Core Scientific, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Core Scientific operates self-mining and third-party hosting facilities. It filed for Chapter 11 protection in December 2022 and continued as a debtor-in-possession during the quarter. Its common stock and warrants were suspended from Nasdaq on January 3, 2023 and traded on OTC Markets as CORZQ and CRZWQ.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $120.7 million | $192.5 million |
| Gross profit / margin | $20.5 million / 17% | $70.0 million / 36% |
| Operating loss | $3.7 million | $26.7 million |
| Net loss | $11.7 million | $466.2 million |
| Adjusted EBITDA, non-GAAP | $28.7 million | $93.0 million |
| Operating cash flow | $19.9 million provided | $3.6 million used |
| Investing cash flow | $1.9 million used | $269.1 million used |
| Financing cash flow | $1.0 million used | $251.5 million provided |
- Revenue fell 37% year over year. Bitcoin mining revenue declined 26% to $98.0 million; hosting revenue was $22.6 million, down 32% from the comparable hosting total. Equipment sales ended as the Company exited that business.
- Mining gross profit fell to $16.7 million from $64.3 million, with segment margin down to 17% from 48%. Hosting gross profit was $3.8 million, versus $5.8 million; hosting margin was 17%, compared with 10%.
- The average bitcoin price fell 45% year over year to $22,877. The Company mined 4,299 bitcoin versus 3,202, as self-mining hash rate increased 94% to 16.1 EH/s. Higher power costs and network hash rate offset the fleet expansion.
- Operating cash flow included $117.1 million of cash from working-capital changes, including proceeds from selling mined digital assets. The Company held no digital assets at March 31, 2023.
- At quarter-end, cash and cash equivalents were $47.5 million and restricted cash was $21.8 million, for total cash, cash equivalents and restricted cash of $69.3 million. Cash and restricted cash together were $52.2 million at December 31, 2022.
- Total liabilities were $1.169 billion, including $950.8 million classified as liabilities subject to compromise; total assets were $760.0 million and stockholders’ deficit was $408.8 million. The Company reported $35.6 million of current notes payable, including $35.0 million drawn under the Replacement DIP Facility.
Material changes and unusual items
- The year-over-year net loss comparison is heavily affected by prior-year non-operating items: Q1 2022 included a $386.0 million fair-value expense on convertible notes and $42.4 million of income tax expense. Q1 2023 included $31.6 million of bankruptcy reorganization costs and a $20.8 million gain from extinguishing the NYDIG loan after transferring collateral miners.
- In March, equipment was transferred to Priority Power to satisfy its $20.8 million secured claim; the transaction was noncash and produced no gain or loss.
- The Company reported a $20.8 million increase in power costs in cost of revenue, while reduced equipment sales costs and lower depreciation helped reduce total cost of revenue.
- Operating and investing cash uses were lower than in Q1 2022, when the Company made substantial equipment deposits and capital expenditures. Capital expenditures were reduced after the bankruptcy filing.
Outlook, risks and contingencies
- Going concern: Management stated that substantial doubt exists about the Company’s ability to continue as a going concern. Continued operations depend on confirming and implementing a Chapter 11 plan, emerging successfully, and obtaining sufficient liquidity. Management said its forecast, cash balances and access to the Replacement DIP Facility were expected to support operations for at least 12 months, subject to the restructuring and related assumptions; this is not an unconditional assurance.
- DIP financing: The Replacement DIP Facility allows up to $70 million, bears 10% interest payable in kind, includes a 3.5% upfront fee and a 5% cash exit premium, and matures December 22, 2023, with a possible extension to March 22, 2024. The Company reported $35 million of undrawn capacity at March 31, 2023.
- Bankruptcy and claims: The amount ultimately allowed or settled for liabilities subject to compromise remains uncertain and may change materially. The former restructuring support agreement was terminated so the Company could pursue alternatives. The bankruptcy court appointed official committees representing unsecured creditors and equity holders.
- Customer and litigation exposure: Celsius, a major hosting customer in bankruptcy, disputed charges and had an $8.7 million allowance against amounts due. The Company also disclosed a stayed Sphere 3D arbitration, a stayed construction-payment lawsuit, and a securities class action; outcomes and potential losses are uncertain.
- Operating risks: Results remain exposed to bitcoin price volatility, network hash-rate and mining-difficulty increases, electricity prices and availability, equipment economics, customer concentration and the 2024 bitcoin reward halving. The top three hosting customers generated approximately 73% of hosting-segment revenue in Q1 2023.
- Controls: Management concluded disclosure controls were not effective at the reasonable-assurance level due to material weaknesses involving IT change management, user access and segregation of duties, and timely recording of transactions. Remediation and testing were ongoing.
- Subsequent development: On April 28, 2023, the Company announced agreements to host 17,935 mining machines for three companies at facilities in Georgia, Kentucky and Texas.
Most important facts for investors to verify
- Progress, court approval and economic terms of a confirmed Chapter 11 plan, including the likely treatment of existing debt and equity.
- Actual cash runway, use and availability of remaining DIP commitments, and liquidity after bankruptcy-related fees and operating needs.
- Resolution and collectability of Celsius-related receivables and the financial effect of customer claims and other litigation.
- Whether mining and hosting margins recover as bitcoin prices, power costs, network difficulty and customer deployments change.
- Completion and independent testing of remediation for the disclosed material weaknesses in financial reporting controls.
- Implementation, utilization and profitability of the announced hosting agreements, and the Company’s ability to maintain or restore national-exchange listing status.