Core Scientific, Inc.

Good afternoon, ladies and gentlemen, and welcome to Core Scientific's first quarter fiscal year 2022 earnings call. This is Stephen Gitlin, Senior Vice President of Investor Relations for Core Scientific. At this time, all participants are in a listen-only mode. We will conduct a question and answer session after management's remarks. As a reminder, this conference is being recorded for replay purposes. Before we begin, please note that on this call, certain information presented contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forelooking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as believe, anticipate, expect, estimate, intend, project, plan, or words or phrases with similar meaning. Forelooking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties, including but not limited to economic, competitive, governmental, and technological factors outside of our control that may cause our business strategy or actual results to differ materially from the forward-looking statements. For further information on these risks, we encourage you to review the risk factors discussed in Core Scientific's periodic reports on Form 10-K and Form 10-Q filed with the SEC, and the Form 8-K filed today with the SEC, along with the associated earnings release and the safe harbor statement contained therein. This afternoon, we also filed a slide presentation with our earnings release and posted the presentation on our website at CoreScientific.com in the events and presentation section. The content of this conference call contains time-sensitive information that is accurate only as of today, May 12, 2022. The company undertakes no obligation to make any revision to any forwarding statement contained in our remarks today or to update them to reflect the events or circumstances occurring after this conference call. Joining me today from Core Scientific, our Chief Executive Officer, Mr. Mike Levin, and Chief Financial Officer, Mrs. Denise Sterling. We will now begin with remarks from Mike Levin. Mike?

Thank you, Steve. On behalf of our nearly 300 employees who work in our corporate headquarters and data centers around the country, welcome to today's first quarter 2022 earnings conference call. Before we review first quarter results, I'd like to comment briefly on current market conditions. Our founders and many of our colleagues have been immersed in the digital asset space for a decade or more. We've experienced cycles of volatility in our industry before, and we believe that we are still in the early phase of digital asset adoption. Current financial market conditions do not impact our view of the long-term opportunity or our focus on execution. However, market conditions are slowing the flow and limiting the availability of outside capital required to fund our industry. We cannot control the price of Bitcoin or other digital assets or the sentiment of the equity markets, but we can control our execution, our focus, and our ability to create value over the long term for our shareholders. Core Scientific remains a leading operator of digital asset data centers in North America. We self-mined 3,202 Bitcoins in the first quarter, as illustrated on slide five of our earnings presentation, representing more than the second and third largest miners combined. Last week, we announced that we also mined 1,121 bitcoins in April for an average of 37.4 bitcoins a day. Again, more than any other public miner. At quarter end, we operated a total of 16.2 exahash in our five data centers. And by the end of April, 17 exahash across our self-mining and hosting businesses. As of April 30, we held 9,618 bitcoins today. More significantly, we now hold more than 10,000 self-mined Bitcoins on our balance sheet. No other public U.S. company has achieved that milestone. We have a world-class team. To provide a summary of our first quarter financial performance, I'm pleased to introduce our CFO, Denise Sterling. We recently promoted Denise to CFO and she has already had a tremendous positive impact on our organization. Denise brings invaluable experience to us from senior leadership roles held over her more than 20 years at Visa. After Denise's comments, I will return to discuss a few additional subjects. At the conclusion of my remarks, we will take your questions. Over to you, Denise.

Thank you, Mike. I am honored to join you today and look forward to meeting our shareholders and the analysts who cover Core Scientific. I'll start with a high-level overview of our first quarter financials summarized on slide six. In the quarter, we generated revenue of $192.5 million, an increase of 255% over first quarter 2021. We recorded a net loss in the quarter of $466.2 million. Importantly, this loss was driven primarily by three items. Two non-cash mark-to-market adjustments as accounting rules require us to revalue private securities we issued as well as digital assets we produced. at a different level than their original value, and stock-based compensation. We highlight these effects on slide 7. The first adjustment is a $386 million increase in the value of our private market convertible notes we issued in 2021. This increase creates a non-cash reduction in our net income and, as suggested, requires us to remeasure the value each quarter. The second adjustment is a $54 million reduction in the value of our digital assets, which correspondingly increases our quarterly expenses. Accounting standards require us to record an impairment each quarter when they value our digital assets decline. This represents a decline in our value from the price that we had originally mined each asset. Unfortunately, these rules do not permit us to mark these digital assets up when their values rise. And last, stock-based compensation in the quarter totaled $25.8 million, and these represent employee stock options that previously were issued and have now begun to vest. Excluding these and a few other non-operating items, adjusted EBITDA for the quarter was $93 million, an increase of 644% over the prior year. Operationally, we continue to expand our total hash rate from 13.5 exahash at the end of 2021 to 16.2 exahash at the end of March, and further to 17 exahash in April. Revenue by segment, highlighted on slide eight of our earnings presentation, is as follows. Digital asset mining revenue of 133 million, or 69% of total revenue, hosting revenue of 33.2 million, or 17%, and equipment sales of 26.3 million, or 14% of revenue. The increase in digital asset revenue in the quarter was driven by an increase in our self-mining hash rate from 0.4 exahash at the end of the first quarter of 2021 to 8.3 exahash at the end of the first quarter of 2022. The increase in hash rate resulted from our investments in data centers as well as new miners. Hosting revenue increased by 162% year-over-year as a result of contract renewals for existing customers and new customers filling available hosting capacity as we brought it online. The 18% year-over-year decline in equipment sales is consistent with our expectations for 2022 and our previous guidance. As a reminder, self-mining and hosting revenue will represent an increasing share of our revenue going forward. Cost of revenue of $122.5 million increased by $82.8 million from the first quarter of 2021. This increase was primarily attributable to two factors. The first was because we continue to expand our mining fleet. The depreciation expense associated with the larger fleet increased, and second, As the self-mining and hosting fleet has increased also, the consumption, it has also increased the consumption of electricity. Additionally, we previously indicated our average cost of electricity has risen by approximately 15 to 20% over prior assumptions for 2022. We expect our all-in average price per kilowatt hour across our entire fleet this year to be in the neighborhood of about four to four and a half cents. Turning to operating expenses, first quarter research and development expenses totaled $3.3 million, an increase of approximately 176% over the first quarter 2021, driven by higher stock-based compensation and an increase in project-related professional fees. Sales and marketing and general and administrative expenses totaled $41.6 million, a nine-fold increase over 2021. The increase was largely driven by higher stock-based compensation and increased marketing activity as we slowly began to ramp up again with the emergence from COVID. Note that we now allocate stock-based compensation to each category as opposed to recording it all in G&A expense. Non-operating expenses, including the convertible note valuation mentioned earlier, Also, interest expense lost on debt from extinguishment and other non-operating expenses net totaled 397.1 million, an increase of 394.9 million from 2021. And net loss for the quarter was 466.2 million as compared to net income of 6.8 million in the prior year. Again, this loss was primarily driven by non-cash valuation adjustments to our convertible notes and digital assets held as well as stock-based compensation. First quarter 2022 adjusted EBITDA was $93.0 million, an increase of $80.5 million from 2021. Loss per fully diluted share was $1.52 and adjusted earnings per fully diluted share was $0.31. Now let's look at the balance sheet and cash flow. As of March 31, 2022, we held 8,497 bitcoins with a carrying value of 307.2 million, net of accounting valuation adjustments. Total cash, cash equivalents and restricted cash was 110.4 million at the end of the first quarter. Cash dues in operating activities and investing activities totaled 3.6 million and 269.1 million respectively, and cash provided by financing activities was 251.5 million dollars. As of the end of our first quarter of 2022, we had outstanding agreements to purchase diesel asset mining equipment, totaling approximately $391 million, of which $256.2 million was paid as deposits for equipment to be scheduled to be delivered in 2022. This left a balance of $134.8 million for miners to be delivered in 2022. Now, I will hand the call back to Mike.