November 6, 2023 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission file number 001-40046

Core Scientific, Inc.

(Exact name of registrant as specified in its charter)

Delaware

86-1243837

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

210 Barton Springs Road

Suite 300

Austin, Texas

(Address of Principal Executive Offices)

78704

(Zip Code)

(512) 402-5233

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.0001 per share	CORZQ	OTC Markets
Warrants, exercisable for shares of common stock	CRZWQ	OTC Markets

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Emerging growth company

☒

Non-accelerated filer

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of October 30, 2023, 386,021,602 shares of Common Stock, par value $0.0001, were outstanding.

Table of Contents

TABLE OF CONTENTS


		Page
Part I. Financial Information
Item 1.	Financial Statements	4
	Consolidated Balance Sheets (Unaudited)	5
	Consolidated Statements of Operations (Unaudited)	6
	Consolidated Statements of Comprehensive Loss (Unaudited)	7
	Consolidated Statements of Changes in Contingently Redeemable Preferred Stock and Stockholders’ (Deficit) Equity (Unaudited)	8
	Consolidated Statements of Cash Flows (Unaudited)	11
	Notes to Unaudited Consolidated Financial Statements	13
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	69

Part II. Other Information
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
Signatures		73

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

Core Scientific, Inc.

(Debtor-in-Possession)

Consolidated Balance Sheets

(in thousands, except par value)


	September 30, 2023		December 31, 2022
Assets	(Unaudited)
Current Assets:
Cash and cash equivalents	$	42,146	$	15,884
Restricted cash	21,797		36,356
Accounts receivable, net of allowance of $8,724 and $8,724, respectively	1,109		234
Accounts receivable from related parties	—		23

Digital assets	559		724
Prepaid expenses and other current assets	33,039		31,881
Assets held for sale	36,069		—
Total Current Assets	134,719		85,102
Property, plant and equipment, net	547,303		691,134
Operating lease right-of-use assets	6,583		20,430

Intangible assets, net	2,448		1,704
Other noncurrent assets	14,409		9,316
Total Assets	$	705,462	$	807,686
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable	$	45,527	$	53,641
Accrued expenses and other current liabilities	55,606		17,952
Deferred revenue	63,170		77,689
Deferred revenue from related parties	—		496

Operating lease liabilities, current portion	205		769
Finance lease liabilities, current portion	19,833		—
Notes payable, current portion	128,321		36,242

Total Current Liabilities	312,662		186,789
Operating lease liabilities, net of current portion	1,047		720
Finance lease liabilities, net of current portion	35,909		—
Notes payable, net of current portion	679,559		—
Other noncurrent liabilities	1,158		2,210
Total liabilities not subject to compromise	1,030,335		189,719
Liabilities subject to compromise	93,853		1,027,313
Total Liabilities	1,124,188		1,217,032

Commitments and contingencies (Note 8)
Stockholders’ Deficit:
Common stock; $0.0001 par value; 10,000,000 shares authorized at both September 30, 2023 and December 31, 2022; 385,868 and 375,225 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	36		36
Additional paid-in capital	1,805,782		1,764,368
Accumulated deficit	(2,224,544)		(2,173,750)

Total Stockholders’ Deficit	(418,726)		(409,346)
Total Liabilities and Stockholders’ Deficit	$	705,462	$	807,686

See accompanying notes to unaudited consolidated financial statements.

Core Scientific, Inc.

(Debtor-in-Possession)

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue:
Hosting revenue from customers	$	27,020	$	35,731	$	72,245	$	94,407
Hosting revenue from related parties	2,828		9,185		10,062		22,659
Equipment sales to customers	—		7,468		—		11,391
Equipment sales to related parties	—		29,693		—		67,269
Digital asset mining revenue	83,056		80,495		278,164		323,337
Total revenue	112,904		162,572		360,471		519,063
Cost of revenue:
Cost of hosting services	24,882		44,975		64,187		119,850
Cost of equipment sales	—		27,917		—		63,993
Cost of digital asset mining	72,603		116,756		212,125		279,576
Total cost of revenue	97,485		189,648		276,312		463,419
Gross profit (loss)	15,419		(27,076)		84,159		55,644

Gain from sales of digital assets	363		11,036		2,358		25,007
Impairment of digital assets	(681)		(7,986)		(2,864)		(212,184)
Impairment of goodwill and other intangibles	—		(268,512)		—		(1,059,265)
Impairment of property, plant and equipment	—		(59,259)		—		(59,259)
Losses on exchange or disposal of property, plant and equipment	(340)		—		(514)		(13,057)
Operating expenses:
Research and development	2,253		6,192		5,308		24,305
Sales and marketing	1,041		39		3,133		11,675
General and administrative	23,511		43,346		69,671		174,380
Total operating expenses	26,805		49,577		78,112		210,360
Operating (loss) income	(12,044)		(401,374)		5,027		(1,473,474)
Non-operating expenses, net:
Gain on debt extinguishment	(374)		—		(21,135)		—
Interest expense, net	2,196		25,942		2,317		74,734
Fair value adjustment on convertible notes	—		(4,123)		—		186,853
Fair value adjustment on derivative warrant liabilities	—		(521)		—		(32,985)
Reorganization items, net	28,256		—		78,270		—
Other non-operating (income) expenses, net	(1,090)		1,478		(3,978)		4,997
Total non-operating expenses, net	28,988		22,776		55,474		233,599
Loss before income taxes	(41,032)		(424,150)		(50,447)		(1,707,073)
Income tax expense	114		10,642		347		4,398
Net loss	$	(41,146)	$	(434,792)	$	(50,794)	$	(1,711,471)


Net loss per share (Note 11):
Basic	$	(0.11)	$	(1.23)	$	(0.13)	$	(5.38)
Diluted	$	(0.11)	$	(1.23)	$	(0.13)	$	(5.38)
Weighted average shares outstanding:
Basic	382,483		354,195		378,107		318,169
Diluted	382,483		354,195		378,107		318,169

See accompanying notes to unaudited consolidated financial statements.

Core Scientific, Inc.

(Debtor-in-Possession)

Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(41,146)	$	(434,792)	$	(50,794)	$	(1,711,471)
Other comprehensive income, net of income taxes:
Change in fair value attributable to instrument-specific credit risk of convertible notes measured at fair value under the fair value option, net of tax effect of $—, $—, $— and $— respectively	—		47,832		—		83,578
Total other comprehensive income, net of income taxes	—		47,832		—		83,578
Comprehensive loss	$	(41,146)	$	(386,960)	$	(50,794)	$	(1,627,893)

See accompanying notes to unaudited consolidated financial statements.

Core Scientific, Inc.

(Debtor-in-Possession)

Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

For the Three and Nine Months Ended September 30, 2023

(in thousands)

(Unaudited)


	Common Stock		Additional Paid-In Capital			Accumulated Deficit				Total Stockholders’ (Deficit) Equity
		Shares			Amount
Balance at July 1, 2023		379,091	$	36		$	1,790,921	$	(2,183,398)		$	(392,441)
Net loss		—	—			—		(41,146)			(41,146)

Stock-based compensation		—	—			14,861		—			14,861

Restricted stock awards issued, net of shares withheld for tax withholding obligations		7,154	—			—		—			—
Restricted stock awards forfeited		(377)	—			—		—			—




Balance at September 30, 2023		385,868	$	36		$	1,805,782	$	(2,224,544)		$	(418,726)


Balance at January 1, 2023	375,225	$	36	$	1,764,368	$	(2,173,750)	$	(409,346)
Net loss	—	—		—		(50,794)		(50,794)

Stock-based compensation	—	—		41,414		—		41,414

Restricted stock awards issued, net of shares withheld for tax withholding obligations	11,020	—		—		—		—
Restricted stock awards forfeited	(377)	—		—		—		—




Balance at September 30, 2023	385,868	$	36	$	1,805,782	$	(2,224,544)	$	(418,726)

See accompanying notes to unaudited consolidated financial statements.

Core Scientific, Inc.

(Debtor-in-Possession)

Consolidated Statements of Changes in Contingently Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity

For the Three and Nine Months Ended September 30, 2022

(in thousands)

(Unaudited)


	Contingently Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ (Deficit) Equity
	Shares	Amount		Shares	Amount

Balance at July 1, 2022	—	$	—	353,481	$	35	$	1,695,748	$	(1,304,111)	$	24,780	$	416,452
Net loss	—	—		—	—		—		(434,792)		—		(434,792)
Other comprehensive income, net of $— income taxes	—	—		—	—		—		—		47,832		47,832
Stock-based compensation	—	—		—	—		29,884		—		—		29,884

Restricted stock awards issued, net of shares withheld for tax withholding obligations	—	—		4,897	—		(2,349)		—		—		(2,349)
Restricted stock awards forfeited	—	—		(2,268)	—		—		—		—		—


Issuances of common stock - equity line of credit	—	—		7,315	1		13,039		—		—		13,040


Issuances of common stock - financing transaction fees	—	—		1,285	—		2,960		—		—		2,960


Balance at September 30, 2022	—	$	—	364,710	$	36	$	1,739,282	$	(1,738,903)	$	72,612	$	73,027


	Contingently Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount

Balance at January 1, 2022	10,826	$	44,476	271,576	$	27	$	1,379,581	$	(27,432)	$	(10,966)	$	1,341,210
Net loss	—	—		—	—				(1,711,471)				(1,711,471)
Other comprehensive income, net of $— income taxes	—	—		—	—		—		—		83,578		83,578
Stock-based compensation	—	—		—	—		165,949		—		—		165,949
Exercise of stock options	—	—		1,321	—		3,846		—		—		3,846
Restricted stock awards issued, net of shares withheld for tax withholding obligations	—	—		39,099	4		(31,630)		—		—		(31,626)
Restricted stock awards forfeited	—	—		(2,268)	—		—		—		—		—
Exercise of convertible notes	—	—		197	—		1,574		—		—		1,574
Cashless exercise of warrants	—	—		3,001	—		—		—		—		—
Issuances of common stock - equity line of credit	—	—		7,315	1		13,039		—		—		13,040
Conversion of contingently redeemable preferred stock to common stock	(10,826)	(44,476)		10,826	1		44,475		—		—		44,476
Issuances of common stock - Merger with XPDI	—	—		30,778	3		163,456		—		—		163,459
Issuances of common stock - financing transaction fees	—	—		1,285	—		2,960		—		—		2,960
Issuances of common stock - vendor settlement	—	—		1,580	—		12,674		—		—		12,674
Costs attributable to issuance of common stock and equity instruments - Merger with XPDI	—	—		—	—		(16,642)		—		—		(16,642)
Balance at September 30, 2022	—	$	—	364,710	$	36	$	1,739,282	$	(1,738,903)	$	72,612	$	73,027

See accompanying notes to unaudited consolidated financial statements.

Core Scientific, Inc.

(Debtor-in-Possession)

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash flows from Operating Activities:
Net loss	$	(50,794)	$	(1,711,471)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	64,800		156,544
Amortization of operating lease right-of-use assets	703		424
Stock-based compensation	41,414		166,548
Digital asset mining revenue	(278,164)		(323,337)
Deferred income taxes	—		3,434

Gain on sale of intangible assets	—		(5,904)
Gain on debt extinguishment	(21,135)		—
Fair value adjustment on derivative warrant liabilities	—		(32,985)
Fair value adjustment on convertible notes	—		210,968
Fair value adjustment on other liabilities	—		9,498
Equity line of credit expenses	—		1,431
Amortization of debt discount and debt issuance costs	—		6,172
Losses on exchange or disposal of property, plant and equipment	514		13,057
Impairment of digital assets	2,864		212,184
Impairment of goodwill, other intangibles and property, plant and equipment	—		1,118,524
Provision for doubtful accounts	—		5,943
Gain on sale of digital assets	(2,358)		(25,007)
Changes in operating assets and liabilities:
Accounts receivable, net	(875)		(6,737)
Accounts receivable from related parties	23		(595)
Digital assets	277,823		350,794
Deposits for equipment	(600)		(66,932)
Prepaid expenses and other current assets	(10,650)		53,832
Accounts payable	32,771		2,954
Accrued expenses and other	13,001		(241)
Deferred revenue	(15,015)		22,251
Deferred revenue from related parties	—		(65,954)
Other noncurrent assets and liabilities, net	(10,911)		(6,194)
Net cash provided by operating activities	43,411		89,201
Cash flows from Investing Activities:
Purchases of property, plant and equipment	(4,516)		(243,755)
Cash acquired in acquisition	—		—
Deposits for self-mining equipment	—		(217,677)
Proceeds from the sale of intangibles	—		10,850
Investments in internally developed software	(840)		—
Other	—		(719)
Net cash used in investing activities	(5,356)		(451,301)
Cash flows from Financing Activities:
Proceeds from issuance of common stock, net of transaction costs	—		—
Proceeds from issuance of common stock upon Merger with XPDI, net of transaction costs	—		210,534
Proceeds from debt, net of issuance costs	—		216,182
Repurchase of common shares to pay employee withholding taxes	—		(31,627)
Principal repayments of finance leases	(3,411)		(28,070)
Principal payments on debt	(22,941)		(98,953)
Payment for transaction costs	—		—
Net cash (used in) provided by financing activities	(26,352)		268,066


Net increase in cash, cash equivalents and restricted cash	11,703		(94,034)
Cash, cash equivalents and restricted cash—beginning of period	52,240		131,678
Cash, cash equivalents and restricted cash—end of period	$	63,943	$	37,644


Supplemental disclosure of other cash flow information:
Cash paid for interest	1,508		69,616
Income tax refunds	(336)		(782)
Cash paid for reorganization items, net	62,590		—

Supplemental disclosure of noncash investing and financing activities:
Change in accrued capital expenditures	(39,660)		(59,030)
Decrease in equipment related to debt extinguishment	17,849		—
Decrease in notes payable in exchange for equipment	(38,610)		—
Payment-in-kind interest	—		24,103
Cashless exercise of warrants	—		3,001
Property, plant and equipment obtained in exchange transaction	—		62,338
Property, plant and equipment disposed of through settlements	6,301		—
Purchase of insurance policies financed by short-term note payable	5,011		—
Issuance of notes payable through settlements	21,035		—

Certain prior year amounts have been reclassified for consistency with the current year presentation.

See accompanying notes to unaudited consolidated financial statements.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

MineCo Holdings, Inc. was incorporated on December 13, 2017, in the State of Delaware and changed its name to Core Scientific, Inc. (“Old Core”) pursuant to an amendment to its Certificate of Incorporation dated June 12, 2018. On August 17, 2020, Old Core engaged in a holdco restructuring to facilitate a borrowing arrangement by Old Core pursuant to which Old Core was merged with and into a wholly owned subsidiary of Core Scientific Holding Co. and became a wholly owned subsidiary of Core Scientific Holding Co. and the stockholders of Old Core became the stockholders of Core Scientific Holding Co. In July 2021, Core Scientific Holding Co. completed the acquisition of Blockcap, Inc. (“Blockcap”). Prior to its acquisition, Blockcap was one of Old Core’s largest hosting customers. On January 19, 2022, following the approval at the special meeting of the stockholders of Power & Digital Infrastructure Acquisition Corp., a Delaware corporation (“XPDI”), Core Scientific Holding Co. merged with XPDI, and XPDI Merger Sub Inc., a Delaware corporation and wholly owned subsidiary of XPDI (“Merger Sub”), consummated the transactions contemplated under the merger agreement. In connection with the closing of the merger, XPDI changed its name from Power & Digital Infrastructure Acquisition Corp. to Core Scientific, Inc. (“Core Scientific” or the “Company”).

Core Scientific is a best-in-class, large-scale operator of purpose-built facilities for digital asset mining. We mine digital assets for our own account and provide colocation hosting services for other large-scale miners at our eight operational data centers in Georgia (2), Kentucky (1), North Carolina (2), North Dakota (1) and Texas (2). Currently, we derive the majority of our revenue from self-mining bitcoin. We began digital asset mining in 2018 and in 2020 became one of the largest North American providers of colocation hosting services for third-party mining customers. We are one of the largest blockchain infrastructure, digital asset mining and colocation hosting provider companies in North America. As of September 30, 2023, we had approximately 1,500 MW of contracted power capacity at our sites, including 500 MW of power allocated to the Muskogee, Oklahoma data center, which remains substantially undeveloped.

Our hosting colocation business provides a full suite of services to digital asset mining customers. We provide deployment, monitoring, troubleshooting, optimization and maintenance of our customers’ digital asset mining equipment and provide necessary electrical power, repair and other infrastructure services necessary to operate, maintain and efficiently mine digital assets.

We operate in two segments: “Mining”, consisting of digital asset mining for our own account, and “Hosting”, consisting of our blockchain infrastructure and third-party hosting business.

Our business strategy is to grow our revenue and profitability by increasing the capacity and efficiency of our self-mining fleet and entering into strategic, revenue-enhancing colocation opportunities with third parties. We intend to develop the infrastructure necessary to support business growth and profitability and capture adjacent opportunities that leverage our mining infrastructure, expertise and capabilities.

Chapter 11 Filing

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 are jointly administered under Case No. 22-90341. The Debtors continue to operate their business and manage their properties as “debtors-in-possession” (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors have filed various “first day” motions with the Bankruptcy Court requesting customary relief, which were generally approved by the Bankruptcy Court on December 22, 2022, that have enabled the Company to operate in the ordinary course while under Chapter 11 protection. For detailed discussion about the Chapter 11 Cases, refer to Note 3 — Chapter 11 Filing and Other Related Matters.

On June 20, 2023 the Debtors filed with the Bankruptcy Court a proposed Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates and a related proposed form of Disclosure Statement; (ii) on August 8, 2023, the Amended Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates and a related Disclosure Statement; and (iii) on September 7, 2023, the Second Amended Joint Chapter 11 Plan of Reorganization of Core Scientific, Inc. and its Debtor Affiliates (the “Plan”) and a related Disclosure Statement (the “Disclosure Statement”).

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

economic terms of the Plan (the “Mediated Settlement”). The Debtors, the Ad Hoc Noteholder Group and the Equity Committee will continue to work and negotiate in good faith to document the Mediated Settlement, resolve certain open issues and revise the Plan and Disclosure Statement to incorporate the terms of the Mediated Settlement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Refer to the significant accounting policies described in Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022.

Basis of Presentation

Our consolidated balance sheet as of December 31, 2022, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). However, in our opinion, the disclosures made therein are adequate to make the information presented not misleading. We believe the unaudited interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. All of these adjustments are of a normal recurring nature. The interim consolidated results of operations and cash flows are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Revision of Previously Issued Financial Statements

See Note 14 — Revision of Previously Issued Financial Statements.

Going Concern

For the nine months ended September 30, 2023, the Company generated a net loss of $50.8 million. The Company had unrestricted cash and cash equivalents of $42.1 million as of September 30, 2023, compared to $15.9 million as of December 31, 2022. The Company has historically generated cash primarily from the issuance of common stock and debt, through sales of digital assets received as digital asset mining revenue and from operations through contracts with customers. As of September 30, 2023, the Company had a total stockholders’ deficit of $418.7 million.

The consolidated financial statements have been prepared on a going concern basis. Our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the Bankruptcy Court’s approval, implement a Chapter 11 plan of reorganization (the “Plan”), successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the restructuring to meet our obligations and operating needs. As a result of risks and uncertainties related to (i) the Company’s ability to successfully consummate the Plan and emerge from the Chapter 11 Cases, and (ii) the effects of disruption from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern. For detailed discussion about the Chapter 11 Cases and the Plan, refer to Note 3 — Chapter 11 Filing and Other Related Matters.

Debtor-in Possession

In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to certain motions and applications intended to limit the disruption of the bankruptcy proceedings on our operations (the First Day Motions (as defined below)) and other motions filed with the Bankruptcy Court throughout the duration of the Chapter 11 Cases, the Bankruptcy Court has authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to obtain DIP financing, pay employee wages and benefits, enter into contracts with customers, vendors and suppliers, continue to earn revenue and pay vendors and suppliers in the ordinary course of business. For detailed discussion about the Chapter 11 Cases, refer to Note 3 — Chapter 11 Filing and Other Related Matters.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

Use of Estimates

The preparation of the Company’s unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Some of the more significant estimates include assumptions used to estimate its ability to continue as a going concern, the valuation of the Company’s common shares and the determination of the grant date fair value of stock-based compensation awards for periods prior to the Merger, the valuation of digital assets, goodwill, other intangible assets and property, plant and equipment, the fair value of convertible debt, derivative warrants, and income taxes. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates.

Cash, Cash Equivalents and Restricted Cash

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. As of September 30, 2023 and December 31, 2022, cash equivalents included $34.1 million and $10.2 million, respectively, of highly liquid money market funds which are classified as Level 1 within the fair value hierarchy. Restricted cash consists of cash held in escrow under the Original DIP Credit Agreement (as defined below) and in escrow to pay for construction and development activities. As of September 30, 2023 and December 31, 2022, the Company had restricted cash of $21.8 million and $36.4 million, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable balance consists of amounts due from its hosting customers. The Company records accounts receivable at the invoiced amount less an allowance for any potentially uncollectible accounts under the current expected credit loss (“CECL”) impairment model and presents the net amount of the financial instrument expected to be collected. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers forecasts of future economic conditions in addition to information about past events and current conditions. Based on this model, the Company considers many factors, including the age of the balance, collection history, and current economic trends. Bad debts are written off after all collection efforts have ceased.

Allowances for credit losses are recorded as a direct reduction from an asset’s amortized cost basis. Credit losses and recoveries are recorded in selling, general and administrative expenses in the consolidated statements of operations. Recoveries of financial assets previously written off are recorded when received. For the nine months ended September 30, 2023 and 2022, the Company did not record any credit losses or recoveries.

Based on the Company’s current and historical collection experience, the Company recorded an allowance for doubtful accounts of $8.7 million as of September 30, 2023 and December 31, 2022.

Performance Obligations - Hosting Segment

The Company’s performance obligations relate to hosting services, which are described below. The Company has performance obligations associated with commitments in customer hosting contracts for future services that have not yet been recognized in the financial statements. For contracts with original terms that exceed one year (typically ranging from 15 to 48 months), those commitments not yet recognized as of September 30, 2023 and December 31, 2022, were $100.8 million and $159.6 million, respectively.

Deferred Revenue

The Company records contract liabilities in Deferred revenue and Other non-current liabilities on the Company’s Consolidated Balance Sheets when cash payments are received in advance of performance and recognizes them as revenue when the performance obligations are satisfied. The Company’s total deferred revenue balance as of September 30, 2023 and December 31, 2022, was $64.3 million and $80.4 million, respectively, all from advance payments received during the periods then ended.

In the three and nine months ended September 30, 2023, the Company recognized $2.7 million and $20.5 million of revenue, respectively, that was included in the deferred revenue balance as of the beginning of the year.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

In the three and nine months ended September 30, 2022, the Company recognized $30.9 million and $79.6 million of revenue, respectively, that was included in the deferred revenue balance as of the beginning of the year.

Advanced payments for hosting services are typically recognized in the following month and are generally recognized within one year.

Recently Adopted Accounting Standards

Measurement of Credit Losses

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Measurement of Credit Losses on Financial Instruments, which will require an entity to measure credit losses for certain financial instruments and financial assets, including trade receivables. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. The Company adopted this new guidance on January 1, 2023, and the adoption did not have a material impact on the Company’s unaudited consolidated financial statements.

Accounting Standards Not Yet Adopted

There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s unaudited consolidated financial statements.

3. CHAPTER 11 FILING AND OTHER RELATED MATTERS

Chapter 11

On December 21, 2022 (the “Petition Date”), the Debtors filed the Chapter 11 Cases in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code. The Chapter 11 Cases are jointly administered under Case No. 22-90341. The Debtors continue to operate their business and manage their properties as “debtors-in-possession” (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors filed various “first day” motions with the Bankruptcy Court requesting customary relief, which were generally approved by the Bankruptcy Court on December 22, 2022, that have enabled the Company to operate in the ordinary course while under Chapter 11 protection.

On September 19, 2023, the Debtors, the ad hoc group of the Debtors’ secured convertible notes holders (the “Ad Hoc Noteholder Group”) and the equity committee (the “Equity Committee”) reached an agreement in principle with respect to the economic terms of the Plan (the “Mediated Settlement”). The Debtors, the Ad Hoc Noteholder Group and the Equity Committee will continue to work and negotiate in good faith to document the Mediated Settlement, resolve certain open issues and revise the Plan and Disclosure Statement to incorporate the terms of the Mediated Settlement.

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

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

Scientific, Inc. (as successor of Core Scientific Holding Co.), the guarantors party thereto from time to time, U.S. Bank National Association, as note agent and collateral agent, and the purchasers of the notes issued thereunder (the “Other Convertible Notes,” and together with the Secured Convertible Notes, the “Convertible Notes”).

Also in connection with the filing of the Chapter 11 Cases, the Company entered into a restructuring support agreement (together with all exhibits and schedules thereto, the “Restructuring Support Agreement”) with the ad hoc group of noteholders, representing more than 70% of the holders of the Convertible Notes (the “Ad Hoc Noteholder Group”) pursuant to which the Ad Hoc Noteholder Group agreed to provide commitments for a debtor-in-possession facility (the “Original DIP Facility”) of more than $57 million and agreed to support the syndication of up to an additional $18 million in new money DIP (defined below) facility loans to all holders of Convertible Notes. The Company terminated the Restructuring Support Agreement pursuant to a “fiduciary out” which permitted the Company to pursue better alternatives.

Replacement DIP Credit Agreement

On February 2, 2023, the Bankruptcy Court entered an interim order (the “Replacement Interim DIP Order”) authorizing, among other things, the Debtors to obtain senior secured non-priming super-priority replacement post-petition financing (the “Replacement DIP Facility”). On February 27, 2023, the Debtors entered into a Senior Secured Super-Priority Replacement Debtor-in-Possession Loan and Security Agreement governing the Replacement DIP Facility (the “Replacement DIP Credit Agreement”), with B. Riley Commercial Capital, LLC, as administrative agent (the “Administrative Agent”), and the lenders from time to time party thereto (collectively, the “Replacement DIP Lender”). Proceeds of the Replacement DIP Facility were used to, among other things, repay amounts outstanding under the Original DIP Facility, including payment of all fees and expenses required to be paid under the terms of the Original DIP Facility. These funds, along with ongoing cash generated from operations, were anticipated to provide the necessary financing to effectuate the planned restructuring, facilitate the emergence from Chapter 11, and cover the fees and expenses of legal and financial advisors.

The Replacement DIP Facility, among other things, provides for a non-amortizing super-priority senior secured term loan facility in an aggregate principal amount not to exceed $70 million. Under the Replacement DIP Facility, (i) $35 million was made available following Bankruptcy Court approval of the Interim DIP Order and (ii) $35 million was made available following Bankruptcy Court approval of the Final DIP Order. Loans under the Replacement DIP Facility will bear interest at a rate of 10%, which will be payable in kind in arrears on the first day of each calendar month. The Administrative Agent received an upfront payment equal to 3.5% of the aggregate commitments under the Replacement DIP Facility on February 3, 2023, payable in kind, and the Replacement DIP Lender will receive an exit premium equal to 5% of the amount of the loans being repaid, reduced or satisfied, payable in cash. The Replacement DIP Credit Agreement includes representations and warranties, covenants applicable to the Debtors, and events of default. If an event of default under the Replacement DIP Credit Agreement occurs, the Administrative Agent may, among other things, permanently reduce any remaining commitments and declare the outstanding obligations under the Replacement DIP Credit Agreement to be immediately due and payable.

The maturity date of the Replacement DIP Credit Agreement is December 22, 2023, which can be extended, under certain conditions, by an additional three months to March 22, 2024. The Replacement DIP Credit Agreement will also terminate on the date that is the earliest of the following (i) the effective date of the Plan with respect to the Borrowers (the “Plan”) (as defined in the Replacement DIP Credit Agreement) or any other Debtor; (ii) the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code; (iii) the date of the acceleration of the Loans and the termination of the Commitments (whether automatically, or upon any Event of Default or as otherwise provided in the Replacement DIP Credit Agreement); and (iv) conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code.

On March 1, 2023, the Bankruptcy Court entered an order approving the Replacement DIP Facility on a final basis and the terms under which the Debtors are authorized to use the cash collateral of the holders of their convertible notes (the “Final DIP Order”).

On July 4, 2023, the Debtors, the Administrative Agents and the Replacement DIP Lender entered into the First Amendment to the Replacement DIP Credit Agreement. For detailed discussion about the First Amendment, refer to Note 5 — Notes Payable.

NYDIG Settlement

On February 26, 2023, the Bankruptcy Court entered an order (the “NYDIG Order”), whereby the Debtors and NYDIG agree that the Debtors would transfer the miners serving as collateral under the NYDIG Loan back to NYDIG over a period of several

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

months in exchange for the full extinguishment of the NYDIG Loan. The final shipment of miners serving as collateral under the NYDIG loan occurred during the quarter ended March 31, 2023, after which the NYDIG Loan was extinguished in full and the Company recorded a $20.8 million gain on extinguishment of debt in the Company’s Consolidated Statements of Operations.

Priority Power Settlement

On March 20, 2023, the Bankruptcy Court entered an order (the “Priority Power Order”), whereby the Debtors and Priority Power agree that the Debtors would transfer equipment to Priority Power and assume an Energy Management and Consulting Services Agreement and other new agreements. Priority Power was determined to have a single aggregate allowed claim of $20.8 million, which was secured by a perfected mechanic’s lien. The claim was deemed paid and fully satisfied by transfer of specific equipment from the Debtors to Priority Power on the date of the Priority Power Order, thereby releasing all Priority Power liens. The satisfaction of the obligation and transfer of the equipment is a noncash transaction which occurred during the quarter ended March 31, 2023, and resulted in a gain of $4.9 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the nine months ended September 30, 2023.

City of Denton Lease Settlement

On August 16, 2023, the Bankruptcy Court entered an order (the “City of Denton Order”), approving the parties agreement to settle all claims of City of Denton and Denton Municipal Electric (“Denton”) against the Debtors and releasing any and all liens related to the Debtor’s lease of the Denton facility in exchange for Debtors execution lease cure costs totaling $1.5 million. The satisfaction of the settlement resulted in a loss of $1.5 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023.

Huband-Mantor Construction Settlement

On August 18, 2023, the Bankruptcy Court entered an order (the “HMC Order”), approving the parties agreement to settle all claims of Huband-Mantor Construction (“HMC”) and its subcontractors against the Debtors and releasing any and all liens in favor of HMC and its subcontractors in exchange for Debtors payment of $2 million and the Debtors execution of a promissory note in favor of HMC in the principal amount of $15.5 million. The promissory note is secured by a mortgage of the Debtors Cottonwood 1 facility in Texas. The satisfaction of the settlement resulted in a loss of $8.3 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023. See Note 5 — Notes Payable for further discussion of the promissory note.

Celsius Mining LLC Settlement

On September 14, 2023, the Debtors and Celsius entered into a purchase and sale agreement (the “PSA”) that provides in addition to a full mutual release of claims asserted against each party in the respective bankruptcy cases for a cash payment by Celsius to the Company of $14.0 million and a full and final release of all claims of Celsius against the Debtors related to the Celsius Contracts, in exchange for the Debtors, (i) sale to Celsius of the Debtor’s Ward County, Texas bitcoin mining data center site (the “Cedarvale Facility”) and certain related assets, (ii) grant to Celsius of a perpetual, non-transferable (except as described in Section 14 of the PSA), non-exclusive limited license to use identified Company intellectual property solely as and to the extent necessary to (x) finish construction and development of the Cedarvale Facility, (y) develop and construct other mining facilities on other properties owned or leased by Celsius similar in type and scope to the Cedarvale Facility, and (z) operate all of the foregoing, (iii) assumption and assignment to Celsius of certain executory contracts. In connection with the PSA the parties released and (iv) unequivocally release claims against Celsius asserted by the Company in connection with the Celsius Chapter 11 Cases and the Company’s Chapter 11 Cases. On November 2, 2023, the Company received the payment of $14.0 million from Celsius in connection with the PSA.

As of September 30, 2023, there were $36.1 million of assets held for sale on the Company’s Consolidated Balance Sheets related to the sale of the Cedarvale Facility. Refer to Note 8 — Commitments and Contingencies for further discussion of the sale.

ACM ELF ST LLC Lease Settlement

In September 2023, the Company entered into a $7.2 million equipment finance agreement with ACM ELF ST LLC in settlement and satisfaction of a previous equipment finance agreement which resulted in a gain of $5.0 million recorded to Reorganization items, net in the Consolidated Statements of Operations for the three months ended September 30, 2023. See Note 5 — Notes Payable for further discussion of the promissory note.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

J.W. Didado Electric, LLC Settlement

On October 2, 2023, the Bankruptcy Court entered an order (the “J.W. Didado Order”), approving the parties agreement to settle all claims of W. Didado Electric, LLC (“Didado”) against the Debtors and releasing any and all liens related to the Debtor’s Muskogee datacenter in exchange for Debtors execution of an unsecured promissory note in favor of Didado in the principal amount of $13 million to be paid over 36 months upon emergence of bankruptcy.

Reorganization items, net and Liabilities Subject to Compromise

Effective on December 21, 2022, the Company began to apply the provisions of ASC 852, Reorganizations (“ASC 852”), which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of certain financial statement line items. ASC 852 requires that the financial statements for periods including and after the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the reorganization must be reported separately as Reorganization items, net in the Consolidated Statements of Operations beginning December 21, 2022, the date of filing of the Chapter 11 Cases. Liabilities that may be affected by the Plan must be classified as liabilities subject to compromise at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the Plan or negotiations with creditors. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. Any resulting changes in classification will be reflected in subsequent financial statements. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under the Plan, the entire amount of the claim is included with prepetition claims in liabilities subject to compromise.

As a result of the filing of the Chapter 11 Cases on December 21, 2022, the classification of pre-petition indebtedness is generally subject to compromise pursuant to the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ businesses and assets. Among other things, the Bankruptcy Court authorized the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical vendors. The Debtors are paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Debtors may reject certain pre-petition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims.

While the Chapter 11 Cases are pending, the Debtors do not anticipate making interest payments due under their pre-petition debt instruments pursuant to the protection under the Plan. The contractual interest expense pursuant to our pre-petition debt instruments that was not recognized in our consolidated statements of operations was $19.2 million and $60.7 million for the three and nine months ended September 30, 2023, respectively.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

Reorganization items, net incurred as a result of the Chapter 11 Cases presented separately in the accompanying Consolidated Statements of Operations were as follows (in thousands):


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023		2023
Professional fees and other bankruptcy related costs	$	25,113	$	62,970
Settlements with creditors:
Priority Power	(4,878)		(4,878)
ACM ELF ST LLC Lease	(5,003)		(5,003)
Huband-Mantor Construction	8,269		8,269
Denton Lease	1,547		1,547
Other, net	4		4
Total settlements with creditors	(61)		(61)
Debtor-in-possession financing costs	3,204		15,361
Reorganization items, net	$	28,256	$	78,270

The Company has incurred and continues to incur significant costs associated with the reorganization, primarily debtor-in-possession financing costs and legal and professional fees, which were classified as Reorganization items, net subsequent to our petition.

The accompanying Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 include amounts classified as Liabilities subject to compromise, which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 Cases. These amounts represent the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process.

Liabilities subject to compromise consisted of the following (in thousands):


	September 30, 2023		December 31, 2022
Accounts payable	$	33,278	$	20,908
Accrued expenses and other current liabilities	18,136		64,493
Accounts payable, and accrued expenses and other current liabilities	$	51,414	$	85,401

Operating lease liability	$	—	$	13,868
Financing lease liability	—		70,796
Debt subject to compromise	41,775		844,695
Accrued interest on liabilities subject to compromise	664		12,553
Leases, debt and accrued interest	42,439		941,912
Liabilities subject to compromise	$	93,853	$	1,027,313

Pre-petition unsecured claims, and secured claims which ultimately may be determined to be impaired during the bankruptcy process and therefor subject to compromise, have been classified as Liabilities subject to compromise. During the quarter ended September 30, 2023, improvements in the Company’s condition and other developments indicated that secured claims which were initially considered subject to compromise at the beginning of the bankruptcy process and at December 31, 2022, were no longer likely to be subject to compromise as of September 30, 2023. This determination is the primary reason for the decrease in the Liabilities subject to compromise balance, with Court approved settlements contributing nominally to the reductions.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

Final determination of the value at which liabilities will ultimately be settled cannot be made until the Plan becomes effective and the Company emerges from bankruptcy. The Company will continue to evaluate and adjust the amount and classification of its pre-petition liabilities. Such adjustments may be material. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of Liabilities subject to compromise may change.

4. DIGITAL ASSETS

Activity related to our digital asset balances for the nine months ended September 30, 2023 and 2022 was as follows (in thousands):


	September 30, 2023		September 30, 2022
Digital assets, beginning of period	$	724	$	234,298
Digital asset mining revenue, net of receivables*	278,100		323,337
Mining proceeds from shared hosting	10,321		—
Proceeds from sales of digital assets	(287,769)		(350,795)
Gain from sales of digital assets	2,351		25,007
Impairment of digital assets	(2,864)		(212,184)
Payment of board fee	(304)		—
Digital assets, end of period	$	559	$	19,663

* As of September 30, 2023, there was $0.9 million of digital asset receivable included in prepaid expenses and other current assets on the consolidated balance sheets.

Digital assets are available to be sold as a source of funds, if needed, for current operations and are classified as current assets on the Company’s Consolidated Balance Sheets. The Company had total digital assets of $0.6 million and $0.7 million, at September 30, 2023 and December 31, 2022, respectively.

The Company does not have any off-balance sheet holdings of digital assets.

5. NOTES PAYABLE

The commencement of the Chapter 11 Cases constituted an event of default under certain of the Company's debt agreements. Any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the Chapter 11 Cases and the creditors' rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code. See Note 3 — Chapter 11 Filing and Other Related Matters for further information. The stay applies to the ability of creditors to demand accelerated payments under default provisions, as a result, the Company continues to classify its notes and leases, not subject to compromise, according to the original payment schedules.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

Notes payable as of September 30, 2023 and December 31, 2022, consist of the following (in thousands):


	Stated Interest Rate	Effective Interest Rates	Maturities	September 30, 2023		December 31, 2022
Kentucky note	5.0%	5.0%	2023	$	529	$	529



NYDIG loan	11.0% - 15.0%	11.0% - 17.0%	Various	—		38,573
Stockholder loan	10.0%	20.0%	2023	10,000		10,000
Trinity loan	11.0%	11.0%	2024	23,356		23,356
Bremer loan	5.5%	5.6%	2026	18,331		18,331
Blockfi loan	9.7% - 13.1%	10.1% - 13.1%	2023	53,913		53,913
Anchor Labs loan	12.5%	12.5%	2024	25,159		25,159
Mass Mutual Barings loans	9.8% - 13.0%	9.8% - 13.0%	2025	63,844		63,844
B. Riley Bridge Notes	7.0%	7.0%	2023	41,777		41,777
Liberty loan	10.6%	10.6%	2024	6,968		6,968
Secured Convertible Notes1	10.0%	10.0%	2025	237,584		237,584
Other Convertible Notes2	10.0%	10.0%	2025	322,396		322,396
Original DIP Credit Agreement3	10.0%	10.0%	2023	—		35,547
Replacement DIP Credit Agreement4	10.0%	10.0%	2023	17,848		—
HMC loan	—	15.0%	2026	15,500		—
ACM financing	—	15.0%	2025	7,232		—
First Insurance loan	—	7.6%	2024	4,399		—
Other				2,618		2,960
Notes payable, prior to reclassification to Liabilities subject to compromise				851,454		880,937
Less: Notes payable in Liabilities subject to compromise5				41,775		844,695
Less: Unamortized discount and debt issuance costs - post-petition				1,799		—
Total notes payable, net				807,880		36,242
Less: current maturities				128,321		36,242
Notes payable, net of current portion				$	679,559	$	—

1 Secured Convertible Notes includes principal balance at issuance and PIK interest.

2 Other Convertible Notes includes principal balance at issuance and PIK interest.

3 Original DIP Credit Agreement, see Note 3 - Chapter 11 Filing and Other Related Matters for further information.

4 Replacement DIP Credit Agreement, see Note 3 - Chapter 11 Filing and Other Related Matters for further information.

5 In connection with the Company's Chapter 11 Cases, $41.8 million and $844.7 million of outstanding notes payable have been reclassified to Liabilities subject to compromise in the Company's Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, respectively, at their expected allowed amount. Up to the Petition Date, the Company continued to accrue interest expense in relation to these reclassified debt instruments. As of September 30, 2023 and December 31, 2022, $0.7 million and $12.6 million, respectively, of accrued interest was classified as Liabilities subject to compromise.

HMC Loan - In August 2023, in addition to a cash payment of $2 million, the Company entered into a $15.5 million secured promissory note agreement with Huband-Mantor Construction, Inc (the “HMC loan”) in connection with its settlement and release from all claims. The note bears interest at a contractual rate per annum of 0% and has a term of 36 months from issuance, The Company is required to make monthly payments of principal and interest. Interest expense on the note has been recognized based on an effective interest rate of 15.0%. The loan is secured by a security interest in the underlying property leased.

ACM Financing - In September 2023, the Company entered into a $7.2 million equipment finance agreement with ACM ELF ST LLC (the “ACM Loan”) in settlement and satisfaction of a previous equipment finance agreement. The finance agreement has a term of 26 months from issuance. Interest expense on the finance agreement has been recognized based on an effective rate of 15.0%. The finance agreement is secured by a security interest in the underlying equipment.

First Insurance Loan - In August 2023, the Company entered into an unsecured $5.0 million Insurance Premium Financing Agreement with First Insurance Funding, a Division of Lake Forest Bank & Trust Company (the “First Insurance loan”) to finance the

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

renewal premium of property insurance policies. Under the agreement, a down payment was paid in the amount of $2.1 million, and the Company will pay the balance in eight monthly installments commencing on September 24, 2023. The contractual annual percentage interest rate is 0%. Interest expense on the note has been recognized based on an effective interest rate of 7.6%

On July 4, 2023, the Debtors, the Administrative Agent and the Replacement DIP Lenders entered into a First Amendment to the Replacement DIP Credit Agreement (the “First Amendment”). The First Amendment, among other things, provides (i) that the Debtors may make certain transfers or payments in connection with settlements of certain third-party claims as described in the First Amendment and (ii) for a reduction in the excess cash threshold amount to the sum of $40.0 million and an amount (which shall not be less than zero) equal to $5.0 million less the amount of any payments on account of prepetition claims, liens or cure costs made by any Obligor after June 30, 2023. This excess cash threshold amount reduction resulted in the Debtors making an additional $6.2 million mandatory prepayment under the Replacement DIP Credit Agreement on July 7, 2023.

As discussed in Note 3 — Chapter 11 Filing and Other Related Matters, under the NYDIG Order, the final shipment of miners that served as collateral under the NYDIG loan occurred during the quarter ended March 31, 2023, after which the NYDIG Loan was extinguished in full and the Company recorded a $20.8 million Gain on extinguishment of debt in the Company’s Consolidated Statements of Operations.

The principal amount of the Convertible Notes as of September 30, 2023, reflects the proceeds received plus any PIK interest added to the principal balance of the notes. Upon the closing of the merger agreement with XPDI in January 2022, the conversion price for the Convertible Notes became fixed at 80% of the financing price ($8.00 per share of common stock) and the holders now have the right to convert at any time until maturity. At maturity, any Secured Convertible Notes not converted will be owed two times the original face value plus accrued interest; any Other Convertible Notes not converted will be owed the original face value plus accrued interest. In addition, at any time (both before and after the merger with XPDI), the Company has the right to prepay the Convertible Notes at the minimum payoff of two times the outstanding principal amount plus accrued interest. All of the Convertible Notes, totaling $560.0 million as of September 30, 2023, are scheduled to mature on April 19, 2025, which includes $237.6 million for the principal amount of the Secured Convertible Notes which have payoff at maturity of two times the principal amount of the note plus accrued interest. The total amount that would be owed on the Secured Convertible Notes outstanding as of September 30, 2023, if held to maturity was $475.2 million.

6. FAIR VALUE MEASUREMENTS

Level 3 Recurring Fair Value Measurements

Securities are transferred from Level 2 to Level 3 when observable market prices for similar securities are no longer available and unobservable inputs become significant to the fair value measurement. All transfers into and out of Level 3 are assumed to occur at the beginning of the quarterly reporting period in which they occur. As of September 30, 2023 and December 31, 2022, there were no Level 3 financial instruments.

Nonrecurring fair value measurements

The Company’s non-financial assets, including digital assets, property, plant and equipment, and intangible assets are measured at estimated fair value on a nonrecurring basis. These assets are adjusted to fair value only when an impairment is recognized, or the underlying asset is held for sale. Refer to Note 2 — Summary of Significant Accounting Policies, for more information regarding fair value considerations when measuring impairment.

No non-financial assets were classified as Level 3 as of September 30, 2023, or December 31, 2022.

Fair value of financial instruments

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, net, accounts payable, notes payable and certain accrued expenses and other liabilities. The carrying amount of these financial instruments, other than notes payable discussed below, approximates fair value due to the short-term nature of these instruments.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

7. LEASES

The Company has entered into non-cancellable operating and finance leases for office, data facilities, computer and networking equipment, electrical infrastructure and office equipment, with lease periods expiring through 2035. In addition, certain leases contain bargain renewal options extending through 2051. The Company recognizes lease expense for these leases on a straight-line basis over the lease term, which includes any bargain renewal options. The Company recognizes rent expense on a straight-line basis over the lease period. In addition to minimum rent, certain leases require payment of real estate taxes, insurance, common area maintenance charges, and other executory costs. Differences between rent expense and rent paid are recognized as adjustments to operating lease right-of-use assets on the Company’s Consolidated Balance Sheets. For certain leases, the Company receives lease incentives, such as tenant improvement allowances, and records those as adjustments to operating lease right-of-use assets and operating lease liabilities on the Company’s Consolidated Balance Sheets and amortizes the lease incentives on a straight-line basis over the lease term as an adjustment to rent expense.

The components of operating and finance leases are presented on the Company’s Consolidated Balance Sheets as follows (in thousands):


	Financial statement line item	September 30, 2023		December 31, 2022
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	6,583	$	20,430
Finance lease right-of-use assets*	Property, plant and equipment, net	$	17,996	$	31,213
Liabilities:
Operating lease liabilities, current portion	Operating lease liabilities, current portion	$	205	$	769
Operating lease liabilities, net of current portion	Operating lease liabilities, net of current portion	$	1,047	$	720
Finance lease liabilities, current portion	Finance lease liabilities, current portion	$	19,833	$	—
Finance lease liabilities, net of current portion	Finance lease liabilities, net of current portion	$	35,909	$	—
Operating and finance lease liabilities subject to compromise	Liabilities subject to compromise	$	—	$	84,664

* December 31, 2022 revised to reflect the impact of the 2022 impairments of property, plant and equipment.

The components of lease expense were as follows (in thousands):


		Three Months Ended September 30,
	Financial statement line item	2023		2022
Operating lease expense	General and administrative expenses	$	77	$	589
Short-term lease expense	General and administrative expenses	161		195
Finance lease expense:
Amortization of right-of-use assets	Cost of revenue	2,580		9,040
Interest on lease liabilities	Interest expense, net	766		2,278
Total finance lease expense		3,346		11,318
Total lease expense		$	3,584	$	12,102

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements


		Nine Months Ended September 30,
	Financial statement line item	2023		2022
Operating lease expense	General and administrative expenses	$	675	$	898
Short-term lease expense	General and administrative expenses	523		671
Finance lease expense:
Amortization of right-of-use assets	Cost of revenue	9,708		27,563
Interest on lease liabilities	Interest expense, net	1,508		6,617
Total finance lease expense		11,216		34,180
Total lease expense		$	12,414	$	35,749

In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate is based on an estimated secured rate with reference to recent borrowings of similar collateral and tenure when available. Determining our incremental borrowing rate, especially if there are insufficient observable borrowings near the time of lease commencement, may require significant judgment.

Information relating to the lease term and discount rate is as follows:


	September 30, 2023		September 30, 2022
Weighted Average Remaining Lease Term (Years)
Operating leases	15.4		10.7
Finance leases	1.3		2.3
Weighted Average Discount Rate
Operating leases	7.1	%	6.5	%
Finance leases	12.9	%	12.7	%

The following tables summarize the Company’s supplemental cash flow information (in thousands):


	Nine Months Ended September 30,
	2023		2022
Lease Payments
Operating lease payments	$	499	$	474
Finance lease payments	$	3,501	$	34,287
Supplemental Noncash Information
	$	—	$	21,574
Operating lease right-of-use assets obtained in exchange for lease obligations1	$	—	$	10,557
(Decrease) increase in finance lease right-of-use assets as a result of lease modification	$	(11,644)	$	693
Decrease in ROU related due to termination	$	13,144	$	—
Decrease in lease liability due to termination	$	(13,517)	$	—

1Includes operating lease right-of-use assets of $6.7 million that were recorded upon adoption of Topic 842 on January 1, 2022.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

The Company’s minimum payments under noncancelable operating and finance leases having initial terms and bargain renewal periods in excess of one year are as follows at September 30, 2023, and thereafter (in thousands):


	Operating leases		Finance leases
Remaining 2023	$	272	$	26,173
2024	170		30,950
2025	170		1,863
2026	170		3
2027	170		—
Thereafter	1,252		—
Total lease payments	2,204		58,989
Less: imputed interest	952		3,247

Total	$	1,252	$	55,742

Balance Sheet Classification

As discussed in 5 — Notes Payable, in October 2022, the Company determined not to make certain payments with respect to several of its debt facilities, equipment financing facilities and leases and other financings, including its two bridge promissory notes. As a result, the creditors under these debt facilities may exercise remedies following any applicable grace periods (which have passed) and pursuant to any confirmed plan of reorganization, including electing to accelerate the principal amount of such debt, suing the Company for nonpayment, increasing interest rates to default rates, or taking action with respect to collateral, where applicable. Remedies available under these debt facilities are stayed while the Company is under Chapter 11 protections.

8. COMMITMENTS AND CONTINGENCIES

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.

Effect of Automatic Stay

Subject to certain exceptions under the Bankruptcy Code, the filing of the Company Parties’ Chapter 11 Cases automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

Celsius filed the Celsius Chapter 11 Cases in the United States Bankruptcy Court for the Southern District of New York under the Bankruptcy Code. Celsius was one of the Company’s largest host-mining customers in July 2022. Prior to the Celsius Chapter 11 Cases, Celsius paid the Company certain PPT Charges invoiced to Celsius pursuant to the Master Services Agreements between Celsius and the Company (the “Celsius Contracts”). After commencing the Celsius Chapter 11 Cases, Celsius refused to pay all PPT Charges the Company invoiced to Celsius; Celsius and the Company filed competing motions, pleadings, and proofs of claims and engaged in protracted litigation, discovery, and mediation.

On September 14, 2023, the Debtors and Celsius entered into a 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 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

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

on other properties owned or leased by Celsius similar in type and scope to the Cedarvale Facility, and (z) operate all of the foregoing, (iii) assumption and assignment to Celsius of certain executory contracts,. In connection with the PSA the parties released and (iv) unequivocally release claims against Celsius asserted by the Company in connection with the Celsius Chapter 11 Cases and the Company’s Chapter 11 Cases. On November 2, 2023, the Company received the payment of $14.0 million from Celsius in connection with the PSA.

In November 2022, Sphere 3D Corp. filed a demand for arbitration with JAMS alleging the existence and breach of a contract for hosting services. The arbitration demand alleges that the Company has failed to provide contracted for services and to return prepayments allegedly made by Sphere 3D for such services. The arbitration demand was stayed by the filing of the Company Parties’ Chapter 11 Cases. Refer to the discussion contained within this footnote under the subtitle “Effect of Automatic Stay.”

In April 2023, Sphere 3D Corp. filed a proof of claim against the Debtors in the Chapter 11 Cases alleging a claim for approximately $39.5 million allegedly pursuant to a contract for services as to which the Debtors were allegedly a party and failed to perform and other claims related thereto. The Debtors have objected to Sphere 3D Corp.’s proof of claim and intends to contest the entirety of the claim in the Chapter 11 Cases. A hearing on the matter is expected during the first quarter of 2024.

In November 2022, McCarthy Building Companies, Inc. filed a complaint against the Company in the United States District Court for the Eastern District of Texas, alleging breach of contract for failing to pay when due certain payments allegedly owing under a contract for construction entered into between the parties. The case has been stayed as a result of the Company’s filing of a petition for relief under chapter 11 of the United States Bankruptcy Code.

In November 2022, plaintiff Mei Peng filed a putative class action (the “Putative Class Action”) in the United States District Court, Western District of Texas, Austin Division, asserting that the Company violated the Securities Exchange Act of 1934, as amended, by failing to disclose to investors, among other things, that the Company was vulnerable to litigation, that certain clients had breached their agreements, and that this impacted the Company's profitability and ability to continue as a going concern. On May 5, 2023, plaintiff filed an amended complaint removing the Company as a defendant and asserting that certain officers, directors and former officers and directors of the Company violated the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, as a result of allegedly false and misleading statements regarding the business of the Company. In April 2023, the lead plaintiff in the matter filed a proof of claim related to the Putative Class Action filed against the Debtors in the Chapter 11 Cases and in August 2023 filed an amended proof of claim to reflect an amendment to the Putative Class Action reserving the right to add Core Scientific as a defendant following the conclusion of the Chapter 11 Cases. In September the lead plaintiff filed a motion with the Bankruptcy Court requesting the grant of (i) class treatment, (ii) certification of the class for purposes of its class proof of claim, and (iii) other relief. The Debtors timely filed its objection and support objecting to the relief requested and the stated basis for the relief requested.

In September 2023 Harlin Dean filed a proof of claim against the Debtors in the Chapter 11 Cases seeking to recover approximately $8 million in severance pay and hypothetical proceeds from the sale of Company stock allegedly due following his resignation from the Company in 2022. The Debtors timely filed an objection to Mr. Dean’s proof of claim denying any obligation to Mr. Dean resulting from his resignation of employment and requesting disallowance of the proof of claim. In October 2023, Mr. Dean filed a Motion for Summary Judgment with respect to his claims. The Debtors intend to respond timely to the motion and vigorously contest the claims.

As of September 30, 2023 and December 31, 2022, there were no other material loss contingency accruals for legal matters.

Leases—See Note 7 — Leases for further information.

9. STOCKHOLDERS' DEFICIT

Stock-Based Compensation

Stock-based compensation expense relates primarily to expense for restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock options. As of September 30, 2023, we had unvested or unexercised stock-based awards outstanding representing approximately 60.7 million shares of our common stock, consisting of approximately 38.6 million RSAs and RSUs with a weighted

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

average per share fair value of $2.74, and options to purchase approximately 22.0 million shares of our common stock with a weighted average exercise price of $8.81.

During the three and nine months ended September 30, 2023, the Company did not grant any stock options, RSUs or RSAs.

During the three and nine months ended September 30, 2023, nil and 1.9 million stock options were cancelled, respectively, and 1.3 million and 6.6 million RSAs and RSUs were forfeited, respectively.

Stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022, is included in the Company’s Consolidated Statements of Operations as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of revenue	$	1,503	$	4,366	$	3,607	$	23,287
Research and development	334		5,210		1,144		20,269
Sales and marketing	517		(720)		1,561		8,870
General and administrative1,2	12,507		20,897		35,102		114,122
Total stock-based compensation expense1,2	$	14,861	$	29,753	$	41,414	$	166,548

1 Includes $(0.1) million and $0.6 million that was recorded as an adjustment to accrued expenses and other within total current liabilities during the three and nine months ended September 30, 2022, respectively.

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

As of September 30, 2023, total unrecognized stock-based compensation expense related to unvested stock options was approximately $62.6 million, which is expected to be recognized over a weighted average time period of 2.3 years. As of September 30, 2023, the Company had approximately $50.8 million of unrecognized stock-based compensation expense related to RSAs and RSUs, which is expected to be recognized over a weighted average time period of 2.3 years, and an additional $13.1 million of unrecognized stock-based compensation expense related to RSUs for which some or all of the requisite service had been provided under the service conditions but had performance conditions that had not yet been achieved.

10. INCOME TAXES

Current income tax expense represents the amount expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.

The income tax expense and effective income tax rate for the three and nine months ended September 30, 2023 and 2022 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
	(in thousands, except percentages)
Income tax expense	$	114		$	10,642		$	347		$	4,398
Effective income tax rate	(0.3)		%	(2.5)		%	(0.7)		%	(0.3)		%

For the nine months ended September 30, 2023, the Company recorded $0.3 million of income tax expense which consisted of discrete state taxes. The Company's estimated annual effective income tax rate without consideration of discrete items is 0.0%, compared to the U.S. federal statutory rate of 21.0% due to projected changes in the valuation allowance 2.3%, state taxes (0.4)%, non-deductible transaction costs (22.8)% and other items (0.1)%. The Company has a full valuation allowance on its net deferred tax asset as the evidence indicates that it is not more likely than not expected to realize such asset.

Core Scientific, Inc.

(Debtor-in-Possession)

Notes to Unaudited Consolidated Financial Statements

For the nine months ended September 30, 2022, the Company recorded $4.4 million of income tax expense, which included a discrete tax expense of $9.1 million related to stock-based compensation and an increase in the valuation allowance on a capital loss. The Company’s estimated annual effective income tax rate was (0.3)%, compared to the U.S. federal statutory rate of 21.0% due to a goodwill impairment (12.2)%, change in valuation allowance (6.7)%, state taxes 0.8%, non-deductible interest (0.6)%, and other items (2.5)%.

11. NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(41,146)	$	(434,792)	$	(50,794)	$	(1,711,471)

Weighted average shares outstanding - basic	382,483		354,195		378,107		318,169
Add: Dilutive share-based compensation awards	—		—		—

Form: 10-Q

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