Core Scientific, Inc./tx 10-K

Item 8. Financial Statements and Supplementary Data Our consolidated financial statements and the notes thereto, included in Part IV, Item 15(1)(a) herein, are incorporated by reference into this Item 8. 101 Report of Independent Registered Public Accounting Firm (PCAOB ID 688 ) To the Stockholders and Board of Directors of Core Scientific, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Core Scientific, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, comprehensive loss, changes in contingently redeemable convertible preferred stock and stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses, has a working capital deficit, and limited cash. In addition, the Company has filed voluntary petitions in the United States Bankruptcy Court for the Southern District of Texas seeking relief under Chapter 11 of the United States Code. As a result, substantial doubt exists regarding the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Adoption of New Accounting Standard As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2022 due to the adoption of ASU No. 2016-02, Leases (Topic 842) , as amended, effective January 1, 2022, using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2022. Los Angeles, CA April 3, 2023 102 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Core Scientific, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Core Scientific, Inc. and subsidiaries (Debtor-in-Possession) (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income (loss), changes in contingently redeemable convertible preferred stock and stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We served as the Company’s auditor from 2018 to 2021. Seattle, Washington March 31, 2022 except for the impact of the SPAC recapitalization as described in Note 4, Merger Agreement as to which the date is April 3, 2023 103 Core Scientific, Inc. (Debtor-in-Possession) Consolidated Balance Sheets (in thousands, except par value) December 31, 2022 2021 Assets Current Assets: Cash and cash equivalents $ 15,884 $ 117,871 Restricted cash 36,356 13,807 Accounts receivable, net of allowance of $ 8,724 and $ — , respectively 234 1,382 Accounts receivable from related parties 23 300 Deposits for equipment — 358,791 Digital assets 724 234,298 Prepaid expenses and other current assets 31,881 30,111 Total Current Assets 85,102 756,560 Property, plant and equipment, net 691,134 597,304 Operating lease right-of-use assets 20,430 — Goodwill — 1,055,760 Intangible assets, net 1,704 8,195 Other noncurrent assets 9,316 21,045 Total Assets $ 807,686 $ 2,438,864 Liabilities, Contingently Redeemable Preferred Stock and Stockholders’ (Deficit) Equity Current Liabilities: Accounts payable $ 53,641 $ 11,617 Accrued expenses and other current liabilities 17,952 67,862 Operating lease liabilities, current portion 769 — Deferred revenue 77,689 63,417 Deferred revenue from related parties 496 72,945 Finance lease obligations, current portion — 28,452 Notes payable, current portion 36,242 75,996 Total Current Liabilities 186,789 320,289 Finance lease obligations, net of current portion — 62,145 Operating lease liabilities, net of current portion 720 — Notes payable, net of current portion (includes $ — and $ 557,007 at fair value) — 652,213 Other noncurrent liabilities 2,210 18,531 Total liabilities not subject to compromise 189,719 1,053,178 Liabilities subject to compromise 1,027,313 — Total Liabilities 1,217,032 1,053,178 Contingently redeemable preferred stock; $ 0.0001 par value; 2,000,000 and 50,000 shares authorized at December 31, 2022 and 2021, respectively; — and 10,826 shares issued and outstanding at December 31, 2022 and 2021, respectively; $ — and 45,164 total liquidation preference at December 31, 2022 and 2021, respectively — 44,476 Commitments and contingencies (Note 14) Stockholders’ (Deficit) Equity: Common stock; $ 0.00010 par value; 10,000,000 and 10,000,000 shares authorized at December 31, 2022 and 2021, respectively; 375,225 and 271,576 shares issued and outstanding at December 31, 2022 and 2021, respectively 36 27 Additional paid-in capital 1,764,368 1,379,581 Accumulated deficit ( 2,173,750 ) ( 27,432 ) Accumulated other comprehensive loss — ( 10,966 ) 104 Total Stockholders’ (Deficit) Equity ( 409,346 ) 1,341,210 Total Liabilities, Contingently Redeemable Preferred Stock and Stockholders’ (Deficit) Equity $ 807,686 $ 2,438,864 See accompanying notes to consolidated financial statements. 105 Core Scientific, Inc. (Debtor-in-Possession) Consolidated Statements of Operations (in thousands, except per share amounts) Year Ended December 31, 2022 2021 2020 Revenue: Hosting revenue from customers $ 130,234 $ 62,350 $ 34,615 Hosting revenue from related parties 29,454 16,973 6,983 Equipment sales to customers 11,391 138,376 11,193 Equipment sales to related parties 71,438 109,859 1,402 Digital asset mining income 397,796 216,925 6,127 Total revenue 640,313 544,483 60,320 Cost of revenue: Cost of hosting services 169,717 77,678 36,934 Cost of equipment sales 67,114 177,785 11,017 Cost of digital asset mining 395,082 50,158 2,977 Total cost of revenue 631,913 305,621 50,928 Gross profit 8,400 238,862 9,392 (Loss) gain on legal settlement — ( 2,636 ) 5,814 Gain from sales of digital assets 44,298 4,814 69 Impairment of digital assets ( 231,315 ) ( 37,206 ) ( 4 ) Impairment of goodwill and other intangibles ( 1,059,265 ) — — Impairment of property, plant and equipment ( 590,673 ) — — Losses on exchange or disposal of property, plant and equipment ( 28,025 ) ( 118 ) ( 2 ) Operating expenses: Research and development 26,962 7,674 5,271 Sales and marketing 12,731 4,062 1,771 General and administrative 213,280 60,486 14,554 Total operating expenses 252,973 72,222 21,596 Operating (loss) income ( 2,109,553 ) 131,494 ( 6,327 ) Non-operating expenses, net: Loss on debt from extinguishment 287 8,016 1,333 Interest expense, net 96,826 44,354 4,436 Fair value adjustment on convertible notes 186,853 16,047 — Fair value adjustment on derivative warrant liabilities ( 37,937 ) — — Reorganization items, net ( 197,405 ) — — Other non-operating expenses, net 5,232 2 110 Total non-operating expense, net 53,856 68,419 5,879 (Loss) income before income taxes ( 2,163,409 ) 63,075 ( 12,206 ) Income tax (benefit) expense ( 17,091 ) 15,763 — Net (loss) income ( 2,146,318 ) 47,312 ( 12,206 ) Deemed dividend from common to preferred exchange — — ( 10,478 ) Net (loss) income attributable to common stockholders $ ( 2,146,318 ) $ 47,312 $ ( 22,684 ) Net (loss) income per share (Note 18): Basic $ ( 6.30 ) $ 0.23 $ ( 0.14 ) Diluted $ ( 6.30 ) $ 0.20 $ ( 0.14 ) Weighted average shares outstanding: 106 Basic 340,647 207,263 157,602 Diluted 340,647 233,305 157,602 See accompanying notes to consolidated financial statements. 107 Core Scientific, Inc. (Debtor-in-Possession) Consolidated Statements of Comprehensive (Loss) Income (in thousands) Year Ended December 31, 2022 2021 2020 Net (loss) income $ ( 2,146,318 ) $ 47,312 $ ( 12,206 ) Other comprehensive income (loss), 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 $— 83,579 ( 10,966 ) — Release to Reorganization items, net of accumulated 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 $— ( 72,613 ) — — Total other comprehensive income (loss), net of income taxes 10,966 ( 10,966 ) — Comprehensive (loss) income $ ( 2,135,352 ) $ 36,346 $ ( 12,206 ) See accompanying notes to consolidated financial statements. 108 Core Scientific, Inc. (Debtor-in-Possession) Consolidated Statements of Changes in Contingently Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity (in thousands) Contingently Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ (Deficit) Equity Shares Amount Shares Amount Balance at January 1, 2020 (as previously reported) 4,421 $ 29,526 99,141 $ 1 $ 168,866 $ ( 62,538 ) $ — $ 106,329 Retroactive application of the recapitalization 2,653 — 59,499 15 ( 15 ) — — Balance at January 1, 2020, as adjusted 7,074 29,526 158,640 16 168,851 ( 62,538 ) — 106,329 Net loss — — — — — ( 12,206 ) — ( 12,206 ) Stock-based compensation — — — — 3,037 — — 3,037 Exchange of common stock for Series A contingently redeemable convertible preferred stock 2,882 12,308 ( 1,754 ) — ( 12,308 ) — — ( 12,308 ) Issuance of Series A contingently redeemable convertible preferred stock 366 1,545 — — — — — — Issuance of Series B contingently redeemable convertible preferred stock 502 1,097 — — — — — — Issuance of common stock - asset acquisition — — 899 — 1,967 — — 1,967 Exercise of warrants and stock options — — — — 2,405 — — 2,405 Balance at December 31, 2020 10,826 $ 44,476 157,786 $ 16 $ 163,952 $ ( 74,744 ) $ — $ 89,224 Net income — — — — — 47,312 — 47,312 Other comprehensive loss, net of income taxes — — — — — — ( 10,966 ) ( 10,966 ) Stock-based compensation — — 40 — 38,937 — — 38,937 Exercise of stock options — — 14 — 7 — — 7 Issuances of common stock - business combination — — 113,456 11 1,173,753 — — 1,173,764 Issuances of common stock - legal settlements — — 240 — 2,436 — — 2,436 Exercise of warrants and stock options — — 40 — 496 — — 496 Balance at December 31, 2021 10,826 $ 44,476 271,576 $ 27 $ 1,379,581 $ ( 27,432 ) $ ( 10,966 ) $ 1,341,210 Net loss — — — — — ( 2,146,318 ) — ( 2,146,318 ) Other comprehensive income, net of income taxes — — — — — — 10,966 10,966 Stock-based compensation — — — — 182,894 — — 182,894 Exercise of stock options — — 1,321 — 3,846 — — 3,846 Restricted stock awards issued, net of shares withheld for tax withholding obligations — — 43,762 4 ( 31,650 ) — — ( 31,646 ) Restricted stock awards forfeited — — ( 2,456 ) — — — — — Exercise of convertible notes — — 197 — 1,574 — — 1,574 Cashless exercise of warrants — — 3,001 — — — — — 109 Issuances of common stock - equity line of credit — — 13,355 1 21,200 — — 21,201 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 Issuances of common stock - financing transaction fees — — 1,285 — 2,960 — — 2,960 Issuances of common stock - vendor settlement — — 1,580 — 12,674 — — 12,674 Costs attributable to issuance of common stock and equity instruments - Merger with XPDI — — — — ( 16,642 ) — — ( 16,642 ) Balance at December 31, 2022 — $ — 375,225 $ 36 $ 1,764,368 $ ( 2,173,750 ) $ — $ ( 409,346 ) See accompanying notes to consolidated financial statements. 110 Core Scientific, Inc. (Debtor-in-Possession) Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from Operating Activities: Net (loss) income $ ( 2,146,318 ) $ 47,312 $ ( 12,206 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 225,259 33,362 9,403 Amortization of operating lease right-of-use assets 834 — — Stock-based compensation 182,894 38,937 3,037 Digital asset mining income ( 397,796 ) ( 216,925 ) ( 6,127 ) Deferred income taxes ( 18,521 ) 9,528 — Loss on legal settlements — 2,636 — Gain on sale of intangible assets ( 5,904 ) — — Loss on debt extinguishment 287 8,016 1,333 Fair value adjustment on derivative warrant liabilities ( 37,937 ) — — Fair value adjustment on convertible notes 186,853 31,217 — Fair value adjustment on other liabilities 9,498 — — Equity line of credit expenses 1,668 — — Amortization of debt discount and debt issuance costs 7,135 1,374 1,300 Losses on disposals of property, plant and equipment 28,025 118 2 Impairments of digital assets 231,315 37,206 4 Impairment of goodwill, other intangibles and property, plant and equipment 1,649,938 — — Allowance for doubtful accounts 9,004 — 616 Reorganization ( 199,707 ) — — Changes in working capital components: Accounts receivable, net ( 7,856 ) ( 7,421 ) ( 1,303 ) Accounts receivable from related parties 277 16 ( 243 ) Digital assets 400,055 24,011 6,090 Deposits for equipment for sales to customers 50,174 ( 244,399 ) ( 54,736 ) Prepaid expenses and other current assets 51,818 ( 34,076 ) ( 2,353 ) Accounts payable 26,713 ( 21,991 ) ( 1,770 ) Accrued expenses and other 17,229 56,200 1,625 Deferred revenue 16,483 184,340 30,009 Deferred revenue from related parties ( 72,449 ) Other noncurrent assets and liabilities, net ( 3,784 ) ( 6,196 ) 1,554 Net cash provided by (used in) operating activities 205,187 ( 56,735 ) ( 23,765 ) Cash flows from Investing Activities: Purchases of property, plant and equipment ( 383,980 ) — — Cash paid in acquisitions — ( 365,210 ) ( 13,668 ) Deposits (credits) for self-mining equipment ( 217,677 ) 704 ( 1,568 ) Proceeds from sales (acquisition) of intangibles 10,850 ( 59,275 ) — Other 29 ( 59 ) 92 Net cash used in investing activities ( 590,778 ) ( 423,840 ) ( 15,144 ) Cash flows from Financing Activities: Proceeds from exercise of stock options and warrants 25,049 513 2,642 Proceeds from the XPDI merger, net of transaction costs 195,010 — — Proceeds from debt, net of issuance costs 261,349 670,750 45,178 Repurchase of common shares to pay employee withholding taxes ( 31,646 ) — — Principal repayments of finance leases ( 30,319 ) ( 7,768 ) ( 1,831 ) Payment for transaction costs — ( 10,682 ) — Principal payments on debt ( 113,290 ) ( 49,281 ) ( 5,266 ) Net cash provided by financing activities 306,153 603,532 40,723 (Decrease) increase in cash, cash equivalents, and restricted cash ( 79,438 ) 122,957 1,814 Cash, cash equivalents and restricted cash—beginning of period 131,678 8,721 6,907 Cash, cash equivalents and restricted cash—end of period $ 52,240 $ 131,678 $ 8,721 Supplemental disclosure of other cash flow information: Cash paid for interest $ 86,010 $ 38,180 $ 2,903 Income tax payments $ 5,756 $ 9,619 $ — 111 Supplemental disclosure of noncash investing and financing activities: Property, plant and equipment obtained in exchange transaction $ 62,338 $ — $ — Noncash consideration paid for acquisitions $ — $ 1,138,838 $ 1,966 Accrued capital expenditures $ 69,286 $ 9,002 $ 2,544 Increase in notes payable for acquisition of property, plant and equipment $ — $ — $ 19,882 Decrease in notes payable in exchange for equipment $ — $ 6,842 $ 7,000 Cashless exercise of warrants $ 3,001 $ — $ — Property, plant and equipment acquired under finance leases $ — $ 93,956 $ — Payment-in-kind interest 31,382 $ 7,274 $ — Common stock issuances for acquisition of long-lived assets $ — $ — $ 1,486 Certain prior year amounts have been reclassified for consistency with the current year presentation. See accompanying notes to consolidated financial statements. 112 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to 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. (“Old Core”) pursuant to an amendment to its Certificate of Incorporation dated June 12, 2018. On August 17, 2020 Old Core engaged in a holdco restructuring to facilitate a borrowing arrangement by Old Core pursuant to which Old Core 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 Old Core became the stockholders of Core Scientific Holding Co.In July 2021, Core Scientific Holding Co. completed the acquisition of Blockcap, Inc. (“Blockcap”), one of Old Core’s largest hosting customers. Prior to its acquisition, Blockcap had retained Core Scientific Holding Co to host in the data centers operated by Core Scientific Holding Co Blockcap’s industrial scale digital asset mining operations. On January 19, 2022, following the approval at the special meeting of the stockholders of Power & Digital Infrastructure Acquisition Corp., a Delaware corporation (“XPDI”), Core Scientific Holding Co. merged with 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. 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 a best-in-class large-scale operator of dedicated, purpose-built facilities for digital asset mining and a premier provider of blockchain infrastructure, software solutions and services. We mine digital assets for our own account and provide colocation hosting services for other large-scale miners. We are one of the largest blockchain infrastructure, hosting provider and digital asset mining companies in North America, with approximately 457 MW of power as of December 31, 2021, and 592 MW of power as of December 31, 2022. We predominately mine bitcoin for third-party hosting customers and for our own account at our eight fully operational data centers in Georgia ( 2 ), Kentucky ( 1 ), North Carolina ( 2 ), North Dakota ( 1 ) and Texas ( 2 ). In February 2022, the Muskogee City-County Port Authority (Oklahoma) announced an agreement with us to develop a 500 MW data center at the Port of Muskogee John T. Griffin Industrial Park which remains substantially undeveloped. Our hosting colocation business provides a full suite of services to digital asset mining customers. We provide deployment, monitoring, troubleshooting, optimization and maintenance of our customers’ digital asset mining equipment and provide necessary electrical power and repair and other infrastructure services necessary to operate, maintain and efficiently mine digital assets. We operate in two segments: “mining” consisting of digital asset mining for our own account, and “hosting and equipment sales” consisting of our blockchain infrastructure and third-party hosting business, and associated sales of mining equipment to customers. Our business strategy is to grow our revenue and profitability by increasing the capacity and efficiency of our self-mining fleet and by enhancing our third-party colocation business. We intend to strategically develop the infrastructure necessary to support business growth and profitability and take advantage of adjacent opportunities that leverage our mining expertise and capabilities. Chapter 11 Filing On December 21, 2022, the Company and certain of its affiliates (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) seeking relief under Chapter 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 Cases are jointly administered under Case No. 22-90341. The Debtors continue to operate their business and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors have filed various “first day” motions with the Bankruptcy Court requesting customary relief, which were generally approved by the Bankruptcy Court on December 22, 2022, that have enabled the Company to operate in the ordinary course while under Chapter 11 protection. For detailed discussion about the Chapter 11 Cases, refer to Note 3 — Chapter 11 Filing and Other Related Matters. 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. 113 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. Going Concern The consolidated financial statements have been prepared on a going concern basis. For the year ended December 31, 2022, the Company generated a net loss of $ 2.1 billion. The Company had unrestricted cash and cash equivalents of $ 15.9 million as of December 31, 2022, compared to $ 117.9 million as of December 31, 2021. The decrease in cash and cash equivalents for the year ended December 31, 2022 primarily reflected $ 205.2 million of cash provided by operating activities (including $ 58.1 million of interest payments on debt), $ 590.8 million of cash used in investing activities (including $ 384.0 million of purchases of property, plant and equipment and $ 217.7 million of deposits for self-mining equipment), partially offset by $ 306.2 million of cash provided by financing activities (including $ 113.3 million of principal payments on debt). The Company has historically generated cash primarily from the issuance of common stock and debt, through sales of digital assets received as digital asset mining revenue and from operations through contracts with customers. During the year ended December 31, 2022, the average price of bitcoin declined to $ 28,198 compared to $ 47,437 for the year ended December 31, 2021. At the same time the Company’s power costs in its Mining Segment increased $ 136.5 million compared to the year ended December 31, 2021, reflecting increases in both power usage and power rates. These factors contributed to the Company’s gross profit of $ 8.4 million for the year ended December 31, 2022, as compared to a gross profit of $ 238.9 million for the year ended December 31, 2021. In addition, as discussed in Note 14 — Commitments and Contingencies, in July 2022, one of the Company’s largest customers filed for voluntary relief under chapter 11 of the Bankruptcy Code. Our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the restructuring to meet our obligations and operating needs. As a result of risks and uncertainties related to (i) the Company’s ability to successfully consummate the Plan and emerge from the Chapter 11 Cases, and (ii) the effects of disruption from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern. For detailed discussion about the Chapter 11 Cases and the Plan, refer to Note 3 — Chapter 11 Filing and Other Related Matters. Debtor-in Possession In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to certain motions and applications intended to limit the disruption of the bankruptcy proceedings on our operations (the First Day Motions) and other motions filed with the Bankruptcy Court, the Bankruptcy Court has authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to obtain DIP financing, pay employee wages and benefits, settle certain de minimis disputes and pay vendors and suppliers in the ordinary course for all goods and services. For detailed discussion about the Chapter 11 Cases, refer to Note 3 — Chapter 11 Filing and Other Related Matters. 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 assumptions used to estimate its ability to continue as a going concern, 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 digital assets, goodwill, other intangible assets and property, plant and equipment, the fair value of convertible debt, derivative warrants, 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. 114 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 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 December 31, 2022, cash equivalents included $ 10.2 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 under the Original DIP Credit Agreement and 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 Company’s Consolidated Balance Sheets to the total of the same amount shown in the consolidated statements of cash flows (in thousands): December 31, 2022 2021 Cash and cash equivalents $ 15,884 $ 117,871 Restricted Cash 36,356 13,807 Total cash, cash equivalents and restricted cash $ 52,240 $ 131,678 Accounts Receivable and Allowance for Doubtful Accounts The Company records accounts receivable at the amount billed to the customer based on the contractual terms, net of the allowance for doubtful accounts. The Company records an allowance for doubtful accounts based on an estimate of amounts that are not collectible. The Company’s credit risk is mitigated by certain customer prepayments, and for transactions that are not prepaid, the relatively short collection period. The Company does not require collateral for accounts receivable, however, the Company’s hosting customer agreements allow the Company to use customer equipment for processing transactions on digital asset networks until the Company has recovered the past due receivables. Accounts receivable also includes sales tax receivable. The Company records adjustments to the allowance when new information becomes available that indicates they are required. The Company writes off accounts receivable in the period in which it deems the receivable to be uncollectible. The Company records recoveries of accounts receivable previously written off when it is known that they will be received. The Company’s allowance for doubtful accounts was $ 8.7 million as of December 31, 2022. The Company had no allowance for doubtful accounts as of December 31, 2021. Valuation of Common Stock The Company determined the fair value of New Core Common Stock using the most observable inputs available, including quoted prices of XPDI Class A Common Stock and sales the Company’s Series A and Series B Contingently Redeemable Convertible Preferred Stock, discussed in Note 15 — Contingently Redeemable Convertible Preferred Stock. The Company also uses the market approach, which estimates the value of the Company’s business by applying valuation multiples derived from the observed valuation multiples of comparable public companies to the Company’s expected financial results. The Company retained the services of certified valuation specialists to assist with the valuation of the Company’s common stock. Applying these valuation and allocation approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, such as those regarding the Company’s expected future revenue, expenses, valuation multiples, the selection of comparable public companies and the probability of future events. Changes in any or all of these estimates and assumptions, or the relationships between these assumptions, impact the Company’s valuation as of each valuation date and may have a material impact on the valuation of the Company’s common stock and common stock warrants issued with the Company’s debt and equity instruments. Digital Assets The Company’s digital asset policy prior to the Blockcap acquisition on July 30, 2021, included selling all digital assets and converting them into fiat currency shortly after they are mined, typically within 1-3 days, in order to fund the growth of the Company’s operations. Following the Blockcap acquisition, the Company significantly expanded its self-mining operation and consequently reevaluated its digital asset investment policy and, at that time, began holding a more significant portion of its digital assets mined on its balance sheet. Since that time, the Company has sold or held its digital assets as dictated by liquidity and funding 115 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements needs. Sales of digital assets awarded to the Company through its self-mining activities are classified as cash flows from operating activities regardless of the length of time for which the digital assets are held. 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 revenue based on the fair value of the digital assets when received. 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. As indefinite lived intangible assets digital assets are not amortized, but are evaluated and assessed for impairment on at least an annual basis and more frequently in the interim when indicators of impairment exist. Impairment is indicated and recognized when the carrying amount of the digital asset lot exceeds its fair value. Impairment is measured using quoted prices of the digital asset at the time its fair value is being assessed. Quoted prices, including intraday low prices, are collected and utilized in impairment testing and measurement on a daily basis. To the extent that an impairment loss is recognized, the loss establishes the new cost basis of the digital asset. For the years ended December 31, 2022, 2021 and 2020, the Company recognized impairments of digital assets of $ 231.3 million, $ 37.2 million, and nil respectively. For the years ended December 31, 2022, 2021 and 2020, the Company recognized net gains of $ 44.3 million, $ 4.8 million, and $ 0.1 million respectively, on sales of digital assets. Activity related to our digital asset balances for the years ended December 31, 2022 and 2021 were as follows (in thousands): December 31, 2022 December 31, 2021 Digital assets, beginning of period $ 234,298 $ 63 Digital asset mining revenue 397,796 216,925 Blockcap acquisition — 77,560 Proceeds from sales of digital assets and other ( 444,353 ) ( 27,858 ) Gain from sales of digital assets 44,298 4,814 Impairment of digital assets ( 231,315 ) ( 37,206 ) Digital assets, end of period $ 724 $ 234,298 Digital assets are available to be sold as a source of funds, if needed, for current operations and are classified as current assets on the Company’s Consolidated Balance Sheets, the details of which are presented below. December 31 2022 December 31 2021 Bitcoin (BTC) $ 724 $ 224,843 Ethereum (ETH) — 4,665 Other — 4,790 Total digital assets $ 724 $ 234,298 The Company does not have any off-balance sheet holdings of digital assets. 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 property and equipment 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. Future obligations related to finance leases are presented as Finance lease obligations, current portion and Finance lease obligations, net of current portion in the Company’s Consolidated Balance Sheets. Depreciation expense, including amortization of assets held under finance leases, is primarily included in Cost of Revenue in the Company’s Consolidated Statements of Operations. 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. 116 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Long-Lived Asset Impairments The Company tests long-lived asset groups for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include property, plant and equipment and intangible assets subject to amortization. A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell. See Note 5 - Property, Plant and Equipment, net for additional discussion of long-lived asset impairments during the year ended December 31, 2022. Goodwill The total purchase price of any of the Company’s acquisitions is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. When stock is issued as consideration, the fair value assigned to the tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions around the valuation of the Company’s common stock at the time of the acquisition. The Company does not amortize goodwill, but tests it for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting units are less than their carrying amounts as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or chooses not to perform a qualitative assessment, then the quantitative goodwill impairment test will be performed. The quantitative test compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the excess of the carrying amount over the fair value is recognized as an impairment loss, and the resulting measurement of goodwill becomes its new cost basis. As of December 31, 2022, the Company had no remaining Goodwill. As of December 31, 2021, the carrying amount of Goodwill was $ 1.06 billion with no accumulated impairment losses or impairment losses for the year. See Note 6 - Goodwill for additional discussion on goodwill and its impairments during the year ended December 31, 2022. 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 have been recognized as derivative liabilities. Accordingly, the Company recognized the warrant instruments as liabilities at fair value and adjusted the instruments to fair value at each reporting period. The liabilities were subject to re-measurement at each balance sheet date until exercised, and any change in fair value was recognized in the Company’s Consolidated Statements of Operations and presented as fair value adjustment 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. After the Petition Date, discussed in Note 3 - Chapter 11 Filing and Other Related Matters below, the Public Warrants and Private Placement Warrants were moved to liabilities subject to compromise. See Note 10 - Derivative Warrant Liabilities for additional discussion. Debt Issuance Costs Debt issuance costs are capitalized and amortized over the term of the associated debt. Debt issuance costs are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability consistent with the debt discount. 117 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Revenue From Contracts With Customers - Digital Asset Mining Income The Company derives its digital asset mining income from operating its owned computer equipment as part of a pool of users, facilitated by a pool operator, that processes transactions conducted on one or more blockchain networks. The contracts with pool operators are terminable at any time by either party. In exchange for providing computing power to the pool, the Company is entitled to receive digital currency assets from the mining pool operator which is a variable amount based on either (a) the amount of computing power the Company has contributed to the mining pool or (b) a fractional share of the digital currency asset award the mining pool operator receives from the blockchain network upon successfully adding a block to the blockchain, based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in processing the block. Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. Providing such computing power is the only performance obligation in the Company’s arrangements with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration that is variable depending on the payout methodology used by the pool operator. In certain arrangements, the Company does not have a reliable means to estimate its relative share of the rewards until they are paid to it and the variable consideration is constrained until the Company receives the consideration, at which time revenue is recognized. The Company measures consideration at fair value on the date received, which is historically not materially different than the fair value at inception of the arrangement or the time the Company has earned the award from the pools. The Company’s digital asset mining income is sensitive to changes in the market prices of digital currency assets which may be significant. There is no significant financing component in these transactions. Revenue From Contracts With Customers - Hosting and Equipment Sales The Company primarily generates revenue from contracts with customers from hosting services and, sales of computer equipment. 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. Performance Obligations The Company’s performance obligations primarily relate to hosting services and equipment sales, which are described below. 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 December 31, 2022 and 2021, were $ 159.6 million and $ 1.05 billion, respectively. T he $ 159.6 million remaining performance obligation as of December 31, 2022, relates solely to the hosting services performance obligation because all equipment sales’ performance obligation commitments had been fulfilled and revenue recognized as of December 31,2022 . Hosting Services We regularly enter contracts that include hosting services, for which revenue is recognized as services are performed on a variable (power consumption) basis. We recognize variable hosting revenue each month as the uncertainty related to the consideration is resolved, hosting services are provided to our customers, and our customers utilize the hosting services (the customer simultaneously receives and consumes the benefits of the Company’s performance). The Company performs hosting services that enable customers to run blockchain and other high-performance computing operations. The Company’s performance obligation related to these services is satisfied over time. The Company recognizes revenue for services that are performed on a consumption basis, such as the amount of electricity used in a period, based on the customer’s use of such resources. The Company recognizes variable consumption usage hosting revenue each month as the uncertainty related to the consideration is resolved, hosting services are provided to our customers, and our customers utilize the hosting services (the customer simultaneously receives and consumes the benefits of the Company’s performance). The Company generally bills its customers in advance based on estimated consumption under the contract. The Company recognizes revenue based on actual consumption in the period and invoices adjustments in subsequent periods or retains credits toward future consumption. The term between invoicing and when payment is due typically does not exceed 30 days. 118 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Equipment Sales We entered contracts with more than one performance obligation. For example, we entered into contacts that include both hosting services and sales of computer equipment to those same customers, for which revenue is recognized at the point in time when control of the equipment is transferred to the customer (typically at the start of the contract period). For these contracts, revenue is recognized based on the relative standalone selling price of each performance obligation in the contract. The Company recognizes revenue from sales of computer equipment to customers at the point in time when control of the equipment is transferred to the customer, which generally occurs upon deployment of the equipment. Customers make a series of deposits on equipment purchases with the final payment typically being due at least one month prior to deployment. Self-mining computer equipment that is subsequently sold to customers is recognized as Equipment Sales to Customers in the Company’s Consolidated Statements of Operations. Due to the change to Bitmain worldwide sale strategy, we do not expect to enter equipment sales contracts in the future or to have any equipment sales revenue after December 31, 2022. Deferred Revenue The Company records contract liabilities in Deferred revenue on the Company’s 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 current and non-current deferred revenue balance as of December 31, 2022 and 2021, was $ 80.4 million and $ 136.4 million, respectively, all from advance payments received during the years then ended. In the year ended December 31, 2022, the Company recognized $ 88.6 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 year ended December 31, 2021, the Company recognized $ 44.5 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. Deposits for Equipment The Company has entered into agreements with vendors to supply equipment for its customers and for the Company’s own digital asset mining operations. These agreements generally require significant refundable deposits payable months in advance of delivery and additional advance payments in monthly installments thereafter. The Company classifies deposits for digital asset mining equipment based on the expected predominant source and use of the cash flows for the equipment that has been contracted for purchase. Prior to the acquisition of Blockcap on July 30, 2021, described in Note 4 — Business Combinations, Acquisitions and Restructuring, the Company expected that the predominant source and use of the cash flows for orders of digital asset mining equipment would be related to customer sales. Beginning with orders placed subsequent to July 30 2021, the Company expects that the predominant source and use of cash flows for digital asset mining equipment will be related to the Company’s own self-mining operations. Therefore, the Company has classified deposits for equipment related to orders prior to July 30, 2021, as cash flow from operating activities and has classified deposits for equipment related to orders made subsequent to July 30, 2021, as cash flows from investing activities. Costs of Revenue The Company’s Cost of Hosting Services and Cost of Digital Asset Mining primarily consist of electricity costs, salaries, stock-based compensation, depreciation of property, plant and equipment used to perform hosting services and mining operations and other related costs. Cost of Equipment Sales represents costs of computer equipment sold to customers. Research and Development The Company’s research and development expenses primarily include personnel costs associated with technology and product development and data science research. Research and development costs are expensed as incurred. 119 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Stock-Based Compensation The Company recognizes the cost of services received in exchange for awards of equity instruments based upon the fair value of those awards on the grant date. For the years ended December 31, 2022, 2021 and 2020, the Company’s consolidated operating results included $ 36.6 million, $ 0.9 million, and $ 0.4 million of stock-based compensation expense related to restricted stock units issued to employees, respectively, and $ 146.3 million, $ 5.8 million, and $ 2.6 million of stock-based compensation expense related to stock options issued to employees and consultants, respectively. In addition, for the year ended December 31, 2021, the Company recognized $ 32.2 million of post-combination expense for share-based compensation awards related to the Blockcap acquisition described in Note 4 — Business Combinations, Acquisitions and Restructuring. The total tax benefit related to stock-based compensation was nil , $ 6.1 million, and $ 0.7 million for the years ended December 31, 2022, 2021, and 2020, respectively. Stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020 is included in the Company’s Consolidated Statements of Operations as follow: Year Ended December 31, 2022 2021 2020 Cost of revenue $ 25,779 $ 4,084 $ — Research and development 22,093 1,140 — Sales and marketing 9,401 836 — General and administrative 1 125,621 32,877 3,038 Total stock-based compensation expense 1 $ 182,894 $ 38,937 $ 3,038 1 Includes $ 1.0 million of stock-based compensation that was provided in severance as part of restructuring charges incurred during the year ended December 31, 2022. Stock-based compensation expense is measured at the grant date based on the value of the equity award. The fair value of stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of restricted stock unit awards is estimated on the date of grant using the estimated fair value of the Company’s common stock on the date of grant. For awards with only service conditions, primarily stock options and certain restricted stock units, the estimated fair value of the equity awards is recognized as expense on a straight-line basis, less actual forfeitures as they occur, over the requisite service period for the entire award, which is generally the vesting period. For awards with service and performance conditions, primarily restricted stock unit awards, the compensation expense is recognized separately for each tranche of each award as if it were a separate award with its own vesting date (i.e., on an accelerated attribution basis) and the estimated fair value of the equity awards is recognized as expense when it is probable that the performance conditions will be achieved. If the performance conditions become probable of being achieved before the end of the requisite service period, the unrecognized compensation costs for which the requisite service have been provided is recognized in the period in which achievement becomes probable and the remaining unrecognized compensation costs for which requisite service has not been provided is recognized as expense prospectively on an accelerated attribution basis over the remaining requisite service period for the entire award, less actual forfeitures as they occur. See Note 16 — Stockholders' (Deficit) Equity for more information about the service and performance conditions associated with the Company’s equity awards. Employee Benefit Plan The Company currently maintains a defined contribution retirement and savings plan for the benefit of our employees who satisfy certain eligibility requirements (the “401(k) Plan”). The U.S. Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) Plan. Prior to January 1, 2022, the Company did not match contributions made by participants in the 401(k) Plan. Earnings Per Share The Company computes earnings per share (“EPS”) following Financial Accounting Standards Board (“FASB”) ASC Topic 260, Earnings per share . 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 120 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 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. Income Taxes The Company is subject to income taxes mainly in the jurisdictions in which it provides various infrastructure, technology and colocation and hosting services. The Company’s tax position requires significant judgment in order to properly evaluate and quantify tax positions and to determine the provision for income taxes. The Company uses the assets and liabilities method to account for income taxes, which requires that deferred tax assets and deferred tax liabilities be determined based on the differences between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to be reversed. The Company estimates its actual current tax expense, including permanent charges and benefits, and the temporary differences resulting from differing treatment of items, for tax and financial accounting purposes. The Company assesses whether it is more likely than not that its deferred tax assets will be realized by considering both positive and negative evidence. If the Company believes that recovery of these deferred tax assets is not more likely than not, the Company establishes a valuation allowance. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considered all available evidence, including recent operating results, projections of future taxable income, the reversal of taxable temporary differences, and the feasibility of tax planning strategies. GAAP sets forth a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Interest and penalties related to unrecognized tax benefits are included within Income Tax Expense. Accrued interest and penalties are included in the related tax liability line in the Company’s Consolidated Balance Sheets. No penalties or interest have been recognized or accrued for unrecognized tax benefits for the years ended December 31, 2022 and 2021. The Company adjusts its reserves for tax positions in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate based on new facts or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, the differences are recorded as adjustments to the provision for income taxes in the period in which such determination is made. The provision (benefit) for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. The Company’s future effective tax rates could be adversely affected by changes in the valuation of the Company’s deferred tax assets or liabilities, or changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, the Company is subject to examination of income tax returns by various tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provisions for income taxes. Recently Adopted Accounting Standards Simplifying Income Taxes In December 2019, the FASB issued Accounting Standards Update (“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. 121 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to 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. 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. 122 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The cumulative effect of initially applying the new lease standard on January 1, 2022 is as follows (in thousands): 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 current liabilities $ 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 Company’s 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 other and the noncurrent portion of operating lease liabilities of $ 1.2 million were recorded within Other noncurrent liabilities on the Consolidated Balance Sheets. 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 and adopted by the Company during the annual reporting period beginning January 1, 2023, including interim periods within that reporting period. The adoption of this standard is not expected to have a material effect on the Company’s 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. 123 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 3. CHAPTER 11 FILING AND OTHER RELATED MATTERS Chapter 11 On December 21, 2022 (the “Petition Date”), the “Company and certain of its affiliates (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) seeking relief under Chapter 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 Cases are jointly administered under Case No. 22-90341. The Debtors continue to operate their business and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors filed various “first day” motions with the Bankruptcy Court requesting customary relief, which were generally approved by the Bankruptcy Court on December 22, 2022, that have enabled the Company to operate in the ordinary course while under Chapter 11 protection. Original DIP Credit Agreement and Restructuring Support Agreement In connection with the Chapter 11 Cases, the Debtors entered into a Senior Secured Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of December 22, 2022 (the “Original DIP Credit Agreement”), with Wilmington Savings Fund Society, FSB, as administrative agent, and the lenders from time to time party thereto (collectively, the “Original DIP Lenders”). The Original DIP Lenders are also holders or affiliates, partners or investors of holders under the Company’s notes sold pursuant to (i) the Secured Convertible Note Purchase Agreement, dated as of April 19, 2021 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time), by and among Core Scientific, Inc. (as successor of Core Scientific Holding Co.), the guarantors party thereto from time to time, U.S. Bank National Association, as note agent and collateral agent, and the purchasers of the notes issued thereunder, and (ii) the Convertible Note Purchase Agreement, dated as of August 20, 2021, (as amended, restated, amended and restated, supplemented or otherwise modified from time to time), by and among Core Scientific, Inc. (as successor of Core Scientific Holding Co.), the guarantors party thereto from time to time, U.S. Bank National Association, as note agent and collateral agent, and the purchasers of the notes issued thereunder (collectively, the “Convertible Notes”). Also in connection with the filing of the Chapter 11 Cases, the Company entered into a restructuring support agreement (together with all exhibits and schedules thereto, the “Restructuring Support Agreement”) with the ad hoc group of noteholders, representing more than 70 % of the holders of its convertible notes (the “Ad Hoc Noteholder Group”) pursuant to which the Ad Hoc Noteholder Group agreed to provide commitments for a debtor-in-possession facility (the “Original DIP Facility”) of more than $ 57 million and agreed to support the syndication of up to an additional $ 18 million in new money DIP (defined below) facility loans to all holders of convertible notes. The Restructuring Support Agreement was terminated by the Company pursuant to a “fiduciary out” which permitted the Company to pursue better alternatives. Replacement DIP Credit Agreement On February 2, 2023, the Bankruptcy Court entered an interim order (the “Replacement Interim DIP Order”) authorizing, among other things, the Debtors to obtain senior secured non-priming super-priority replacement post-petition financing (the “Replacement DIP Facility”). On February 27, 2023, the Debtors entered into a Senior Secured Super-Priority Replacement Debtor-in-Possession Loan and Security Agreement governing the Replacement DIP Facility (the “Replacement DIP Credit Agreement”), with Riley Commercial Capital, LLC, as administrative agent (the “Administrative Agent”), and the lenders from time to time party thereto (collectively, the “Replacement DIP Lender”). Proceeds of the Replacement DIP Facility were used to, among other things, repay amounts outstanding under the Original DIP Facility, including payment of all fees and expenses required to be paid under the terms of the Original DIP Facility. These funds, along with ongoing cash generated from operations, were anticipated to provide the necessary financing to effectuate the planned restructuring, facilitate the emergence from Chapter 11, and cover the fees and expenses of legal and financial advisors. The Replacement DIP Facility, among other things, provides for a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $ 70 million. Under the Replacement DIP Facility, (i) $ 35 million was made available following Bankruptcy Court approval of the Interim DIP Order and (ii) $ 35 million was made available following Bankruptcy Court approval of the Final DIP Order. Loans under the Replacement DIP Facility will bear interest at a rate of 10 %, which will be payable in kind in arrears on the first day of each calendar month. The Administrative Agent received an upfront payment equal to 3.5 % of the aggregate commitments under the Replacement DIP Facility on February 3, 2023, payable in kind, and the Replacement DIP Lender will receive an exit premium equal to 5 % of the amount of the loans being repaid, reduced or satisfied, payable in cash. The Replacement DIP Credit Agreement includes representations and warranties, covenants applicable to the Debtors, and events of default. If an event of default under the Replacement DIP Credit Agreement occurs, the Administrative Agent may, 124 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements among other things, permanently reduce any remaining commitments and declare the outstanding obligations under the Replacement DIP Credit Agreement to be immediately due and payable. The maturity date of the Replacement DIP Credit Agreement is December 22, 2023, which can be extended, under certain conditions, by an additional three months to March 22, 2024. The Replacement DIP Credit Agreement will also terminate on the date that is the earliest of the following (i) the effective date of any chapter 11 plan of reorganization with respect to the Borrowers (as defined in the Replacement DIP Credit Agreement) or any other Debtor; (ii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iii) the date of the acceleration of the Loans and the termination of the Commitments (whether automatically, or upon any Event of Default or as otherwise provided in the Replacement DIP Credit Agreement); and (iv) conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code. On March 1, 2023, the Bankruptcy Court entered an order approving the Replacement DIP Facility on a final basis and the terms under which the Debtors are authorized to use the cash collateral of the holders of their convertible notes (the “Final DIP Order”). For detailed discussion about the Replacement DIP Facility, refer to Note 21 — Subsequent Events. Reorganization items, net and Liabilities Subject to Compromise Effective on December 21, 2022, we began to apply the provisions of ASC 852, Reorganizations (“ASC 852”), which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of certain financial statement line items. ASC 852 requires that the financial statements for periods including and after the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the reorganization must be reported separately as Reorganization items, net in the consolidated statements of operations beginning December 21, 2022, the date of filing of the Chapter 11 Cases. Liabilities that may be affected by the Plan must be classified as liabilities subject to compromise at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the Plan or negotiations with creditors. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. Any resulting changes in classification will be reflected in subsequent financial statements. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under the Plan, the entire amount of the claim is included with prepetition claims in liabilities subject to compromise. As a result of the filing of the Chapter 11 Cases on December 21, 2022, the classification of pre-petition indebtedness is generally subject to compromise pursuant to the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ businesses and assets. Among other things, the Bankruptcy Court authorized the Debtors’ to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical vendors. The Debtors are paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Debtors may reject certain pre-petition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims. Reorganization items, net incurred as a result of the Chapter 11 Cases presented separately in the accompanying consolidated statements of operations were as follows (in thousands): Year Ended December 31, 2022 Write-off of debt issuance costs and original issue net discount on liabilities subject to compromise $ 3,529 (Gain) from adjustment of liabilities subject to compromise fair value to expected allowed amount ( 203,236 ) Professional fees and other bankruptcy related costs 2,302 Reorganization items, net $ ( 197,405 ) The Company has incurred and continues to incur significant costs associated with the reorganization, primarily legal and professional fees, which were classified as Reorganization items, net subsequent to our petition. Write-off of deferred debt issuance 125 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements costs, the write-off of original issue net discount related to debt subject to compromise, and the derecognition of the fair value adjustments to liabilities transferred to subject to compromise were also included in Reorganization items, net. The accompanying consolidated balance sheets as of December 31, 2022, includes amounts classified as Liabilities subject to compromise, which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 Cases. These amounts represent the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. Liabilities subject to compromise consisted of the following (in thousands): December 31, 2022 Accounts payable $ 20,908 Other current liabilities 64,493 Accounts payable, and other current liabilities $ 85,401 Operating lease liability 13,868 Financing lease liability 70,796 Debt subject to compromise 844,695 Accrued interest on liabilities subject to compromise 12,553 Leases, debt and accrued interest $ 941,912 Liabilities subject to compromise $ 1,027,313 Determination of the value at which liabilities will ultimately be settled cannot be made until the Plan becomes effective and the Company emerges from bankruptcy. The Company will continue to evaluate and adjust the amount and classification of its pre-petition liabilities. Such adjustments may be material. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of Liabilities subject to compromise may change. 4. BUSINESS COMBINATIONS, ACQUISITIONS AND RESTRUCTURING Merger Agreement In 2021, XPDI entered into that 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 Old Core. 126 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements In connection with the Special Meeting and the Merger, holders of 12.3 million of the 34.5 million then-outstanding shares of XPDI Class A Common Stock 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. The Merger provided gross proceeds of approximately $ 221.6 million from the XPDI trust account, resulting in approximately $ 201.0 million in net cash proceeds to Core Scientific, after the payment of transaction expenses, which is presented within proceeds from issuance of common stock, net of transaction costs on the consolidated statements of cash flows. Following the Merger, Old Core stockholders owned 90.7 %, former XPDI public stockholders owned 6.7 % and XPDI’s sponsor owned 2.6 % of the issued and outstanding shares of New Core Common Stock, excluding the impact of unvested restricted stock units and options. The proceeds from the Merger were used to fund mining equipment purchases and infrastructure build-out. 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 Company’s Consolidated Balance Sheets as of December 31, 2021, and the remaining $ 7.9 million were recognized during the year ended December 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’ (deficit) equity. The cash outflows related to these costs have been netted against the proceeds from the issuance of New Core 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 a charge within general and administrative expenses for the year ended December 31, 2022. Immediately prior to the Effective Time, each share of Series A convertible preferred stock, par value $ 0.00001 , of Old Core automatically converted into one share of New Core Common Stock, and each share of Series B convertible preferred stock, par value $ 0.00001 , of Old Core automatically converted into one share of New Core 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 change in control of the Company, or a sale of substantially all of the Company’s assets that results in a change of control that is consummated within five years of the Closing Date that results in a price per share paid to the holders of the Company’s Common Stock equal to or in excess of $ 12.50 per share. 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 restricted stock units (“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. 127 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 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. 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). During the three months ended June 30, 2022, we determined that a measurement period adjustment to the accounting for the Blockcap acquisition was necessary based upon obtaining updated information about property, plant and equipment, net acquired, resulting in an increase in fair value of property, plant and equipment, net of $ 0.7 million, a decrease in goodwill of $ 1.0 million and additional depreciation expense of $ 0.3 million recognized in the three months ended June 30, 2022. The measurement period for the Blockcap acquisition closed during the three months ended June 30, 2022. 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 December 31, 2022, based on information arising after the initial preliminary valuation. 128 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Purchase Price 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 98,965 Other noncurrent assets 1,293 Total assets acquired 182,080 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 $ 142,320 Goodwill on acquisition $ 996,518 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 12 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. See Note 6 — Goodwill for a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period. Intangible Assets 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. 129 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Transaction Costs The Company recognized transaction costs of $ 1.1 million for the year ended December 31, 2021. These costs were associated with legal and professional services and were recognized as General and administrative expenses in the Company’s Consolidated Statements of Operations. Unaudited Pro Forma Information The following unaudited pro forma financial information gives effect to the Blockcap acquisition as if it had been completed on January 1, 2020. The unaudited pro forma information was prepared in accordance with the requirements of ASC 805, Business Combinations , which is a different basis than pro forma information prepared under Article 11 of Regulation S-X (“Article 11”). As such, they are not directly comparable with historical results for stand-alone Core Scientific prior to July 30, 2021, historical results for Core Scientific from July 30, 2021 that reflect the acquisition and are inclusive of the results and operations of Blockcap, nor our previously provided pro forma financials prepared in accordance with Article 11. The pro forma results for the year ended December 31, 2021 include the impact of several significant nonrecurring pro forma adjustments to previously reported operating results. The pro forma adjustments are based on historically reported transactions by the respective companies. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisition (in thousands). Year Ended December 31, 2021 2020 Total revenue $ 586,991 $ 70,948 Operating income $ 137,109 $ ( 23,354 ) Significant pro forma adjustments include: • Transaction costs of $ 1.9 million are assumed to have occurred on the pro forma close date of January 1, 2020, and are recognized as if incurred in the first quarter of 2020; • Tangible and intangible assets are assumed to be recorded at their estimated fair values as of January 1, 2020 and are depreciated or amortized over their estimated useful lives; and • Accounting policies of Blockcap are conformed to those of Core Scientific including depreciation for mining equipment. • Share-based compensation awards of Blockcap for which the performance condition of the award is assumed to be probable of being met as of January 1, 2020 and expensed as they are earned based on the service condition. • The elimination of $ 19.2 million of expense recognized by Blockcap in July 2021 for the acceleration of certain equity awards of its CEO and others. Because this acceleration was deemed to be in contemplation of the Merger, Core Scientific has recorded $ 23.3 million of compensation expense for the acceleration in its financial statements for the period ending December 31, 2021, which was determined based on the fair value of the awards at the time of the Merger. This adjustment is necessary to avoid duplication of the expense attributable to the combined company related to the acceleration of the same awards. The selected unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations would have been had the acquisition actually occurred on January 1, 2021, nor do they purport to project the future consolidated results of operations. For the periods subsequent to the acquisition, Blockcap contributed total revenues of $ 42.6 million and operating income of $ 15.5 million for the year ended December 31, 2021, that were included in the Company’s Consolidated Statements of Operations. Restructuring Activities During the second quarter of 2022 market conditions led management to evaluate its operations and refocus its efforts and resources on the core activities of its hosting and mining segments. Management initiated a plan to exit certain activities, technologies and ancillary businesses, and to reduce portions of the Company’s workforce including those acquired through Blockcap’s acquisition of RADAR. Management completed the restructuring plan in October 2022 and all expected costs of the restructuring plan have been recognized as of December 31, 2022. 130 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements At June 30, 2022 Core had accrued and expensed estimated cash restructuring charges of $ 1.4 million relating to this restructuring plan. Cash severance and related payments under the Company’s ongoing severance policy of $ 0.9 million were paid as compensation for the year ended December 31, 2022. In addition to the cash restructuring charges, $ 1.0 million of stock based compensation was paid in severance during the year ended December 31, 2022. Total cash and stock-based restructuring charges of $ 2.3 million were recognized in general and administrative expenses for the year ended December 31, 2022. As a result of exiting Blockchain Technologies during the second quarter of 2022, $ 2.0 million of intangible assets will cease to be used. Additionally, the Company determined that $ 2.5 million of software intangible assets that were previously acquired from Stax Digital LLC would no longer be used as a result of current and planned software upgrades. Consequently, the Company recorded an impairment of other intangible assets of $ 4.5 million for the year ended December 31, 2022, which is presented within impairment of goodwill and other intangibles on the Company’s Consolidated Statements of Operations. Goodwill associated with these activities was included in the goodwill impairment charge of $ 1.05 billion for the year ended December 31, 2022, of which $ 996.5 million was related to the Mining reporting unit and $ 58.2 million was related to the Equipment Sales and Hosting reporting unit. 5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net as of December 31, 2022 and 2021 consist of the following (in thousands): December 31, 2022 2021 Estimated Useful Lives Land and improvements 1 $ 27,758 $ 12,995 20 years Building and improvements 294,480 93,064 12 to 39 years Computer, mining and network equipment 2 464,823 475,331 1 to 5 years Electrical equipment 3 170,793 59,253 5 to 10 years Other property, plant and equipment 4 1,513 1,156 5 to 7 years Total 959,367 641,799 Less: accumulated depreciation and amortization 5 268,233 44,495 Property, plant and equipment, net $ 691,134 $ 597,304 1 Estimated useful life of improvements. Land is not depreciated. 2 Includes finance lease assets of $ 112.7 million and $ 103.9 million at December 31, 2022 and 2021, respectively. 3 Includes finance lease assets of $ 12.6 million and $ 12.6 million at December 31, 2022 and 2021, respectively. 4 Includes finance lease assets of $ 0.4 million and $ 0.4 million at December 31, 2022 and 2021, respectively. 5 Includes accumulated amortization for assets under finance leases of $ 41.7 million and $ 10.3 million at December 31, 2022 and 2021, respectively. Depreciation expense, including amortization of finance lease assets, for the years ended December 31, 2022 and 2021, was $ 224.1 million and $ 31.8 million, respectively. Depreciation for the year ended December 31, 2022 and 2021, allocated to costs of revenue was $ 223.6 million and was $ 31.7 million, respectively. During the year ended December 31, 2022, the Company’s operating performance and liquidity continued to be severely impacted by the prolonged decrease in the price of bitcoin, the increase in electricity costs, the increase in the global bitcoin network hash rate and an increase in additional operating costs related to these factors. Additionally, primary and secondary market prices for ASIC miners of the type used by the Company in its business operations have decreased significantly from previous levels. During the quarter ended September 30, 2022, the Company evaluated whether the estimated future undiscounted cash flows from the operation of its data center facilities would recover the carrying value of the property, plant and equipment located at the sites and used in site operations, including the Company’s deployed mining equipment. Based on this evaluation, the Company determined that the carrying value of the property, plant and equipment at the Cedarvale, Texas facility site may no longer be fully recoverable by the cash flows of the site. The Company measured the amount of impairment at the Cedarvale facility site as the difference between the carrying amount of the site asset group of $ 119.8 million and the estimated fair value of the site asset group of $ 60.5 million, resulting in an impairment of the facility site’s property, plant and equipment of $ 59.3 million for the quarter ended September 30, 2022. During the quarter ended December 31, 2022, the Company evaluated whether the estimated future undiscounted cash flows from its operations would recover the carrying value of the property, plant and equipment asset groups located at the sites and used in 131 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements site operations, including the Company’s deployed mining equipment. Based on this evaluation, the Company determined that the carrying value of its entire fleet of mining equipment and the other property, plant and equipment at the Cedarvale and Cottonwood, Texas facility sites may no longer be fully recoverable by the cash flows of those asset groups. The Company measured the amount of impairment of its fleet of mining equipment as the difference between their carrying amount of $ 668.5 million and their estimated fair value of $ 176.3 million resulting in an impairment of the fleet of mining equipment of $ 492.2 million. The Company measured the amount of impairment of its other property, plant and equipment at the Cedarvale and Cottonwood, Texas facility sites as the difference between their carrying amount of $ 174.3 million and their estimated fair value of $ 135.1 million resulting in an impairment of the other site property, plant and equipment of $ 39.2 million. During the year ended December 31, 2022, the Company recognized impairments to property, plant and equipment of $ 590.7 million. There were no impairments to long-lived assets for the years ended December 31, 2021 and 2020. The Company’s analysis involved the use of a combination and corroboration of cost and market approaches. The cost approach has been used to estimate the fair value of some buildings, improvements, electrical equipment and other tangible assets used in combination with other assets. The cost approach was also used to corroborate certain estimates made using the market approach. Significant assumptions used in the cost approach include reproduction and replacement costs, useful service life, and orderly liquidation values. The cost approach utilizes useful service life and other estimates developed by the Company to determine fair value, which are unobservable Level 3 inputs. The market approach has been used to estimate the fair value of the Company’s ASIC miners, network equipment, real estate, and other of its buildings, improvements, electrical equipment and other tangible assets. The market approach was also used to corroborate certain estimates made using the cost approach. Valuations using the market approach are derived from manufacturer and secondary market pricing sources and, when available, comparable secondary market transactions. Significant judgment in using the market approach includes the selection of comparable assets based on the most relevant attributes of the evaluated asset, a selection of and modifications to transactions according to comparable use, size, geography and other traits, and the use of broker indications of relative market price metrics. The market approach utilizes comparable use, relative efficiency and other estimates developed by the Company to determine fair value, which are unobservable Level 3 inputs. Unobservable Level 3 inputs are used to measure fair value to the extent that relevant observable inputs are not available. The Company developed its estimates using the best information available at the time. Changes in management’s estimates or any of its other assumptions used in its analysis could result in a different conclusion. Continued elevated power costs, continued increases in the bitcoin network hash rate and a continuing depression or further decrease of bitcoin’s value in the market could result in further impairment of the Company’s property, plant and equipment. 6. GOODWILL The following table provides the reconciliation of the carrying amount of goodwill by segment at the beginning and end of the reporting period (in thousands): Equipment Sales and Hosting Segment Mining Segment Total Goodwill Balance as of December 31, 2021 $ 58,241 $ 997,519 $ 1,055,760 Subsequent measurement period adjustment — ( 1,000 ) ( 1,000 ) Impairment of goodwill ( 58,241 ) ( 996,519 ) ( 1,054,760 ) Balance as of December 31, 2022 $ — $ — $ — As of December 31, 2022, after impairment, the Company had no remaining goodwill. At December 31, 2021, the carrying amount of goodwill was $ 1.06 billion. For the year ended December 31, 2022 there was a measurement period adjustment reducing goodwill by $ 1.0 million and accumulated impairment losses of $ 1.05 billion. There were no goodwill adjustments or impairment losses for the year ended December 31, 2021. The Company does not amortize goodwill, but tests it for impairment annually as of October 31, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair values of the reporting units are less than their carrying amounts as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If management determines that it is more likely than not that the fair value of a reporting unit is less than the reporting unit’s carrying 132 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements amount, or management chooses not to perform a qualitative assessment, then the quantitative goodwill impairment test will be performed. The quantitative test compares the fair value of the reporting unit with the reporting unit’s carrying amount. If the carrying amount exceeds its fair value, the excess of the carrying amount over the fair value is recognized as an impairment loss, and the resulting measurement of goodwill becomes its new cost basis. The Company’s reporting units are the same as its reportable and operating segments. The Company identified goodwill impairment triggering events during the year ended December 31, 2022. These events included declines in the market price of bitcoin, the market price of the Company’s stock and the Company’s market capitalization. As a result, the Company performed the quantitative test to compare the fair value to the carrying amount for each reporting unit at June 30, 2022. Sustained and further deterioration in market prices and in the Company’s financial position resulted in additional quantitative testing at September 30, 2022. The Company concluded that the carrying value of the Mining reporting unit exceeded its fair value and, as such, recorded a $ 996.5 million impairment of goodwill in its Mining reporting unit for the year ended December 31, 2022. The Company concluded the carrying amount of the Equipment Sales and Hosting reporting unit exceeded its fair value and, as such, recorded a $ 58.2 million impairment of goodwill in its Equipment Sales and Hosting reporting unit for the year ended December 31, 2022. These impairments are presented within impairment of goodwill and other intangibles on the Company’s Consolidated Statements of Operations. The Company’s analysis during the year ended December 31, 2022, involved the use of a market approach. Valuations using the market approach are derived from metrics of market transactions. Significant judgments and assumptions used in the market approach includes the selection of comparable businesses based on the characteristics of each reporting unit, the consideration and application of relevant relative metrics and a reconciliation to the Company’s market capitalization to the fair value measured. Sustained depressed bitcoin market value, increased power costs, decreased liquidity, and increased cost of financing, along with other factors have contributed to significant and sustained deterioration in the Company’s market capitalization. The Company concluded that the fair value of its reporting units would no longer support the remaining acquired goodwill carrying values. The Company developed its estimates using the best information available at the time. Changes in management’s estimates or any of its other assumptions used in its analysis could result in a different conclusion. 133 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 7. INTANGIBLE ASSETS, NET Intangible assets, net as of December 31, 2022 and 2021 consist of the following (in thousands): December 31, 2022 Gross Accumulated Amortization Net Carrying Amount Estimated Useful Lives Internally-developed software $ 1,452 $ ( 87 ) $ 1,365 3 - 8 years Patents 344 ( 22 ) 322 20 years Trademarks 66 ( 49 ) 17 8 years Total intangible assets, net $ 1,862 $ ( 158 ) $ 1,704 December 31, 2021 Gross Accumulated Amortization Net Carrying Amount Estimated Useful Lives Internally-developed software $ 10,093 $ ( 2,503 ) $ 7,590 3 - 8 years Patents 423 ( 9 ) 414 20 years Customer relationships 150 ( 21 ) 129 3 years Trademarks 73 ( 11 ) 62 8 years Total intangible assets, net $ 10,739 $ ( 2,544 ) $ 8,195 The Company amortizes intangible assets subject to amortization over their estimated useful lives. Amortization of intangible assets is included within general and administrative expenses in the Company’s Consolidated Statements of Operations. Amortization expense for intangible assets was $ 1.2 million and $ 1.6 million for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company recorded a $ 590.7 million impairment charge to internally developed software within impairment of goodwill and other intangibles in the Consolidated Statements of Operations. The future five-year amortization of intangibles subject to amortization as of December 31, 2022 was as follows (in thousands): Amortization 2023 $ 598 2024 550 2025 421 2026 15 2027 12 Thereafter 108 Total $ 1,704 Sale of Intangible Assets In March 2022, the Company reclassified $ 2.2 million of intangible assets that were previously acquired from Atrio Inc. and RStor, Inc. to be held for sale as a result of the expected sale of the software and related patents. The intangible assets were sold in June 2022 for proceeds of $ 10.9 million, resulting in a gain on sale of intangible assets of $ 5.9 million. The resulting gain is reflected within other non-operating expenses, net in the Consolidated Statements of Operations. 134 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 8. OTHER ASSETS Prepaid expenses and o ther current assets as of December 31, 2022 and 2021 consist of the following (in thousands): Year Ended December 31, 2022 2021 Prepaid expenses $ 28,308 $ 27,055 Security deposits 241 355 Prepaid rent 46 453 Other 3,286 2,248 Total prepaid expenses and other current assets $ 31,881 $ 30,111 Prepaid expenses include prepayments of insurance premiums, rent expense, licenses, and subscriptions. Security deposits represent payments by the Company primarily associated with utilities and leases. Other noncurrent assets as of December 31, 2022 and 2021 consist of the following (in thousands): Year Ended December 31, 2022 2021 Security deposits $ 9,084 $ 2,079 Utility construction contributions — 2,453 Prepaid rent 232 4,478 Capitalized transaction costs — 10,682 Other — 1,353 Total other noncurrent assets $ 9,316 $ 21,045 Security deposits represents payments by the Company primarily associated with utilities and leases. Utility construction contributions include amounts contributed to utilities for the construction of assets that allow the Company to obtain utility services, primarily electricity. 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other as of December 31, 2022 and 2021 consist of the following (in thousands): Year Ended December 31, 2022 2021 Accrued expenses and other $ 11,590 $ 25,332 Accrued taxes 4,720 5,736 Vendor payable — 21,313 Customer deposits 1 — 5,570 Accrued interest — 5,521 Other current liabilities 1,642 4,390 Total accrued expenses and other $ 17,952 $ 67,862 1 Consists of amounts deposited by the Company’s customers relating to future tax estimates. Should the deposits be unnecessary once the customer units are owned and deployed, the deposits are either applied against an existing equipment balance due, or applied against future hosting invoices. 135 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 10. DERIVATIVE WARRANT LIABILITIES As of December 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 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. 136 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Effect of Chapter 11 Filing As discussed in Note 3 - Chapter 11 Filing and Other Related Matters, liabilities that may be affected by the Plan must be classified as liabilities subject to compromise at the amounts expected to be allowed by the Bankruptcy Court. The warrants have been classified as liabilities subject to compromise at their expected allowed amount of zero at December 31, 2022. Their fair value of $ 335 thousand was derecognized as a gain in Reorganization items, net in the Company’s Consolidated Statements of Operations at December 31, 2022. 137 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 11. NOTES PAYABLE The commencement of the Chapter 11 Cases constituted an event of default under certain of the Company's debt agreements. Accordingly, all debt not reclassified as liabilities subject to compromise with original long-term stated maturities was classified as current on the consolidated balance sheets as of December 31, 2022. However, any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the Chapter 11 Cases and the creditors' rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. See Note 3 — Chapter 11 Filing and Other Related Matters for further information. Notes payable as of December 31, 2022 and 2021 consist of the following (in thousands): December 31 2022 December 31 2021 Kentucky note $ 529 $ 1,032 Genesis loan — 552 NYDIG loan 38,573 67,435 Stockholder loan 10,000 10,000 Trinity loan 23,356 19,641 Bremer 18,331 15,066 Blockfi 53,913 60,000 Anchor Labs loan 25,159 — Mass Mutual Barings loans 63,844 — B. Riley Bridge loans 41,777 — Liberty loan 6,968 — Secured Convertible Notes 1 237,584 220,871 Other Convertible Notes 2 322,396 301,226 Original DIP Credit Agreement 3 35,547 Other 2,960 663 Notes payable, prior to reclassification to Liabilities subject to compromise 880,937 696,486 Less: Notes payable in Liabilities subject to compromise 4 844,695 — Unamortized discount and debt issuance costs 5 ( 36,456 ) ( 3,187 ) Fair value adjustments to convertible notes 6 ( 808,148 ) 34,910 Total notes payable, net $ 36,242 $ 728,209 1 Secured Convertible Notes includes principal balance at issuance and PIK interest. 2 Other Convertible Notes includes principal balance at issuance and PIK interest. 3 Original DIP Credit Agreement, see Note 3 - Chapter 11 Filing and Other Related Matters for further information. 4 In connection with the Company's Chapter 11 Cases, $ 844.7 million of outstanding notes payable have been reclassified to Liabilities subject to compromise in the Company's consolidated balance sheets as of December 31, 2022 at their expected allowed amount. Up to the Petition Date, the Company continued to accrue interest expense in relation to these reclassified debt instruments. At December 31, 2022 $ 12.6 million of accrued interest was classified as liabilities subject to compromise. 5 As a result of the Company's Chapter 11 Cases, the Company expensed $ 3.5 million of unamortized discount and debt issuance costs, net recorded in Reorganization items, net in the year ended December 31, 2022. 6 As a result of the Company's Chapter 11 Cases, the Company recognized a gain of $ 202.9 million from the derecognition of accumulated fair value adjustments recorded in Reorganization items, net in the year ended December 31, 2022. 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 note 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 has been recognized based on an effective interest rate of 28 %, which 138 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements includes the amortization of a debt discount. The loan is secured by blockchain computing equipment financed by the loans. The loan was paid off in April 2022. 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 loans bear an interest rate of 15 % and have a term of 24 months from issuance. Interest expense on the loans 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 %. 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. Trinity Loan —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. The loan is secured by the blockchain computing equipment financed by the loan. 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 for 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. In April 2022, the Company borrowed an additional $ 0.7 million from Bremer to finance the construction of our North Dakota facility. 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. 139 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 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 of the Company’s loans financed through Bremer Bank. The total amount of interest buydown over the term of the loan is $ 0.8 million. 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 years ended December 31, 2022 and 2021, there was no interest buydown. Blockfi Loan —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 Loan —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 Company borrowed $ 20.0 million in March 2022. 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 %. In May 2022, the Company entered into a $ 11.7 million equipment loan and security agreement with Anchor Labs to finance the Company’s purchase of blockchain computing equipment. The Company borrowed $ 11.7 million in May 2022. 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 Loans —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. (“Mass Mutual Barings”) to finance the Company’s purchase of blockchain computing equipment. The Company borrowed the first tranche of $ 30.0 million in March 2022 and borrowed the second tranche of $ 39.6 million in April 2022. On June 30, 2022, the remaining $ 30.4 million funding commitment expired unused. The loans under the agreement have a term of 36 months from issuance. Interest expense on the loans have been recognized based on an effective interest rate of 9.8 %. The loans are secured by certain blockchain computing equipment. In August 2022, the Company amended the Mass Mutual Barings loans to defer principal payments for a period of six months beginning with payments due in August 2022. The amendments result in no change to the term of the loans and the remaining principal will amortize over the remaining life of the loans beginning in February 2023. The amendments also require an additional amount of blockchain computing equipment to be provided as collateral. Interest expense on the amended loans has been recognized based on an effective interest rate of 13.0 %. In August 2022, the Company issued 0.3 million shares of Common Stock to Mass Mutual Barings as an amendment fee. 140 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements B. Riley Bridge Notes —In April 2022, the Company entered into a $ 60.0 million bridge promissory note with B. Riley Commercial Capital, LLC and a $ 15.0 million bridge promissory note with an affiliate of B. Riley Commercial Capital, LLC (the “Bridge Notes”) maturing in December 2022. Interest expense on the Bridge Notes has been recognized based on an effective interest rate of 7.0 %. In August 2022, the Company amended the Bridge Notes to, among other things, extend the maturity date to June 2023 (the “Amended Bridge Notes”). Under the terms of the modified agreement, $ 37.5 million of principal payments previously due in the second half of 2022 are now due in the first half of 2023. The Amended Bridge Notes require the proceeds of (i) any equity issuances (other than issuances consummated for purposes of making tax payments in connection with the vesting of restricted stock and restricted stock units and equity line of credit under the Equity Line of Credit discussed in Note 16 — Stockholders' (Deficit) Equity (“ELOC”) sales), (ii) any secured debt incurred on or after April 7, 2022 (other than purchase money debt) in excess of $ 500 million and (iii) any ELOC sales in an amount equal to 25 % of the net cash proceeds received from any such ELOC sale, in each case, to be applied by us to repay the outstanding principal amount of the Amended Bridge Notes. On August 1, 2022, the Company issued a total of 0.4 million shares of Common Stock to B. Riley Securities, Inc., an affiliate of B. Riley Commercial Capital, in satisfaction of an advisory fee for providing advisory services to the Company in connection with entering into the Amended Bridge Notes. Liberty Loan —In April 2022, the Company entered into an $ 11.0 million equipment finance agreement with Liberty Commercial Finance LLC (“Liberty”) to finance the Company’s purchase of blockchain computing equipment. The Company borrowed $ 11.0 million in April 2022. 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 10.6 %. The loans are secured by a first priority security interest in the equipment purchased. 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 initial public offering or SPAC merger and then became secured by a lien on the same collateral securing 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 $31.4 million from issuance through December 31, 2022 as payment-in-kind interest on convertible notes outstanding at the end of 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. During the year ended December 31, 2022, $ 1.6 million of Convertible Notes were exercised resulting in 0.2 million shares issued to the holders of the Convertible Notes that were exercised. As discussed in Note 12 — Fair Value Measurements, the Company had elected to measure its Convertible Notes at fair value prior to the Petition Date 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. The Company presented changes in fair value of the Convertible Notes during the periods prior to the Petition Date as follows: (1) the 10 % contractual rate of interest on the convertible notes (consisting of 4 % cash interest and 6 % PIK interest) was presented as interest expense, net on the Consolidated Statements of Operations; (2) changes in fair value attributable to the Company’s own credit risk were presented within Accumulated other comprehensive loss on the Company’s Consolidated Balance Sheets and as a component of Other comprehensive income (loss) on the Consolidated Statements of Comprehensive (Loss) Income; and (3) other fair value changes were presented within Non-operating expenses, net on the Consolidated Statements of Operations. The fair value option is not available to liabilities subject to compromise as they are recorded at their expected allowed amount. At the Petition Date the accumulated fair value adjustment on the Convertible Notes was $ 130.3 million and the Accumulated other comprehensive loss related to changes in fair value attributable to the Company’s own credit risk was $ 72.6 million, these amounts were derecognized for a gain of $ 202.9 million reported in Reorganization items, net when the Convertible Notes were reclassified as Liabilities subject to compromise. 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 141 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements significant increase in the fair value of the convertible notes (excluding interest expense and instrument-specific credit risk) for the year up until the Petition Date. The following summarizes the fair value adjustments and debt issuance costs recognized on the Convertible Notes (in thousands): Year Ended December 31, Financial statement line item 2022 2021 Cash interest payments Interest expense, net $ 21,581 $ 10,114 Payment-in-kind (PIK) interest Interest expense, net 31,550 15,170 Instrument-specific credit risk Other comprehensive income, net of income taxes ( 83,579 ) 10,966 Other fair value adjustments Fair value adjustment on convertible notes ( 103,274 ) 16,047 Reclass to Reorganization items, net Reorganization items, net 202,900 — Total fair value adjustments $ 69,178 $ 52,297 Debt issuance costs Reorganization items, net $ 2,788 $ 12,831 The principal amount of the Convertible Notes as of December 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 $ 560.0 million as of December 31, 2022, are scheduled to mature on April 19, 2025, which includes $ 237.6 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 December 31, 2022, if held to maturity was $ 475.2 million. The total amount that would be owed on the Convertible Notes if prepaid as of December 31, 2022, was $ 811.3 million. See Note 12 — Fair Value Measurements for further information on fair value measurement of the Convertible Notes. 12. 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. 142 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Recurring fair value measurements Prior to the Petition Date the Public Warrants and the Private Placement Warrants were recognized as derivative liabilities in accordance with ASC 815, Derivatives and Hedging . Accordingly, the Company recognized the warrant instruments as liabilities at fair value and adjusted the instruments to fair value at each reporting period. The liabilities were subject to remeasurement at each balance sheet date until exercised, and any change in fair value were 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. After the Petition Date the Public Warrants and Private Placement Warrants were transferred to Liabilities subject to compromise at the expected allowed amount of zero dollars. A gain of $ 0.3 million from the derecognition of the prior fair value is reported in Reorganization items, net. The Company had elected prior to the Petition Date to measure its Convertible Notes at fair value on a recurring basis because the Company believed it better reflected 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. Prior to the three months ended June 30, 2022, when observable market data was not available, the Company used an as-converted value plus risk put option model that included certain unobservable inputs that were 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 considered 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 increased 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 considered 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 were to fall 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. Due to the occurrence of the SPAC merger and the subsequent significant decline in the Company’s stock price below the conversion price, the fair value of the Company’s convertible notes beginning with the three months ended June 30, 2022 was determined using a discounted cash flow model that considered the principal and interest payments, including the minimum payoff at maturity of two times the face value of the note plus accrued interest for the Secured Convertible Notes and the value of the call option that includes certain unobservable inputs that may be significant to the fair value measurement such as expected term and volatility of the call option. At December 31, 2022 the Company did not have any remaining recurring fair value measurements. 143 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The following presents the levels of the fair value hierarchy for the Company's derivative warrant liabilities and the Convertible Notes by issuance date measured at fair value on a recurring basis as of December 31, 2021 (in thousands): 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 1,2,3 — — — 7,896 7,896 Total convertible notes $ 522,097 $ — $ — $ 557,007 $ 557,007 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 December 31, 2021 which was 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 Convertible Notes measured at fair value on a recurring basis using Level 3 inputs as of December 31, 2022 (in thousands): Convertible Notes (Level 3) Balance at December 31, 2021 $ 557,007 Issuances (PIK principal recorded) 31,382 Settlements (including interest payments and conversions) ( 23,144 ) Unrealized gains 186,853 Transfers out of Level 3 ( 752,098 ) Balance at December 31, 2022 $ — Securities are transferred from Level 2 to Level 3 when observable market prices for similar securities are no longer available and unobservable inputs become 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 December 31, 2022, there were no Level 3 financial instruments. During the year ended December 31, 2022, the Convertible Notes were transferred from Level 3 out of recurring fair value measurements. During the year ended December 31, 2021, the Convertible Notes were transferred from Level 2 to Level 3. 144 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to 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 Note 2 — Summary of Significant Accounting Policies, Note 5 — Property, Plant and Equipment, Net, Note 6 — Goodwill and Note 7 — Intangible Assets, Net for more information regarding fair value considerations when measuring impairment. The estimated fair value of the Company’s digital assets as of December 31, 2022 and 2021, was $ 0.7 million and $ 248.1 million, respectively. No non-financial assets were classified as Level 3 as of December 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 and the expected allowed amount transferred to Liabilities subject to compromise), 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. At December 31, 2022, the estimated fair value of the Company’s other notes payable, including both the current and noncurrent portion, was $ 36.2 million and equaled the carrying value of the Company’s other notes payable, including both the current and noncurrent portion. At December 31, 2021, the estimated fair value and carrying value of the Company’s notes payable, including both the current and noncurrent portion, was $ 184.7 million and $ 171.2 million, respectively. 13. LEASES 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 2033. 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 Company’s 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 145 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements operating lease liabilities on the Company’s 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 leases are presented on the Company’s Consolidated Balance Sheets as follows (in thousands): Financial statement line item December 31, 2022 Assets: Operating lease right-of-use assets Operating lease right-of-use assets $ 20,430 Finance lease right-of-use assets Property, plant and equipment, net $ 84,092 Liabilities: Operating lease liabilities, current portion Operating lease liabilities, current portion $ 769 Operating lease liabilities, net of current portion Operating lease liabilities, net of current portion $ 720 Finance lease liabilities, current portion Finance lease liabilities, current portion $ — Finance lease liabilities, net of current portion Finance lease liabilities, net of current portion $ — Operating and finance lease liabilities subject to compromise Liabilities subject to compromise $ 84,664 The components of lease expense were as follows (in thousands): Financial statement line item Year Ended December 31, 2022 Operating lease expense General and administrative expenses $ 1,937 Short-term lease expense General and administrative expenses 24 Finance lease expense: Amortization of right-of-use assets Cost of revenue 31,372 Interest on lease liabilities Interest expense, net 7,080 Total finance lease expense 38,452 Total lease expense $ 40,413 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. Information relating to the lease term and discount rate is as follows: December 31, 2022 Weighted Average Remaining Lease Term (Years) Operating leases 10.5 Finance leases 2.1 Weighted Average Discount Rate Operating leases 6.5 % Finance leases 12.4 % 146 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The following table summarizes the Company’s supplemental cash flow information (in thousands): Year Ended December 31, 2022 Lease Payments Operating lease payments $ 726 Finance lease payments $ 36,740 Supplemental Noncash Information Operating lease right-of-use assets obtained in exchange for lease obligations 1 $ 14,195 Finance lease right-of-use assets obtained in exchange for lease obligations $ 10,557 Increase in finance lease right-of-use assets as a result of lease modification $ 693 1 Includes operating lease right-of-use assets of $ 6.7 million that were recorded upon adoption of Topic 842 on January 1, 2022. Refer to Note 2 for further information. 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 December 31, 2022, and thereafter (in thousands): Operating leases Finance leases 2023 2,082 38,876 2024 1,810 39,769 2025 1,866 1,972 2026 1,924 32 2027 1,985 — Thereafter 12,037 — Total lease payments 21,704 80,649 Less: imputed interest 6,347 9,853 Less: Liabilities subject to compromise 13,868 70,796 Total $ 1,489 $ — 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 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. In addition to the above, in December 2021, the Company entered into an agreement to lease office space for its new corporate headquarters that commenced in July of 2022. The lease includes base rent of approximately $ 14.0 million to be paid over a period of 130 months. On November 11, 2022, the landlord notified the Company that it was terminating the lease. 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 bear interest at a 147 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 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 %. In August 2022, the Company amended the finance lease agreements with MassMutual Asset Finance LLC to defer lease payments for a period of six months beginning with payments due in August 2022. The amendments result in no change to the term of the finance leases and the remaining principal will amortize over the remaining life of the leases beginning in February 2023. The amendments also requires an additional amount blockchain computing equipment to be provided as collateral. The leases under the amended agreements bear interest at a rate of 13.0 % per annum. Interest expense on the amended leases has been recognized based on an effective interest rate of 12.5 %. As a result of the lease modification, the lease liabilities decreased by $ 7.7 million with a corresponding decrease to finance lease right-of assets of $ 7.7 million. Balance Sheet Classification As discussed in Note 11 — Notes Payable, in October 2022, the Company determined not to make certain payments with respect to several of its debt facilities, equipment financing facilities and leases and other financings, including its two bridge promissory notes. As a result, the creditors under these debt facilities may exercise remedies following any applicable grace periods and pursuant to any confirmed plan of reorganization, including electing to accelerate the principal amount of such debt, suing the Company for nonpayment, increasing interest rates to default rates, or taking action with respect to collateral, where applicable. The Company has classified all of its finance lease liabilities as current liabilities as of December 31, 2022. 14. 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. In July 2022, one of the Company’s largest customers, Celsius Mining LLC (“Celsius”), along with its parent company and certain affiliates, filed for voluntary relief under chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court for the Southern District of New York. On September 28, 2022, Celsius filed a motion in the chapter 11 case alleging that the Company is violating the automatic stay with respect to the Master Services Agreement between Celsius and the Company (the “Celsius Agreement”). Celsius is also using its Chapter 11 proceeding to withhold payment of certain charges billed to Celsius pursuant to the Celsius Agreement. The Company strongly disagrees with the allegations made in the Celsius motion and the interpretation of the Celsius Agreement espoused therein and is vigorously defending its interests, including seeking resolution from the bankruptcy court and payment of any outstanding amounts owed under the Celsius Agreement (subject to applicable bankruptcy law in the Celsius chapter 11 case). The parties have agreed to stay the proceedings, including the evidentiary hearing scheduled for November 18, 2022. There can be no guarantee that the bankruptcy court will rule in the Company’s favor in a timely manner or that Celsius will honor the terms of the Celsius Agreement. An adverse ruling by the bankruptcy court that provides Celsius the benefits of the Company’s hosting services without Celsius fully paying the costs of such services would have a material effect on the Company’s business, financial condition, results of operations and cash flows. As of December 31, 2022, the Company had accrued $ 8.7 million as an allowance against amounts due from Celsius. In November 2022, Sphere 3D Corp. filed a demand for arbitration with JAMS alleging the existence and breach of a contract for hosting services. The arbitration demand alleges that the Company has failed to provide contracted for services and to return prepayments allegedly made by Sphere 3D for such services. The Company denies the allegations contained in Sphere 3D’s arbitration demand and intends to vigorously defend its interests. The arbitration demand was stayed by the filing of the Company Parties’ Chapter 11 Cases. Refer to the discussion contained within this footnote under the subtitle “Effect of Automatic Stay.” In November 2022, McCarthy Building Companies, Inc. filed a complaint against the Company in the United States District Court for the Eastern District of Texas, alleging breach of contract for failing to pay when due certain payments allegedly owing under a contract for construction entered into between the parties. In November 2022, plaintiff Mei Peng filed a putative class action in the United States District Court, Western District of Texas, Austin Division, asserting that the Company violated the Securities Exchange Act by failing to disclose to investors, among other things, that the Company was vulnerable to litigation, that certain clients had breached their agreements, and that this impacted 148 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements the Company's profitability and ability to continue as a going concern. The Company denies the allegations contained in the complaint and intends to vigorously defend its interests. As of December 31, 2022 and 2021, there were no other material loss contingency accruals for legal matters. Effect of Automatic Stay Subject to certain exceptions under the Bankruptcy Code, the filing of the Company Parties’ Chapter 11 Cases automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers. Leases —See Note 13 — Leases for further information. Loss on legal settlements —The Company recognized a loss of $ 2.6 million during the year ended December 31, 2021 with respect to the resolution of legal actions for damages resulting from the early termination of agreements by former customers. 15. CONTINGENTLY REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company is authorized to issue 2.00 billion shares of preferred stock, $ 0.00010 par value. 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 Old Core Common Stock and each outstanding share of Old Core Common Stock issued as a result of the conversion of Series A and Series B Preferred Stock in connection with the Merger 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 New Core Common Stock during the year ended December 31, 2022. As of December 31, 2021, 10.8 million shares of preferred stock were issued and outstanding (the below table is in thousands, except per share amounts). Year Ended December 31, 2021 Shares Authorized Shares Issued and Outstanding Issuance Price per Share Net Proceeds Liquidation preference Contingently Redeemable Convertible Preferred Stock: Series A 14,641 10,324 $ 4.27 $ 31,070 $ 44,064 Series B 14,327 502 2.19 1,097 1,100 Undesignated 21,032 — — — Total contingently redeemable convertible preferred stock 50,000 10,826 $ 32,167 $ 45,164 There were no additional contingently redeemable convertible preferred stock issuances in 2021. 16. STOCKHOLDERS' (DEFICIT) EQUITY Authorized Capital— As of December 31, 2022, the Company was authorized to issue 10.0 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 11 — Notes Payable, 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 December 31, 2022. 149 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements As a result of the Merger, 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 . Equity Line of Credit In July 2022, the Company entered into a common stock purchase agreement (the “Equity Line of Credit”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B. Riley. Pursuant to the Equity Line of Credit, subject to the satisfaction of the conditions set forth in the Equity Line of Credit, the Company will have the right to sell to B. Riley, up to $ 100.0 million of shares of the Company’s common stock, par value $ 0.0001 per share (the “Common Stock”), subject to certain limitations and conditions set forth in the Equity Line of Credit, from time to time during the term of the Equity Line of Credit. Sales of Common Stock pursuant to the Equity Line of Credit, and the timing of any sales, are solely at the Company’s option, and the Company is under no obligation to sell any securities to B. Riley under the Equity Line of Credit. The per share purchase price that B. Riley is required to pay for shares of the Company’s Common Stock in a Purchase effected by the Company pursuant to the Equity Line of Credit, if any, will be determined by reference to the volume weighted average price (“VWAP”) of the Common Stock, calculated in accordance with the Equity Line of Credit, for the period (the “Purchase Valuation Period”) beginning at the official open (or “commencement”) of the regular trading session on Nasdaq on the applicable Purchase Date (as defined in the Equity Line of Credit) for such Purchase, and ending at the earliest to occur of (i) 3:59 p.m., New York City time, on such Purchase Date or such earlier time publicly announced by the trading market as the official close of the regular trading session on such Purchase Date, (ii) such time that the total aggregate number (or volume) of shares of Common Stock traded on Nasdaq during such Purchase Valuation Period (calculated in accordance with the Equity Line of Credit) reaches the applicable share volume maximum amount for such Purchase (the “Purchase Share Volume Maximum”), calculated by dividing (a) the applicable Purchase Share Amount for such Purchase, by (b) 0.20 , and (iii) such time that the trading price of a share of Common Stock on Nasdaq during such Purchase Valuation Period (calculated in accordance with the Equity Line of Credit) falls below the applicable minimum price threshold for such Purchase specified by the Company in the Purchase Notice for such Purchase, or if the Company does not specify a minimum price threshold in such Purchase Notice, a price equal to 75.0 % of the closing sale price of the Common Stock on the trading day immediately prior to the applicable Purchase Date for such Purchase (the “Minimum Price Threshold”), less a fixed 3.0 % discount to the VWAP for such Purchase Valuation Period. The net proceeds to the Company from sales that the Company elects to make to B. Riley under the Equity Line of Credit, if any, will depend on the frequency and prices at which the Company sells shares of the Company’s Common Stock to B. Riley. The Company expects that any proceeds received by the Company from such sales to B. Riley will be used for general corporate purposes. There are no restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Equity Line of Credit or Registration Rights Agreement, other than a prohibition (with certain limited exceptions) on entering into specified “Variable Rate Transactions” (as such term is defined in the Equity Line of Credit) during the term of the Equity Line of Credit. Such transactions include, among others, the issuance of convertible securities with a conversion or exercise price that is based upon or varies with the trading price of the Company’s Common Stock after the date of issuance, or the Company’s effecting or entering into an agreement to effect an “equity line of credit” or other substantially similar continuous offering with a third party, in which the Company may offer, issue or sell Common Stock or any securities exercisable, exchangeable or convertible into Common Stock at a future determined price. The Equity Line of Credit will automatically terminate on the earliest to occur of (i) the first day of the month next following the 24 -month anniversary of the Commencement Date (as such term is defined in the Equity Line of Credit), (ii) the date on which B. Riley shall have purchased from the Company under the Equity Line of Credit shares of Common Stock for an aggregate gross purchase price of $ 100.0 million, (iii) the date on which the Common Stock shall have failed to be listed or quoted on Nasdaq or another U.S. national securities exchange identified as an “eligible market” in the Equity Line of Credit, (iv) the 30 th trading day after the date on which the Company commences a voluntary proceeding or any third party commences a bankruptcy proceeding against the Company that is not discharged or dismissed prior to such trading day, and (v) the date on which a bankruptcy custodian is appointed for all or substantially all of the Company’s property or the Company makes a general assignment for the benefit of creditors. 150 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The Company has the right to terminate the Equity Line of Credit at any time after Commencement, at no cost or penalty, upon five ( 5 ) trading days’ prior written notice to B. Riley. B. Riley has the right to terminate the Equity Line of Credit upon five ( 5 ) trading days’ prior written notice to the Company upon the occurrence of certain events set forth in the Equity Line of Credit. The Company and B. Riley may also agree to terminate the Equity Line of Credit by mutual written consent, provided that no termination of the Equity Line of Credit will be effective until the fifth trading day immediately following the settlement date related to any pending purchase that has not been fully settled in accordance with the Equity Line of Credit. Neither the Company nor B. Riley may assign or transfer their respective rights and obligations under the Equity Line of Credit or the Registration Rights Agreement. As consideration for B. Riley’s commitment to purchase shares of Common Stock at the Company’s direction upon the terms and subject to the conditions set forth in the Equity Line of Credit, upon execution of the Equity Line of Credit in July 2022, the Company issued 0.6 million shares to B. Riley with a fair value of $ 1.1 million at issuance which was recorded within other non-operating expenses, net on the Company’s Consolidated Statements of Operations and presented as equity line of credit expenses on the Consolidated Statements of Cash Flows. In addition, the Company reimbursed $ 0.1 million of reasonable legal fees and disbursements of B. Riley’s legal counsel in connection with the transactions contemplated by the Equity Line of Credit and the Registration Rights Agreement. During the year ended December 31, 2022, the Company issued 13.4 million shares under the Equity Line of Credit for a total sales price to B. Riley of $ 20.7 million is net of $ 0.6 million for the fixed 3.0 % discount to the VWAP described above which was recorded within other non-operating expenses, net on the Company’s Consolidated Statements of Operations and presented as equity line of credit expenses on the Consolidated Statements of Cash Flows. As of December 31, 2022, 56.9 million shares of Common Stock were available to be issued under the Equity Line of Credit. As discussed in Note 11 — Notes Payable, 25 % of the net cash proceeds received for shares issued under the Equity Line of Credit is required to be applied by the Company to repay the outstanding principal amount of the Amended Bridge Notes. As of December 31, 2022, the Company owed $ 5.3 million on the Amended Bridge Notes related to proceeds received under the Equity Line of Credit. 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, a warrant holder exercised their warrant to purchase 3.2 million shares in a cashless exercise resulting in 2.9 million net shares issued to the warrant holder after withholding 0.3 million shares for the exercise price. 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. During the year ended December 31, 2022, 4.4 million of the warrants were exercised in a cashless exercise resulting in 3.0 million net shares issued to the warrant holders. Convertible Note Exercises As discussed in Note 11 — Notes Payable, the Company issued $ 514.8 million of Convertible Notes in 2021 along with issuing an additional $ 31.4 million from issuance through December 31, 2022, as payment-in-kind interest on convertible notes outstanding. The Convertible Notes became convertible into common shares at the option of the holder at a conversion price equal to $ 8.00 per share upon the closing of the Merger Agreement with XPDI in January 2022. During the year ended December 31, 2022, $ 1.6 million of Convertible Notes were exercised resulting in 0.2 million shares issued to the holders of the Convertible Notes that were exercised. SPAC Vesting Shares 1.7 million common shares are subject to vesting requirements, as described further in Note 1 — Organization and Description of Business. 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 Company’s Consolidated Balance Sheets as of December 31, 2022. Vendor Settlement 151 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 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. In addition, the vendor liability requires settlement in cash based on the difference between the weighted average of the closing price of the Company’s common stock for each day there was a closing price during the thirty consecutive days immediately prior to the expiration of the lockup period (defined in the agreement as 180 days from the date from the closing of the XPDI merger) and the $ 21.3 million contractual amount of the liability. During the year ended December 31, 2022, we recorded $ 9.5 million, within Other non-operating expenses, net on the Consolidated Statements of Operations related to changes in the fair value of the vendor liability. As of December 31, 2022, the fair value of the liability of $ 18.1 million was recorded within Liabilities subject to compromise on the Consolidated Balance Sheets. Equity Incentive Plans The Company has outstanding awards under the 2018 Omnibus Incentive Plan (the “2018 Plan”). No new awards can be made under the 2018 Plan subsequent to the XPDI Merger, as described below. Awards that were granted under the 2018 Plan included incentive stock options (must meet all statutory requirements), non-qualified stock options and restricted stock units. Awards granted under the 2018 Plan were 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 were required to 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 (the “Board”). 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. No new awards may be made under the Legacy Blockcap Plan and the RADAR Plan (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 (subject to satisfaction of applicable 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. Following the consummation of the Merger, the Company expects that its Board will make grants of awards under the 2021 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, of which 30.6 million was available for issuance as of December 31, 2022. 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 December 31, 2022, we had unvested or unexercised stock-based awards outstanding representing approximately 69.1 million shares of our common stock, consisting of approximately 45.2 million RSAs and RSUs and options to purchase approximately 23.9 million shares of our common stock. On June 8, 2022, the compensation committee (the “Compensation Committee”) of the Board of the Company approved an amendment to the Company’s award agreement for the RSUs outstanding under the 2018 Plan, to provide for the waiver and elimination of the requirement that the Company undergo a “change in control” or a “public offering” for full vesting of the previously outstanding time-vested award (the “RSU Amendment”). Although the mergers that the Company underwent did not satisfy the event-based vesting requirement, they significantly reduced the possibility of the requirement being met as contemplated under the 2018 Plan. The RSU Amendment was authorized and approved by the Board and the Compensation Committee as necessary, desirable, and in the best interest of the Company and its stockholders. As a result of the RSU Amendment, all outstanding RSUs under the 2018 Plan are subject only to time-based vesting, of which RSUs covering approximately 42 million shares of Common Stock were net settled, with approximately 15 million shares of Common Stock to be canceled and forfeited to satisfy tax withholding obligations in June 2022. 152 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Stock Options —Stock options granted under the 2018 Plan are granted at a price per share not less than the fair value at date of grant. Options granted to date generally vest over 4 years and are exercisable for up to 10 years. Determining the fair value of stock options at the grant date requires judgment, including estimating the expected term, expected volatility, risk-free interest rate, and expected dividends. Expected Term — The Company’s expected term is determined using the simplified method and represents the midpoint between the vesting period and the contractual term of the awards. Expected Volatility —The Company’s volatility factor is estimated using comparable public company volatility for similar terms. Risk-Free Interest Rate— The Company bases the risk-free interest rate used in the Black-Scholes option-pricing model on the implied yield currently available on US Treasury zero coupon issues with an equivalent remaining term. Where the expected term of the Company’s stock-based awards does not correspond with the term for which an interest rate is quoted, the Company performs a straight-line interpolation to determine the rate from the available term maturities. Expected Dividends — The Company has no history of paying cash dividends and has no present intention to pay common stock cash dividends in the future; as a result, the expected dividend yield is 0 % as of December 31, 2022 and 2021. The weighted-average assumptions for options granted for the years ended December 31, 2022 and 2021, are as follows: Year Ended December 31, 2022 2021 Dividend yield 0.00 % 0.00 % Expected volatility 72.29 % 72.57 % Risk-free interest rate 1.82 % 1.39 % Expected life (years) 7.00 6.22 A summary of stock option activity for the year ended December 31, 2022 is as follows (amounts in thousands, except per share amounts): Number of Shares Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value Options outstanding - December 31, 2021 31,942 8.76 Granted — — Exercised ( 1,321 ) 2.91 Forfeited ( 5,528 ) 10.45 Expired ( 1,178 ) 10.04 Options outstanding - December 31, 2022 23,915 $ 8.64 7.6 $ — Options vested and expected to vest as of December 31, 2022 23,915 $ 8.64 8.8 $ — Options vested and exercisable as of December 31, 2022 7,521 $ 5.42 5.0 $ — The weighted-average grant date fair value of options granted for the year ended December 31, 2021, was $ 10.92 . The total fair value of stock options vested during the year ended December 31, 2022 and 2021, was $ 0.6 million and $ 35.6 million, respectively. As of December 31, 2022, total unrecognized stock-based compensation expense related to unvested stock options was approximately $ 83.0 million, which is expected to be recognized over a weighted-average time period of 3.1 years. 153 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Restricted Stock Units —Restricted stock units (“RSUs”) granted in 2018 required that the holder elect before the date of grant whether the RSUs will vest either • Over a 4 -year service period, or • Over a 4 -year service period and upon either i) completion of an initial public offering of the Company’s common stock, or ii) upon consummation of a transaction resulting in a change in control of the Company. RSUs granted in 2022 and 2021 generally vest over a 4 -year service period and upon either i) completion of an initial public offering of the Company’s common stock, or ii) upon consummation of a transaction resulting in a change in control of the Company. RSUs granted as replacement awards in the Blockcap acquisition on July 30, 2021 vest based on a service period only and are not subject to any transaction-based vesting conditions. A summary of RSU activity for the year ended December 31, 2022 is as follows (amounts in thousands, except per share amounts): Number of Shares Weighted-Average Grant Date Fair Value Unvested - December 31, 2021 88,600 $ 7.74 Granted 28,897 2.84 Vested ( 53,908 ) 2.49 Forfeited ( 18,372 ) 4.65 Unvested - December 31, 2022 45,217 $ 2.79 As of December 31, 2022, the Company had approximately $ 98.2 million of unrecognized stock-based compensation expense, of which $ 75.3 million is expected to be recognized over a weighted-average time period of 3.0 years and $ 22.9 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 and is not expected to occur, if at all, prior to expiration of the applicable lock-up period. 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. 17. 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 Company had $ 17.1 million of income tax benefit for the year ended December 31, 2022 and $ 15.8 million income tax expense for the year ended December 31, 2021. There was no income tax expense for the year ended December 31, 2020. 154 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Year Ended December 31, 2022 2021 2020 Current tax: Federal $ 74 $ — $ — State 1,356 6,235 — Total current tax 1,430 6,235 — Deferred tax: Federal ( 18,532 ) 11,218 — State 11 ( 1,690 ) — Total deferred tax ( 18,521 ) 9,528 — Total income tax (benefit) expense $ ( 17,091 ) $ 15,763 $ — 155 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The reconciliation between the U.S. statutory tax rate and the Company’s effective tax rate is presented as follows (in thousands): Year Ended December 31, 2022 2021 2020 U.S. federal statutory income tax (benefit) expense applied to loss before income taxes $ ( 454,316 ) $ 13,246 $ ( 2,563 ) State income taxes, net of federal benefit ( 31,667 ) 3,591 ( 410 ) Stock compensation 4,789 141 — Non-deductible interest 11,366 5,310 — Fair value adjustment - convertible notes ( 10,942 ) 3,370 — Non-deductible expenses 288 ( 702 ) — Valuation allowance 241,892 ( 9,180 ) 1,106 Deferred tax adjustments — — 1,827 Goodwill impairment 221,499 — Other permanent items — ( 13 ) 40 Total income tax expense $ ( 17,091 ) $ 15,763 $ — The Company’s deferred tax assets and liabilities are detailed as follows (in thousands): Year Ended December 31, 2022 2021 2020 Deferred tax assets: Net operating loss carryforward $ 79,729 $ 29,837 $ 10,674 Capital loss carryforward 52,765 — — Deferred interest carryforward 11,289 — 137 Research tax credit carryforward 404 404 — Reserves and accruals 4,248 148 159 Stock-based compensation 16,917 15,190 3,579 Unrealized capital loss — — 548 Property, plant and equipment, net 70,464 — — Digital asset impairment loss — 8,368 61 Debt extinguishment loss 2,561 2,558 406 Intangibles (other than goodwill) 2,301 2,270 3,015 Leases 7,062 5,231 — Capitalized research and development expenses 801 — — Other 169 3 — Gross deferred tax assets 248,710 64,009 18,579 Valuation allowance ( 248,710 ) ( 6,781 ) ( 15,961 ) Deferred tax assets, net of valuation allowance — 57,228 2,618 Deferred tax liabilities: Property, plant and equipment, net — ( 75,759 ) ( 2,618 ) Deferred tax liabilities, net — ( 75,759 ) ( 2,618 ) Total net deferred tax assets (liabilities) $ — $ ( 18,531 ) $ — 156 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The changes in the Company’s valuation allowance were as follows (in thousands): Year Ended December 31, 2022 2021 2020 Beginning Balance $ 6,781 $ 15,961 $ 14,855 Change related to current net operating losses and impairments 241,892 20,680 2,238 Net change related to generation of tax attributes — ( 695 ) 695 Change related to deferred tax adjustments 37 ( 20,025 ) ( 1,827 ) Change related to prior period adjustments — ( 137 ) — Acquisition deferred tax liabilities — ( 9,003 ) — Ending Balance $ 248,710 $ 6,781 $ 15,961 Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. The assessment regarding whether a valuation allowance is required on deferred tax assets considers the evaluation of both positive and negative evidence when concluding whether it is more likely than not that deferred tax assets are realizable. After reviewing the positive and negative evidence available, the Company has recorded a valuation allowance of $ 248.7 million. The valuation allowance primarily relates to deferred tax assets for fixed assets, net operating loss carryforwards and capital loss carryforwards. In connection with the Blockcap and Radar acquisition on July 30, 2021, the Company recognized a deferred tax liability of $ 9.0 million during the year. As a result, the Company recorded an income tax benefit of $ 9.0 million for the release of the valuation allowance on the existing deferred tax assets because of the offset of the deferred tax liabilities established for fixed and intangible assets from the acquisition. As of December 31, 2022, the Company has federal and state net operating loss carryforwards in the amount of $ 344.6 million and $ 198.5 million, respectively. As of December 31, 2021, the Company had federal and state net operating loss carryforwards in the amount of $ 142.3 million and $ 16.0 million, respectively. The federal net operating loss can be carried forward indefinitely, however the utilization of the federal net operating loss for a tax year is equal to the lesser of (1) the aggregate of the net operating loss carryovers to such year, plus the net operating carrybacks to such tax year, or (2) 80% of taxable income determined without regard to the deduction. The Company's state net operating loss carryforwards range from 2035 to indefinite. As of December 31, 2022, the Company had U.S. federal and state capital loss carryforwards of $ 220.7 million and $ 193.4 million, respectively. The capital loss carryforwards begin to expire in 2027. In addition, the Company's net operating loss may be subject to utilization limitations due to changes of control, as defined by tax law under Internal Revenue Code Sections 382. Similar provisions may subject the capital loss carryforwards to utilization limitation. The Company completed a Section 382 study related to the acquired Blockcap tax attributes and determined there are no limitations on future utilization of the acquired attributes. The Company had no unrecognized income tax benefits for the years ended December 31, 2022, 2021 and 2020. To date, no interest and penalties have been recognized related to the underpayment of income taxes. The Company continues to believe its positions are supportable; however, due to uncertainties in any tax audit outcome, the Company's estimates of the ultimate settlement of uncertain tax positions may change and the actual tax benefits may differ from the estimates. The Company files income tax returns in the U.S. federal and various state jurisdictions. The Company’s 2018 through 2021 tax years are subject to U.S. federal and state examination. 18. 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. 157 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements Securities that potentially have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the 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 — Organization and Description of Business, 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. 158 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share (in thousands, except per share amounts): Year Ended December 31, 2022 2021 2020 Net (loss) income $ ( 2,146,318 ) $ 47,312 $ ( 12,206 ) Deemed dividend from common to preferred exchange — — ( 10,478 ) $ ( 2,146,318 ) $ 47,312 $ ( 22,684 ) Weighted average shares outstanding - basic 340,647 207,263 157,602 Add: Dilutive share-based compensation awards — 26,042 — Weighted average shares outstanding - diluted 340,647 233,305 157,602 Net (loss) income per share - basic $ ( 6.30 ) $ 0.23 $ ( 0.14 ) Net (loss) income per share - diluted $ ( 6.30 ) $ 0.20 $ ( 0.14 ) 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, in thousands): December 31, 2022 2021 2020 Stock options 23,915 6,716 4,048 Preferred stock — — 10,827 Warrants 18,311 — 6,617 Restricted stock 45,217 84,035 60,719 Share settled liability — 1,943 — SPAC vesting shares 1,725 — — Total potentially dilutive shares 89,168 92,694 82,211 19. SEGMENT REPORTING The Company’s operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics and have similar business activities. 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 Mining 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. 159 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements The following table presents revenue and gross profit by reportable segment for the periods presented (in thousands): Year Ended December 31, 2022 2021 2020 Equipment Sales and Hosting Segment Revenue: Hosting revenue $ 159,688 $ 79,323 $ 41,598 Equipment sales 82,829 248,235 12,595 Total revenue 242,517 327,558 54,193 Cost of revenue: Cost of hosting services 169,717 77,678 36,934 Cost of equipment sales 67,114 177,785 11,017 Total cost of revenue $ 236,831 $ 255,463 $ 47,951 Gross profit $ 5,686 $ 72,095 $ 6,242 Mining Segment Digital asset mining income $ 397,796 $ 216,925 $ 6,127 Total revenue 397,796 216,925 6,127 Cost of revenue 395,082 50,158 2,977 Gross profit $ 2,714 $ 166,767 $ 3,150 Consolidated total revenue $ 640,313 $ 544,483 $ 60,320 Consolidated cost of revenue $ 631,913 $ 305,621 $ 50,928 Consolidated gross profit $ 8,400 $ 238,862 $ 9,392 For the years ended December 31, 2022, 2021 and 2020, cost of revenue included depreciation expense of $ 12.1 million, $ 7.4 million and $ 7.4 million, respectively for the Equipment Sales and Hosting segment. For the years ended December 31, 2022, 2021 and 2020, cost of revenue included depreciation expense of $ 223.6 million, $ 24.3 million and $ 1.1 million , respectively for the Mining segment. 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 December 31, 2022 and 2021, all of the Company’s fixed assets were located in the United States. For the years ended December 31, 2022 and 2021, 99 % and 100 % of the Company’s revenue was generated in the United States, respectively. For the years ended December 31, 2022 and 2021, 62 % and 40 %, respectively, of the Company’s total revenue was generated from digital asset mining of bitcoin, which is subject to extreme price volatility. As of December 31, 2022 and 2021, substantially all of our digital assets were held by two third-party digital asset services. For the years ended December 31, 2022, 2021 and 2020, the concentration of customers comprising 10% or more of the Company’s total revenue and Equipment Sales and Hosting segment revenue was as follows: Year Ended December 31, Year Ended December 31, 2022 2021 2020 2022 2021 2020 Percent of total revenue: Percent of Equipment Sales and Hosting segment: Customer A N/A 15 % N/A N/A 26 % N/A B N/A 14 % N/A N/A 23 % N/A C N/A N/A 24 % N/A N/A 27 % D N/A N/A 13 % N/A N/A 14 % 160 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements A reconciliation of the reportable segment gross profit to (loss) income before income taxes included in the Company’s Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020, is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Reportable segment gross profit $ 8,400 $ 238,862 $ 9,392 (Loss) gain on legal settlement — ( 2,636 ) 5,814 Gain from sales of digital assets 44,298 4,814 69 Impairment of digital assets ( 231,315 ) ( 37,206 ) ( 4 ) Impairment of goodwill and other intangibles ( 1,059,265 ) — — Impairment of property, plant and equipment ( 590,673 ) — — Losses on exchange or disposal of property, plant and equipment ( 28,025 ) ( 118 ) ( 2 ) Operating expense: Research and development 26,962 7,674 5,271 Sales and marketing 12,731 4,062 1,771 General and administrative 213,280 60,486 14,554 Total operating expense 252,973 72,222 21,596 Operating (loss) income ( 2,109,553 ) 131,494 ( 6,327 ) Non-operating expense, net: Loss on debt extinguishment and other 287 8,016 1,333 Interest expense, net 96,826 44,354 4,436 Fair value adjustment on convertible notes 186,853 16,047 — Fair value adjustment on derivative warrant liabilities ( 37,937 ) — — Reorganization items, net ( 197,405 ) — — Other non-operating expenses, net 5,232 2 110 Total non-operating expense, net 53,856 68,419 5,879 (Loss) income before income taxes $ ( 2,163,409 ) $ 63,075 $ ( 12,206 ) 161 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements 20. 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 years ended December 31, 2022 and 2021, the Company recognized hosting revenue from the contracts with these entities of $ 29.5 million and $ 17.0 million , respectively. In addition, for the years ended December 31, 2022 and 2021, there was equipment sales revenue recognized of $ 71.4 million and $ 109.9 million to these same various entities. A nominal amount was receivable from these entities at December 31, 2022. As of December 31, 2021, the Company had accounts receivable of $ 0.3 million from these entities. During the year ended December 31, 2021, the Company entered various promissory notes with Blockcap, a related party entity that was managed by individuals that are directors and executives of the Company. The Company had existing contracts for equipment sales and hosting services with Blockcap prior to the Company acquiring Blockcap on July 30, 2021, as described above. The promissory notes deferred $ 32.7 million of amounts originally due in June through July 2021, from Blockcap contracts until August 2021. The promissory notes were effectively settled by the Company’s acquisition of Blockcap. During the year ended December 31, 2021, Company paid $ 0.1 million for management and professional fees from an affiliated company that had been accrued by Blockcap prior to being acquired on July 30, 2021. The Company reimburses certain officers and directors of the Company for use of a personal aircraft for flights taken on Company business. For the years ended December 31, 2022 and 2021, the Company incurred reimburseme nts of $ 1.9 million and $ 1.4 million , respectively. Nominal amounts were payable at December 31, 2022 and 2021. 21. SUBSEQUENT EVENTS The Replacement DIP Facility As previously discussed in Note 3 — Chapter 11 Filing and Other Related Matters, in connection with the Chapter 11 Cases, the Debtors entered into a Senior Secured Super-Priority Debtor-In-Possession Credit Agreement, dated as of December 22, 2022 (the “Original DIP Credit Agreement”), with Wilmington Savings Fund Society, FSB, as administrative agent, and the lenders from time to time party thereto, which was authorized, on an interim basis, pursuant to an order of the Bankruptcy Court on December 23, 2022 (the “Original Interim DIP Order”). In connection therewith, the Company utilized $ 37.5 million of the approximately $ 57.3 million available under the Original DIP Credit Agreement. Subsequent to the Original Interim DIP Order, the Debtors sought new financing with improved terms to replace the Original DIP Credit Agreement. On February 2, 2023, the Bankruptcy Court entered an interim order (the “Replacement Interim DIP Order”) authorizing, among other things, the Debtors to (i) obtain senior secured non-priming super-priority replacement post-petition financing (the “Replacement DIP Facility”) from B. Riley Commercial Capital, LLC (the “Replacement DIP Lender”) and (ii) refinance the Original DIP Credit Agreement. The Replacement DIP Facility, among other things, provides for a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $ 70 million. Under the Replacement DIP Facility, (i) $ 35 million was available following Bankruptcy Court approval pursuant to the Replacement Interim DIP Order and (ii) up to $ 35 million became available following Bankruptcy Court approval on a final basis (the “Final DIP Order”). DIP Loans under the Replacement DIP Facility will bear interest at a rate of 10 % which will be payable in kind in arrears on the first day of each month. The Replacement DIP Lender will receive an upfront commitment fee equal to 3.5 % of the aggregate commitments under the Replacement DIP Facility, payable in kind, and exit fees equal to 5 % of the amount of the DIP Loans being repaid, reduced or satisfied. The Replacement DIP Facility includes representations and warranties, covenants applicable to the Debtors, and events of default. If an Event of Default under the Replacement DIP Facility occurs, the Replacement DIP Lender may, among other things, permanently reduce any remaining commitments and declare the outstanding obligations under the Replacement DIP Facility to be immediately due and payable. The maturity date of the Replacement DIP Facility is December 22, 2023, which can be extended, under certain conditions, by an additional three months to March 22, 2024. The Replacement DIP Facility will also terminate on the date that is the earliest of the following (i) the effective date of any chapter 11 plan of reorganization with respect to the Borrowers or any other Debtor; (ii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iii) the date of the acceleration of the DIP Loans and the termination of the DIP Commitments; (iv) the date of the 162 Table of Contents Core Scientific, Inc. (Debtor-in-Possession) Notes to Consolidated Financial Statements DIP Agent’s written notice to the Borrowers of the occurrence of an Event of Default under the Replacement DIP Facility; and (v) dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code. NYDIG Settlement On February 26, 2023, the Bankruptcy Court entered an order (the “NYDIG Order”), whereby the Debtors and NYDIG agree that the Debtors would transfer the ASICs serving as collateral under the NYDIG Loan back to NYDIG over a period of several months in exchange for the full extinguishment of the NYDIG Loan. The Company anticipates that the final shipment of ASICs serving as collateral under the NYDIG loan to occur on or about March 31, 2023, after which the NYDIG Loan will be extinguished in full. Priority Power Settlement On March 20, 2023, the Bankruptcy Court entered an order (the “Priority Power Order”), whereby the Debtors and Priority Power agree that the Debtors would transfer equipment to Priority Power and assume an Energy Management and Consulting Services Agreement and other new agreements. 163 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures As previously reported in our Current Report on Form 8-K filed with the SEC on October 28, 2022 (the “October 28 th Form 8-K”), at a meeting held on October 24, 2022, the Audit Committee of the Board of Directors of Core Scientific, Inc. (the “Company”) approved the engagement of Marcum LLP (“Marcum”) as its independent registered public accounting firm for the fiscal year ending December 31, 2022, subject to Marcum’s completion of their client acceptance procedures. At the same meeting, the Audit Committee approved the dismissal of Ernst & Young LLP (“EY”) as independent registered public accounting firm of the Company effective upon the date of the filing of the quarterly report on Form 10-Q for the quarter ending September 30, 2022. The report of EY on the financial statements of Core Scientific Holding Co. and its subsidiaries (“Legacy Core”) for the fiscal years ended December 31, 2021 and December 31, 2020, included in the Form 8-K/A of Core Scientific, Inc., which was filed with the SEC on March 31, 2022, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audits of Legacy Core’s consolidated financial statements for each of the two fiscal years ended December 31, 2021 and December 31, 2020, and for the Company’s financial statements in the subsequent interim periods through the date of the October 28 th Form 8-K there were no (i) disagreements, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, between the Company and EY on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedure, which, if not resolved to the satisfaction of EY, would have caused EY to make reference to the matter in their reports for such fiscal years, and (ii) no “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K), except for the following material weaknesses identified in connection with the audit of Legacy Core’s consolidated financial statements for the two fiscal years ended December 31, 2021 and December 31, 2020 and the review of the Company’s consolidated financial statements for the interim period ended March 31, 2022 and the interim period ended June 30, 2022 in Core Scientific’s internal control over financial reporting related to (i) insufficient accounting and supervision with respect to the appropriate level of technical accounting experience and appropriate processes and procedures to assess and apply the relevant accounting framework, particularly in new or non-routine areas, (ii) a lack of appropriate communication and recordkeeping, particularly related to equity transactions, (iii) design deficiencies in internal controls necessary to enforce appropriate segregation of duties for manual journal entries to our books and records, and (iv) design deficiencies in internal controls necessary to enforce appropriate segregation of duties for our digital asset wallets. The Company provided EY with a copy of the disclosures it is making in the October 28 th Form 8-K and requested that EY furnish the Company a letter addressed to the U.S. Securities and Exchange Commission stating whether it agrees with the above statements. A copy of EY’s letter, dated October 28, 2022, was filed as Exhibit 16.1 to the October 28 th Form 8-K. Subsequently, as reported on our Current Report on Form 8-K/A filed with the SEC on November 23, 2022 (the “November 23 rd 8-K/A), on November 22, 2022, Marcum completed its client acceptance procedures. During the Company’s two most recent fiscal years ended December 31, 2021 and 2020, and the subsequent interim period through November 22, 2022, neither the Company nor anyone acting on its behalf consulted with Marcum regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, in connection with which either a written report or oral advice was provided to the Company that Marcum concluded was a factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).