Core Scientific(US:CORZ)2022-08-22 13:24Part I. Financial Information Financial Statements The unaudited consolidated financial statements for Core Scientific, Inc. as of June 30, 2022, reflect a significant net loss due to impairment charges despite revenue growth from expanded mining operations Consolidated Balance Sheets The balance sheet as of June 30, 2022, shows a significant reduction in total assets and stockholders' equity, primarily due to goodwill impairment and decreased digital asset holdings, while liabilities increased Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $128,542 | $117,871 | +$10,671 | | Digital assets | $40,664 | $234,298 | -$193,634 | | Goodwill | $266,038 | $1,055,760 | -$789,722 | | Total Assets | $1,845,158 | $2,438,864 | -$593,706 | | Notes payable, net | $1,069,997 | $728,209 | +$341,788 | | Total Liabilities | $1,428,706 | $1,053,178 | +$375,528 | | Total Stockholders' Equity | $416,452 | $1,341,210 | -$924,758 | Consolidated Statements of Operations The company reported a net loss of $810.5 million in Q2 2022 and $1.28 billion in H1 2022, primarily due to significant goodwill and digital asset impairments despite revenue growth Q2 2022 vs Q2 2021 Performance (in thousands, except per share) | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $163,972 | $75,303 | +118% | | Gross Profit | $12,717 | $24,538 | -48% | | Impairment of goodwill | ($790,753) | $0 | NM | | Impairment of digital assets | ($150,213) | $0 | NM | | Operating (Loss) Income | ($1,045,383) | $15,526 | NM | | Net (Loss) Income | ($810,475) | ($3,414) | NM | | Diluted EPS | ($2.49) | ($0.02) | NM | H1 2022 vs H1 2021 Performance (in thousands, except per share) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $356,491 | $129,549 | +175% | | Gross Profit | $82,720 | $39,071 | +112% | | Impairment of goodwill | ($790,753) | $0 | NM | | Impairment of digital assets | ($204,198) | $0 | NM | | Operating (Loss) Income | ($1,072,100) | $24,552 | NM | | Net (Loss) Income | ($1,276,679) | $3,435 | NM | | Diluted EPS | ($4.04) | $0.02 | NM | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $141.3 million in H1 2022, while investing activities surged to $445.6 million for expansion, funded by $313.2 million from financing Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $141,273 | ($121,331) | | Net cash used in investing activities | ($445,640) | ($39,217) | | Net cash provided by financing activities | $313,169 | $210,198 | | Net increase in cash | $8,802 | $49,650 | Notes to the Consolidated Financial Statements The notes detail the January 2022 merger, significant goodwill and digital asset impairments, complex debt structure, and subsequent events including new financing and a major customer's bankruptcy - The company completed its merger with Power & Digital Infrastructure Acquisition Corp. (XPDI) on January 19, 2022, accounted for as a reverse recapitalization, providing net cash proceeds of approximately $195.0 million2227 - A goodwill impairment charge of $788.7 million was recorded for the Mining reporting unit as of June 30, 2022, due to a decline in the company's stock price and the market value of bitcoin7981 - Impairment of digital assets totaled $204.2 million for the six months ended June 30, 2022, driven by the decline in cryptocurrency prices146 - Subsequent to quarter-end, in July 2022, the company entered into a $100 million committed equity financing agreement with B. Riley, amended bridge notes in August 2022, and is navigating the Chapter 11 bankruptcy of major customer Celsius in July 2022224235239 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant revenue growth from expanded self-mining operations, overshadowed by market headwinds, substantial impairment charges, compressed margins, and ongoing liquidity challenges Results of Operations Q2 2022 saw 118% total revenue growth driven by a 920% surge in digital asset mining revenue, but gross profit declined 48% due to higher costs and non-cash impairments led to a $1.05 billion operating loss - Digital asset mining revenue increased by $99.1 million (920%) in Q2 2022 compared to Q2 2021, driven by a significant increase in self-mining hash rate to 10.30 EH/s from 0.45 EH/s, partially offset by a 30% decrease in the average price of bitcoin314 - Cost of revenue increased 198% YoY in Q2 2022, primarily due to a $45.9 million increase in power consumption costs, a $46.3 million increase in depreciation, and a $16.9 million increase in stock-based compensation within cost of revenue315 - Operating expenses for Q2 2022 increased to $115.9 million from $9.0 million in Q2 2021, largely due to a significant increase in stock-based compensation ($108.9 million vs $2.1 million) following an RSU amendment257322323324 Segment Performance The Equipment Sales and Hosting segment reported a gross loss and negative margin in Q2 2022, while the Mining segment's gross margin dramatically compressed to 14% from 80% due to higher costs and lower bitcoin prices Segment Gross Profit and Margin (Q2 2022 vs Q2 2021) | Segment | Gross Profit (Loss) Q2 2022 | Gross Profit Q2 2021 | Margin Q2 2022 | Margin Q2 2021 | | :--- | :--- | :--- | :--- | :--- | | Equipment Sales and Hosting | ($3,055) | $15,888 | (6)% | 25% | | Mining | $15,772 | $8,650 | 14% | 80% | - The decrease in the Hosting Margin was primarily due to lower margins on equipment sales and an increase in stock-based compensation expense330 - The decrease in the Mining Margin was primarily due to an increase in power rates, higher depreciation, increased stock-based compensation, and a 30% decrease in the average price per bitcoin mined331 Liquidity and Capital Resources As of June 30, 2022, the company held $140.5 million in cash and equivalents, relying on external financing due to market conditions, but believes existing resources and future funding will meet needs for the next 12 months - The company had $128.5 million in cash and cash equivalents and $11.9 million in restricted cash as of June 30, 2022362 - As of June 30, 2022, the company had outstanding purchase obligations for blockchain mining equipment totaling approximately $192.4 million, with remaining payments of $61.6 million167 - The company believes its existing cash, together with cash from operations and funding from debt or equity, will be sufficient to meet its needs for at least the next 12 months, but may need to seek additional financing372 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Core Scientific is not required to provide the information for this item - The company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information otherwise required under this item395 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2022, due to material weaknesses in internal control over financial reporting, including inadequate resources and segregation of duties, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of the end of the reporting period398 - Material weaknesses were identified related to inadequate technical accounting resources, poor cross-functional communication, lack of segregation of duties for journal entries, and insufficient controls over digital asset custody398 - Remediation efforts include hiring more experienced accounting staff, enhancing communication, and implementing new internal reporting procedures to improve review and segregation of duties399401 Part II. Other Information Legal Proceedings The company is not currently a party to any litigation that it believes would have a material adverse effect on its business, financial condition, or results of operations - The company states it is not presently a party to any litigation that would have a material adverse effect on its business402 Risk Factors The company faces extensive risks, including high dependency on volatile bitcoin prices, significant capital intensity, supplier concentration, customer bankruptcy, power costs, regulatory uncertainties, and identified material weaknesses in internal controls - The business is highly dependent on the price of bitcoin; if prices are not sufficiently high, results of operations could be materially and adversely affected405417 - The business is capital intensive and requires significant electric power, where failure to obtain necessary capital or low-cost power could limit expansion and harm operations405409438 - The company has identified material weaknesses in its internal control over financial reporting, which may result in material misstatements of financial statements407604 - The company faces customer concentration risk, and the July 2022 bankruptcy filing of Celsius, one of its two largest customers, could materially affect business and cash flows432434 Unregistered Sales of Equity Securities and Use of Proceeds In July and August 2022, the company issued 960,078 shares of common stock to B. Riley and affiliates as commitment and advisory fees for a new equity purchase agreement and amended bridge notes, relying on registration exemptions - In July 2022, 573,381 shares were issued to B. Riley as a commitment fee for a $100 million common stock purchase agreement652 - In August 2022, 386,697 shares were issued to a B. Riley affiliate as an advisory fee for amending bridge notes653