What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-22 · 389 added, 805 removed, 277 unchanged (81% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, all references in this section to “we,” “us,” “our,” the “Company” or “Core Scientific” refer to Core Scientific Holding Co.

and its subsidiaries prior to the consummation of the Business Combination (as defined below) and Core Scientific, Inc.

(f/k/a Power & Digital Infrastructure Acquisition Corp.) and its subsidiaries after the consummation of the Business Combination.

References to “XPDI” refer to the predecessor registrant prior to the consummation of the Business Combination.

Unless the context otherwise requires, all references in this section to “we,” “us,” “our,” the “Company” or “Core Scientific” refer to Core Scientific, Inc.

and its subsidiaries.

The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our results of operations and financial condition.

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“Risk Factors” elsewhere in this Report.

Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 1A.

“Risk Factors.”

Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A.

“Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year 2022.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal securities laws.

Our forward-looking statements include, but are not limited to, statements regarding our and our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future.

Forward-looking statements include, but are not limited to, statements regarding our and our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future.

In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.

The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

Forward-looking statements in this Quarterly Report on Form 10-Q may include, for example, statements about our ability to:

• meet future liquidity requirements and comply with covenants in our indebtedness;

Forward-looking statements in this Quarterly Report on Form 10-Q may include statements about our ability to:

• implement a Chapter 11 plan of reorganization;

• successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the restructuring to meet our obligations and operating needs;

• have shares of our common stock listed on the Nasdaq or another national securities exchange upon emergence from the Chapter 11 Cases;

• eff ectively respond to general economic and business conditions, including the price of bitcoin;

• maintain the listing on, or to prevent the delisting of our securities from, Nasdaq or another national securities exchange;

• obtain additional capital, whether equity or debt, or exist or remain as a going concern;

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• anticipate rapid changes in laws, regulations and technology;

• execute its business strategy, including enhancement of the profitability of services provided;

• execute its business strategy, including enhancement of the profitability of services provided, including profitably mine digital assets;

• realize the benefits expected from the acquisition of Blockcap, including any related synergies;

• anticipate the uncertainties inherent in the development of new business strategies;

• anticipate the impact of the COVID-19 pandemic, including variant strains of COVID-19, and its effect on business and financial conditions;

• manage risks associated with operational changes in response to the COVID-19 pandemic, including the emergence of variant strains of COVID-19;

• anticipate overall demand of blockchain technology or blockchain hosting resources;

• increase brand awareness;

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• comply with laws and regulations applicable to its business, including tax laws and laws and regulations related to data privacy and the protection of the environment;

• purchase and develop additional sources of low-cost renewable sources of energy:

• stay abreast of modified or new laws and regulations applicable to its business or withstand the impact of any new laws and regulations related to its industry;

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• maintain key strategic relationships with partners and distributors;

• maintain and operate our key facilities:

• respond to uncertainties associated with product and service development and market acceptance;

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These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

Core Scientific is a best-in-class large-scale operator of dedicated, purpose-built facilities for digital asset mining colocation services and a premier provider of blockchain infrastructure, software solutions and services.

We mine digital assets for our own account and provide hosting colocation 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 457MW of power as of December 31, 2021 and 606MW as of September 30, 2022.

We mine Bitcoin, Ethereum and other digital assets for third-party hosting customers and for our own account at our six fully operational data centers in North Carolina (2), Georgia (2), North Dakota (1) and Kentucky (1).

In addition, in October 2021, we announced the entry of an agreement with the City of Denton, Texas and an affiliate of Tenaska Energy, Inc.

to develop our seventh facility, a blockchain data center in Denton, Texas, which became operational in February 2022 with an initial operating capacity approaching 22 MW and is expected to have 300MW of power when completed.

In July 2021 we completed the acquisition of Blockcap, Inc.

(“Blockcap”), one of our largest hosting customers.

Prior to its acquisition, Blockcap had retained the Company to host in the Company’s data centers Blockcap’s 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.

At the time of its acquisition, Blockcap claimed to be the largest independent cryptocurrency mining operator in North America.

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.

The acquisition of Blockcap significantly expanded our self-mining operations and increased the number of miners we own.

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 customer’s 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 continue to grow our self-mining operations by significantly increasing the number of miners dedicated to producing digital assets for our own account, and to continue to develop and grow the infrastructure and facilities necessary to house our growing digital asset mining business and support our robust third-party hosting colocation business.

We may also explore adjacent lines of businesses that leverage our mining expertise and bitcoin assets.

Our total revenue was $162.6 million and $113.1 million for the three months ended September 30, 2022 and 2021, respectively.

We had an operating loss of $401.4 million and operating income of $4.8 million for the three months ended September 30, 2022 and 2021, respectively.

We had a net loss of $434.8 million and $16.6 million for the three months ended September 30, 2022 and 2021, respectively.

Our Adjusted EBITDA was $17.5 million and $54.7 million for the three months ended September 30, 2022 and 2021, respectively.

Core Scientific 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 at our eight operational data centers in Georgia (2), Kentucky (1), North Carolina (2), North Dakota (1) and Texas (2).

We began digital asset mining in 2018 and in 2020 became one of the largest North American providers of colocation hosting services for third-party mining customers, at which time we derived almost all our revenue from third-party colocation hosting fees and the resale of digital asset mining machines.

Currently, we derive the majority of our revenue from self-mining bitcoin.

We are one of the largest blockchain infrastructure, digital asset mining and colocation hosting provider companies in North America, with an average hourly operating power demand of approximately 581 MW and 636 MW for the three months ending March 31, 2023, and December 31, 2022, respectively.

As of March 31, 2023, we had approximately 1,500 MW of contracted power capacity at our sites, including 500MW of power allocated to the Muskogee data center, which remains substantially undeveloped.

Our total revenue was $120.7 million and $192.5 million for the three months ended March 31, 2023 and 2022, respectively.

We had an operating loss of $3.7 million and $26.7 million for the three months ended March 31, 2023 and 2022, respectively.

We had a net loss of $11.7 million and a net loss of $466.2 million for the three months ended March 31, 2023 and 2022, respectively.

Our Adjusted EBITDA was $28.7 million and $93.0 million for the three months ended March 31, 2023 and 2022, respectively.

Adjusted EBITDA is a non-GAAP financial measure.

See “ Key Business Metrics and Non-GAAP Financial Measure ” below for our definition of, and additional information related to Adjusted EBITDA.

Our total revenue was $519.1 million and $242.7 million for the nine months ended September 30, 2022 and 2021, respectively.

We had an operating loss of $1.47 billion and operating income of $29.3 million for the nine months ended September 30, 2022 and 2021, respectively.

We had a net loss of $1.71 billion and $13.2 million for the nine months ended September 30, 2022 and 2021, respectively.

Our Adjusted EBITDA was $169.7 million and $88.0 million for the nine months ended September 30, 2022 and 2021, respectively.

Recent Developments

Updates on our Business and Liquidity Position

Our operating performance and liquidity have been 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.

As a result, management has been actively taking steps to decrease operating costs, eliminate and delay construction expenses, reduce and delay capital expenditures and increase hosting revenues.

In addition, in October 2022 we determined not to make certain payments with respect to several of our debt facilities, equipment financing facilities and leases and other financings, including our two bridge promissory notes.

interest rates to default rates, or taking action with respect to collateral, where applicable.

We do not believe we were in default under any of our debt agreements as of September 30, 2022.

In light of the foregoing, we are in the process of exploring a number of potential strategic alternatives with respect to our capital structure, including hiring strategic advisers, raising additional capital or restructuring its existing capital structure.

Specifically, we have engaged Weil, Gotshal & Manges LLP, as legal advisers, and PJT Partners LP, as financial advisers, to assist us in analyzing and evaluating potential strategic alternatives and initiatives to improve liquidity.

We and our advisers have begun to engage in discussions with certain of its creditors regarding these initiatives.

We expect these activities will continue and intensify.

Among possible alternatives, we may explore liability management transactions, including exchanging its existing debt for equity or additional debt, which transactions may be dilutive to holders of our common stock.

These discussions may not result in any agreement on commercially acceptable terms or at all.

Furthermore, we may seek alternative sources of equity or debt financing, evaluate potential asset sales, and potentially could seek relief under the applicable bankruptcy or insolvency laws.

As of October 31, 2022, we held 62 bitcoins and approximately $32.2 million in cash as compared to 1,051 bitcoins and approximately $29.5 million in cash as of September 30, 2022.

It is very difficult to estimate our future liquidity requirements.

We anticipate that existing cash resources will be depleted by the end of 2022 or sooner.

Depending on our assumptions regarding the timing and ability to achieve more normalized levels of operating revenue, the estimates of amounts of required liquidity vary significantly.

Similarly, it is very difficult to predict when or if bitcoin prices will recover or energy costs will abate.

Given the uncertainty regarding our financial condition, substantial doubt exists about our ability to continue as a going concern for a reasonable period of time.

Refer to the discussion under Liquidity and Capital Resources and the discussion within Note 2 under Basis for Presentation – Going Concern for further information.

Celsius Bankruptcy

In July 2022, one of our 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.

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 us (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.

We strongly disagree with the allegations made in the Celsius motion and the interpretation of the Celsius Agreement espoused therein and are vigorously defending our 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 our 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 our hosting services without Celsius fully paying the costs of such services would have a material effect on our business, financial condition, results of operations and cash flows.

As of September 30, 2022, $5.2 million was due from Celsius, for we had had fully reserved $5.2 million as an allowance, that is presented within accounts receivable, net, of which $1.6 million was outstanding in July 2022 at the time of bankruptcy petition.

Celsius may take actions in its chapter 11 proceeding to terminate or renegotiate its agreements with us and/or seek to reduce our claims for services and damages to which we may be entitled.

Our recovery on our claims will be subject to factors outside of our control.

Riley Equity Line of Credit

In July 2022, we entered into a common stock purchase agreement (the “Equity Line of Credit”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with B.

Riley Principal Capital II, LLC (“B.

Pursuant to the Equity Line of Credit, subject to the satisfaction of the conditions set forth in the Equity Line of Credit, we will have the right to sell to B.

Riley, up to $100.0 million of shares of our 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 our option, and we are under no obligation to sell any securities to B.

Riley under the Equity Line of Credit.

Under the applicable Nasdaq rules, in no event may the Company issue to B.

Riley under the Equity Line of Credit more than 70.3 million shares of Common Stock, which number of shares is equal to approximately 19.99% of the shares of the Common Stock outstanding immediately prior to the execution of the Equity Line of Credit (the “Exchange Cap”), unless (i) we obtain stockholder approval to issue shares of Common Stock in excess of the Exchange Cap in accordance with applicable Nasdaq rules, or (ii) the average price per share paid by B.

Riley for all of the shares of Common Stock that the Company directs B.

Riley to purchase from us pursuant to the Equity Line of Credit, if any, equals or exceeds $1.75 per share (representing the lower of the official closing price of the our Common Stock on Nasdaq on the trading day immediately preceding the date of the Equity Line of Credit and the average official closing price of our Common Stock on Nasdaq for the five consecutive trading days ending on the trading day immediately preceding the date of the Equity Line of Credit, as adjusted pursuant to applicable Nasdaq rules).

Moreover, we may not issue or sell any shares of Common Stock to B.

Riley under the Equity Line of Credit which, when aggregated with all other shares of Common Stock then beneficially owned by B.

Riley and its affiliates (as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 13d-3 thereunder), would result in B.

Riley beneficially owning more than 4.99% of the outstanding shares of Common Stock.

The net proceeds to us from sales that we elect to make to B.

Riley under the Equity Line of Credit, if any, will depend on the frequency and prices at which we sell shares of our Common Stock to B.

We expect that any proceeds received by us from such sales to B.

Riley will be used for general corporate purposes.

As consideration for B.

Riley’s commitment to purchase shares of Common Stock at our 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, we issued 0.6 million shares to B.

In addition, we 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 three and nine months ended September 30, 2022 , the Company issued 7.3 million shares under the Equity Line of Credit for a total sales price to B.

Riley of $12.8 million, consisting of (a) cash proceeds received of $11.7 million and (b) $1.1 million of proceeds due from B.

Riley as of September 30, 2022 that was recorded within prepaid expenses and other current assets on the Consolidated Balance Sheets.

The total sales price of $12.8 million for issuances d uring the three and nine months ended September 30, 2022 is net of $0.3 million for the fixed 3.0% discount to the volume weighted average price (“VWAP”) of the Common Stock, calculated in accordance with the Equity Line of Credit, which was recorded within other non-operating expenses, net on the Company’s Consolidated Statements of Operations.

As of September 30, 2022, 63.0 million shares of Common Stock were available to be issued under the Equity Line of Credit.

As described below, 25% of the net cash proceeds received for shares issued under the Equity Line of Credit that is required to be applied by us to repay the outstanding principal amount of the Amended Bridge Notes.

As of September 30, 2022, the Company owed $2.9 million on the Amended Bridge Notes related to proceeds received under the Equity Line of Credit.

Subsequent to September 30, 2022 , we issued 6.0 million shares under the Equity Line of Credit for a total sales price to B.

Riley of $7.9 million .

In addition, we received $1.1 million of proceeds due from B.

Riley that had been recorded within prepaid expenses and other current assets on the Consolidated Balance Sheets as of September 30, 2022.

As of the date of this report, 56.9 million shares of Common Stock were available to be issued under the Equity Line of Credit .

Amended Bridge Notes

On August 1, 2022, we entered into two amended and restated bridge promissory notes, one in an aggregate principal amount of $60 million with B.

Riley Commercial Capital, LLC (“B.

Riley Commercial Capital”) and one in an aggregate principal amount of $15 million with an affiliate of B.

Riley Commercial Capital (the “Amended Bridge Notes”).

The Amended Bridge Notes amend the original notes having identical principal amounts to extend the maturity date from December 7, 2022 to June 1, 2023.

The Amended Bridge Notes bear interest at a rate of 7% per annum and amortize collectively as follows:

Payment Dates Payment Amount

August 1, 2022 $ 18,000,000

September 1, 2022 $ 4,875,000

October 1, 2022 $ 4,875,000

November 1, 2022 $ 4,875,000

December 1, 2022 $ 4,875,000

January 1, 2023 $ 6,250,000

February 1, 2023 $ 6,250,000

March 1, 2023 $ 6,250,000

April 1, 2023 $ 6,250,000

May 1, 2023 $ 6,250,000

The net proceeds of the notes were used by us for working capital and general corporate purposes.

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 (“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.

MassMutual Amendments

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.

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.

Impairment Charges

During the three months ended September 30, 2022, falli ng digital asset prices, significantly higher energy prices, inflation and supply chain disruptions increased our electricity costs, delayed facility development and miner deployments and reduced our profitability.

The costs of constructing, developing, operating and maintaining hosting facilities and growing our hosting operations also increased significantly, which have made it difficult for us to expand our business and reduced our operating profitability.

Inflation and capital constraints have forced us and many companies like us to sell digital assets for cash that has contributed to large scale selling of digital assets and a decrease in the price of digital assets, including bitcoin.

On June 30, 2022 and September 30, 2022, we identified a triggering event related to our assets and recorded a goodwill and other intangibles impairment charge of $268.5 million and $1.06 billion for the three and nine months ended September 30, 2022, respectively.

The falling prices of digital assets also resulted in a n $8.0 million and $212.2 million im pairment of digital assets being recorded for the three and nine months ended September 30, 2022, respectively.

In addition, the prolonged decrease in the price of bitcoin, the increase in electricity costs and the increase in the global bitcoin network hash rate during the period resulted in an impairment of property, plant and equipment of $59.3 million for both the three and nine months ended September 30, 2022.

A continuation of these trends could result in further asset impairments in future periods.

RSU Amendment

During the nine months ended September 30, 2022, we amended our outstanding restricted stock units (“RSUs”) to provide for the waiver and elimination of the additional vesting requirement that Core Scientific undergo a “change in control” or a “public offering” for full vesting of outstanding time-vested awards (the “RSU Amendment”).

As a result of the RSU Amendment, outstanding RSUs that were time-vested were net settled and outstanding RSUs not vested are subject only to time-based vesting.

Share-based compensation expense increased $135.5 million for the nine months ended September 30, 2022 , as compared to the nine months ended September 30, 2021, primarily as a result of the RSU Amendment.

Hosting contract terminations

Subsequent to September 30, 2022, the hosting contracts for three customers, (including two related-party customers) were terminated.

The previously-hosted ASIC servers are expected to be removed from our data center facilities and returned to the customers by the end of 2022.

For all three customers in the aggregate, we recorded total hosting revenue for the three and nine month ended September 30, 2022 of $7.3 million and $16.3 million, respectively, of which $5.1 million and $11.7 million, respectively, was hosting revenue from related parties.

We plan to replace the previously-hosted ASIC servers with our own self-mining equipment as the ASIC servers are removed and returned to the customers.

Chapter 11 Filing and Other Related Matters

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.

The Debtors continue to operate their business and manage their properties as “debtors-in-possession” (“DIP”) 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.

For detailed discussion about the Chapter 11 Cases, refer to Note 3 — Chapter 11 Filing and Other Related Matters to our unaudited consolidated financial statements in Item 1 of Part I of this report.

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 (the “Secured Convertible Notes”), 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 (the “Other Convertible Notes,” and together with the Secured Convertible Notes, 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 the 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 Company terminated the Restructuring Support Agreement 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 B.

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, 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 the Plan 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”).

The Bankruptcy Court has appointed two official committees:

the Official Committee of Unsecured Creditors (the "Creditors' Committee"), which represents general unsecured creditors, and the Official Committee of Equity Security Holders (the “Equity Committee”), which represents equity security holders.

These committees have the right to be heard on all matters that come before the Bankruptcy Court and have important roles in the Chapter 11 Cases.

The Debtors are required to bear certain costs and expenses of the committees, including those of their counsel and financial advisors, in each case subject to a limited budget.

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 miners 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 final shipment of miners that served as collateral under the NYDIG loan occur during the quarter ended March 31, 2023, after which the NYDIG Loan was extinguished in full and the Company recorded a $20.8 million Gain on extinguishment of debt in the Company’s Consolidated Statements of Operations.

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.

Priority Power was determined to have a single aggregate allowed claim of $20.8 million which was secured by a perfected mechanic’s lien.

The claim was deemed paid and fully satisfied by transfer of specific equipment from the Debtors to Priority Power on the date of the Priority Power Order, thereby releasing all Priority Power liens.

The satisfaction of the obligation and transfer of the equipment is a noncash transaction which did not result in any gain or loss at March 31, 2023.

Our Business Model

Company Overview

Core Scientific is a blockchain technology company with industrial scale digital asset mining, equipment sales and hosting operations.

Our operations are currently conducted in the United States at state-of-the-art facilities specifically designed and constructed for housing advanced mining equipment.

The Company’s primary business is self-mining and hosting third-party equipment used in mining of digital asset coins and tokens, including bitcoin.

Since July 2018, we have operated for ourselves and on behalf of our customers and related parties, miners of varying models, types, and manufacturers, but primarily miners of bitcoin manufactured by Bitmain Technologies, Ltd (“Bitmain”).

We have accumulated significant expertise in the installation, operation, optimization, and repair of digital mining equipment.

We have expanded our self-mining operation to take advantage of favorable market conditions and leverage our expertise for our own account.

Our hosting colocation business provides a full suite of services to digital asset mining customers.

We may also explore adjacent lines of businesses that leverage our mining expertise and bitcoin assets.

Our proprietary data centers in Georgia, Kentucky, North Carolina, North Dakota and Texas are purpose-built facilities optimized for the unique requirements of high density blockchain computer servers.

We are one of the largest blockchain infrastructure, digital asset mining, and colocation hosting provider companies in North America, with an average hourly operating power demand of approximately 581MW as of March 31, 2023, and 636MW as of December 31, 2022.

As of March 31, 2023, we have approximately 1,500MW of contracted power capacity at our sites, including 500MW of power allocated to the Muskogee data center which remains substantially undeveloped.

Our existing completed facilities leverage our specialized construction proficiency by employing high-density, low-cost engineering and power designs.

We continually evaluate our mining performance, including our ability to access additional megawatts of electric power and to expand our total self-mining and customer and related party hosting hash rates.

We may explore additional mining facilities and mining arrangements in connection with our short-, medium- and long-term strategic planning.

We have two operating segments:

“Equipment Sales and Hosting” which consists primarily of our blockchain infrastructure and third-party hosting business and equipment sales to customers, and “Mining” consisting of digital asset mining for our own account.

“Hosting” which consists primarily of our blockchain infrastructure and third-party hosting business, and “Mining” consisting of digital asset mining for our own account.

The blockchain hosting business generates revenue through the sale of consumption-based contracts for our hosting services which are recurring in nature.

Equipment sales revenue is derived from our ability to leverage our partnerships with leading equipment manufacturers to secure equipment in advance, which is then sold to our customers when they are unable to obtain them otherwise.

The digital asset mining operation segment generates revenue from operating owned computer equipment as part of a pool of users that process transactions conducted on one or more blockchain networks.

During 2022, our “Hosting” segment also included sales of mining equipment to customers, and was referred to as “Hosting and Equipment Sales”.

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, we receive digital assets.

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We own and host specialized computers (“miners”) configured for the purpose of validating transactions on multiple digital asset network blockchains (referred to as, “mining”), predominantly the bitcoin network.

Substantially all of the miners we own and host were manufactured by Bitmain and incorporate ASIC chips specialized to solve blocks on the bitcoin blockchains using the 256-bit secure hashing algorithm (“SHA-256”) in return for bitcoin digital asset rewards.

Substantially all of the miners we own and host were manufactured by Bitmain and incorporate application-specific integrated circuit (“ASIC”) chips specialized to solve blocks on the bitcoin blockchains using the 256-bit secure hashing algorithm (“SHA-256”) in return for bitcoin digital asset rewards.

We have entered into and facilitated agreements with vendors to supply mining equipment for our and our users’ digital asset mining operations.

We prepay a significant portion of the purchase price for these new miners as partially refundable deposits, with delivery expected to occur in monthly installments through the first quarter of 2023, and the remainder of the purchase price for these new miners is payable in installments, with payment due in advance of the scheduled delivery dates set forth in the applicable purchase agreement.

As of September 30, 2022, we had deployed approximately 232,000 bitcoin miners, which number consists of approximately 130,000 self-miners and approximately 102,000 hosted miners, which represented 13.0 exahash per second (“EH/s”) and 9.5 EH/s for self-miners and hosted miners, respectively.

As of September 30, 2022, the remaining contractual purchase obligations on the bitcoin miners on order is approximately $49.9 million, substantially all of which are expected to be settled within one year.

We expect a significant portion of our commitments for bitcoin miners as of September 30, 2022 to be reduced through price reductions and coupons.

We pay for these new miners in installments, with payment due in advance of the scheduled delivery dates set forth in the applicable purchase agreement.

We allocate in advance our mining equipment orders between our self -mining operations and our hosting operations conducted on behalf of customers based on our estimates of where such equipment can most profitably and efficiently be used and in accordance with contractual arrangements with our customers.

The table below summarizes the total number of self- and hosted miners in operation as of September 30, 2022 (miners in thousands).

Bitcoin Miners in Operation as of September 30, 2022

As of March 31, 2023, all new miners have been paid for in arrangements with our customers.

As of March 31, 2023, we had deployed approximately 207,000 bitcoin miners, which number consists of approximately 155,000 self-miners and approximately 52,000 hosted miners, which represented 16.1 EH/s and 5.7 EH/s for self-miners and hosted miners, respectively.

The table below summarizes the total number of self- and hosted miners in operation as of March 31, 2023 and December 31, 2022, (miners in thousands).

Bitcoin Miners in Operation as of March 31, 2023

Mining Equipment Hash rate (EH/s) Number of Miners

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Total mining equipment 21.8 207.0

Bitcoin Miners in Operation as of December 31, 2022

Mining Equipment Hash rate (EH/s) Number of Miners

Self-miners 15.7 153.0

Hosted miners 8.0 81.0

Total mining equipment 23.7 234.0

During the three months ended March 31, 2023, the hosting contracts for 24 customers, (including two related-party customers) were terminated.

The previously-hosted ASIC servers were removed from our data center facilities and returned to the customers.

Summary of Digital Asset Activity

Activity related to our digital asset balances for the nine months ended September 30, 2022 and 2021 were as follows (in thousands):

September 30, 2022 September 30, 2021

Activity related to our digital asset balances for the three months ended March 31, 2023 and 2022, were as follows (in thousands):

March 31, 2023 March 31, 2022

Digital assets, beginning of period $ 724 $ 234,298

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98,026 133,000

Blockcap acquisition — 77,560

Proceeds from sales of digital assets and other (350,795) (26,754)

Proceeds from sales of digital assets (98,384) —

Gain from sales of digital assets 1,064 2,163

Impairment of digital assets (1,056) (53,985)

Other (374) 847

Digital assets, end of period $ — $ 316,323

Impact of COVID-19

The COVID-19 pandemic has had and continues to have an adverse impact on our business and operations, particularly as a result of preventive and precautionary measures that we, other businesses, and governments are taking.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.

It also allocated funds for the U.S.

Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.

In April 2020, we received a loan of $2.2 million from the PPP through the SBA.

The loan was unsecured and bore interest at a rate per annum of 1% and monthly payments of principal were to begin in July 2021.

The loan was due in full in April 2022, however in July 2021, we repaid the loan in full.

We are unable to predict the full impact that the COVID-19 pandemic, including variant strains of COVID-19, will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic and the actions that may be taken by government authorities across the United States.

However, COVID-19, including variant strains of COVID-19, is not expected to result in any significant changes in costs going forward.

We will continue to monitor the performance of our business and assess the impacts of COVID-19 and the emergence of new variant strains of COVID-19, including potential constraints on the supply of new miners.

The Merger and Public Company Costs

On July 20, 2021, we entered into the merger agreement with XPDI and the Merger Sub (the “Merger Agreement”).

XPDI’s stockholders approved the transactions contemplated by the Merger Agreement (collectively, the “Business Combination”) at a special meeting of stockholders held on January 19, 2022 (the “Special Meeting”).

Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, XPDI acquired Core Scientific through a series of transactions, including (x) Merger Sub merging with and into Core Scientific (the “First Merger”), with Core Scientific surviving the First Merger as a wholly owned subsidiary of XPDI, and (y) following the closing of the First Merger, Core Scientific merging with and into XPDI (the “Second

Merger”), with XPDI surviving the Second Merger.

In connection with the closing of the Business Combination, we changed our name from Power & Digital Infrastructure Acquisition Corp.

to Core Scientific, Inc.

As a result of the merger, among other things, each outstanding share of Legacy Core Scientific common stock was cancelled in exchange for the right to receive 1.6001528688 of a share of our common stock.

The Merger provided gross proceeds of approximately $221.6 million from the XPDI trust account, resulting in approximately $195.0 million in net cash proceeds to Core Scientific, after the payment of transaction expenses.

As a result of the Merger, former Core Scientific stockholders own 90.7%, former XPDI public stockholders own 6.7% and XPDI’s sponsor owns 2.6% of the issued and outstanding shares of common stock, respectively, of the Company, excluding the impact of unvested restricted stock units and options.

The proceeds from the Merger were used to fund mining equipment purchases and infrastructure build-out as the Company expands its leadership position.

The merger is accounted for as a reverse recapitalization and XPDI is treated as the “acquired” company for financial reporting purposes.

Legacy Core Scientific has been deemed the predecessor and Core, the post-combination company, is the successor Securities and Exchange Commission (“SEC”) registrant, meaning that Legacy Core Scientific’s financial statements for periods prior to the consummation of the merger are disclosed in Core’s periodic reports.

As a consequence of the merger, we and XPDI collectively incurred an aggregate of $39.0 million in professional fees associated with legal services, M&A advisor fees, financial advice, due diligence, and other deal-related costs.

These transaction costs will be 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 allocated to equity-classified instruments were recognized as an adjustment to additional paid-in capital within total stockholders’ equity while transaction costs allocated to liability-classified instruments that are subsequently measured at fair value through earnings were expensed in the first quarter of 2022.

Core Scientific is registered with the SEC and listed on Nasdaq as of January 19, 2022, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

We expect to incur additional annual expenses as a public company for, among other things, internal controls compliance and public company reporting obligations, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.

Performance Metrics

Miners perform computational operations in support of digital asset blockchains measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain;

therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations.

The original equipment used for mining bitcoin utilized the Central Processing Unit (“CPU”) of a computer to mine various forms of digital assets.

Due to performance limitations, CPU mining was rapidly replaced by the Graphics Processing Unit (“GPU”), which offers significant performance advantages over CPUs.

General purpose chipsets like CPUs and GPUs have since been replaced as the standard in the mining industry by ASIC chips such as those

found in the miners we and our customers use to mine bitcoin.

These ASIC chips are designed specifically to maximize the rate of hashing operations.

Network Hash Rate

In digital asset mining, hash rate is a measure of the processing speed at which a mining computer operates in its attempt to secure a specific digital asset.

A participant in a blockchain network’s mining function has a hash rate equivalent to the total of all its miners seeking to mine a specific digital asset.

System-wide, the total network hash rate reflects the sum total of all miners seeking to mine each specific type of digital asset.

A participant’s higher total hash rate relative to the system-wide total hash rate generally results in a corresponding higher success rate in digital asset rewards over time as compared to mining participants with relatively lower total hash rates.

However, as the relative market price for a digital asset, such as bitcoin, increases, more users are incentivized to mine for that digital asset, which increases the network’s overall hash rate.

As a result, a mining participant must increase its total hash rate in order to maintain its relative possibility of solving a block on the network blockchain.

Achieving greater hash rate power by deploying increasingly sophisticated miners in ever greater quantities has become one of the bitcoin mining industry’s great sources of competition.

Our goal is to deploy a powerful fleet of self- and hosted-miners, while operating as energy-efficiently as possible.

Key Factors Affecting Our Performance

Market Price of Digital Assets

Our business is heavily dependent on the spot price of bitcoin, as well as other digital assets.

The prices of digital assets, specifically bitcoin, have experienced substantial volatility, which may reflect “bubble” type volatility, meaning that high or low prices may have little or no relationship to identifiable market forces, may be subject to rapidly changing investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation, and media reporting.

Bitcoin (as well as other digital assets) may have value based on various factors, including their acceptance as a means of exchange by consumers and others, scarcity, and market demand.

Our financial performance and continued growth depend in large part on our ability to mine for digital assets profitably and to attract customers for our hosting services.

Increases in power costs, inability to mine digital assets efficiently and to sell digital assets at favorable prices will reduce our operating margins, impact our ability to attract customers for our services, may harm our growth prospects and could have a material adverse effect on our business, financial condition and results of operations.

Over time, we have observed a positive trend in the total market capitalization of digital assets which suggests increased adoption.

However, historical trends are not indicative of future adoption, and it is possible that the adoption of digital assets and blockchain technology may slow, take longer to develop, or never be broadly adopted, which would negatively impact our business and operating results.

Network Hash Rate

Our business is not only impacted by the volatility in digital asset prices, but also by increases in the competition for digital asset production.

For bitcoin, this increased competition is described as the network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the bitcoin blockchain, and the difficulty index associated with the secure hashing algorithm employed in solving the blocks.

The increase in bitcoin’s network hash rate results in a regular increase in the cryptographic complexity associated with solving blocks on its blockchain, or its difficulty.

Increased difficulty reduces the mining proceeds of the equipment proportionally and eventually requires bitcoin miners to upgrade their mining equipment to remain profitable and compete effectively with other miners.

Similarly, a decline in network hash rate results in a decrease in difficulty, increasing mining proceeds and profitability.

The table below provides a summary of the impact to revenue from the increase or decrease in the market price of bitcoin, difficulty and our hash rate.

The impact to revenue in each scenario assumes only one driver increases or decreases and all others are held constant.

Impact to Revenue

Driver Increase in Driver Decrease in Driver

Market Price of Bitcoin Favorable Unfavorable

Difficulty Unfavorable Favorable

Core Scientific Hash Rate Favorable Unfavorable

Further affecting the industry, and particularly for the bitcoin blockchain, the digital asset reward for solving a block is subject to periodic incremental halvening.

Halvening is a process designed to control the overall supply and reduce the risk of inflation in digital assets using a proof of work consensus algorithm.

At a predetermined block, the mining reward is reduced by half, hence the term “halvening.”

For bitcoin, our most significant digital asset to which the vast majority of our mining power is devoted, the reward was initially set at 50 bitcoin currency rewards per block.

The bitcoin blockchain has undergone halvening three times since its inception, as follows:

(1) on November 28, 2012, at block 210,000;

(2) on July 9, 2016 at block 420,000;

and (3) on May 11, 2020 at block 630,000, when the reward was reduced to its current level of 6.25 bitcoin per block.

The next halvening for the bitcoin blockchain is anticipated to occur in early 2024 at block 840,000.

This process will repeat until the total amount of bitcoin currency rewards issued reaches 21 million and the theoretical supply of new bitcoin is exhausted, which is expected to occur around the year 2140.

Many factors influence the price of bitcoin and the other digital assets we may mine for, and potential increases or decreases in prices in advance of or following a future halvening are unknown.

Electricity Costs

Electricity cost is the major operating cost for the mining fleet, as well as for the hosting services provided to customers and related parties.

The cost and availability of electricity are affected primarily by changes in seasonal demand, with peak demand during the summer months driving higher costs and increased curtailments to support grid operators.

Severe winter weather can increase the cost of electricity and the frequency of curtailments when it results in damage to power transmission infrastructure that reduces the grid’s ability to deliver power.

Geopolitical and macroeconomic factors, such as overseas military or economic conflict between states, can adversely affect electricity costs by raising the cost of power generation inputs such as natural gas.

Locally, factors such as animal incursion, sabotage and other events out of our control can also impact electricity costs and availability.

Equipment Costs

The long-term trend of increasing digital assets market value has increased demand for the newest, most efficient miners and has resulted in scarcity in the supply of, and thereby a resulting increase in the price of, those miners.

The recent decline in the market value of digital assets has resulted in excess supply of miners and a decline in their price.

As a result, the cost of new machines can be unpredictable, and could be significantly higher than our historical cost for new miners.

Our Customers

In addition to factors underlying our mining business growth and profitability, our success greatly depends on our ability to retain and develop opportunities with our existing customers and to attract new customers.

On July 30, 2021, we acquired an existing hosting customer, Blockcap, Inc.

(“Blockcap”), and thereby increased our self-mining operations.

Our business environment is constantly evolving, and digital asset miners can range from individual enthusiasts to professional mining operations with dedicated data centers.

The Company competes with other enterprises that focus all or a portion of their activities on mining activities at scale.

We face significant competition in every aspect of our business, including, but not limited to, the acquisition of new miners, the ability to raise capital, obtaining low-cost electricity, obtaining access to energy sites with reliable sources of power, and evaluating new technology developments in the industry.

At present, the information concerning the activities of these enterprises may not be readily available as the vast majority of the participants in this sector do not publish information publicly, or the information may be unreliable.

Published sources of information include “bitcoin.org” and “blockchain.info”;

however, the reliability of that information and its continued availability cannot be assured.

We believe, based on available data, that despite the significant decrease in market prices for bitcoin and other major digital assets during 2022, an increase in the scale and sophistication of competition in the digital asset mining industry has continued increasing network hash rate, with new entrants and existing competitors increasing the number of miners mining for bitcoin.

Despite this trend, we believe, we have continued to maintain a competitive hash rate capacity among both public and private bitcoin miners.

However, to remain competitive in our evolving industry, both against new entrants into the market and existing competitors, we anticipate that we will need to continue to expand our existing miner fleet by purchasing new and available used miners, as well as innovating to develop and implement new technologies and mining solutions.

We believe that our integrated blockchain service portfolio, as well as our differentiated customer experience and technology, are keys to retaining and growing revenue from existing customers and to acquiring new customers.

For example, we believe our significant build-out and ready power along with our Minder TM fleet management software, represent meaningful competitive advantages favorable to our business.

Key Business Metrics and Non-GAAP Financial Measure

In addition to our financial results, we use the following business metrics and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, and make strategic decisions.

For a definition of these key business metrics, see the sections titled “─Hash Rate” and “─Adjusted EBITDA” below.

September 30,

For a definition of these key business metrics, see the sections titled “Self-Mining Hash Rate” and “Adjusted EBITDA” (below).

Three Months Ended March 31,

Self-Mining Hash rate (Exahash per second)

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Adjusted EBITDA (in millions) $ 28.7 $ 93.0

We operate mining hardware that performs computational operations in support of the blockchain measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain;

therefore, a miner’s “hash rate” refers to the rate at which the hardware is capable of performing such computations.

Self-Mining Hash Rate

We operate mining hardware which performs computational operations in support of the blockchain measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain;

therefore, a miner’s “hash rate” refers to the rate at which the hardware is capable of solving such computations.

Our hash rate represents the hash rate of our miners as a proportion of the total bitcoin network hash rate and drives the number of digital asset rewards that will be earned by our fleet.

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We measure the hash rate produced by our mining fleet through our management software Minder TM , which consolidates the reported hash rate from each miner.

The method by which we measure our hash rate may differ from how other operators present a such measure.

Our self-mining hash rate was 13.00 EH/s and 2.64 EH/s as of September 30, 2022 and 2021, respectively, representing a 392% increase year over year.

Our combined self-mining and customer and related party hosting hash rate grew 216%, to 22.50 EH/s as of September 30, 2022 from 7.12 EH/s as of September 30, 2021.

The method by which we measure our hash rate may differ from how other operators present such measure.

Our self-mining hash rate was 16.1 EH/s and 8.3 EH/s for the three months ended March 31, 2023 and 2022, respectively representing a 94% increase year over year.

Our combined self-mining and customer and related party hosting hash rate grew 35%, to 21.8 EH/s for the three months ended March 31, 2023 from 16.2 EH/s for the three months ended March 31, 2022.

Adjusted EBITDA

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(v) gain on sale of intangible assets;

(vi) restructuring charges;

and (vii) certain additional non-cash or non-recurring items, that do not reflect our ongoing business operations.

(vi) Reorganization items, net;

and (vii) certain additional non-cash or non-recurring items, which do not reflect our ongoing business operations.

For additional information, including the reconciliation of net income (loss) to Adjusted EBITDA, please refer to the table below.

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You should review the reconciliation of net loss to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

The following table presents a reconciliation of net loss to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

The following table presents a reconciliation of net loss to Adjusted EBITDA for the three months ended March 31, 2023 and 2022, (in thousands):

Three Months Ended March 31,

Adjusted EBITDA

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Interest expense, net 157 21,676

Income tax expense (benefit) 10,642 (815) 4,398 (697)

Income tax expense 104 42,406

Depreciation and amortization 20,094 42,139

Loss on debt extinguishment — — — 8,016

Gain on debt extinguishment (20,761) —

Stock-based compensation expense 12,273 25,797

29,753 28,288 166,548 31,012

Loss on legal settlement — 2,603 — 2,603

Fair value adjustment on derivative warrant liabilities — (10,275)

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Impairment of digital assets 1,056 53,985

Impairment of goodwill and other intangibles 268,512 — 1,059,265 —

Impairment of property, plant and equipment 59,259 — 59,259 —

Losses on exchange or disposal of property, plant and equipment — — 13,057 17

Gain on sale of intangible assets — — (5,904) —

Cash restructuring charges (125) — 1,320 —

Fair value adjustment on acquired vendor liability 68 — 9,498 —

Equity line of credit expenses 1,431 — 1,431 —

Reorganization items, net 31,559 —

Non-cash and other items (3,069) (357)

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$ 28,664 $ 93,041

1 Includes $1.0 million of stock-based compensation that was provided in severance as part of restructuring charges incurred during the three and nine months ended September 30, 2022.

Components of Results of Operations

Our revenue consists primarily of returns from our hosting operations, including the sales of mining equipment to be hosted in our data centers, and proceeds related to digital currency transaction processing (digital asset mining revenue) fees.

Our revenue consists primarily of returns from our hosting operations, including the sales of mining equipment to be hosted in our data centers and digital asset mining income.

• Hosting revenue from customers and related parties.

Hosting revenue from customers and related parties is based on consumption-based contracts with our customers and related parties.

Most contracts are renewable, and our customers are generally billed on a fixed and recurring basis each month for the duration of their contracts, which vary from one to three years in length.

Hosting revenue from customers and related parties is based on electricity-based consumption contracts with our customers and related parties.

Most contracts are renewable, and our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which vary from one to three years in length.

See Item 13 - “Certain Relationships and Related Transactions, and Director Independence,” to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

• Equipment sales to customers and related parties.

Revenue from equipment sales to customers and related parties is derived from our ability to leverage our partnerships with leading equipment manufacturers to secure equipment in advance, which is then sold to our customers and related parties.

Equipment sales to customers and related parties is derived from our ability to leverage our partnerships with leading equipment manufacturers to secure equipment in advance, which is then sold to our customers and related parties.

Our equipment sales are typically in connection with a hosting contract.

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The mining pool operator provides a service that coordinates the computing power of the independent mining enterprises participating in the mining pool.

Fees are paid to the mining pool operator to cover the costs of maintaining the pool.

The pool uses software that coordinates the pool members’ mining power, identifies new block rewards, records how much hash rate each participant contributes to the pool, and assigns digital asset rewards earned by the pool among its participants in proportion to the hash rate each participant contributed to the pool in connection with solving a block.

Revenue from digital asset mining are impacted by volatility in bitcoin prices, as well as increases in the Bitcoin blockchain’s network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the Bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks.

The diagram below provides a simple illustration of the calculation of our annual digital asset mining revenue.

1 Amount represents the average number of blocks mined per year, e.g., blocks are mined on average every 10 minutes, or 144 per day, 52,560 per year

Revenues from digital asset mining are impacted by volatility in bitcoin prices, as well as increases in the bitcoin blockchain’s network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the bitcoin blockchain and the difficulty index associated with the secure hashing algorithm employed in solving the blocks.

Cost 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 includes costs of mining computer equipment sold to customers.

Loss on legal settlement

Loss on legal settlement represents a settlement loss on amounts paid to a former customer.

Cost of Equipment Sales includes costs of computer equipment sold to customers.

Gain from sales of digital assets

Gain from sales of digital assets consists of gain on sales of digital assets and impairment charges for digital assets at the lower of cost or fair value.

Gain from sales of digital assets consist of gain on sales of digital assets.

Impairment of digital assets

We initially recognize digital assets that are received as digital asset mining revenue based on the fair value of the digital assets.

Digital assets that are purchased in an exchange of one digital asset for another digital asset are recognized at the fair value of the asset received.

These assets are adjusted to fair value only when an impairment is recognized, or the underlying asset is held for sale.

Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital asset at the time its fair value is being measured, which is on a daily basis.

To the extent that an impairment loss is recognized, the loss establishes the new cost basis of the digital asset.

We initially recognize digital assets that are received as digital asset mining revenue based on the fair value of the digital assets when earned and 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 received at the time of the transaction.

These assets are adjusted to fair value only when an impairment is recognized.

Impairment exists when the carrying amount 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 costs basis of the digital asset.

Impairment losses are recognized in the period in which the impairment is identified.

The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value.

See Note 2 under “Digital Assets” in our audited consolidated financial statements for the year ended December 31, 2021 on Form 8-K/A, which was filed with the SEC on March 31, 2022, for further information.

Impairment of goodwill and other intangibles

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 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 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 tests intangible assets subject to amortization whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of the intangible assets.

Intangible assets 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 intangible 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 intangible asset.

This evaluation is performed at the lowest level for which separately identifiable cash flows exist.

Intangible assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell.

Impairment of property, plant and equipment

The Company tests property, plant and equipment for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of the property, plant and equipment.

Property, plant and equipment 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.

This evaluation is performed at the lowest level for which separately identifiable cash flows exist.

Losses on exchange or disposal of property, plant and equipment

Losses on exchange or disposal of property, plant and equipment are measured as the differences between the carrying value of the property, plant and equipment exchanged or disposed of and fair value of the consideration received upon exchange or disposal.

The fair value of noncash consideration received in an exchange of property, plant and equipment is determined as of contract inception.

The impaired digital assets are written down to their fair value at the time of impairment and this new carrying value will not be adjusted upward for any subsequent increase in fair value.

See Note 2 — Summary of Significant Accounting Policies in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Operating expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

Operating expenses consists of research and development, sales and marketing, and general and administrative expenses.

Each is outlined in more detail below.

6 unchanged sentences

General and administrative expenses include compensation and benefits expenses for employees, who are not part of the research and development and sales and marketing organization, professional fees, and other personnel related expenses.

Also included is stock-based compensation, insurance, amortization of intangibles, asset impairments, franchise taxes, and bank fees.

Non-operating expenses, net

Non-operating expenses, net includes loss on debt extinguishment, interest expense, net, fair value adjustment on convertible notes, fair value adjustment on derivative warrant liabilities and other non-operating expenses (income), net.

Income tax expense (benefit)

Income tax expense (benefit) consists of U.S.

federal, state and local income taxes, if any.

For the three and nine months ended September 30, 2022, our income tax expense was $10.6 million and $4.4 million, respectively.

For the three and nine months ended September 30, 2021, our income tax benefit was $0.8 million and $0.7 million, respectively.

We evaluate our ability to recognize our deferred tax assets quarterly by considering all positive and negative evidence available as proscribed by the Financial Accounting Standards Board (“FASB”) under its general principles of Accounting Standards Codification (“ASC”) 740, Income Taxes .

Results of Operations for the Three Months Ended September 30, 2022 and 2021

The following table sets forth our selected Consolidated Statements of Operations for each of the periods indicated.

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Hosting revenue from customers $ 35,731 $ 17,585 $ 18,146 103 %

Hosting revenue from related parties 9,185 2,903 6,282 216 %

Equipment sales to customers 7,468 23,879 (16,411) (69) %

Equipment sales to related parties 29,693 11,654 18,039 155 %

Digital asset mining revenue 80,495 57,118 23,377 41 %

Total revenue 162,572 113,139 49,433 44 %

Cost of revenue:

Cost of hosting services 44,975 19,577 25,398 130 %

Cost of equipment sales 27,917 24,997 2,920 12 %

Cost of digital asset mining 116,756 10,141 106,615 NM

Total cost of revenue 189,648 54,715 134,933 247 %

Gross (loss) profit (27,076) 58,424 (85,500) NM

Loss on legal settlement — (2,603) 2,603 NM

Gain from sales of digital assets 11,036 391 10,645 NM

Impairment of digital assets (7,986) (12,552) 4,566 NM

Impairment of goodwill and other intangibles (268,512) — (268,512) NM

Impairment of property, plant and equipment (59,259) — (59,259) NM

Operating expenses:

Research and development 6,192 1,586 4,606 290 %

Sales and marketing 39 932 (893) NM

General and administrative 43,346 36,358 6,988 19 %

Total operating expenses 49,577 38,876 10,701 28 %

Operating (loss) income (401,374) 4,784 (406,158) NM

Non-operating expenses, net:

Loss on debt extinguishment — — — NM

Interest expense, net 25,942 13,569 12,373 91 %

Fair value adjustment on convertible notes (4,123) 8,663 (12,786) NM

Fair value adjustment on derivative warrant liabilities (521) — (521) NM

Other non-operating expenses (income), net 1,478 (4) 1,482 NM

Total non-operating expenses, net 22,776 22,228 548 2 %

Loss before income taxes (424,150) (17,444) (406,706) NM

Income tax expense (benefit) 10,642 (815) 11,457 NM

Net loss $ (434,792) $ (16,629) $ (418,163) NM

NM - Not Meaningful

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Hosting revenue from customers $ 35,731 $ 17,585 $ 18,146 103 %

Hosting revenue from related parties 9,185 2,903 6,282 216 %

Equipment sales to customers 7,468 23,879 (16,411) (69) %

Equipment sales to related parties 29,693 11,654 18,039 155 %

Digital asset mining revenue 80,495 57,118 23,377 41 %

Total revenue $ 162,572 $ 113,139 $ 49,433 44 %

Percentage of total revenue:

Hosting revenue from customers

Hosting revenue from related parties

Equipment sales to customers

Equipment sales to related parties

Digital asset mining revenue

Total revenue

Total revenue increased by $49.4 million to $162.6 million for the three months ended September 30, 2022 from $113.1 million for the three months ended September 30, 2021 as a result of the factors described below.

Total hosting revenue from customers increased by $18.1 million or 103%, to $35.7 million for the three months ended September 30, 2022 from $17.6 million for the three months ended September 30, 2021.

The increase in hosting revenue from customers was driven primarily by the onboarding of new clients and improvements in hosting price for the three months ended September 30, 2022.

Total hosting revenue from related parties increased by $6.3 million or 216%, to $9.2 million for the three months ended September 30, 2022 from $2.9 million for the three months ended September 30, 2021.

The increase in related party hosting contracts was primarily driven by the onboarding of new related party hosting contracts for miners deployed during the three months ended September 30, 2022.

Equipment sales to customers decreased by $16.4 million to $7.5 million for the three months ended September 30, 2022 from $23.9 million for the three months ended September 30, 2021.

The decrease in equipment sales to customers was primarily driven by more of our hosting customers purchasing mining equipment directly from manufacturers for deployments in our data centers during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Equipment sales to related parties increased by $18.0 million or 155%, to $29.7 million for the three months ended September 30, 2022 from $11.7 million for the three months ended September 30, 2021.

The increase in equipment sales to related parties was primarily driven by the timing of deployments of mining equipment during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Digital asset mining revenue increased by $23.4 million to $80.5 million for the three months ended September 30, 2022 from $57.1 million for the three months ended September 30, 2021.

The increase in mining revenue was driven primarily by an increase in our self-mining hash rate, partially offset by the decrease in the price of bitcoin and an increase in the global bitcoin network hash rate.

Our self-mining hash rate increased to 13.00 EH/s for the three months ended September 30, 2022 from 2.64 EH/s for the three months ended September 30, 2021.

The total number of bitcoins awarded for the three months ended September 30, 2022 was 3,768 compared to 1,139 for the three months ended September 30, 2021.

The average price of bitcoin for the three months ended September 30, 2022 was $21,324 as compared to $46,507 for the three months ended September 30, 2021, a decrease of 54%.

Cost of revenue

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Cost of revenue

$ 189,648 $ 54,715 $ 134,933 247 %

Gross (loss) profit

(27,076) 58,424 (85,500) NM

Cost of revenue increased by $134.9 million or 247%, to $189.6 million for the three months ended September 30, 2022 from $54.7 million for the three months ended September 30, 2021.

As a percentage of total revenue, cost of revenue totaled 117% and 48% for the three months ended September 30, 2022 and 2021, respectively.

The increase in cost of revenue was primarily attributable to higher power consumption costs of $62.3 million driven by an increase in the number of self-mining and hosted miners operating in our fleet and an increase in power rates, increased depreciation expense of $58.3 million driven by an increase in the number of self-mining units deployed, higher personnel and facilities operating costs driven by the opening and expansion of our data centers of $11.4 million, which includes increased payroll and benefit costs for personnel of $2.4 million and increased stock-based compensation of $4.4 million, primarily reflecting the RSU Amendment described above, and higher equipment sales costs of $2.9 million.

Loss on legal settlement

The Company recognized a loss on legal settlement of $2.6 million during the three months ended September 30, 2021 related to a settlement with a former customer.

Gain from sales of digital assets

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Gain from sales of digital assets $ 11,036 $ 391 $ 10,645 NM

Percentage of total revenue

Gain from sales of digital assets increased by $10.6 million for the three months ended September 30, 2022 from a gain of $0.4 million for the three months ended September 30, 2021.

Gains are recorded when realized upon sale(s).

In determining the gain to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale.

For the three months ended September 30, 2022, the carrying value of our digital assets sold was $93.5 million and the sales price was $104.5 million.

Current and future proceeds from sales of digital assets are primarily used for funding our operations and investing in capital expenditures.

Impairment of digital assets

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Impairment of digital assets $ (7,986) $ (12,552) $ 4,566 NM

Percentage of total revenue

Impairment of digital assets decreased by $4.6 million for the three months ended September 30, 2022.

Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency asset at the time its fair value is being measured, which is on a daily basis.

We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired.

In determining if an impairment has occurred, we consider the market price of one unit of digital asset quoted on the active exchange since acquiring the digital asset, which is measured once a day at 00:00 Coordinated Universal Time (“UTC”).

If the then current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying value and the price determined.

The carrying value of our digital assets amounted to $19.7 million and $234.3 million as of September 30, 2022 and December 31, 2021, respectively.

Impairment of goodwill and other intangibles

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Impairment of goodwill and other intangibles $ (268,512) $ — $ (268,512) NM

Impairment of goodwill and other intangibles increased by $268.5 million for the three months ended September 30, 2022.

We identified a triggering event as of September 30, 2022 due to declines in the market price of bitcoin, the market price of our common stock and our market capitalization and, as such, we performed the quantitative test to compare the fair value to the carrying amount for each reporting unit.

We concluded the carrying amount of the Mining reporting unit and Equipment Sales and Hosting reporting unit exceeded each reporting unit’s fair value and, as such, recorded an impairment of goodwill of $207.8 million in our Mining reporting unit and $58.2 million in our Equipment Sales and Hosting reporting unit.

See Note 4─Goodwill to our unaudited consolidated financial statements for further information.

In addition, in the third quarter of 2022, we 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, we recorded an impairment of other intangible assets of $2.5 million for three months ended September 30, 2022 which is presented within impairment of goodwill and other intangibles on the Company’s Consolidated Statements of Operations.

Impairment of property, plant and equipment

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Impairment of property, plant and equipment $ (59,259) $ — $ (59,259) NM

Impairment of property, plant and equipment increased by $59.3 million for the three months ended September 30, 2022.

During the three months ended September 30, 2022, our 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 ASIC miners of the type used by us in our business operations have decreased significantly from previous levels, including those acquired earlier in 2022.

Accordingly, we evaluated whether the estimated future undiscounted cash flows from the operation of our data center facilities sites would recover the carrying value of the property, plant and equipment located at the sites and used in site operations, including our deployed mining equipment.

Based on this evaluation, we determined that the carrying value of the property, plant and equipment at the Cedarvale, TX facility site may no longer be fully recoverable by the cash flows of the site.

We measured the amount of impairment at the Cedarvale, TX 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 three months ended September 30, 2022.

See the discussion of long-lived asset impairments in Note 2 to our unaudited consolidated financial statements for further information.

Subsequent to September 30, 2022, we relocated its approximately 7,600 self-miners from Cedarvale, TX to other of our data center facilities.

There were no hosting customer miners at Cedarvale, TX as of September 30, 2022.

After removing our self-miners from the data center facility, we ceased current operations and further development on the data center facility, for the time being.

We are currently considering alternative paths forward at the location but have not concluded on a plan.

An estimate of additional impacts to the financial statements of the decision to pause activity at the site, beyond the impairment discussed above, cannot be made by us at this time.

Operating Expenses

Research and development

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Research and development

$ 6,192 $ 1,586 $ 4,606 290 %

Percentage of total revenue

Research and development expenses increased by $4.6 million or 290%, to $6.2 million for the three months ended September 30, 2022 from $1.6 million for the three months ended September 30, 2021.

The increase was primarily driven by higher stock-based compensation of $5.2 million, primarily reflecting the RSU Amendment described above.

Sales and marketing

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Sales and marketing

$ 39 $ 932 $ (893) NM

Percentage of total revenue

Sales and marketing expenses decreased by $0.9 million to $39.0 thousand for the three months ended September 30, 2022 from $0.9 million for the three months ended September 30, 2021.

The decrease was primarily driven by lower stock-based compensation of $0.7 million, primarily reflecting the RSU Amendment described above.

General and administrative

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

General and administrative

$ 43,346 $ 36,358 $ 6,988 19 %

Percentage of total revenue

General and administrative expenses increased by $7.0 million to $43.3 million for the three months ended September 30, 2022 from $36.4 million for the three months ended September 30, 2021.

The increase of $7.0 million was primarily driven by $5.9 million of higher bad debt expense, $3.7 million of higher professional fees, primarily related to investments made to support public company readiness, $2.9 million of higher business insurance and $1.2 million of higher payroll and benefit costs for personnel, primarily offset by $7.4 million of lower stock-based compensation, reflecting the accelerated vesting of stock-based compensation awards upon the closing of the Blockcap acquisition during the three months ended September 30, 2021

Non-operating expenses, net

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

Also included are stock-based compensation, professional fees, business insurance, auditor fees, bad debt, amortization of intangibles, franchise taxes, and bank fees.

Non-operating expenses, net

(in thousands, except percentages)

Interest expense, net 25,942 13,569 12,373 91 %

Fair value adjustment on convertible notes (4,123) 8,663 (12,786) NM

Fair value adjustment on derivative warrant liabilities (521) — (521) NM

Other non-operating expenses (income), net 1,478 (4) 1,482 NM

Total non-operating expenses, net $ 22,776 $ 22,228 $ 548 2 %

Total non-operating expenses, net increased by $0.5 million, to $22.8 million for the three months ended September 30, 2022 from $22.2 million for the three months ended September 30, 2021.

The increase in non-operating expenses, net of $0.5 million was due to $12.4 million of higher interest expense, net and $1.5 million of higher other non-operating expenses, net (which included $1.4 million of equity line of credit expenses that were recorded during the three months ended September 30, 2022), partially offset by $13.3 million of lower net expenses from fair value adjustments of the convertible notes (excluding interest expense and changes in instrument-specific credit risk) and derivative warrant liabilities.

The decrease in the fair value of the convertible notes and derivative warrant liabilities was primarily driven by the decrease in the market price of our common stock during the three months ended September 30, 2022.

See Note 8─Fair Value Measurements in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.

Income tax expense (benefit)

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Income tax expense (benefit) $ 10,642 $ (815) $ 11,457 NM

Percentage of total revenue

Income tax expense (benefit) consists of U.S.

Non-operating expenses, net includes gain on debt extinguishment, interest expense, net, fair value adjustment on convertible notes, fair value adjustment on derivative warrant liabilities, reorganization items, net and other non-operating expenses, net.

Income tax expense

Income tax expense consists of U.S.

federal, state and local income taxes.

For the three months ended September 30, 2022, our income tax expense was $10.6 million.

For the three months ended September 30, 2021, our income tax benefit was $0.8 million.

We evaluate our ability to recognize our deferred tax assets quarterly by considering all positive and negative evidence available as proscribed by the FASB under its general principles of ASC 740, Income Taxes .

See Note 13─Income Taxes in our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for further information.

Segment Total Revenue and Gross (Loss) Profit

The following table presents total revenue and gross (loss) profit by reportable segment for the periods presented:

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

Equipment Sales and Hosting Segment (in thousands, except percentages)

Hosting revenue $ 44,916 $ 20,488 $ 24,428 119 %

Equipment sales 37,161 35,533 1,628 5 %

Total revenue 82,077 56,021 26,056 47 %

Cost of revenue:

Cost of hosting services 44,975 19,577 25,398 130 %

Cost of equipment sales 27,917 24,997 2,920 12 %

Total cost of revenue $ 72,892 $ 44,574 $ 28,318 64 %

Gross profit $ 9,185 $ 11,447 $ (2,262) NM

Hosting Margin 11 % 20 %

Mining Segment

Digital asset mining revenue $ 80,495 $ 57,118 $ 23,377 41 %

Total revenue 80,495 57,118 23,377 41 %

Cost of revenue 116,756 10,141 106,615 NM

Gross (loss) profit $ (36,261) $ 46,977 $ (83,238) NM

Mining Margin (45) % 82 %

Consolidated total revenue $ 162,572 $ 113,139 $ 49,433 44 %

Consolidated cost of revenue $ 189,648 $ 54,715 $ 134,933 247 %

Consolidated gross (loss) profit $ (27,076) $ 58,424 $ (85,500) (146) %

For the three months ended September 30, 2022, cost of revenue included depreciation expense of $3.3 million for the Equipment Sales and Hosting segment and $61.1 million for the Mining segment.

For the three months ended September 30, 2021, cost of revenue included depreciation expense of $1.5 million for the Equipment Sales and Hosting segment and $4.6 million for the Mining segment.

For the three months ended September 30, 2022 and 2021, the top three customers accounted for approximately 74% and 75%, respectively, of the Equipment Sales and Hosting segment total revenue.

For the three months ended September 30, 2022, gross profit in the Equipment Sales and Hosting Segment decreased $2.3 million compared to the three months ended September 30, 2021 reflecting gross profit for the Equipment Sales and Hosting Segment as a percentage of the segment’s total revenue (the “Hosting Margin”) of 11% for the three months ended September 30, 2022 compared to a Hosting Margin of 20% for the three months ended September 30, 2021.

The decrease in the Hosting Margin for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily due to lower margins on equipment sales, an increase in stock-based compensation expense and higher power rates, partially offset by a decrease in payroll and benefits as a percentage of revenue in the Equipment Sales and Hosting Segment and improvements in hosting prices.

For the three months ended September 30, 2022, gross profit in the Mining Segment decreased $83.2 million compared to the three months ended September 30, 2021 primarily due to lower gross profit (loss) for the Mining Segment as a percentage of the segment’s total revenue (the “Mining Margin”) of (45)% for the three months ended September 30, 2022 compared to 82% for the three months ended September 30, 2021.

The decrease in the Mining Margin for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily due to an increase in power rates, an increase in depreciation as a percentage of segment revenues, which reflected higher costs of self-mining units more recently deployed, an increase in stock-based compensation expense as a percentage of revenues, and a 54% decrease in average price per bitcoin mined.

The decrease in the Mining Margin was partially offset by an increase in our self-mining hash rate, which was 13.00 EH/s at September 30, 2022 compared to 2.64 EH/s at September 30, 2021

A reconciliation of the reportable segment gross (loss) profit to loss before income taxes included in our Consolidated Statements of Operations for the three months ended September 30, 2022 and 2021, is as follows:

Three Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Reportable segment gross (loss) profit $ (27,076) $ 58,424 $ (85,500) (146) %

Loss on legal settlement — (2,603) 2,603 NM

Gain from sales of digital assets 11,036 391 10,645 NM

Impairment of digital assets (7,986) (12,552) 4,566 NM

Impairment of goodwill and other intangibles (268,512) — (268,512) NM

Impairment of property, plant and equipment (59,259) — (59,259) NM

Operating expenses:

Research and development 6,192 1,586 4,606 290 %

Sales and marketing 39 932 (893) NM

General and administrative 43,346 36,358 6,988 19 %

Total operating expenses 49,577 38,876 10,701 28 %

Operating (loss) income (401,374) 4,784 (406,158) NM

Non-operating expenses, net:

Interest expense, net 25,942 13,569 12,373 91 %

Fair value adjustment on derivative warrant liabilities (521) — (521) NM

Fair value adjustment on convertible notes (4,123) 8,663 (12,786) NM

Other non-operating expenses (income), net 1,478 (4) 1,482 NM

Total non-operating expenses, net 22,776 22,228 548 2 %

Loss before income taxes $ (424,150) $ (17,444) $ (406,706) NM

Results of Operations for the Nine Months Ended September 30, 2022 and 2021

See Note 10 — Income Taxes, in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Results of Operations for the Three Months Ended March 31, 2023 and 2022

The following table sets forth our selected Consolidated Statements of Operations for each of the periods indicated.

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

2 unchanged sentences

Hosting revenue from related parties 3,720 5,876 (2,156) (37) %

Equipment sales to customers 11,391 84,378 (72,987) (87) %

Equipment sales to related parties 67,269 29,057 38,212 132 %

Equipment sales to customers — 416 (416) NM

Equipment sales to related parties — 25,889 (25,889) NM

Digital asset mining revenue 98,026 133,000 (34,974) (26) %

2 unchanged sentences

Cost of hosting services 18,826 31,231 (12,405) (40) %

Cost of equipment sales 63,993 82,328 (18,335) (22) %

Cost of digital asset mining 279,576 13,909 265,667 NM

Cost of equipment sales — 22,535 (22,535) NM

Cost of digital asset mining 81,345 68,750 12,595 18 %

Total cost of revenue 100,171 122,516 (22,345) (18) %

Gross profit 55,644 97,495 (41,851) NM

Loss on legal settlement — (2,603) 2,603 NM

Gain from sales of digital assets 25,007 405 24,602 NM

Gross profit 20,484 70,003 (49,519) (71) %

Gain from sales of digital assets 1,064 2,163 (1,099) (51) %

Impairment of digital assets (1,056) (53,985) 52,929 NM

Impairment of goodwill and other intangibles (1,059,265) — (1,059,265) NM

Impairment of property, plant and equipment (59,259) — (59,259) NM

Losses on exchange or disposal of property, plant and equipment (13,057) (17) (13,040) NM

Operating expenses:

3 unchanged sentences

Total operating expenses 24,187 44,898 (20,711) (46) %

Operating (loss) income (1,473,474) 29,336 (1,502,810) NM

Operating loss (3,695) (26,717) 23,022 NM

Non-operating expenses, net:

Loss on debt extinguishment — 8,016 (8,016) (100) %

Gain on debt extinguishment (20,761) — (20,761) NM

Interest expense, net 157 21,676 (21,519) (99) %

1 unchanged sentence

Fair value adjustment on derivative warrant liabilities — (10,275) 10,275 NM

Other non-operating expenses (income), net 4,997 (2) 4,999 NM

Reorganization items, net 31,559 — 31,559 NM

Other non-operating income, net (3,069) (357) (2,712) NM

Total non-operating expenses, net

7,886 397,081 (389,195) (98) %

Loss before income taxes (11,581) (423,798) 412,217 NM

Income tax expense (benefit) 4,398 (697) 5,095 NM

Income tax expense 104 42,406 (42,302) (100) %

Net loss $ (11,685) $ (466,204) $ 454,519 NM

NM - Not Meaningful

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

2 unchanged sentences

Hosting revenue from related parties 3,720 5,876 (2,156) (37) %

Equipment sales to customers 11,391 84,378 (72,987) (87) %

Equipment sales to related parties 67,269 29,057 38,212 132 %

Equipment sales to customers — 416 (416) NM

Equipment sales to related parties — 25,889 (25,889) NM

Digital asset mining revenue 98,026 133,000 (34,974) (26) %

7 unchanged sentences

Total revenue

Total revenue increased by $276.4 million to $519.1 million for the nine months ended September 30, 2022 from $242.7 million for the nine months ended September 30, 2021 as a result of the factors described below.

Total hosting revenue from customers increased by $56.6 million or 150%, to $94.4 million for the nine months ended September 30, 2022 from $37.8 million for the nine months ended September 30, 2021.

The increase in hosting revenue from customers was primarily driven by the onboarding of new clients and improvements in hosting prices for the nine months ended September 30, 2022.

Total hosting revenue from related parties increased by $8.8 million or 63%, to $22.7 million for the nine months ended September 30, 2022 from $13.9 million for the nine months ended September 30, 2021.

The increase in related party hosting contracts was primarily driven by the onboarding of new related party hosting contracts for miners deployed during the nine months ended September 30, 2022.

Equipment sales to customers decreased by $73.0 million to $11.4 million for the nine months ended September 30, 2022 from $84.4 million for the nine months ended September 30, 2021.

The decrease in equipment sales to customers was primarily driven by more of our hosting customers purchasing mining equipment directly from manufacturers for deployments in our data centers during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Equipment sales to related parties increased by $38.2 million or 132%, to $67.3 million for the nine months ended September 30, 2022 from $29.1 million for the nine months ended September 30, 2021.

The increase in equipment sales to related parties was primarily driven by the timing of deployments of mining equipment during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Digital asset mining revenue increased by $245.8 million to $323.3 million for the nine months ended September 30, 2022 from $77.5 million for the nine months ended September 30, 2021.

The year over year increase in mining revenue was driven primarily by an increase in our self-mining hash rate, partially offset by the decrease in the price of bitcoin and an increase in the global bitcoin network hash rate.

Our self-mining hash rate increased by 392%, to 13.0 EH/s for the nine months ended September 30, 2022 from 2.64 EH/s for the nine months ended September 30, 2021.

The total number of bitcoins awarded for the nine months ended September 30, 2022 was 10,335 compared to 1,525 for the nine months ended September 30, 2021.

The average price of bitcoin for the nine months ended September 30, 2022 was $36,876 as compared to $44,591 for the nine months ended September 30, 2021, a decrease of 17%.

Total revenue decreased by $71.9 million to $120.7 million for the three months ended March 31, 2023, from $192.5 million for the three months ended March 31, 2022, as a result of the factors described below.

Total hosting revenue from customers decreased by $8.4 million or 31%, to $18.9 million for the three months ended March 31, 2023, from $27.3 million for the three months ended March 31, 2022.

The decrease in hosting revenue from customers was primarily driven by the termination of contracts for several customers in the portfolio at less profitable hosting rates and the associated reduction in the total number of hosting miners in the fleet for the three months ended March 31, 2023.

Total hosting revenue from related parties decreased by $2.2 million or 37%, to $3.7 million for the three months ended March 31, 2023, from $5.9 million for the three months ended March 31, 2022.

The decrease in related party hosting revenue was primarily driven by the termination of hosting contracts during the three months ended March 31, 2023.

Equipment sales to customers decreased by $0.4 million or 100%, to nil for the three months ended March 31, 2023, from $0.4 million for the three months ended March 31, 2022.

The decrease in equipment sales to customers was driven by the Company’s decision to exit the Equipment Sales business due to the increasing number of hosting customers purchasing mining equipment directly from manufacturers for deployments in our data centers during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

Equipment sales to related parties decreased by $25.9 million or 100%, to nil for the three months ended March 31, 2023, from $25.9 million for the three months ended March 31, 2022.

The decrease in equipment sales to related parties was driven by the Company’s decision to exit the Equipment Sales business due to the increasing number of customers purchasing mining equipment directly from manufacturers for deployments in our data centers during the year ended March 31, 2023, as compared to the year ended March 31, 2022.

Digital asset mining revenue decreased by $35.0 million to $98.0 million for the three months ended March 31, 2023, from $133.0 million for the three months ended March 31, 2022.

The year over year decrease in mining revenue was driven primarily by a decrease in the price of bitcoin and an increase in the global bitcoin network hash rate, partially offset by the increase in our self-mining hash rate from increases in the number of mining units deployed.

Our self-mining hash rate increased by 94%, to 16.1 EH/s for the three months ended March 31, 2023, from 8.3 EH/s for the three months ended March 31, 2022.

The total number of bitcoins mined for the three months ended March 31, 2023, was 4,299 compared to 3,202 for the three months ended March 31, 2022.

The average price of bitcoin for the three months ended March 31, 2023, was $22,877 as compared to $41,299 for the three months ended March 31, 2022, a decrease of 45%.

Cost of revenue

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

2 unchanged sentences

$ 100,171 $ 122,516 $ (22,345) (18) %

55,644 97,495 (41,851) NM

Cost of revenue increased by $318.2 million or 219%, to $463.4 million for the nine months ended September 30, 2022 from $145.2 million for the nine months ended September 30, 2021.

As a percentage of total revenue, cost of revenue totaled 89% and 60% for the nine months ended September 30, 2022 and 2021, respectively.

The increase in cost of revenue was primarily attributable to increased depreciation expense of $143.6 million driven by an increase in the number of self-mining units deployed, higher power consumption costs of $145.9 million driven by an increase in the number of self-mining and hosted miners operating in our fleet and an increase in power rates, higher personnel and facilities operating costs driven by the opening and expansion of our data centers of $47.1 million, which includes increased payroll and benefit costs for personnel of $9.1 million and increased stock-based compensation of $23.3 million, primarily reflecting the RSU Amendment described above, partially offset by lower equipment sales costs of $18.4 million.

Loss on legal settlement

The Company recognized a loss on legal settlement of $2.6 million during the nine months ended September 30, 2021 related to a settlement with a former customer.

20,484 70,003 (49,519) (71) %

Cost of revenue decreased by $22.3 million or 18%, to $100.2 million for the three months ended March 31, 2023, from $122.5 million for the three months ended March 31, 2022.

As a percentage of total revenue, cost of revenue totaled 83% and 64% for the three months ended March 31, 2023 and 2022, respectively.

The decrease in cost of revenue was primarily attributable to $22.5 million of lower equipment sales costs due the Company exiting the selling of equipment, decreased depreciation expense of $21.4 million driven by an adjustment to the depreciable base for the deployed self-mining units, partially offset by an increase in power costs of $22.2 million from higher power consumption associated with the expansion of capacity at our mining sites and increasing number of miners deployed and operational.

Gain from sales of digital assets

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Gain from sales of digital assets $ 25,007 $ 405 $ 24,602 NM

Gain from sales of digital assets $ 1,064 $ 2,163 $ (1,099) (51) %

Percentage of total revenue

Gain from sales of digital assets increased by $24.6 million to $25.0 million for the nine months ended September 30, 2022 from a gain of $0.4 million for the nine months ended September 30, 2021.

Gain from sales of digital assets decreased by $1.1 million to $1.1 million for the three months ended March 31, 2023, from a gain of $2.2 million for the three months ended March 31, 2022.

Gains are recorded when realized upon sale(s).

In determining the gain to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale.

For the nine months ended September 30, 2022, the carrying value of our digital assets sold was $325.8 million and the sales price was $350.8 million.

For the three months ended March 31, 2023, the carrying value of our digital assets sold was $97.3 million and proceeds were $98.4 million.

For the three months ended March 31, 2022, the carrying value of our digital assets sold was $21.4 million and the sales price was $23.6 million.

Impairment of digital assets

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

2 unchanged sentences

Percentage of total revenue

Impairment of digital assets increased by $199.6 million to $212.2 million for the nine months ended September 30, 2022 from $12.6 million for the nine months ended September 30, 2021.

Impairment of digital assets decreased by $52.9 million to $1.1 million for the three months ended March 31, 2023, from $54.0 million for the three months ended March 31, 2022.

Impairment exists when the carrying amount 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.

The carrying value of our digital assets amounted to $19.7 million and $234.3 million as of September 30, 2022 and December 31, 2021, respectively.

Impairment of goodwill and other intangibles

Nine Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Impairment of goodwill and other intangibles $ (1,059,265) $ — $ (1,059,265) NM

Impairment of goodwill and other intangibles increased by $1.06 billion for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

We identified a triggering event as of June 30, 2022 and September 30, 2022 due to declines in the market price of bitcoin, the market price of our common stock and our market capitalization and, as such, we performed the quantitative test to compare the fair value to the carrying amount for each reporting unit.

We concluded the carrying amount of the Mining reporting unit and Equipment Sales and Hosting reporting unit exceeded each reporting unit’s fair value and, as such, recorded an impairment of goodwill of $996.5 million in our Mining reporting unit and $58.2 million in our Equipment Sales and Hosting reporting unit.

See Note 4─Goodwill to our unaudited consolidated financial statements for further information.

In addition, 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, in the third quarter of 2022, 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 nine months ended September 30, 2022 which is presented within impairment of goodwill and other intangibles on the Company’s Consolidated Statements of Operations.

Impairment of property, plant and equipment

Nine Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Impairment of property, plant and equipment $ (59,259) $ — $ (59,259) NM

Impairment of property, plant and equipment increased by $59.3 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

See the discussion of long-lived asset impairments in Note 2 to our unaudited consolidated financial statements for further information.

Subsequent to September 30, 2022, we relocated its approximately 7,600 self-miners from Cedarvale, TX to other of our data center facilities.

There were no hosting customer miners at Cedarvale, TX as of September 30, 2022.

After removing our self-miners from the data center facility, we ceased current operations and further development on the data center facility, for the time being.

We are currently considering alternative paths forward at the location but have not concluded on a plan.

An estimate of additional impacts to the financial statements of the decision to pause activity at the site, beyond the impairment discussed above, cannot be made by us at this time.

Losses on exchange or disposal of property, plant and equipment

Nine Months Ended September 30, Period over Period Change

2022 2021 Dollar Percentage

(in thousands, except percentages)

Losses on exchange or disposal of property, plant and equipment $ (13,057) $ (17) $ (13,040) NM

Percentage of total revenue

Losses on exchange or disposal of property, plant and equipment increased by $13.0 million to $13.1 million for the nine months ended September 30, 2022 from a nominal loss for the nine months ended September 30, 2021.

The increase was due to a noncash exchange of mining equipment.

See nonrecurring fair value measurements in Note 8 for more information.

The carrying value of our digital assets amounted to nil and $316.3 million as of March 31, 2023 and March 31, 2022, respectively.

Operating Expenses

Research and development

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

Percentage of total revenue

Research and development expenses increased by $20.1 million or 474%, to $24.3 million for the nine months ended September 30, 2022 from $4.2 million for the nine months ended September 30, 2021.

The increase was primarily driven by higher stock-based compensation of $20.3 million, primarily reflecting the RSU Amendment described above, primarily offset by lower personnel and related expenses of $0.2 million and a decrease in professional fees of $0.2 million.

Research and development expenses decreased by $1.9 million or 58%, to $1.4 million for the three months ended March 31, 2023, from $3.3 million for the three months ended March 31, 2022.

The decrease was driven by lower stock-based compensation of $1.4 million as prior year included vesting acceleration associated with the acquisition of BlockCap, a decrease in professional fees of $0.4 million, and lower personnel and related expenses of $0.1 million,

Sales and marketing

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

Percentage of total revenue

Sales and marketing expenses increased by $9.5 million or 434%, to $11.7 million for the nine months ended September 30, 2022 from $2.2 million for the nine months ended September 30, 2021.

The increase was primarily driven by higher stock-based compensation of $8.9 million, primarily reflecting the RSU Amendment described above.

Sales and marketing expenses decreased by $0.4 million or 28%, to $1.0 million for the three months ended March 31, 2023, from $1.4 million for the three months ended March 31, 2022.

The decrease was driven primarily by lower advertising and marketing investment for the three months ended March 31, 2023.

General and administrative

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

Percentage of total revenue

General and administrative expenses increased by $127.4 million to $174.4 million for the nine months ended September 30, 2022 from $47.0 million for the nine months ended September 30, 2021.

The increase of $127.4 million was primarily driven by $83.1 million higher stock-based compensation driven by the impact of the Blockcap acquisition and the RSU Amendment described above, $16.1 million of higher professional fees, primarily related to investments made to support public company readiness, $8.2 million of higher business insurance, $6.8 million of higher payroll and benefit costs for personnel and $5.9 million of higher bad debt expense.

General and administrative expenses decreased by $18.4 million to $21.8 million for the three months ended March 31, 2023, from $40.2 million for the three months ended March 31, 2022.

The decrease was primarily driven by $10.7 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $5.4 million of lower professional fees primarily related to expenses in the prior year to support public company readiness, $1.4 million of lower payroll and benefit costs associated with lower headcount, $0.9 million lower employee related expenses such as travel, software and rent, and $0.7 million of reduced depreciation and amortization, partially offset by $0.6 million of increased business insurance.

Non-operating expenses, net

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

1 unchanged sentence

(in thousands, except percentages)

Loss on debt extinguishment $ — $ 8,016 $ (8,016) (100) %

Gain on debt extinguishment $ (20,761) $ — $ (20,761) NM

Interest expense, net 157 21,676 (21,519) (99) %

1 unchanged sentence

Fair value adjustment on derivative warrant liabilities — (10,275) 10,275 NM

Other non-operating expenses (income), net 4,997 (2) 4,999 NM

Reorganization items, net 31,559 — 31,559 NM

Other non-operating income, net (3,069) (357) (2,712) NM

Total non-operating expenses, net

Total non-operating expenses, net increased by $190.4 million, to $233.6 million for the nine months ended September 30, 2022 from $43.2 million for the nine months ended September 30, 2021.

The increase in non-operating expenses, net of $190.4 million was primarily driven by an increase in the fair value of the convertible notes (excluding interest expense and changes in instrument-specific credit risk) and corresponding loss of $178.2 million and higher interest expense, net of $48.2 million, partially offset by a decrease in the fair value of the derivative warrant liabilities and corresponding gain of $33.0 million.

The increase in the fair value of the convertible notes was primarily driven by the elimination of the negotiation discount described below, partially offset by a decrease in the market value of our common stock during the nine months ended September 30, 2022.

See Note 8─Fair Value Measurements in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further information.

As discussed in Note 8, the fair value of our 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 Core Scientific's negotiating position.

Since the transaction was an orderly transaction, we 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, which resulted in a significant increase in the fair value of the convertible notes (excluding interest expense and changes in instrument-specific credit risk) of $186.9 million for the nine months ended September 30, 2022.

Income tax expense (benefit)

Nine Months Ended September 30, Period over Period Change

$ 7,886 $ 397,081 $ (389,195) (98) %

Total non-operating expenses, net decreased by $389.2 million, to $7.9 million for the three months ended March 31, 2023, from $397.1 million for the three months ended March 31, 2022.

The decrease in non-operating expenses, net was primarily driven by a fair value adjustment on convertible notes of $386.0 million (excluding interest expense and changes in instrument-specific credit risk) for the three months ended March 31, 2022, compared to no adjustment for the same period in 2023, partially offset by a $31.6 million increase in Reorganization items, net related to DIP financing fees and bankruptcy advisor fees post-petition in the first quarter of 2023.

Income tax expense

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Income tax expense (benefit) $ 4,398 $ (697) $ 5,095 NM

Income tax expense $ 104 $ 42,406 $ (42,302) (100) %

Percentage of total revenue

Income tax expense (benefit) consists of U.S.

Income tax expense consists of U.S.

federal, state and local income taxes.

For the nine months ended September 30, 2022, our income tax expense was $4.4 million.

For the nine months ended September 30, 2021, our income tax benefit was $0.7 million.

See Note 13─Income Taxes in our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for further information.

For the three months ended March 31, 2023 and 2022, our income tax expense was $0.1 million and $42.4 million, respectively.

The $42.3 million decrease in the provision for income taxes for the three months ended March 31, 2023, compared to same period in 2022, was primarily due to a reduction in our U.S.

federal deferred tax liability.

The Company's effective tax rate for the three months ended March 31, 2023, was lower than the federal statutory rate of 21% primarily due to losses and certain deductions for which no tax benefit can be recognized.

Segment Total Revenue and Gross Profit

The following table presents total revenue and gross profit by reportable segment for the periods presented:

Nine Months Ended September 30, Period over Period Change

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

Equipment Sales and Hosting Segment (in thousands, except percentages)

Hosting Segment (in thousands, except percentages)

Hosting revenue $ 22,629 $ 33,214 $ (10,585) (32)%

Equipment sales 78,660 113,435 (34,775) (31) %

Equipment sales — 26,305 (26,305) NM

Total revenue 22,629 59,519 (36,890) (62)%

1 unchanged sentence

Cost of hosting services 18,826 31,231 (12,405) (40)%

Cost of equipment sales 63,993 82,328 (18,335) (22) %

Cost of equipment sales — 22,535 (22,535) NM

Total cost of revenue $ 18,826 $ 53,766 $ (34,940) (65)%

4 unchanged sentences

Total revenue 98,026 133,000 (34,974) (26)%

Cost of revenue 279,576 13,909 265,667 NM

Gross profit $ 43,761 $ 63,602 $ (19,841) NM

Cost of revenue 81,345 68,750 12,595 18%

Gross profit $ 16,681 $ 64,250 $ (47,569) (74)%

Mining Margin 17% 48%

1 unchanged sentence

Consolidated cost of revenue $ 100,171 $ 122,516 $ (22,345) (18)%

Consolidated gross profit $ 55,644 $ 97,495 $ (41,851) NM

For the nine months ended September 30, 2022, cost of revenue included depreciation expense of $8.2 million for the Equipment Sales and Hosting segment and $146.8 million for the Mining segment.

For the nine months ended September 30, 2021, cost of revenue included depreciation expense of $5.2 million for the Equipment Sales and Hosting segment and $6.2 million for the Mining segment.

For the nine months ended September 30, 2022 and 2021, the top three customers accounted for approximately 70% and 73%, respectively, of the Equipment Sales and Hosting segment total revenue.

For the nine months ended September 30, 2022, gross profit in the Equipment Sales and Hosting Segment decreased $22.0 million compared to the nine months ended September 30, 2021, reflecting a Hosting Margin of 6% for the nine months ended September 30, 2022 compared to 21% for the nine months ended September 30, 2021.

The decrease in Hosting Margin for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily due to lower margins on equipment sales, an increase in stock-based compensation expense, which primarily reflected the RSU Amendment, and higher power costs.

For the nine months ended September 30, 2022, gross profit in the Mining Segment decreased $19.8 million compared to the nine months ended September 30, 2021 due to a lower Mining Margin of 14% for the nine months ended September 30, 2022 compared to 82% for the nine months ended September 30, 2021.

The decrease in the Mining Margin for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily due to an increase in power rates, an increase in depreciation as a percentage of segment revenues, which reflected higher costs of self-mining units more recently deployed, an increase in stock-based compensation expense as a percentage of revenues, which primarily reflected the RSU Amendment, and a 17% decrease in average price per bitcoin mined.

The decrease in the Mining Margin was partially offset by an increase in our self-mining hash rate, which was 13.00 EH/s at September 30, 2022 compared to 2.64 EH/s at September 30, 2021.

A reconciliation of the reportable segment gross profit to loss before income taxes included in our consolidated statements of operations for the nine months ended September 30, 2022 and 2021, is as follows:

Nine Months Ended September 30, Period over Period Change

Consolidated gross profit $ 20,484 $ 70,003 $ (49,519) (71)%

For the three months ended March 31, 2023, cost of revenue included depreciation expense of $0.2 million for the Hosting segment and $19.9 million for the Mining segment.

For the three months ended March 31, 2022, cost of revenue included depreciation expense of $2.2 million for the Hosting segment and $39.4 million for the Mining segment.

For the three months ended March 31, 2023 and 2022, the top three customers accounted for approximately 73% and 66%, respectively, of the Hosting’s segment total revenue.

For the three months ended March 31, 2023, gross profit in the Hosting segment decreased $2.0 million compared to the three months ended March 31, 2022, reflecting a Hosting segment gross profit margin of 17% for the three months ended March 31, 2023, compared to 10% for the three months ended March 31, 2022.

The decrease in Hosting segment gross profit margin for the three months ended March 31, 2023, compared to the three months ended March 31, 2022 was primarily due to lower margins on equipment sales, an increase in stock-based compensation expense, which primarily reflected the RSU Amendment, and higher power costs.

For the three months ended March 31, 2023, gross profit in the Mining segment decreased $47.6 million compared to the three months ended March 31, 2022, due to a lower Mining segment gross profit margin of 17% for the three months ended March 31, 2023, compared to 48% for the three months ended March 31, 2022.

The decrease in the Mining segment gross profit margin was primarily due to an increase in power rates, an increase in depreciation as a percentage of segment revenues, which reflected higher costs of self-mining units more recently deployed, an increase in stock-based compensation expense as a percentage of revenues, which primarily reflected the RSU Amendment, and a 45% a decrease in average price per bitcoin mined.

The decrease in the Mining segment gross profit margin was partially offset by an increase in our self-mining hash rate, which was 16.10 EH/s for the three months ended March 31, 2023, compared to 8.3 EH/s for the three months ended March 31, 2022.

A reconciliation of the reportable segment gross profit to loss before income taxes included in our Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, is as follows:

Three Months Ended March 31, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Reportable segment gross profit $ 55,644 $ 97,495 $ (41,851) NM

Loss on legal settlement — (2,603) 2,603 NM

Gain from sales of digital assets 25,007 405 24,602 NM

Reportable segment gross profit $ 20,484 $ 70,003 $ (49,519) (71)%

Gain from sales of digital assets 1,064 2,163 (1,099) (51)%

Impairment of digital assets (1,056) (53,985) 52,929 NM

Impairment of goodwill and other intangibles (1,059,265) — (1,059,265) NM

Impairment of property, plant and equipment (59,259) — (59,259) NM

Losses on exchange or disposal of property, plant and equipment (13,057) (17) (13,040) NM

Operating expenses:

3 unchanged sentences

Total operating expenses 24,187 44,898 (20,711) (46)%

Operating (loss) income (1,473,474) 29,336 (1,502,810) NM

Operating loss (3,695) (26,717) 23,022 NM

Non-operating expenses, net:

Loss on debt extinguishment — 8,016 (8,016) (100) %

Gain on debt extinguishment (20,761) — (20,761) NM

Interest expense, net 157 21,676 (21,519) (99)%

1 unchanged sentence

Fair value adjustment on convertible notes — 386,037 (386,037) NM

Other non-operating expenses (income), net 4,997 (2) 4,999 NM

Reorganization items, net 31,559 — 31,559 NM

Other non-operating income, net (3,069) (357) (2,712) 760%

Total non-operating expenses, net

7,886 397,081 (389,195) NM

Loss before income taxes $ (11,581) $ (423,798) $ 412,217 NM

1 unchanged sentence

Sources of Liquidity

To date, we have financed our operations primarily through sales of equity securities, debt issuances, equipment financing arrangements and cash generated from operations, including sales of self-mined bitcoin and other digital assets.

The Company anticipates that existing cash resources will be depleted by the end of 2022 or sooner.

We determined in October 2022 not to make certain payments with respect to several of our 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, including electing to accelerate the principal amount of such debt, suing us for nonpayment, increasing interest rates to default rates, or taking action with respect to collateral, where applicable.

We do not believe we were in default under any of our debt agreements as of September 30, 2022.

As a result, we are in the process of exploring a number of potential strategic alternatives with respect to our capital structure, including hiring strategic advisers, raising additional capital or restructuring its existing capital structure.

Specifically, we have engaged Weil, Gotshal & Manges LLP, as legal advisers, and PJT Partners LP, as financial advisers, to assist the Company in analyzing and evaluating potential strategic alternatives and initiatives to improve liquidity.

Us and our advisers have begun to engage in discussions with certain of its creditors regarding these initiatives.

We expect these activities will continue and intensify.

These discussions may not result in any agreement on commercially acceptable terms or at all.

Furthermore, we may seek alternative sources of equity or debt financing, evaluate potential asset sales, and potentially could seek relief under the applicable bankruptcy or insolvency laws.

In the event of a bankruptcy proceeding or insolvency, or restructuring of our capital structure, holders of our common stock could suffer a total loss of their investment.

Historically, we have financed our operations primarily through sales of equity securities, debt issuances, equipment financing arrangements and cash from operations, including sales of self-mined bitcoin and other digital assets.

Subsequent to filing Chapter 11, our primary sources of cash are cash flows from operations, cash on hand and proceeds from the Original DIP Facility and the Replacement DIP Facility.

At March 31, 2023, we have $35.0 million of undrawn borrowing capacity under the Replacement DIP Facility.

We have engaged Weil, Gotshal & Manges LLP, as legal advisers, and PJT Partners LP and AlixPartners, LLP, as financial advisers, to assist the Company in managing the Chapter 11 Cases and developing, confirming, and consummating a Chapter 11 plan of reorganization or alternative restructuring transaction.

Our ability to continue as a going concern is dependent upon our ability to successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the restructuring to meet our obligations and operating needs.

Refer to “Other Events —Chapter 11 and Other Related Matters” below for more information on the Chapter 11 Cases and the effect on our liquidity.

Operating and Capital Resources

Historically, a substantial portion of our liquidity needs arose from debt service on our outstanding indebtedness and from funding the costs of operations, working capital and capital expenditures.

Our previous level of capital expenditures have been reduced since filing Chapter 11 and we expect them to remain at a reduced level until our emergence from Chapter 11.

We have assessed our current and expected operating and capital expenditure requirements and our current and expected sources of liquidity, and have determined, based on our forecasted financial results and financial condition as of March 31, 2023, that our operating cash flows, existing cash balances, and access to the Replacement DIP Facility will be adequate to finance our working capital requirements, fund capital expenditures and make our required debt interest and principal payments, pay taxes and make other payments due under any plan of reorganization.

We believe that the plan of reorganization, our current liquidity and expected funding requirements will allow us to operate for at least the next 12 months.

Cash, cash equivalents, restricted cash, cash requirements and cash flows

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.

September 30, December 31, Period over Period Change

March 31, December 31, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Cash and cash equivalents $ 29,546 $ 117,871 $ (88,325) NM

Cash and cash equivalents $ 47,487 $ 15,884 $ 31,603 199 %

Restricted cash 21,805 36,356 (14,551) (40) %

Total cash, cash equivalents and restricted cash $ 37,644 $ 131,678 $ (94,034) NM

As of September 30, 2022 and December 31, 2021, restricted cash of $8.1 million and $13.8 million, respectively, consisted of cash held in escrow to pay for construction and development activities.

Total cash, cash equivalents and restricted cash $ 69,292 $ 52,240 $ 17,052 33 %

As of March 31, 2023 and December 31, 2022, restricted cash of $21.8 million and $36.4 million, consisted of cash held in escrow under the Original DIP Credit Agreement and to pay for construction activities.

The following table summarizes our cash, cash equivalents and restricted cash and cash flows for the periods indicated.

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

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Operating Activities

Changes in net cash from operating activities results primarily from cash received from hosting customers and equipment sales and payments for power fees and equipment purchases.

Other drivers of the changes in net cash from operating activities include research and development costs, sales and marketing costs and general and administrative expenses (including personnel expenses and fees for professional services) and interest payments on debt.

Net cash provided by operating activities was $89.2 million for the nine months ended September 30, 2022 compared to net cash used in operating activities of $166.5 million for the nine months ended September 30, 2021.

The increase in net cash provided by operating activities for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily due to changes in working capital, which increased cash from operating activities by $421.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by a $347.8 million decrease in deposits for equipment sales to customers and a $298.5 million decrease in digital assets, partially offset by a $284.3 million decrease in deferred revenue from related parties.

Offsetting the increase in net cash provided due to changes in working capital was a decrease in net income, excluding non-cash adjustments, of $165.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by a $120.3 million decrease in cash inflows on gross profit, a $38.8 million increase in cash outflows from operating expenses and a $26.2 million increase in cash outflows for interest payments on debt, partially offset by cash proceeds from sales of digital assets in excess of their carrying value of $24.6 million.

Net cash provided by operating activities was $19.9 million for the three months ended March 31, 2023, compared to net cash used in operating activities of $3.6 million for the three months ended March 31, 2022.

The increase in net cash provided by operating activities for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was primarily due to a decrease in net loss of $454.5 million and an increase of $61.8 million in working capital, partially offset by a decrease in fair value adjustments on convertible notes of $393.9 million, a $52.9 million decrease in impairments of digital currency assets, and a $34.0 million decrease in deferred income taxes.

Investing Activities

Our net cash used in investing activities consists of purchases of property, plant and equipment and acquisitions of intangible assets, net of proceeds from sales of property, plant and equipment.

Net cash used in investing activities for the nine months ended September 30, 2022 and 2021 was $451.3 million and $115.5 million, respectively, driven primarily by $243.8 million and $116.1 million, respectively, used for the purchase of property, plant and equipment primarily related to the development of hosting facilities and the acquisition of equipment used for generating digital asset mining revenue.

For the nine months ended September 30, 2022, $217.7 million was used for deposits for self-mining equipment.

Net cash used in investing activities for the three months ended March 31, 2023 and 2022, was $1.9 million and $269.1 million, respectively.

The decrease in net cash used in investing activities was driven primarily by a $135.9 million decrease in deposits for self-mining equipment and a $131.7 million decrease in purchases of property, plant and equipment.

Financing Activities

Net cash provided by financing activities consists of proceeds from stock issuances, issuances of debt, net of issuance costs and principal payments on debt, including notes payable and finance leases.

For the nine months ended September 30, 2022, net cash provided by financing activities was $268.1 million, primarily related to $210.5 million of proceeds from the issuance of common stock, net of issuance costs (including $195.0 million in net cash proceeds received from the Merger with XPDI after payment of transaction expenses, $11.7 million in cash proceeds received for shares issued under the Equity Line of Credit, and $3.8 million in cash proceeds received for employee stock option exercises ) and $216.2 million from the issuance of debt, driven by equipment financing arrangements.

Offsetting this increase to net cash provided by financing activities for the nine months ended September 30, 2022 was $99.0 million of principal payments on debt, $31.6 million for the repurchase of common shares to pay employee withholding taxes and $28.1 million of principal repayments of finance leases.

For the nine months ended September 30, 2021, net cash provided by financing activities was $433.3 million, primarily related to $475.3 million from the issuance of debt, including the issuance of $420.9 million of convertible notes, $10.0 million received in January 2021 from a stockholder for the purchase of Bitcoin mining equipment, the issuance of a $9.0 million tranche of senior secured notes (net of issuance costs) in February 2021, and $3.8 million, $13.4 million, $25.6 million and $1.0 million of additional loans under a master equipment finance agreement issued in March 2021, May 2021, July 2021 and August 2021, respectively.

Offsetting this increase to net cash provided by financing activities for the nine months ended September 30, 2021 was $42.5 million of principal payments on debt.

Operating and capital expenditure requirements

Our future capital requirements will depend on many factors including our revenue growth rate, the timing and extent of spending to support further sales and marketing and research and development efforts and the timing and extent of additional capital expenditures to invest in the expansion of existing facilities as well as new facilities.

It is very difficult to estimate our future liquidity requirements.

The Company anticipates that existing cash resources will be depleted by the end of 2022 or sooner.

Depending on the Company’s assumptions regarding the timing and ability to achieve more normalized levels of operating revenue, the estimates of amounts of required liquidity vary significantly.

Similarly, it is very difficult to predict when or if bitcoin prices will recover or energy costs will abate.

Given the uncertainty regarding the Company’s financial condition, substantial doubt exists about the Company’s ability to continue as a going concern for a reasonable period of time.

In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights.

We may be required to seek additional equity or debt financing.

If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.

If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be materially and adversely affected.

Net cash used in financing activities for the three months ended March 31, 2023, was $1.0 million.

Net cash provided by financing activities for the three months ended March 31, 2022, was $251.5 million, respectively.

The change over prior year was due primarily to $195.0 million of proceeds from the issuance of common stock and cash acquired upon the Merger with XPDI, net of issuance costs and $82.2 million from the issuance of debt for the three months ended March 31, 2022.

Commitments and Contractual Obligations

For a discussion of Commitments and Contractual Obligations, refer to Note 10─Commitments and Contingencies to our unaudited consolidated financial statements.

We have a substantial amount of indebtedness, which requires significant interest payments.

As of September 30, 2022, we and our subsidiaries had debt with a carrying value of $1.05 billion, consisting of notes payable with a carrying value of $977.6 million and finance lease liabilities with a carrying value of $73.0 million.

Our substantial level of indebtedness and the current constraints on our liquidity could have important consequences, including the following:

• we must use a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which reduces or will reduce funds available to us for other purposes such as working capital, capital expenditures, other general corporate purposes and potential acquisitions;

• our ability to refinance such indebtedness or to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;

• our leverage may be greater than that of some of our competitors, which may put us at a competitive disadvantage and reduce our flexibility in responding to current and changing industry and financial market conditions;

• there are significant constraints on our ability to generate liquidity through incurring additional debt;

• we may be more vulnerable to economic downturn and adverse developments in our business.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in the agreements governing our indebtedness.

To the extent new indebtedness is added to our debt levels, including as a result of satisfying interest payment obligations on certain of our indebtedness with payments-in-kind, the related risks that we now face could intensify.

If we are unable to comply with our covenants under our indebtedness, our liquidity may be further adversely affected.

Our ability to meet our expenses, to remain in compliance with our covenants under our debt instruments and to make future principal and interest payments in respect of our debt depends on, among other factors, our operating performance, competitive developments and financial market conditions, all of which are significantly affected by financial, business, economic and other factors.

We are not able to control many of these factors.

Given current industry and economic conditions, our cash flow may not be sufficient to allow us to pay principal and interest on our debt and meet our other obligations.

For example, in late October 2022, in October 2022 we determined not to make certain payments with respect to several of our debt facilities, equipment financing facilities and leases and other financings, including our two bridge promissory notes.

We do not believe we were in default under any of our debt agreements as of September 30, 2022.

Financing activities

In January 2022, as a result of the closing of the merger with XPDI (the “Merger”), we received approximately $195.0 million in net cash proceeds after the payment of transaction expenses along with $0.3 million of cash acquired from XPDI.

In January through March 2022, we borrowed an additional $4.8 million under our lending agreement with Bremer Bank, National Association for the purchase of blockchain mining equipment and improvements to data center and infrastructure.

In April 2022, we 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.

In January 2022, we borrowed an additional $20.0 million under our two lending agreements with Blockfi Lending, LLC for the purchase of blockchain mining equipment.

The loans bear interest at 13.1% with a term of 24 months from issuance.

In February 2022, we drew down on the remaining $10.0 million of our master equipment finance facility agreement with Trinity Capital Inc.

(“Trinity”) to finance the acquisition of blockchain computing equipment.

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 March 2022, we entered into a $20.0 million equipment loan and security agreement with Anchorage Lending CA, LLC.

(“Anchor Labs”) to finance the purchase of blockchain computing equipment.

We 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 March 2022, we 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 purchase of blockchain computing equipment.

In March 2022, we borrowed the first tranche of $30.0 million and borrowed the second tranche of $39.6 million in April 2022.

The loan has a term of 36 months from issuance.

Interest expense on the loan has been recognized based on an effective interest rate of 9.8%.

In April 2022, we 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 loan has been recognized based on an effective interest rate of 7.0%.

In August 2022, we amended the Bridge Notes to, among other things, extend the maturity date to June 2023.

In April 2022, we 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.

We 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%.

In May 2022, we entered into a $11.7 million equipment loan and security agreement with Anchor Labs to finance the purchase of blockchain computing equipment.

We 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%.

In July 2022, we entered into a common stock purchase agreement and a Registration Rights Agreement with B.

Riley Principal Capital II, LLC.

Pursuant to the Equity Line of Credit, we have the right to sell to B.

Sales of common stock pursuant to the Equity Line of Credit, and the timing of any sales, are solely at our option, and we are under no obligation to sell any securities to B.

Riley under the Equity Line of Credit.

As consideration for B.

In addition, we 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.

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 12 (“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.

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 required 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.

In October 2022 we determined not to make certain payments with respect to several of our debt facilities, equipment financing facilities and leases and other financings, including our two bridge promissory notes.

We do not believe we were in default under any of our debt agreements as of September 30, 2022.

Separation Agreement with Former Chief Financial Officer

On April 4, 2022, Michael Trzupek, Executive Vice President and Chief Financial Officer of the Company, notified the board of directors of the Company of his decision to resign from his position, effective immediately.

On April 19, 2022, the Company and Mr.

Trzupek reached an agreement regarding Mr.

Trzupek’s separation from the Company (the “Separation Agreement”), effective May 6, 2022 (the “Separation Date”).

Denise Sterling, the former Senior Vice President of Finance of the Company, assumed the role of Chief Financial Officer on April 5, 2022.

Pursuant to the Separation Agreement, in exchange for certain releases of claims, Mr.

Trzupek’s agreement to transition his responsibilities and duties to other Company personnel, and certain additional covenants related to cooperation and competitive activity, the Company provided cash severance benefits to Mr.

Trzupek of $75,000, representing three months of base salary, paid in a single lump sum less any required taxes and other withholding amounts.

He was also entitled to any accrued but unpaid compensation for the period prior to the Separation Date.

In addition, Mr.

Trzupek was deemed to have time vested in 1,200,000 of his outstanding restricted stock units, which remain subject to certain transaction vesting terms, as detailed in the award agreements assumed by XPDI, and he is entitled to receive an additional 200,000 time-vested restricted stock units.

For a discussion of Commitments and Contractual Obligations, refer to Notes 7 — Leases and 8 — Commitments and Contingencies to our unaudited consolidated financial statements.

Chapter 11 and Other Related Matters

Chapter 11 Cases

As an initial step towards implementation of the plan of reorganization, on the Petition Date, the Debtors filed the Chapter 11 Cases.

Each Debtor continues to operate its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

The Chapter 11 Cases are being jointly administered under Case No.

In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business, however, we may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

To ensure the Debtors’ ability to continue operating in the ordinary course of business and minimize the effect of

the restructuring on the Debtors’ customers and employees, the Debtors filed certain motions and applications intended to limit the disruption of the bankruptcy proceedings on its operations (the “First Day Motions”), including authority to pay employee wages and benefits, and pay vendors and suppliers for goods and services provided both before and after the filing date, which were approved on a final basis for wages and interim basis for vendors on December 22, 2022.

Pursuant to the First Day Motions, the Bankruptcy Court 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:

continue to operate our cash management system and honor certain prepetition obligations related thereto;

maintain existing business forms;

continue to perform intercompany transactions;

obtain super priority administrative expense status for post-petition intercompany balances;

pay certain prepetition claims of critical vendors, lien claimants and section 503(b)(9) of the Bankruptcy Code claimants in the ordinary course of business on a post-petition basis;

pay prepetition employee wages, salaries, other compensation and reimbursable employee expenses and continue employee benefits programs;

pay obligations under prepetition insurance policies, continue to pay certain brokerage fees;

renew, supplement, modify or purchase insurance coverage;

maintain our surety bond program;

and pay certain prepetition taxes and fees.

Original DIP Credit Agreement and Restructuring Support Agreement

In connection with the Chapter 11 Cases, the Debtors entered into the Original DIP Credit Agreement, with Wilmington Savings Fund Society, FSB, as administrative agent, and the Original DIP Lenders.

Also in connection with the filing of the Chapter 11 Cases, the Company entered into a Restructuring Support Agreement with the Ad Hoc Noteholder Group pursuant to which the Ad Hoc Noteholder Group agreed to provide commitments for 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 Company terminated the Restructuring Support Agreement pursuant to a “fiduciary out” which permitted the Company to pursue better alternatives.

Replacement 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.

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 Replacement DIP Credit Agreement includes representations and warranties, covenants applicable to the Debtors, and events of default.

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;

and (iv) conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code.

Related Party Transactions

We have agreements to provide hosting services to various entities that are managed and invested in by individuals who are directors and executives of Core Scienti fic.

For the three and nine months ended September 30, 2022, we recognized hosting revenue from the contracts with these entities of $9.2 million and $22.7 million, respectively.

For the three and nine months ended September 30, 2021, we recognized hosting revenue from the contracts with these entities of $2.9 million and $13.9 million, respectively.

In addition, for the three and nine months ended September 30, 2022, we recognized equipment sales revenue of $29.7 million and $67.3 million, respectively, from these entities.

For the three and nine months ended September 30, 2021, we recognized equipment sales revenue of $11.7 million and $29.1 million, respectively, from these same various entities.

As of September 30, 2022 and December 31, 2021, we had accounts receivable of $0.9 million and $0.3 million, respectively, from these entities.

For the three months ended March 31, 2023 and 2022, we recognized hosting revenue from the contracts with these entities of $3.7 million and $5.9 million, respectively.

In addition, for the three months ended March 31, 2023 and 2022, we recognized equipment sales revenue of nil and $25.9 million, respectively, from these entities.

A nominal amount was receivable from these entities as of March 31, 2023, and December 31, 2022.

Core Scientific reimburses certain of its officers and directors for use of a personal aircraft for flights taken on Company business.

For the three and nine months ended September 30, 2022, we incurred reimbursements of $0.7 million and $1.8 million, respectively.

We incurred reimbursements of $0.4 million and $0.6 million for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022, $0.2 million was payable.

A nominal amount was pa yable at December 31, 2021.

For the three months ended March 31, 2023 and 2022, we incurred reimbursements of nil and $0.5 million, respectively.

As of March 31, 2023, and December 31, 2022, there was no reimbursements payable.

Foreign Currency and Exchange Risk

The vast majority of our cash generated from revenue is denominated in U.S.

dollars, with a small amount denominated in foreign currencies.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those accounting policies and estimates that are both the most important to the portrayal of our net assets and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material.

Preparation of our unaudited consolidated financial statements in accordance with U.S.

GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities.

Other than the goodwill impairment charge discussed in Note 4─Goodwill to our unaudited consolidated financial statements, there have been no material changes to the critical accounting policies and estimates as previously disclosed in our audited consolidated financial statements and accompanying notes included as an exhibit to the amendment to our Current Report on Form 8-K/A which was filed with the SEC on March 31, 2022.

There have been no material changes to the critical accounting policies and estimates during the three months ended March 31, 2023, as compared to those disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on April 3, 2023.

Recent Accounting Pronouncements

For a discussion of new accounting standards relevant to our business, refer to Note 2─Summary of Significant Accounting Policies to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Emerging Growth Company and a Smaller Reporting Company Status

Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive

compensation and any golden parachute payments.

We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments.

We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier.

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We will remain an emerging growth company under the JOBS Act until the earliest of (a) February 12, 2026, the fifth anniversary of XPDI’s initial public offering, (b) the last date of our fiscal year in which we have a total annual gross revenue of at least $1.07 billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (d) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.

We are also a “smaller reporting company” as defined in the Securities Exchange Act of 1934, as amended.

We may continue to be a smaller reporting company even after we are no longer an emerging growth company.

We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.

Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and have reduced disclosure obligations regarding executive compensation, and, similar to emerging growth companies, if we are a smaller reporting company that qualifies as a “non-accelerated filer” under the rules of the SEC, we would not be required to obtain an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.

Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis