Core Scientific, Inc. quarterly report, Q2 FY2022

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Core Scientific, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. The company operates self-mining and third-party hosting, as well as mining-equipment sales. The January 2022 XPDI merger was accounted for as a reverse recapitalization; prior-period share information was adjusted for the merger exchange ratio.

Financial performance and position

  • Q2 revenue: $164.0 million, up 118% from $75.3 million. Digital-asset mining contributed $109.8 million (67% of revenue); hosting contributed $38.9 million; equipment sales contributed $15.2 million.
  • Q2 profitability: Gross profit was $12.7 million, a 8% gross margin versus 33% a year earlier. Operating loss was $1.045 billion and net loss was $810.5 million, or $2.49 per diluted share. The loss included $790.8 million of goodwill and intangible impairment and $150.2 million of digital-asset impairment.
  • Six-month results: Revenue was $356.5 million, up 175%; gross profit was $82.7 million, with a 23% gross margin versus 30%. Operating loss was $1.072 billion and net loss was $1.277 billion, versus net income of $3.4 million in the first half of 2021. Adjusted EBITDA, a non-GAAP measure, was $59.1 million for Q2 and $152.2 million for the half year.
  • Cash flow: First-half operating cash flow was $141.3 million, compared with cash used of $121.3 million in 2021. Management attributed the improvement substantially to working-capital movements, including lower equipment deposits and digital assets. Investing cash outflow was $445.6 million, including $238.5 million of property and equipment purchases and $217.7 million of self-mining equipment deposits. Financing cash inflow was $313.2 million.
  • Liquidity: June 30 cash and cash equivalents were $128.5 million; restricted cash was $11.9 million. Current assets were $511.6 million and current liabilities $516.6 million. Management stated that cash, operating cash flow and anticipated debt or equity funding were expected to meet needs for at least 12 months, while also warning that access to financing was uncertain.
  • Debt: Notes payable totaled $1.070 billion, including $536.3 million principal on convertible notes carried at $726.6 million fair value. The convertible notes bear 10% interest (4% cash, 6% payment-in-kind) and mature in April 2025; secured notes not converted carry a minimum maturity payoff of twice face value plus accrued interest. Finance lease liabilities totaled $77.3 million.
  • Digital assets and scale: Digital assets fell to $40.7 million from $234.3 million at year-end 2021. At June 30, the company reported 606 MW of power capacity, 182,000 deployed miners and 17.9 EH/s combined self-mining and hosted hash rate; 10.3 EH/s was self-mining.

Material changes versus the prior comparable period

  • Mining revenue rose sharply with expanded self-mining capacity: Q2 bitcoin awards were 3,365 versus 180 a year earlier. The average bitcoin price fell 30% year over year in Q2 to $32,502, while higher electricity costs and depreciation reduced mining margin to 14% from 80%.
  • Hosting revenue increased, but the Equipment Sales and Hosting segment recorded a Q2 gross loss of $3.1 million, versus gross profit of $15.9 million; its margin fell to negative 6% from 25%. Lower equipment sales to customers and increased operating costs contributed.
  • Goodwill declined to $266.0 million from $1.056 billion following a $788.7 million mining-segment impairment, triggered by the decline in the company’s share price and bitcoin market value. The filing says further market or bitcoin declines could prompt additional impairment.
  • Stock-based compensation increased substantially following an amendment that removed an event-based vesting condition for outstanding restricted stock units. Q2 expense was $111.0 million versus $2.1 million a year earlier.

Outlook, risks and unusual items

  • No quantified company-wide earnings or mining guidance is provided. Management described ongoing facility and fleet expansion as subject to available capital and financing. A July colocation agreement for 75 MW was expected to generate approximately $50 million of annual revenue at full deployment, with deployment beginning in Q4 2022 and completion expected during 2023.
  • In July, the company entered an optional equity purchase arrangement allowing sales of up to $100 million of shares to B. Riley, subject to conditions and limits. It issued approximately 0.6 million commitment-fee shares. In August, it amended $75 million of B. Riley bridge notes, extending maturity to June 2023; the notes require specified financing proceeds to be used for repayment.
  • Celsius, one of the company’s two largest customers, filed for Chapter 11 in July. Core Scientific reported $0.9 million due from Celsius at June 30 and warned that contracts could be terminated or renegotiated and claims reduced.
  • The filing cites falling digital-asset prices, rising power costs, inflation, supply-chain disruption, miner deployment delays, capital intensity and limited access to financing as risks. It also notes significant customer concentration, pledged assets, potential dilution, and exposure to volatile bitcoin prices and power availability.
  • Management concluded disclosure controls were not effective at June 30 because of material weaknesses involving financial-reporting resources and expertise, cross-functional processes, journal-entry segregation of duties and digital-asset custody. Remediation was underway, but testing of design and operating effectiveness was incomplete.
  • Other notable items include a $13.1 million loss on a mining-equipment exchange and $1.445 million of restructuring severance charges. Management initiated a plan to exit certain ancillary activities and reduce portions of the workforce, expecting completion by September 30, 2022.

Important facts for investors to verify

  • Whether operating cash generation can persist without large working-capital benefits, and whether liquidity remains adequate given investment needs, debt service and limited financing access.
  • The economics and timing of planned miner deployments and facility expansion, including electricity pricing, curtailments, equipment delivery, and the expected economics of the 75 MW hosting agreement.
  • The fair-value assumptions and repayment burden of convertible notes, especially the secured notes’ twice-face-value maturity payoff, and compliance with debt covenants and bridge-note repayment requirements.
  • The financial and operating effect of Celsius’s bankruptcy, customer concentration and any contract changes or recovery shortfalls.
  • Progress in remediating material weaknesses and completing control testing, particularly over digital-asset custody and financial reporting.
  • The potential for further impairment charges, share dilution from equity facilities and equity awards, and volatility in bitcoin prices, power costs and the company’s share price.