Core Scientific, Inc./tx 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context otherwise requires, all references in this section to “we,” “us,” “our,” the “Company,” “Core Scientific,” or “Core” refer to Core Scientific, Inc. and its subsidiaries. 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 unaudited consolidated financial statements and the accompanying Notes to Unaudited Financial Statements (Part I, Item 1 of this Form 10-Q) as well as the financial and other information included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 13, 2024. This section generally discusses the results of operations for the quarter ended March 31, 2024 compared to March 31, 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 our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 13, 2024. 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 digital infrastructure, software solutions and services to assist our customers in transforming energy into high-value compute. 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 and Graphics Processing Unit (“GPU”) cloud compute 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 primarily for third-party mining customers. We had an average hourly operating power demand of approximately 660 megawatts (“MW”) for the three months ended March 31, 2024. We had secured approximately 1,198 MW of contracted power capacity at our sites as of March 31, 2024. We also owned and managed the largest infrastructure asset base of publicly listed miners in North America of 745 MW and improved our average self-mining fleet energy efficiency to 26.85 joules per terahash. Our total revenue was $179.3 million and $120.7 million for the three months ended March 31, 2024 and 2023, respectively. We had operating income of $55.2 million and $7.6 million for the three months ended March 31, 2024 and 2023, respectively. We had net income of $210.7 million and net loss of $0.4 million for the three months ended March 31, 2024 and 2023, respectively. Our adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) was $88.0 million and $40.3 million for the three months ended March 31, 2024 and 2023, 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. Recent Developments Emergence from Bankruptcy On January 15, 2024, the Company and certain of its affiliates filed with the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) 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. 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 was constituted and the Company, in accordance with the Plan of Reorganization satisfied and extinguished claims in the Chapter 11 cases 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 our emergence from bankruptcy, refer to Notes 3 — Chapter 11 Filing and Emergence from Bankruptcy, 6 — Convertible and Other Notes Payable, 7 — Contingent Value Rights and Warrant Liabilities and 10 — Stockholders' Deficit to our consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. 39 Halving On April 19, 2024, bitcoin underwent its fourth halving event at block 840,000, when the reward was reduced to its current level of 3.125 bitcoin per block from the previous level of 6.25 bitcoin per block. During a halving, we expect that it could have a negative impact on our revenue as the reward for each bitcoin mined will be reduced. However, the impact of halving on revenue may be offset by a rise in the price of bitcoin due to fewer miners after the halving event. Our Business Model Business Overview As a large-scale bitcoin digital asset miner, provider of blockchain solutions and leader in transforming energy into high-value compute with high efficiency at scale, 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. Further, as noted in the “Strategic Investments” section below, we believe that opportunities for growth exist in various applications of our data centers for third party customers focused on cloud computing as well as machine learning and artificial intelligence. 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. 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. 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. In addition to exploring additional mining facilities and mining arrangements, we may also explore additional uses of our current and future data centers to take advantage of high value compute in connection with our short-, medium- and long-term strategic planning. 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 pursue adjacent high-value compute opportunities that lever our mining expertise and capabilities. For example, in February 2024, we entered into a multi-year lease agreement for a data center in Austin, Texas with a current operating capacity of 12 MW (the “Austin Lease”) within which to perform colocation hosting services for CoreWeave, Inc. to supply up to 16 MW of data center infrastructure to support its GPU cloud compute workloads. We expect this facility to be operational in the second fiscal quarter of 2024. We believe our expertise in digital asset mining can be applied favorably to the design, development and operation of large-scale data centers configured to optimize the performance of specialized computers for other specific, high-value applications such as cloud computing, as well as machine learning and artificial intelligence. We intend to look for opportunities to expand our business into these areas using our knowledge, expertise and existing infrastructure where favorable market opportunities exist. 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. 40 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. As of December 31, 2023, we had two active purchase agreements with Bitmain. The first agreement was for the acquisition of Antminer S19J XP miners with a combined exahash of 4.08 or 28,400 miners, all of which have been delivered as of March 31, 2024. The second agreement was for the acquisition of Antminer S21 miners with a combined exahash of 2.52 or approximately 12,900 miners. As of March 31, 2024, the Company had received approximately 4,790 miners. The remaining miners were received in April 2024. As of the reporting date of this Quarterly Report on Form 10-Q, we have completed all 2024 payments due on miners ordered for deployment this year. The tables below summarize the total number of self- and hosted miners in operation as of March 31, 2024 and December 31, 2023 (miners in thousands): Bitcoin Miners in Operation as of March 31, 2024 Mining Equipment Hash rate (EH/s) Number of Miners Self-miners 19.3 172.8 Hosted miners 6.2 51.1 Total mining equipment 25.5 223.9 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 41 Summary of Digital Asset Activity Activity related to our digital asset balances for the three months ended March 31, 2024 and 2023, were as follows (in thousands): March 31, 2024 March 31, 2023 Digital assets, beginning of period $ 2,284 $ 724 Cumulative effect of ASU 2023-08, adopted January 1, 2024 1 24 — Digital assets, beginning of period, as adjusted 2,308 724 Digital asset mining revenue, net of receivables 2 149,644 98,026 Mining proceeds from shared hosting 8,371 — Proceeds from sales of digital assets (160,777) (98,384) Realized gain from sale of digital assets 543 1,064 Impairment of digital assets — (1,056) Payment of board fee (89) — Other — (374) Digital assets, end of period $ — $ — 1 Reflects the impact of the Company’s adoption of Accounting Standards Update (“ASU”) 2023-08, Intangibles-Goodwill and Other-Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (“ASU 2023-08”) effective January 1, 2024. 2 As of March 31, 2024 and March 31, 2023, there was $2.0 million and $1.2 million, respectively, of digital asset receivable included in prepaid expenses and other current assets on the consolidated balance sheets. Performance Metrics Hash Rate Miners perform computational operations in support of digital asset blockchains measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers to the rate at which it is capable of solving such computations. The 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 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. Network Hash Rate In digital asset mining, hash rate is a measure of the processing speed at which a mining computer operates in its attempt to secure a specific digital asset. A participant in a blockchain network’s mining function has a hash rate equivalent to the total of all its miners seeking to mine a specific digital asset. System-wide, the total network hash rate reflects the sum total of all miners seeking to mine each specific type of digital asset. A participant’s higher total hash rate relative to the system-wide total hash rate generally results in a corresponding higher success rate in digital asset rewards over time as compared to mining participants with relatively lower total hash rates. However, as the relative market price for a digital asset, such as bitcoin, increases, more users are incentivized to mine for that digital asset, which increases the network’s overall hash rate. As a result, a mining participant must increase its total hash rate in order to maintain its relative possibility of solving a block on the network blockchain. Achieving greater hash rate power by deploying increasingly sophisticated miners in ever greater quantities has become one of the bitcoin mining industry’s great sources of competition. Our goal is to deploy a powerful fleet of self- and hosted-miners, while operating as energy-efficiently as possible. Key Factors Affecting Our Financial 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, meaning that high or low prices may have little or no relationship to 42 identifiable market forces, may be subject to rapidly changing investor sentiment, and may be influenced by factors such as technology, regulatory void or changes, fraudulent actors, manipulation, and media reporting. Bitcoin (as well as other digital assets) may have value based on various factors, including their acceptance as a means of exchange by consumers and others, scarcity, and market demand. Our financial performance and continued growth depend in large part on our ability to mine for digital assets profitably and to attract customers for our hosting services. Increases in power costs, inability to mine digital assets efficiently and to sell digital assets at favorable prices will reduce our operating margins, impact our ability to attract customers for our services, may harm our growth prospects and could have a material adverse effect on our business, financial condition and results of operations. Over time, we have observed a positive trend in the total market capitalization of digital assets, which suggests increased adoption. However, historical trends are not indicative of future adoption, and it is possible that the adoption of digital assets and blockchain technology may slow, take longer to develop, or never be broadly adopted, which would negatively impact our business and operating results. Network Hash Rate Our business is not only impacted by the volatility in digital asset prices, but also by increases in the competition for digital asset production. For bitcoin, this increased competition is described as the network hash rate resulting from the growth in the overall quantity and quality of miners working to solve blocks on the bitcoin blockchain, and the difficulty index associated with the secure hashing algorithm employed in solving the blocks. 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. 43 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 four 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 6.25 bitcoin per block; and (4) on April 19, 2024 at block 840,000, when the reward was reduced to its current level of 3.125 bitcoin per block. The next halving for the bitcoin blockchain is anticipated to occur in 2028 at block 1,050,000. 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 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. 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. 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, 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. 44 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 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. 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). March 31, 2024 2023 Self-Mining Hash rate (Exahash per second) 19.3 16.1 Three Months Ended March 31, 2024 2023 Adjusted EBITDA (in millions) $ 88.0 $ 40.3 45 Self-Mining Hash Rate We operate mining hardware which performs computational operations in support of the blockchain measured in “hash rate” or “hashes per second.” A “hash” is the computation run by mining hardware in support of the blockchain; therefore, a miner’s “hash rate” refers to the rate at which the hardware is capable of solving such computations. Our hash rate represents the hash rate of our miners as a proportion of the total bitcoin network hash rate and drives the number of digital asset rewards that will be earned by our fleet. We calculate and report our hash rate in exahash per second (“EH/s”). One exahash equals one quintillion hashes per second. We measure the hash rate produced by our mining fleet through our management software Minder TM , which consolidates the reported hash rate from each miner. The method by which we measure our hash rate may differ from how other operators present such a measure. Our self-mining hash rate was 19.3 EH/s and 16.1 EH/s as of March 31, 2024 and 2023, respectively representing a 20% increase year over year. Our combined self-mining and customer and related party hosting hash rate increased 17%, to 25.5 EH/s as of March 31, 2024, from 21.8 EH/s as of March 31, 2023. 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) Reorganization items, net; (vi) unrealized changes in fair value of energy derivatives; (vii) change in the fair value of warrant and contingent value rights 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 Quarterly Report on Form 10-Q because it is a key measurement used by our management internally to make operating decisions, including those related to operating expenses, evaluate performance, and perform strategic and financial planning. The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature or because the amount and timing of these items 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 income (loss) to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business. 46 The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for the three months ended March 31, 2024 and 2023, (in thousands): Three Months Ended March 31, 2024 2023 1 Adjusted EBITDA Net income (loss) $ 210,691 $ (388) Adjustments: Interest expense, net 14,087 157 Income tax expense 206 104 Depreciation and amortization 28,996 20,094 Stock-based compensation expense (1,060) 12,273 Unrealized fair value adjustment on energy derivatives (797) — Losses on disposal of property, plant and equipment 3,820 — Advisor fees 1,687 — Loss (gain) on debt extinguishment 50 (20,761) Reorganization items, net (111,439) 31,559 Change in fair value of warrant and contingent value rights (60,114) — Other non-operating expenses (income), net 1,746 (3,069) Other 123 368 Adjusted EBITDA $ 87,996 $ 40,337 1 Certain prior year amounts have been reclassified for consistency with the current year presentation. Components of Results of Operations Revenue Our revenue consists primarily of digital asset mining income, and fees from our hosting operations, including the sales of mining equipment to be hosted in our data centers. • 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. • 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 digital asset mining 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. 47 Cost of revenue The Company’s cost of hosting services and cost of digital asset mining primarily consist of electricity costs, salaries, stock-based compensation, depreciation of property, plant and equipment used to perform hosting services and mining operations and other related costs. Gain from sales of digital assets Gain from sales of digital assets consist of gain on sales of digital assets. 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 Impairment of digital assets The Company adopted ASU 2023-08 effective January 1, 2024. Under ASU 2023-08 the Company is required to measure digital assets at fair value each reporting period with changes in fair value recognized in net income. Prior to the adoption of ASU 2023-08, digital assets, which were initially recognized and measured at fair value, were remeasured only when an impairment is recognized. Impairment existed when the current carrying amount exceeded its current fair value. Impairment was measured using quoted prices of the digital asset at the time its fair value was being assessed. Quoted prices, including intraday low prices, were collected and utilized in impairment testing and measurement on a daily basis. To the extent that an impairment loss was recognized, the loss established the new costs basis and carrying value of the digital asset. Prior to the adoption of ASU 2023-08 effective January 1, 2024, impairment losses were recognized in the period in which the impairment was identified. The impaired digital assets were written down to their fair value at the time of impairment and this new carrying value would not be adjusted upward for any subsequent increase in fair value. Change in fair value of energy derivatives The Change in fair value of energy derivatives 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 our Annual Report on Form 10-K for the year ended December 31, 2023. Losses on disposal of property, plant and equipment Losses on disposal of property, plant and equipment are measured as the differences between the carrying value of the property, plant and equipment disposed of and fair value of the consideration received upon disposal. Operating expenses Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Each is outlined in more detail below. • Research and development. We invest in research and development to 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 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. 48 Non-operating (income) expenses, net: Non-operating expenses, net includes (gain) loss on debt extinguishment, interest expense, net, reorganization items, net, fair value adjustments of warrants and contingent value rights, and other non-operating (income) expenses, net. Reorganization items, net consists of costs directly associated with the reorganization during the bankruptcy period, including professional fees (including reimbursed third-party professional fees) and other bankruptcy related costs, negotiated settlements, satisfaction of allowed claims, and debtor-in-possession finance fees. Income tax expense Income tax expense 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. 49 Results of Operations for the Three Months Ended March 31, 2024 and 2023 The following table sets forth our selected Consolidated Statements of Operations for each of the periods indicated. Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage Revenue: (in thousands, except percentages) Digital asset mining revenue $ 149,959 $ 98,026 $ 51,933 53 % Hosting revenue from customers 29,332 18,909 10,423 55 % Hosting revenue from related parties — 3,720 (3,720) NM Total revenue 179,291 120,655 58,636 49 % Cost of revenue: Cost of digital asset mining 81,564 72,676 8,888 12% Cost of hosting services 20,081 16,198 3,883 24% Total cost of revenue 101,645 88,874 12,771 14% Gross profit 77,646 31,781 45,865 144% Gain from sales of digital assets 543 1,064 (521) (49)% Impairment of digital assets — (1,056) 1,056 NM Change in fair value of energy derivatives (2,218) — (2,218) NM Losses on disposal of property, plant and equipment (3,820) — (3,820) NM Operating expenses: Research and development 1,799 1,415 384 27% Sales and marketing 982 1,008 (26) (3)% General and administrative 14,143 21,764 (7,621) (35)% Total operating expenses 16,924 24,187 (7,263) (30)% Operating income 55,227 7,602 47,625 NM Non-operating (income) expenses, net: Loss (gain) on debt extinguishment 50 (20,761) 20,811 NM Interest expense, net 14,087 157 13,930 NM Reorganization items, net (111,439) 31,559 (142,998) NM Change in fair value of warrant and contingent value rights (60,114) — (60,114) NM Other non-operating expense (income), net 1,746 (3,069) 4,815 NM Total non-operating (income) expenses, net (155,670) 7,886 (163,556) NM Income (loss) before income taxes 210,897 (284) 211,181 NM Income tax expense 206 104 102 98% Net income (loss) $ 210,691 $ (388) $ 211,079 NM NM - Not Meaningful 50 Revenue Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage Revenue: (in thousands, except percentages) Digital asset mining revenue $ 149,959 $ 98,026 $ 51,933 53 % Hosting revenue from customers 29,332 18,909 10,423 55 % Hosting revenue from related parties — 3,720 (3,720) NM Total revenue $ 179,291 $ 120,655 $ 58,636 49 % Percentage of total revenue: Digital asset mining revenue 84 % 81 % Hosting revenue from customers 16 % 16 % Hosting revenue from related parties — % 3 % Total revenue 100 % 100 % Total revenue increased by $58.6 million or 49%, to $179.3 million for the three months ended March 31, 2024, from $120.7 million for the three months ended March 31, 2023, as a result of the factors described below. Digital asset mining revenue increased by $51.9 million or 53%, to $150.0 million for the three months ended March 31, 2024, from $98.0 million for the three months ended March 31, 2023. The year over year increase in mining revenue was driven primarily by an increase in the price of bitcoin and an increase in our self-mining hash rate, which was due to an approximate increase of 18,000 mining units deployed. The increase in mining revenue was partially offset by a 34% decrease in bitcoin mined. Our self-mining hash rate increased by 20%, to 19.3 EH/s for the three months ended March 31, 2024, from 16.1 EH/s for the same period in the prior year. The total number of bitcoins self-mined for the three months ended March 31, 2024, was 2,825 compared to 4,299. Although our self-mining hash rate increased 20%, the global hash rate increased approximately 73%, leading to a 34% decrease in bitcoin received from self-mining. The average price of bitcoin for the three months ended March 31, 2024, was $53,579 as compared to $22,877 for the same period in the prior year, a 134% increase. Total hosting revenue from customers increased by $10.4 million or 55%, to $29.3 million for the three months ended March 31, 2024, from $18.9 million for the three months ended March 31, 2023. The increase in hosting revenue from customers was primarily driven by the onboarding of new clients since March 31, 2023, under proceeds sharing arrangements. Total hosting revenue from related parties decreased by $3.7 million or 100%, to nil for the three months ended March 31, 2024, from $3.7 million for the three months ended March 31, 2023. There were no related-party transactions during the three months ended March 31, 2024. Cost of revenue Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Cost of revenue $ 101,645 $ 88,874 $ 12,771 14 % Gross profit 77,646 31,781 45,865 144 % Gross margin 43 % 26 % Cost of revenue increased by $12.8 million or 14%, to $101.6 million for the three months ended March 31, 2024, from $88.9 million for the three months ended March 31, 2023. As a percentage of total revenue, cost of revenue totaled 57% and 74% for the three months ended March 31, 2024 and 2023, respectively. The increase in cost of revenue was primarily attributable to increased depreciation expense of $8.6 million driven by the increase in the number of miners in service, increased proceeds sharing costs of $2.6 million associated with the Company entering proceed sharing contracts with digital asset mining customers beginning in the second fiscal quarter of 2023, a $1.1 million increase in payroll and benefits primarily related to salary adjustments, and a $0.5 million increase in power costs. 51 Gain from sales of digital assets Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Gain from sales of digital assets $ 543 $ 1,064 $ (521) (49)% Percentage of total revenue — % 1 % Gain from sales of digital assets decreased by $0.5 million to $0.5 million for the three months ended March 31, 2024, from a gain of $1.1 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, the carrying value of our digital assets sold was $160.2 million and proceeds were $160.8 million. For the three months ended March 31, 2023, the carrying value of our digital assets sold was $97.3 million and the sales price was $98.4 million. Impairment of digital assets Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Impairment of digital assets $ — $ (1,056) $ 1,056 NM Percentage of total revenue — % (1) % Impairment of digital assets decreased by $1.1 million to nil for the three months ended March 31, 2024, from $1.1 million for the three months ended March 31, 2023. Upon the Company’s adoption of ASU 2023-08 effective January 1, 2024, the Company measures digital assets at fair value each reporting period with changes in fair value recognized in net income. Prior to the adoption of ASU 2023-08, impairment existed when the carrying amount exceeded its fair value. Impairment was measured using quoted prices of the digital asset at the time its fair value was being assessed. Quoted prices, including intraday low prices, were collected and utilized in impairment testing and measurement on a daily basis. If the then current carrying value of a digital asset exceeded the fair value so determined, an impairment loss occurred with respect to those digital assets in the amount equal to the difference between their carrying value and the price determined. The carrying value of our digital assets amounted to nil as of March 31, 2024 and March 31, 2023. Change in fair value of energy derivatives Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Change in fair value of energy derivatives $ (2,218) $ — $ (2,218) NM Percentage of total revenue (1) % — % Change in fair value of energy derivatives, which is related to the change in fair value of the derivative liability of the energy forward purchase contract entered into in October 2023, was $2.2 million for the three months ended March 31, 2024, The $2.2 million decrease in fair value consisted of a realized loss of $3.0 million partially offset by an unrealized gain of $0.8 million. 52 Losses on disposal of property, plant and equipment Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Losses on disposal of property, plant and equipment $ (3,820) $ — $ (3,820) NM Percentage of total revenue (2) % — % Losses on disposal of property, plant and equipment increased by $3.8 million to $3.8 million for the three months ended March 31, 2024, from nil for the three months ended March 31, 2023. This loss was due to the disposal of mining equipment. Operating Expenses Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage Operating expenses: (in thousands, except percentages) Research and development $ 1,799 $ 1,415 $ 384 27 % Sales and marketing 982 1,008 (26) (3) % General and administrative 14,143 21,764 (7,621) (35) % Total operating expenses $ 16,924 $ 24,187 $ (7,263) (30) % Percentage of total revenue 9 % 20 % Total operating expenses decreased $7.3 million or 30%, to $16.9 million for the three months ended March 31, 2024, from $24.2 million for the three months ended March 31, 2023. Research and development expenses increased $0.4 million or 27%, to $1.8 million for the three months ended March 31, 2024, from $1.4 million for the three months ended March 31, 2023. The increase was driven by a $0.5 million increase in payroll and benefits expense primarily driven by h igher salaries, partially offset by lower stock-based compensation expenses. Sales and marketing expenses decreased nominally for the three months ended March 31, 2024, from the three months ended March 31, 2023. General and administrative expenses decreased $7.6 million to $14.1 million for the three months ended March 31, 2024, from $21.8 million for the three months ended March 31, 2023. The decrease was primarily driven by $13.3 million lower stock-based compensation due to forfeitures during the current quarter and no new equity awards granted during fiscal year 2023, partially offset by a $3.4 million increase in payroll and benefits expense primarily driven by increased bonuses and higher salaries, and by $1.7 million increase during the current quarter in advisor fees related to the reorganization incurred after the Effective Date. 53 Non-operating (income) expenses, net Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage Non-operating (income) expenses, net: (in thousands, except percentages) Loss (gain) on debt extinguishment $ 50 $ (20,761) $ 20,811 NM Interest expense, net 14,087 157 13,930 NM Reorganization items, net (111,439) 31,559 (142,998) NM Change in fair value of warrant and contingent value rights (60,114) — (60,114) NM Other non-operating expense (income), net 1,746 (3,069) 4,815 NM Total non-operating (income) expenses, net $ (155,670) $ 7,886 $ (163,556) NM Total non-operating expenses, net decreased by $163.6 million, to total non-operating income, net of $155.7 million for the three months ended March 31, 2024, from total non-operating expenses, net of $7.9 million for the three months ended March 31, 2023. The decrease in total non-operating expenses, net was primarily driven by: • a $143.0 million gain in Reorganization items, net related to a $143.8 million gain associated with the satisfaction of allowed claims, a $11.1 million decrease in debtor-in-possession financing costs, partially offset by a $12.8 million increase in reimbursed claimant professional fees, and a $60.1 million increase in change in fair value of warrant and contingent value rights, partially offset by, • a $20.8 million gain on extinguishment of debt recognized during the same period in the prior year and a $13.9 million increase in Interest expense, net resulting from the Bankruptcy Court ordered stay on payment of pre-petition obligations, including interest during the same period in 2023. Income tax expense Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Income tax expense $ 206 $ 104 $ 102 98 % Percentage of total revenue — % — % Income tax expense consists of U.S. federal, state and local income taxes. For the three months ended March 31, 2024, our income tax expense was $0.2 million. For the three months ended March 31, 2023, our income tax expense was $0.1 million. The Company's effective tax rate for the three months ended March 31, 2024, was lower than the federal statutory rate of 21% primarily due to a valuation allowance on the Company’s deferred tax assets and certain non-deductible expenses. 54 Segment Total Revenue and Gross Profit The following table presents total revenue and gross profit by reportable segment for the periods presented: Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage Mining Segment (in thousands, except percentages) Digital asset mining revenue $ 149,959 $ 98,026 $ 51,933 53 % Cost of digital asset mining 81,564 72,676 8,888 12 % Mining gross profit $ 68,395 $ 25,350 $ 43,045 NM Mining gross margin 46 % 26% Hosting Segment Hosting revenue $ 29,332 $ 22,629 $ 6,703 30 % Cost of hosting services 20,081 16,198 3,883 24 % Hosting gross profit $ 9,251 $ 6,431 $ 2,820 44 % Hosting gross margin 32 % 28 % Consolidated Consolidated total revenue $ 179,291 $ 120,655 $ 58,636 49 % Consolidated cost of revenue $ 101,645 $ 88,874 $ 12,771 14 % Consolidated gross profit $ 77,646 $ 31,781 $ 45,865 144% Consolidated gross margin 43% 26% For the three months ended March 31, 2024, cost of revenue included depreciation expense of $27.5 million for the Mining segment and $1.3 million for the Hosting segment. For the three months ended March 31, 2023, cost of revenue included depreciation expense $19.9 million for the Mining segment and $0.2 million for the Hosting segment. For the three months ended March 31, 2024 and 2023, the top three hosting customers accounted for approximately 86% and 73%, respectively, of the Hosting’s segment total revenue. For the three months ended March 31, 2024, gross profit in the Mining segment increased $43.0 million compared to the three months ended March 31, 2023, due to a higher Mining segment gross margin of 46% for the three months ended March 31, 2024, compared to 26% for the three months ended March 31, 2023. The increase in the Mining segment gross profit was primarily due to a 53% increase in mining revenue driven by a 134% increase in the price of bitcoin and an increase in our self-mining hash rate driven by an increase in the number of mining units deployed, partially offset by the 34% decrease in bitcoin mined. The increase in the Mining segment gross profit was partially offset by an increase in depreciation expense as a percentage of segment revenues, which was driven primarily by an approximate increase of 18,000 miners placed in service. Our self-mining hash rate was 19.3 EH/s for the three months ended March 31, 2024, compared to 16.1 EH/s for the three months ended March 31, 2023, an increase of 20%. For the three months ended March 31, 2024, gross profit in the Hosting segment increased $2.8 million compared to the three months ended March 31, 2023, reflecting a Hosting segment gross margin of 32% for the three months ended March 31, 2024, compared to a gross margin of 28% for the three months ended March 31, 2023. The increase in Hosting segment gross margin for the three months ended March 31, 2024, compared to the three months ended March 31, 2023 was primarily due to an increase in revenue of $6.7 million driven by the onboarding of new clients under proceeds sharing arrangements, partially offset by increased proceeds sharing costs of $2.6 million associated with the Company entering proceed sharing contracts with customers beginning in the second fiscal quarter of 2023 and increased depreciation expense of $1.1 million. 55 A reconciliation of the reportable segment gross profit to income (loss) before income taxes included in our Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023, is as follows: Three Months Ended March 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Reportable segment gross profit $ 77,646 $ 31,781 $ 45,865 144% Gain from sales of digital assets 543 1,064 (521) (49) % Impairment of digital assets — (1,056) 1,056 NM Change in fair value of energy derivatives (2,218) — (2,218) NM Losses on exchange or disposal of property, plant and equipment (3,820) — (3,820) NM Operating expenses: Research and development 1,799 1,415 384 27 % Sales and marketing 982 1,008 (26) (3) % General and administrative 14,143 21,764 (7,621) (35) % Total operating expenses 16,924 24,187 (7,263) (30) % Operating income 55,227 7,602 47,625 NM Non-operating (income) expenses, net: Loss (gain) on debt extinguishment 50 (20,761) 20,811 NM Interest expense, net 14,087 157 13,930 NM Reorganization items, net (111,439) 31,559 (142,998) NM Change in fair value of warrant and contingent value rights (60,114) — (60,114) NM Other non-operating expense (income), net 1,746 (3,069) 4,815 NM Total non-operating (income) expenses, net (155,670) 7,886 (163,556) NM Income (loss) before income taxes $ 210,897 $ (284) $ 211,181 NM 56 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. 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. We continue to monitor the impact of the fourth halving event in April 2024, on our liquidity. Refer to “Recent Developments — Emergence from Bankruptcy” above for more information on our emergence from bankruptcy 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. Following our Chapter 11 filing, our level of capital expenditures was reduced, and we expect them to remain at a reduced level now that we have emerged from Chapter 11. We have assessed our current and expected operating and capital expenditure requirements and our current and expected sources of liquidity, and have determined, based on our forecasted financial results and financial condition as of March 31, 2024, that our operating cash flows, existing cash balances, and access to the 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, Cash Requirements and Cash Flows Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less from the date of acquisition. March 31, December 31, Period over Period Change 2024 2023 Dollar Percentage (in thousands, except percentages) Cash and cash equivalents $ 98,125 $ 50,409 $ 47,716 95 % Restricted cash 16,151 19,300 (3,149) (16) % Total cash, cash equivalents and restricted cash $ 114,276 $ 69,709 $ 44,567 64 % As of March 31, 2024 and December 31, 2023, restricted cash of $16.2 million and $19.3 million, consisted of cash held in escrow under the Original DIP Credit Agreement and to pay for construction and development activities. The following table summarizes our cash, cash equivalents and restricted cash and cash flows for the periods indicated. Three Months Ended March 31, 2024 2023 (in thousands) Cash, cash equivalents and restricted cash – beg. of period $ 69,709 $ 52,240 Net cash provided by (used in) Operating activities 22,174 19,942 Investing activities (31,970) (1,869) Financing activities 54,363 (1,021) Cash, cash equivalents and restricted cash - end of period $ 114,276 $ 69,292 57 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 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 $22.2 million for the three months ended March 31, 2024 and $19.9 million for the three months ended March 31, 2023. The increase in net cash provided by operating activities was primarily due to a increase in net income of $211.1 million, a $26.9 million increase in working capital components, a $20.8 million decrease in gain on debt extinguishment, and a $8.9 million increase in depreciation and amortization. The increase in net cash provided by operating activities was offset by a $144 million increase in non-cash reorganization items, a $51.9 million increase in digital asset mining income, a $41.7 million increase in fair value adjustment on contingent value rights, a $18.4 million increase in fair value adjustment on warrant liabilities, and a $13.3 million decrease in stock-based compensation. Investing Activities Our net cash used in investing activities consists primarily of purchases of property, plant and equipment. Net cash used in investing activities for the three months ended March 31, 2024 and 2023, was $32.0 million and $1.9 million, respectively. The increase in net cash used in investing activities was driven primarily by a $30.4 million increase in purchases of property, plant and 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. Net cash provided by financing activities for the three months ended March 31, 2024 was $54.4 million. Net cash used by financing activities for the three months ended March 31, 2023 was $1.0 million. The change was due primarily to $55.0 million from the issuance of common stock during the three months ended March 31, 2024 and a $20.0 million draw from the Exit Facility, partially offset by an increase in principal payments on debt of $12.7 million, an increase in principal payments on finance leases of $3.6 million, and an increase in restricted stock tax holding obligations of $3.4 million. Future Commitments and Contractual Obligations For a discussion of Commitments and Contractual Obligations, refer to Note 9 — Commitments and Contingencies to our unaudited consolidated financial statements. Related Party Transactions We had agreemen ts to provide hosting services to various entities that are either managed and invested in by individuals who were directors and executives of Core Scientific during fiscal year 2023. For the three months ended March 31, 2024, there were no related-party transactions. For the three months ended March 31, 2023, we recognized hosting revenue of $3.7 million from the contracts with related-parties. Foreign Currency and Exchange Risk The vast majority of our cash generated from revenue is denominated in U.S. dollars. Critical Accounting Estimates Critical accounting policies and estimates are those accounting policies and estimates that are both the most important to the portrayal of our net assets and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Critical accounting estimates are 58 accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material. Preparation of our unaudited consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. Except for the accounting and estimates relating to the issuance of Convertible and Other Notes Payable, Contingent Value Rights Obligations and Warrant Liabilities, as discussed below, there have been no material changes to the critical accounting policies and estimates during the three months ended March 31, 2024, as compared to those disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the SEC on March 13, 2024. Convertible and Other Notes Payable Convertible and other notes payable (“Notes payable”) are accounted for under ASC 470, Debt (“ASC 470”) are presented at their carrying value, which is their remaining par or face amount net of any related unamortized premium, discount and issuance costs. Notes payable are initially recognized at their present value. When cash proceeds are received for the issuance of Notes payable the proceeds are used to establish their present value. When cash proceeds are not received for the issuance of Notes payable their present value is based on the consideration exchanged. This present value generally will be the Notes payable’s cash flows discounted at a market rate when it is more evident than the consideration received. When the present value of Notes payable on issuance varies from its par or face amount, an original discount or premium results and along with any related issuance costs are used to determine an effective interest rate. Original premium, discount and issuance costs are amortized using the level effective rate interest method. Amortization is recognized as a component of current interest expense. Notes payable are evaluated at issuance to determine whether or not they have features or terms which would be treated as embedded derivatives that are required to be bifurcated under ASC 815, Derivatives and Hedging (ASC 815). At December 31, 2023 and March 31, 2024 Notes payable did not have any embedded derivatives required to be bifurcated. Contingent Value Rights Liabilities On the Effective Date, pursuant to the Plan of Reorganization, the Company entered into a contingent value rights agreement which provides for the issuance of the CVR to certain creditors and provides for the issuance of CVRs issued to holders of allowed general unsecured claims (“GUC”) (in such capacity, the “GUC Payees”) (the “GUC CVRs”). The CVRs and GUC CVRs are equity-linked instruments which are either only cash settled or in some instances share settled at the Company’s sole discretion. The Company determined that these equity-linked instruments are not indexed to the Company’s stock and are required to be recognized as liabilities which are, initially and subsequently, measured at fair value with changes in value reflected in Net income (loss). Warrant Liabilities On the Effective Date, pursuant to the Plan of Reorganization, holders of the Company’s previous common stock received warrants. The warrants are equity-linked instruments. The Company determined that these equity-linked instruments are not indexed to the Company’s stock and are required to be recognized as liabilities which are, initially and subsequently, measured at fair value with changes in value reflected in Net income (loss). Recent Accounting Pronouncements For a discussion of new accounting standards relevant to our business, refer to Note 2 — Summary of Significant Accounting Policies to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Emerging Growth Company We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive 59 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.