Core Scientific, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The unaudited filing was signed November 21, 2022. Core Scientific operates bitcoin mining and third-party hosting and equipment-sales businesses.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $162.6m | $113.1m | $519.1m | $242.7m |
| Gross profit (loss) | $(27.1)m | $58.4m | $55.6m | $97.5m |
| Operating income (loss) | $(401.4)m | $4.8m | $(1,473.5)m | $29.3m |
| Net income (loss) | $(434.8)m | $(16.6)m | $(1,711.5)m | $(13.2)m |
| Adjusted EBITDA, non-GAAP | $17.5m | $54.7m | $169.7m | $88.0m |
Q3 gross margin was negative 17%, versus positive 52% a year earlier; nine-month gross margin was 11%, versus 40%. Q3 hosting and equipment-sales gross profit was $9.2m, while mining gross loss was $36.3m. Results include substantial impairment charges and non-cash fair-value changes; Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP results.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $29.5m and restricted cash was $8.1m, down from $117.9m and $13.8m, respectively, at December 31, 2021. The company reported $37.6m total cash, cash equivalents and restricted cash.
- For the first nine months, operating activities provided $89.2m, investing activities used $451.3m and financing activities provided $268.1m. Operating cash flow benefited materially from working-capital changes, including reduced equipment deposits and digital-asset balances. In Q3 alone, operating activities used $52.1m.
- Notes payable had a carrying value of $977.6m and finance lease liabilities were $73.0m. The company classified all notes and finance lease liabilities as current because it considered payment within one year probable following subsequent payment decisions and potential creditor remedies.
- Management stated that additional liquidity would be needed to continue operations through November 2023, but expected existing cash resources to be depleted by year-end 2022 or sooner. The filing concludes that substantial doubt exists about the company’s ability to continue as a going concern.
Material changes and unusual items
- Revenue rose 44% year over year in Q3, mainly from higher hosting and mining revenue; equipment sales to non-related customers fell. Nine-month revenue more than doubled, reflecting expansion in self-mining and hosting.
- Cost of revenue rose 247% in Q3. Management cited higher power consumption and rates, increased depreciation from deployed miners, and higher facility and personnel costs. The average bitcoin price in Q3 was $21,324, down from $46,507 in Q3 2021; management also cited rising network hash rate.
- The company recorded $268.5m of goodwill and intangible impairment in Q3 and $1.06bn for the first nine months, leaving no goodwill at September 30. It also recorded $59.3m of property and equipment impairment at its Cedarvale, Texas site and $212.2m of digital-asset impairment for the nine-month period.
- Q3 interest expense was $25.9m. The nine-month results included a $186.9m loss from fair-value changes on convertible notes, partly offset by a $33.0m gain on derivative warrant liabilities. Convertible notes had $544.3m principal outstanding and a $682.8m fair value at September 30; secured notes carry a minimum payoff at maturity of twice face value plus accrued interest.
- In October, the company decided not to make certain payments on debt, equipment-financing facilities, leases and other financings, including its two bridge notes. Creditors could accelerate debt, impose default rates, sue or act against collateral after applicable grace periods. The company said it did not believe it was in default as of September 30.
- Management engaged legal and financial advisers and began creditor discussions regarding capital-structure alternatives, including new financing, liability-management transactions, asset sales or possible insolvency proceedings. Any debt-for-equity exchange could dilute shareholders; discussions might not produce an agreement.
Outlook, risks and contingencies
Management cited falling bitcoin prices, rising electricity costs, increasing network hash rate and limited capital-market access as pressures on performance and liquidity. It was reducing operating costs, delaying construction and capital spending, and seeking to increase hosting revenue. No specific forward financial guidance is provided in the supplied filing text.
One of the company’s largest customers, Celsius Mining, filed for Chapter 11 and withheld disputed hosting charges. Core Scientific recorded a $5.2m allowance against amounts due from Celsius and warned an adverse ruling could materially affect results and cash flows. Subsequent events disclosed hosting-contract terminations for three customers, including two related parties. November litigation and arbitration matters included a Sphere 3D claim involving approximately $35m in prepayments, a construction-payment lawsuit and a putative securities class action; the company disputes the allegations.
The company reported ineffective disclosure controls due to material weaknesses, including insufficient financial-reporting resources and deficiencies in journal-entry and digital-asset-custody segregation of duties. Remediation was underway but not yet fully tested. Other significant risks include customer concentration, power availability and pricing, bitcoin volatility, pledged assets, debt and refinancing needs, potential further impairments, and possible shareholder dilution.
Important facts for investors to verify
- Whether Core Scientific obtained sufficient liquidity after the filing, and the status and terms of any restructuring, financing, asset-sale or insolvency process.
- Which payments were missed after September 30, whether grace periods expired, and whether creditors accelerated obligations or pursued collateral.
- The company’s subsequent cash, bitcoin holdings, mining economics, power costs and operating status at facilities, including Cedarvale.
- The outcome and collection prospects of the Celsius claims, the terminated hosting contracts and the other disclosed legal proceedings.
- Whether material weaknesses in internal controls were remediated and operating effectiveness tested; also verify the scale of potential dilution from equity facilities, awards and convertible securities.