Core Scientific, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Core Scientific operates bitcoin-mining facilities and provides colocation hosting services. The company remained in Chapter 11 as a debtor-in-possession; its common stock traded over the counter as CORZQ.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $126.9 million | $164.0 million | $247.6 million | $356.5 million |
| Gross profit (margin) | $37.0 million (29%) | $12.7 million (8%) | $68.7 million (28%) | $82.7 million (23%) |
| Operating income (loss) | $9.4 million | $(1,045.4) million | $17.0 million | $(1,072.1) million |
| Net loss | $(9.3) million | $(810.5) million | $(9.6) million | $(1,276.7) million |
| Adjusted EBITDA | $44.8 million | $59.1 million | $84.8 million | $152.2 million |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $38.0 million | $141.3 million |
Q2 revenue fell 23% year over year; six-month revenue fell 31%. Q2 mining revenue was $97.1 million, down 12%, while hosting revenue was $29.8 million; equipment sales ceased. For the six months, mining revenue declined 20% and hosting-segment revenue declined 54%, including the absence of prior-year equipment sales. Management attributed weaker mining revenue mainly to lower bitcoin prices and rising network hash rate, partly offset by growth in its own mining fleet. Adjusted EBITDA is a non-GAAP measure.
At June 30, cash and cash equivalents were $57.6 million and restricted cash was $19.2 million, versus $15.9 million and $36.4 million, respectively, at year-end 2022. Six-month investing cash use was $2.5 million and financing cash use was $11.0 million. The company said operating cash flow included $195.5 million from changes in operating assets and liabilities, a material source of period cash generation.
Total assets were $750.9 million, total liabilities $1.143 billion, and stockholders’ deficit $392.4 million. Liabilities subject to compromise totaled $952.6 million, including $805.9 million of debt. Notes payable outside that classification were $27.7 million. Convertible notes had $560.0 million of principal outstanding; the secured notes’ stated maturity payoff could be twice their principal, plus accrued interest.
Material changes and operating position
- Mining gross margin improved to 31% in Q2 from 14% a year earlier; six-month mining gross margin fell to 28% from 33%, with higher power costs and lower average bitcoin prices weighing on the period.
- Hosting gross margin improved to 23% in Q2 from a 6% gross loss margin, and to 25% for six months from 2%. The company cited lower equipment-related costs and stock compensation, while customer contract terminations reduced hosting revenue.
- Self-mining hash rate was 15.1 EH/s, up 47% from June 2022; combined self-mining and hosted hash rate was 22.3 EH/s. The company operated about 210,900 miners and reported average operating power demand of approximately 607 MW. Contracted capacity was approximately 1,500 MW, including 500 MW at the substantially undeveloped Muskogee site.
- Capital spending was sharply lower: purchases of property, plant and equipment were $1.8 million in the first half of 2023 versus $238.5 million in the comparable 2022 period.
Restructuring, outlook, and risks
- Chapter 11 and liquidity: The company filed for Chapter 11 on December 21, 2022. Its replacement DIP facility provides up to $70 million at 10% interest payable in kind, with a 5% exit premium. At June 30, $35 million of borrowing capacity remained. The stated maturity was December 22, 2023, with a possible extension to March 22, 2024, subject to conditions.
- Subsequent event: A July 4 DIP amendment changed the excess-cash threshold and permitted certain claim-related payments. The company made an additional $6.2 million mandatory DIP prepayment on July 7, 2023.
- Going concern: Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern, dependent on confirming and implementing a reorganization plan, emerging from Chapter 11, and generating sufficient liquidity. Management also said forecast liquidity, operating cash flows, and DIP access were expected to support operations for at least 12 months.
- Contingencies: Celsius, a former major hosting customer in bankruptcy, disputed the hosting agreement and filed a claim; Core Scientific accrued an $8.7 million allowance against Celsius receivables. Other disclosed matters include a stayed Sphere 3D arbitration, a stayed construction-payment suit, and securities litigation against certain current and former officers and directors.
- Concentration and industry risks: Bitcoin mining revenue is exposed to bitcoin-price volatility, network difficulty and hash-rate growth, electricity costs, and the anticipated 2024 bitcoin halving. One customer represented 49% of hosting-segment revenue in Q2 and 11% of total revenue. Substantially all digital assets were held with one third-party service at quarter-end.
- Controls and unusual items: Management concluded disclosure controls were not effective at the reasonable-assurance level, citing material weaknesses in IT change management, access controls/segregation of duties, and timely GAAP recording. A prior-quarter cost-of-revenue error was revised; management deemed the March 2023 error not material, and the revision did not change reported cash flow. Q2 included $18.4 million of reorganization costs; first-half results included a $20.8 million gain from extinguishing the NYDIG loan.
- Guidance: The filing provides no specific revenue, earnings, or production guidance.
Investor verification priorities
- Track Chapter 11 plan approval, creditor and equity-holder treatment, emergence timing, and the resulting capital structure and liquidity.
- Verify cash availability after restrictions, required DIP repayments and fees, and whether operating cash generation can continue without unusually large working-capital contributions.
- Assess the status and potential financial impact of Celsius and other litigation, disputed claims, and liabilities subject to compromise.
- Monitor bitcoin price, network hash rate, electricity costs, fleet deployment, and customer concentration for their effect on mining and hosting margins.
- Confirm whether disclosed control weaknesses are remediated and whether subsequent reporting requires further revisions.