Core Scientific, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023. Core Scientific operates bitcoin-mining and third-party hosting facilities and filed for Chapter 11 protection in December 2022. It continued operating as a debtor-in-possession. Its common stock and warrants traded on OTC Markets under CORZQ and CRZWQ; 386.0 million common shares were outstanding on October 30, 2023.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $112.9 million | $162.6 million | $360.5 million | $519.1 million |
| Gross profit (loss) | $15.4 million | $(27.1) million | $84.2 million | $55.6 million |
| Gross margin | 14% | (17)% | 23% | 11% |
| Operating income (loss) | $(12.0) million | $(401.4) million | $5.0 million | $(1,473.5) million |
| Net loss | $(41.1) million | $(434.8) million | $(50.8) million | $(1,711.5) million |
| Adjusted EBITDA | $27.9 million | $17.9 million | $113.0 million | $170.1 million |
Adjusted EBITDA is a non-GAAP measure; the company cautions that it is not a substitute for GAAP results and may not be comparable with similarly titled measures at other companies.
- Revenue mix and operations: Q3 mining revenue was $83.1 million, up 3% year over year; hosting revenue was $29.8 million, down 34%. There were no equipment sales, compared with $37.2 million in the prior-year quarter. For the first nine months, mining generated 77% of revenue. Self-mining hash rate was 15.0 EH/s, up 15% from September 2022; combined self- and hosted-mining capacity was 22.3 EH/s.
- Cash flow: In the first nine months, operating activities provided $43.4 million, investing activities used $5.4 million, and financing activities used $26.4 million. Cash, cash equivalents and restricted cash totaled $63.9 million at September 30, including $42.1 million unrestricted cash and $21.8 million restricted cash.
- Debt and liabilities: Net notes payable were $807.9 million, including $128.3 million current; finance lease liabilities totaled $55.7 million. Liabilities subject to compromise were $93.9 million. Total liabilities were $1.124 billion, against assets of $705.5 million and a stockholders’ deficit of $418.7 million. The $560.0 million of convertible notes are scheduled to mature in April 2025; the company disclosed that secured convertible notes could require repayment at twice principal plus accrued interest if held to maturity.
- DIP financing: The Replacement DIP Facility had a maximum principal amount of $70 million, bears 10% interest payable in kind, and had $35 million of undrawn capacity at September 30. Its stated maturity was December 22, 2023, subject to a possible conditional extension.
Material changes versus prior periods
- Q3 revenue fell 31% year over year, mainly reflecting the exit from equipment sales and lower hosting revenue following customer contract terminations. Hosting revenue from related parties also declined. Mining revenue increased modestly as bitcoin prices and self-mining hash rate rose, partly offset by higher network hash rate.
- For the first nine months, revenue fell 31%, including a 14% decline in mining revenue. Management attributed the mining decrease chiefly to lower average bitcoin prices and increased network hash rate; average bitcoin price was $26,353 versus $36,876 a year earlier.
- Gross profit and margins improved in both comparison periods. Management cited lower depreciation following adjustments to the depreciable base of deployed miners, lower costs and stock-based compensation, and the exit from equipment sales. These factors do not eliminate the operating and net losses.
- Prior-year comparisons include major impairment charges: $1.1 billion of goodwill and intangible impairment and $59.3 million of property impairment in the first nine months of 2022, versus none in 2023. The 2022 period also included $212.2 million of digital-asset impairment.
- Interest expense was substantially lower, partly because the bankruptcy stay halted payment of pre-petition obligations. The company said unrecognized contractual interest on pre-petition debt was $19.2 million for Q3 and $60.7 million for the first nine months of 2023.
Outlook, risks, contingencies and unusual items
- Restructuring and going concern: In September 2023, the debtors, an ad hoc noteholder group and the equity committee reached an agreement in principle on economic terms of a plan. After quarter-end, on October 30, they reached a further agreement in principle, subject to definitive documentation and court processes. Management said it expected available cash, operating cash flows and DIP access to support operations for at least 12 months, but the filing states that substantial doubt about the company’s ability to continue as a going concern exists, given the need to confirm and implement a plan, emerge from Chapter 11 and generate sufficient liquidity. No formal revenue or earnings guidance is provided.
- Chapter 11 costs and settlements: Reorganization expense was $28.3 million in Q3 and $78.3 million for the first nine months, primarily professional fees and DIP financing costs. Q3 included settlement losses related to the Denton lease and Huband-Mantor Construction, partly offset by settlement gains. The Celsius agreement included sale of the Cedarvale facility and related assets for $14 million; the company received the payment on November 2, 2023, after quarter-end. Cedarvale assets of $36.1 million were classified as held for sale at September 30.
- Operational and market risks: Results depend heavily on bitcoin price, network hash rate and mining difficulty, electricity cost and availability, and equipment economics. The next bitcoin halving was expected in early 2024. Bitcoin mining represented 77% of year-to-date revenue. One customer accounted for approximately 45% of Q3 and 48% of year-to-date hosting-segment revenue.
- Investment commitments: The company reported a $77.1 million purchase agreement for 27,000 Bitmain S19j XP miners, with delivery expected by Q1 2024. A subsequent agreement for 12,600 S21 miners totaled approximately $50.4 million, with deployment expected by Q3 2024.
- Legal matters: The company disclosed, among other matters, a disputed Sphere 3D proof of claim of approximately $39.5 million, which it intends to contest; a hearing was expected in Q1 2024. Many pre-petition proceedings are stayed, but claims and settlement amounts remain subject to bankruptcy-court processes.
- Controls and reporting: Management concluded disclosure controls were not effective at the reasonable-assurance level because of material weaknesses involving IT change management, user access and segregation of duties, and timely GAAP recording. Remediation was ongoing and had not completed testing of design and operating effectiveness. The filing also reports a non-material revision to previously issued Q1 2023 financial statements: $11.3 million of expenses had been recorded in the wrong quarter.
Important facts for investors to verify
- Whether the restructuring plan is finalized, approved by the bankruptcy court, and completed, and what recovery or dilution it implies for existing common stock and warrants.
- Liquidity available after restrictions, DIP repayments and restructuring costs, and the status of the DIP maturity or extension.
- Final allowed claims and settlement values, including treatment of convertible notes and other liabilities subject to compromise.
- Whether customer concentration, hosting contract changes, bitcoin prices, network difficulty, power costs and the 2024 halving materially affect mining and hosting margins.
- Whether planned miner purchases can be funded and deployed as scheduled, and whether the identified material weaknesses are fully remediated.