What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-15 · 427 added, 121 removed, 545 unchanged (50% of the section changed)

53 unchanged sentences

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.

As of June 30, 2023, we had approximately 1,500 MW of contracted power capacity at our sites, including 500 MW of power allocated to the Muskogee data center, which remains substantially undeveloped.

Our total revenue was $126.9 million and $164.0 million for the three months ended June 30, 2023 and 2022, respectively.

We had operating income of $9.4 million and an operating loss of $1.0 billion for the three months ended June 30, 2023 and 2022, respectively.

We had a net loss of $9.3 million and a net loss of $810.5 million for the three months ended June 30, 2023 and 2022, respectively.

Our Adjusted EBITDA was $44.8 million and $59.1 million for the three months ended June 30, 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 $247.6 million and $356.5 million for the six months ended June 30, 2023 and 2022, respectively.

We had operating income of $17.0 million and an operating loss of $1.1 billion for the six months ended June 30, 2023 and 2022, respectively.

We had a net loss of $9.6 million and a net loss of $1.3 billion for the six months ended June 30, 2023 and 2022, respectively.

Our Adjusted EBITDA was $84.8 million and $152.2 million for the six months ended June 30, 2023 and 2022, respectively.

Adjusted EBITDA is a non-GAAP financial measure.

Recent Developments

12 unchanged sentences

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.

23 unchanged sentences

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.

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

2 unchanged sentences

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.

The satisfaction of the obligation and transfer of the equipment is a noncash transaction which did not result in any gain or loss at June 30, 2023.

Our Business Model

11 unchanged sentences

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.

As of June 30, 2023, we had approximately 1,500 MW of contracted power capacity at our sites, including 500 MW 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.

13 unchanged sentences

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.

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

As of June 30, 2023, all new miners have been paid for in arrangements with our customers.

As of June 30, 2023, we had deployed approximately 210,900 bitcoin miners, which number consists of approximately 144,900 self-miners and approximately 66,000 hosted miners, which represented 15.1 EH/s and 7.2 EH/s for self-miners and hosted miners, respectively.

The tables below summarizes the total number of self- and hosted miners in operation as of June 30, 2023 and December 31, 2022 (miners in thousands):

Bitcoin Miners in Operation as of June 30, 2023

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

7 unchanged sentences

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.

During the fourth quarter of December 31, 2022, 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 three months ended March 31, 2023 and 2022, were as follows (in thousands):

March 31, 2023 March 31, 2022

Activity related to our digital asset balances for the six months ended June 30, 2023 and 2022, were as follows (in thousands):

June 30, 2023 June 30, 2022

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

Digital asset mining revenue

Digital asset mining revenue, net of receivables *

194,917 242,842

Mining proceeds from shared hosting 4,610 —

Proceeds from sales of digital assets (199,646) (246,249)

1 unchanged sentence

Impairment of digital assets (2,183) (204,198)

Other (374) 847

Payment of board fee (89) —

Digital assets, end of period $ 321 $ 40,664

* As of June 30, 2023, there was $1.0 million of digital asset receivable included in prepaid expenses and other current assets on the consolidated balance sheets.

Performance Metrics

3 unchanged sentences

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.

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.

14 unchanged sentences

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.

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.

49 unchanged sentences

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

Key Business Metrics and Non-GAAP Financial Measures

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 “Self-Mining Hash Rate” and “Adjusted EBITDA” (below).

Three Months Ended March 31,

Self-Mining Hash rate (Exahash per second)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Adjusted EBITDA (in millions) $ 44.8 $ 59.1 $ 84.8 $ 152.2

7 unchanged sentences

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.

Our self-mining hash rate was 15.1 EH/s and 10.3 EH/s as of June 30, 2023 and 2022, respectively representing a 47% increase year over year.

Our combined self-mining and customer and related party hosting hash rate grew 25%, to 22.3 EH/s as of June 30, 2023 from 17.9 EH/s as of June 30, 2022.

Adjusted EBITDA

17 unchanged sentences

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 months ended March 31, 2023 and 2022, (in thousands):

Three Months Ended March 31,

The following table presents a reconciliation of net loss to Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022, (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Adjusted EBITDA

7 unchanged sentences

Fair value adjustment on convertible notes — (195,061) — 190,976

Loss on legal settlement 85 — 85 —

Gain from sales of digital assets (931) (11,808) (1,995) (13,971)

Impairment of digital assets 1,127 150,213 2,183 204,198

Impairment of goodwill and other intangibles — 790,753 — 790,753

Losses on exchange or disposal of property, plant and equipment 174 13,057 174 13,057

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

Cash restructuring charges — 1,445 — 1,445

Reorganization items, net 18,370 — 49,929 —

Fair value adjustment on acquired vendor liability — 9,789 — 9,430

Non-cash and other items 406 (8) (2,663) (6)

6 unchanged sentences

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.

During the three months ended June 30, 2023, we initiated our first new customer contracts based on proceed sharing.

Under these new contracts, customers pay for the cost of hosting and infrastructure and we share the proceeds that are generated.

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.

5 unchanged sentences

The Company participates in “mining pools” organized by “mining pool operators” in which we share our mining power (known as “hash rate”) with the hash rate generated by other miners participating in the pool to earn digital asset rewards.

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

The mining pool operator provides a service that coordinates the computing power of the independent mining

enterprises participating in the mining 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.

3 unchanged sentences

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

Loss on legal settlement

Loss on legal settlements represent cost incurred for resolution of a legal settlement with a vendor.

Gain from sales of digital assets

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

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

Impairment of digital assets

9 unchanged sentences

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.

Impairment of goodwill and other intangibles

The Company does not amortize goodwill, but tests it for impairment annually as of October 31 each year, 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.

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.

Operating expenses

9 unchanged sentences

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

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.

Non-operating expenses (income), net:

Income tax expense

3 unchanged sentences

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

Results of Operations for the Three Months Ended June 30, 2023 and 2022

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

Three Months Ended March 31, Period over Period Change

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

12 unchanged sentences

Gross profit 36,959 12,717 24,242 191 %

Loss on legal settlement (85) — (85) NM

Gain from sales of digital assets 931 11,808 (10,877) (92) %

Impairment of digital assets (1,127) (150,213) 149,086 NM

Impairment of goodwill and other intangibles — (790,753) 790,753 NM

Losses on exchange or disposal of property, plant and equipment (174) (13,057) 12,883 NM

Operating expenses:

3 unchanged sentences

Total operating expenses 27,120 115,885 (88,765) (77) %

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

Operating income (loss) 9,384 (1,045,383) 1,054,767 NM

Non-operating expenses (income), net:

Interest (income) expense, net

(36) 27,116 (27,152) (100) %

Fair value adjustment on convertible notes — (195,061) 195,061 NM

Fair value adjustment on derivative warrant liabilities — (22,189) 22,189 NM

Reorganization items, net 18,370 — 18,370 NM

Other non-operating expenses, net 181 3,876 (3,695) NM

Total non-operating expenses (income), net

18,515 (186,258) 204,773 NM

Loss before income taxes

(9,131) (859,125) 849,994 NM

Income tax expense (benefit) 129 (48,650) 48,779 NM

$ (9,260) $ (810,475) $ 801,215 NM

NM - Not Meaningful

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Hosting revenue from customers $ 26,316 $ 31,338 $ (5,022) (16) %

Hosting revenue from related parties 3,514 7,598 (4,084) (54) %

Equipment sales to customers — 3,507 (3,507) NM

Equipment sales to related parties — 11,687 (11,687) NM

Digital asset mining revenue 97,082 109,842 (12,760) (12) %

Total revenue $ 126,912 $ 163,972 $ (37,060) (23) %

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 decreased by $37.1 million to $126.9 million for the three months ended June 30, 2023, from $164.0 million for the three months ended June 30, 2022, as a result of the factors described below.

Total hosting revenue from customers decreased by $5.0 million or 16%, to $26.3 million for the three months ended June 30, 2023, from $31.3 million for the three months ended June 30, 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, partially offset by the deployment of additional miners for existing customers as well as the addition of several hosted miners related to our shared proceeds hosting customers for the three months ended June 30, 2023.

Total hosting revenue from related parties decreased by $4.1 million or 54%, to $3.5 million for the three months ended June 30, 2023, from $7.6 million for the three months ended June 30, 2022.

The decrease in related party hosting revenue was primarily driven by the termination of hosting contracts during the three months ended June 30, 2023.

Equipment sales to customers decreased by $3.5 million or 100%, to nil for the three months ended June 30, 2023, from $3.5 million for the three months ended June 30, 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 June 30, 2023, as compared to the three months ended June 30, 2022.

Equipment sales to related parties decreased by $11.7 million or 100%, to nil for the three months ended June 30, 2023, from $11.7 million for the three months ended June 30, 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 three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

Digital asset mining revenue decreased by $12.8 million to $97.1 million for the three months ended June 30, 2023, from $109.8 million for the three months ended June 30, 2022.

The year over year decrease in mining revenue was driven primarily by a 14% decrease in the price of bitcoin and an 88% increase in the global bitcoin network hash rate, partially offset by the increase in our self-mining hash rate driven by an increase in the number of mining units deployed.

Our self-mining hash rate increased by 47%, to 15.1 EH/s for the three months ended June 30, 2023, from 10.3 EH/s for the three months ended June 30, 2022.

The total number of bitcoins mined for the three months ended June 30, 2023, was 3,470 compared to 3,365 for the three months ended June 30, 2022.

The average price of bitcoin for the three months ended June 30, 2023, was $28,034 as compared to $32,502 for the three months ended June 30, 2022.

Cost of revenue

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Cost of revenue

$ 89,953 $ 151,255 $ (61,302) (41) %

36,959 12,717 24,242 191 %

Cost of revenue decreased by $61.3 million or 41%, to $90.0 million for the three months ended June 30, 2023, from $151.3 million for the three months ended June 30, 2022.

As a percentage of total revenue, cost of revenue totaled 71% and 92% for the three months ended June 30, 2023 and 2022, respectively.

The decrease in cost of revenue was primarily attributable to decreased depreciation expense of $28.7 million driven by an adjustment to the depreciable base for the deployed self-mining units, lower stock-based compensation of $15.4 million as prior year included vesting acceleration associated with the acquisition of BlockCap, and $13.5 million of lower equipment sales costs due the Company exiting the selling of equipment

Loss on legal settlements

The loss on legal settlement of $0.1 million for the three months ended June 30, 2023, represent cost incurred for resolution of a legal settlement with a vendor.

Gain from sales of digital assets

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Gain from sales of digital assets $ 931 $ 11,808 $ (10,877) (92) %

Percentage of total revenue

Gain from sales of digital assets decreased by $10.9 million to $0.9 million for the three months ended June 30, 2023, from a gain of $11.8 million for the three months ended June 30, 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 three months ended June 30, 2023, the carrying value of our digital assets sold was $102.5 million and proceeds were $101.2 million.

For the three months ended June 30, 2022, the carrying value of our digital assets sold was $235.3 million and the sales price was $247.1 million.

Impairment of digital assets

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Impairment of digital assets $ (1,127) $ (150,213) $ 149,086 NM

Percentage of total revenue

Impairment of digital assets decreased by $149.1 million to $1.1 million for the three months ended June 30, 2023, from $150.2 million for the three months ended June 30, 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.

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 $0.3 million and $0.7 million as of June 30, 2023 and December 31, 2022, respectively.

Impairment of goodwill and other intangibles

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Impairment of goodwill and other intangibles $ — $ (790,753) $ 790,753 NM

Percentage of total revenue

Impairment of goodwill and other intangibles decreased by $790.8 million to nil for the three months ended June 30, 2023, from $790.8 million for the three months ended June 30, 2022.

The Company identified a triggering event as of June 30, 2022 due to a decline in the Company’s stock price and market decline in the value of bitcoin and, as such, the Company performed the quantitative test to compare the fair value to the carrying amount for each reporting unit.

The Company concluded the carrying amount of the Mining segment exceeded its fair value and, as such, recorded a $788.7 million impairment of goodwill in its Mining reporting unit.

In addition, as part of the restructuring activities during the second quarter of 2022, the Company determined that $2.0 million of software intangible assets would no longer be used.

Losses on exchange or disposal of property, plant and equipment

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Losses on exchange or disposal of property, plant and equipment $ (174) $ (13,057) $ 12,883 NM

Percentage of total revenue

Losses on exchange or disposal of property, plant and equipment decreased by $12.9 million to $0.2 million for the three months ended June 30, 2023, from $13.1 million for the three months ended June 30, 2022.

The decrease was due to a noncash exchange of mining equipment during 2022.

Operating Expenses

Research and development

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Research and development

$ 1,640 $ 14,773 $ (13,133) (89) %

Percentage of total revenue

Research and development expenses decreased by $13.1 million or 89%, to $1.6 million for the three months ended June 30, 2023, from $14.8 million for the three months ended June 30, 2022.

The decrease was driven by lower stock-based compensation of $12.8 million as prior year included vesting acceleration associated with the acquisition of BlockCap, a decrease in professional fees of $0.2 million, and lower personnel and employee related expenses of $0.1 million.

Sales and marketing

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Sales and marketing

$ 1,084 $ 10,238 $ (9,154) (89) %

Percentage of total revenue

Sales and marketing expenses decreased by $9.2 million or 89%, to $1.1 million for the three months ended June 30, 2023, from $10.2 million for the three months ended June 30, 2022.

The decrease was primarily driven by $8.6 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $0.3 million lower personnel and related expenses, and $0.2 million lower advertising and marketing expenses.

General and administrative

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

General and administrative

$ 24,396 $ 90,874 $ (66,478) (73) %

Percentage of total revenue

General and administrative expenses decreased by $66.5 million to $24.4 million for the three months ended June 30, 2023, from $90.9 million for the three months ended June 30, 2022.

The decrease was primarily driven by $59.9 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $2.5 million of lower payroll and benefit costs associated with lower headcount, $1.7 million of lower professional fees primarily related to expenses in the prior year to support public company readiness, $0.6 million of reduced depreciation and amortization, $0.5 million lower employee related expenses such as travel and software, and $0.5 million of lower business insurance, partially offset by $1.0 million higher utilities costs and other miscellaneous expenses.

Non-operating expenses (income), net

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

Non-operating expenses (income), net:

(in thousands, except percentages)

Interest expense, net (36) 27,116 (27,152) (100) %

Fair value adjustment on convertible notes — (195,061) 195,061 NM

Fair value adjustment on derivative warrant liabilities — (22,189) 22,189 NM

Reorganization items, net 18,370 — 18,370 NM

Other non-operating income, net 181 3,876 (3,695) NM

Total non-operating expenses (income), net

$ 18,515 $ (186,258) $ 204,773 NM

Total non-operating expenses, net increased by $204.8 million, to $18.5 million for the three months ended June 30, 2023, from non-operating income, net of $186.3 million for the three months ended June 30, 2022.

The increase in non-operating expenses, net was primarily driven by a fair value adjustment on convertible notes of $195.1 million (excluding interest expense and changes in instrument-specific credit risk) for the three months ended June 30, 2022, compared to no adjustment for the same period in 2023, partially offset by a $18.4 million increase in Reorganization items, net related to DIP financing fees and bankruptcy advisor fees post-petition in the second quarter of 2023.

Income tax expense (benefit)

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Income tax expense (benefit) $ 129 $ (48,650) $ 48,779 NM

Percentage of total revenue

Income tax expense consists of U.S.

federal, state and local income taxes.

For the three months ended June 30, 2023, our income tax expense was $0.1 million.

For the three months ended June 30, 2022, our income tax benefit was $48.7 million.

The Company's effective tax rate for the three months ended June 30, 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:

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

Hosting Segment (in thousands, except percentages)

Hosting revenue $ 29,830 $ 38,936 $ (9,106) (23)%

Equipment sales — 15,194 (15,194) (100)%

Total revenue 29,830 54,130 (24,300) (45)%

Cost of revenue:

Cost of hosting services 23,107 43,644 (20,537) (47)%

Cost of equipment sales — 13,541 (13,541) (100)%

Total cost of revenue $ 23,107 $ 57,185 $ (34,078) (60)%

Gross profit (loss) $ 6,723 $ (3,055) $ 9,778 NM

Hosting Margin 23 % (6)%

Mining Segment

Digital asset mining revenue $ 97,082 $ 109,842 $ (12,760) (12)%

Total revenue 97,082 109,842 (12,760) (12)%

Cost of revenue 66,846 94,070 (27,224) (29)%

Gross profit $ 30,236 $ 15,772 $ 14,464 92%

Mining Margin 31 % 14%

Consolidated total revenue $ 126,912 $ 163,972 $ (37,060) (23)%

Consolidated cost of revenue $ 89,953 $ 151,255 $ (61,302) (41)%

Consolidated gross profit $ 36,959 $ 12,717 $ 24,242 191%

For the three months ended June 30, 2023, cost of revenue included depreciation expense of $1.5 million for the Hosting segment and $18.8 million for the Mining segment.

For the three months ended June 30, 2022, cost of revenue included depreciation expense of $2.6 million for the Hosting segment and $46.5 million for the Mining segment.

For the three months ended June 30, 2023 and 2022, the top customer accounted for approximately 49% and 10%, respectively, of the Hosting’s segment total revenue.

For the three months ended June 30, 2023, gross profit in the Hosting segment increased $9.8 million compared to the three months ended June 30, 2022, reflecting a Hosting segment gross margin of 23% for the three months ended June 30, 2023, compared to a gross loss margin of 6% for the three months ended June 30, 2022.

The increase in Hosting segment gross margin for the three

months ended June 30, 2023, compared to the three months ended June 30, 2022 was primarily due to decreased equipment sales costs driven by the Company’s decision to exit the Equipment Sales business, and a decrease in stock-based compensation expense as a percentage of revenues as prior year included vesting acceleration associated with the acquisition of BlockCap.

The increase in the Hosting and Equipment Sales segment gross profit margin was partially offset by a decrease in hosting revenue driven by the termination of contracts for several customers in the portfolio at less profitable hosting rates, and higher power costs as a percentage of segment revenues.

For the three months ended June 30, 2023, gross profit in the Mining segment increased $14.5 million compared to the three months ended June 30, 2022, due to a higher Mining segment gross profit margin of 31% for the three months ended June 30, 2023, compared to 14% for the three months ended June 30, 2022.

The increase in the Mining segment gross profit margin was primarily due to a decrease in depreciation as a percentage of segment revenues, which was driven by an impairment adjustment to the depreciable base for the deployed self-mining units, a decrease in stock-based compensation expense as a percentage of revenues as prior year included vesting acceleration associated with the acquisition of BlockCap, and an increase in our self-mining hash rate, which was 15.1 EH/s for the three months ended June 30, 2023, compared to 10.3 EH/s for the three months ended June 30, 2022.

The increase in the Mining segment gross profit margin was partially offset by higher power costs as a percentage of segment revenues and by a 14% decrease in the average price of bitcoin.

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 June 30, 2023 and 2022, is as follows:

Three Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Reportable segment gross profit $ 36,959 $ 12,717 $ 24,242 191%

Loss on legal settlement (85) — (85) NM

Gain from sales of digital assets 931 11,808 (10,877) (92)%

Impairment of digital assets (1,127) (150,213) 149,086 NM

Impairment of goodwill and other intangibles — (790,753) 790,753 NM

Impairment of property, plant and equipment — — — NM

Losses on exchange or disposal of property, plant and equipment (174) (13,057) 12,883 NM

Operating expenses:

Research and development 1,640 14,773 (13,133) (89)%

Sales and marketing 1,084 10,238 (9,154) (89)%

General and administrative 24,396 90,874 (66,478) (73)%

Total operating expenses 27,120 115,885 (88,765) (77)%

Operating income (loss) 9,384 (1,045,383) 1,054,767 NM

Non-operating expenses (income), net:

Interest (income) expense, net (36) 27,116 (27,152) (100)%

Fair value adjustment on derivative warrant liabilities — (22,189) 22,189 NM

Fair value adjustment on convertible notes — (195,061) 195,061 NM

Reorganization items, net 18,370 — 18,370 NM

Other non-operating income, net 181 3,876 (3,695) (95)%

Total non-operating expenses (income), net

18,515 (186,258) 204,773 NM

Loss before income taxes $ (9,131) $ (859,125) $ 849,994 NM

Results of Operations for the Six Months Ended June 30, 2023 and 2022

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

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Hosting revenue from customers $ 45,225 $ 58,676 $ (13,451) (23) %

Hosting revenue from related parties 7,234 13,474 (6,240) (46) %

Equipment sales to customers — 3,923 (3,923) NM

Equipment sales to related parties — 37,576 (37,576) NM

Digital asset mining revenue 195,108 242,842 (47,734) (20) %

Total revenue 247,567 356,491 (108,924) (31) %

Cost of revenue:

Cost of hosting services 39,305 74,875 (35,570) (48) %

Cost of equipment sales — 36,076 (36,076) NM

Cost of digital asset mining 139,522 162,820 (23,298) (14) %

Total cost of revenue 178,827 273,771 (94,944) (35) %

Gross profit 68,740 82,720 (13,980) (17) %

Loss on legal settlement (85) — (85) NM

Gain from sales of digital assets 1,995 13,971 (11,976) (86) %

Impairment of digital assets (2,183) (204,198) 202,015 NM

Impairment of goodwill and other intangibles — (790,753) 790,753 NM

Losses on exchange or disposal of property, plant and equipment (174) (13,057) 12,883 NM

Operating expenses:

Research and development 3,055 18,113 (15,058) (83) %

Sales and marketing 2,092 11,636 (9,544) (82) %

General and administrative 46,160 131,034 (84,874) (65) %

Total operating expenses 51,307 160,783 (109,476) (68) %

Operating income (loss) 16,986 (1,072,100) 1,089,086 NM

Non-operating expenses, net:

4 unchanged sentences

Reorganization items, net 49,929 — 49,929 NM

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

Other non-operating (income) expenses, net (2,888) 3,519 (6,407) NM

Total non-operating expenses, net 26,401 210,823 (184,422) (87) %

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

Loss before income taxes (9,415) (1,282,923) 1,273,508 NM

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

Income tax expense (benefit) 233 (6,244) 6,477 NM

Net loss $ (9,648) $ (1,276,679) $ 1,267,031 NM

NM - Not Meaningful

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

13 unchanged sentences

Total revenue

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.

Total revenue decreased by $108.9 million to $247.6 million for the six months ended June 30, 2023, from $356.5 million for the six months ended June 30, 2022, as a result of the factors described below.

Total hosting revenue from customers decreased by $13.5 million or 23%, to $45.2 million for the six months ended June 30, 2023, from $58.7 million for the six months ended June 30, 2022.

Total hosting revenue from related parties decreased by $6.2 million or 46%, to $7.2 million for the six months ended June 30, 2023, from $13.5 million for the six months ended June 30, 2022.

The decrease in related party hosting revenue was primarily driven by the termination of hosting contracts during the fourth quarter of December 31, 2022.

Equipment sales to customers decreased by $3.9 million or 100%, to nil for the six months ended June 30, 2023, from $3.9 million for the six months ended June 30, 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 six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Equipment sales to related parties decreased by $37.6 million or 100%, to nil for the six months ended June 30, 2023, from $37.6 million for the six months ended June 30, 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 six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Digital asset mining revenue decreased by $47.7 million to $195.1 million for the six months ended June 30, 2023, from $242.8 million for the six months ended June 30, 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%.

Our self-mining hash rate increased by 47%, to 15.1 EH/s for the six months ended June 30, 2023, from 10.3 EH/s for the six months ended June 30, 2022.

The total number of bitcoins mined for the six months ended June 30, 2023, was 7,768 compared to 6,567 for the six months ended June 30, 2022.

The average price of bitcoin for the six months ended June 30, 2023, was $25,470 as compared to $36,876 for the six months ended June 30, 2022, decrease of 31%.

Cost of revenue

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

68,740 82,720 (13,980) (17) %

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.

Cost of revenue decreased by $94.9 million or 35%, to $178.8 million for the six months ended June 30, 2023, from $273.8 million for the six months ended June 30, 2022.

As a percentage of total revenue, cost of revenue totaled 72% and 77% for the six months ended June 30, 2023 and 2022, respectively.

The decrease in cost of revenue was primarily attributable to $50.1 million of decreased depreciation expense driven by an adjustment to the depreciable base for the deployed self-mining units, $36.1 million of lower equipment sales costs due to the Company exiting the selling of equipment, and lower stock-based compensation of $16.8 million as prior year included vesting acceleration associated with the acquisition of BlockCap, partially offset by an increase in power costs of $7.4 million from higher power consumption associated with the expansion of capacity at our mining sites and increasing number of miners deployed and operational.

Loss on legal settlement

The loss on legal settlement of $0.1 million for the six months ended June 30, 2023, represent cost incurred for resolution of a legal settlement with a vendor.

Gain from sales of digital assets

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

2 unchanged sentences

Percentage of total revenue

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.

Gain from sales of digital assets decreased by $12.0 million to $2.0 million for the six months ended June 30, 2023, from a gain of $14.0 million for the six months ended June 30, 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 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.

For the six months ended June 30, 2023, the carrying value of our digital assets sold was $199.8 million and proceeds were $199.6 million.

For the six months ended June 30, 2022, the carrying value of our digital assets sold was $232.3 million and the sales price was $246.2 million.

Impairment of digital assets

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

2 unchanged sentences

Percentage of total revenue

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 of digital assets decreased by $202.0 million to $2.2 million for the six months ended June 30, 2023, from $204.2 million for the six months ended June 30, 2022.

Impairment exists when the carrying amount exceeds its fair value.

1 unchanged sentence

Quoted prices, including intraday low prices, are collected and utilized in impairment testing and measurement on a daily basis.

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 nil and $316.3 million as of March 31, 2023 and March 31, 2022, respectively.

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 $0.3 million and $0.7 million as of June 30, 2023 and December 31, 2022, respectively.

Impairment of goodwill and other intangibles

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Impairment of goodwill and other intangibles $ — $ (790,753) $ 790,753 NM

Percentage of total revenue

Impairment of goodwill and other intangibles decreased by $790.8 million to nil for the six months ended June 30, 2023, from $790.8 million for the six months ended June 30, 2022.

The Company concluded the carrying amount of the Mining segment exceeded its fair value and, as such, recorded an $788.7 million impairment of goodwill in its Mining reporting unit.

In addition, as part of the restructuring activities during the second quarter of 2022, the Company determined that $2.0 million of software intangible assets would no longer be used.

Losses on exchange or disposal of property, plant and equipment

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

Losses on exchange or disposal of property, plant and equipment $ (174) $ (13,057) $ 12,883 NM

Percentage of total revenue

Losses on exchange or disposal of property, plant and equipment decreased by $12.9 million to $0.2 million for the six months ended June 30, 2023, from $13.1 million for the six months ended June 30, 2022.

The decrease was due to a noncash exchange of mining equipment during 2022.

Operating Expenses

Research and development

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

Percentage of total revenue

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.

Research and development expenses decreased by $15.1 million or 83%, to $3.1 million for the six months ended June 30, 2023, from $18.1 million for the six months ended June 30, 2022.

The decrease was driven by lower stock-based compensation of $14.2 million as prior year included vesting acceleration associated with the acquisition of BlockCap, a decrease in professional fees of $0.6 million, and lower personnel and related expenses of $0.2 million.

Sales and marketing

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

Percentage of total revenue

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.

Sales and marketing expenses decreased by $9.5 million or 82%, to $2.1 million for the six months ended June 30, 2023, from $11.6 million for the six months ended June 30, 2022.

The decrease was driven primarily driven by $8.5 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $0.5 million of lower advertising and marketing expenses and $0.3 million lower personnel and related expenses.

General and administrative

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

3 unchanged sentences

Percentage of total revenue

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.

General and administrative expenses decreased by $84.9 million to $46.2 million for the six months ended June 30, 2023, from $131.0 million for the six months ended June 30, 2022.

The decrease was primarily driven by $70.6 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $7.0 million of lower professional fees primarily related to expenses in the prior year to support public company readiness, $3.8 million of lower payroll and benefit costs associated with lower headcount, $1.3 million of reduced depreciation and amortization, and $1.8 million lower employee related expenses such as travel, software and rent.

Non-operating expenses, net

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

9 unchanged sentences

$ 26,401 $ 210,823 $ (184,422) (87) %

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

Total non-operating expenses, net decreased by $184.4 million, to $26.4 million for the six months ended June 30, 2023, from $210.8 million for the six months ended June 30, 2022.

The decrease in non-operating expenses, net was primarily driven by a fair value adjustment on convertible notes of $191.0 million (excluding interest expense and changes in instrument-specific credit risk) for the six months ended June 30, 2022, compared to no adjustment for the same period in 2023, partially offset by a $49.9 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 (benefit)

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

(in thousands, except percentages)

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

Income tax expense (benefit) $ 233 $ (6,244) $ 6,477 NM

Percentage of total revenue

1 unchanged sentence

federal, state and local income taxes.

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.

For the six months ended June 30, 2023 and 2022, our income tax expense was $0.2 million and a income tax benefit was $6.2 million, respectively.

The $6.5 million increase in the provision for income taxes for the six months ended June 30, 2023, compared to same period in 2022, was due to our ability to benefit a portion of the losses during the six months ended June 30, 2022.

During the six months ended June 30, 2023, the Company was no longer able to benefit losses, which were subject to a full valuation allowance.

The Company's effective tax rate for the six months ended June 30, 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:

Three Months Ended March 31, Period over Period Change

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

7 unchanged sentences

Total cost of revenue $ 39,305 $ 110,951 $ (71,646) (65)%

Gross profit $ 3,803 $ 5,753 $ (1,950) (34)%

Gross (loss) profit $ 13,154 $ 2,698 $ 10,456 388%

Hosting Margin 25% 2%

8 unchanged sentences

Consolidated gross profit $ 68,740 $ 82,720 $ (13,980) (17)%

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

For the six months ended June 30, 2023, cost of revenue included depreciation expense of $1.8 million for the Hosting segment and $38.8 million for the Mining segment.

For the six months ended June 30, 2022, cost of revenue included depreciation expense of $4.8 million for the Hosting segment and $85.9 million for the Mining segment.

For the six months ended June 30, 2023 and 2022, the top customer accounted for approximately 49% and 8%, respectively, of the Hosting’s segment total revenue.

For the six months ended June 30, 2023, gross profit in the Hosting segment increased $10.5 million compared to the six months ended June 30, 2022, reflecting a Hosting segment gross margin of 25% for the six months ended June 30, 2023, compared to gross profit margin of 2% for the six months ended June 30, 2022.

The increase in Hosting segment gross profit margin for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily due to decreased equipment sales costs driven by the Company’s decision to exit the Equipment Sales business, and a decrease in stock-based compensation expense as a percentage of revenues as prior year included vesting acceleration associated with the acquisition of BlockCap.

For the six months ended June 30, 2023, gross profit in the Mining segment decreased $24.4 million compared to the six months ended June 30, 2022, due to a lower Mining segment gross profit margin of 28% for the six months ended June 30, 2023, compared to 33% for the six months ended June 30, 2022.

The decrease in the Mining segment gross profit margin was primarily due to higher power costs as a percentage of segment revenues and by a 31% decrease in the average price of bitcoin.

This decrease was partially offset by a decrease in depreciation as a percentage of segment revenues, which was driven by an impairment adjustment to the depreciable base for the deployed self-mining units, a decrease in stock-based compensation expense as a percentage of revenues as prior year included vesting acceleration associated with the acquisition of BlockCap, and an increase in our self-mining hash rate, which was 15.09 EH/s for the six months ended June 30, 2023, compared to 10.3 EH/s for the six months ended June 30, 2022.

A reconciliation of the reportable segment gross profit to loss before income taxes included in our Consolidated Statements of Operations for the six months ended June 30, 2023 and 2022, is as follows:

Six Months Ended June 30, Period over Period Change

2023 2022 Dollar Percentage

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Reportable segment gross profit $ 68,740 $ 82,720 $ (13,980) (17)%

Loss on legal settlement (85) — (85) NM

Gain from sales of digital assets 1,995 13,971 (11,976) (86)%

Impairment of digital assets (2,183) (204,198) 202,015 NM

Impairment of goodwill and other intangibles — (790,753) 790,753 NM

Losses on exchange or disposal of property, plant and equipment (174) (13,057) 12,883 NM

Operating expenses:

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Total operating expenses 51,307 160,783 (109,476) (68)%

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

Operating income (loss) 16,986 (1,072,100) 1,089,086 NM

Non-operating expenses, net:

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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.

At June 30, 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.

As previously reported in our Current Report on Form 8-K filed with the SEC on June 20, 2023, we filed a proposed Joint Chapter 11 Plan of Reorganization and a related proposal form of Disclosure Statement with the Bankruptcy Court.

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.

These factors, together with the Company’s recurring losses from operations and accumulated deficit, create substantial doubt about the Company’s ability to continue as a going concern.

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.

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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.

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 June 30, 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 a 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.

March 31, December 31, Period over Period Change

June 30, December 31, Period over Period Change

2023 2022 Dollar Percentage

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Total cash, cash equivalents and restricted cash $ 76,760 $ 52,240 $ 24,520 47 %

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.

As of June 30, 2023 and December 31, 2022, restricted cash of $19.2 million and $36.4 million, consisted of cash held in escrow under the Original DIP Credit Agreement and to pay for construction and development activities.

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

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands)

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Operating Activities

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.

Net cash provided by operating activities was $38.0 million for the six months ended June 30, 2023 and $141.3 million for the six months ended June 30, 2022.

The decrease in net cash provided by operating activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily due to a decrease in net loss of $1.3 billion, a decrease in intangible impairments of $790.8 million, a decrease in fair value adjustments on convertible notes of $206.9 million, a $202.0 million decrease in impairments of digital currency assets, a $110.2 million decrease in stock-based compensation, partially offset by a $47.7 million increase in digital asset mining income.

Investing Activities

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.

Net cash used in investing activities for the six months ended June 30, 2023 and 2022, was $2.5 million and $445.6 million, respectively.

The decrease in net cash used in investing activities was driven primarily by a $236.8 million decrease in purchases of property, plant and equipment and a $217.7 million decrease in deposits for self-mining equipment.

Financing Activities

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.

Net cash used in financing activities for the six months ended June 30, 2023 was $11.0 million.

Net cash provided by financing activities for the six months ended June 30, 2022 was $313.2 million.

The change over prior year was due primarily to $216.3 million from the issuance of debt and $198.9 million of proceeds from the issuance of common stock for the six months ended June 30, 2022, partially offset by principal payments on debt of $40.8 million.

Commitments and Contractual Obligations

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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.

As an initial step towards implementation of a 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.

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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.

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:

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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”).

On July 4, 2023, the Debtors, the Administrative Agents and the Replacement DIP Lender entered into the First Amendment to the Replacement DIP Credit Credit Agreement (the “First Amendment”).

For detailed discussion about the First Amendment, refer to Note 15 — Subsequent Events.

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 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.

For the three and six months ended June 30, 2023, we recognized hosting revenue from the contracts with these entities of $3.5 million and $7.2 million, respectively.

For the three and six months ended June 30, 2022, we recognized hosting revenue from the contracts with these entities of $7.6 million and $13.5 million, respectively.

In addition, for the three and six months ended June 30, 2023, there was no equipment sales revenue recognized to these same various entities.

For the three and six months ended June 30, 2022, we recognized $11.7 million and $37.6 million, respectively, from these entities.

A nominal amount was receivable from these entities as of June 30, 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 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.

For the three and six months ended June 30, 2023, we incurred reimbursements of nil and for the three and six months ended June 30, 2022 we incurred reimbursements of $0.8 million and $1.2 million, respectively.

As of June 30, 2023, and December 31, 2022, there was no reimbursements payable.

Foreign Currency and Exchange Risk

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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.

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.

There have been no material changes to the critical accounting policies and estimates during the six months ended June 30, 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 4, 2023.

Recent Accounting Pronouncements

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Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

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.

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.

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