Core Scientific(CORZ) - 2022 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The financial statements for the period ended September 30, 2022, reveal significant distress, marked by a dramatic decline in assets and equity, a $1.71 billion net loss, and a critical 'Going Concern' warning due to depleted cash and declining bitcoin prices Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Metric | September 30, 2022 ($ in million) | December 31, 2021 ($ in million) | Change (%) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $29.5 | $117.9 | -75.0% | | Digital assets | $19.7 | $234.3 | -91.6% | | Property, plant and equipment, net | $1,156.4 | $597.3 | +93.6% | | Goodwill | $0.0 | $1,055.8 | -100.0% | | Total Assets | $1,404.0 | $2,438.9 | -42.4% | | Notes payable, current portion | $977.6 | $76.0 | +1186.4% | | Total Liabilities | $1,331.0 | $1,053.2 | +26.4% | | Total Stockholders' Equity | $73.0 | $1,341.2 | -94.6% | - Total assets decreased by 42.4% from December 31, 2021, primarily due to a complete impairment of goodwill ($1.06 billion) and a 91.6% drop in the value of digital assets held. Total liabilities increased by 26.4%, while stockholders' equity plummeted by 94.6%, reflecting the significant net losses incurred during the period[11] - A significant portion of notes payable, totaling $977.6 million, has been classified as current liabilities as of September 30, 2022, up from just $76.0 million at year-end 2021. This reclassification reflects the high probability that the debt will become due within one year, signaling severe liquidity pressure[11][105] Consolidated Statements of Operations Statement of Operations Summary (Unaudited) | Metric ($ in million) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $162.6 | $113.1 | $519.1 | $242.7 | | Total cost of revenue | $189.6 | $54.7 | $463.4 | $145.2 | | Gross (loss) profit | ($27.1) | $58.4 | $55.6 | $97.5 | | Impairment of goodwill and other intangibles | ($268.5) | $0.0 | ($1,059.3) | $0.0 | | Impairment of property, plant and equipment | ($59.3) | $0.0 | ($59.3) | $0.0 | | Impairment of digital assets | ($8.0) | ($12.6) | ($212.2) | ($12.6) | | Operating (loss) income | ($401.4) | $4.8 | ($1,473.5) | $29.3 | | Net loss | ($434.8) | ($16.6) | ($1,711.5) | ($13.2) | | Net loss per share (Basic & Diluted) | ($1.23) | ($0.07) | ($5.38) | ($0.07) | - For the nine months ended September 30, 2022, the company reported a net loss of over $1.71 billion, a stark contrast to the $13.2 million net loss in the same period of 2021. This was primarily driven by massive non-cash impairment charges totaling over $1.33 billion for goodwill, digital assets, and property, plant, and equipment[13] - In Q3 2022, the company swung to a gross loss of $27.1 million from a gross profit of $58.4 million in Q3 2021. This was caused by the cost of revenue ($189.6 million) significantly exceeding total revenue ($162.6 million), driven by higher costs for digital asset mining[13] Consolidated Statements of Cash Flows Consolidated Cash Flow Summary (Unaudited) | Metric ($ in million) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $89.2 | ($166.5) | | Net cash used in investing activities | ($451.3) | ($115.5) | | Net cash provided by financing activities | $268.1 | $433.3 | | Net (decrease) increase in cash | ($94.0) | $151.3 | | Cash, cash equivalents and restricted cash—end of period | $37.6 | $160.0 | - Despite a massive net loss, operating activities provided $89.2 million in cash for the first nine months of 2022, largely due to significant non-cash expenses like impairment and depreciation being added back. This is a reversal from the $166.5 million cash used in the same period of 2021[21] - Investing activities used $451.3 million, a significant increase from the prior year, primarily for purchases of property, plant, and equipment ($243.8 million) and deposits for self-mining equipment ($217.7 million)[21] - Financing activities provided $268.1 million, mainly from stock issuances ($210.5 million, including proceeds from the XPDI merger) and new debt ($216.2 million), offset by debt and lease repayments[21] Notes to the Consolidated Financial Statements - Going Concern Warning: Management has substantial doubt about the company's ability to continue as a going concern through November 2023. Existing cash resources are expected to be depleted by the end of 2022 or sooner due to declining bitcoin prices, increased power costs, and significant indebtedness[39] - Debt Defaults and Restructuring: In October 2022, the company decided not to make payments on several debt facilities. It has engaged legal and financial advisors to explore strategic alternatives, including restructuring its capital structure or potentially seeking bankruptcy protection[40][42] - Massive Asset Impairments: The company recorded total impairment charges of $1.12 billion for the nine months ended Sep 30, 2022, including a $1.05 billion impairment of goodwill and other intangibles, a $212.2 million impairment of digital assets, and a $59.3 million impairment of property, plant, and equipment[89][157][162] - Celsius Bankruptcy: One of the company's largest customers, Celsius Mining LLC, filed for Chapter 11 bankruptcy. Celsius is withholding payments and has alleged the company is violating the automatic stay. An adverse ruling could materially impact Core Scientific's business and cash flows. The company has accrued a $5.2 million allowance against amounts due from Celsius[181] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management confirms severe operational and liquidity challenges due to declining bitcoin prices and rising costs, with cash depletion expected by year-end 2022, leading to substantial doubt about going concern and exploration of restructuring or bankruptcy - The company's operating performance and liquidity have been severely impacted by the prolonged decrease in the price of bitcoin, increased electricity costs, and a higher global bitcoin network hash rate[274] - Management anticipates that existing cash resources will be depleted by the end of 2022 or sooner, which raises substantial doubt about the company's ability to continue as a going concern[278][279] - In October 2022, the company stopped making payments on several debt and financing facilities and has hired strategic advisors to explore restructuring, raising capital, or potential bankruptcy[274][276] Key Financial Metrics Comparison | Metric ($ in millions) | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Total Revenue | $519.1 | $242.7 | | Operating Loss / (Income) | ($1,470.0) | $29.3 | | Net Loss | ($1,710.0) | ($13.2) | | Adjusted EBITDA | $169.7 | $88.0 | Results of Operations Revenue Breakdown - Nine Months Ended Sep 30 | Revenue Source ($ in million) | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Hosting revenue (customers & related parties) | $117.1 | $51.7 | +126% | | Equipment sales (customers & related parties) | $78.7 | $113.4 | -31% | | Digital asset mining revenue | $323.3 | $77.5 | +317% | | Total Revenue | $519.1 | $242.7 | +114% | - For the nine months ended Sep 30, 2022, total revenue increased 114% year-over-year, driven by a 317% surge in digital asset mining revenue due to a significant increase in the company's self-mining hash rate (from 2.64 EH/s to 13.0 EH/s). This was partially offset by a 17% decrease in the average price of bitcoin[372] - Cost of revenue for the nine-month period increased 219% to $463.4 million, outpacing revenue growth. The increase was driven by higher depreciation ($143.6 million), power costs ($145.9 million), and personnel/facilities costs ($47.1 million) associated with the expanded mining operations[373] - The company recorded impairment charges of $1.06 billion for goodwill and other intangibles, $212.2 million for digital assets, and $59.3 million for property, plant, and equipment during the first nine months of 2022, reflecting the sharp decline in market conditions and asset values[378][376][380] Liquidity and Capital Resources - The company's primary sources of liquidity have been equity sales, debt, and cash from operations. However, existing cash is expected to be depleted by the end of 2022 or sooner[394] - As of September 30, 2022, the company had $29.5 million in cash and cash equivalents, a significant decrease from $117.9 million at the end of 2021[397] - In October 2022, the company chose not to make payments on several debt facilities. This action, combined with the severe liquidity constraints, has led management to explore strategic alternatives, including restructuring or bankruptcy, as there is substantial doubt about its ability to continue as a going concern[394][395][406] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide the detailed quantitative and qualitative disclosures about market risk that are typically required for larger filers - As a smaller reporting company, Core Scientific is exempt from providing detailed disclosures about market risk under this item[443] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective as of September 30, 2022, due to material weaknesses in internal control over financial reporting, including inadequate resources and segregation of duties, with remediation efforts ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of the end of the reporting period[446] - The ineffectiveness is due to material weaknesses in internal control over financial reporting, specifically related to: inadequate technical accounting resources, poor cross-functional processes, and a lack of segregation of duties for journal entries and digital asset custody[446] - Remediation efforts are underway, including hiring more experienced staff and enhancing internal procedures, but were not completed or tested as of the reporting date[447][449] Part II. Other Information Item 1. Legal Proceedings The company faces multiple significant legal proceedings, including disputes with bankrupt customer Celsius, arbitration for $35 million in prepayments, a construction contract lawsuit, and a class action alleging securities law violations - The company is in a dispute with Celsius Mining LLC, one of its largest customers, which filed for Chapter 11 bankruptcy and is withholding payments. An adverse ruling could materially harm the company's financial condition[450] - In November 2022, Sphere 3D Corp. filed for arbitration, alleging breach of contract and seeking the return of ~$35 million in prepayments for hosting services[451] - In November 2022, McCarthy Building Companies, Inc. filed a complaint for breach of contract related to alleged non-payment for construction services[452] - A putative class action lawsuit was filed in November 2022, alleging the company violated the Securities Exchange Act by failing to disclose its vulnerability to litigation and other issues affecting its ability to continue as a going concern[453] Item 1A. Risk Factors Key risks include substantial doubt about going concern, severe liquidity constraints, high indebtedness, dependence on volatile bitcoin prices, customer concentration, and internal control weaknesses, with potential for bankruptcy or total loss for stockholders - Going Concern and Liquidity Risk: There is substantial doubt about the company's ability to continue as a going concern, with cash expected to be depleted by the end of 2022. An investment is highly speculative, and stockholders could suffer a total loss[457][700][701] - Indebtedness and Default Risk: The company has a substantial level of debt (over $1 billion) and has already defaulted on payments in October 2022. This could lead to acceleration of debt and trigger cross-defaults, potentially forcing the company into bankruptcy[457][702][706] - Dependence on Bitcoin Price: The company's financial health is highly dependent on the price of bitcoin. If prices are not sufficiently high to cover the costs of mining (including high energy costs), its business and financial condition will be materially and adversely affected[457][469] - Customer Concentration and Bankruptcy Risk: A significant portion of revenue comes from a small number of customers. The bankruptcy of a key customer, Celsius, poses a material risk to revenue and cash flows[457][485][487] - Internal Control Weaknesses: The company has identified material weaknesses in its internal control over financial reporting, which may result in material misstatements of its financial statements or failure to meet reporting obligations[459][667] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter, the company issued unregistered common stock to B. Riley as commitment and advisory fees for its Equity Line of Credit and Amended Bridge Notes, relying on Securities Act exemptions - On July 20, 2022, the company issued 573,381 shares of common stock to B. Riley as a commitment fee for the Equity Line of Credit[727] - On August 1, 2022, the company issued 386,697 shares of common stock to B. Riley Commercial Capital as an advisory fee for the Amended Bridge Notes[728] - These issuances were made in reliance upon exemptions from registration under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D[729] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period covered by this report - None reported for the period[730] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - None reported[731] Item 5. Other Information The company reported no other information under this item - None reported[732] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Bridge Promissory Notes with B. Riley, certifications from the CEO and CFO as required by the Sarbanes-Oxley Act, and XBRL data files - Lists filed exhibits, including debt agreements and Sarbanes-Oxley certifications[734]