financial Crimes Enforcement Networkand the Federal Bureau of Investigation) have begun to examine the operations of cryptoasset networks, cryptoasset users and cryptoasset exchange markets. Other countries around the world are likewise reviewing and, in some cases, increasing regulation of the cryptoasset industry. For instance, on September 24, 2021, Chinaimposed a ban on all crypto transactions and mining. Ongoing and future regulatory actions could effectively prevent our customers' mining operations and our ongoing or planned co-hosting operations, limiting or preventing future revenue generation by us or rendering our operations and crypto mining equipment obsolete. Such actions could severely impact our ability to continue to operate and our ability to continue as a going concern or to pursue our strategy at all, which would have a material adverse effect on our business, prospects or operations. 21 --------------------------------------------------------------------------------
Hosting Business Highlights
January 6, 2022, we and Antpool Capital Asset Investment, L.P., an affiliate of Bitmain Technologies Holding Company, entered into a joint venture in the form of 1.21 Gigawatts, LLC, pursuant to which we and Antpool contributed $8 millionand $2 million, respectively, and will initially own 80% and 20% of 1.21 Gigawatts, respectively. 1.21 Gigawatts will develop, acquire, construct, finance, operate, maintain and own one or more Next-Gen datacenters with initially up to 1.5GW of capacity for hosting blockchain infrastructure. We are the managing member of 1.21 Gigawatts and are responsible for all site development, construction and operations of the datacenters. However, certain activities of 1.21 Gigawatts and its subsidiaries, if any, require the vote of 90% of the then outstanding units of each such entity. As long as Antpool owns 10% or more of the total issued and outstanding units of 1.21 Gigawatts, Antpool may appoint an individual with industry expertise to serve as an advisor to 1.21 Gigawatts. 1.21 Gigawatts will pay fees to such advisor as reasonably determined by us as managing member. Transfers by members of units of 1.21 Gigawatts are prohibited without approval of 90% of units then outstanding, which consent may be granted or withheld for any reason and transfers of such units to non-affiliates, after obtaining consent, are subject to a right of first refusal of other members to purchase some or all of such units. Additionally, Antpool has the right at any time to convert all or any portion of its 1.21 Gigawatts units into a number of shares of our Common Stock equal to the capital contributions by Antpool in connection with the acquisition of such units divided by $7.50, which will result in an increase in our ownership percentage of 1.21 Gigawatts. On February 2, 2022, we brought our first North Dakotafacility online as to the initial 55 MW, and as of May 31, 2022, there was approximately 90 MW of power online at this facility. Sale of Crypto Mining Equipment On March 9, 2022, we ceased all crypto mining operations and completed the sale of all crypto mining equipment in service. Total proceeds from the sale of the equipment were $1.6 million. We recognized a loss of $2.9 millionin the sale of the equipment during the quarter and year ended May 31, 2022. We have no plans to return to crypto mining operations in the future as we grow our co-hosting operations. The results of our crypto mining operations have been accounted for as discontinued operations in our consolidated financial statements as of and for the year ended May 31, 2022. This decision may decrease liquidity and our available capital resources, which may adversely affect us.
Opportunity for expansion
November 24, 2021, we entered into a letter of intent to develop a facility in Texasusing 200 MW of wind power. On April 13, 2022, the Company entered into a 99-year ground lease in Garden City, TX, with the intent to build our second datacenter facility on this site. On April 25, 2022the Company began construction on this site. This facility is collocated with a wind farm and upon completion is expected to provide 200 MW of power to hosting customers. The facility is expected to begin operating in calendar Q4 of 2022 and the 200 MW capacity is fully contracted with our customers. As our hosting operations expand, we believe our business structure will become conducive to a REIT structure, akin to Digital Realty Trust (NYSE: DLR) and Equinix, Inc. (NASDAQ: EQIX), each of which is a traditional datacenter operator and Innovative Industrial Properties, Inc. (NYSE: IIPR), a specialty REIT that similarly services a new growth industry. We have begun to investigate the possibility, costs and benefits of converting to a REIT structure.
Public offering and change of shares
August 13, 2021, the Company filed a registration statement for the resale by certain selling stockholders of shares of Common Stock with the SEC(Reg. No. 333-258818) (the "Resale Registration Statement") and received a notice of effectiveness for such registration statement on April 12, 2022. On November 22, 2021, the Company filed a registration statement for the sale by the Company of shares of Common Stock with the SEC(Reg. No. 333-261278) (the "IPO Registration Statement") and received a notice of effectiveness for such registration statement on April 12, 2022. On April 11, 2022, the Company filed a registration statement for the Common Stock 22 --------------------------------------------------------------------------------
Under the Securities Exchange Act of 1934, as amended,
automatically enabled with
April 12, 2022, concurrent with receipt of the notice of effectiveness for the Resale Registration Statement, all outstanding shares of Series C Preferred Stock and Series D Preferred Stock were automatically converted (without payment of additional consideration) into fully paid and non-assessable shares of Common Stock, consistent with the Series C and Series D Preferred Stock terms. All rights with respect to the Series C and Series D Preferred Stock terminated upon conversion. The Company's board of directors approved a reverse split of shares of the Company's common stock on a one-for-six basis, which was effected on April 12, 2022(the "Reverse Stock Split"). All references to Common Stock, options to purchase common stock, restricted stock units, share data, per share data and related information contained in the condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares of the Company's common stock were issued in connection with the Reverse Stock Split. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share and the affected holder received cash in lieu of such fraction share. Any fractional share resulting from the Reverse Stock Split was rounded down to the nearest whole share. On April 13, 2022, the Company announced its initial public offering of 8 million shares of its Common Stock at $5.00per share. The shares began trading on the Nasdaq Global Select Market on April 13, 2022, under the ticker symbol "APLD." On April 18, 2022, the Company completed its initial public offering. The net proceeds received by the Company from the offering (after deducting underwriting discounts and commission and estimated offering expenses) were approximately $36 million. The Company intends to use the net proceeds to lease or purchase 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 for funding its working capital and general corporate purposes.
March 11, 2022, the Company and Applied Hosting, LLC("Hosting"), a wholly-owned subsidiary of the Company, entered into a term loan agreement (the "VBT Loan Agreement") by and among Hosting, as the borrower, Vantage Bank Texas, as lender (the "VBT Lender") and the Company as guarantor. Pursuant to the Loan Agreement, on March 11, 2022, Hosting entered into a promissory note agreement (the " VBT Note") and borrowed $7.50 millionfor a five (5)) year term with an interest rate of five percent (5%) per annum (the "VBT Term Loan"). The proceeds of the VBT Term Loan were used for working capital needs for the operation of Phase I of the hosting facility in Jamestown, North Dakota(the "Property"). The VBT Loan Agreement and VBT Note contain customary representations and warranties and events of default. In addition, the VBT Note contains certain affirmative and negative covenants and other terms and conditions for a facility of this type. Also on March 11, 2022, the Company entered into a continuing guaranty agreement (the "VBT Guaranty Agreement") with the VBT Lender, pursuant to which the Company agreed to guaranty Hosting's indebtedness and obligations under the VBT Loan Agreement. The VBT Term Loan is secured by a mortgage on the Property pursuant to a Mortgage, Security Agreement and Fixture Financing Statement (the "VBT Mortgage"), dated March 11, 2022, by and between Hosting and the VBT Lender, and a security interest in the all accounts receivable, rents and servicing agreements relating to the property and equipment as set forth in or required by the VBT Loan Agreement. On July 25, 2022, Hosting entered into a Loan Agreement with Starion Bank(the "Starion Lender") and the Company as Guarantor (the "Starion Loan Agreement"). The Starion Loan Agreement provides for a term loan (the "Starion Loan") in the principal amount of $15.0 millionwith a maturity date of July 25, 2027. The Starion Loan Agreement contains customary covenants, representations and warranties and events of default. 23 --------------------------------------------------------------------------------
Stallion Loan Advances Must Not Exceed Total Principal
not exceed 80% of the total principal amount of
Available in advance after borrower proves 100% intended operation
The Starion Loan Agreement provides for an interest rate of 6.50% per annum. The proceeds of the Starion Loan will be used for (i) repayment of existing indebtedness under the VBT Loan Agreement and (ii) working capital needs and general corporate purposes. The
City of Jamestown, North Dakotaand Stutsman County's Economic Development Fundprovides a multimillion-dollar economic development program, available to assist with expanding or relocating businesses. As part of financial packages, the Jamestown Stutsman Development Corporation(JSDC) makes direct loans, equity investments, and interest buy-downs to businesses. Contingent upon such incentives, the Company expects the effective interest rate of the Loan to be less than 6.50% per annum after different state funds are applied to the Loan, pending final approval. The Starion Loan is secured by a mortgage on the Property, and a security interest in the substantially all of the assets of Hosting as set forth in the Security Agreement dated as of July 25, 2022by and between Hosting and the Starion Lender (the "Hosting Starion Security Agreement") and a security interest in the form of a collateral assignment of Company's rights and interests in a master hosting agreement related to the Property and records and data relating thereto as set forth in the Security Agreement dated as of July 25, 2022by and among Hosting, the Company, as Grantor, and the Starion Lender (the "Company Starion Security Agreement"). In addition, the Company unconditionally guaranteed Hosting's obligations to the Starion Lender, including under the Starion Loan, pursuant to an Unlimited Commercial Corporate Guaranty of the Company dated as of July 25, 2022.
The agreement and related VBT mortgages have been terminated.
Operating results for the fiscal year under review
24 -------------------------------------------------------------------------------- Fiscal Year Ended May 31, 2022 May 31, 2021 Hosting revenue
$ 8,549$ - Cost of revenues $ 9,506$ - Gross loss $ (957)$ - Costs and expenses: Selling, general and administrative $ 7,555 $ 332Stock-based compensation 12,337 - Depreciation and amortization 49 - Total costs and expenses $ 19,941 $ 332Operating loss $ (20,898) $ (332)Other (expense) income: Interest expense $ (112) $ (236)Gain on extinguishment of accounts payable 406 - Loss on extinguishment of debt (1,342) - Total other expense $ (1,048) $ (236)Net loss from continuing operations before income tax expenses (21,946) (568) Income tax expenses (540) - Net loss from continuing operations $ (22,486) $ (568)Net loss from discontinued operations, net of income taxes (1,044) - Net Loss including noncontrolling interests (23,530) (568) Net Loss attributable to noncontrolling interest 10 - Net loss attributable to Applied Blockchain (23,520) (568) Adjusted Amounts (a) Adjusted Operating Loss from Continuing Operations $(6,222) $(332)Adjusted Operating Margin from Continuing Operations (72.8) % - % Adjusted Net Loss from Continuing Operations $(7,810) $(568)Other Financial Data (a) EBITDA $(20,714) $(332)as a percentage of revenues (242.3) % - % Adjusted EBITDA $(6,038) $(332)as a percentage of revenues (70.6) % - % (a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliation" section of the MD&A.
Hosting revenues increased
$8.5 million, or 100%, from the year ended May 31, 2021to May 31, 2022. Hosting revenues for the quarter-ended May 31, 2021were $0, compared to $7.5 millionfor the quarter-ended May 31, 2022The increase in hosting revenues was driven by our completion of our first hosting facility in Jamestown, North Dakota, which was brought online in phases between the third and fourth fiscal quarters of fiscal year 2022.
cost of revenue
Cost of revenues increased
$9.5 million, or 100%, from the year ended May 31, 2021to May 31, 2022. The increase in cost of revenues was primarily driven by the initiation of our Co-hosting business in fiscal year 2022, which represent all of our continuing operations. Cost of revenues for the year ended May 31, 2022consists of $986,000of depreciation and amortization expense attributable to the property, plant and equipment at our Jamestown, ND25 --------------------------------------------------------------------------------
Operating Expenses Selling, general and administrative expense increased
$7.2 million, or 2177%, from the year ended May 31, 2021to May 31, 2022. This increase is driven by the initiation of our co-hosting business in fiscal year 2022, which represents our sole continuing operations. The two primary drivers of Selling, general and administrative expense are $2.3 millionof employee salaries and benefits expense, and $2.4 millionof professional service expenses incurred to support the growth of the business. Stock-based compensation for service agreement increased $12.3 million, or 100%, from the year ended May 31, 2021to May 31, 2022. The expense was related to our service agreements with strategic partners, who provided advisory and consulting services in exchange for shares of common stock we issued to them. These services were fully rendered within the first quarter of fiscal year 2022.
Interest expense decreased by
$124,000, or 52%, from the year ended May 31, 2021to May 31, 2022. This decrease was driven by the change in our debt obligations. Interest expense for the year ended May 31, 2021was incurred on related party notes, which bore interest at a annual rate of 16%. These notes were extinguished through a conversion to common stock which occurred on June 12, 2021. Interest expense in fiscal year 2022 relates to our VBT Term Loan which we entered into on March 11, 2022. Loss on extinguishment of debt increased $1.3 million, or 100% from the year ended May 31, 2021to May 31, 2022. This increase was driven by the extinguishment of our related party notes payable by conversion to common stock. The extinguishment loss reflects the difference in the carrying value of the notes and accrued interest and the fair value of the common stock issued in exchange for the debt.
income tax expense
Hosting business in Q3 2022.
Loss from discontinued operations
Beginning in the quarter ended
August 31, 2021(the first quarter of fiscal year 2022), we began cryptoasset mining operations, using Nvidia GPU miners which we hosted at a facility operated by Coinmint. In fiscal year 2022, we made the strategic decision to discontinue our mining operations and focus on hosting operations in the future. As a result of this strategic shift, our mining operations were reclassified as discontinued operations. Loss from discontinued operations totaled $1.0 millionfor the year-ended May 31, 2022, and consists of $3.0 millionof mining revenues and a $1.2 milliongain on the purchase and subsequent resale of miners, offset by $1.6 millionof recurring mining costs and $393,000in cryptocurrency impairment charges, and losses of $2.9 millionand $327,000in the write-down of mining assets and assets purchased from Bitmain, respectively, as a result of presenting these assets as held-for sale within discontinued operations. As of May 31, 2022, the Company no longer generates revenues from mining operations. 26
Non-GAAP Measures Fiscal Year Ended Quarter Ended $ in thousands May 31, 2022 May 31, 2021 May 31, 2022 May 31, 2021 Adjusted Operating Loss Operating loss from continuing operations (GAAP)
$(20,898) $(332) $(4,266) $(332)Add: Stock-based compensation for service agreement 12,337 - - - Add: Gain on extinguishment of accounts payable (406) - - - Add: Loss on extinguishment of debt 1,342 - - - Add: Non-recurring professional service costs 1,310 - 240 - Add: Other non-recurring expenses 93 - 93 - Adjusted Operating Loss from continuing operations (Non-GAAP) $(6,222) $(332) $(3,933) $(332)Adjusted operating margin from continuing operations (72.8) % - % (52.3) % - % Adjusted Net Loss Net loss from continuing operations (GAAP) $(22,486) $(568) $(4,643) $(345)Add: Stock-based compensation for service agreement 12,337 - - - Add: Gain on extinguishment of accounts payable (406) - - - Add: Loss on extinguishment of debt 1,342 - - - Add: Non-recurring professional service costs 1,310 - 240 - Add: Other non-recurring expenses 93 - 93 - Adjusted Net Loss from continuing operations (Non-GAAP) $(7,810) $(568) $(4,310) $(345)EBITDA and Adjusted EBITDA Net loss from continuing operations (GAAP) $(22,486) $(568) $(4,643) $(345)Add: Interest expense 112 236 112 13 Add: Income tax expense 540 - 266 - Add: Depreciation and amortization 1,120 - 875 - EBITDA (non-GAAP) $(20,714) $(332) $(3,390) $(332)Add: Stock-based compensation for service agreement 12,337 - - - Add: Gain on extinguishment of accounts payable (406) - - - Add: Loss on extinguishment of debt 1,342 - - - Add: Non-recurring professional service costs 1,310 - 240 - Add: Other non-recurring expenses 93 - 93 - Adjusted EBITDA (Non-GAAP) $(6,038) $(332) $(3,057) $(332)EBITDA and Adjusted EBITDA "EBITDA" is defined as earnings before interest, taxes, and depreciation and amortization. "Adjusted EBITDA" is defined as EBITDA adjusted for stock-based compensation, gain on extinguishment of accounts payable, loss on extinguishment of debt, one-time professional service costs not directly related to the company's offering and therefore not deferred under the guidance in ASC 340 and SAB Topic 5A, and other one-time expenses. These costs have been adjusted as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of Applied Blockchain'sperformance that is neither required by, nor presented in accordance with, GAAP. Applied Blockchainbelieves that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating EBITDA and Adjusted EBITDA, Applied Blockchainmay incur future expenses similar to those excluded when calculating these measures. In addition, Applied Blockchain'spresentation of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Applied Blockchain'scomputation of Adjusted EBITDA may not be comparable to 27 --------------------------------------------------------------------------------
Other similarly titled measures calculated by other companies.
Companies may not be able to calculate Adjusted EBITDA in the same way.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
Applied Blockchaincompensates for these limitations by relying primarily on its GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate Applied Blockchain'sbusiness.
Liquidity and funding sources
source of liquidity
We have generated cash from the sale of our equity securities, the sale of Ether generated from our discontinued mining operations, and the receipt of contractual deposits, revenue and pre-payments from hosting customers, and proceeds from loans. Since
December 2020, when we began planning to acquire or build an operational business, we have raised aggregate gross proceeds of $51 millionfrom issuances of our convertible preferred stock. On April 15, 2021, we received $16.5 millionin gross proceeds from the issuance of our Series C Convertible Redeemable Preferred Stock and on July 30, 2021, we received $34.5 millionin gross proceeds from the issuance of our Series D Preferred Stock. On April 18, 2022, we received $40.0 millionin gross proceeds from the issuance of 8 million shares of the Company's Common Stock in conjunction with the closing of our initial public offering. During the year ended May 31, 2021, we did not generate any revenue from crypto mining, co-hosting or otherwise. We have incurred net losses from operations. In June 2021, as a result of commencement of our crypto mining operations, we began to generate revenue. As of May 31, 2022and May 31, 2021, we had cash of $46.3 millionand $11.8 millionrespectively, and an accumulated deficit of $56.1 millionand $21.6 million, respectively. On March 11, 2022, we entered into the VBT Loan Agreement for $7.5 millionfor a term of five years with an interest rate of 5% per annum. On August 5, 2022, the VBT Term Loan was paid off in full and the VBT Term Loan Agreement and the associated VBT Mortgage were terminated.
The loan agreement provides for the principal of the stallion loan to
Contains Customary Covenants, Representations, Warranties and Events
Default, and offers an interest rate of 6.50% per annum.
Having ceased our operations in 2014, we have experienced net losses through our fiscal year ended
May 31, 2022. Our transition to profitability is dependent on the successful operation of our co-hosting facilities. We believe that amounts we received from our April 2021and July 2021sales of convertible preferred stock, from our crypto mining operations, prior to cessation of such operations on March 9, 2022, proceeds from term loan, proceeds from our initial public offering, and revenue we have begun to achieve in our co-hosting operations since our first co-hosting facility was brought online as to 92MW as of May 31, 2022, after planned expenditures to build our co-hosting operations, will be sufficient to meet our working capital needs for at least the next 12 months. We expect that our general and administrative expenses and our operating expenditures will continue to increase as we continue to expand our operations and as we bear the costs of being a public company. We expect significant increases in our investment in property and equipment as we expand our co-hosting capacity. We also expect that our revenues will increase as we continue to bring online additional capacity, particularly at our Jamestown, ND, and Garden City, TXlocations. We expect to need additional capital to fund continued growth, which we may obtain through one or more equity offerings, debt financings or other third-party funding. Because of the numerous risks and uncertainties associated with the crypto mining industry, we are unable to estimate the amount of increased 28 --------------------------------------------------------------------------------
Capital that may need to be raised to continue building additional co-hosting
We may use our facilities and available capital sooner than we currently anticipate.
We believe that our existing cash, together with the anticipated revenues from current operations and debt funding opportunities, will enable us to fund our operating expense requirements through at least 12 months. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect, in which case, we would be required to obtain additional financing sooner than currently projected, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
For the year ended
May 31, 2022, we used $0.9 millionin cash from operating activities from continuing operations. Significant reconciling items between our net loss and our net cash inflows from operations include the $12.3 millionstock-based operating expense described above, and our $1.3 millionloss incurred upon the conversion of our related party notes payable to common stock. Our working capital also fluctuated, with accounts receivable and prepaid expenses increasing by $227,000and $1.3 million, respectively , and accounts payable and accrued expenses increasing by $6.7 million. These fluctuations were the result of the normal timing differences accrual-basis revenue & expenses and cash payments and receipts. In addition, cash outflows related to our discontinued operations were $10.1 million. For the year ended May 31, 2022, we had $45.9 millionof cash outflows from investing activities from continuing operations, which primarily consisted of $58.3 millionof cash paid for property, plant, and equipment for our hosting facilities, partially offset by $3.3 millionof a decrease in deposits on equipment as these were applied against equipment purchases. These are partially offset by $9.1 millionin net inflows related to our discontinued operations, which consist of sales of mining equipment and Ether. For the year ended May 31, 2022, we had $81.3 millionof cash inflows from financing activities, which primarily consisted of inflows of $40.0 millionfrom our initial public offering of common stock, $34.5 millionfrom the placement of Class D preferred stock, and $7.3 millionfrom term loan proceeds, less issuance costs of $2.9 millionand $4.3 millionrelated to these equity offerings. For the year ended May 31, 2021, cash outflows from operating activities was $83,000, which was primarily driven by accrued paid in kind interest and changes in accounts payable and accrued liabilities. Net cash outflows from investing activities was $3.3 million, which was primarily driven by payments for deposits on equipment. Net cash outflows from financing activities was $15.1 million, which was primarily driven by the issuance of preferred stock, partially offset by issuance costs for preferred stock.
Off balance sheet arrangement
Important accounting notes
recent financial announcements
We continually assess any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that our consolidated financial statements properly reflect the change. 29
August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. We are currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures. In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of January 1, 2023. Early adoption will continue to be permitted. We are currently evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.
Estimated critical accounting
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in
the United States of America("GAAP"). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are described in Note 3 – Accounting Standards.
Presentation of Consolidated Notes and Significant Accounting Policies
Financial Statements for this Annual Report on Form 10-K.