Core Scientific's Restructuring Odyssey

Summary Core Scientific is undergoing a restructuring process after facing financial difficulties during the crypto bear market. The company's recent strategies, including the sale of a mining facility in Texas and plans to acquire 27,000 high-efficiency miners from Bitmain, suggest a potential comeback. While there have been operational improvements, the company's profitability still depends on the performance of Bitcoin and there are risks associated with investing in this stock. Thesis Last year's long crypto bear market affected most Bitcoin ( BTC-USD ) mining companies, and Core Scientific (CORZQ) was forced to enter a Chapter 11 bankruptcy proceeding. Core Scientific now stands at a pivotal juncture in its restructuring. The company's recent strategies like the divestiture of a mining facility in Texas, and a deal to acquire 27,000 Bitmain high-efficiency miners seem to be setting the stage for a comeback. As the crypto market gains fresh momentum, driven by the growing speculation regarding a potential spot Bitcoin ETF approval by the SEC, Core Scientific's revamped mining infrastructure positions the company to capitalize on this growing momentum. However, there are still concerns about net loss and Bitcoin's speculative nature, making CORZQ a risky stock. A Long Walk To Restructuring This article delves into the analysis and comparison of Core Scientific's financial health pre- and post-bankruptcy. Core Scientific's restructuring journey has been a fight to get back liquidity and clear off debt. At the time of filing for bankruptcy (December 2022), Core Scientific's debt problem was so serious that many expected the company to be completely out of business in no time. The latest quarterly filing at the time (Q3 2022) showed that the company reported $434 million in net losses. Total current assets were $213 million, while total current liabilities were $1.3 billion. Core Scientific had a serious liquidity problem. The working capital ratio at that time would be a meager 0.16, and the price of Bitcoin was at a 65% decline YTD, trading at ~$16,700 at that time. It is easy to deduce that the decline in Bitcoin price was the main factor that led to Core Scientific's earnings and margin problems. The company ran so many Bitcoin miners that incurred significant energy costs to run coupled with BTC's low price, which led to diminishing returns. Following last year's stock dilution worth $25 million, and after high-profile asset managers like BlackRock (BLK) and Ibex Investors purchased Core Scientific's convertible notes, from which the company raised $500 million in January, have the numbers improved and is the restructuring going well? Let's look at the numbers. The latest reported earnings for Q2 2023, released in August, show a total revenue of $126.9 million for Q2. Compared to earnings before going bankrupt, Core Scientific's revenue was $164 million and $162.6 million for Q2 and Q3 2022 respectively. Revenue has fallen by around 22% YoY. Analyzing the balance sheet, we see that while revenue was higher most of last year, the cost of revenue ((COR)) was also very high, resulting in negative margins. In last year's Q2 earnings report , Core Scientific attributed the increasing COR to higher power consumption costs. At the time COR was $151.3 million while total revenue was $164 million. In the following quarter (Q3), COR surpassed total revenue, apparently due to the BTC price decrease. By Q3, Core Scientific recorded a gross loss of $27.1 million. By Q4 last year, the situation worsened; gross loss increased by ~74%; COR was $168.5 million while total revenue was $121.3 million. The revenue generated couldn't cover the cost of producing Bitcoin. Presently, COR is much lower than last year's, and margins are better. This is evidently a result of the BTC price gains since the start of 2023. BTC is up over 100% YTD, which has made the miner's gross profit show a positive turnaround so far this year. While gross profit has improved, BTC has to gain more value for Core Scientific to see an improved bottom line. Net profit has been negative since Q1 last year; it has however improved since the start of this year. While a net loss of $810 million was recorded in Q2 last year, the latest reported loss was $9.3 million. This indicates significant operational improvements. I believe Core Scientific has the potential to become profitable again; however, this hinges mainly on the price performance of Bitcoin. The possible addition of the new 27,000 S19J XP Bitmain miners (when the deal is finalized between Core Scientific and Bitmain) could greatly improve mining operations for the company, and potentially reduce the cost of mining BTC. Specifications show the S19J XP miners to have potentially more mining efficiency than Core Scientific's current fleet of S19, S19 Pro, S19J, and S19J Pro Bitmain miners. S19J has a maximum hashrate of 104 Th/s for a power consumption of 3068W, compared to the new S19J XP which has a maximum hashrate of 151 Th/s for a power consumption of 3247W. The soon-to-be-acquired mining servers also work at a high-efficiency level of 21.7 Joules per TH/s, while the current fleet of miners has a power efficiency of ~29.50 J/TH. The new S19J XP mining servers will potentially add 4.1 exahashes to Core Scientific's self-mining hash rate. I expect the cost of mining BTC to slightly decrease as the new Bitmain miners are touted to be more energy efficient, potentially creating room for higher gross profit and eventually setting the stage for a strong bottom line. Risk Given the volatile nature of the crypto market and the crypto mining industry's direct correlation to crypto, investors need to acknowledge and assess the potential risks associated with investing in crypto mining stocks like CORZQ. Also, the Bitcoin halving is just months away (est. April 2024) and block rewards will be cut in half with mining difficulty adjusted. If the price of Bitcoin doesn't increase to levels that would compensate for the reduced block rewards, this will essentially translate into weaker earnings for Bitcoin mining firms, including Core Scientific. Takeaway This year, Core Scientific has demonstrated operational improvements, with reduced costs and better margins over last year's. The pending acquisition of more efficient mining equipment from Bitmain could further enhance mining operations and help the company generate more operating income. The company is on the path to an impressive comeback. However, based on my analysis, I would stay away from this stock at the moment and rather keep an eye on the efficiency gains when new mining rigs arrive, and watch how they translate into the company's bottom line before deciding to buy in the future.