Core Scientific, Inc. (NASDAQ: CORZ), an operator of data centers used by customers in the blockchain and cryptocurrency mining sector, made voluntary Chapter 11 filings in the United States Bankruptcy Court for the Southern District of Texas (Houston Division).
Core Scientific’s Chapter 11 bankruptcy filing involves over $1 billion of total debt obligations and was triggered by the company’s deteriorating financial performance, power prices, the Chapter 11 filing of Celsius Mining, overcommitments for construction, equipment financing, and a cross default.
Of Core Scientific’s more than $1 billion of total debt, the company owes over $985 million in secured obligations, which include convertible notes and equipment financing. Additionally, Core Scientific’s largest unsecured obligation from a single creditor is a $42.4 million unliquidated claim from B. Riley Financial related to financing, in the form of unsecured bridge notes.
In terms of equity ownership, Core Scientific lists its key shareholders as Darin Feinstein (Chief Vision Officer and Co-Chair of the Board) who has an 8.21% equity interest, Matt Minnis (member of the Board) who has a 5.69% equity interest, and Michael Levitt (Co-Chairman and CEO) who has a 5.03% equity interest.
What Events Led to Core Scientific’s Bankruptcy Filing?
Core Scientific’s liquidity crisis and subsequent Chapter 11 bankruptcy filing was driven by 6 main factors: its worsening financial performance, power prices, the Chapter 11 filing of Celsius Mining, overcommitments for construction, equipment financing, and a cross default.
At the same time, Core Scientific was unable to access the capital markets after October 2022, to raise equity for additional liquidity, due to the industry deteriorating, as well as its own stock price. To this end, after Core Scientific announced in an SEC filing that it was exploring a potential restructuring and would not make certain debt payments, the company’s stock price fell from ~$1.00 per share to under $0.15 per share, representing a market capitalization of ~$50 million.
Below are further details on the 6 main factors that rendered Core Scientific’s capital structure and debt burden unsustainable, as well as significantly affected the company’s liquidity position:
1) Financial Performance
Core Scientific’s financial performance has been drastically impacted by the precipitous and prolonged decline in the price of Bitcoin during the so-called “crypto winter” that began in the spring of 2022. More specifically, the price of Bitcoin declined from an all-time high of $68,789 in November 2021, continued declining throughout most of 2022, and as of December 21, 2022, the price of Bitcoin had dropped to ~$16,800. Expressed differently, year-to-date, the price of Bitcoin has fallen by ~65%.
Additionally, the decrease in Bitcoin prices has been accompanied by an increase in network difficulty resulting from increased network “hash rates” – or the measure of computational power active on a particular blockchain network – resulting in reduced revenues and profitability for Bitcoin miners.
As such, Core Scientific realized a net loss of $434.8 million for the three months ending September 30, 2022, as compared to a net loss of only $16.6 million in the three months ending September 30, 2021.
2) Power Prices
Core Scientific is a Bitcoin mining company that is heavily dependent on power to operate its data centers and the miners, which support its self-mining and hosting operations. Prior to 2021, in-line with natural gas prices, Core Scientific’s power costs were relatively low. However, beginning in the spring of 2022, fossil fuel prices – especially natural gas prices – increased due to Russia’s invasion of Ukraine and increasing fuel usage in many countries, among other factors.
Between July 2022 and September 2022, significantly higher energy prices, inflation, and supply chain disruptions increased Core Scientific’s electricity costs, and together with delays in facility development and miner deployments, reduced profits. Due to requests by power providers to curtail usage at certain of the company’s facilities, it became necessary for Core Scientific to limit its power usage more frequently.
During the first-half of 2022, Core Scientific’s power costs totaled ~$106 million, comprising ~40% of its cost of revenue. Due to the company’s reliance on high volumes of power consumption at its data centers, the recent steep increase in power costs have negatively impacted Core Scientific’s margins and, as a result, its liquidity position.
3) Chapter 11 Filing of Celsius Mining
Celsius Mining LLC, a subsidiary of Celsius Network, which made its own Chapter 11 bankruptcy filing in July 2022, is one of Core Scientific’s largest hosting customers, owning ~37,536 miners hosted by Core Scientific. Adversely, Celsius has failed to perform on its hosting contract with Core Scientific, and the resulting ongoing litigation with Celsius has strained Core Scientific’s financial position.
Core Scientific provides hosting services to Celsius as part of two master services agreements (MSAs) through which Core Scientific may pass through any tariffs (power costs) to Celsius, which is a standard provision in all of the company’s hosting contracts.
However, Celsius claims it is not responsible for paying increased power costs and has refused to pay all “power pass through” charges that have been invoiced following its own Chapter 11 bankruptcy filing. By doing so, Celsius has forced Core Scientific to accept millions of dollars of increased power costs onto its own balance sheet, instead of Celsius’. In total, Celsius owes Core Scientific ~$7 million in unpaid amounts.
Core Scientific continues to lose ~$29,000 per day, or around $900,000 a month, to cover the increased electricity tariffs that Celsius refuses to pay since Celsius filed for chapter 11 protection.
4) Overcommitments for Construction
Core Scientific significantly overcommitted for construction costs to build-out additional mining capacity. As of December 21, 2022, Core Scientific was committed on over $200 million in construction costs, while contractors had asserted more than $70 million in past due invoices and asserted mechanics liens.
As an example, Core Scientific’s Denton, Texas facility expansion is anticipated to cost an incremental ~$40 million, inclusive of past due invoices and power deposits. The Denton, Texas expansion would add an incremental 172 megawatts of capacity, which implies a cost to build of ~$200,000 per megawatt (excluding power deposits). Following completion of the expansion, Core Scientific’s Denton, Texas capacity would total 297 megawatts.
5) Equipment Financing
Core Scientific’s equipment financing was made when the price of Bitcoin was significantly higher than it is today and the theoretical payoff on miners was significantly faster.
As of December 21, 2022, Core Scientific was indebted on ~$275 million of equipment financing, and they were not making payments on significant amounts of equipment financing. This equipment financing is largely undersecured, and Core Scientific believes that the value of the collateral securing the equipment may be $90 million or less. Therefore, the collateral securing the equipment is worth ~$185 million less in value than the indebtedness from the equipment financing.
Core Scientific’s secured mining equipment financing and equipment lease arrangements are with lenders including Mass Mutual, Barings (Barings BDC, Barings Capital Investment Corp., and Barings Private Credit Corp.), BlockFi, NYDIG, Stonebriar Commercial Finance, Liberty Commercial Finance, Atalaya Capital Management, 36th Street Capital, Anchorage Digital, and Trinity Capital.
6) Cross Default
As Core Scientific’s liquidity waned, one of its equipment lenders accelerated the debt it was owed, which caused a cross default to Core Scientific’s secured convertible notes, which have a principal balance of over $550 million.
Next Steps for Core Scientific
As of December 21, 2022, Core Scientific’s liquidity is extremely limited, with the company holding only $4 million in cash on hand. Moreover, Core Scientific’s projected operating expenses are expected to total ~$60 million over the first 4 weeks of its Chapter 11 bankruptcy process.
Through the Chapter 11 bankruptcy process, Core Scientific has signed a restructuring support agreement (RSA) that will reduce the company’s funded indebtedness by hundreds of millions of dollars and reduce the company’s interest expenses by tens of millions of dollars annually.
The restructuring contemplates a debt-for-equity swap whereby Core Scientific’s convertible notes will be exchanged for 97% of the equity in the reorganized company. Core Scientific has also secured $75 million of debtor-in-possession (DIP) financing from the Ad Hoc Noteholder Group, which comprises more than 50% of the holders of Core Scientific’s convertible notes.
Ultimately, Core Scientific is seeking to emerge from Chapter 11 bankruptcy as a reorganized and stronger enterprise with a new capital structure. Furthermore, during the Chapter 11 bankruptcy process and upon emergence, the company will continue to operate its existing self-mining and hosting operations, which remain significantly cash flow positive on a debt-free basis.
Company Overview – Core Scientific
Core Scientific was founded in December 2017 and is headquartered in Austin, Texas. The company is one of the largest blockchain infrastructure, hosting provider, and digital asset mining companies in North America.
Core Scientific operates large-scale, purpose-built facilities for digital asset mining and colocation services in the United States and provides blockchain infrastructure, software solutions, and services. Additionally, the company mines digital assets for its own account (Self-Mining) and provides hosting colocation services for third-party large-scale miners (Hosting Operations).
Presently, Core Scientific employs 330 people, of which 266 are full-time employees and 64 are part-time employees.
On July 30, 2021, Core Scientific acquired 100% of the equity in one of its largest customers, Blockcap, Inc., a blockchain technology company with digital asset mining operations, primarily for Bitcoin. The acquisition of Blockcap significantly expanded Core Scientific’s self-mining operations and increased the number of miners it owned.
On January 20, 2022, Core Scientific completed a merger with Power & Digital Infrastructure Acquisition Corp. (NASDAQ: XPDI), a special purpose acquisition company (SPAC), and began trading as a public company under the ticker NASDAQ: CORZ. This transaction resulted in Core Scientific receiving ~$195 million in net cash proceeds, which it used to fund mining equipment purchases and infrastructure build-out.
Data Centers – Core Scientific
Core Scientific has 8 operational data centers with 814 megawatts of aggregate capacity across 1.125 million square feet in Georgia (2), Kentucky, North Carolina (2), North Dakota, and Texas (2).
Additionally, Core Scientific has another 2 data centers, which are not operational, located in Texas and Oklahoma. Below is a summary of the company’s 10 operational and non-operational facilities:
|Marble, North Carolina (Marble 1)||Owned||35 MW||200,000|
|Marble, North Carolina (Marble 2)||Owned||69 MW||50,000|
|Dalton, Georgia (Dalton Green)||Leased||142 MW||100,000|
|Dalton, Georgia (Dalton Brown)||Leased||53 MW||200,000|
|Calvert City, Kentucky||Owned||150 MW||60,000|
|Grand Forks, North Dakota (Prairie Site)||Leased||100 MW||90,000|
|Denton, Texas||Leased||125 MW||300,000|
|Pecos, Texas (Cottonwood)||Leased||140 MW||125,000|
|Operational – Total||—||814 MW||1,125,000|
|Barstow, Texas (Cedarvale)||Owned||22 MW||5,000|
|Muskogee, Oklahoma||Owned||0 MW||525,000|
|Operational + Not in Use – Total||—||836 MW||1,655,000|
Core Scientific’s data centers house its own and its customers’ cryptocurrency miners. The data centers are constructed with the technological specifications and capabilities necessary to generate the computing power required for the operation of its miners.
Business Segments – Core Scientific
Core Scientific’s primary business segments and sources of revenue are produced from its Self-Mining and Hosting Operations:
Core Scientific’s Self-Mining segment consists of mining digital currency assets utilizing owned and leased computer equipment (miners) to process transactions conducted on one or more blockchain networks in exchange for transaction processing fees awarded in digital currency assets. The company generates revenue in this segment through the sale of Bitcoin mined by its owned and leased mining machines.
Core Scientific has participated in Self-Mining since its inception. The company’s share of owned miners (or self-miners) versus hosted miners at its data centers has grown substantially, from ~10% in 2020 to ~60% today, in-part due to the Blockcap acquisition in July 2021. Almost all of Core Scientific’s miners are produced by Bitmain Technologies.
Core Scientific has ~150,000 Bitcoin self-miner rigs operational, through which it mines 45 Bitcoin per day, on average. Furthermore, the company anticipates incremental deployments of ~30,000 self-miners through April 2023. Importantly, any costs related to miners to-be-delivered are limited to shipping and customs, as Core Scientific will be able to utilize credits / pre-payments in order to fund the actual costs of the miners.
Presently, Core Scientific converts their mined Bitcoin into U.S. dollars on a regular basis, generally within 2.5 days of mining. Consequently, the company currently does not hold large amounts of Bitcoin on its balance sheet at any given time. As of December 21, 2022, Core Scientific holds ~50 Bitcoin, equivalent to ~$840,000 U.S. dollars at today’s exchange rate.
Core Scientific’s Hosting Operations segment consists of providing colocation and hosting services to customers’ miners by owning and operating data center facilities in the United States. The company generates revenue in this segment through hosting customers’ miners at the company’s data centers.
Since 2017, Core Scientific has positioned itself as a premium provider of hosting services to third-party miners, with high-quality facilities that deliver the optimal operating environment for consistent performance. The company’s data centers include on-site technicians available 24/7 for repair, adding value to Core Scientific’s customers by prolonging the life of the mining equipment.
Core Scientific uses custom software to manage GPU and ASIC miners remotely, which allows for real-time performance monitoring, historical data analysis, deployment tracking, and instant adjustment of voltage draws. Customers can take advantage of high uptime percentage – despite slightly higher hosting price with Core Scientific – by producing additional Bitcoin.
Overall, Core Scientific focuses on serving larger customers, generally with greater than 1,000 miners. These larger, professionally-managed customers benefit more from Core Scientific’s hosting value proposition (i.e., high uptime and software solutions) and are more likely to be generating consistent cash flow for the company. Presently, Core Scientific’s data centers host over 85,000 miners on behalf of ~15 customers.
Customer Base – Hosting Operations – Core Scientific
|Customer 2||5,000 to 10,000||10 to 50|
|Customer 3||5,000 to 10,000||10 to 50|
|Customer 4||5,000 to 10,000||10 to 50|
|Customer 5||250 to 5,000||1 to 10|
|Customer 6||250 to 5,000||1 to 10|
|Customer 7||250 to 5,000||1 to 10|
|Customer 8||250 to 5,000||1 to 10|
In 2020, access to mining equipment was limited for a variety of reasons. Core Scientific’s relationship with a key OEM (Bitmain) allowed it to provide third-parties with access to miners. The company was able to sell hardware “bundled” with hosting capabilities, bringing cash upfront via equipment sales.
While hosting contracts were not particularly profitable, margins were subsidized by profits earned upon upfront sale of miners to third-parties. The proceeds from the bundled hardware sales and prepayments on the hosting contracts helped Core Scientific to further build-out its data centers to provide additional capacity for its own miners, as well as for hosted miners for its Hosting Operations.
Bitmain has since opened a U.S. office to sell directly to customers, such as Core Scientific’s existing customers. Because of these developments, while Core Scientific historically earned revenue from equipment sales, as part of its revised business plan, the company has shifted away from equipment sales.
Chapter 11 Bankruptcy Advisors and Entities – Core Scientific
Below are the advisors and entities involved in Core Scientific’s Chapter 11 bankruptcy filing and process:
Core Scientific’s investment banker is PJT Partners, financial advisor is AlixPartners, and legal advisor is Weil, Gotshal & Manges. Additionally, the Ad Hoc Noteholder Group has engaged Moelis & Company as its financial advisor and Paul Hastings as its legal advisor.
Entities and Organizational Structure Chart
Each of the affiliated entities listed below, including Core Scientific, Inc., filed a voluntary petition for relief under Chapter 11 in the United States Bankruptcy Court for the Southern District of Texas (Houston Division):
- Core Scientific Mining LLC
- Core Scientific, Inc.
- Core Scientific Acquired Mining LLC
- Core Scientific Operating Company
- Radar Relay, Inc.
- Core Scientific Specialty Mining (Oklahoma) LLC
- American Property Acquisition, LLC
- Starboard Capital LLC
- RADAR LLC
- American Property Acquisitions I, LLC
- American Property Acquisitions VII, LLC