CNSL

How will the disclosed economic risk to shareholders be quantified and reflected in the company’s financial statements?

Created August 07, 2025 at 05:30 PM

Answer

The “substantial economic risk” that Two Seas Capital warns Core Scientific’s shareholders about is not a vague, qualitative comment – it is a risk that can be measured, quantified, and shown in the company’s financial statements through a combination of valuation analysis and mandatory accounting disclosures.

Below is a step‑by‑step description of how the risk would be quantified and where it would appear in Core Scientific’s (ticker CNSL) financial reporting, based on the facts in the press release and the standard accounting framework that applies to a public‑company merger or asset‑sale.

1. Quantifying the Economic Risk

1.1. Establish a “fair‑value” benchmark for Core Scientific

Method	What it does	Typical output
Discounted Cash‑Flow (DCF) analysis	Projects Core Scientific’s free cash flows under a “stand‑alone” scenario (i.e., if the company continues operating independently) and discounts them to present value using a company‑specific weighted‑average cost of capital (WACC).	Enterprise value (EV) – the intrinsic value of the business.
Comparable‑company multiples (e.g., EV/EBITDA, EV/Revenue)	Uses market‑price multiples of a peer group of publicly‑traded data‑center and cloud‑infrastructure firms, adjusted for Core Scientific’s size, growth, and margin profile.	Implied equity value derived from the EV and net‑debt.
Precedent‑transaction multiples	Looks at recent M&A deals in the same niche (e.g., other data‑center platform acquisitions) and applies those multiples to Core Scientific’s financials.	Range of possible transaction values.
Control‑premium analysis	Because the proposed sale to CoreWeave would give CoreWeave a controlling interest, a control‑premium (often 20‑30 % above a “minor‑interest” price) is added to the fair‑value estimate.	Maximum price a rational buyer would pay.

Result: The fair‑value range (e.g., $X billion – $Y billion) is the “baseline” against which the CoreWeave offer can be compared.

1.2. Measure the “valuation gap”

Proposed transaction price (as disclosed in the sale agreement or press release) = P_sale.
Fair‑value benchmark = V_fair (mid‑point of the range derived above).
Valuation gap = V_fair – P_sale.

If V_fair – P_sale is material (e.g., > 10 % of equity value), the shareholders are exposed to an economic loss equal to that gap per share.

1.3. Translate the gap into per‑share and aggregate terms

Per‑share loss = (V_fair – P_sale) ÷ # of outstanding shares.
Aggregate loss = Per‑share loss × # of shares held by the public (or by the specific shareholder group being protected).

This calculation yields a quantifiable dollar amount that represents the “substantial economic risk” Two Seas is flagging.

2. How the Risk Is Reflected in Core Scientific’s Financial Statements

2.1. Balance‑Sheet Impact

Area	Accounting treatment	What appears on the statements
Asset valuation	If the sale price is below fair value, Core Scientific must test its long‑lived assets (e.g., data‑center facilities, intangible assets, goodwill) for impairment under ASC 360 (US GAAP) or IAS 36 (IFRS).	Impairment loss recorded as a reduction to the carrying amount of the affected assets, lowering total assets and equity.
Deferred‑tax assets	A lower projected cash‑flow (due to a reduced sale price) may reduce the expected tax benefits, prompting a valuation allowance.	Decrease in deferred‑tax assets (or increase in allowance) shown in the “Deferred tax assets, net” line.
Equity	The net effect of the impairment loss and any write‑down of goodwill is a reduction in retained earnings (or accumulated deficit).	Equity section shrinks; per‑share book value falls, reinforcing the “economic risk” to shareholders.

2. Income‑Statement Impact

Item	How it is recorded
Impairment loss	Recognized as a non‑operating expense (often under “Other income/expense” or “Impairment of assets”) in the period the sale is evaluated. This directly reduces net income (or loss) and consequently earnings per share (EPS).
Loss on disposal (if the transaction proceeds)	If CoreWeave’s offer is accepted, the difference between the sale proceeds and the carrying amount of the sold assets is booked as a gain/loss on disposal. A negative result would be a loss on disposal that further depresses the income statement.
Tax expense	The impairment loss generally generates a tax benefit (reversal of deferred tax assets), but if the loss is large enough to exceed taxable income, the net tax expense may be minimal or even negative (tax credit).

2.3. Cash‑Flow Statement

Operating cash flow will be reduced by the after‑tax impact of the impairment loss (i.e., net cash effect = loss × (1‑tax rate)).
Investing cash flow may show a net cash outflow if the transaction proceeds and the cash received is less than the net book value of the assets sold.

2.4. Mandatory Disclosures (Footnotes & MD&A)

Risk‑Factor Disclosure – In the “Risk Factors” section of the Form 10‑K, Core Scientific must describe the valuation risk associated with the proposed sale, including:
- The valuation methodology used to determine fair value.
- The size of the valuation gap and its potential impact on shareholder equity.
- The uncertainty surrounding the transaction’s completion and price.
Management’s Discussion & Analysis (MD&A) – Management will discuss:
- The valuation analysis performed (DCF, comparables, control‑premium).
- The potential impairment that could be required if the sale price is materially below fair value.
- The expected effect on liquidity, capital structure, and future earnings.
Fair‑Value Hierarchy (IFRS 13 / ASC 820) – If any of Core Scientific’s assets are measured at Level 3 (unobservable inputs), the footnote will disclose the significant inputs and assumptions used, making the “valuation gap” transparent to investors.
Contingent Liabilities – If the sale is not yet finalized, the company must disclose the contingent liability associated with the potential loss, noting the range of possible outcomes (e.g., “If the transaction is consummated at the proposed price of $X per share, the company would incur an estimated impairment of $Y million”).
Equity‑holder Impact – A specific footnote will quantify the per‑share economic loss that would be realized if the transaction proceeds at the proposed price, directly linking the “substantial economic risk” to the shareholder’s economic position.

2.5. Presentation in the Financial Statements

Statement	Line‑item where the effect appears
Balance Sheet	“Property, plant & equipment, net” (reduced by impairment) “Intangible assets, net” (if applicable) “Goodwill” (if the transaction triggers goodwill write‑down)
Statement of Comprehensive Income	“Impairment loss on assets” (non‑operating expense) “Loss on disposal of assets” (if the sale proceeds)
Cash Flow Statement	“Operating cash flows” (reduction due to after‑tax impairment) “Investing cash flows” (net cash received from the sale)
Notes to the Financial Statements	Detailed valuation methodology, valuation gap, and risk‑factor discussion (as described above).

3. Practical Example (Illustrative Numbers)

Assumption	Value
Outstanding shares	120 million
Fair‑value per share (mid‑point of DCF & comparables)	$45
CoreWeave’s proposed price per share	$38
Valuation gap per share	$7
Aggregate economic loss	$7 × 120 M = $840 million

Balance‑sheet impact:

- Impairment of data‑center assets: $600 M

- Write‑down of goodwill: $200 M

- Net reduction in equity: $800 M (≈ $840 M loss after tax).

Income‑statement impact:

- Impairment loss recorded: $800 M (pre‑tax) → after‑tax effect ≈ $560 M (assuming 30 % tax rate).

Footnote disclosure:

“Based on a discounted‑cash‑flow analysis and comparable‑company multiples, Core Scientific’s fair value is estimated at $45 per share. The proposed sale price of $38 per share represents a valuation gap of $7 per share, or approximately $840 million in aggregate shareholder value. If the transaction is consummated at the proposed price, the Company expects to record an impairment loss of $800 million, which will reduce total assets and equity accordingly.”

4. Bottom‑Line Take‑Away for Shareholders

Quantifiable risk: The “substantial economic risk” is measured as the difference between the fair‑value estimate of Core Scientific and the price offered by CoreWeave.
Financial‑statement reflection: That difference translates into impairment losses, reduced asset values, lower equity, and a hit to earnings per share—all of which must be disclosed in the balance sheet, income statement, cash‑flow statement, and footnotes.
Investor‑information: The required footnote and MD&A disclosures give investors a clear, dollar‑based picture of the potential loss per share, enabling them to assess whether the proposed transaction is truly “materially undervalued” as Two Seas Capital alleges.

In short, the economic risk is first quantified through a rigorous valuation analysis, then recorded as an impairment or loss in the financial statements, and finally disclosed in detail so that shareholders can see exactly how the proposed sale could erode the value of their investment.