Core Scientific, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Unless otherwise noted, amounts are in U.S. dollars. The company operates digital-asset mining and blockchain hosting and equipment-sales businesses. Its January 2022 merger with XPDI was accounted for as a reverse recapitalization, with Core Scientific as the accounting acquirer.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $192.5 million | $54.2 million | Up 255% |
| Gross profit / margin | $70.0 million / 36% | $14.5 million / 27% | Improved |
| Operating income (loss) | $(26.7) million | $9.0 million | Turned to loss |
| Net income (loss) | $(466.2) million | $6.8 million | Primarily affected by large convertible-note fair-value expense |
| Adjusted EBITDA | $93.0 million | $12.5 million | Non-GAAP; up substantially |
| Cash from (used in) operations | $(3.6) million | $15.4 million | Cash generation weakened |
| Cash, cash equivalents and restricted cash | $110.4 million | $131.7 million at Dec. 31, 2021 | Includes $14.1 million restricted for construction and development |
| Notes payable, carrying amount | $1.163 billion | $728.2 million at Dec. 31, 2021 | Includes fair-value-measured convertible notes |
Mining income was $133.0 million, versus $9.6 million a year earlier, and generated $64.3 million of segment gross profit. Equipment Sales and Hosting revenue was $59.5 million, up 33%, but segment gross profit fell to $5.8 million from $6.6 million.
At March 31, 2022, total assets were $2.704 billion and stockholders’ equity was $1.127 billion. Current assets were $808.2 million and current liabilities $414.7 million. Property, plant and equipment, net, was $820.2 million; digital assets were $316.3 million.
Material changes versus the prior comparable period
- Revenue growth primarily reflected expansion of self-mining: reported self-mining hash rate rose to 8.3 EH/s from 0.4 EH/s, and bitcoin awards increased to 3,202 from 206. The average bitcoin price was lower year over year: $41,299 versus $44,274.
- Cost of revenue rose 209% to $122.5 million, driven mainly by higher depreciation, power consumption and facility costs. Gross margin nevertheless increased to 36% from 27%.
- A $54.0 million digital-asset impairment was recorded, compared with none in Q1 2021. The company’s accounting policy recognizes impairment when market value falls below carrying value but does not reverse prior impairment for subsequent price increases until sale.
- General and administrative expense increased to $40.2 million from $3.8 million, including higher stock-based compensation and public-company readiness costs. Total stock-based compensation expense was $25.8 million.
- Non-operating expense was $397.1 million, including a $386.0 million convertible-note fair-value charge and $21.7 million net interest expense. A $10.3 million warrant fair-value gain partly offset these amounts. The company attributed the note remeasurement in large part to elimination of a negotiation discount following the XPDI merger.
- Investing cash outflow was $269.1 million, including $133.2 million of property and equipment purchases and $135.9 million of deposits for self-mining equipment. Financing provided $251.5 million, including $195.0 million net merger proceeds and $82.2 million of debt proceeds.
Liquidity, debt and capital commitments
Convertible notes had $530.0 million of principal at quarter-end but a $923.7 million fair value. They bear 10% annual interest, with 4% payable in cash and 6% paid in kind, and mature in April 2025. Secured notes have a minimum payoff at maturity of twice face value plus accrued interest; the filing states the amount owed on those notes at maturity would be $448.4 million and the total amount to prepay all convertible notes was $767.3 million as of March 31, 2022. Other debt includes equipment financing and loans, some secured by mining equipment.
Mining-equipment purchase agreements totaled approximately $391.0 million at quarter-end. The filing reported $134.8 million of remaining payments, substantially all expected within a year, and $256.2 million of deposits paid for equipment scheduled for delivery in 2022. Management said existing cash, operating cash flow and debt or equity funding were expected to meet needs for at least the next 12 months, while noting that additional financing may be needed and may not be available on acceptable terms or at all.
Outlook, commentary and significant risks
- Expansion: Management described continued investment in mining equipment and infrastructure. Capacity was reported at 571 MW at March 31, 2022, up from 457 MW at December 31, 2021. Denton, Texas began operating with capacity approaching 22 MW; the planned facility is expected to reach 300 MW when complete. The company also announced a planned 500 MW data center in Muskogee, Oklahoma. These are plans, not assurances of completion or profitability.
- Subsequent financing and leadership: After quarter-end, the company borrowed $75 million under a B. Riley bridge loan bearing 7% and maturing in December 2022, among other equipment-related borrowings. CFO Michael Trzupek resigned effective April 4, 2022; Denise Sterling assumed the CFO role. The separation agreement provides $75,000 cash severance and specified restricted-stock-unit treatment.
- Market and operating exposure: Results depend on bitcoin and other digital-asset prices, network difficulty and hash rate, electricity cost and availability, miner supply, facility construction and customer demand. The company notes that operations lack backup generators and that digital assets are not covered by FDIC or SIPC protection.
- Accounting volatility: Digital-asset impairment and recurring fair-value remeasurement of convertible notes and warrants can materially affect reported earnings. Adjusted EBITDA is non-GAAP and should not be treated as a substitute for GAAP results or cash flow.
- Controls and contingencies: Management concluded disclosure controls were not effective because of material weaknesses involving accounting resources and expertise, cross-functional processes, journal-entry segregation of duties and digital-asset custody. Remediation was underway, but design and operating-effectiveness testing was not complete. The company reported no material loss-contingency accruals and no litigation it believed would have a material adverse effect.
- Related parties and concentration: Related parties generated $5.9 million of hosting revenue and $25.9 million of equipment-sales revenue in the quarter. One customer accounted for 12% of total revenue. The company also disclosed $0.5 million of business-flight reimbursements to certain officers and directors.
Most important facts for investors to verify
- Whether operating cash flow, equipment deposits and expansion spending remain supportable by available liquidity and financing; review subsequent borrowing terms and maturity obligations.
- The economic burden and conversion/dilution implications of the $530.0 million convertible-note principal, its $923.7 million reported fair value, and the secured notes’ two-times minimum maturity payoff.
- Mining economics under changes in bitcoin prices, network difficulty, power costs and equipment deployment; confirm the timing and cost of planned facility expansions.
- The amount and cause of digital-asset impairment, the company’s digital-asset holdings and its policy for selling or retaining mined assets.
- Progress in remediating material weaknesses, especially digital-asset custody and journal-entry controls, and whether subsequent filings report effective controls or additional issues.
- Related-party transactions, customer concentration, major equipment purchase commitments and the status of post-quarter-end financings and CFO transition.