Core Scientific, Inc.

Good afternoon, ladies and gentlemen, and welcome to Core Scientific's second 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. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. They may contain words such as believe, anticipate, expect, estimate, intend, project, plan, or words or phrases with similar meaning. Forward-looking 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're also filing a slide presentation with our earnings release, and we're posting the presentation on our website at CoreScientific.com in the events and presentations section. The content of this conference call contains time-sensitive information that is only accurate as of today, August 11, 2022. The company undertakes no obligation to make any revisions or any forward-looking statements 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 begin with remarks from Mike Levin.

Mike? Thank you, Steve. On behalf of our entire team, welcome to today's second quarter 2022 earnings conference call. On today's call, we'll provide highlights from our second quarter, discuss our financial performance, comment on current market conditions, and provide thoughts on how we're structuring our company for long-term success. Core Scientific operates more Bitcoin mining servers in our facilities than any other public company in the United States. We have eight data centers operating in five states and expect to be in operation at our ninth data center in Oklahoma within the next few quarters. Our purpose-built, company-owned data centers now hold over 200,000 servers in approximately 800,000 square feet. By year end, we expect to be operating approximately 300,000 servers, of which more than half will be for our own self-mining operations in over 1 million square feet. I will discuss our future plans in more detail later in this call, but first, I'd like to introduce my colleague and our CFO, Denise Sterling, to discuss our financial highlights.

Thank you, Mike, and good afternoon. I will review results for second quarter as compared to the same period one year. Total revenue consisting of self-mining, hosting, and equipment sales increased by 118% to $164 million from $75.3 million, primarily by an increase in our self-mining revenue. The total number of Bitcoin produced in the second quarter was 3,365 compared to 180 for the three months ended June 30th, 2021. The average price of Bitcoin was 32.5 thousand, a decrease of 30% as compared to 46.5 thousand for the three months ended June 30th of 2021. Total hosting revenue increased by 110% to 38.9 million. Equipment sales for the quarter decreased by 90% to $30.5 million as the majority of our hosting customers now purchase their miners directly from manufacturers for deployments in our data centers. Cost of revenue increased by $100.5 million to $151.3 million. The increase was primarily attributable to an increase in our number of self-mining and hosted servers operating in our facilities. Power consumption increased by $45.9 million Depreciation rose by 46.3 million, and personnel and related expenses and facilities cost increased by 25.8 million. Related expenses included stock-based compensation of 16.9 million. The increases were offset by a decline in equipment sales of 17.6 million. Cost of revenue for the three months ended June 30, 2022, included depreciation expense of 49.1 million, of which 46.5 million was from the self-mining segment. For the three months ended June 30th, 2021, cost of revenue included depreciation expense of 2.8 million, of which 0.9 million was for self-mining segment. With increases in energy prices generally, we expect our average power price for the year to now come in at about 5 to 5.5 cents per kilowatt hour. Prices do move around seasonally, and the extreme heat across the South has impacted our pricing for the second quarter and will continue to do so in the third quarter. Gain from the sales of our digital assets was $11.8 million for the three months ended June 30th of 2022, resulting from a total sales price of our digital assets sold of $265.8 million versus the carrying value of $254.0 million. Consistent with prior quarters, we recorded several non-cash accounting entries in the second quarter of 2020, including the impairment of digital assets, impairment of goodwill, a fair value adjustment to our convertible notes, and stock-based compensation. Impairment of digital assets increased by $150.2 million for the second quarter as a result of a decline in the price of Bitcoin. An impairment is recorded when the carrying value of our digital assets exceed their fair value based on current market pricing. We recorded a goodwill impairment of approximately $840 million due to a revaluation of our assets, resulting from the sustained decline in Bitcoin price, a decline in the market capitalization of public Bitcoin mining companies, including Core Scientific, and the uncertain outlook for our industry. We recorded a favorable non-cash fair value adjustment to our convertible notes of 195 million due to a decrease in their value resulting from the decline in our stock price. We will continue to mark to market our convertible notes each quarter. Total operating expenses increased by 106.9 million to 115.9 million. This increase was primarily driven by 92 million of stock-based compensation representing 86% of the total increase. This resulted from the removal of the IPO transaction trigger from outstanding RSU awards that had previously met the time-vesting requirement. In order to ensure we are well-positioned to achieve our objectives, we have taken a disciplined approach to reducing operating expense growth. We have eliminated the majority of our discretionary expenses, reduced headcount by 10%, renegotiated vendor contracts, and right-sized the organization to focus on our core business. We now expect our operating expenses in the second half of the year to be 25% lower compared to the first half of the year. Net loss of 861.7 million decreased by 858.3 million from a net loss of 3.4 million. The increase in net loss was primarily driven by the non-cash items I spoke about earlier. Adjusted EBITDA increased by $38.3 million to $59.1 million. The increase was driven primarily by increased revenue of $88.7 million, offset by higher cost of revenue excluding depreciation and stock-based compensation of $37.3 million, and increased operating expenses of $13 million excluding stock-based compensation. Adjusted EPS for the quarter ended June 30th, 2022, was 18 cents per share. Our total cash position at June 30th, 2022, including cash, cash equivalents, and restricted cash, was 140.5 million, a year-to-date increase of approximately 8.8 million. The primary drivers of this change included inflows from operations of 151.9 million and proceeds from borrowing of 415.1 million. These sources of cash were partially offset by cash outflows for infrastructure costs to build our purpose-built data centers of $238.5 million, payments to vendors for our ASIC servers of $217.7 million, interest and principal payments on our outstanding debt of $72.7 million, and payment of tax obligations for vesting of employee RSUs of $29.3 million. By net settling our RSUs, we reduced our outstanding share count by approximately 14 million shares. In order to better understand our self-mining business, cost structure, and break-even price for producing Bitcoin, we are introducing a metric that we call cash to mine. It produces a view of the marginal cash cost to mine a single Bitcoin and represents the cash-based components of cost of revenue divided by the number of Bitcoin mined for the period. There are two cash-based components of this calculation. The first is our power cost, which is based on price per kilowatt hour. The second is our data center cash-based operating cost, which include the expenses required to operate, maintain, and secure our data centers, including personnel and related expenses and facilities cost. These two components are included as part of our total cost of revenue. As the metric is cash-based, it does not include expenses such as stock-based compensation or depreciation. For the first half of 2022, our power cost per Bitcoin was approximately $8,500, and our data center operating costs were approximately $1,700. As such, our cash to mine of Bitcoin for the first half of 2022 was approximately $10,200. We expect our cash to mine of Bitcoin to vary quarter by quarter, primarily based on fluctuations in power costs and global hash rate. Now, I would like to turn the call back over to Mike.