Core Scientific, Inc./tx 10-K

Item 7. 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,” “Core Scientific,” or “Core” refer to Core Scientific Holding Co. and its subsidiaries prior to the consummation of the Business Combination (as defined below) and Core Scientific, Inc. (f/k/a Power & Digital Infrastructure Acquisition Corp.) and its subsidiaries after the consummation of the Business Combination. References to “XPDI” refer to the predecessor registrant prior to the consummation of the Business Combination. The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to promote understanding of the results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying Notes to Financial Statements (Part II, Item 8 of this Form 10-K). This section generally discusses the results of operations for 2023 compared to 2022. For discussion related to the results of operations and changes in consolidated financial condition for 2022 compared to 2021 refer to Part II, Item 7. — “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal year 2022 Annual Report on Form 10-K, which was filed with the SEC on April 4, 2023. As discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” under Part I, Item 1A in this Annual Report on Form 10-K. Overview Core Scientific is a best-in-class large-scale operator of dedicated, purpose-built facilities for digital asset mining and a premier provider of blockchain infrastructure, software solutions and services. We employ our own large fleet of computers (“miners”), primarily manufactured by Bitmain Technologies Limited (“Bitmain”), to produce bitcoin for our own account and provide hosting services for large bitcoin mining customers at our seven operational data centers in Georgia (2), Kentucky (1), North Carolina (1), North Dakota (1) and Texas (2). We derive the majority of our revenue from earning bitcoin for our own account (“self-mining”). We began digital asset mining at scale in 2018 and in 2020 became one of the largest North American providers of hosting services for third-party mining customers. As of December 31, 2023, we had an average hourly operating power demand of approximately 592 MW for the year, and we had secured approximately 1,198 MW of contracted power capacity at our sites. We also owned and managed the largest infrastructure asset base of publicly listed miners in North America of 724 MW and improved our average self-mining fleet energy efficiency to 27.94 joules per terahash. Although our business operations date back to 2018 (and was known as “Core Scientific” (“Legacy Core”)), the current corporate entity operating our business was formerly known as Power & Digital Infrastructure Acquisition Corp. (“XPDI”) which was a special purpose acquisition corporation formed for the purpose of acquiring an operating business such as Legacy Core. On July 20, 2021, XPDI, Core Scientific Holding Co., and XPDI Merger Sub entered into a merger agreement (the “Merger Agreement”) which provided for business combination transactions (the “Business Combination”) pursuant to which the business of Legacy Core was combined with XPDI and XPDI changed its name to Core Scientific, Inc. (“New Core” or the “Company”). XPDI’s stockholders approved the transactions contemplated by the Business Combination at a special meeting of stockholders held on January 19, 2022. For more detailed information regarding the Business Combination, refer to Note 4 — Business Combinations, Acquisitions and Restructuring to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. Our total revenue was $502.4 million and $640.3 million for the years ended December 31, 2023 and 2022, respectively. We had operating income of $9.0 million and operating loss of $2.1 billion for the years ended December 31, 2023 and 2022, respectively. The increase of $2.12 billion in operating income was predominantly due to a $1.06 billion impairment of goodwill and other intangibles and a $590.7 million impairment of property, plant and equipment for the year ended December 31, 2023, a $226.9 million decrease in impairment of digital assets year over year, as well as higher total operating expenses of $144.9 million for the year ended December 31, 2022. We had a net loss of $246.5 million and $2.15 billion for the years ended December 31, 2023 and 2022, respectively. Our adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) was $170.0 million and $(10.7) million for the years ended December 31, 2023 and 2022, respectively. Adjusted EBITDA is a non-GAAP financial measure. See “ Key Business Metrics and Non-GAAP Financial Measure ” below for our definition of, and additional information related to, Adjusted EBITDA. 46 Recent Developments On January 15, 2024, the Debtors filed with the Bankruptcy Court (both defined below) the Fourth Amended Joint Chapter 11 Plan of Core Scientific, Inc. and its Affiliated Debtors (with Technical Modifications) (the “Plan of Reorganization”). On January 16, 2024, the Bankruptcy Court entered an order confirming the Plan of Reorganization (the “Confirmation Order”). On January 23, 2024 (the “Effective Date”), the conditions to the effectiveness of the Plan of Reorganization were satisfied or waived and the Company emerged from bankruptcy. On the Effective Date, a new Board of Directors (the “Board of Directors”) was constituted and the Company, in accordance with the Plan of Reorganization satisfied and extinguished claims in the Chapter 11 Cases (as defined below) through the issuance of (i) new common stock (“New Common Stock”), (ii) new warrants (“New Warrants”), (iii) contingent value rights (“CVRs”), (iv) new secured convertible notes due 2029 (“New Secured Convertible Notes”), and (v) new secured notes due 2028 (“New Secured Notes”). For more detailed information regarding the Chapter 11 Cases, refer to Notes 3 — Chapter 11 Filing and Other Related Matters and 17 — Subsequent Events to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. On March 6, 2024, the Company announced a multi-year contract for Core Scientific to supply up to 16 MW of data center infrastructure to CoreWeave, Inc. The total potential revenue associated with the contract is more than $100 million. Under the terms of the contract, Core Scientific will deliver up to 16 MW of capacity at its new Austin, Texas data center to host CoreWeave, Inc.’s infrastructure. Core Scientific is leasing a tier 3 data center in Austin that formerly housed Hewlett Packard to include high performance computing. Chapter 11 Filing and Other Related Matters - Pre-Emergence Chapter 11 On December 21, 2022, the Company and certain of its affiliates (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) seeking relief under Chapter 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 Cases were jointly administered under Case No. 22-90341. The Debtors operated their business and managed their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. For detailed discussion about the Chapter 11 Cases, refer to Note 3 — Chapter 11 Filing and Other Related Matters to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. 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 (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 debtor-in-possession 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. 47 Replacement DIP Credit Agreement On February 2, 2023, the Bankruptcy Court entered an interim 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. In January 2024, the Replacement DIP Facility was repaid in full and terminated on the Effective Date of the Company’s Plan of Reorganization. NYDIG Settlement On February 26, 2023, the Bankruptcy Court entered an order whereby the Debtors and NYDIG agreed 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 debt extinguishment 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 Management, LLC (“Priority Power”) agreed 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 year ended December 31, 2023. City of Denton Lease Settlement On August 16, 2023, the Bankruptcy Court entered an 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 Debtors’ lease of the Denton facility in exchange for the Debtors’ execution lease cure costs totaling $1.5 million. There was no impact to the Consolidated Statements of Operations as a result of the satisfaction of the settlement. Huband-Mantor Construction Settlement On August 18, 2023, the Bankruptcy Court entered an order approving the parties’ agreement to settle all claims of Huband-Mantor Construction (“HMC”) and its subcontractors against the Debtors and releasing any and all liens in favor of HMC and its 48 subcontractors in exchange for the 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 year ended December 31, 2023. For more information on the promissory note, refer to Note 7 — Notes Payable to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. Celsius Mining LLC Settlement On September 14, 2023, the Debtors and Celsius Mining LLC (“Celsius”) entered into a purchase and sale agreement, as amended, (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, and (iv) unequivocal release of 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. The sale of the Cedarvale Facility resulted in a loss of $2.2 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Refer to Note 10 — Commitments and Contingencies to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K for further discussion of the sale. ACM ELF ST LLC Lease Settlement In September 2023, the Company entered into a $7.5 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 year ended December 31, 2023. See Note 7 — Notes Payable to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K 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 J.W. Didado Electric, LLC (“Didado”) against the Debtors and releasing any and all liens related to the Debtors’ Muskogee datacenter in exchange for the Debtors’ execution of an unsecured promissory note in favor of Didado in the principal amount of $13.0 million to be paid over 36 months upon emergence from bankruptcy. The satisfaction of the settlement resulted in a loss of $0.7 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Trilogy LLC Settlement On October 2, 2023, the Bankruptcy Court entered an order approving the parties’ agreement to settle all claims of Trilogy LLC (“Trilogy”) against the Debtors and releasing any and all liens related to the Trilogy contracts in exchange for the Debtors’ execution of an unsecured promissory note in favor of Trilogy in the principal amount of $2.9 million to be paid over 30 months starting three months after the confirmation date. The satisfaction of the settlement resulted in a gain of $0.4 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Harper Construction Company, Inc. Settlement On November 4, 2023, the Bankruptcy Court entered an order approving the parties’ agreement to settle all claims of Harper Construction Company, Inc (“Harper”) against the Debtors and releasing any and all liens related to the Debtors’ Muskogee datacenter in exchange for the Debtors’ execution of an unsecured promissory note in favor of Harper in the principal amount of $4.7 million to be paid over 30 months starting forty-five days after the emergence date. The satisfaction of the settlement resulted in a loss of 49 $5.0 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Dalton Settlement On December 29, 2023, the Bankruptcy Court entered an order approving the parties’ agreement to settle all claims of Dalton Utilities (“Dalton”) against the Debtors including the Dalton cure claims in exchange for Debtors’ execution of an unsecured promissory note. As of December 31, 2023 , the Company accrued the face value of the pending settlement of $9.1 million as the execution of the promissory note is still pending. The satisfaction of the settlement resulted in a gain of $1.1 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Maddox Settlement On January 16, 2024, the Bankruptcy Court entered an order approving the parties’ agreement to terminate and reject all existing purchase orders and enter into a new purchase order. Pursuant to the new purchase order, the Company will pay a total purchase price of $2.8 million in seven equal monthly installments to Maddox Industrial Transformer LLC for 39 18 kilovolt transformers. The satisfaction of the settlement resulted in a loss of $1.3 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Sphere 3D Corp. and Gryphon Settlement On January 16, 2024, the Bankruptcy Court entered an order granting Sphere 3D Corp. (“Sphere”) an allowed $10 million general unsecured claim and a complete and final release of all claims of Sphere and Gryphon Digital Mining, Inc. (“Gryphon”) against the Debtors related to the hosting contracts . As part of the resolution, all miners have been returned to the client. Furthermore, the adversary proceeding was dismissed with prejudice, against both Gryphon and Sphere. The satisfaction of the settlement resulted in a gain of $23.3 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. McCarthy & Humphrey Settlement On January 18, 2024, the Bankruptcy Court entered an order approving the parties’ agreement to settle all claims and release all liens of McCarthy Building Companies, Inc. (“McCarthy”) and Humphrey & Associates, Inc. (“Humphrey”) against the Company in exchange for cash payments ($6.8 million to McCarthy and $5.6 million to Humphrey) within 90 days of emergence and promissory notes (to McCarthy in principal amount of $5.4 million and to Humphrey in principal amount of $1.4 million). However, if the Company delivers notice to McCarthy to proceed with construction activities, the Company will make the cash payments within three business days of such notice and pay off the promissory notes in full within one business day of such notice. As the amount of the expected settlement results in amounts that are estimable and probable, the Company accrued for those liabilities as of December 31, 2023. The satisfaction of the settlement resulted in a loss of $4.6 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Foundry Settlement On January 16, 2024, the Bankruptcy Court entered an order granting Foundry Digital LLC (“Foundry”) an allowed $5.5 million general unsecured claim and a comprehensive release of all claims of Foundry against the Debtors. Concurrently, hosting contracts are assumed, and common stock in Core after emergence from bankruptcy have been confirmed as part of the resolution. The satisfaction of the settlement resulted in a gain of $12.6 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. Oklahoma Gas & Electric Settlement On January 24, 2024, the Bankruptcy Court entered an order granting Oklahoma Gas & Electric Company (“OG&E”) an allowed $4.8 million general unsecured claim in full and final satisfaction of all claims of OG&E against the Debtors. The satisfaction of the settlement resulted in a loss of $4.8 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the year ended December 31, 2023. 50 Our Business Model Business Overview As a large-scale bitcoin digital asset miner and provider of blockchain solutions, we believe that we are well positioned to serve customers in a rapidly expanding market for digital asset mining and blockchain solutions. We believe that the adoption and mainstream use of bitcoin and the blockchain technology on which it is based has accelerated the demand for bitcoin and other digital currencies. As one of the largest owner operators of infrastructure for digital asset mining in North America, we focus primarily on mining bitcoin and selling the bitcoin generated for cash and activities directly related to growing our mining capabilities (increasing the number of bitcoin mined) and enhancing efficiencies in our operations (reducing our cost to mine). Our rapidly growing digital asset mining operation is focused on the generation of digital assets by solving complex cryptographic algorithms to validate transactions on specific digital asset network blockchains, which is commonly referred to as “mining.” Our digital asset self-mining activity competes with myriad mining operations throughout the world to complete new blocks in the blockchain and earn the reward in the form of an established unit of a digital asset. The terms of our debt agreements currently require that we sell our digital assets as we receive them, and we typically use the proceeds to fund our growth strategies or for general corporate purposes. We also provide hosting services for large bitcoin mining customers at our seven operational data centers in Georgia (2), Kentucky (1), North Carolina (1), North Dakota (1) and Texas (2). 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 bitcoin mining computers. We currently have seven fully operational data centers in Georgia (2), Kentucky (1), North Carolina (1), North Dakota (1) and Texas (2), with approximately 592 MW of average hourly operating electric power demand for the year ended December 31, 2023. Our existing, completed facilities lever our specialized construction proficiency by employing high-density, low-cost engineering and power designs. Our proprietary thermodynamic system manages heat and airflow to deliver best-in-class uptime and, ultimately, increasing mining rewards to us and our customers. As of December 31, 2023, we had approximately 1,198 MW of contracted power capacity at our sites. 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. Segments We have two operating segments: “Mining,” consisting of bitcoin self-mining, and “Hosting,” consisting of our third-party hosting business. Our Mining operation segment generates revenue from operating our own mining computers as part of a pool of users that process transactions conducted on one or more blockchain networks. In exchange for this activity, we receive digital assets in the form of bitcoin. Our Hosting operation segment generates revenue through the sale of electricity-based consumption 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.” We derived e quipment sales revenue from our ability to lever our partnerships with leading equipment manufacturers to secure equipment in advance, which we then sold to our customers when they were unable to obtain them otherwise. 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 and facilitated agreements with vendors 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 Antminer S19J XP miners with a combined exahash of 4.08 or 28,400 miners to be delivered from the fourth quarter of 2023 through early 2024. The second agreement is for the acquisition of Antminer S21 miners with a combined exahash of 2.52 or approximately 12,900 miners to be delivered during the first half of 2024. We are accelerating the delivery and deployment of the Antminer S21 miners. As of December 31, 2023, we are current on our payment commitments under both agreements. As of the reporting date of this Annual Report on Form 10-K, we have completed payment on all new bitcoin miners ordered for 2024. 51 As of December 31, 2023, we had deployed approximately 209,100 bitcoin miners, which number consists of approximately 158,000 self-miners and approximately 51,100 hosted miners, which represented 16.9 EH/s and 6.3 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 December 31, 2023 and December 31, 2022, respectively (miners in thousands). Bitcoin Miners in Operation as of December 31, 2023 Mining Equipment Hash rate (EH/s) Number of Miners Self-miners 16.9 158.0 Hosted miners 6.3 51.1 Total mining equipment 23.2 209.1 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. Summary of Digital Asset Activity Activity related to our digital asset balances for the years ended December 31, 2023 and 2022 were as follows (in thousands): December 31, 2023 December 31, 2022 Digital assets, beginning of period $ 724 $ 234,298 Digital asset mining revenue, net of receivables * 389,456 397,796 Mining proceeds from shared hosting 17,626 — Proceeds from sales of digital assets (404,686) (444,353) Gain from sales of digital assets 3,886 44,298 Impairment of digital assets (4,406) (231,315) Payment of board fee (316) — Digital assets, end of period $ 2,284 $ 724 * As of December 31, 2023 and 2022, there was $1.7 million and $0.8 million, respectively, of digital asset receivable from our mining pool customer included in Prepaid expenses and other current assets on the Company’s 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 equipment originally employed for mining bitcoin used 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 (although they continue to have uses in other industries). These ASIC chips are designed specifically to maximize the rate of hashing operations. 52 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. The Business Combination and Public Company Costs The merger of Legacy Core and XPDI provided gross proceeds of approximately $221.6 million from the XPDI trust account, resulting in approximately $201.0 million in net cash proceeds to Core Scientific, after the payment of transaction expenses. As a result of the merger, former Core Scientific stockholders owned 90.7%, former XPDI public stockholders owned 6.7% and XPDI’s sponsor owned 2.6% of the issued and outstanding shares of common stock, respectively, of the Company, excluding the impact of unvested restricted stock units and options. The proceeds from the merger were used to fund mining equipment purchases and infrastructure build-out as the Company expanded its leadership position. As a result of the merger, among other things, each outstanding share of Legacy Core common stock was cancelled in exchange for the right to receive 1.6001528688 of a share of the Company’s common stock. The merger was accounted for as a reverse recapitalization and XPDI was treated as the “acquired” company for financial reporting purposes. Legacy Core was deemed the predecessor and Core Scientific, Inc., the post-combination company, is the successor SEC registrant, meaning that Legacy Core’s financial statements for periods prior to the consummation of the merger are disclosed in Core Scientific’s periodic reports. As a consequence of the merger, the Company and XPDI collectively incurred an aggregate of $39.0 million in professional fees associated with legal services, M&A advisor fees, financial advice, due diligence, and other deal-related costs. These transaction costs were allocated to all instruments assumed or issued in the merger on a relative fair value basis as of the date of the merger. Transaction costs allocated to equity-classified instruments were recognized as an adjustment to additional paid-in capital within total stockholders’ equity while transaction costs allocated to liability-classified instruments that were subsequently measured at fair value through earnings were expensed in the first quarter of 2022. Key Factors Affecting Our Performance Market Price of Digital Assets Our business is heavily dependent on the spot price of bitcoin, as well as other digital assets. The prices of digital assets, specifically bitcoin, have experienced substantial volatility, which may reflect “bubble” type volatility, meaning that high or low prices may have little or no relationship to identifiable market forces, may be subject to rapidly changing investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation, and media reporting. Bitcoin (as well as other digital assets) may have value based on various factors, including their acceptance as a means of exchange by consumers and others, scarcity, and market demand. Our financial performance and continued growth depend in large part on our ability to mine for digital assets profitably and to attract customers for our hosting services. Increases in power costs, inability to mine digital assets efficiently and to sell digital assets at favorable prices will reduce our operating margins, impact our ability to attract customers for our services, may harm our growth prospects and could have a material adverse effect on our business, financial condition and results of operations. Over time, we have observed a positive trend in the total market capitalization of digital assets, which suggests increased adoption. However, historical trends are not indicative of future adoption, and it is possible that the adoption of digital assets and blockchain technology may slow, take longer to develop, or never be broadly adopted, which would negatively impact our business and operating results. 53 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. Transaction Fees Bitcoin miners receive a transaction fee in the form of a portion of bitcoin for validating transactions on the Bitcoin network. The transaction fee can vary in value over time, with higher fees prioritizing certain transactions over those with lower fees. An increase in Bitcoin network transactions could represent a more significant component of miner revenue if their value increases over time. 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 Core Scientific Hash Rate Favorable Unfavorable Difficulty Unfavorable Favorable Transaction Fees 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 halving. Halving 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 “halving.” A reduction in the number of bitcoins rewarded per block would result in a reduction of revenue to those mining bitcoin, barring any increase in the spot price of bitcoin or decrease in Bitcoin network hash rate or difficulty. Historically, the network hash rate has tended to decline, for a period of time, post-halving as less efficient mining servers become less profitable to operate and their operators discontinue or limit their use. For bitcoin, our most significant digital asset to which our mining power is devoted, the reward was initially set at 50 bitcoin rewards per block. The bitcoin blockchain has undergone halving 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; (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 halving for the bitcoin blockchain is anticipated to occur in April 2024 at block 840,000. This process will repeat until the total amount of bitcoin 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 halving are unknown. Electricity Costs Electricity cost is the major operating cost for the mining fleet, as well as for the hosting services provided to customers and related parties. The cost and availability of electricity are affected primarily by changes in seasonal demand, with peak demand during the summer months driving higher costs and increased curtailments to support grid operators. Severe winter weather can increase the 54 cost of electricity and the frequency of curtailments when it results in damage to power transmission infrastructure that reduces the grid’s ability to deliver power. Geopolitical and macroeconomic factors, such as overseas military or economic conflict between states, can adversely affect electricity costs by raising the cost of power generation inputs such as natural gas. Locally, factors such as animal incursion, sabotage and other events out of our control can also impact electricity costs and availability. In certain power markets, financial hedging can be employed to protect buyers from the financial impact of significant increases in power prices. Equipment Costs Increases in the market value of digital assets increases the demand for new miners, which can result in a scarcity in the supply of, and increases in the price of, those miners. Declines in the market value of digital assets can result in excess supply of miners and a general decline in their prices. As a result, the cost of new miners can be unpredictable and could be significantly different than our historical cost for new miners. Our Customers In addition to factors underlying our mining business growth and profitability, our success greatly depends on our ability to retain and develop opportunities with our existing customers and to attract new customers. On July 30, 2021, we acquired an existing hosting customer, Blockcap, Inc. (“Blockcap”), and thereby increased our self-mining operations. Our business environment is constantly evolving, and digital asset miners can range from individual enthusiasts to professional mining operations with dedicated data centers. The Company competes with other enterprises that focus all or a portion of their activities on mining activities at scale. We face significant competition in every aspect of our business, including, but not limited to, the acquisition of new miners, the ability to raise capital, obtaining low-cost electricity, obtaining access to energy sites with reliable sources of power, and evaluating new technology developments in the industry. Presently, 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. Based on available data we believe 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 to increase 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 services 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 combined with our Minder TM fleet management software layer represent meaningful competitive advantages favorable to our business. Differentiation, Innovation and Expansion of Our Platform Our investments in research and development drive differentiation of our service offerings, core technology innovation and our ability to bring new products to market. We believe that we differentiate ourselves by offering premium products and services, including our ability to manage our electricity sourcing, construct proprietary passive cooled data centers. Our existing, completed facilities lever our specialized construction proficiency by employing high-density, low-cost engineering and power designs. Our proprietary thermodynamic system manages heat and airflow to deliver best-in-class uptime and, ultimately, increases mining rewards to us and our customers. Our facilities are designed to maximize not only mining equipment efficiency but mining equipment life. We have accumulated expertise in the installation, operation, optimization and repair of digital mining equipment. We continue to refine and develop our data center design and technology solutions to optimize our data center and mining operations with the knowledge gained from our considerable 55 digital asset mining experience, including optimizing the location of miners in our data centers to increase profitability. Our approach to data center design enables us to deliver efficiency at scale. We intend to continue to invest judiciously in research and development activities to extend our platform management and software solutions in order to manage our mining fleet more efficiently and productively. Regulation Due to the relatively short history of digital assets, and their emergence as a new asset class, government regulation of blockchain and digital assets is constantly evolving, with increased interest expressed by U.S. and internal regulators. In October 2020, the Cyber-Digital Task Force of the U.S. Department of Justice published a report entitled “Cryptocurrency: An Enforcement Framework” that detailed the Department’s view with respect to digital assets and the tools at the Department’s disposal to deal with threats posed by digital assets. In February 2021, representatives of the government of Inner Mongolia, China announced plans to ban digital asset mining within the province due to the energy and rare earth mineral demands of the industry. In March 2021, the nominee for Chair of the SEC expressed the need for investor protection along with promotion of innovation in the digital asset space. In March 2022, President Biden signed an Executive Order outlining an “whole-of-government” approach to addressing the risks and harnessing the potential benefits of digital assets and its underlying technology. The executive order lays out a national policy for digital assets over six highlighted priorities. In January 2023, the U.S. House of Representatives created a new congressional subcommittee focused on digital assets, the Subcommittee of Digital Assets, Financial Technology and Inclusion, operating under the House Financial Services Committee. In addition to the activities of the United States federal government and its various agencies and regulatory bodies, government regulation of blockchain and digital assets is also under active consideration by similar entities in other countries and transnational organizations, such as the European Union. State and local regulations within the United States also may apply to our activities and other activities in which we may participate in the future. Other governmental or semi-governmental regulatory bodies have shown an interest in regulating or investigating companies engaged in blockchain or digital asset businesses. For instance, the SEC has taken an active role in regulating the use of public offerings of proprietary coins (so-called “initial coin offerings”) and has made statements and official promulgations as to the status of certain digital assets as “securities” subject to regulation by the SEC. Strategic Investments Our business strategy is to grow our revenue and profitability by increasing the capacity and efficiency of our self-mining fleet and by enhancing our third-party hosting business. We intend to strategically develop the infrastructure necessary to support business growth and profitability and take advantage of adjacent opportunities that lever our mining expertise and capabilities. 56 Condensed Statements of Operations The following table presents a condensed statements of operations for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 2022 (in thousands) Total Revenue $ 502,400 $ 640,313 Cost of revenue 378,941 631,913 Gross profit 123,459 8,400 Gain from sales of digital assets 3,893 44,298 Impairment of digital assets (4,406) (231,315) Change in fair value of derivative instruments (3,918) — Impairment of goodwill and other intangibles — (1,059,265) Impairment of property, plant and equipment — (590,673) Losses on exchange or disposal of property, plant and equipment (1,956) (28,025) Total operating expenses 108,111 252,973 Operating income (loss) 8,961 (2,109,553) Total non-operating expense, net 1 254,765 53,856 Loss before income taxes (245,804) (2,163,409) Income tax expense (benefit) 683 (17,091) Net loss $ (246,487) $ (2,146,318) 1 Total non-operating expense, net includes Reorganization items, net of $191.1 million and $(197.4) million for the years ended December 31, 2023 and 2022, respectively. 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). Year Ended December 31, 2023 2022 Self-Mining Hash rate (Exahash per second) 16.9 15.7 Adjusted EBITDA (in millions) $ 170.0 $ (10.7) 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 performing such computations. Our hash rate represents the aggregate hash rate of all miners deployed in our fleet. Our hash rate expressed as a percentage of the total Bitcoin network hash rate generally determines the number of bitcoin 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 measure. 57 Generally, miners with a greater hash rate relative to the global Bitcoin network hash rate at a given time will, over time, have a greater chance of earning a bitcoin, as compared to miners with relatively lower total hash rates. Further, with the increase in demand for bitcoin contributing to an increase in computational resources for digital asset mining, the global network hash rate has increased, and we expect it to continue to increase. As such, our self-mining hash rate provides useful information to investors because it demonstrates our capacity, and our competitive advantage, for mining bitcoin, which contributes to our digital asset mining revenue. Management uses our self-mining hash rate to monitor our performance and competitive advantage in mining bitcoin as global competition also increases. Our self-mining hash rate was 16.9 EH/s and 15.7 EH/s for the years ended December 31, 2023 and 2022, respectively representing an 8% improvement year over year. Our combined self-mining and customer and related party hosting hash rate decreased 2%, to 23.2 EH/s for the year ended December 31, 2023 from 23.7 EH/s for the year ended December 31, 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) restructuring charges 1 ; (vi) Reorganization items, net 2 ; (vii) unrealized changes in fair value of derivative instruments; and (viii) certain additional non-cash or non-recurring items, that do not reflect the performance of 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 Annual Report on Form 10-K 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 are not related to the current results of our core business operations which renders evaluation of our current performance, comparisons of performance between periods and comparisons of our current performance with our 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. 1 Within the financial statements and relating to financial metrics “restructuring charges” refers to charges relating to a prepetition restructuring plan completed in October 2022 and described further in Note 4 — Business Combinations, Acquisitions and Restructuring to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. 2 Within the financial statements and relating to financial metrics “Reorganization items, net” refers to charges requiring separate presentation under the provisions of Accounting Standards Codification (“ASC”) 852, Reorganizations (“ASC 852”) and described further in Note 3 — Chapter 11 Filing and Other Related Matters to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. 58 The following table presents a reconciliation of net loss to Adjusted EBITDA for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 2022 1,2 Adjusted EBITDA (in thousands) Net loss $ (246,487) $ (2,146,318) Adjustments: Interest expense, net 86,238 96,826 Income tax expense (benefit) 683 (17,091) Depreciation and amortization 96,003 225,259 Amortization of operating lease right-of-use assets 442 834 (Gain) loss on debt extinguishment (20,065) 287 Stock-based compensation expense 3 58,892 182,894 Fair value adjustment on derivative warrant liabilities — (37,937) Fair value adjustment on convertible notes — 186,853 Impairment of goodwill and other intangibles — 1,059,265 Impairment of property, plant and equipment — 590,673 Losses on exchange or disposal of property, plant and equipment 1,956 28,025 Gain on sale of intangible assets — (5,904) Cash restructuring charges — 1,320 Reorganization items, net 191,122 (197,405) Fair value adjustment on acquired vendor liability — 9,498 Equity line of credit expenses — 1,668 Unrealized change in fair value of derivative instruments 2,262 — Other non-operating (income) expenses, net (2,530) 5,232 Other items 1,474 5,276 Adjusted EBITDA $ 169,990 $ (10,745) 1 Certain prior year amounts have been reclassified for consistency with the current year presentation. 2 Previously, the Company had held the bitcoin it earned as an investment for long-term appreciation. This strategy was outside our primary business operations and the results of impairments and realized gains and losses had been excluded from Adjusted EBITDA. With our current strategy of monetizing our bitcoin revenue soon after earning it and recent changes in accounting standards, management is no longer excluding these amounts from its Adjusted EBITDA. 3 Includes $1.0 million of stock-based compensation that was provided in severance as part of restructuring charges incurred during the year ended December 31, 2022. 59 Components of Results of Operations Revenue Our revenue consists primarily of fees from our hosting operations, including the sales of mining equipment to be hosted in our data centers and digital asset mining revenue. • 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 second quarter of 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.” in Part III of this Annual Report on Form 10-K. • Equipment sales to customers and related parties. Equipment sales to customers and related parties is derived from our ability to lever 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. After fiscal 2022, we no longer sell equipment to customers and related parties. • Digital asset mining revenue. We operate a digital asset mining operation using specialized computers equipped with 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 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. Costs of Revenue The Company’s cost of hosting services and cost of digital asset mining primarily consist of electricity costs, salaries, stock-based compensation, depreciation of property, plant and equipment used to perform hosting services and mining operations and other related costs. Cost of equipment sales includes costs of computer equipment sold to customers. Gain from sales of digital assets Gain from sales of digital assets consist of gain on sales of digital assets. Impairment of digital assets Digital assets, which are initially recognized and measured at fair value, are remeasured only when an impairment is recognized. Impairment exists when the current carrying amount exceeds its current 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 and carrying value 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 to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information. 60 Change in fair value of derivative instruments The change in fair value of derivative instruments represents changes in the fair value of the derivative liability related to the energy forward purchase contract described in more detail in “Energy Forward Purchase Contract” in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. 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. Impairment of property, plant and equipment The Company tests property, plant and equipment for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of the property, plant and equipment. Property, plant and equipment may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the estimated fair value of the asset. This evaluation is performed at the lowest level for which separately identifiable cash flows exist. Losses on exchange or disposal of property, plant and equipment Losses on exchange or disposal of property, plant and equipment are measured as the differences between the carrying value of the property, plant and equipment exchanged or disposed of and fair value of the consideration received upon exchange or disposal. The fair value of noncash consideration received in an exchange of property, plant and equipment is determined as of contract inception. Operating expenses Operating expenses consists 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 enhance the efficiency and effectiveness of our mining operations and hosting services and to support our efforts to capture business opportunities in adjacent high-value compute markets. 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 61 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) loss on debt extinguishment, interest expense, net, fair value adjustment on convertible notes, fair value adjustment on derivative warrant liabilities, reorganization items, net and other non-operating expenses, net. Reorganization items, net consists of expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the reorganization. Income tax expense (benefit) Income tax expense (benefit) consists of U.S. federal and state income taxes. We maintain a full valuation allowance against our U.S. federal and state net deferred tax assets as realization of deferred tax assets is dependent upon the generation of future taxable income, the timing and amount of which are uncertain and therefore have concluded it is not more likely than not that we will realize our net deferred tax assets. Income tax expense consists of federal and state tax expense on our operating activity, and changes to our deferred tax asset and deferred tax liability. Deferred income tax expense consists of income taxes recorded using the asset and liability method. Under this method, deferred tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial reporting and tax bases of existing assets and liabilities. These differences are measured using the enacted tax rates that are expected to be in effect when these differences are anticipated to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management believes it is not more likely than not to be realized. 62 Results of Operations The following table sets forth our consolidated statements of operations for each of the periods indicated (in thousands, except percentages). Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage Revenue: Hosting revenue from customers $ 102,005 $ 130,234 $ (28,229) (22)% Hosting revenue from related parties 10,062 29,454 (19,392) (66)% Equipment sales to customers — 11,391 (11,391) NM Equipment sales to related parties — 71,438 (71,438) NM Digital asset mining revenue 390,333 397,796 (7,463) (2)% Total revenue 502,400 640,313 (137,913) (22)% Cost of revenue: Cost of hosting services 87,245 169,717 (82,472) (49)% Cost of equipment sales — 67,114 (67,114) NM Cost of digital asset mining 291,696 395,082 (103,386) (26)% Total cost of revenue 378,941 631,913 (252,972) (40)% Gross profit 123,459 8,400 115,059 NM Gain from sales of digital assets 3,893 44,298 (40,405) (91)% Impairment of digital assets (4,406) (231,315) 226,909 NM Change in fair value of derivative instruments (3,918) — — NM Impairment of goodwill and other intangibles — (1,059,265) 1,059,265 NM Impairment of property, plant and equipment — (590,673) 590,673 NM Losses on exchange or disposal of property, plant and equipment (1,956) (28,025) 26,069 NM Operating expenses: Research and development 7,184 26,962 (19,778) (73)% Sales and marketing 7,019 12,731 (5,712) (45)% General and administrative 93,908 213,280 (119,372) (56)% Total operating expenses 108,111 252,973 (144,862) (57)% Operating income (loss) 8,961 (2,109,553) 2,118,514 NM Non-operating expenses, net: (Gain) loss on debt extinguishment (20,065) 287 (20,352) NM Interest expense, net 86,238 96,826 (10,588) (11)% Fair value adjustment on convertible notes — 186,853 (186,853) NM Fair value adjustment on derivative warrant liabilities — (37,937) 37,937 NM Reorganization items, net 191,122 (197,405) 388,527 NM Other non-operating (income) expenses, net (2,530) 5,232 (7,762) (148)% Total non-operating expense, net 254,765 53,856 200,909 373% Loss before income taxes (245,804) (2,163,409) 1,917,605 NM Income tax expense (benefit) 683 (17,091) 17,774 NM Net loss $ (246,487) $ (2,146,318) $ 1,899,831 NM NM - Not Meaningful 63 Revenue Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage Revenue: (in thousands, except percentages) Hosting revenue from customers $ 102,005 $ 130,234 $ (28,229) (22)% Hosting revenue from related parties 10,062 29,454 (19,392) (66)% Equipment sales to customers — 11,391 (11,391) NM Equipment sales to related parties — 71,438 (71,438) NM Digital asset mining revenue 390,333 397,796 (7,463) (2)% Total revenue $ 502,400 $ 640,313 $ (137,913) (22)% Percentage of total revenue: Hosting revenue from customers 20 % 20 % Hosting revenue from related parties 2 % 5 % Equipment sales to customers — % 2 % Equipment sales to related parties — % 11 % Digital asset mining revenue 78 % 62 % Total Revenue 100 % 100 % Total revenue decreased by $137.9 million to $502.4 million for the year ended December 31, 2023, from $640.3 million for the year ended December 31, 2022, as a result of the factors described below. Total hosting revenue from customers decreased by $28.2 million or 22%, to $102.0 million for the year ended December 31, 2023, from $130.2 million for the year ended December 31, 2022. The decrease in hosting revenue from customers was primarily driven by the termination of contracts for several customers in the portfolio at less profitable hosting rates and the associated reduction in the total number of hosting miners in the fleet for the year ended December 31, 2023. Total hosting revenue from related parties decreased by $19.4 million or 66%, to $10.1 million for the year ended December 31, 2023, from $29.5 million for the year ended December 31, 2022. The decrease in related party hosting contracts was primarily driven by the termination of hosting contracts during the fourth quarter of December 31, 2022, when 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. The Company produced approximately 5,512 bitcoin for hosting customers in its data centers for the year ended December 31, 2023. Equipment sales to customers decreased by $11.4 million or 100%, to nil for the year ended December 31, 2023, from $11.4 million for the year ended December 31, 2022. The decrease in equipment sales to customers was primarily 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 year ended December 31, 2023, as compared to the year ended December 31, 2022. Equipment sales to related parties decreased by $71.4 million or 100%, to nil for the year ended December 31, 2023, from $71.4 million for the year ended December 31, 2022. The decrease in equipment sales to related parties was primarily driven 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 year ended December 31, 2023, as compared to the year ended December 31, 2022. Digital asset mining revenue decreased by $7.5 million or 2%, to $390.3 million for the year ended December 31, 2023, from $397.8 million for the year ended December 31, 2022. The year over year decrease in mining revenue was driven primarily by increased mining difficulty associated with the growth in the global Bitcoin network hash rate in fiscal year 2023 relative to fiscal year 2022, partially offset by the increase in the number of mining units deployed in our self-mining fleet. Our self-mining hash rate increased by 8%, to 16.9 EH/s for the year ended December 31, 2023, from 15.7 EH/s for the year ended December 31, 2022. The total number of bitcoins self-mined for the year ended December 31, 2023, was 13,762 compared to 14,436 for the year ended 64 December 31, 2022. The average price of bitcoin for the year ended December 31, 2023, was $28,859 as compared to $28,198 for the year ended December 31, 2022, an improvement of 2%. Cost of revenue Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Cost of revenue $ 378,941 $ 631,913 $ (252,972) (40) % Gross profit 123,459 8,400 115,059 NM Gross margin 25 % 1 % Cost of revenue decreased by $253.0 million or 40%, to $378.9 million for the year ended December 31, 2023, from $631.9 million for the year ended December 31, 2022. As a percentage of total revenue, cost of revenue totaled 75% and 99% for the years ended December 31, 2023 and 2022, respectively. The decrease in cost of revenue was primarily attributable to $128.1 million of decreased depreciation expense driven by a late fiscal 2022 impairment adjustment to the depreciable base for the deployed self-mining units, $67.1 million of lower equipment sales costs due to the Company exiting the selling of equipment, $41.8 million of lower power costs, and lower stock-based compensation of $20.7 million as the prior year included accelerated vesting of awards and a decrease in equity awards granted for the current fiscal year. Gain from sales of digital assets Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Gain from sales of digital assets $ 3,893 $ 44,298 $ (40,405) (91) % Percentage of total revenue 1 % 7 % Gain from sales of digital assets decreased by $40.4 million to $3.9 million for the year ended December 31, 2023, from a gain of $44.3 million for the year ended December 31, 2022. Gains are recorded when realized upon sale(s). In determining the gain to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. For the year ended December 31, 2023, the carrying value of our digital assets sold was $400.8 million and the sales price was $404.7 million. For the year ended December 31, 2022, the carrying value of our digital assets sold was $400.1 million and the sales price was $444.4 million. Impairment of digital assets Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of digital assets $ (4,406) $ (231,315) $ 226,909 NM Percentage of total revenue (1) % (36) % Impairment of digital assets decreased by $226.9 million to $4.4 million for the year ended December 31, 2023, from $231.3 million for the year ended December 31, 2022, due primarily to the falling prices of digital assets during fiscal 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 65 determined. The carrying value of our digital assets amounted to $2.3 million and $0.7 million as of December 31, 2023 and December 31, 2022, respectively. Change in fair value of derivative instruments Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Change in fair value of derivative instruments $ (3,918) $ — $ (3,918) NM Percentage of total revenue (1) % — % Change in fair value of derivative instruments was $3.9 million for the year ended December 31, 2023 and was driven by the change in fair value of the derivative liability related to the energy forward purchase contract described in more detail in 2 — Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. Impairment of goodwill and other intangibles Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of goodwill and other intangibles $ — $ (1,059,265) $ 1,059,265 NM Percentage of total revenue — % (165) % Impairment of goodwill and other intangibles decreased by $1.06 billion for the year ended December 31, 2023, compared to the year ended December 31, 2022. We identified triggering events as of June 30, 2022, September 30, 2022, and December 31, 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 value for each reporting unit. We concluded the carrying value of the Mining reporting unit and Equipment Sales and Hosting reporting unit exceeded each reporting unit’s fair value and, as such, recorded an impairment of goodwill of $996.5 million in our Mining reporting unit and $58.2 million in our Equipment Sales and Hosting reporting unit. 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. See Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information. Impairment of property, plant and equipment Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Impairment of property, plant and equipment $ — $ (590,673) $ 590,673 NM Percentage of total revenue — % (92) % Impairment of property, plant and equipment decreased by $590.7 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. During the second half of December 31, 2022, our operating performance and liquidity continued to be severely impacted by the prolonged decrease in the price of bitcoin, the increase in electricity costs, the increase in the global Bitcoin network hash rate and an increase in additional operating costs related to these factors. Additionally, primary and secondary market prices for ASIC miners of the type used in our business operations have decreased significantly from previous levels, including prices for those miners acquired earlier in 2022. Accordingly, we evaluated whether the estimated future undiscounted cash flows from the operation of our data center facilities sites would recover the carrying value of the property, plant and equipment located at the sites and used in site operations, including our deployed mining equipment. Based on this evaluation, we determined that the carrying value of the fleet of deployed mining equipment and of the other non-mining equipment property, plant and equipment at the Cedarvale and Cottonwood, Texas facility sites may no longer be fully recoverable by the cash flows of the site. We measured the 66 amount of impairment of the fleet of deployed mining equipment as the difference between their carrying amount of $690.4 million and the estimated fair value of $176.3 million, resulting in an impairment of $514.1 million on the fleet of deployed mining equipment for the year ended December 31, 2022. We measured the amount of impairment at the identified facility sites as the difference between the carrying amount of the site asset group of $211.6 million and the estimated fair value of the site asset group of $135.1 million, resulting in an impairment of the facility site’s property, plant and equipment of $76.5 million for the year ended December 31, 2022. See the discussion of long-lived asset impairments in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K for further information. Losses on exchange or disposal of property, plant and equipment Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Losses on exchange or disposal of property, plant and equipment $ (1,956) $ (28,025) $ 26,069 NM Percentage of total revenue — % (4) % Losses on exchange or disposal of property, plant and equipment decreased by $26.1 million to $2.0 million for the year ended December 31, 2023, from loss of $28.0 million for the year ended December 31, 2022. The decrease was due primarily to a noncash exchange of mining equipment during 2022. Operating Expenses Research and development Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Research and development $ 7,184 $ 26,962 $ (19,778) (73)% Percentage of total revenue 1 % 4 % Research and development expenses decreased by $19.8 million or 73%, to $7.2 million for the year ended December 31, 2023, from $27.0 million for the year ended December 31, 2022. The decrease was driven by lower stock-based compensation of $20.8 million, as the prior year included accelerated vesting of awards and a decrease in equity awards granted during the year ended December 31, 2023, primarily offset by higher personnel and related expenses of $1.0 million. Sales and marketing Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Sales and marketing $ 7,019 $ 12,731 $ (5,712) (45)% Percentage of total revenue 1 % 2 % Sales and marketing expenses decreased by $5.7 million or 45%, to $7.0 million for the year ended December 31, 2023, from $12.7 million for the year ended December 31, 2022. The decrease was primarily driven by lower stock-based compensation of $4.5 million, as the prior year included accelerated vesting of awards and a decrease in equity awards granted for the current fiscal year, $0.8 million of lower advertising and marketing expenses and $0.4 million lower personnel and related expenses. 67 General and administrative Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) General and administrative $ 93,908 $ 213,280 $ (119,372) (56)% Percentage of total revenue 19 % 33 % General and administrative expenses decreased by $119.4 million to $93.9 million for the year ended December 31, 2023, from $213.3 million for the year ended December 31, 2022. The decrease was primarily driven by lower stock-based compensation of $77.9 million, as the prior year included accelerated vesting of awards and a decrease in equity awards granted during the current fiscal year, $14.1 million of lower professional fees primarily related to investments made to support public company readiness, $10.0 million of lower advisor fees in the prior year, $9.0 million decrease in bad debt expense, $3.2 million of lower payroll and benefit costs associated with lower headcount, $2.6 million lower employee related expenses such as travel and software, and $1.3 million decrease in rent expense, partially offset by higher corporate taxes of $1.0 million. Non-operating expenses, net Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage Non-operating expenses, net: (in thousands, except percentages) (Gain) loss on debt extinguishment $ (20,065) $ 287 $ (20,352) NM Interest expense, net 86,238 96,826 (10,588) (11)% Fair value adjustment on convertible notes — 186,853 (186,853) NM Fair value adjustment on derivative warrant liabilities — (37,937) 37,937 NM Reorganization items, net 191,122 (197,405) 388,527 NM Other non-operating (income) expenses, net (2,530) 5,232 (7,762) (148)% Total non-operating expense, net $ 254,765 $ 53,856 $ 200,909 373% Total non-operating expenses, net increased by $200.9 million, to $254.8 million for the year ended December 31, 2023, from $53.9 million for the year ended December 31, 2022. The increase in non-operating expenses, net was primarily driven by a $388.5 million increase in Reorganization items, net related to DIP financing fees and bankruptcy advisor fees post-petition during the year ended December 31, 2023, changes in fair value of derivative warrant liabilities of $37.9 million, partially offset by a fair value adjustment on the convertible notes of $186.9 million (excluding interest expense and changes in instrument-specific credit risk) for the year ended December 31, 2022, compared to no adjustment for the year ended December 31, 2023, a $20.4 million gain on extinguishment of debt primarily related to the settlement of the NYDIG Loan for the year ended December 31, 2023, and a $10.6 million decrease in Interest expense, net as a result of suspension of interest during the Chapter 11 Cases,. Income tax expense (benefit) Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Income tax expense (benefit) $ 683 $ (17,091) $ 17,774 NM Percentage of total revenue — % (3) % Income tax expense (benefit) consists of U.S. federal, state and local income taxes. For the year ended December 31, 2023, our income tax expense was $0.7 million. For the year ended December 31, 2022, our income tax benefit was $17.1 million. The $17.8 million increase in the provision for income taxes for the year ended December 31, 2023, compared to same period in 2022, was primarily due to a reduction in our US federal deferred tax liability. The Company's effective tax rate for the year ended December 31, 2023, was lower than the federal statutory rate of 21% primarily due to losses and certain deductions for which no tax benefit can be 68 recognized. We evaluate our ability to recognize our deferred tax assets quarterly by considering all positive and negative evidence available as proscribed by the FASB under its general principles of ASC 740, Income Taxes. See Note 13 — Income Taxes to our consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K for further information. Segment Total Revenue and Gross Profit The following table presents total revenue and gross profit by reportable segment for the periods presented: Year Ended December 31, Period over Period Change 2023 2022 Dollar Percentage Hosting Segment 1 (in thousands, except percentages) Revenue: Hosting revenue $ 112,067 $ 159,688 $ (47,621) (30)% Equipment sales — 82,829 (82,829) NM Total revenue 112,067 242,517 (130,450) (54)% Cost of revenue: Cost of hosting services 87,245 169,717 (82,472) (49) % Cost of equipment sales — 67,114 (67,114) (100) % Total cost of revenue $ 87,245 $ 236,831 $ (149,586) (63) % Gross profit $ 24,822 $ 5,686 $ 19,136 NM Gross margin 2 22 % 2 % Mining Segment Digital asset mining revenue $ 390,333 $ 397,796 $ (7,463) (2) % Total revenue 390,333 397,796 (7,463) (2) % Cost of revenue 291,696 395,082 (103,386) (26) % Gross profit $ 98,637 $ 2,714 $ 95,923 NM Gross margin 2 25 % 1 % Consolidated total revenue $ 502,400 $ 640,313 $ (137,913) (22) % Consolidated cost of revenue $ 378,941 $ 631,913 $ (252,972) (40) % Consolidated gross profit $ 123,459 $ 8,400 $ 115,059 NM 1 During the year ended December 31. 2022, our “Hosting” segment also included sales of mining equipment to customers and was referred to as “Hosting and Equipment Sales”. 2 Gross margin is calculated as gross profit as a percentage of total revenue. For the year ended December 31, 2023, cost of revenue included depreciation expense of $6.9 million for the Hosting segment and $88.5 million for the Mining segment. For the year ended December 31, 2022, cost of revenue included depreciation expense of $12.1 million for the Equipment Sales and Hosting segment and $214.8 million for the Mining segment. For the years ended December 31, 2023 and 2022, the top three customers accounted for approximately 72% and 57%, respectively, of the Hosting’s segment total revenue. For the year ended December 31, 2023, gross profit in the Hosting segment increased $19.1 million compared to the year ended December 31, 2022, reflecting a Hosting segment gross margin of 22% for the year ended December 31, 2023, compared to 2% for the year ended December 31, 2022. The increase in Hosting segment gross profit for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to a decrease in stock-based compensation expense as a percentage of revenues as prior year included accelerated vesting of awards. 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 year ended December 31, 2023, gross profit in the Mining segment increased $95.9 million compared to the year ended December 31, 2022, due to a higher Mining segment gross margin of 25% for the year ended December 31, 2023, compared to 1% for the year ended December 31, 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 69 units, a decrease in stock-based compensation expense as a percentage of revenues as prior year included accelerated vesting of awards, and an improvement in our self-mining hash rate, which was 16.9 EH/s for the year ended December 31, 2023, compared to 15.7 EH/s for the year ended December 31, 2022. This increase in the Mining segment gross profit margin is partially offset by a 2% improvement in the average price of bitcoin and by higher power costs. 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 generated 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. See below for discussion of cash flows from operating activities and cash and cash equivalents. At December 31, 2023, we had unrestricted cash on hand of $50.4 million and $35.0 million of undrawn borrowing capacity under the Replacement DIP Facility. In January 2024, the Replacement DIP Facility was repaid in full and terminated on the Effective Date of the Company’s Plan of Reorganization. On the Effective Date, we entered into a new $80.0 million credit and guaranty agreement (the “Exit Credit Agreement”), and currently have $20.0 million of undrawn borrowing capacity under that facility. 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. 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 following 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 December 31, 2023, that our operating cash flows, existing cash balances, and access to the Replacement DIP Facility and Exit Credit Agreement 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 the Plan of Reorganization. We believe that our current liquidity and expected funding requirements will allow us to operate for at least the next 12 months. Cash, Cash Equivalents, Restricted Cash, and Cash Flow Activities 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. December 31, Period over Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Cash and cash equivalents $ 50,409 $ 15,884 $ 34,525 217% Restricted cash 19,300 36,356 (17,056) NM Total cash, cash equivalents and restricted cash $ 69,709 $ 52,240 $ 17,469 33% As of December 31, 2023 and 2022, restricted cash of $19.3 million and $36.4 million, respectively, consisted of cash held in escrow under the Original DIP Credit Agreement and to pay for construction and development activities. 70 The following table summarizes our cash and cash equivalents, restricted cash and cash flows for the periods indicated. December 31, 2023 2022 (in thousands) Cash, cash equivalents and restricted cash $ 69,709 $ 52,240 Cash provided by (used in) Operating activities 65,114 205,187 Investing activities (2,996) (590,778) Financing activities (44,649) 306,153 Cash, cash equivalents and restricted cash – beg. of period 52,240 131,678 Cash, cash equivalents and restricted cash – end of period $ 69,709 $ 52,240 Our principal uses of cash in recent periods have been funding our operations and investing in capital expenditures. Operating Activities Changes in net cash from operating activities results primarily from cash received from hosting customers and equipment sales and payments for power fees and equipment purchases. Other drivers of the changes in net cash from operating activities include research and development costs, sales and marketing costs and general and administrative expenses (including personnel expenses and fees for professional services) and interest payments on debt. Net cash provided by operating activities was $65.1 million for the year ended December 31, 2023, compared to $205.2 million for the year ended December 31, 2022. The decrease in net cash provided by operating activities for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to a decrease in net loss of $1.90 billion, a decrease in intangible impairments of $1.65 billion, a decrease in fair value adjustments on convertible notes of $186.9 million, and a decrease in stock-based compensation of $124.0 million. Investing Activities Our net cash used in investing activities consists of purchases of property, plant and equipment, deposits for self-mining equipment, proceeds from the sale of intangible assets, and investments in internally developed software. Net cash used in investing activities for the years ended December 31, 2023 and 2022, was $3.0 million and $590.8 million, respectively. The change over prior year was driven primarily by $367.8 million decrease in purchases of property, plant and equipment and to a $217.7 million decrease in deposits for self-mining equipment. Financing Activities Net cash used in financing activities consists of proceeds from stock issuances, issuances of debt, net of issuance costs and principal payments on debt, including notes payable and finance leases. In connection with the filing of the Chapter 11 Cases, the Company recorded approximately $2.5 million in financing costs related to the issuance of the Original DIP Facility for the year ended December 31, 2022. For the year ended December 31, 2023, net cash used in financing activities was $44.6 million, primarily related to $41.0 million of principal payments on debt and $3.7 million of principal repayments of finance leases. For the year ended December 31, 2022, net cash provided by financing activities was $306.2 million, primarily related to $261.3 million from the issuance of debt, driven by equipment financing arrangements and $25.0 million of proceeds from the issuance of common stock, net of issuance costs (including $201.0 million in net cash proceeds received from the merger with XPDI after payment of transaction expenses, $21.3 million in cash proceeds received for shares issued under the Equity Line of Credit (as defined in Note 12 — Stockholders' (Deficit) Equity in Item 8 of Part II of this Annual Report on Form 10-K), and $3.8 million in cash proceeds received for employee stock option exercises). Offsetting this increase to net cash provided by financing activities for the year ended December 31, 2022, was $113.3 million of principal payments on debt, $31.6 million for the repurchase of common shares to pay employee withholding taxes and $30.3 million of principal repayments of finance leases. 71 Future Commitments and Contractual Obligations Legal Proceedings —The Company is subject to legal proceedings arising in the ordinary course of business. The Company accrues losses for a legal proceeding when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, the uncertainties inherent in legal proceedings make it difficult to reasonably estimate the costs and effects of resolving these matters. Accordingly, actual costs incurred may differ materially from amounts accrued and could materially adversely affect the Company’s business, cash flows, results of operations, financial condition and prospects. Unless otherwise indicated, the Company is unable to estimate reasonably possible losses in excess of any amounts accrued. As of December 31, 2023 and 2022, there were no loss contingency accruals for legal matters. Commitments Purchase Commitments In September 2023, the Company entered into a purchase agreement to acquire S19 XP miners with a combined exahash of 4.08 or 28,400 miners from Bitmain for approximately $77.1 million, of which $4.1 million was paid as of December 31, 2023. As of the reporting date of this Annual Report on Form 10-K, we have completed payment on all new bitcoin miners ordered for 2024. As of December 31, 2023, the Company had received approximately 22,700 miners. The remaining miners were received in January 2024. In October 2023, the Company entered into a purchase agreement to acquire S21 miners with a combined exahash of 2.52 or approximately 12,900 miners from Bitmain for approximately $50.4 million, of which $2.4 million was paid as a deposit as of December 31, 2023, and included in other current assets on the Company's consolidated balance sheets. Delivery of the miners is expected between the first and second quarters of 2024. Leases Our lease portfolio primarily consists of offices, data facilities, mining and networking equipment, electrical infrastructure and office equipment. For additional information, see Note 9 — Leases in the notes to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. Notes Payable We have long-term debt with varying maturities dates through 2027. For additional information, see Note 7 — Notes Payable in the notes to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. Other Events 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. Related Party Transactions We had agreements to provide hosting services to various entities that are managed and invested in by individuals who were directors and executives of Core Scienti fic. For the years ended December 31, 2023 and 2022, we recognized hosting revenue of $10.1 million and $29.5 million, respectively, from the contracts with these entities. In addition, for the years ended December 31, 2023 and December 31, 2022, we recognized equipment sales revenue of nil and $71.4 million, respectively, from these entities. Receivables from these entities were nil as of December 31, 2023 and a nominal amount as of 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 years ended December 31, 2023 and 2022, we incurred reimbursements of nil and $1.9 million, respectively. As of December 31, 2023, nil was payable, and as of December 31, 2022, $0.2 million was payable. Foreign Currency and Exchange Risk The vast majority of our cash generated from revenue are denominated in U.S. dollars. 72 Critical Accounting Estimates The critical accounting estimates, assumptions, judgments and the related policies that we believe have the most significant impact on our consolidated financial statements are described below. Liabilities Subject to Compromise As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities will ultimately be settled or treated is determined by the confirmed Chapter 11 plan of reorganization when it becomes effective. Accordingly, the ultimate amount of such claims is not determinable until such time as the Bankruptcy Court determines their allowed amount. Pre-petition liabilities that are subject to compromise are reported at the amounts management expects to become allowed by the Bankruptcy Court, even if they may be settled for different amounts upon confirmation. The amounts currently classified as Liabilities subject to compromise are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events. Revenue From Contracts With Customers - Digital Asset Mining Revenue The Company recognizes revenue in accordance with ASC 606, Revenue Recognition (“ASC 606”). The core principle of the revenue standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: • Step 1: Identify the contract with the customer • Step 2: Identify the performance obligations in the contract • Step 3: Determine the transaction price • Step 4: Allocate the transaction price to the performance obligations in the contract • Step 5: Recognize revenue when the Company satisfies a performance obligation In order to identify the performance obligations in a contract with a customer, an entity must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: • The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct); and • The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following: • Variable consideration • Constraining estimates of variable consideration • The existence of a significant financing component in the contract • Noncash consideration • Consideration payable to a customer Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized under the accounting contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. 73 The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time, as appropriate. Application of the five-step model to the Company’s mining operations One of the Company’s ongoing major or central operations is to provide a service of performing hash calculations to third-party pool operators alongside collectives of third-party bitcoin miners (such collectives, “mining pools”) as a participant. The Company considers the third-party mining pool operators to be its customers under Topic 606. Contract inception and our enforceable right to consideration begins when we commence providing hash calculation services to the mining pool operators. Each party to the contract has the unilateral right to terminate the contract at any time without any compensation to the other party for such termination. As such, the duration of a contract is less than a day and may be continuously renewed multiple times throughout the day. The implied renewal option is not a material right because there are no upfront or incremental fees in the initial contract and the terms, conditions, and compensation amount for the renewal options are at the then market rates. The Company is entitled to non-cash compensation based on the Full-Pay-Per-Share (“FPPS”) model of the mining pool it is a participant in. FPPS pools pay block rewards and transaction fees, less mining pool fees and the participants are entitled to non-cash consideration even if a block is not successfully validated by the mining pool operator. The Company is entitled to compensation once it begins to perform hash calculations for the pool operator in accordance with the operator’s specifications over a 24-hour period beginning mid-night UTC and ending 23:59:59 UTC on a daily basis. The non-cash consideration that we are entitled to for providing hash calculations to the pool operator under the FPPS payout method is made up of block rewards and transaction fees less pool operator expenses determined as follows: • The non-cash consideration in the form of a block reward is based on the total blocks expected to be generated on the Bitcoin Network for the daily 24-hour period beginning midnight UTC and ending 23:59:59 UTC in accordance with the following formula: the daily hash calculations that we provided to the pool operator as a percent of the Bitcoin Network’s implied hash calculations as determined by the network difficulty, multiplied by the total Bitcoin Network block rewards expected to be generated for the same daily period. • The non-cash consideration in the form of transaction fees paid by transaction requestors is based on the share of total actual fees paid over the daily 24-hour period beginning midnight UTC and ending 23:59:59 UTC in accordance with the following formula: total actual transaction fees generated on the Bitcoin Network during the 24-hour period as a percent of total block rewards the Bitcoin Network actually generated during the same 24-hour period, multiplied by the block rewards we earned for the same 24-hour period noted above. • The block reward and transaction fees earned by the Company is reduced by mining pool fees charged by the operator for operating the pool based on a rate schedule per the mining pool contract. The mining pool fee is only incurred to the extent we perform hash calculations and generate revenue in accordance with the pool operator’s payout formula during the same 24-hour period beginning mid-night UTC daily. The above non-cash consideration is variable, since the amount of block reward earned depends on the amount of hash calculations we perform; the amount of transaction fees we are entitled to depends on the actual Bitcoin Network transaction fees over the same 24-hour period; and the operator fees for the same 24-hour period are variable since it is determined based on the total block rewards and transaction fees in accordance with the pool operator’s agreement. While the non-cash consideration is variable, the Company has the ability to estimate the variable consideration at contract inception with reasonable certainty without the risk of significant revenue reversal. The Company does not constrain this variable consideration because it is probable that a significant reversal in the amount of revenue recognized from the contract will not occur when the uncertainty is subsequently resolved and recognizes the non-cash consideration on the same day that control is transferred, which is the same day as contract inception. The Company measures the non-cash consideration based on the volume weighted average spot rates of aggregated exchanges over a 24-hour period beginning mid-night UTC and ending 23:59:59 UTC on the day of contract inception using the Company’s primary bitcoin pricing source system. The Company recognizes non-cash consideration on the same day that control of the contracted service is transferred to the pool operator, which is the same day as the contract inception. Direct expenses associated with providing hash calculation services to a third-party operated mining pool are recorded as cost of revenues. Depreciation and amortization expenses on fixed and right-of-use assets, including digital asset mining equipment, used to provide the services are also recorded as a component of cost of revenues. 74 Equipment Sales (Applicable to years ended December 31, 2022 and 2021) We entered contracts with more than one performance obligation. For example, we entered into contacts that include both hosting services and sales of computer equipment to those same customers, for which revenue is recognized at the point in time when control of the equipment is transferred to the customer (typically at the start of the contract period). For these contracts, revenue was recognized based on the relative standalone selling price of each performance obligation in the contract. The Company recognized revenue from sales of computer equipment to customers at the point in time when control of the equipment is transferred to the customer, which generally occurred upon deployment of the equipment. Customers made a series of deposits on equipment purchases with the final payment typically being due at least one month prior to deployment. Self-mining computer equipment that was subsequently sold to customers was recognized as Equipment Sales to Customers in the Company’s Consolidated Statements of Operations. Due to the change to Bitmain worldwide sale strategy, we do not expect to enter equipment sales contracts in the future or to have any equipment sales revenue after December 31, 2022. Stock-Based Compensation The Black-Scholes assumptions used in evaluating our awards are as follows: Year Ended December 31, 2023 (1) 2022 Dividend yield 0.00 % 0.00 % Expected volatility — % 72.29 % Risk-free interest rate — % 1.82 % Expected life (years) 0 7.00 (1) No stock options were granted during the year ended December 31, 2023. We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimation process, which could materially impact our future stock-based compensation expense. In addition, for awards with performance conditions, primarily restricted stock unit awards, we recognize the estimated fair value of the awards based on management’s judgment as to whether or not it is probable that the performance conditions will be achieved. Common Stock Valuations In valuing the fair value of our common stock prior to the Business Combination, we used the most observable inputs available. We used the market approach, which estimates the value of our business by applying valuation multiples derived from the observed valuation multiples of comparable public companies to our expected financial results. When observable inputs were not available, we used the income approach. This approach typically projects cash flows for the forecast period and uses the perpetuity growth method to calculate terminal values. These cash flows and terminal values were then discounted using an appropriate discount rate. Projections of cash flows were based on management’s earnings forecasts. Applying these valuation and allocation approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, such as those regarding the Company’s expected future revenue, expenses and cash flows, as well as discount rates, valuation multiples, the selection of comparable public companies and the probability of future events. Changes in any or all of these estimates and assumptions, or the relationships between these assumptions, impact the Company’s valuation as of each valuation date and may have a material impact on the valuation of the Company’s common stock and common stock warrants issued with the Company’s debt and equity instruments. Long-Lived Assets We test long-lived assets for recoverability whenever events or changes in circumstances have occurred that may affect the recoverability or the estimated useful lives of long-lived assets. Long-lived assets include intangible assets subject to amortization. A long-lived asset may be impaired when the estimated future undiscounted cash flows are less than the carrying amount of the asset. If 75 that comparison indicates that the asset’s carrying value may not be recoverable, the impairment is measured based on the difference between the carrying amount and the estimated fair value of the asset. This evaluation is performed at the lowest level for which separately identifiable cash flows exist. Long-lived assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell. We did not have any impairments in our long-lived assets for the year ended December 31, 2023. For the year ended December 31, 2022, we recorded a $4.5 million impairment of other intangibles and a $590.7 million impairment of property, plant and equipment. Digital Assets Our digital assets, e.g., bitcoin, are accounted for as intangible assets with indefinite useful lives. We initially recognize digital currency assets that are earned as digital asset mining revenue based on the fair value of the digital assets using prices in connection with the Company’s revenue recognition policy. Digital asset disposals are on a first-in-first-out (“FIFO”) basis. Impairment is measured using quoted prices of the digital asset obtained from the Company’s primary market 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 continuous basis. The Company deems the price of digital assets to be a Level 1 input under the ASC 820, Fair Value Measurement hierarchy as these are based on observable quoted prices in the Company’s primary market for identical assets. To the extent an impairment loss is recognized, the loss establishes a new carrying value of the digital asset lot. Subsequent reversal of impairment losses is not permitted. Digital assets are classified on our balance sheet as a current asset due to the Company’s ability to sell it in a highly liquid marketplace and its intent to liquidate its digital assets to fund operations when necessary. For the years ended December 31, 2023 and 2022, the Company recognized net gains of $3.9 million and $44.3 million, respectively, on sales of digital assets. Purchases and sales of digital assets by the Company and digital assets awarded to the Company are included within Cash flows from operating activities on the Consolidated Statements of Cash Flows. Any realized gains or losses from sales of bitcoin are included in Operating income (loss) on the Consolidated Statements of Operations. The Company accounts for its gains or losses by lot on a FIFO basis. Foreign Currency and Exchange Risk Substantially all revenue and operating expenses are denominated in U.S. dollars. 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 consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K. 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 (1) the last day of the fiscal year (a) following February 12, 2026, the fifth anniversary of the date of the first sale of common equity securities of the Company in a registered offering, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates meets or exceeds $700.0 million as of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. 76