Core Scientific, Inc./tx 10-Q

Item 2. 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, 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. This discussion and analysis should be read together with the unaudited consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. See the sections entitled “─Forward-Looking Statements” and Part II, Item 1A. “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 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. 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 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; • obtain additional capital, whether equity or debt, or exist or remain as a going concern; • enhance future operating and financial results; • s uccessfully execute expansion pla ns; • attract and retain employees, officers or directors; • anticipate rapid changes in laws, regulations and technology; • execute its business strategy, including enhancement of the profitability of services provided, including profitably mine digital assets; • anticipate the uncertainties inherent in the development of new business strategies; • anticipate overall demand of blockchain technology or blockchain hosting resources; • increase brand awareness; • upgrade and maintain effective business controls and information technology systems; • acquire and protect intellectual property; • 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; 35 • anticipate the impact of, and response to, new accounting standards; • anticipate the significance and timing of contractual obligations; • 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; • anticipate the impact of changes in U.S. federal income tax laws, including the impact on deferred tax assets; and • successfully defend litigation, including matters in the Chapter 11 Cases. These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the documents we reference in this Quarterly Report on Form 10-Q, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. You should read this Quarterly Report on Form 10-Q with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and such statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. 36 Overview Core Scientific is a best-in-class, large-scale operator of purpose-built facilities for digital asset mining. 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). Currently, we derive the majority of our revenue from self-mining bitcoin. 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. 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 586 MW for the three months ending September 30, 2023. As of September 30, 2023, we had approximately 1,500 MW of contracted power capacity at our sites, including 500 MW of power allocated to the Muskogee, Oklahoma data center, which remains substantially undeveloped. Our total revenue was $112.9 million and $162.6 million for the three months ended September 30, 2023 and 2022, respectively. We had operating losses of $12.0 million and $401.4 million for the three months ended September 30, 2023 and 2022, respectively. We had net losses of $41.1 million and $434.8 million for the three months ended September 30, 2023 and 2022, respectively. Our Adjusted EBITDA was $27.9 million and $17.9 million for the three months ended September 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 $360.5 million and $519.1 million for the nine months ended September 30, 2023 and 2022, respectively. We had operating income of $5.0 million and an operating loss of $1.5 billion for the nine months ended September 30, 2023 and 2022, respectively. We had net losses of $50.8 million and $1.7 billion for the nine months ended September 30, 2023 and 2022, respectively. Our Adjusted EBITDA was $113.0 million and $170.1 million for the nine months ended September 30, 2023 and 2022, respectively. Adjusted EBITDA is a non-GAAP financial measure. Recent Developments Chapter 11 Filing and Other Related Matters Chapter 11 On December 21, 2022 (the “Petition Date”), the “Company and certain of its affiliates (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) seeking relief under Chapter 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 Cases are jointly administered under Case No. 22-90341. The Debtors continue to operate their business and manage their properties as “debtors-in-possession” (“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. On June 20, 2023 the Debtors filed with the Bankruptcy Court a proposed Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates and a related proposed form of Disclosure Statement; (ii) on August 8, 2023, the Amended Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates and a related Disclosure Statement; and (iii) on September 7, 2023, the Second Amended Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates (the “Plan”) and a related Disclosure Statement (the “Disclosure Statement”). On September 19, 2023, the Debtors, the ad hoc group of the Debtors’ secured convertible notes holders (the “Ad Hoc Noteholder Group”) and the equity committee (the “Equity Committee”) reached an agreement in principle with respect to the economic terms of the Plan (the “Mediated Settlement”). The Debtors, the Ad Hoc Noteholder Group and the Equity Committee will continue to work and negotiate in good faith to document the Mediated Settlement, resolve certain open issues and revise the Plan and Disclosure Statement to incorporate the terms of the Mediated Settlement. 37 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. 38 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 occurred 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 resulted in a gain of $4.9 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023. City of Denton Lease Settlement On August 16, 2023, the Bankruptcy Court entered an order (the “City of Denton Order”), approving the parties agreement to settle all claims of City of Denton and Denton Municipal Electric (“Denton”) against the Debtors and releasing any and all liens related to the Debtor’s lease of the Denton facility in exchange for Debtors execution lease cure costs totaling $1.5 million. The satisfaction of the settlement resulted in a loss of $1.5 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023. Huband-Mantor Construction Settlement On August 18, 2023, the Bankruptcy Court entered an order (the “HMC Order”), approving the parties agreement to settle all claims of HMC and its subcontractors against the Debtors and releasing any and all liens in favor of HMC and its subcontractors in exchange for Debtors payment of $2 million and the Debtors execution of a promissory note in favor of HMC in the principal amount of $15.5 million. The promissory note is secured by a mortgage of the Debtors Cottonwood 1 facility in Texas. The satisfaction of the settlement resulted in a loss of $8.3 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023. For more information on the promissory note, refer to Note 5 — Notes Payable to our unaudited consolidated financial statements in Item 1 of Part I of this report. Celsius Mining LLC Settlement On September 14, 2023, the Debtors and Celsius entered into a purchase and sale agreement (the “PSA”) that provides in addition to a full mutual release of claims asserted against each party in the respective bankruptcy cases for a cash payment by Celsius to the Company of $14.0 million and a full and final release of all claims of Celsius against the Debtors related to the Celsius Contracts, in exchange for the Debtors, (i) sale to Celsius of the Debtor’s Ward County, Texas bitcoin mining data center site (the “Cedarvale Facility”) and certain related assets, (ii) grant to Celsius of a perpetual, non-transferable (except as described in Section 14 of the PSA), non-exclusive limited license to use identified Company intellectual property solely as and to the extent necessary to (x) finish construction and development of the Cedarvale Facility, (y) develop and construct other mining facilities on other properties owned or leased by Celsius similar in type and scope to the Cedarvale Facility, and (z) operate all of the foregoing, (iii) assumption and assignment to Celsius of certain executory contracts. In connection with the PSA the parties released and (iv) unequivocally 39 release claims against Celsius asserted by the Company in connection with the Celsius Chapter 11 Cases and the Company’s Chapter 11 Cases. On November 2, 2023, the Company received the payment of $14.0 million from Celsius in connection with the PSA. As of September 30, 2023, there were $36.1 million of assets held for sale on the Company’s Consolidated Balance Sheets related to the sale of the Cedarvale Facility. Refer to Note 8 — Commitments and Contingencies to our unaudited consolidated financial statements in Item 1 of Part I of this report for further discussion of the sale. ACM ELF ST LLC Lease Settlement In September 2023, the Company entered into a $7.2 million equipment finance agreement with ACM ELF ST LLC in settlement and satisfaction of a previous equipment finance agreement which resulted in a gain of $5.0 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023. See Note 5 — Notes Payable to our unaudited consolidated financial statements in Item 1 of Part I of this report for further discussion of the promissory note. J.W. Didado Electric, LLC Settlement On October 2, 2023, the Bankruptcy Court entered an order approving the parties agreement to settle all claims of W. Didado Electric, LLC (“Didado”) against the Debtors and releasing any and all liens related to the Debtor’s Muskogee datacenter in exchange for Debtors execution of an unsecured promissory note in favor of Didado in the principal amount of $13 million to be paid over 36 months upon emergence of bankruptcy. Our Business Model Company Overview Core Scientific is a best-in-class, large-scale operator of purpose-built facilities for digital asset mining. 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 the enhanced revenue opportunities of self-mining and opportunity to benefit from higher bitcoin prices. 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. Our business strategy is to grow our revenue and profitability by increasing the capacity and efficiency of our self-mining fleet and entering into strategic, revenue-enhancing colocation opportunities with third parties. We intend to develop the infrastructure necessary to support business growth and profitability and capture adjacent opportunities that leverage our mining infrastructure, expertise and capabilities. 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 586 MW for the three months ended September 30, 2023. As of September 30, 2023, we had approximately 1,500 MW of contracted power capacity at our sites, including 500 MW of power allocated to the Muskogee, Oklahoma 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. 40 Segments We have two operating segments: “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. 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. Mining Equipment 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 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 agreements with mining equipment manufacturers to supply mining equipment for our digital asset mining operations. The majority of our purchases are made on multi-month contracts with installment payments due in advance of scheduled deliveries. Delivery schedules have ranged from one month to 12 months. We currently have two active purchase agreements with Bitmain. The first agreement is for the acquisition of 27,000 Antminer S19J XP miners to be delivered during the fourth quarter of 2023. The second agreement is for the acquisition of 12,600 Antminer S21 miners to be delivered during the first half of 2024. As of September 30, 2023, we are current on our payment commitments under both agreements. As of September 30, 2023, we had deployed approximately 206,200 bitcoin miners, which number consists of approximately 144,300 self-miners and approximately 61,900 hosted miners, which represented 15.0 EH/s and 7.3 EH/s for self-miners and hosted miners, respectively. The tables below summarize the total number of self- and hosted miners in operation as of September 30, 2023 and December 31, 2022 (miners in thousands): Bitcoin Miners in Operation as of September 30, 2023 Mining Equipment Hash rate (EH/s) Number of Miners Self-miners 15.0 144.3 Hosted miners 7.3 61.9 Total mining equipment 22.3 206.2 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 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. 41 Summary of Digital Asset Activity Activity related to our digital asset balances for the nine months ended September 30, 2023 and 2022, were as follows (in thousands): September 30, 2023 September 30, 2022 Digital assets, beginning of period $ 724 $ 234,298 Digital asset mining revenue, net of receivables * 278,100 323,337 Mining proceeds from shared hosting 10,321 — Proceeds from sales of digital assets (287,769) (350,795) Gain from sales of digital assets 2,351 25,007 Impairment of digital assets (2,864) (212,184) Payment of board fee (304) — Digital assets, end of period $ 559 $ 19,663 * As of September 30, 2023, there was $0.9 million of digital asset receivable included in prepaid expenses and other current assets on the consolidated balance sheets. Performance Metrics Hash Rate 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. 42 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. Difficulty 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 Halving 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 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 a reduction in available wind and solar generated electricity, an increase in demand for electrical energy generally or damage to power transmission infrastructure that reduces the grid’s ability to 43 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 at times 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 an 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 self-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 a declining number of individual enthusiasts to a growing number of 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 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). September 30, 2023 2022 Self-Mining Hash rate (Exahash per second) 15.0 13.0 44 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Adjusted EBITDA (in millions) $ 27.9 $ 17.9 $ 113.0 $ 170.1 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. We calculate and report our hash rate in exahash per second (“EH/s”). One exahash equals one quintillion hashes per second. 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 such a measure. Our self-mining hash rate was 15.0 EH/s and 13.0 EH/s as of September 30, 2023 and 2022, respectively representing a 15% increase year over year. Our combined self-mining and customer and related party hosting hash rate declined 1%, to 22.3 EH/s as of September 30, 2023, from 22.5 EH/s as of September 30, 2022. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure defined as our net income or (loss), adjusted to eliminate the effect of (i) interest income, interest expense, and other income (expense), net; (ii) provision for income taxes; (iii) depreciation and amortization; (iv) stock-based compensation expense; (v) gain on sale of intangible assets; (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. We believe Adjusted EBITDA is an important measure because it allows management, investors, and our board of directors to evaluate and compare our operating results, including our return on capital and operating efficiencies, from period-to-period by making the adjustments described above. In addition, it provides useful information to investors and others in understanding and evaluating our results of operations, as well as provides a useful measure for period-to-period comparisons of our business, as it removes the effect of net interest expense, taxes, certain non-cash items, variable charges, and timing differences. Moreover, we have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measurement used by our management internally to make operating decisions, including those related to operating expenses, evaluate performance, and perform strategic and financial planning. The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, or because the amount and timing of these items is unpredictable, not driven by core results of operations and renders comparisons with prior periods and competitors less meaningful. However, you should be aware that when evaluating Adjusted EBITDA, we may incur future expenses similar to those excluded when calculating this measure. Our presentation of this measure should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Further, this non-GAAP financial measure should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We compensate for these limitations by relying primarily on GAAP results and using Adjusted EBITDA on a supplemental basis. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because not all companies calculate this measure in the same fashion. You should review the reconciliation of net loss to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business. 45 The following table presents a reconciliation of net loss to Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022, (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Adjusted EBITDA Net loss $ (41,146) $ (434,792) $ (50,794) $ (1,711,471) Adjustments: Interest expense, net 2,196 25,942 2,317 74,734 Income tax expense 114 10,642 347 4,398 Depreciation and amortization 24,233 64,570 64,800 156,544 Amortization of operating lease right-of-use assets 234 317 703 424 Gain on debt extinguishment (374) — (21,135) — Stock-based compensation expense 14,861 29,753 41,414 166,548 Fair value adjustment on derivative warrant liabilities — (521) — (32,985) Fair value adjustment on convertible notes — (4,123) — 186,853 Gain from sales of digital assets (363) (11,036) (2,358) (25,007) Impairment of digital assets 681 7,986 2,864 212,184 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 340 — 514 13,057 Gain on sale of intangible assets — — — (5,904) Cash restructuring charges — (125) — 1,320 Reorganization items, net 28,256 — 78,270 — Fair value adjustment on acquired vendor liability — 68 — 9,498 Equity line of credit expenses — 1,431 — 1,431 Other items (1,090) (21) (3,978) (27) Adjusted EBITDA $ 27,942 $ 17,862 $ 112,964 $ 170,121 Components of Results of Operations Revenue 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 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. 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. • Equipment sales to 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. • Digital asset mining revenue. We operate a digital asset mining operation using specialized computers equipped with application-specific integrated circuit (“ASIC”) chips (known as “miners”) to solve complex cryptographic algorithms in support of the bitcoin blockchain (in a process known as “solving a block”) in exchange for digital asset rewards (primarily bitcoin). The Company participates in “mining pools” organized by “mining pool operators” in which we share our mining 46 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 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. 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 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. 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 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 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. 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. 47 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 Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Each is outlined in more detail below. • Research and development. We invest in research and development to build capabilities to extend our blockchain platform management and software solutions, in order to manage our mining fleet more efficiently, expand within existing accounts, and to gain new customers by offering differentiated blockchain hosting services. Research and development costs include compensation and benefits, stock-based compensation, other personnel related costs and professional fees. • Sales and Marketing. Sales and Marketing expenses consist of marketing expenses, trade shows and events, professional fees, compensation and benefits, stock-based compensation and other personnel-related costs. • General and administrative. 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 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 (income) expenses, net. Income tax expense Income tax expense consists of U.S. federal, state and local income taxes. 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 ASC 740, Income Taxes. See Note 10 — Income Taxes, in our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. 48 Results of Operations for the Three Months Ended September 30, 2023 and 2022 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 2023 2022 Dollar Percentage Revenue: (in thousands, except percentages) Hosting revenue from customers $ 27,020 $ 35,731 $ (8,711) (24) % Hosting revenue from related parties 2,828 9,185 (6,357) (69) % Equipment sales to customers — 7,468 (7,468) (100) % Equipment sales to related parties — 29,693 (29,693) (100) % Digital asset mining revenue 83,056 80,495 2,561 3 % Total revenue 112,904 162,572 (49,668) (31) % Cost of revenue: Cost of hosting services 24,882 44,975 (20,093) (45) % Cost of equipment sales — 27,917 (27,917) (100) % Cost of digital asset mining 72,603 116,756 (44,153) (38) % Total cost of revenue 97,485 189,648 (92,163) (49) % Gross profit (loss) 15,419 (27,076) 42,495 NM Gain from sales of digital assets 363 11,036 (10,673) (97) % Impairment of digital assets (681) (7,986) 7,305 (91) % Impairment of goodwill and other intangibles — (268,512) 268,512 (100) % Impairment of property, plant and equipment — (59,259) 59,259 (100) % Losses on exchange or disposal of property, plant and equipment (340) — (340) 100 % Operating expenses: Research and development 2,253 6,192 (3,939) (64) % Sales and marketing 1,041 39 1,002 NM General and administrative 23,511 43,346 (19,835) (46) % Total operating expenses 26,805 49,577 (22,772) (46) % Operating loss (12,044) (401,374) 389,330 (97) % Non-operating expenses, net: Gain on debt extinguishment (374) — (374) NM Interest expense, net 2,196 25,942 (23,746) (92) % Fair value adjustment on convertible notes — (4,123) 4,123 (100) % Fair value adjustment on derivative warrant liabilities — (521) 521 (100) % Reorganization items, net 28,256 — 28,256 100 % Other non-operating (income) expenses, net (1,090) 1,478 (2,568) NM Total non-operating expenses, net 28,988 22,776 6,212 27 % Loss before income taxes (41,032) (424,150) 383,118 (90) % Income tax expense 114 10,642 (10,528) (99) % Net loss $ (41,146) $ (434,792) $ 393,646 (91) % NM - Not Meaningful 49 Revenue Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage Revenue: (in thousands, except percentages) Hosting revenue from customers $ 27,020 $ 35,731 $ (8,711) (24) % Hosting revenue from related parties 2,828 9,185 (6,357) (69) % Equipment sales to customers — 7,468 (7,468) (100) % Equipment sales to related parties — 29,693 (29,693) (100) % Digital asset mining revenue 83,056 80,495 2,561 3 % Total revenue $ 112,904 $ 162,572 $ (49,668) (31) % Percentage of total revenue: Hosting revenue from customers 24 % 22 % Hosting revenue from related parties 3 % 6 % Equipment sales to customers — % 5 % Equipment sales to related parties — % 17 % Digital asset mining revenue 73 % 50 % Total revenue 100 % 100 % Total revenue decreased by $49.7 million to $112.9 million for the three months ended September 30, 2023, from $162.6 million for the three months ended September 30, 2022, as a result of the factors described below. Total hosting revenue from customers decreased by $8.7 million or 24%, to $27.0 million for the three months ended September 30, 2023, from $35.7 million for the three months ended September 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 September 30, 2023. Total hosting revenue from related parties decreased by $6.4 million or 69%, to $2.8 million for the three months ended September 30, 2023, from $9.2 million for the three months ended September 30, 2022. The decrease in related party hosting revenue was primarily driven by the termination of hosting contracts during the three months ended September 30, 2023. Equipment sales to customers decreased by $7.5 million or 100%, to nil for the three months ended September 30, 2023, from $7.5 million for the three months ended September 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 September 30, 2023, as compared to the three months ended September 30, 2022. Equipment sales to related parties decreased by $29.7 million or 100%, to nil for the three months ended September 30, 2023, from $29.7 million for the three months ended September 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 September 30, 2023, as compared to the three months ended September 30, 2022. Digital asset mining revenue increased by $2.6 million to $83.1 million for the three months ended September 30, 2023, from $80.5 million for the three months ended September 30, 2022. The year over year increase in mining revenue was driven primarily by a 32% increase in the price of bitcoin and an increase in our self-mining hash rate driven by an increase in the number of mining units deployed. The increase in mining revenue was partially offset by the 77% increase in the global bitcoin network hash rate. Our self-mining hash rate increased by 15%, to 15.0 EH/s for the three months ended September 30, 2023, from 13.0 EH/s for the three months ended September 30, 2022. The total number of bitcoins mined for the three months ended September 30, 2023, was 2,953 compared to 3,768 for the three months ended September 30, 2022. The average price of bitcoin for the three months ended September 30, 2023, was $28,091 as compared to $21,324 for the three months ended September 30, 2022. 50 Cost of revenue Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Cost of revenue $ 97,485 $ 189,648 $ (92,163) (49) % Gross profit (loss) 15,419 (27,076) 42,495 NM Gross margin 14 % (17) % Cost of revenue decreased by $92.2 million or 49%, to $97.5 million for the three months ended September 30, 2023, from $189.6 million for the three months ended September 30, 2022. As a percentage of total revenue, cost of revenue totaled 86% and 117% for the three months ended September 30, 2023 and 2022, respectively. The decrease in cost of revenue was primarily attributable to decreased depreciation expense of $40.4 million driven by an adjustment to the depreciable base for the deployed self-mining units, $27.9 million of lower equipment sales costs due the Company exiting the selling of equipment, $25.5 million of lower power costs due to adjustments made for prior period deposits, and lower stock-based compensation of $2.9 million as prior year included vesting acceleration associated with the acquisition of BlockCap, partially offset by an increase in facility related expenses of $2.1 million. Gain from sales of digital assets Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Gain from sales of digital assets $ 363 $ 11,036 $ (10,673) (97) % Percentage of total revenue — % 7 % Gain from sales of digital assets decreased by $10.7 million to $0.4 million for the three months ended September 30, 2023, from a gain of $11.0 million for the three months ended September 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 September 30, 2023, the carrying value of our digital assets sold was $88.5 million and proceeds were $88.1 million. 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. Impairment of digital assets Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of digital assets $ (681) $ (7,986) $ 7,305 (91) % Percentage of total revenue (1) % (5) % Impairment of digital assets decreased by $7.3 million to $0.7 million for the three months ended September 30, 2023, from $8.0 million for the three months ended September 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 $0.6 million and $0.7 million as of September 30, 2023 and December 31, 2022, respectively. 51 Impairment of goodwill and other intangibles Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of goodwill and other intangibles $ — $ (268,512) $ 268,512 (100) % Percentage of total revenue — % (165) % Impairment of goodwill and other intangibles decreased by $268.5 million to nil for the three months ended September 30, 2023, from $268.5 million for the three months ended September 30, 2022. The Company 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. In addition, as part of the restructuring activities during the third quarter of 2022, the Company determined that $2.5 million of software intangible assets would no longer be used. Impairment of property, plant and equipment Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of property, plant and equipment $ — $ (59,259) $ 59,259 (100) % Percentage of total revenue — % (36) % During the three months ended September 30, 2022, we determined that the carrying value of the property, plant and equipment at the Cedarvale, Texas facility site may no longer be fully recoverable by the cash flows of the site. We measured the amount of impairment at the Cedarvale, Texas 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. Losses on exchange or disposal of property, plant and equipment Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Losses on exchange or disposal of property, plant and equipment $ (340) $ — $ (340) 100 % Percentage of total revenue — % — % Losses on exchange or disposal of property, plant and equipment increased by $0.3 million to $0.3 million for the three months ended September 30, 2023, from nil for the three months ended September 30, 2022. This loss was due to the disposal of mining equipment. 52 Operating Expenses Research and development Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Research and development $ 2,253 $ 6,192 $ (3,939) (64) % Percentage of total revenue 2 % 4 % Research and development expenses decreased by $3.9 million or 64%, to $2.3 million for the three months ended September 30, 2023, from $6.2 million for the three months ended September 30, 2022. The decrease was driven by lower stock-based compensation of $4.9 million as prior year included vesting acceleration associated with the acquisition of BlockCap, partially offset by higher personnel and employee related expenses of $0.5 million and an increase in software related expenses of $0.4 million. Sales and marketing Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Sales and marketing $ 1,041 $ 39 $ 1,002 NM Percentage of total revenue 1 % — % Sales and marketing expenses increased by $1.0 million for the three months ended September 30, 2023, from the three months ended September 30, 2022. The increase was primarily driven by $1.2 million higher stock-based compensation as prior year included an adjustment for forfeitures, partially offset by $0.2 million lower marketing and advertising-related expenses. General and administrative Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) General and administrative $ 23,511 $ 43,346 $ (19,835) (46) % Percentage of total revenue 21 % 27 % General and administrative expenses decreased by $19.8 million to $23.5 million for the three months ended September 30, 2023, from $43.3 million for the three months ended September 30, 2022. The decrease was primarily driven by $8.4 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $5.9 million decrease in bad debt expense, $2.8 million of lower professional fees primarily related to expenses in the prior year to support public company readiness, $1.5 million lower employee related expenses such as travel, workplace expenses and software, $0.6 million of lower corporate taxes and $0.3 million of lower payroll and benefit costs associated with lower headcount. 53 Non-operating expenses, net Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage Non-operating expenses, net: (in thousands, except percentages) Gain on debt extinguishment $ (374) $ — $ (374) NM Interest expense, net 2,196 25,942 (23,746) (92) % Fair value adjustment on convertible notes — (4,123) 4,123 (100) % Fair value adjustment on derivative warrant liabilities — (521) 521 (100) % Reorganization items, net 28,256 — 28,256 100 % Other non-operating (income) expense, net (1,090) 1,478 (2,568) NM Total non-operating expenses, net $ 28,988 $ 22,776 $ 6,212 27 % Total non-operating expenses, net increased by $6.2 million, to $29.0 million for the three months ended September 30, 2023, from non-operating income, net of $22.8 million for the three months ended September 30, 2022. The increase in non-operating expenses, net was primarily driven by a $28.3 million increase in Reorganization items, net related to DIP financing fees and bankruptcy advisor fees post-petition in the third quarter of 2023, and a fair value adjustment on convertible notes of $4.1 million (excluding interest expense and changes in instrument-specific credit risk) for the three months ended September 30, 2022, compared to no adjustment for the same period in 2023, partially offset by a $23.7 million decrease in 2023 Interest expense, net resulting from the bankruptcy court ordered stay on payment of pre-petition obligations, including interest. Income tax expense Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Income tax expense $ 114 $ 10,642 $ (10,528) (99) % Percentage of total revenue — % 7 % Income tax expense consists of U.S. federal, state and local income taxes. For the three months ended September 30, 2023, our income tax expense was $0.1 million. For the three months ended September 30, 2022, our income tax expense was $10.6 million. The Company's effective tax rate for the three months ended September 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. 54 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 September 30, Period over Period Change 2023 2022 Dollar Percentage Hosting Segment (in thousands, except percentages) Revenue: Hosting revenue $ 29,848 $ 44,916 $ (15,068) (34) % Equipment sales — 37,161 (37,161) (100) % Total revenue 29,848 82,077 (52,229) (64) % Cost of revenue: Cost of hosting services 24,882 44,975 (20,093) (45) % Cost of equipment sales — 27,917 (27,917) (100) % Total cost of revenue $ 24,882 $ 72,892 $ (48,010) (66) % Gross profit $ 4,966 $ 9,185 $ (4,219) (46) % Hosting Margin 17 % 11% Mining Segment Digital asset mining revenue $ 83,056 $ 80,495 $ 2,561 3 % Total revenue 83,056 80,495 2,561 3 % Cost of revenue 72,603 116,756 (44,153) (38) % Gross profit (loss) $ 10,453 $ (36,261) $ 46,714 NM Mining Margin 13 % (45)% Consolidated Consolidated total revenue $ 112,904 $ 162,572 $ (49,668) (31) % Consolidated cost of revenue $ 97,485 $ 189,648 $ (92,163) (49) % Consolidated gross profit (loss) $ 15,419 $ (27,076) $ 42,495 NM For the three months ended September 30, 2023, cost of revenue included depreciation expense of $1.9 million for the Hosting segment and $22.0 million for the Mining segment. For the three months ended September 30, 2022, cost of revenue included depreciation expense of $3.3 million for the Hosting segment and $61.1 million for the Mining segment. For the three months ended September 30, 2023 and 2022, the top customer accounted for approximately 45% and 10%, respectively, of the Hosting’s segment total revenue. For the three months ended September 30, 2023, gross profit in the Hosting segment decreased $4.2 million compared to the three months ended September 30, 2022, reflecting a Hosting segment gross margin of 17% for the three months ended September 30, 2023, compared to a gross margin of 11% for the three months ended September 30, 2022. The increase in Hosting segment gross margin for the three months ended September 30, 2023, compared to the three months ended September 30, 2022 was primarily due to decreased equipment sales costs driven by the Company’s decision to exit the Equipment Sales business, lower power costs, 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 segment gross profit 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. For the three months ended September 30, 2023, gross profit in the Mining segment increased $46.7 million compared to the three months ended September 30, 2022, due to a higher Mining segment gross profit (loss) margin of 13% for the three months ended September 30, 2023, compared to (45)% for the three months ended September 30, 2022. The increase in the Mining segment gross profit 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, lower power costs, 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 15.0 EH/s for the three months ended September 30, 2023, compared to 13.0 EH/s for the three months ended September 30, 2022. 55 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 September 30, 2023 and 2022, is as follows: Three Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Reportable segment gross profit (loss) $ 15,419 $ (27,076) $ 42,495 NM Gain from sales of digital assets 363 11,036 (10,673) (97) % Impairment of digital assets (681) (7,986) 7,305 (91) % Impairment of goodwill and other intangibles — (268,512) 268,512 (100) % Impairment of property, plant and equipment — (59,259) 59,259 (100) % Losses on exchange or disposal of property, plant and equipment (340) — (340) 100 % Operating expenses: Research and development 2,253 6,192 (3,939) (64) % Sales and marketing 1,041 39 1,002 NM General and administrative 23,511 43,346 (19,835) (46) % Total operating expenses 26,805 49,577 (22,772) (46) % Operating loss (12,044) (401,374) 389,330 (97) % Non-operating expenses, net: Gain on debt extinguishment (374) — (374) 100 % Interest expense, net 2,196 25,942 (23,746) (92) % Fair value adjustment on derivative warrant liabilities — (521) 521 (100) % Fair value adjustment on convertible notes — (4,123) 4,123 (100) % Reorganization items, net 28,256 — 28,256 100 % Other non-operating (income) expenses, net (1,090) 1,478 (2,568) NM Total non-operating expenses, net 28,988 22,776 6,212 27 % Loss before income taxes $ (41,032) $ (424,150) $ 383,118 (90) % 56 Results of Operations for the Nine Months Ended September 30, 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 2023 2022 Dollar Percentage Revenue: (in thousands, except percentages) Hosting revenue from customers $ 72,245 $ 94,407 $ (22,162) (23) % Hosting revenue from related parties 10,062 22,659 (12,597) (56) % Equipment sales to customers — 11,391 (11,391) (100) % Equipment sales to related parties — 67,269 (67,269) (100) % Digital asset mining revenue 278,164 323,337 (45,173) (14) % Total revenue 360,471 519,063 (158,592) (31) % Cost of revenue: Cost of hosting services 64,187 119,850 (55,663) (46) % Cost of equipment sales — 63,993 (63,993) (100) % Cost of digital asset mining 212,125 279,576 (67,451) (24) % Total cost of revenue 276,312 463,419 (187,107) (40) % Gross profit 84,159 55,644 28,515 51 % Gain from sales of digital assets 2,358 25,007 (22,649) (91) % Impairment of digital assets (2,864) (212,184) 209,320 (99) % Impairment of goodwill and other intangibles — (1,059,265) 1,059,265 (100) % Impairment of property, plant and equipment — (59,259) 59,259 (100) % Losses on exchange or disposal of property, plant and equipment (514) (13,057) 12,543 (96) % Operating expenses: Research and development 5,308 24,305 (18,997) (78) % Sales and marketing 3,133 11,675 (8,542) (73) % General and administrative 69,671 174,380 (104,709) (60) % Total operating expenses 78,112 210,360 (132,248) (63) % Operating income (loss) 5,027 (1,473,474) 1,478,501 NM Non-operating expenses, net: Gain on debt extinguishment (21,135) — (21,135) 100 % Interest expense, net 2,317 74,734 (72,417) (97) % Fair value adjustment on convertible notes — 186,853 (186,853) (100) % Fair value adjustment on derivative warrant liabilities — (32,985) 32,985 (100) % Reorganization items, net 78,270 — 78,270 100 % Other non-operating (income) expenses, net (3,978) 4,997 (8,975) NM Total non-operating expenses, net 55,474 233,599 (178,125) (76) % Loss before income taxes (50,447) (1,707,073) 1,656,626 (97) % Income tax expense 347 4,398 (4,051) (92) % Net loss $ (50,794) $ (1,711,471) $ 1,660,677 (97) % NM - Not Meaningful 57 Revenue Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage Revenue: (in thousands, except percentages) Hosting revenue from customers $ 72,245 $ 94,407 $ (22,162) (23) % Hosting revenue from related parties 10,062 22,659 (12,597) (56) % Equipment sales to customers — 11,391 (11,391) (100) % Equipment sales to related parties — 67,269 (67,269) (100) % Digital asset mining revenue 278,164 323,337 (45,173) (14) % Total revenue $ 360,471 $ 519,063 $ (158,592) (31) % Percentage of total revenue: Hosting revenue from customers 20 % 18 % Hosting revenue from related parties 3 % 4 % Equipment sales to customers — % 2 % Equipment sales to related parties — % 13 % Digital asset mining revenue 77 % 63 % Total revenue 100 % 100 % Total revenue decreased by $158.6 million to $360.5 million for the nine months ended September 30, 2023, from $519.1 million for the nine months ended September 30, 2022, as a result of the factors described below. Total hosting revenue from customers decreased by $22.2 million or 23%, to $72.2 million for the nine months ended September 30, 2023, from $94.4 million for the nine months ended September 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 and the associated reduction in the total number of hosting miners in the fleet for the nine months ended September 30, 2023. Total hosting revenue from related parties decreased by $12.6 million or 56%, to $10.1 million for the nine months ended September 30, 2023, from $22.7 million for the nine months ended September 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 $11.4 million or 100%, to nil for the nine months ended September 30, 2023, from $11.4 million for the nine months ended September 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 nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. Equipment sales to related parties decreased by $67.3 million or 100%, to nil for the nine months ended September 30, 2023, from $67.3 million for the nine months ended September 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 nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. Digital asset mining revenue decreased by $45.2 million to $278.2 million for the nine months ended September 30, 2023, from $323.3 million for the nine months ended September 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 15%, to 15.0 EH/s for the nine months ended September 30, 2023, from 13.0 EH/s for the nine months ended September 30, 2022. The total number of bitcoins mined for the nine months ended September 30, 2023, was 10,721 compared to 10,335 for the nine months ended September 30, 2022. The average price of bitcoin for the nine months ended September 30, 2023, was $26,353 as compared to $36,876 for the nine months ended September 30, 2022, a decrease of 29%. 58 Cost of revenue Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Cost of revenue $ 276,312 $ 463,419 $ (187,107) (40) % Gross profit 84,159 55,644 28,515 51 % Gross margin 23 % 11 % Cost of revenue decreased by $187.1 million or 40%, to $276.3 million for the nine months ended September 30, 2023, from $463.4 million for the nine months ended September 30, 2022. As a percentage of total revenue, cost of revenue totaled 77% and 89% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in cost of revenue was primarily attributable to $90.5 million of decreased depreciation expense driven by an adjustment to the depreciable base for the deployed self-mining units, $64.0 million of lower equipment sales costs due to the Company exiting the selling of equipment, and lower stock-based compensation of $19.7 million as prior year included vesting acceleration associated with the acquisition of BlockCap, lower power costs of $18.1 million due to adjustments made for prior period deposits, partially offset by an increase in facility expenses of $2.8 million. Gain from sales of digital assets Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Gain from sales of digital assets $ 2,358 $ 25,007 $ (22,649) (91) % Percentage of total revenue 1 % 5 % Gain from sales of digital assets decreased by $22.6 million to $2.4 million for the nine months ended September 30, 2023, from a gain of $25.0 million for the nine months ended September 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 nine months ended September 30, 2023, the carrying value of our digital assets sold was $285.4 million and proceeds were $287.8 million. 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. Impairment of digital assets Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of digital assets $ (2,864) $ (212,184) $ 209,320 (99) % Percentage of total revenue (1) % (41) % Impairment of digital assets decreased by $209.3 million to $2.9 million for the nine months ended September 30, 2023, from $212.2 million for the nine months ended September 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 $0.6 million and $0.7 million as of September 30, 2023 and December 31, 2022, respectively. 59 Impairment of goodwill and other intangibles Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of goodwill and other intangibles $ — $ (1,059,265) $ 1,059,265 (100) % Percentage of total revenue — % (204) % Impairment of goodwill and other intangibles decreased by $1.1 billion to nil for the nine months ended September 30, 2023, from $1.1 billion for the nine months ended September 30, 2022. The Company identified a triggering event as of June 30, 2022 and September 30, 2022, due to declines 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 $996.5 million impairment of goodwill in its Mining reporting unit and $58.2 million in our Equipment Sales and Hosting reporting unit. In addition, as part of the restructuring activities during the second quarter of 2022, the Company determined that $4.5 million of software intangible assets would no longer be used. Impairment of property, plant and equipment Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of property, plant and equipment $ — $ (59,259) $ 59,259 (100) % Percentage of total revenue — % (36) % During the nine months ended September 30, 2022, we determined that the carrying value of the property, plant and equipment at the Cedarvale, Texas facility site may no longer be fully recoverable by the cash flows of the site. We measured the amount of impairment at the Cedarvale, Texas 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 nine months ended September 30, 2022. Losses on exchange or disposal of property, plant and equipment Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Losses on exchange or disposal of property, plant and equipment $ (514) $ (13,057) $ 12,543 (96) % Percentage of total revenue — % (3) % Losses on exchange or disposal of property, plant and equipment decreased by $12.5 million to $0.5 million for the nine months ended September 30, 2023, from $13.1 million for the nine months ended September 30, 2022. The decrease was due to a noncash exchange of mining equipment during 2022. 60 Operating Expenses Research and development Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Research and development $ 5,308 $ 24,305 $ (18,997) (78) % Percentage of total revenue 1 % 5 % Research and development expenses decreased by $19.0 million or 78%, to $5.3 million for the nine months ended September 30, 2023, from $24.3 million for the nine months ended September 30, 2022. The decrease was driven by lower stock-based compensation of $19.1 million as prior year included vesting acceleration associated with the acquisition of BlockCap, a decrease in professional fees of $0.6 million, partially offset by higher personnel and related expenses of $0.4 million. Sales and marketing Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Sales and marketing $ 3,133 $ 11,675 $ (8,542) (73) % Percentage of total revenue 1 % 2 % Sales and marketing expenses decreased by $8.5 million or 73%, to $3.1 million for the nine months ended September 30, 2023, from $11.7 million for the nine months ended September 30, 2022. The decrease was primarily driven by $7.3 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $0.7 million of lower advertising and marketing expenses and $0.4 million lower personnel and related expenses. General and administrative Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) General and administrative $ 69,671 $ 174,380 $ (104,709) (60) % Percentage of total revenue 19 % 34 % General and administrative expenses decreased by $104.7 million to $69.7 million for the nine months ended September 30, 2023, from $174.4 million for the nine months ended September 30, 2022. The decrease was primarily driven by $79.0 million lower stock-based compensation as prior year included vesting acceleration associated with the acquisition of BlockCap, $9.8 million of lower professional fees primarily related to expenses in the prior year to support public company readiness, $5.9 million decrease in bad debt expense $4.1 million of lower payroll and benefit costs associated with lower headcount, $2.3 million lower employee related expenses such as travel and software, and lower corporate taxes of $0.7 million. 61 Non-operating expenses, net Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage Non-operating expenses, net: (in thousands, except percentages) Gain on debt extinguishment $ (21,135) $ — $ (21,135) 100 % Interest expense, net 2,317 74,734 (72,417) (97) % Fair value adjustment on convertible notes — 186,853 (186,853) (100) % Fair value adjustment on derivative warrant liabilities — (32,985) 32,985 (100) % Reorganization items, net 78,270 — 78,270 100 % Other non-operating (income) expenses, net (3,978) 4,997 (8,975) NM Total non-operating expenses, net $ 55,474 $ 233,599 $ (178,125) (76) % Total non-operating expenses, net decreased by $178.1 million, to $55.5 million for the nine months ended September 30, 2023, from $233.6 million for the nine months ended September 30, 2022. The decrease in non-operating expenses, net was primarily driven by a fair value adjustment on convertible notes of $186.9 million (excluding interest expense and changes in instrument-specific credit risk) for the nine months ended September 30, 2022, compared to no adjustment for the same period in 2023, a $72.4 million decrease in interest expense, net for the nine months ended September 30, 2023, resulting from the bankruptcy court ordered stay on payment of pre-petition obligations, including interest, and a $21.1 million gain on debt extinguishment primarily related to the settlement of the NYDIG Loan for the nine months ended September 30, 2023. These decreases in non-operating expenses were partially offset by a $78.3 million increase in Reorganization items, net related to DIP financing fees and bankruptcy advisor fees post-petition during the nine months ended September 30, 2023, and a $33.0 million decrease in the fair value adjustment on derivative warrant liabilities. Income tax expense Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Income tax expense $ 347 $ 4,398 $ (4,051) (92) % Percentage of total revenue — % 1 % Income tax expense consists of U.S. federal, state and local income taxes. For the nine months ended September 30, 2023 and 2022, our income tax expense was $0.3 million and $4.4 million, respectively. The $4.1 million decrease in the provision for income taxes for the nine months ended September 30, 2023, compared to same period in 2022, was due to our ability to benefit a portion of the losses during the nine months ended September 30, 2022. During the nine months ended September 30, 2023, the Company was no longer able to benefit from losses, which were subject to a full valuation allowance. The Company's effective tax rate for the nine months ended September 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. 62 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 2023 2022 Dollar Percentage Hosting Segment (in thousands, except percentages) Revenue: Hosting revenue $ 82,307 $ 117,066 $ (34,759) (30) % Equipment sales — 78,660 (78,660) (100) % Total revenue 82,307 195,726 (113,419) (58) % Cost of revenue: Cost of hosting services 64,187 119,850 (55,663) (46) % Cost of equipment sales — 63,993 (63,993) (100) % Total cost of revenue $ 64,187 $ 183,843 $ (119,656) (65) % Gross profit $ 18,120 $ 11,883 $ 6,237 52 % Hosting Margin 22% 6% Mining Segment Digital asset mining revenue $ 278,164 $ 323,337 $ (45,173) (14) % Total revenue 278,164 323,337 (45,173) (14) % Cost of revenue 212,125 279,576 (67,451) (24) % Gross profit $ 66,039 $ 43,761 $ 22,278 51 % Mining Margin 24% 14% Consolidated Consolidated total revenue $ 360,471 $ 519,063 $ (158,592) (31) % Consolidated cost of revenue $ 276,312 $ 463,419 $ (187,107) (40) % Consolidated gross profit $ 84,159 $ 55,644 $ 28,515 51 % For the nine months ended September 30, 2023, cost of revenue included depreciation expense of $3.7 million for the Hosting segment and $60.8 million for the Mining segment. For the nine months ended September 30, 2022, cost of revenue included depreciation expense of $8.2 million for the Hosting segment and $146.8 million for the Mining segment. For the nine months ended September 30, 2023 and 2022, the top customer accounted for approximately 48% and 8%, respectively, of the Hosting’s segment total revenue. For the nine months ended September 30, 2023, gross profit in the Hosting segment increased $6.2 million compared to the nine months ended September 30, 2022, reflecting a Hosting segment gross margin of 22% for the nine months ended September 30, 2023, compared to gross profit of 6% for the nine months ended September 30, 2022. The increase in Hosting segment gross profit for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to decreased equipment sales costs driven by the Company’s decision to exit the Equipment Sales business, lower power fees, 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 segment gross profit 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. For the nine months ended September 30, 2023, gross profit in the Mining segment increased $22.3 million compared to the nine months ended September 30, 2022, due to a higher Mining segment gross profit of 24% for the nine months ended September 30, 2023, compared to 14% for the nine months ended September 30, 2022. The increase in the Mining segment gross profit 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 15.00 EH/s for the nine months ended September 30, 2023, compared to 13.0 EH/s for the nine months ended 63 September 30, 2022. This increase in the Mining segment gross profit margin is partially offset by higher power costs and a 29% 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 nine months ended September 30, 2023 and 2022, is as follows: Nine Months Ended September 30, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Reportable segment gross profit $ 84,159 $ 55,644 $ 28,515 51 % Gain from sales of digital assets 2,358 25,007 (22,649) (91) % Impairment of digital assets (2,864) (212,184) 209,320 (99) % Impairment of goodwill and other intangibles — (1,059,265) 1,059,265 (100) % Impairment of property, plant and equipment — (59,259) 59,259 (100) % Losses on exchange or disposal of property, plant and equipment (514) (13,057) 12,543 (96) % Operating expenses: Research and development 5,308 24,305 (18,997) (78) % Sales and marketing 3,133 11,675 (8,542) (73) % General and administrative 69,671 174,380 (104,709) (60) % Total operating expenses 78,112 210,360 (132,248) (63) % Operating income (loss) 5,027 (1,473,474) 1,478,501 NM Non-operating expenses, net: Gain on debt extinguishment (21,135) — (21,135) 100 % Interest expense, net 2,317 74,734 (72,417) (97) % Fair value adjustment on derivative warrant liabilities — (32,985) 32,985 (100) % Fair value adjustment on convertible notes — 186,853 (186,853) (100) % Reorganization items, net 78,270 — 78,270 100 % Other non-operating (income) expenses, net (3,978) 4,997 (8,975) NM Total non-operating expenses, net 55,474 233,599 (178,125) (76) % Loss before income taxes $ (50,447) $ (1,707,073) $ 1,656,626 (97) % 64 Liquidity and Capital Resources Sources of Liquidity 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 September 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 October 30,2023, we reached an agreement in principle with the Ad Hoc Noteholder Group and the Equity Committee regarding the terms of a chapter 11 plan of reorganization, subject to the finalization of the Debtors’ Third Amended Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates and a related Disclosure Statement, and the execution of a restructuring support agreement and other definitive documentation. 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 “Recent Developments — Chapter 11 and Other Related Matters” above 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 September 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. September 30, December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Cash and cash equivalents $ 42,146 $ 15,884 $ 26,262 165 % Restricted cash 21,797 36,356 (14,559) (40) % Total cash, cash equivalents and restricted cash $ 63,943 $ 52,240 $ 11,703 22 % As of September 30, 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 and development activities. 65 The following table summarizes our cash, cash equivalents and restricted cash and cash flows for the periods indicated. Nine Months Ended September 30, 2023 2022 (in thousands) Cash, cash equivalents and restricted cash – beg. of period $ 52,240 $ 131,678 Net cash provided by (used in) Operating activities 43,411 89,201 Investing activities (5,356) (451,301) Financing activities (26,352) 268,066 Cash, cash equivalents and restricted cash - end of period $ 63,943 $ 37,644 Our principal uses of cash in recent periods have been funding our operations and investing in capital expenditures. Operating Activities Net cash provided by operating activities was $43.4 million for the nine months ended September 30, 2023 and $89.2 million for the nine months ended September 30, 2022. The decrease in net cash provided by operating activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily due to a decrease in net loss of $1.7 billion, a decrease in intangible impairments of $1.1 billion, a decrease in fair value adjustments on convertible notes of $211.0 million, a $209.3 million decrease in impairments of digital currency assets, a $125.1 million decrease in stock-based compensation, and a $45.2 million decrease in digital asset mining income. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2023 and 2022, was $5.4 million and $451.3 million, respectively. The decrease in net cash used in investing activities was driven primarily by a $239.2 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 nine months ended September 30, 2023 was $26.4 million. Net cash provided by financing activities for the nine months ended September 30, 2022 was $268.1 million. The change over prior year was due primarily to $216.2 million of proceeds from the issuance of debt and $210.5 million of proceeds from the issuance of common stock for the nine months ended September 30, 2022, partially offset by principal payments on debt of $99.0 million. Commitments and Contractual Obligations For a discussion of Commitments and Contractual Obligations, refer to Notes 7 — Leases and 8 — Commitments and Contingencies to our unaudited consolidated financial statements. Other Events In September 2023, the Company entered into a purchase agreement with Bitmain to acquire 27,000 Antminer S19j XP 151TH model miners for a total purchase price of approximately $77.1 million. Delivery of the miners is expected to begin in the fourth quarter of 2023, with all miners expected to be received and deployed by the first quarter of 2024. Chapter 11 and Other Related Matters For a discussion of Chapter 11 and Other Related Matters, refer to “Recent Developments — Chapter 11 and Other Related Matters” above for more information on the Chapter 11 Cases and the effect on our liquidity. 66 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, 2023, we recognized hosting revenue from the contracts with these entities of $2.8 million and $10.1 million, respectively. 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. In addition, for the three and nine months ended September 30, 2023, there was no equipment sales revenue recognized to these same various entities. For the three and nine months ended September 30, 2022, we recognized $29.7 million and $67.3 million, respectively, from these entities. A nominal amount was receivable from these entities as of September 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 and nine months ended September 30, 2023, we incurred reimbursements of nil and for the three and nine months ended September 30, 2022, we incurred reimbursements of $0.7 million and $1.8 million, respectively. As of September 30, 2023, and December 31, 2022, there were no reimbursements payable. Foreign Currency and Exchange Risk The vast majority of our cash generated from revenue is denominated in U.S. dollars. 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. There have been no material changes to the critical accounting policies and estimates during the nine months ended September 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 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 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 these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to use the extended transition period under the JOBS Act. 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 67 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.