Core Scientific(CORZ) - 2023 Q1 - Quarterly Report

Part I. Financial Information Financial Statements The company, operating as a Debtor-in-Possession, reported a significantly reduced net loss and positive operating cash flow in Q1 2023, despite decreases in total assets and liabilities Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $47,487 | $15,884 | | Total Current Assets | $100,195 | $85,102 | | Property, plant and equipment, net | $628,037 | $691,134 | | Total Assets | $760,019 | $807,686 | | Liabilities & Stockholders' Deficit | | | | Total Current Liabilities | $214,746 | $186,789 | | Liabilities subject to compromise | $950,765 | $1,027,313 | | Total Liabilities | $1,168,777 | $1,217,032 | | Total Stockholders' Deficit | ($408,758) | ($409,346) | Consolidated Statement of Operations Highlights (Unaudited) | Account | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total revenue | $120,655 | $192,519 | | Gross profit | $20,484 | $70,003 | | Operating loss | ($3,695) | ($26,717) | | Gain on debt extinguishment | ($20,761) | $— | | Reorganization items, net | $31,559 | $— | | Net loss | ($11,685) | ($466,204) | | Net loss per share (Basic & Diluted) | ($0.03) | ($1.52) | Consolidated Statement of Cash Flows Highlights (Unaudited) | Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $19,942 | ($3,615) | | Net cash used in investing activities | ($1,869) | ($269,096) | | Net cash (used in) provided by financing activities | ($1,021) | $251,465 | | Net increase (decrease) in cash | $17,052 | ($21,246) | Management's Discussion and Analysis of Financial Condition and Results of Operations Operating under Chapter 11, the company experienced significant revenue decline and gross margin contraction in Q1 2023, securing DIP financing while facing substantial doubt about its going concern ability Recent Developments and Chapter 11 Filing The company filed for Chapter 11 bankruptcy, secured a $70 million replacement DIP facility, and settled significant claims with NYDIG and Priority Power - The company and certain affiliates filed for Chapter 11 bankruptcy protection on December 21, 2022, and continue to operate as "debtors-in-possession"[139] - On February 27, 2023, the company entered into a replacement Senior Secured Super-Priority Debtor-in-Possession (DIP) facility for up to $70 million to fund operations and restructuring[144][145] - The company settled with NYDIG by transferring miners back to them, resulting in the full extinguishment of the NYDIG loan and a $20.8 million gain on debt extinguishment in Q1 2023[149] - A settlement with Priority Power was reached, satisfying a $20.8 million secured claim through the transfer of specific equipment, resulting in no gain or loss[150] Business Model and Operations Core Scientific operates "Mining" and "Hosting" segments, deploying 207,000 bitcoin miners with a total hash rate of 21.8 EH/s and an average operating power demand of 581 MW - The company operates two segments: "Mining" (digital asset mining for its own account) and "Hosting" (blockchain infrastructure and third-party hosting)[156] - As of March 31, 2023, the company had an average hourly operating power demand of approximately 581 MW and 1,500 MW of contracted power capacity[155] Bitcoin Miners in Operation as of March 31, 2023 | Mining Equipment | Hash rate (EH/s) | Number of Miners (in thousands) | | :--- | :--- | :--- | | Self-miners | 16.1 | 155.0 | | Hosted miners | 5.7 | 52.0 | | Total | 21.8 | 207.0 | Results of Operations Q1 2023 saw a 37% revenue decrease and gross margin contraction, but significantly reduced operating and non-operating expenses led to a substantially improved net loss Revenue Breakdown (Q1 2023 vs Q1 2022) | Revenue Source | Q1 2023 (in thousands) | Q1 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Hosting Revenue | $22,629 | $33,214 | (31)% | | Equipment Sales | $0 | $26,305 | (100)% | | Digital Asset Mining Revenue | $98,026 | $133,000 | (26)% | | Total Revenue | $120,655 | $192,519 | (37)% | - The decrease in digital asset mining revenue was driven by a 45% decrease in the average price of bitcoin ($22,877 in Q1 2023 vs $41,299 in Q1 2022), partially offset by a 94% increase in the company's self-mining hash rate[207] - Gross profit fell 71% to $20.5 million in Q1 2023 from $70.0 million in Q1 2022, with gross margin decreasing to 17% from 36% in the prior year period[201][208] - Total operating expenses decreased by 46% to $24.2 million, primarily due to lower stock-based compensation and reduced professional fees[201][213] - Non-operating expenses decreased by $389.2 million, mainly because Q1 2022 included a $386.0 million adverse fair value adjustment on convertible notes, while Q1 2023 included $31.6 million in new reorganization costs[215] Segment Performance In Q1 2023, the Hosting segment's gross margin improved despite lower profit, while the Mining segment experienced a significant decline in gross profit and margin due to increased power costs and lower bitcoin prices Segment Gross Profit (Q1 2023 vs Q1 2022) | Segment | Q1 2023 Gross Profit (in thousands) | Q1 2022 Gross Profit (in thousands) | Change (%) | Q1 2023 Margin (%) | Q1 2022 Margin (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Hosting | $3,803 | $5,753 | (34)% | 17% | 10% | | Mining | $16,681 | $64,250 | (74)% | 17% | 48% | | Consolidated | $20,484 | $70,003 | (71)% | 17% | 36% | - The Hosting segment's gross margin improved to 17% in Q1 2023 from 10% in Q1 2022, despite a decrease in gross profit, largely due to the absence of lower-margin equipment sales that were present in the 2022 period[220] - The Mining segment's gross margin fell sharply to 17% from 48% year-over-year, driven by increased power rates and a 45% decrease in the average price per bitcoin mined[221] Liquidity and Capital Resources Post-Chapter 11, the company's liquidity is supported by cash from operations and DIP financing, with $69.3 million in total cash and $35.0 million undrawn capacity, deemed sufficient for 12 months contingent on reorganization - Primary sources of liquidity are cash flows from operations, cash on hand, and proceeds from the Debtor-in-Possession (DIP) financing facilities[223] Cash Position | Account | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $47,487 | $15,884 | | Restricted cash | $21,805 | $36,356 | | Total cash, cash equivalents and restricted cash | $69,292 | $52,240 | - Net cash provided by operating activities was $19.9 million for Q1 2023, a significant improvement from the $3.6 million used in Q1 2022[232] - Net cash used in investing activities plummeted to $1.9 million in Q1 2023 from $269.1 million in Q1 2022, reflecting a sharp reduction in capital expenditures for equipment and facilities[233] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is bitcoin price volatility, directly impacting revenue and digital asset values, with no bitcoin held as of March 31, 2023 - The company's main market risk is the price volatility of bitcoin, which directly affects revenue and the value of digital assets held[254] - As of March 31, 2023, the company held no bitcoin, compared to 43.55 bitcoin with a carrying value of $0.7 million as of December 31, 2022[254] - Digital assets are tested for impairment daily, and any impairment loss establishes a new cost basis, with subsequent reversals of impairment losses not permitted[255] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2023, due to material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2023[258] - The ineffectiveness is due to material weaknesses in internal control over financial reporting, including issues with IT change management, user access controls, and segregation of duties[261] - Ongoing remediation efforts include increasing the experience of the accounting team, enhancing communication, and implementing additional internal reporting and review procedures[260][262] Part II. Other Information Legal Proceedings The company is involved in various legal proceedings arising from the normal course of business, with pre-Chapter 11 claims automatically stayed by bankruptcy proceedings - Litigation and claims against the company that arose before the bankruptcy filing on December 21, 2022, are automatically stayed pursuant to the Bankruptcy Code[264] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes have been made to the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year 2022[265] Unregistered Sales of Equity Securities and Use of Proceeds None reported for the period - None[266] Defaults Upon Senior Securities None reported for the period - None[267] Mine Safety Disclosures None reported for the period - None[268] Other Information None reported for the period - None[269] Exhibits The report lists exhibits filed, including merger agreements incorporated by reference, corporate governance documents, DIP credit agreements, and CEO/CFO certifications pursuant to the Sarbanes-Oxley Act - Key exhibits filed include the Replacement DIP Credit Agreement and certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act[271]