Core Scientific, Inc./tx 10-Q

Item 1. Financial Statements 3 Table of Contents Core Scientific, Inc. Consolidated Balance Sheets (in thousands, except par value) March 31, 2022 December 31, 2021 Assets Unaudited Current Assets: Cash and cash equivalents $ 96,355 $ 117,871 Restricted cash 14,077 13,807 Accounts receivable 168 1,382 Accounts receivable from related parties 342 300 Deposits for equipment 279,153 358,791 Digital assets 316,323 234,298 Prepaid expenses and other current assets 101,827 30,111 Total Current Assets 808,245 756,560 Property, plant and equipment, net 820,182 597,304 Goodwill 1,055,760 1,055,760 Intangible assets, net 5,474 8,195 Other noncurrent assets 14,387 21,045 Total Assets $ 2,704,048 $ 2,438,864 Liabilities, Redeemable Preferred Stock and Stockholders’ Equity Current Liabilities: Accounts payable $ 15,623 $ 11,617 Accrued expenses and other 72,806 67,862 Deferred revenue 103,215 63,417 Deferred revenue from related parties 50,472 72,945 Derivative warrant liabilities 27,997 — Finance lease liabilities, current portion 34,405 28,452 Notes payable, current portion 110,175 75,996 Total Current Liabilities 414,693 320,289 Finance lease liabilities, net of current portion 56,494 62,145 Notes payable, net of current portion (includes $ 923,731 and $ 557,007 at fair value) 1,052,496 652,213 Other noncurrent liabilities 53,655 18,531 Total Liabilities 1,577,338 1,053,178 Contingently redeemable preferred stock; $ 0.0001 par value; 2,000,000 shares authorized; — and 10,826 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively; $ — and $ 45,164 total liquidation preference at March 31, 2022 and December 31, 2021, respectively — 44,476 Commitments and contingencies (Note 9) Stockholders’ Equity: Common stock; $ 0.0001 par value; 10,000,000 shares authorized at both March 31, 2022 and December 31, 2021; 324,564 and 271,576 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively 32 27 Additional paid-in capital 1,604,116 1,379,581 Accumulated deficit ( 493,636 ) ( 27,432 ) Accumulated other comprehensive income (loss) 16,198 ( 10,966 ) Total Stockholders’ Equity 1,126,710 1,341,210 Total Liabilities, Redeemable Preferred Stock and Stockholders’ Equity $ 2,704,048 $ 2,438,864 See accompanying notes to unaudited consolidated financial statements. 4 Table of Contents Core Scientific, Inc. Consolidated Statements of Operations (in thousands, except per share amounts) Unaudited Three Months Ended March 31, 2022 2021 Revenue: Hosting revenue from customers $ 27,338 $ 8,356 Hosting revenue from related parties 5,876 4,336 Equipment sales to customers 416 24,042 Equipment sales to related parties 25,889 7,884 Digital asset mining income 133,000 9,628 Total revenue 192,519 54,246 Cost of revenue: Cost of hosting services 31,231 11,829 Cost of equipment sales 22,535 26,231 Cost of digital asset mining 68,750 1,653 Total cost of revenue 122,516 39,713 Gross profit 70,003 14,533 Gain from sales of digital assets 2,163 30 Impairment of digital assets ( 53,985 ) — Operating expenses: Research and development 3,340 1,208 Sales and marketing 1,398 534 General and administrative 40,160 3,795 Total operating expenses 44,898 5,537 Operating (loss) income ( 26,717 ) 9,026 Non-operating expenses, net: Loss on debt from extinguishment — 42 Interest expense, net 21,676 2,135 Fair value adjustments on convertible notes 386,037 — Fair value adjustments on derivative warrant liabilities ( 10,275 ) — Other non-operating (income), net ( 357 ) — Total non-operating expense, net 397,081 2,177 (Loss) income before income taxes ( 423,798 ) 6,849 Income tax expense 42,406 — Net (loss) income $ ( 466,204 ) $ 6,849 Net (loss) income per share (Note 13): Basic $ ( 1.52 ) $ 0.04 Diluted $ ( 1.52 ) $ 0.04 Weighted average shares outstanding: Basic 307,475 157,786 Diluted 307,475 175,964 See accompanying notes to unaudited consolidated financial statements. 5 Table of Contents Core Scientific, Inc. Consolidated Statements of Comprehensive (Loss) Income (in thousands, except per share amounts) Three Months Ended March 31, 2022 2021 Net (loss) income $ ( 466,204 ) $ 6,849 Other comprehensive income, net of income taxes: Change in fair value attributable to instrument-specific credit risk of convertible notes measured at fair value under the fair value option, net of tax effect of $ — and $ — 27,164 — Total other comprehensive income, net of income taxes 27,164 — Comprehensive (loss) income $ ( 439,040 ) $ 6,849 See accompanying notes to unaudited consolidated financial statements. 6 Table of Contents Core Scientific, Inc. Consolidated Statements of Changes in Contingently Redeemable Convertible Preferred Stock and Stockholders’ Equity (in thousands) (Unaudited) Contingently Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Stockholders’ Equity Shares Amount Shares Amount Balance at December 31, 2020 6,766 $ 44,476 98,607 $ 1 $ 163,967 $ ( 74,744 ) $ — $ 89,224 Retroactive application of the recapitalization 4,060 — 59,179 15 — — — 15 Balance at December 31, 2020, as adjusted 10,826 44,476 157,786 16 163,967 ( 74,744 ) — 89,239 Net income — — — — — 6,849 — 6,849 Stock-based compensation — — — — 588 — — 588 Issuances of common stock- warrants and options — — — — 496 — — 496 Balance at March 31, 2021 10,826 44,476 157,786 16 165,051 ( 67,895 ) — 97,172 Balance at December 31, 2021 10,826 44,476 271,576 27 1,379,581 ( 27,432 ) ( 10,966 ) 1,341,210 Net loss — — — — — ( 466,204 ) — ( 466,204 ) Other comprehensive income — — — — — — 27,164 27,164 Stock-based compensation — — — — 20,573 — — 20,573 Issuance of common stock - restricted stock and restricted stock units — — 6,803 1 ( 1 ) — — — Issuance of common stock - exercise of warrants — — 3,001 — — — — — Issuance of common stock - conversion of contingently redeemable preferred stock to common stock ( 10,826 ) ( 44,476 ) 10,826 1 44,475 — — 44,476 Issuances of common stock- Merger with XPDI — — 30,778 3 163,456 — — 163,459 Costs attributable to issuance of common stock and equity instruments- Merger with XPDI — — — — ( 16,642 ) — — ( 16,642 ) Issuances of common stock- vendor settlement — — 1,580 — 12,674 — — 12,674 Balance at March 31, 2022 — $ — 324,564 $ 32 $ 1,604,116 $ ( 493,636 ) $ 16,198 $ 1,126,710 See accompanying notes to unaudited consolidated financial statements. 7 Table of Contents Core Scientific, Inc. Consolidated Statements of Cash Flows (in thousands) (Unaudited) Three Months Ended March 31, 2022 2021 Cash flows from Operating Activities: Net (loss) income $ ( 466,204 ) $ 6,849 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 42,139 2,916 Amortization of operating lease right-of-use assets 53 — Stock-based compensation 25,797 588 Digital asset mining income ( 133,000 ) ( 9,628 ) Deferred income taxes 33,974 — Loss on debt extinguishment — 42 Fair value adjustment on derivative warrant liabilities ( 10,275 ) — Fair value adjustment on convertible notes 393,888 — Amortization of debt discount and debt issuance costs 1,027 543 Impairments of digital assets 53,985 — Changes in working capital components: Accounts receivable, net 1,214 ( 6,616 ) Accounts receivable from related parties ( 42 ) 16 Digital assets ( 3,010 ) 9,587 Deposits for equipment for sales to customers 62,302 ( 100,150 ) Prepaid expenses and other current assets ( 23,647 ) 1,235 Accounts payable ( 9,022 ) ( 1,792 ) Accrued expenses and other 11,741 ( 709 ) Deferred revenue 39,798 112,846 Deferred revenue from related parties ( 22,473 ) — Other noncurrent assets and liabilities, net ( 1,860 ) ( 315 ) Net cash (used by) provided by operating activities ( 3,615 ) 15,412 Cash flows from Investing Activities: Purchases of property, plant and equipment ( 133,223 ) ( 10,757 ) Deposits for self-mining equipment ( 135,873 ) — Other — ( 16 ) Net cash used in investing activities ( 269,096 ) ( 10,773 ) Cash flows from Financing Activities: Proceeds from issuance of common stock upon Merger with XPDI, net of transaction costs 195,010 496 Proceeds from debt, net of issuance costs 82,152 22,220 Principal repayments of financing leases ( 10,256 ) — Principal payments on debt ( 15,441 ) ( 1,683 ) Net cash provided by financing activities 251,465 21,033 (Decrease) Increase in cash, cash equivalents, and restricted cash ( 21,246 ) 25,672 Cash, cash equivalents and restricted cash—beginning of period 131,678 8,721 Cash, cash equivalents and restricted cash—end of period $ 110,432 $ 34,393 See accompanying notes to unaudited consolidated financial statements. 8 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Notes to Unaudited Consolidated Financial Statements 1. ORGANIZATION AND DESCRIPTION OF BUSINESS MineCo Holdings, Inc. was incorporated on December 13, 2017 in the State of Delaware and changed its name to Core Scientific, Inc. (“Legacy Core Scientific”) pursuant to an amendment to its Certificate of Incorporation dated June 12, 2018. On August 17, 2020 Legacy Core Scientific engaged in a holdco restructuring to facilitate a borrowing arrangement by Legacy Core Scientific pursuant to which Legacy Core Scientific was merged with and into a wholly owned subsidiary of Core Scientific Holding Co. and became a wholly owned subsidiary of Core Scientific Holding Co. and the stockholders of Legacy Core Scientific became the shareholders of Core Scientific Holding Co. On January 19, 2022, Core Scientific Holding Co. merged with Power & Digital Infrastructure Acquisition Corp., a Delaware corporation (“XPDI”), and XPDI Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of XPDI (“Merger Sub”), consummated the transactions contemplated under the merger agreement, following the approval at the special meeting of the stockholders of XPDI held on January 19, 2022. In connection with the closing of the merger, XPDI changed its name from Power & Digital Infrastructure Acquisition Corp. to Core Scientific, Inc. (“Core Scientific” or the “Company”). The Company, headquartered in Austin, Texas, is an infrastructure, technology and services company that conducts, or plans to conduct, the following business activities: • Owning and operating computer equipment used to process transactions conducted on one or more blockchain networks in exchange for transaction processing fees rewarded in digital currency assets, commonly referred to as mining; • Owning and operating datacenter facilities in the U.S. to provide colocation and hosting services for distributed ledger technology, also commonly known as blockchain; • Developing blockchain-based platforms and applications, including infrastructure management, security technologies, mining optimization, and recordkeeping; Merger Agreement In 2021, XPDI entered into a certain Agreement and Plan of Reorganization and Merger, dated as of July 20, 2021, as amended on October 1, 2021, and as further amended on December 29, 2021, by and among Core Scientific Holding Co., XPDI Merger Sub and XPDI (the “Merger Agreement”). XPDI’s stockholders approved the transactions (collectively, the “Merger”) contemplated by the Merger Agreement at a special meeting of stockholders held on January 19, 2022 (the “Special Meeting”). Pursuant to the terms of (a) the Merger Agreement and (b) that certain Agreement and Plan of Merger, dated as of October 1, 2021, as amended on January 14, 2022, by and among XPDI, Core Scientific Holding Co., XPDI Merger Sub 3, LLC, a Delaware limited liability company and wholly owned subsidiary of XPDI (“Merger Sub 3”), and Blockcap, Inc., a Nevada corporation and wholly owned subsidiary of Core Scientific (“Blockcap”), the Merger was effected by (i) the merger of Merger Sub with and into Core Scientific (the “First Merger”), which occurred on January 19, 2022 (the “Closing Date”), with Core Scientific surviving the First Merger as a wholly owned subsidiary of XPDI, (ii) the merger of Core Scientific with and into XPDI (the “Second Merger”), which occurred on January 20, 2022, with XPDI surviving the Second Merger, and (iii) following the closing of the Second Merger on January 20, 2022, the merger of Blockcap with and into Merger Sub 3 (the “Third Merger”), with Merger Sub 3 surviving the Third Merger as a wholly owned subsidiary of XPDI under the name “Core Scientific Acquired Mining LLC.” Immediately prior to the effective time of the First Merger (such effective time of the First Merger, the “Effective Time”), XPDI filed a Second Amended and Restated Certificate of Incorporation (the “Post-Combination Charter”) with the Secretary of State of the State of Delaware pursuant to which XPDI changed its name from “Power & Digital Infrastructure Acquisition Corp.” to “Core Scientific, Inc.” (hereinafter referred to as the “Company” or “New Core”) and redesignated its Class A common stock, par value $ 0.0001 per share (“XPDI Class A Common Stock”), and Class B common stock, par value $ 0.0001 per share (“XPDI Class B Common Stock”), as common stock, par value $ 0.0001 , of the Company (“New Core Common Stock”). The Exchange Ratio (as defined in the Merger Agreement) was 1.6001528688 of a share of New Core Common Stock per fully-diluted share of Core Scientific Common Stock. In connection with the Special Meeting and the Merger, holders of 12.3 million of the 34.5 million then-outstanding shares of Class A common stock of XPDI exercised their right to redeem their shares for cash at a redemption price of approximately $ 10.00 per share, for an aggregate redemption amount of $ 123.5 million. 9 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements The Merger provides gross proceeds of approximately $ 221.6 million from the XPDI trust account, resulting in approximately $ 195.0 million in net cash proceeds to Core Scientific, after the payment of transaction expenses. As a result of the Transaction, former Core Scientific stockholders own 90.7 %, former XPDI public stockholders own 6.7 % and XPDI’s sponsor owns 2.6 % of the issued and outstanding shares of common stock, respectively, of the Company, excluding the impact of unvested restricted stock units and options. The proceeds from the Merger will be used to fund mining equipment purchases and infrastructure build-out as the Company expands its leadership position. The Merger is accounted for as a reverse recapitalization with the Company being the accounting acquirer. A reverse recapitalization does not result in a new basis of accounting. Accordingly, the reverse recapitalization was treated as the equivalent of Core Scientific Holding Co. issuing stock for the net assets of XPDI, accompanied by a recapitalization. The net assets of XPDI are stated at historical costs, with no goodwill or other intangible assets recorded. The Company identified $ 18.6 million of direct and incremental transaction costs, which consist of legal, accounting, and other professional services directly related to the Merger, of which $ 10.7 million were recorded in other noncurrent assets on the consolidated balance sheets as of December 31, 2021 and the remaining $ 7.9 million were recording in the three months ended March 31, 2022. These transaction costs have been allocated to all instruments assumed or issued in the merger on a relative fair value basis as of the date of the merger. Transaction costs of $ 16.6 million have been allocated to equity-classified instruments and recognized as an adjustment to additional paid-in capital within total stockholders’ equity. The cash outflows related to these costs have been netted against the proceeds from the issuance of common stock upon the Merger with XPDI within financing activities on the Company’s consolidated statement of cash flows. Transaction costs of $ 2.0 million have been allocated to liability-classified instruments that are measured at fair value through earnings and have been recognized as incurred within general and administrative expenses in the three months ended March 31, 2022. Immediately prior to the Effective Time, each share of Series A convertible preferred stock, par value $ 0.00001 , of Core Scientific automatically converted into one share of Core Scientific common stock, par value $ 0.00001 per share (“Core Scientific Common Stock”), and each share of Series B convertible preferred stock, par value $ 0.00001 , of Core Scientific automatically converted into one share of Core Scientific Common Stock. In addition, immediately prior to the Effective Time, each share of XPDI Class B Common Stock automatically converted into one share of New Core Common Stock. 1.7 million shares (“SPAC Vesting Shares”) are subject to vesting conditions, and will vest i) upon the date on which New Core Common Stock’s volume weighted average price is greater than $ 12.50 per share for any 20 trading days within any 30 consecutive trading day period within five years of the Closing Date or ii) upon any Company Sale that is consummated within five years of the Closing Date that results in the holders of the Company’s common stock receiving a Company Sale Price equal to or in excess of $ 12.50 per share. A Company Sale means any change in control of the Company, or a sale of substantially of the Company’s assets that results in a change in control. Company Sale Price means the price per share paid to holders of common stock in a Company Sale. As a result of the Merger, all of XPDI’s Class A Common Stock and Class B Common Stock automatically converted into shares of New Core Common Stock on a one -for-one basis. XPDI’s 8.6 million public warrants issued in its initial public offering (the “Public Warrants”) and 6.3 million warrants issued in connection with private placement at the time of XPDI’s initial public offering (the “Private Placement Warrants) became warrants for New Core Common Stock. All share-based compensation awards were converted into comparable equity awards that are settled or exercisable for shares of New Core Common Stock. As a result, each stock option and warrant was converted into an option or warrant to purchase shares New Core Common Stock based on an exchange ratio of 1.6001528688 . Each award of the Company’s RSUs was converted into RSUs of New Core based on an exchange ratio of 1.6001528688 . Each convertible note is convertible into New Core Common Stock in accordance with the terms of such convertible promissory note; provided, however, that with respect to outstanding convertible promissory notes for which Core Scientific received a duly executed exercise of conversion in accordance with such convertible promissory note, exercising the right of such holder to convert such convertible promissory note subject to and conditioned upon the occurrence of the Effective Time, the outstanding principal amount and accrued interest as of the Effective Time with respect to such convertible promissory note was converted into shares of New Core Common Stock, equal to the product (rounded down to the nearest whole number) of (i) the number of shares of Core Scientific Common Stock issuable upon the conversion of such convertible promissory note in accordance with such convertible promissory note immediately prior to the Effective Time and (ii) the Exchange Ratio. 10 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the consolidated financial statements. Basis of Presentation We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated cash flows, operating results, and balance sheets for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included as an exhibit to the amendment to the Current Report on Form 8-K/A, which was filed with the SEC on March 31, 2022 (the “8-K/A”). Use of Estimates The consolidated assets, liabilities and results of operations prior to the reverse recapitalization are those of Core Scientific Holding Co. The outstanding shares and corresponding capital amounts, and losses per share, prior to the reverse recapitalization, have been retroactively adjusted in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations . The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Some of the more significant estimates include the valuation of the Company’s common shares and the determination of the grant date fair value of stock-based compensation awards for periods prior to the Merger, the valuation of goodwill and intangibles, the fair value of convertible debt, acquisition purchase price accounting, and income taxes. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates. Cash, Cash Equivalents, and Restricted Cash Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less from the date of acquisition. As of March 31, 2022, cash equivalents included $ 90.0 million of highly liquid money market funds, which are classified as Level 1 within the fair value hierarchy. Restricted cash consists of cash held in escrow to pay for construction and development activities. The following table provides a reconciliation of the amount of cash, cash equivalents, and restricted cash reported on the consolidated balance sheets to the total of the same amount shown in the consolidated statements of cash flows (in thousands): March 31, 2022 December 31, 2021 Cash and cash equivalents $ 96,355 $ 117,871 Restricted Cash 14,077 13,807 Total cash, cash equivalents and restricted cash $ 110,432 $ 131,678 Property, Plant and Equipment, Net Property, plant and equipment includes land, buildings and improvements for datacenter facilities and leasehold improvements for the Company’s corporate headquarters. Property and equipment consists of computer, mining, network, electrical and other equipment, including right-of-use assets under finance leases. Property, plant and equipment, net is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized at cost and amortized over the shorter of their estimated useful lives or the lease term. Property, plant and equipment, net included construction in progress of $ 65.5 million and $ 42.6 million as of March 31, 2022 and December 31, 2021, respectively. 11 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Subsequent to January 1, 2022, future obligations related to finance leases are presented as Finance lease liabilities, current portion and Finance lease liabilities, net of current portion in the Company’s Consolidated Balance Sheets. Finance lease right-of-use assets are included within Property and equipment, net on our Condensed Consolidated Balance Sheets. Depreciation expense, including amortization of right-of-use assets held under finance leases, is primarily included in Cost of Revenue in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Prior to January 1, 2022, future obligations related to capital leases accounted for under ASC 840 are presented as Finance lease liabilities, current portion and Finance lease liabilities, net of current portion on the Company’s Consolidated Balance Sheets. Capital lease assets for those periods are included within Property and equipment, net on our Condensed Consolidated Balance Sheets. Amortization of capital lease assets for periods prior to January 1, 2022 are primarily included in Cost of Revenue in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. Self-mining computer equipment that is subsequently contracted for sale to customers is valued at the lower of cost or net realizable value, with any write-down recognized as Cost of Equipment Sales in the Company’s Consolidated Statements of Operations. Derivative Warrant Liabilities The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. The classification of derivative instruments, including whether such instruments should be classified as liabilities or as equity, is re-assessed at the end of each reporting period. The Public Warrants and the Private Placement Warrants are recognized as derivative liabilities. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s consolidated statements of operations and presented as Fair value adjustments on derivative warrant liabilities. The initial and subsequent estimated fair value of both the Public Warrants and Private Placement Warrants was based on the listed price in an active market for the Public Warrants. Recently Adopted Accounting Standards Simplifying Income Taxes In December 2019 , the FASB issued ASU 2019-12 , Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing the exceptions to the incremental approach for intra-period tax allocation in certain situations, the requirement to recognize a deferred tax liability for a change in the status of a foreign investment, and the general methodology for computing income taxes in an interim period when year-to date loss exceeds the anticipated loss for the year. The amendments also simplify the accounting for income taxes with regard to franchise tax, the evaluation of step up in the tax basis goodwill in certain business combinations, allocating current and deferred tax expense to legal entities that are not subject to tax and enacted change in tax laws or rates. The standard was applied on a prospective basis beginning January 1, 2022 and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements. Leases In February 2016, the FASB issued ASU No. 2016-02, Leases-(Topic 842). Under this new guidance, lessees are required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee’s right to use, or control the use of, a specified asset for the lease term (“ROU asset”). The Company adopted Topic 842 effective for the Company’s annual and interim reporting periods beginning January 1, 2022. The adoption of Topic 842 required the Company to recognize non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but it did not have a material effect on the Company’s results of operations or cash flows. Topic 842 also requires additional footnote disclosures to the Company’s consolidated financial statements. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The Company adopted the new standard on January 1, 2022 and used the effective date as the date of initial application. Consequently, financial information has not been updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2022. 12 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’, which permits the Company not to reassess prior conclusions about lease identification, lease classification and initial direct costs under the new standard. The Company has not elected the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company. The new standard also provides practical expedients for the Company’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company does not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company has not elected to apply the practical expedient to not separate lease and non-lease components for the Company’s leases as of the transition date of January 1, 2022 but may apply the practical expedient prospectively to certain asset classes. The cumulative effect of initially applying the new lease standard on January 1, 2022 is as follows: January 1, 2022 Beginning Balance Cumulative Effect Adjustment Beginning Balance, As Adjusted Assets Prepaid expenses and other current assets $ 30,111 $ ( 453 ) $ 29,658 Other noncurrent assets $ 21,045 $ 1,814 $ 22,859 Liabilities Accrued expenses and other $ 67,862 $ ( 188 ) $ 67,674 Other noncurrent liabilities $ 18,531 $ ( 1,173 ) $ 17,358 The most significant judgments and impacts upon adoption of the standard include the following: • We recognized right-of-use assets and operating lease liabilities for operating leases that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent. Deferred and prepaid rent are no longer presented separately but are included in the balance of operating lease right-of-use assets. • In determining the discount rate used to measure the right-of-use asset and lease liability, rates implicit in the leases were not readily available and therefore we used an estimate of our incremental borrowing rate. Our incremental borrowing rate was based on an estimated secured rate with reference to recent borrowings of similar collateral and tenure. • Certain line items in the Consolidated Balance Sheets have been renamed to align with the new terminology presented in the new lease standard; “Capital lease obligations, current portion” and “Capital lease obligations, net of current portion” are now presented as “Finance lease liabilities, current portion” and “Finance lease liabilities, net of current portion” on the Consolidated Balance Sheets, respectively. • Upon adoption on January 1, 2022, Operating lease right-of-use assets of $ 6.7 million were recorded in Other noncurrent assets , which included $ 0.5 million related to prepaid rent that was reclassified from Prepaid Expenses and other current assets and $ 4.8 million related to prepaid rent and other that had already previously been presented as Other noncurrent assets on the Consolidated Balance Sheets. In addition, upon adoption on January 1, 2022, the current portion of operating lease liabilities of $ 0.2 million were recorded in Accrued expenses and the noncurrent portion of operating lease liabilities of $ 1.2 million were recorded within Other noncurrent liabilities on the Consolidated Balance Sheets. 13 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Accounting Standards not yet adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Measurement of Credit Losses on Financial Instruments, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. This update will be effective for the Company with the annual reporting period beginning January 1, 2023, including interim periods within that reporting period. Should the company lose its status as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and its status as a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended, prior to this adoption date, the standard would be applicable in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Early adoption is permitted. The Company is currently evaluating the impacts the adoption of this standard will have on the consolidated financial statements. There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s consolidated financial statements . 14 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 3. ACQUISITIONS In June 2020, Core Scientific entered into an Asset Purchase Agreement with Atrio Inc. (“Atrio”) to acquire certain assets of Atrio in exchange for $ 1.2 million cash consideration and 0.5 million shares of the Company’s common stock. The Company and Atrio contemplated a valuation for the transaction of approximately $ 2.4 million based on an estimate of the fair value of the Company’s common stock of $ 2.19 per share which was allocated to cost of the acquired software intangible assets. In a separate transaction in June 2020, the Company entered into an agreement with RStor, Inc. (“RStor”) to obtain a non-exclusive license to three specific patents held by RStor for consideration of 0.4 million shares of the Company’s common stock. The Company and RStor contemplated a valuation for the transaction of approximately $ 0.9 million based on an estimate of the fair value of the Company’s common stock of $ 2.19 per share which was allocated to the cost of the acquired patent intangible assets. The software acquired from Atrio and the acquired patents from RStor are not businesses under ASC 805, Business Combinations, because substantially all the fair value of the acquired assets is concentrated in a single intellectual property asset. Accordingly, the asset purchases are accounted for as asset acquisitions where the cost of the acquisition, measured as the fair value of the cash consideration transferred and the common stock issued by the Company, is allocated to the assets acquired. In March 2022, the Company reclassified all the software intangible assets related to the Atrio and RStor asset acquisitions to held for sale as a result of the expected sale of the software anticipated to occur in 2022. As of March 31, 2021, the Company had $ 2.2 million of software intangible assets classified as held for sale and presented within Prepaid expenses and other current assets on the Company’s Consolidated Balance Sheets. The Company did not record any loss on the software intangible assets held for sale during the three months ended March 31, 2022 . Blockcap Acquisition On July 30, 2021, the Company acquired 100 % of the equity interest in Blockcap, one of its largest hosting customers. Blockcap is a blockchain technology company with industrial scale digital asset mining operations. Blockcap’s primary historical business was the mining of digital asset coins and tokens, primarily Bitcoin and, to a lesser extent, Siacoin and Ethereum. While Blockcap did sell or exchange the digital assets it mined to fund its growth strategies or for general corporate purposes from time to time, it generally retained its digital assets as investments in anticipation of continued adoption of digital assets as a “store of value” and a more accessible and efficient medium of exchange than traditional fiat currencies. In addition to mining, holding and exchanging digital assets, Blockcap also evaluated and completed investments in related technologies and ancillary businesses, including RADAR, an early stage company focused on technology enhancement and development in the digital asset industry that it acquired on July 1, 2021. The acquisition of Blockcap significantly expanded the Company’s self-mining operations and increased the number of miners it owns. The Company intends to utilize RADAR’s business assets and the technical expertise of its principals in enhancing the Company’s existing blockchain mining technology and software and in further strengthening the Company’s leadership position and value creation potential through the development of products and services that utilize blockchain technologies. Consideration consisted of the issuance of 113.9 million shares of the Company’s common stock, approximately 6.8 million shares of the Company’s restricted stock and approximately 7.3 million options to purchase shares of the Company’s common stock. The acquisition has been accounted for as a business combination using the acquisition method of accounting, whereby the net assets acquired and the liabilities assumed were recorded at fair value. The Company and Blockcap had preexisting relationships which were settled on the acquisition date. Using the estimated purchase price for the transaction, the Company has allocated the purchase price to identifiable assets and liabilities based upon preliminary fair value estimates. The excess of the purchase price over the fair value of the net identifiable assets acquired was allocated to goodwill. In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (not to exceed one year from the acquisition date). Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received. Specifically, the measurement period is still open for consideration transferred, property, plant and equipment, net and deferred tax liabilities as the Company is still in the process of obtaining information about certain shares allocated to Blockcap shareholders and certain transactions between Blockcap and Core that were outstanding as of July 30, 2021. The following table summarizes the fair values for each major class of assets acquired and liabilities assumed at the acquisition date. The Company retained the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities. Amounts initially disclosed for the estimated values of certain acquired assets and liabilities assumed were adjusted through March 31, 2022 based on information arising after the initial preliminary valuation. 15 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements PPA Allocation Consideration (in thousands) : 113.9 million common shares valued at $ 10.11 per share 1,2 $ 1,151,985 Fair value of replaced Blockcap share-based payments attributable to pre-combination service 3 21,768 Settlement of Blockcap debt 4 25,607 Settlement of preexisting contracts 5 ( 60,522 ) Total Consideration $ 1,138,838 Fair value of assets acquired, and liabilities assumed: Cash and cash equivalents $ 704 Digital assets-Bitcoin 73,304 Digital assets-Ethereum 365 Digital assets-Bitcoin cash 8 Digital assets-Siacoin 554 Digital assets-Other 3,329 Other current assets 633 Intangible assets, net 2,925 Property, plant and equipment, net 97,964 Other noncurrent assets 1,293 Total assets acquired 181,079 Accounts payable 492 Accrued expenses and other 22,647 Deferred revenue 414 Other current liabilities 7,204 Deferred tax liability 9,003 Total liabilities assumed $ 39,760 Total identifiable net assets $ 141,319 Goodwill on acquisition $ 997,519 1 113.9 million common shares represent the equivalent Core Scientific common shares issued to Blockcap shareholders as consideration for the purchase. 2 The price per share of our common shares was estimated to be $ 10.11 . As the Core Scientific common shares were not listed on a public marketplace, the calculation of the fair value of the common shares was subject to a greater degree of estimation. Given the absence of a public market, an estimate of the fair value of the common shares was required at the time of the Blockcap Acquisition. Objective and subjective factors were considered in determining the estimated fair value and because there was no active trading of the Core Scientific equity shares on an established securities market, an independent valuation specialist was engaged. The valuation was determined by weighting the outcomes of scenarios estimating share value based on both public company valuations and private company valuations. Both a market approach and common stock equivalency model were used to determine a range of outcomes, which were weighted based on probability to determine the result. 3 Reflects the estimated fair value of replaced Blockcap share-based payments allocated to purchase price based on the proportion of service related to the pre-combination period 4 Reflects the fair value of loans issued by the Company in July 2021 that were effectively used to settle debt that had previously been held by Blockcap. Refer to Note 5 for further discussion of the debt issuance. 5 Blockcap had preexisting hosting and equipment contracts with the Company that were effectively settled by the Company’s acquisition of Blockcap. As a result, the consideration transferred to Blockcap has been adjusted by the deferred revenue balances that were settled at the time of acquisition. Intangible Assets and Liabilities Goodwill with an assigned value of $ 1.00 billion represents the excess of the consideration transferred over the estimated fair values of assets acquired and liabilities assumed in the Blockcap acquisition. The goodwill recognized includes the assembled workforce of Blockcap and intangible assets that do not qualify for separate recognition. None of the goodwill resulting from the acquisition is deductible for tax purposes. All of the goodwill acquired is allocated to the Mining segment. Management believes the acquisition of Blockcap strengthens its presence in the data mining market due to the scale of its operations. These factors are the basis for the excess purchase price paid over the value of the assets acquired and liabilities assumed, resulting in goodwill. Other intangible assets acquired in the Blockcap acquisition consisted of $ 2.8 million developed technology intangibles and $ 0.1 million of customer relationships with a weighted-average useful life of 3 years. 16 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 4. DERIVATIVE WARRANT LIABILITIES As of March 31, 2022, the Company had 14.9 million warrants outstanding including: (a) 8.6 million Public Warrants and (b) 6.3 million Private Placement Warrants issued to XPDI Sponsor LLC (“Sponsor”) and certain institutional investors (“Anchor Investors”). Each Public Warrant and Private Placement Warrant became exercisable 30 days following the Closing Date of the XPDI Merger and may be exercised for one share of common stock at an exercise price of $ 11.50 per share. The Public Warrants and Private Placement Warrants expire January 19, 2027, which is five years after the Closing Date. Redemption of Public Warrants when the price per share of common stock equals or exceeds $ 18.00 . Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants: • in whole and not in part; • at a price of $ 0.01 per warrant; • upon a minimum of 30 days’ prior written notice of redemption to each warrant holder; and • if, and only if, the last reported sale price of common stock for any 20 trading days within a 30 -trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders equals or exceeds $ 18.00 per share (as adjusted). The Company will not redeem the warrants as described above unless a registration statement under the Securities Act covering the issuance of the shares of common stock issuable upon exercise of the warrants is then effective and a current prospectus relating to those shares of common stock is available throughout the 30 -day redemption period. If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of Public Warrants when the price per share of common stock equals or exceeds $ 10.00 Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants: • in whole and not in part; • at $ 0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to an agreed table based on the redemption date and the “fair market value” (as defined below) of common stock; • if, and only if, the the last reported sales price of the Company’s common stock for any twenty ( 20 ) trading days within the thirty ( 30 ) trading-day period ending on the third trading day prior to the date on which notice of the redemption is given (the “Reference Value”) equals or exceeds $ 10.00 per share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant); and • if the Reference Value is less than $ 18.00 per share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant), the Private Placement Warrants must also concurrently be called for redemption on the same terms as the outstanding Public Warrants, as described above. • The “fair market value” of common stock shall mean the volume weighted average price of common stock during the 10 trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. In no event will the warrants be exercisable in connection with this redemption feature for more than 0.361 shares of Class A common stock per warrant (subject to adjustment). Redemption of Private Placement Warrants The terms of redemption of Private Placement Warrants are identical in all respects to those for the Public Warrants except that, so long as they are held by the Sponsor, Anchor Investors or their permitted transferees they will not be redeemable , except as described above in Redemption of Public Warrants when the price per share of common stock equals or exceeds $ 10.00 . If the Private Placement Warrants are held by someone other than the Sponsor, the Anchor Investors or their respective permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants 17 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Registration If the Company fails to cause a registration statement for the underlying common shares to be effective by the sixtieth ( 60 th) day following the Closing Date, or fails to maintain such registration statement at any time, the holders of the Private Placement Warrants and Public Warrants may exercise such warrants on a cashless basis by exchanging the warrants for that number of shares of common stock equal to the lesser of (A) the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the Warrants, multiplied by the excess of the “Fair Market Value” (as defined below) less the Warrant Price by (y) the Fair Market Value and (B) the product of the number of Warrants surrendered and 0.361 , subject to adjustment. “Fair Market Value” shall mean the volume-weighted average price of the shares of common stock as reported during the ten ( 10 ) trading day period ending on the trading day prior to the date that notice of exercise is received. Classification Both the Public Warrants and Private Placement Warrants are classified as a liability on the Company’s Consolidated Balance Sheet because their settlement amount is subject to change based on the existence of an effective registration statement for the underlying shares and the holder of the warrant (for Private Placement Warrants only). As of March 31, 2022 the liability balance was $ 28.0 million . For the three months ended March 31, 2022, the Company recorded a mark to market gain of $ 5.9 million and $ 4.3 million within the Consolidated Statement of Operations for the Public Warrants and Private Placement Warrants, respectively. Refer to Note 7 for further information about the fair value measurement of the warrants. 18 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 5. NOTES PAYABLE Notes payable as of March 31, 2022 and December 31, 2021 consist of the following (in thousands): March 31 2022 December 31 2021 Kentucky note $ 909 $ 1,032 Stockholder loan 10,000 10,000 Genesis loan 27 552 NYDIG loan 58,190 67,435 Trinity loan 28,154 19,641 Bremer 19,902 15,066 Blockfi 74,130 60,000 Anchor Labs 20,000 — Mass Mutual Barings 30,000 — Secured Convertible Notes 1 224,211 220,871 Other Convertible Notes 2 305,782 301,226 Other 592 663 Total 771,897 696,486 Unamortized discount and debt issuance costs ( 2,964 ) ( 3,187 ) Fair value adjustments to convertible notes 393,738 34,910 Total notes payable, net $ 1,162,671 $ 728,209 1 Secured Convertible Notes (includes principal balance at issuance and PIK interest) which considers the minimum payoff at maturity of two times the face value of the note plus accrued interest. The minimum payoff at maturity related to the principal balance was $ 448.4 million on March 31, 2022. The minimum payoff at maturity related to the principal balance was $ 441.7 million on December 31, 2021. 2 Other Convertible Notes which considers the minimum payoff at maturity of one times the face value of the note plus accrued interest. Kentucky Note — In December 2018, the Company entered into a five -year secured promissory note agreement for $ 2.4 million in connection with the acquisition of property in Kentucky for datacenter development (“Kentucky note”). The note bears interest at a rate per annum of 5 % and the Company is required to make monthly payments of principal and interest. Interest expense on the notes has been recognized based on an effective interest rate of 5 % . The loan is secured by the underlying property purchased. Genesis Loan —In July 2020, the Company entered into a credit facility with Genesis Global Capital, LLC that provides capacity of up to $ 13.0 million to finance the Company’s acquisition of blockchain computing equipment (“Genesis Loan”). The Company borrowed $ 5.3 million in three installments and the borrowing capacity of the facility was reduced via an amendment in September 2020 to equal the actual amounts borrowed. The loans under the credit facility are secured by the blockchain computing equipment and the Company is required to comply with an approved mining strategy and other restrictions on use of the collateral. Loans under the credit facility have terms of 20 months, bear interest at a rate per annum of 16 % plus a fixed risk premium, and require monthly payments. Interest expense on the loans have been recognized based on an effective interest rate of 28 %, which includes the amortization of a debt discount. The loan is secured by blockchain computing equipment financed by the loans. NYDIG Loan —In October 2020, the Company entered into a master equipment finance agreement with NYDIG and received a loan of $ 0.8 million to finance the Company’s acquisition of blockchain computing equipment. In March 2021, the Company received $ 3.8 million of additional loans under the master equipment finance agreement with NYDIG to finance the Company’s acquisition of blockchain computing equipment. The loan bears an interest rate of 15 % and has a term of 24 months from issuance. Interest expense on the loan has been recognized based on an effective interest rate of 16 %. The loans are secured by the blockchain computing equipment financed by the loans. In May 2021, the Company received $ 13.4 million of additional loans under the master equipment finance agreement with NYDIG to finance the Company’s acquisition of blockchain computing equipment that bear an interest rate of 14.25 % and have a term of 24 months from issuance. Interest expense on the loans issued in May 2021 has been recognized based on an effective interest rate of 17 %. 19 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements In July 2021, the Company received blockchain computing equipment from NYDIG (which had been concurrently acquired by NYDIG from Blockcap in exchange for settlement of Blockcap’s debt with NYDIG) in exchange for $ 26.1 million of additional loans under the master equipment finance agreement with NYDIG that bear an interest rate of 14.25 % and have a term of 24 months from issuance. Interest expense on the loans issued in July 2021 has been recognized based on an effective interest rate of 16 %. In November 2021, the Company received blockchain computing equipment from NYDIG in exchange for $ 33.4 million of additional loans under the master equipment finance agreement with NYDIG that bear an interest rate of 11 % and have a term of 24 months from issuance. Interest expense on the loans issued in November 2021 has been recognized based on an effective interest rate of 11 %. Stockholder loan —In January 2021, the Company borrowed $ 10.0 million from a stockholder for the purchase of blockchain computing equipment. The loan bears interest at 10 % per annum over a two-year term. The loan was issued with a warrant to purchase 0.2 million shares of common stock at an exercise price of $ 4.21 per share. The warrant has a two-year term. The Company allocated proceeds of $ 9.5 million to the notes and $ 0.5 million to the warrants on a relative fair value basis. Interest expense on the loan has been recognized based on an effective interest rate of 20 %. The loan is secured by the blockchain computing equipment financed by the loan. Convertible Notes —In April 2021, the Company entered into a secured convertible note purchase agreement and issued $ 215.0 million of secured convertible notes to new and existing lenders (the “Secured Convertible Notes”). In addition, in August 2021 the Company entered into a convertible note purchase agreement and issued $ 299.8 million of convertible notes in August through November 2021 under substantially the same terms and conditions as the original April 2021 notes except that the August through November 2021 notes have a minimum payoff based on the face value plus accrued interest rather than two times the outstanding face amount plus accrued interest. In addition, the August through November 2021 notes were unsecured until an IPO or SPAC merger and then became secured pari passu with the Secured Convertible Notes in January 2022 upon the closing of the Merger Agreement with XPDI (together with the Secured Convertible Notes, the “Convertible Notes”). In addition, the Company also issued $ 15.2 million from issuance through March 31, 2022 as payment-in-kind interest on convertible notes outstanding during the period. The Convertible Notes have a maturity date of April 2025 and bear interest at a rate of 10 % per annum, of which 4 % is payable in cash and 6 % is payable in kind. Upon the closing of the Merger Agreement with XPDI in January 2022, the Convertible Notes became convertible into common shares at the option of the holder at a conversion price equal to $ 8.00 per share. The proceeds from the Convertible Notes were used, in part, to repay $ 30.0 million of senior secured loans to Silverpeak Credit Partners LP. As discussed in Note 7, the Company has elected to measure its Convertible Notes at fair value and accordingly recognized $ 13.1 million of debt issuance costs as incurred at the time of issuance within Interest Expense, Net in the Company’s Consolidated Statements of Operations and Comprehensive (loss) income. The Convertible Notes had a fair value of $ 923.7 million compared to a principal amount of $ 530.0 million at March 31, 2022. The Company presents changes in fair value of the Convertible Notes during the period as follows: (1) the 10 % contractual rate of interest on the convertible notes (consisting of 4 % cash interest and 6 % PIK interest) is presented as interest expense, net on the Consolidated Statements of Operations; (2) changes in fair value attributable to the Company’s own credit risk are presented within accumulated other comprehensive loss on the Consolidated Balance Sheets and as a component of other comprehensive income on the Consolidated Statements of Comprehensive (Loss) Income; and (3) other fair value changes are presented within other non-operating expense, net on the Consolidated Statements of Operations. The fair value of the Company’s convertible notes as of December 31, 2021 included the effect of a negotiation discount, which is a calibration adjustment that reflects the illiquidity of the instruments and the Company's negotiating position. Since the transaction was an orderly transaction, the Company deemed that the fair value equaled the transaction price at initial recognition. However, the closing of the merger of XPDI (which represents the occurrence of a qualified financing event as defined by the terms of the notes) in January 2022 resulted in the elimination of the negotiation discount along with other changes in fair value resulted in a significant increase in the fair value of the convertible notes (excluding interest expense and instrument-specific credit risk) of $ 386.0 million for the three months ended March 31, 2022. 20 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements The following summarizes the fair value adjustments and debt issuance costs recognized on the convertible notes (in thousands): Financial statement line item Three months ended March 31, 2022 Cash interest payments Interest expense, net $ 5,227 Payment-in-kind (PIK) interest Interest expense, net 7,851 Instrument specific credit risk Other comprehensive income ( 27,164 ) Other fair value adjustments Fair value adjustments on convertible notes 386,037 Total fair value adjustments $ 371,951 The principal amount of the Convertible Notes as of March 31, 2022 reflects the proceeds received plus any PIK interest added to the principal balance of the notes. Upon the closing of the Merger Agreement with XPDI in January 2022, the conversion price for the Convertible Notes became fixed at 80 % of the financing price ($ 8.00 per share of common stock) and the holders now have the right to convert at any time until maturity. At maturity, any Secured Convertible Notes not converted will be owed two times the original face value plus accrued interest; any other Convertible Notes (other than the Secured Convertible Notes) not converted will be owed the original face value plus accrued interest. In addition, at any time (both before and after the merger with XPDI), the Company has the right to prepay the Secured Convertible Notes at the minimum payoff of two times the outstanding face value plus accrued interest and for other Convertible Notes the outstanding face value plus accrued interest. All of the Convertible Notes, totaling $ 530.0 million as of March 31, 2022, are scheduled to mature on April 19th, 2025, which includes $ 224.2 million for the face value of the Secured Convertible Notes which have payoff at maturity of two times the face value of the note plus accrued interest. The total amount that would be owed on the Secured Convertible Notes outstanding as of March 31, 2022 if held to maturity was $ 448.4 million. The total amount that would be owed on the Convertible Notes if prepaid as of March 31, 2022 was $ 767.3 million. See Note 7 for further information on fair value measurement of the Convertible Notes. Trinity Loans —In August 2021, the Company entered into a $ 30.0 million master equipment finance facility agreement with Trinity Capital Inc. (“Trinity”) to finance the Company’s acquisition of blockchain computing equipment and received a loan of $ 1.0 million at close. The loan has a term of 36 months from issuance. Interest expense on the loan has been recognized based on an effective interest rate of 11.0 %. In November and December 2021, the Company borrowed $ 14.0 million and $ 5.0 million, respectively. The remaining balance of $ 10.0 million was drawn in February 2022. Bremer Loan – In October 2021, the Company entered into a lending agreement with Bremer Bank, National Association to borrow up to $ 16.2 million in two tranches through May 22, 2022 for the purchase of blockchain mining equipment and improvements to data center and infrastructure. In December 2021, the Company entered into an additional term loan to borrow up to $ 9.6 million. The Company borrowed $ 15.2 million in October through December 2021. The Company borrowed an additional $ 4.8 million in January through March 2022. The loans bear interest at 5.5 % annually and are due at the earlier of the date of sale of the underlying mining equipment or 60 months from issuance. Interest expense on the loans has been recognized based on an effective interest rate of 5.6 %. The loans require the Company to maintain the following financial covenants: (1) a minimum debt service coverage ratio (defined in the agreement as EBITDA divided by scheduled principal and interest payments) of not less than 1.2 :1, measured annually beginning December 31, 2022; and (2) a fixed charge coverage ratio (defined in the agreement as EBITDA minus net distributions divided by scheduled principal and interest payments) of 1 :1, measured annually beginning December 31, 2022. The loans are secured by a first priority security interest in certain of the assets financed by the loans. Additionally, an interest buydown agreement was made between Grand Forks Growth Fund and the Bank of North Dakota acting on behalf of the PACE Program for the purpose of a buydown on the interest for certain the Company’s loans financed through Bremer Bank. The total amount of interest buydown over the term of the loan is $ 0.8 million and payments will begin to be received beginning when principal payments are due from the Company beginning May 2022. In order to receive the interest buydown incentive, the Company must (a) continue operation in the jurisdiction for a minimum of five years from the benefit date, (b) employ 13 new full-time employees within two years of receiving the incentive and continue to keep them employed for the duration of the agreement and (c) continue to make debt payments and no event of default should occur. If the Company discontinues operation in the jurisdiction within the next five years , it is obligated to repay the incentive back to the Bank of North Dakota. If after two years , the Company does not employ 13 new full-time employees, the interest buydown will be prorated to reflect any partial fulfillment and the Company, at a minimum, is required to pay back the value of the incentive to the Bank of North Dakota. For the three months ended March 31, 2022 and 2021, there was no interest buydown. 21 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Blockfi – In December 2021, the Company entered into two lending agreements with Blockfi Lending, LLC to borrow up to $ 110.0 million for the purchase of blockchain mining equipment. The first agreement consists of $ 10.0 million and bears interest at 9.7 % with a term of 24 months from issuance. Interest expense on the loans issued in December 2021 has been recognized based on an effective interest rate of 10.1 %. The second agreement consists of $ 100.0 million and bears interest at 13.1 % with a term of 24 months from issuance. The company borrowed the first tranche totaling $ 60.0 million across the two loans in December 2021 and borrowed the second tranche of $ 20.0 million in January 2022. The remaining $ 30.0 million expired unused in March 2022. Interest expense on the loans issued in December 2021 has been recognized based on an effective interest rate of 13.1 %. The loans are secured by a first priority security interest in certain of the assets financed by the loans. Anchor Labs — In March 2022, the Company entered into a $ 20.0 million equipment loan and security agreement with Anchorage Lending CA, LLC. (“Anchor Labs”) to finance the Company’s purchase of blockchain computing equipment. The loan has a term of 24 months from issuance. Interest expense on the loan has been recognized based on an effective interest rate of 12.5 %. The loans are secured by a first priority security interest in certain of the assets financed by the loans. Mass Mutual Barings — In March 2022, the Company entered into a $ 100.0 million equipment loan and security agreement with Barings BDC, Inc., Barings Capital Investment Corporation and Barings Private Credit Corp. (“Barings”) to finance the Company’s purchase of blockchain computing equipment. In March 2022, the Company borrowed the first tranche of $ 30.0 million. The loan has a term of 36 months from issuance. Interest expense on the loan has been recognized based on an effective interest rate of 9.8 %. The loans are secured by certain blockchain computing equipment. 22 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 6. REVENUE The Company primarily generates revenue from hosting services, sales of computer equipment and digital asset mining income. The Company generally recognizes revenue when the promised service is performed, or control of the promised equipment is transferred to customers. Revenue excludes any amounts collected on behalf of third parties, including sales and indirect taxes. Deferred Revenue The Company records contract liabilities in Deferred Revenue on the consolidated balance sheets when cash payments are received in advance of performance and recognizes them as revenue when the performance obligations are satisfied. The Company’s deferred revenue balance as of March 31, 2022 and December 31, 2021 was $ 153.7 million and $ 136.4 million, respectively, all from advance payments received during the periods then ended. In the three months ended March 31, 2022, the Company recognized $ 36.8 million of revenue that was included in the deferred revenue balance as of the beginning of the year, primarily due to the deployment of customer equipment for which advanced payment had been received from customers prior to January 1, 2021. In the three months ended March 31, 2021, the Company recognized $ 32.3 million of revenue that was included in the deferred revenue balance as of the beginning of the year, primarily due to the performance of hosting services for which advance payments had been received from customers prior to January 1, 2020. Advanced payments for hosting services are typically recognized in the following month and advanced payments for equipment sales are generally recognized within one year. Performance Obligations The Company’s performance obligations primarily relate to hosting services and equipment sales. The Company has performance obligations associated with commitments in customer hosting contracts for future services and commitments to acquire and deploy customer equipment that have not yet been recognized in the financial statements. For contracts with original terms that exceed one year (typically ranging from 18 to 48 months), those commitments not yet recognized as of March 31, 2022 and 2021 were $ 989.4 million and $ 333.4 million, respectively. 23 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 7. FAIR VALUE MEASUREMENTS The Company measures certain assets and liabilities at fair value on a recurring or non-recurring basis in certain circumstances. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value: Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets. Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 — Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The Company uses observable market data when determining fair value whenever possible and relies on unobservable inputs only when observable market data is not available. Recurring fair value measurements The Public Warrants and the Private Placement Warrants are recognized as derivative liabilities in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s consolidated statements of operations. The initial and subsequent fair value estimates of the Public Warrants and Private Placement Warrants are based on the listed price in an active market for such warrants. The Company has elected to measure its Secured Convertible Notes at fair value on a recurring basis because the Company believes it better reflects the underlying economics of the convertible notes, which contain multiple embedded derivative features. The fair value of the Company’s convertible notes payable is determined using a market approach based on observable market prices for similar securities when available. When observable market data is not available, the Company uses an as-converted value plus risk put option model that includes certain unobservable inputs that may be significant to the fair value measurement such as probability of a financing event occurring (e.g., a SPAC merger or qualified financing), expected term, volatility and the negotiation discount. The fair value of the Secured Convertible Notes considers the minimum payoff at maturity of two times the face value of the note plus accrued interest, as well as the opportunity for appreciation if the value of the Company's stock increases 60 % or more relative to the pricing at the financing event (since the conversion price is set at 80 % of the stock price at the financing event, a stock price appreciation of 60 % would match the minimum payoff of two times the face value plus accrued interest). The fair value of the other Convertible Notes considers the minimum payoff at maturity of one times the face value of the note plus accrued interest, as well as the opportunity for appreciation if the value of the Company's stock falls no more than 20 % relative to the pricing at the financing event (since the conversion price is set at 80 % of the stock price at the financing event, a stock price decline of 20 % would match the minimum payoff of one times the face value plus accrued interest). Upon the closing of the Merger Agreement with XPDI in January 2022, the conversion price for the Convertible Notes became fixed at 80 % of the financing price ($ 8.00 per share of common stock) and the holders now have the right to convert at any time until maturity. The following presents the levels of the fair value hierarchy for the Company's convertible notes by issuance date measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands): 24 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements March 31, 2022 Fair value hierarchy Principal Level 1 Level 2 Level 3 Fair value Derivative warrant liabilities: Public Warrants $ — $ 16,215 $ — $ — $ 16,215 Private Placement Warrants — — 11,781 — 11,781 Total derivative warrant liabilities — 16,215 11,781 — 27,996 Convertible notes: April 19, 2021 1 $ 92,813 $ — $ — $ 192,223 $ 192,223 April 21, 2021 1 5,214 — — 10,796 10,796 April 23, 2021 1 46,928 — — 97,128 97,128 April 26, 2021 1 79,256 — — 163,959 163,959 August 20, 2021 2 51,362 — — 76,264 76,264 September 10, 2021 2 16,354 — — 24,200 24,200 September 23, 2021 2 77,202 — — 113,994 113,994 September 24, 2021 2 60,923 — — 89,943 89,943 September 27, 2021 2 2,004 — — 2,957 2,957 October 1, 2021 2 87,966 — — 129,718 129,718 November 10, 2021 2 9,971 — — 14,698 14,698 Accrued PIK interest 1,2,3 — — — 7,851 7,851 Total convertible notes 529,993 — — 923,731 923,731 Total liabilities measured at fair value on a recurring basis $ 529,993 $ 16,215 $ 11,781 $ 923,731 $ 951,727 December 31, 2021 Fair value hierarchy Principal Level 1 Level 2 Level 3 Fair value Convertible notes: April 19, 2021 1 $ 91,430 $ — $ — $ 101,078 $ 101,078 April 21, 2021 1 5,137 — — 5,674 5,674 April 23, 2021 1 46,229 — — 51,062 51,062 April 26, 2021 1 78,075 — — 86,165 86,165 August 20, 2021 2 50,597 — — 50,941 50,941 September 10, 2021 2 16,110 — — 16,472 16,472 September 23, 2021 2 76,051 — — 77,559 77,559 September 24, 2021 2 60,016 — — 61,179 61,179 September 27, 2021 2 1,974 — — 2,012 2,012 October 1, 2021 2 86,655 — — 87,150 87,150 November 10, 2021 2 9,823 — — 9,819 9,819 Accrued PIK interest 1,2,4 — — — 7,896 7,896 Total convertible notes $ 522,097 $ — $ — $ 557,007 $ 557,007 25 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 1 Secured Convertible Notes (includes principal balance at issuance and PIK interest) which considers the minimum payoff at maturity of two times the face value of the note plus accrued interest. 2 Other Convertible Notes (other than the Secured Convertible notes) which considers the minimum payoff at maturity of one times the face value of the note plus accrued interest. 3 Represents PIK interest accrued as of March 31, 2022 which will be recorded as additional principal for each respective convertible note on April 1, 2022. 4 Represents PIK interest accrued as of December 31, 2021 which will be recorded as additional principal for each respective convertible note on January 1, 2022. Level 3 Recurring Fair Value Measurements The following presents a rollforward of the activity for the Company's convertible notes measured at fair value on a recurring basis as of March 31, 2022 (in thousands): Convertible Notes Balance at December 31, 2021 $ 557,007 Issuances (including PIK principal recorded) 7,896 Settlements (including interest payments and PIK principal recorded) ( 13,123 ) Unrealized losses 371,951 Balance at March 31, 2022 $ 923,731 Securities are transferred from Level 2 to Level 3 when observable market prices for similar securities are no longer available and unobservable inputs becomes significant to the fair value measurement. All transfers into and out of level 3 are assumed to occur at the beginning of the quarterly reporting period in which they occur. As of March 31, 2022, Level 3 financial instruments included all the Convertible Notes as the effect of unobservable inputs became significant to the fair value measurement due to the time lapse between the issuance of the notes and the reporting date. The following presents significant Level 3 unobservable inputs used to measure fair value of certain convertible notes March 31, 2022 (dollars in thousands): Fair value Unobservable Input Low High Weighted Average 1 Convertible Notes $ 923,731 Expected term (years) 3.05 3.05 3.05 Volatility 45.2 % 45.2 % 45.2 % 1 Weighted average based on the fair value of convertible notes. Expected term is an input into the risk put option model that measures the length of time the instrument is expected to be outstanding before it is exercised or terminated. An increase in expected term, in isolation, would generally result in an increase in the fair value measurement of the convertible notes. Volatility is an input into the risk put option model that measures the variability in possible returns for the convertible notes based on how much the price of underlying shares change in value over time. An increase in volatility, in isolation, would generally result in an increase in the fair value measurement of the convertible notes. The increase or decrease in the fair value of the convertible notes resulting from changes to the expected term or volatility assumptions are not interrelated. The Company presents separately in other comprehensive income (loss) the portion of the total change in the fair value of the convertible notes that resulted from a change in the instrument-specific credit risk on the convertible notes. The amount of change in the fair value attributable to instrument-specific credit risk is determined by comparing the amount of the total change in fair value to the amount of change in fair value that would have occurred if the Company’s credit risk had not changed during the period as reflected in the discount rates applied to the debt and risk put option. 26 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Nonrecurring fair value measurements The Company’s non-financial assets, including digital assets, property, plant and equipment, goodwill, and intangible assets are measured at estimated fair value on a nonrecurring basis. These assets are adjusted to fair value only when an impairment is recognized, or the underlying asset is held for sale. Refer to the discussion of digital assets below for more information regarding fair value considerations when measuring the impairment of digital assets held. The Company classifies digital assets primarily as Level 1. The Company’s digital assets are accounted for as intangible assets with indefinite useful lives. The Company initially recognizes digital assets that are received as digital asset mining income based on the fair value of the digital assets. Digital assets that are purchased in an exchange of one digital asset for another digital asset are recognized at the fair value of the asset surrendered or at the fair value of the asset received if more readily apparent. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital asset at the time its fair value is being measured, which is measured on a daily basis. To the extent that an impairment loss is recognized, the loss establishes the new cost basis of the digital asset. In the three months ended March 31, 2022 and 2021, the Company recognized impairments of digital assets of $ 54.0 million and a nominal amount, respectively. For the three months ended March 31, 2022 and 2021, the Company recognized net gains of $ 2.2 million and a nominal amount, respectively, on sales of digital assets. Digital assets are available for use, if needed, for current operations and are classified as current assets on the Consolidated Balance Sheets, the details of which are presented below. March 31 2022 December 31 2021 Bitcoin (BTC) $ 307,172 $ 224,843 Ethereum (ETH) 6,474 4,665 Polygon (MATIC) 1,586 1,085 Siacoin (SC) 765 803 Dai (DAI) 8 1,353 Other 318 1,549 Total digital assets $ 316,323 $ 234,298 The Company does not have any off-balance sheet holdings of digital assets. No non-financial assets were classified as Level 3 as of March 31, 2022 or December 31, 2021. Fair value of financial instruments The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, net, accounts payable, notes payable and certain accrued expenses and other liabilities. The carrying amount of these financial instruments, other than notes payable discussed below, approximates fair value due to the short-term nature of these instruments. The fair value of the Company’s notes payable (excluding the Convertible Notes carried at fair value described above), which are carried at amortized cost, was determined based on a discounted cash flow approach using market interest rates of instruments with similar terms and maturities and an estimate for our standalone credit risk. We classified the other notes payable as Level 3 financial instruments due to the considerable judgment required to develop assumptions of the Company’s standalone credit risk and the significance of those assumptions to the fair value measurement. The estimated fair value of the Company’s other notes payable, including both the current and noncurrent portion, was $ 238.6 million at March 31, 2022 and $ 184.7 million at December 31, 2021. The carrying values of the notes payable, including both the current and noncurrent portion, was $ 238.9 million and $ 171.2 million at March 31, 2022 and December 31, 2021, respectively. 27 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 8. LEASES Lessee The Company has entered into non-cancellable operating and finance leases for office, data facilities, computer and networking equipment, electrical infrastructure, and office equipment, with original lease periods expiring through 2028. In addition, certain leases contain bargain renewal options extending through 2051. The Company recognizes lease expense for these leases on a straight-line basis over the lease term, which includes any bargain renewal options. The Company recognizes rent expense on a straight-line basis over the lease period. In addition to minimum rent, certain leases require payment of real estate taxes, insurance, common area maintenance charges, and other executory costs. Differences between rent expense and rent paid are recognized as adjustments to operating lease right-of-use assets on the unaudited consolidated balance sheets. For certain leases the Company receives lease incentives, such as tenant improvement allowances, and records those as adjustments to operating lease right-of-use assets and operating leases liabilities on the unaudited condensed consolidated balance sheets and amortizes the lease incentives on a straight-line basis over the lease term as an adjustment to rent expense. The components of operating and finance lease are presented on the Company’s Consolidated Balance Sheets follows (in thousands): Financial statement line item March 31, 2022 Assets: Operating lease right-of-use assets Other noncurrent assets $ 6,535 Financing lease right-of-use assets Property, plant and equipment, net $ 178,819 Liabilities: Operating lease liabilities, current portion Accrued expenses and other $ 132 Operating lease liabilities, net of current portion Other noncurrent liabilities $ 1,150 Finance lease liabilities, current portion Finance lease liabilities, current portion $ 34,405 Finance lease liabilities, net of current portion Finance lease liabilities, net of current portion $ 56,494 The components of lease expense were as follows (in thousands): Financial statement line item Three Months Ended March 31, 2022 Operating lease expense General and administrative expenses $ 154 Short-term lease expense General and administrative expenses 191 Financing lease expense: Amortization of right-of-use assets Cost of revenue 9,824 Interest on lease liabilities Interest expense, net 2,102 Total financing lease expense 11,926 Total lease expense $ 12,271 In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate is based on an estimated secured rate with reference to recent borrowings of similar collateral and tenure when available. Determining our incremental borrowing rate, especially if there are insufficient observable borrowings near the time of lease commencement, may require significant judgment. 28 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Information relating to the lease term and discount rate is as follows: March 31, 2022 Weighted Average Remaining Lease Term (Years) Operating leases 22.1 Financing leases 2.6 Weighted Average Discount Rate Operating leases 6.4 % Financing leases 10.2 % The following table summarizes the Company’s supplemental cash flow information: Three Months Ended March 31, 2022 Lease Payments Operating lease payments $ 101 Financing lease payments $ 12,357 Supplemental Noncash Information Operating lease right-of-use assets obtained in exchange for lease obligations $ — Financing lease right-of-use assets obtained in exchange for lease obligations $ 10,557 The Company’s minimum payments under noncancelable operating and finance leases having initial terms and bargain renewal periods in excess of one year are as follows at March 31, 2022, and thereafter (in thousands): Operating leases Financing leases Remaining 2022 $ 170 $ 33,435 2023 170 35,280 2024 170 31,650 2025 170 4,509 2026 170 3 2027 170 — Thereafter 1,251 — Total lease payments 2,271 104,877 Less: imputed interest 989 13,978 Total $ 1,282 $ 90,899 Operating leases In September 2021, the Company entered into operating lease agreements with Minnkota Power Cooperative to develop a hosting facility in Grand Forks, North Dakota as well as enter into a power supply purchase agreement to purchase 100 megawatts of power supply once construction of the hosting facility is complete. As a result of the agreements being entered into contemporaneously and in contemplation of one another, the agreements are considered to be a single unit of account and consideration has been allocated between lease and non-lease components based on relative standalone selling price with approximately $ 5.3 million allocated to the lease components and $ 2.6 million allocated to the non-lease components. Substantially all of the payments for the intended leases would be for a five-year to thirty-year term (comprising an initial five-year term with five five-year bargain renewal options to renew) with purchase options exercisable at any time for approximately $ 5.6 million less any rent paid to date and subject to certain other adjustments. 29 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements In addition to the above, in December 2021, the Company entered into an agreement to lease office space for its new corporate headquarters that the Company anticipates will commence in the second half of 2022. The lease includes base rent of approximately $ 14.0 million to be paid over a period of 130 months. Finance leases In December 2021, the Company entered into finance lease agreements with Liberty Commercial Finance LLC totaling $ 40.9 million for the purchase of bitcoin mining equipment, with a weighted average term of 3.2 years. The leases bear interest at a weighted average rate per annum of 12.6 % and the Company is required to make monthly payments of principal and interest. Interest expense on the lease has been recognized based on a weighted average effective interest rate of 12.6 %. In December 2021, the Company entered into finance lease agreements with MassMutual Asset Finance LLC totaling $ 50.0 million for the purchase of bitcoin mining equipment, with a weighted average term of 3.2 years. The leases bears interest at a rate per annum of 10 % and the Company is required to make monthly payments of principal and interest. Interest expense on the leases has been recognized based on an effective interest rate of 10 %. 30 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 9. COMMITMENTS AND CONTINGENCIES Legal Proceedings —The Company is subject to legal proceedings arising in the ordinary course of business. The Company accrues losses for a legal proceeding when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, the uncertainties inherent in legal proceedings make it difficult to reasonably estimate the costs and effects of resolving these matters. Accordingly, actual costs incurred may differ materially from amounts accrued and could materially adversely affect the Company’s business, cash flows, results of operations, financial condition and prospects. Unless otherwise indicated, the Company is unable to estimate reasonably possible losses in excess of any amounts accrued. As of March 31, 2022 and December 31, 2021, there were no material loss contingency accruals. Leases —See Note 8 for further information. Purchase obligations— As of March 31, 2022, the Company had outstanding agreements to purchase blockchain mining equipment totaling approximately $ 391.0 million of which approximately $ 256.2 million was paid as deposits for blockchain mining equipment scheduled to be delivered in 2022. As of the date that the financial statements were available to be issued, the aggregate amount of the Company’s purchase obligations totaled approximately $ 134.8 million, substantially all of which are expected to be settled within one year of the date that the financial statements were available to be issued. 31 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 10. CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company is authorized to issue 2.00 billion shares of preferred stock, $ 0.0001 as of March 31, 2022. Prior to the Merger with XPDI, the Company was authorized to issue 50.0 million, shares of preferred stock, $ 0.0001 par value. As of December 31, 2021, 10.8 million shares of preferred stock were issued and outstanding. Upon the closing of the merger with XPDI on January 19, 2022, each share of Series A and Series B Preferred Stock automatically converted into one share of Core Scientific common stock and each outstanding share of common stock issued as a result of the conversion of Series A and Series B Preferred Stock in connection with the Business Combination was cancelled and extinguished and converted into the right to receive a number of shares of New Core Common Stock equal to the Exchange Ratio of 1.6001528688 . All of the Company’s shares of Contingently Redeemable Convertible Preferred Stock were converted into 10.8 million shares of the Company’s common stock during the three months ended March 31, 2022. 32 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 11. STOCKHOLDERS' EQUITY Authorized Capital— As of March 31, 2022, the Company was authorized to issue 10.00 billion shares of common stock, $ 0.0001 par value. The holders of the Company’s common stock are entitled to one vote per share. In January 2021, in connection with the stockholder loan described in Note 5, the Company issued a warrant to the stockholder to purchase up to 0.2 million shares of common stock at an exercise price of $ 4.21 per share. The warrant is set to expire in January 2023 and is exercisable and unexercised as of March 31, 2022. As a result of the Business Combination, all of XPDI’s Class A Common Stock and Class B Common Stock automatically converted into 30.8 million shares of New Core Common Stock on a one -for-one basis. XPDI’s 8.6 million public warrants issued in its initial public offering (the “Public Warrants”) and 6.3 million warrants issued in connection with private placement at the time of XPDI’s initial public offering (the “Private Placement Warrants”) became warrants for New Core Common Stock. Following the Merger with XPDI, each share of common stock or warrant was converted to shares of New Core Common Stock or a warrant to purchase shares of New Core Common Stock based on an exchange ratio of 1.6001528688 . Warrant Exercises In March 2020, the Company issued warrants to the Company’s president and chief executive officer and a member of the Board of Directors to purchase up to 6.4 million shares of the Company’s common stock at an exercise price of $ 0.84 per share (as amended). In March 2022, 3.2 million of the warrants were exercised in a cashless exercise resulting in 2.9 million net shares issued to the warrant holder. In March 2020, the Company issued warrants to service providers in exchange for services provided related to the issuance of Series A Convertible Preferred Stock. The warrants were for an aggregate of 0.2 million shares at an exercise price of $ 4.27 per share. In February 2022, 0.2 million of the warrants were exercised in a cashless exercise resulting in 0.1 million net shares issued to the warrant holders. SPAC Vesting Shares 1.7 million common shares are subject to vesting requirements, as described further in Note 1. These contingently issuable shares do not require future service in order to vest and do not result in stock-based compensation expense. The SPAC Vesting Shares are accounted for as an equity contract, and meet the criteria for equity classification. The Company has recorded the SPAC Vesting Shares within additional paid-in capital on the Consolidated Balance Sheet as of March 31, 2022. Vendor Settlement In March 2022, the Company issued 1.6 million shares of the Company’s common stock related to a vendor liability that had been assumed by the Company in July 2021 as part of the Blockcap acquisition. Equity Incentive Plans The Company has outstanding awards under the 2018 Omnibus Incentive Plan (the “2018 Plan”), which has a 10 -year life for granting up to 132.0 million shares of common stock for awards. Awards granted under the 2018 Plan may be incentive stock options (must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock and stock units, performance awards and other cash-based or stock-based awards. Awards granted under the 2018 Plan are subject to a minimum vesting period of at least one year commencing from the date of grant. Additionally, options granted under the plan must expire within ten years of the grant date and must be granted with exercise prices of no less than the fair value of the common stock on the grant date, as determined by the Company’s Board of Directors. 33 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements In July 2021, the Company acquired Blockcap. Under the terms of the Blockcap merger agreement, (i) each stock option granted, whether vested or unvested, and each award of restricted stock under the Blockcap, Inc. Equity Incentive Plan (the “Legacy Blockcap Plan”) was assumed by the Company. In addition, the Radar Relay, Inc. Amended and Restated 2018 Equity Incentive Plan (the “RADAR Plan”) provides for the grant of stock options, restricted stock awards, and other awards to eligible employees, non-employee directors and consultants. On June 4, 2021, prior to its acquisition by the Company, Blockcap entered into an agreement and plan of merger with RADAR for all the issued and outstanding equity interests of RADAR, which merger closed on July 1, 2021 (the “Blockcap/RADAR Merger”) The RADAR Plan was assumed by us upon the closing of the Blockcap/RADAR Merger and the Blockcap acquisition. As of March 31, 2021, there were 14.0 million shares of common stock subject to outstanding awards under the Legacy Blockcap Plan and the RADAR Plan (the “Blockcap Plans.”) No new awards may be made under the Blockcap Plans subsequent to the closing of the Blockcap acquisition. At the Special Meeting in connection with the XPDI Merger, the stockholders of XPDI approved the Core Scientific, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). Awards granted under the 2021 Plan may be incentive stock options (must meet all statutory requirements), non-qualified stock options, stock appreciation rights, restricted stock and stock units, performance awards and other cash-based or stock-based awards. Awards granted under the 2021 Plan are subject to a minimum vesting period of at least one year commencing from the date of grant. Additionally, options granted under the plan must expire within ten years of the grant date and must be granted with exercise prices of no less than the fair value of the common stock on the grant date, as determined by the Company’s Board of Directors. Following the consummation of the Merger, the Company expects that its board of directors will make grants of awards under the Incentive Plan to eligible participants. The maximum number of shares of the Company’s common stock that may be issued under the 2021 Plan is 45.0 million shares. As of March 31, 2022, the Company had reserved shares of common stock for future issuances under the 2018 Plan and 2021 Plan as follows (in thousands): Blockcap Plans 2018 Plan 2021 Plan Options outstanding 7,332 24,610 — Unvested restricted stock and restricted stock units outstanding 4,830 92,070 — Vested restricted stock and restricted stock units outstanding 1,827 1,363 — Available for future stock option and restricted stock units and grants — 13,970 45,000 Total outstanding and reserved for future issuance 13,989 132,013 45,000 Stock-Based Compensation Stock-based compensation expense relates primarily to expense for restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock options. As of March 31, 2022, we had unvested or unexercised stock-based awards outstanding representing approximately 128.8 million shares of our common stock, consisting of approximately 96.9 million RSAs and RSUs and options to purchase approximately 31.9 million shares of our common stock with a weighted average exercise price of $ 8.76 and weighted average remaining life of 8.6 years. During the three months ended March 31, 2022, the Company granted 11.9 million restricted stock units to various employees and directors with a weighted-average grant-date fair value of $ 9.54 per share. In addition, in March 2022, the Company approved 1.4 million RSUs to be granted to various employees of the Company. Stock-based compensation expense for the three months ended March 31, 2022 and 2021 is included in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income as follows: 34 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Three Months Ended March 31, 2022 2021 Cost of revenue $ 2,039 $ — Research and development 1,882 — Sales and marketing 458 — General and administrative 21,418 588 Total stock-based compensation expense $ 25,797 $ 588 As of March 31, 2022, total unrecognized stock-based compensation expense related to unvested stock options was approximately $ 141.8 million, which is expected to be recognized over a weighted-average time period of 3.7 years. As of March 31, 2022, the Company had approximately $ 768.7 million of unrecognized stock-based compensation expense related to RSAs and RSUs, of which $ 34.4 million is expected to be recognized over a weighted-average time period of 3.3 years and $ 734.3 million is related to RSUs for which some or all of the requisite service had been provided under the service condition but had performance conditions that had not yet been achieved. For RSUs subject to both the service and performance conditions, the unrecognized compensation expense will be recognized as expense when it is probable that the performance conditions will be achieved. The performance conditions for the RSUs are satisfied upon the earlier of a change in control or an initial public offering. The closing of the Merger Agreement with XPDI in January 2022 did not meet the definition of a change in control or an initial public offering. The performance condition can be met in future years only with respect to a change in control or waiver of the condition by the Company’s board of directors. If the performance conditions become probable of being achieved before the end of the requisite service period, the unrecognized compensation expense for which requisite service has not been provided will be recognized as expense prospectively on an accelerated attribution basis over the remaining requisite service period. 35 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 12. INCOME TAXES Current income tax expense represents the amount expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized. The income tax expense and effective income tax rate for the three months ended March 31, 2022 and 2021 were as follows: Three Months Ended March 31, 2022 2021 (in thousands, except percentages) Income tax expense $ 42,406 $ — Effective income tax rate ( 10.0 ) % — % For the three months ended March 31, 2022, discrete tax expense of $ 7.3 million is included in the $ 42.4 million of income tax expense. The Company's estimated annual effective income tax rate without discrete items was ( 8.3 )%, compared to the US federal statutory rate of 21.0% due to the fair value adjustment on debt instruments ( 15.8 )%, change in valuation allowance ( 9.9 )%, non-deductible interest ( 2.2 )%, non-deductible employee costs ( 1.5 )% and other 0.1 %. No discrete tax expense was included in income tax expense for the three months ended March 31, 2021. The Company’s estimated annual effective income tax rate without discrete items was 0 %, compared to the US federal statutory rate of 21.0% due to the change in valuation allowance of ( 24.1 )% and other 3.1 %. 36 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 13. NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS Basic EPS is measured as the income or loss available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per-share basis from the potential conversion of convertible securities or the exercise of options and or warrants; the dilutive impacts of potentially convertible securities are calculated using the if-converted method; the potentially dilutive effect of options or warrants are computed using the treasury stock method. Securities that are potentially an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted EPS calculation. Upon the closing of the Merger Agreement with XPDI in January 2022, the Convertible Notes became convertible into common shares at the option of the holder at a conversion price equal to $ 8.00 per share and also began to meet the definition of a participating security. On or after the closing of the Merger, dividend payments made to equity holders of the Company are also made ratably to holders of the Convertible Notes on an as-converted basis. As a result, the Convertible Notes meet the definition of participating securities based on their respective rights to receive dividends and they are treated as a separate class of securities in computing basic EPS using the two-class method. Under the two-class method, all earnings (distributed and undistributed) are allocated to common stock and participating securities. However, undistributed losses are not allocated to the Convertible Notes under the two-class method because holders of the Convertible Notes do not have a contractual obligation to share in the losses of the Company. Diluted EPS for the Convertible Notes is calculated under both the two-class and if-converted methods, and the more dilutive amount is reported. Restricted stock awards assumed from Blockcap in July 2021 and the SPAC Vesting Shares issued as part of the XPDI Merger in January 2022 also have non-forfeitable rights to receive dividends, if declared, and meet the definition of participating securities. Because these instruments do not have a contractual obligation to share in the losses of the Company, undistributed losses are not allocated to them. As discussed in Note 1, the shares and corresponding capital amounts and earnings per share available for common stockholders prior to the Merger with XPDI have been retroactively restated as shares reflecting the exchange ratio established in the Merger. As a result of the Merger, the Company has retrospectively adjusted the weighted-average number of shares of common stock outstanding prior to January 19, 2022 by multiplying them by the exchange ratio of 1.6001528688 used to determine the number of shares of Class A common stock into which they converted. Three Months Ended March 31, 2022 2021 Net (loss) income $ ( 466,204 ) $ 6,849 Weighted average shares outstanding - basic 307,475 157,786 Add: Dilutive share-based compensation awards — 18,178 Weighted average shares outstanding - diluted 307,475 175,964 Net (loss) income per share - basic $ ( 1.52 ) $ 0.04 Net (loss) income per share - diluted $ ( 1.52 ) $ 0.04 Pote ntially dilutive securities includes securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive and contingently issuable shares for which all necessary conditions for issuance had not been satisfied by the end of the period. Potentially dilutive securities are as follows (in common stock equivalent shares): March 31, 2022 2021 Stock options 31,942 — Warrants 18,284 — Restricted stock and restricted stock units 96,900 61,452 Convertible Notes 66,249 — SPAC vesting shares 1,725 — Total potentially dilutive securities 215,100 61,452 37 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 14. SEGMENT REPORTING The Company has two operating segments: “Equipment Sales and Hosting” which consists primarily of its blockchain infrastructure and third-party hosting business and equipment sales to customers, and “Mining” consisting of digital asset mining for its own account. The blockchain hosting business generates revenue through the sale of consumption-based contracts for its hosting services which are recurring in nature. Equipment sales revenue is derived from its ability to leverage its partnership with leading equipme nt manufacturers to secure equipment in advance, which is then sold to its customers when they are unable to obtain them otherwise. The digital asset mining operation segment generates revenue from operating owned computer equipment as part of a pool of users that process transactions conducted on one or more blockchain networks. In exchange for these services, the Company receives digital assets. The primary financial measures used by the CODM to evaluate performance and allocate resources are revenue and gross profit. The CODM does not evaluate performance or allocate resources based on segment asset or liability information; accordingly, the Company has not presented a measure of assets by segment. The segments’ accounting policies are the same as those described in the summary of significant accounting policies. The Company excludes certain operating expenses and other expense from the allocations to operating segments. The following table presents revenue and gross profit by reportable segment for the periods presented (in thousands): Three Months Ended March 31, 2022 2021 Equipment Sales and Hosting Segment Revenue: Hosting revenue $ 33,214 $ 12,692 Equipment sales 26,305 31,926 Total revenue $ 59,519 $ 44,618 Cost of revenue: Cost of hosting services $ 31,231 $ 11,829 Cost of equipment sales 22,535 26,231 Total Cost of revenue $ 53,766 $ 38,060 Gross profit $ 5,753 $ 6,558 Mining Segment Digital asset mining income $ 133,000 $ 9,628 Total revenue $ 133,000 $ 9,628 Cost of revenue 68,750 1,653 Gross profit $ 64,250 $ 7,975 Consolidated total revenue $ 192,519 $ 54,246 Consolidated cost of revenue $ 122,516 $ 39,713 Consolidated gross profit $ 70,003 $ 14,533 For the three months ended March 31, 2022 and 2021, cost of revenue included depreciation expense of $ 2.2 million and $ 1.8 million, respectively, for the Equipment Sales and Hosting segment. For the three months ended March 31, 2022 and 2021, cost of revenue included depreciation expense of $ 39.4 million and $ 0.8 million , respectively for the Mining segment. 38 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements Concentrations of Revenue and Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Credit risk with respect to accounts receivable is concentrated with a small number of customers. The Company places its cash and cash equivalents with major financial institutions, which management assesses to be of high credit quality, in order to limit the exposure to credit risk. As of March 31, 2022 and December 31, 2021, all of the Company’s fixed assets were located in the United States. For the three months ended March 31, 2022 and 2021, all of the Company’s revenue was generated in the United States. For the three months ended March 31, 2022 and 2021, the concentration of customers comprising 10% or more of the Company’s total revenue, Equipment Sales and Hosting segment revenue was as follows: Three Months Ended March 31, Three Months Ended March 31, 2022 2021 2022 2021 Percent of total revenue: Percent of Equipment Sales and Hosting segment: Customer A 12 % N/A 39 % N/A B N/A 42 % N/A 51 % Blockcap N/A 21 % N/A 25 % A reconciliation of the reportable segment gross profit to (loss) income before income taxes included in the Company’s consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2022 and 2021 is as follows (in thousands): Three Months Ended March 31, 2022 2021 Reportable segment gross profit $ 70,003 $ 14,533 Gain from sales of digital assets 2,163 30 Impairment of digital assets ( 53,985 ) — Operating expense: Research and development 3,340 1,208 Sales and marketing 1,398 534 General and administrative 40,160 3,795 Total operating expense 44,898 5,537 Operating (loss) income ( 26,717 ) 9,026 Non-operating expense, net: Loss on debt extinguishment and other — 42 Interest expense, net 21,676 2,135 Other non-operating (income), net ( 357 ) — Fair value adjustments on convertible notes 386,037 — Fair value adjustments on derivative warrant liabilities ( 10,275 ) — Other non-operating (income), net ( 357 ) — Total non-operating expense, net 397,081 2,177 (Loss) income before income taxes ( 423,798 ) 6,849 Income tax expense 42,406 — Net (loss) income $ ( 466,204 ) $ 6,849 39 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 15. RELATED-PARTY TRANSACTIONS In the ordinary course of business, the Company enters into various transactions with related parties. The Company has agreements to provide hosting services to various entities that are managed and invested in by individuals that are directors and executives of the Company. For the three months ended March 31, 2022 and 2021, the Company recognized hosting revenue from the contracts with these entities of $ 5.9 million and $ 4.3 million , respectively. In addition, for the three months ended March 31, 2022 and 2021, the company recognized equipment sales revenue of $ 25.9 million and $ 7.9 million from these same various entities. As of both March 31, 2022 and December 31, 2021, the Company had accounts receivable of $ 0.3 million from these entities. The Company reimburses certain officers and directors of the Company for use of a personal aircraft for flights taken on Company business. F or the three months ended March 31, 2022, the Company incurred reimbursements of $ 0.5 million. The Company did not incur any reimburseme nts for the three months ended March 31, 2021. As of March 31, 2022, $ 0.3 million was payable. A nominal amount was payable at December 31, 2021. 40 Table of Contents Core Scientific, Inc. Notes to Unaudited Consolidated Financial Statements 16. SUBSEQUENT EVENTS Financing Transactions In April 2022, the Company borrowed an additional $ 0.7 million from Bremer to finance the construction of our North Dakota facility. In April 2022, the Company borrowed a second tranche from Mass Mutual Barings of $ 39.6 million to purchase blockchain equipment. In April 2022, the Company borrowed from $ 75.0 million on a bridge loan from B. Riley Financial, Inc. maturing in December 2022. The loan bears interest at a rate of 7.0 %. In April 2022, the Company borrowed $ 11.0 million from Liberty Commercial Finance for the purchase of blockchain equipment. The loan bears interest at 10.6 % with a term of 24 months. Leases In May 2022, the Company added $ 0.8 million to their existing lease agreements for the purchase of equipment. The loan bears interest at 7.7 % with a term of 36 months. Separation Agreement with Former Chief Financial Officer On April 5, 2022, Core Scientific, Inc. the Company issued a press release announcing that Michael Trzupek, Executive Vice President and Chief Financial Officer of the Company, notified the Board of Directors of the Company of his decision to resign from his position on April 4, 2022, effective immediately. On April 19, 2022, the Company and Mr. Trzupek reached an agreement regarding Mr. Trzupek’s separation from the Company (the “Separation Agreement”), effective May 6, 2022 (the “Separation Date”). As previously announced, Denise Sterling, the former Senior Vice President of Finance of the Company, assumed the role of Chief Financial Officer on April 5, 2022. Pursuant to the Separation Agreement, in exchange for certain releases of claims, Mr. Trzupek’s agreement to transition his responsibilities and duties to other Company personnel, and certain additional covenants related to cooperation and competitive activity, the Company will provide cash severance benefits to Mr. Trzupek of $ 75,000 , representing three months of base salary, to be paid in a single lump sum less any required taxes and other withholding amounts. He will also be entitled to any accrued but unpaid compensation for the period prior to the Separation Date. In addition, Mr. Trzupek will be deemed to have time vested in 1,200,000 of his outstanding restricted stock units, which will remain subject to certain transaction vesting terms, as detailed in the award agreements assumed by Power & Digital Infrastructure Acquisition Corp (“XPDI”) pursuant to Section 3.01(a)(iv) of the Agreement and Plan of Merger by and among XPDI et al and the Company, dated as of July 20, 2021, and he will be entitled to receive an additional 200,000 time-vested restricted stock units. The Separation Agreement contains mutual releases, subject to customary exceptions, and mutual covenants not to compete or disparage. 41 Table of Contents